This Preliminary Official Statement and the information contained herein are subject to completion, amendment or other change without notice. The Series 2017A Bonds may not be sold nor may offers to buy be accepted prior to the time the Official Statement is delivered in final form. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Series 2017A Bonds in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the applicable securities laws of any such jurisdiction. The Authority has deemed this Preliminary Official Statement to be final for purposes of Rule 15c2 -12(b)(1) of the Securities and Exchange Commission, except for certain information which has been omitted in accordance with such Rule and which will be provided in the final Official Statement. * Preliminary, subjectto change. opinion regardingStateofDelawarefranchiseorestatetax.See“TAXMATTERS”herein. and by the municipalities and other political subdivisions in the State of Delaware. Bond Counsel will express no Series 2017ABonds,theirtransferandtheincometherefrom,arefreefromtaxationbyStateofDelaware minimum taxundercircumstancesdescribed“TAXMATTERS”herein.BytermsoftheAct(asdefinedbelow), tax; however,interestpaidtocorporateholdersoftheSeries2017ABondsmaybeindirectlysubjectalternative Series 2017ABondsisnotapreferenceitemforpurposesofeitherindividualorcorporatefederalalternativeminimum of federalincometax,assumingcontinuingcompliancewiththerequirementstaxlaws.Intereston PNC Capital MarketsLLC entire OfficialStatementto obtain informationessentialtomakinganinformedinvestment decision. York, Newonorabout December1,2017. is expectedthattheSeries2017A Bondsindefinitiveformwillbeavailablefordelivery throughthefacilitiesofDTCinNew Certain legalmatterswillbepassedonfortheUnderwriters bytheircounsel,McGuireWoodsLLP,Baltimore,Maryland.It P.C., Wilmington,Delaware,andfortheAuthoritybyits counsel, PotterAnderson&CorroonLLP,Wilmington,Delaware. Delaware, BondCounsel.Certainlegalmatterswillbe passedonfortheCorporationbyitscounsel,Stevens&Lee, withdrawal ormodificationoftheofferwithoutnotice, and totheapprovaloflegalitybyBallardSpahrLLP,Wilmington, THE AUTHORITYHASNOTAXINGPOWER. AND CREDITORTAXINGPOWERSOFTHESTATE DELAWAREOROFANYPOLITICALSUBDIVISIONTHEREOF. POLITICAL SUBDIVISIONORAGENCYTHEREOF,OTHER THANTHEAUTHORITY,ORAPLEDGEOFFAITH OF THEAUTHORITYANDDONOTCONSTITUTEADEBT ORLIABILITYOFTHESTATEDELAWAREANY redemption priortomaturityasdescribedherein.See“DESCRIPTIONOFTHESERIES2017ABONDS” SERIES 2017ABONDS–Book-EntryOnlySystem”herein. Series 2017ABondswillbemadetoBeneficialOwnersbyDTCthroughitsParticipants.See“DESCRIPTION OFTHE Co., solongasCede&Co.istheregisteredownerofSeries2017ABonds.Paymentsprincipalandinterest onthe as described herein. The principal of and interest on the Series 2017A Bonds will be paid by the Bond Trustee to Cede & herein), and no physical delivery of the Series 2017A Bonds will be made to Beneficial Owners(asdefined herein), except herein. PurchasesoftheSeries2017ABondswillbemadeonlyinbook-entryformthroughDTCParticipants(as defined (“DTC”), NewYork,andDTC will actasthe securities depositoryfortheSeries 2017A Bonds,as described The Series2017ABondswillberegisteredinthenameofCede&Co.,asnomineeforDepositoryTrust Company July 1,2018,andtheSeries2017ABondsmatureattimesinamountsshownoninsidecover hereof. thereof. InterestontheSeries2017ABondsispayablesemiannuallyeachJanuary1andJuly1,commencing on the dateofissuanceSeries2017ABonds,CorporationwillbesolememberObligatedGroup. Obligation issuedbytheObligatedGroupMembersasdescribedhereinunderMasterIndentureherein. Asof dated asofDecember1,2017betweentheAuthorityandBayhealthMedicalCenter,Inc.(the“Corporation”) a2017A payable solely from, and secured equally by, payments to be received by the Authority pursuant to a Loan Agreement and areissuedsecuredundertheprovisionsofBondIndenture(asdefinedherein).TheSeries2017A Bonds are 2017A (the“SeriesBonds”)arelimitedobligationsoftheDelawareHealthFacilitiesAuthority“Authority”) Dated: DateofDelivery NEW ISSUE–BOOK-ENTRYONLY In theopinionofBondCounsel,interestonSeries2017ABondsisexcludablefromgrossincomeforpurposes This covercontainsinformation forquickreferenceonlyanddoesnotsummarizethe issue.Investorsmustreadthis The Series 2017A Bonds are offered when, as and if issued and received by the Underwriters, subject to prior sale, to THE SERIES2017ABONDS,PREMIUM,IFANY, AND INTERESTTHEREONARELIMITEDOBLIGATIONS The Series2017ABondsaresubjecttomandatorysinkingfundredemption,optionalredemptionandextraordinary The Series2017ABondswillbeissuedasfullyregisteredbondsindenominationsof$5,000oranyintegralmultiples The $106,335,000*DelawareHealthFacilitiesAuthorityRevenueBonds,BayhealthMedicalCenterProject,Series PRELIMINARY OFFICIAL STATEMENT DATED NOVEMBER 3, 2017
DELAWARE HEALTH FACILITIES AUTHORITY BAYHEALTH MEDICALCENTERPROJECT
The dateofthis Official StatementisNovember ___,2017.
REVENUE BONDS $106,335,000* SERIES 2017A Due: July1,asshownoninsidecover (See “RATINGS”herein) BofA Merrill Lynch RATINGS: Fitch: AA- S&P: AA-
$106,335,000* DELAWARE HEALTH FACILITIES AUTHORITY REVENUE BONDS BAYHEALTH MEDICAL CENTER PROJECT SERIES 2017A
MATURITIES, INTEREST RATES, YIELDS, PRICES AND CUSIPS
Due Principal Interest (July 1)* Amount* Rate Yield Price CUSIP† 2018 $3,590,000 % % % 2019 1,555,000 2020 1,615,000 2021 1,685,000 2022 1,770,000 2023 1,860,000 2024 1,570,000 2025 1,650,000 2026 1,735,000 2027 1,820,000 2028 1,910,000 2029 2,000,000 2030 3,115,000 2031 3,270,000 2032 3,430,000
$19,885,000*, ___% Term Bond due July 1, 2037*, Yield ___%, Price ___%, CUSIP: ______$18,965,000*, ___% Term Bond due July 1, 2040*, Yield ___%, Price ___%, CUSIP: ______$34,910,000*, ___% Term Bond due July 1, 2044*, Yield ___%, Price ___%, CUSIP: ______
†Copyright 2017, American Bankers Association. CUSIP data is 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 and issuance of the Series 2017A Bonds and the Authority makes no representation with respect to such numbers and undertakes no responsibility for their accuracy now or at any time in the future. The CUSIP numbers are subject to being changed after the issuance of the Series 2017A Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part of the Series 2017A Bonds.
*Preliminary, subject to change. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2017A BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
No dealer, broker, salesman or other person has been authorized by the Authority, the Corporation or the Underwriters (as defined herein) to give any information or to make any representation other than as contained in this Official Statement, and if given or made, such other information or representation must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Series 2017A Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The information set forth herein describing the Authority has been obtained from the Authority; the remaining information has been obtained from the Corporation and other sources which are deemed to be reliable, but it is not guaranteed as to accuracy or completeness by the Authority or the Underwriters, and is not to be construed as a representation either by the Underwriters or, as to information from sources other than the Authority, by the Authority, or as to information from sources other than the Corporation, by the Corporation. The Underwriters have reviewed the information in this Official Statement 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 Underwriters do not guarantee the accuracy or completeness of such information.
This Official Statement is not to be construed as a contract or agreement between the Authority and the purchasers or owners of any of the Series 2017A Bonds.
The Series 2017A Bonds are not and will not be registered under the Securities Act of 1933, as amended, and the Bond Indenture has not been qualified under the Trust Indenture Act of 1939, as amended, or under any state securities laws, in reliance upon exemptions contained in such Acts.
All quotations from and summaries and explanations of provisions of laws and documents herein do not purport to be complete and reference is made to such laws and documents for full and complete statements of their provisions. Any statements made in this Official Statement involving estimates or matters of opinion, whether or not expressly so stated, are intended merely as estimates or opinions and not as representations of fact. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale of the Series 2017A Bonds shall under any circumstances create any implication that there has been no change in the affairs of the Authority or the Corporation since the date hereof.
Certain statements included or incorporated by reference in this Official Statement constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as “plan,” “expect,” “estimate,” “budget,” “projection” or other similar words. Such forward-looking statements include, among others, certain of the information in “MANAGEMENT’S DISCUSSION OF UTILIZATION AND FINANCIAL PERFORMANCE” in Appendix A and “CERTAIN BONDHOLDERS’ RISKS” herein.
THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVES KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE CORPORATION DOES NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD- LOOKING STATEMENTS IF OR WHEN ITS EXPECTATIONS CHANGE OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED OCCUR OR FAIL TO OCCUR.
TABLE OF CONTENTS
INTRODUCTION ...... 1 THE AUTHORITY ...... 4 PLAN OF FINANCE ...... 5 ESTIMATED SOURCES AND USES OF FUNDS ...... 7 SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017A BONDS ...... 7 DESCRIPTION OF THE SERIES 2017A BONDS ...... 10 ANNUAL DEBT SERVICE REQUIREMENTS ...... 15 BONDHOLDERS’ RISKS ...... 16 UNDERWRITING ...... 47 LEGALITY OF SERIES 2017A BONDS FOR INVESTMENT AND DEPOSIT ...... 48 LITIGATION ...... 48 TAX MATTERS ...... 48 RATINGS ...... 49 LEGAL MATTERS ...... 49 CONTINUING DISCLOSURE ...... 50 INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ...... 50 FINANCIAL STATEMENTS ...... 50 FINANCIAL ADVISORS ...... 50 VERIFICATION AGENT ...... 51 CERTAIN RELATIONSHIPS ...... 51 MISCELLANEOUS ...... 51
Appendix A – Bayhealth Medical Center, Inc. Appendix B – Bayhealth Medical Center, Inc. Audited Financial Statements, June 30, 2017 and 2016 Appendix C – Summary of Bond Indenture and Loan Agreement Appendix D – Form of Substantially Final Master Indenture Appendix E – Form of Opinion of Bond Counsel Appendix F – Form of Continuing Disclosure Agreement Appendix G – Information Regarding Book-Entry Only System
OFFICIAL STATEMENT
$106,335,000* DELAWARE HEALTH FACILITIES AUTHORITY REVENUE BONDS BAYHEALTH MEDICAL CENTER PROJECT SERIES 2017A
INTRODUCTION
This introduction is subject in all respects to the more complete information set forth in this Official Statement. The descriptions and summaries of various documents hereinafter set forth do not purport to be comprehensive or definitive, and reference is made to each such document for the complete details of all terms and conditions. All statements herein regarding any such document are qualified in their entirety by reference to such document. All capitalized terms used herein but not defined herein shall have the meanings set forth in Appendix C or Appendix D hereto, as applicable. Each of the Appendices hereto is an integral part of this Official Statement and should be read in its entirety.
Purpose
This Official Statement, including the cover page, inside cover and the Appendices, is provided to furnish information regarding the $106,335,000* Revenue Bonds, Bayhealth Medical Center Project, Series 2017A, dated the date of their delivery (the “Series 2017A Bonds”), being issued by the Delaware Health Facilities Authority (the “Authority”). The Series 2017A Bonds are being issued pursuant to a Trust Indenture dated as of December 1, 2017 (the “Bond Indenture”), between the Authority and Wilmington Trust, National Association, as trustee (the “Bond Trustee”). The proceeds of the Series 2017A Bonds will be loaned by the Authority to Bayhealth Medical Center, Inc. (the “Corporation”) pursuant to a Loan Agreement dated as of December 1, 2017 (the “Loan Agreement”), between the Authority and the Corporation and used, together with other available funds, to advance refund the Series 2009A Bonds (defined below) and to pay costs of issuance with respect to the Series 2017A Bonds. The obligations of the Corporation under the Loan Agreement will be secured by the 2017A Obligation (defined below). The Series 2017A Bonds will be issued pursuant to (i) the Delaware Health Facilities Act (16 Del. Code Ann., Section 9201, et seq.), as amended (the “Act”), and (ii) the resolution adopted by the Authority authorizing the issuance, sale and delivery of the Series 2017A Bonds.
Delaware Health Facilities Authority
The Authority is a body politic and corporate, constituting a public instrumentality of the State of Delaware (the “State”), created under and existing by virtue of the Act for the purpose of assisting in the acquisition, financing and refinancing of projects for hospitals and other health-care facilities. The Authority is empowered, among other things, to make loans to participating facilities for the cost of a project and for the refunding of outstanding obligations, and to fund and refund health care projects through the issuance of bonds, notes and other obligations. See “THE AUTHORITY” herein.
The Obligated Group and the Corporation
The Master Indenture (defined below) provides for the establishment of an “Obligated Group” that, on the date of issuance of the Series 2017A Bonds, will be comprised of only the Corporation. The Corporation and any other members added to the Obligated Group in the future are referred to herein as the “Obligated Group Members” and each as an “Obligated Group Member.” The Corporation may not withdraw from the Obligated Group.
The Corporation is a Delaware not-for-profit corporation which has been determined by the Internal Revenue Service to be a tax-exempt organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”). The Corporation owns and operates Milford Memorial Hospital, an acute care hospital located in Milford, Delaware (“Milford Memorial”) and Kent General Hospital, an acute care hospital located in Dover,
*Preliminary, subject to change. 1
Delaware (“Kent General”). Milford Memorial and Kent General are hereinafter sometimes collectively referred to as the “Hospital Facilities,” as more fully described below. The Corporation was created in 1997 following the merger of Kent General Hospital (Incorporated) (“KGH”) and Milford Memorial Hospital, Inc. (“MMH”). Bayhealth, Inc. is a not-for-profit, non-stock Delaware corporation, established in 1983 as the Central Delaware Health Care Corporation, which serves as the corporate parent to the Corporation and to certain other affiliated corporations. As corporate parent, Bayhealth, Inc. is responsible for coordinating the activities of its subsidiaries and has certain reserved powers over its subsidiaries. See “CORPORATE STRUCTURE” in Appendix A. The Corporation is the sole Obligated Group Member on the date of this Official Statement and will be the sole Obligated Group Member at the time of issuance of the Series 2017A Bonds. Neither Bayhealth, Inc. nor any affiliates of the Corporation are obligated to pay principal or interest on the Series 2017A Bonds.
The Hospital Facilities
Kent General is a 266 licensed-bed general acute care hospital with related parking and other facilities, and includes medical, surgical, obstetrical/gynecological, pediatric and diagnostic services on both an inpatient and outpatient basis, a 24-hour emergency department, a trauma center, an intermediate care unit, a cardiac care unit and cardiac rehabilitation, speech and physical therapy, sports medicine, extensive diagnostic imaging facilities, substance abuse, home health care and patient and community education and support groups (collectively, the “Kent General Hospital Facilities”), all located in Dover, the capital city of Delaware. The Corporation also owns certain other property which is ancillary to the Kent General Hospital Facilities. Kent General serves the residents of Dover and surrounding communities in Kent County, southern New Castle County, and northern Sussex County, Delaware.
Milford Memorial is a 168 licensed-bed general acute care hospital, and includes medical, surgical, obstetrical/gynecological, pediatric and diagnostic services on both an inpatient and outpatient basis, a 24-hour emergency department and special outpatient services center providing laboratory, diagnostic imaging, electrocardiogram, outpatient surgery and chemotherapy and includes four skilled nursing licensed beds located in Milford, Delaware, and is a major health care provider for Kent and Sussex Counties, Delaware.
For a more complete description of the Hospital Facilities and their services and operations, see “EXISTING FACILITIES” and “SERVICES AND PROGRAMS” in Appendix A. For detailed information concerning the financial operations of the Corporation, see Appendix B which sets forth recent audited financial statements of the Corporation.
Plan of Finance and Concurrent Financing
The proceeds of the Series 2017A Bonds will be used, together with other available funds, to (a) advance refund certain bonds previously issued by the Authority for the benefit of the Corporation and (b) pay costs of issuance of the Series 2017A Bonds.
Concurrently with the issuance of the Series 2017A Bonds, the Corporation has requested that the Authority issue an additional series of bonds (the “Series 2017B Direct Purchase Bonds” or the “Series 2017B Bonds” and together with the Series 2017A Bonds, the “Series 2017 Bonds”) for the benefit of the Corporation. The proceeds of the Series 2017B Direct Purchase Bonds will be loaned by the Authority to the Corporation pursuant to a loan agreement dated as of December 1, 2017 (the “Series 2017B Loan Agreement”), between the Authority and the Corporation, and used (a) to currently refund certain bonds previously issued by the Authority for the benefit of the Corporation, (b) for the reimbursement to the Corporation of a portion of the costs of the construction, acquisition, renovation and equipping of certain capital projects of the Corporation, and (C) to pay costs of issuance of the Series 2017B Direct Purchase Bonds. The Series 2017B Direct Purchase Bonds are expected to be purchased by a financial institution (the “Bank”) and is not offered by this Official Statement. The Corporation’s obligations under the Series 2017B Loan Agreement will be secured by a master note (the “2017B Obligation”) issued by the Obligated Group in a principal amount equal to the aggregate principal amount of the Series 2017B Direct Purchase Bonds, which 2017B Obligation will be secured on parity under the Master Indenture (defined below). See “PLAN OF FINANCE” and “ESTIMATED SOURCES AND USES OF FUNDS” herein.
2 Security
The Bond Indenture and Loan Agreement. The Series 2017A Bonds will be secured under and pursuant to the Bond Indenture and the Loan Agreement. Under the Loan Agreement, the Corporation will be obligated to make payments that are fixed as to time of payment and amount so as to enable the Authority to pay the principal or redemption price of and interest on all Series 2017A Bonds as and when due. The Authority will assign all of its rights under the Loan Agreement (excluding certain unassigned rights) and its right to receive loan payments thereunder to the Bond Trustee as security for the payment of the Series 2017A Bonds.
The Master Indenture. The obligations of the Corporation under the Loan Agreement will be secured by a master note (the “2017A Obligation” and together with the 2017B Obligation, the “2017 Obligations”) issued by the Obligated Group Members, in a principal amount equal to the aggregate principal amount of the Series 2017A Bonds, pursuant to the Master Trust Indenture dated as of December 1, 2017 (as amended and supplemented, the “Master Indenture”), between the Obligated Group Members and Wilmington Trust, National Association, as master trustee (the “Master Trustee”). The 2017 Obligations will together represent 100% of the aggregate principal amount of the Obligations Outstanding under the Master Indenture on the date of delivery of the Series 2017 Bonds.
Pursuant to the Master Indenture, the 2017 Obligations will be secured on a parity basis with any future Obligations by a lien on and security interest in the Gross Revenues of the Obligated Group Members from time to time under the Master Indenture for the equal and ratable benefit of the holders of all Obligations. “Gross Revenues” means all receipts, revenues, income and other money received by any Member of the Obligated Group, or held under the Master Indenture for the benefit of any Member of the Obligated Group, from any source and investment earnings thereon, including (but not limited to) gifts, grants, bequests, donations and contributions, and all rights to receive the same including, without limitation, patient service revenues (net of contractual allowances and discounts), other operating revenues and nonoperating revenues, whether in the form of accounts, accounts receivable, pledges receivable, contract rights, chattel paper, instruments or other rights, and the proceeds thereof, and any insurance thereon, whether now existing or hereafter coming into existence and whether now owned or held or hereafter acquired by any Member of the Obligated Group, with certain exclusions as described in the Master Indenture. The 2017A Obligation also will be secured by the moneys and investments, if any, from time to time on deposit in the funds established pursuant to the Master Indenture, and any and all other property conveyed, pledged, assigned or transferred as additional security under the Master Indenture by any Obligated Group Member to the Master Trustee.
Outstanding Obligations
Assuming the issuance of the 2017 Bonds as described herein and the refunding of the Refunded Bonds (defined below) thereby, the 2017 Obligations will constitute the only outstanding Obligations secured on a parity basis under the Master Indenture.
The Series 2017A Bonds will not be secured by a debt service reserve fund. See “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017A BONDS – No Debt Service Reserve Fund” herein.
Other Covenants
Providers of credit facilities, including the financial institution purchasing the Series 2017B Direct Purchase Bonds, may have agreements with the Corporation that contain more restrictive covenants than those set forth in the Master Indenture and the Loan Agreement, including but not limited to additional financial covenants relating to debt service coverage, liquidity levels and debt ratios, which if not met could result in an event of default under the Master Indenture or the Loan Agreement, as applicable. These covenants cease to be effective upon payment in full of the obligations to which such agreement relates. See “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017A BONDS – Other Covenants” herein.
Certain Bondholders’ Risks
There are a number of risks associated with the purchase of the Series 2017A Bonds. See “CERTAIN BONDHOLDERS’ RISKS” herein for a discussion of certain of these risks.
3 Continuing Disclosure
Pursuant to Rule 15c2-12 promulgated by the Securities and Exchange Commission (the “Rule”), the Obligated Group Members will enter into a Continuing Disclosure Agreement, dated the date of delivery of the Series 2017A Bonds (the “Continuing Disclosure Agreement”) for the benefit of the holders of the Series 2017A Bonds to provide certain information annually and quarterly and to provide notice of certain events to the Municipal Securities Rulemaking Board, pursuant to the requirements of the Rule. See “CONTINUING DISCLOSURE” herein. A form of the Continuing Disclosure Agreement is set forth in Appendix F.
Document Descriptions and Summaries
The descriptions and summaries of various documents set forth in this Official Statement do not purport to be comprehensive or definitive and reference should be made to each document for complete details of all terms and conditions. All statements herein are qualified in their entirety by the terms of each such document. Until the issuance and delivery of the Series 2017A Bonds, copies of the documents described herein may be obtained from the Corporation. After delivery of the Series 2017A Bonds, copies of such documents will be available for inspection at the corporate trust office of the Bond Trustee. See “SUMMARY OF BOND INDENTURE AND LOAN AGREEMENT” in Appendix C and “FORM OF SUBSTANTIALLY FINAL MASTER INDENTURE” in Appendix D.
THE AUTHORITY
The Authority is a body politic and corporate constituting a public instrumentality of the State created under the Act for the purpose of assisting in the acquisition, construction, financing and refinancing of projects for hospitals and other health-care related facilities located in the State. The Authority is empowered, among other things, to make loans to any participating facility to pay the costs of a project or to refund outstanding obligations, mortgages or advances issued, and to fund and refund health care projects through the issuance of bonds, notes and other obligations of the Authority. The Authority has no taxing power and no source of funds other than from the contractual obligations of participating health care facilities.
The Act provides for seven members of the Authority, each of whom is appointed by the Governor of the State to a five-year term. Under the Act, at least two of the members must be trustees, directors, officers or employees of a health care facility, at least one must have a favorable reputation for skill, knowledge and experience in the field of state and municipal finance, and at least one must be a person having a favorable reputation for skill, knowledge and experience in the building construction field. The Authority has no full-time staff, and Authority members receive no compensation for the performance of their duties under the Act.
The present members of the Authority are as follows:
Name Title
Rolf F. Eriksen Chairman
Desmond A. Baker Vice Chairman, Secretary, Treasurer
William J. Riddle Assistant Secretary, Assistant Treasurer
George W. Forbes, III Member
Lisa More Member
Howard A. Palley, Ph.D. Member
Potter Anderson & Corroon LLP is serving as counsel to the Authority and Public Financial Management, Inc. is serving as financial advisor to the Authority in connection with the issuance of the Series 2017A Bonds.
4 PLAN OF FINANCE
The Series 2017A Bonds and the Series 2009A Refunded Bonds
The proceeds of the Series 2017A Bonds will be used, together with other available funds, to (a) advance refund all of the Authority’s Revenue Bonds, Bayhealth Medical Center Project, Series 2009A (the “Series 2009A Bonds”) and (b) pay costs of issuance of the Series 2017A Bonds.
The Series 2009A Bonds are presently outstanding in the aggregate principal amount of $126,800,000. A portion of the proceeds of the Series 2017A Bonds, together with the Corporation’s equity contribution (the “Equity Contribution”), will be used to advance refund all of the outstanding Series 2009A Bonds (the “Series 2009A Refunded Bonds”). Simultaneously with the issuance of the Series 2017A Bonds, the Authority, Wells Fargo Bank, National Association and the Corporation will enter into an Escrow Deposit Agreement (the “2009A Escrow Agreement”) to provide for the advance refunding of the Series 2009A Refunded Bonds. A portion of the proceeds of the Series 2017A Bonds, together with the Equity Contribution, will be held as uninvested cash and/or used to purchase non-callable United States Obligations, the maturing principal of and interest on which, together with uninvested cash, if any, held under the 2009A Escrow Agreement, will be sufficient to provide for the principal or mandatory sinking fund redemption requirements of and interest on the Series 2009A Refunded Bonds up to and including July 1, 2019 (the “Series 2009A Redemption Date”).
The mathematical accuracy of the computation of the adequacy of the maturing principal and interest earned on the funds to be deposited pursuant to the 2009A Escrow Agreement to provide for the payment of the principal or redemption price of and interest on the Series 2009A Refunded Bonds to and including the Series 2009A Redemption Date will be verified by The Arbitrage Group, Inc. (the “Verification Agent”). See “VERIFICATION AGENT” herein.
Concurrent Financing
Concurrently with the issuance of the Series 2017A Bonds, the Authority intends to issue the Series 2017B Direct Purchase Bonds under a separate bond indenture (the “Series 2017B Indenture”) for the benefit of the Corporation in the aggregate principal amount of $77,405,000*, which, upon its issuance, will be purchased and held by a financial institution (the “Bank”). The proceeds of the Series 2017B Direct Purchase Bonds will be loaned to the Corporation pursuant to a separate loan agreement (the “Series 2017B Loan Agreement”). The Series 2017B Direct Purchase Bonds are expected to bear interest at a variable rate and to mature on July 1, 2039. The Bank has agreed to purchase and hold the Series 2017B Direct Purchase Bonds until December 1, 2027 (the “Scheduled Mandatory Purchase Date”), subject, however, to the Bank’s right to accelerate payment of the Series 2017B Direct Purchase Bonds upon the occurrence of certain events of default specified in the Series 2017B Indenture, the Series 2017B Loan Agreement and the Series 2017B Covenant Agreement referenced in the following paragraph.
The Series 2017B Direct Purchase Bonds will be secured by the 2017B Obligation issued to the trustee for the Series 2017B Direct Purchase Bonds, secured on a parity basis with the 2017A Obligation and all other Obligations Outstanding under the Master Indenture from time to time. In addition, the Bank and the Corporation will enter into a Continuing Covenants Agreement (the “Series 2017B Covenant Agreement”) containing terms, covenants and conditions in favor of the Bank that may be different from, or in addition to, terms, covenants and conditions set forth in the Master Indenture. See “OTHER FINANCIAL INFORMATION – Summary of Certain Provisions of the Series 2017B Financing Agreement” in Appendix A.
The proceeds of the Series 2017B Direct Purchase Bonds will be used (a) along with other available funds to currently refund the entire outstanding amount of the Authority’s Variable Rate Refunding Revenue Bonds, Bayhealth Medical Center Project, Series 2012 (the “Series 2012 Bonds” and together with the Series 2009A Refunded Bonds, the “Refunded Bonds”), (b) for the reimbursement to the Corporation of a portion of the costs of the construction, acquisition, renovation and equipping of certain capital projects of the Corporation, and (c) to pay costs of issuance of the Series 2017B Direct Purchase Bonds. The Series 2012 Bonds are presently outstanding in the principal amount of $62,095,000. The Series 2012 Bonds will be paid in full and cancelled on the closing date for the Series 2017 Bonds.
*Preliminary, subject to change.
5 The issuance of the Series 2017A Bonds is conditioned upon the issuance of the Series 2017B Direct Purchase Bonds and the payment in full of the Series 2012 Bonds, in order to effectuate the pledge of the collateral by the Obligated Group under the Master Indenture.
[Remainder of Page Intentionally Left Blank]
6 ESTIMATED SOURCES AND USES OF FUNDS*
The estimated amounts required to refund the Series 2009A Bonds and certain incidental costs related thereto and the estimated sources of funds available therefor are as follows.
Series 2017A Bonds Estimated Sources of Funds*: Series 2017A Bonds $106,335,000 Equity Contribution 17,415,347 Net Original Issue Premium (Discount) 13,389,182 Total Sources of Funds: $137,139,529 Estimated Uses of Funds*: Amount Required to Refund the Series $135,808,780 2009A Bonds Estimated Financing Expenses(1) 1,330,749 Total Uses of Funds: $137,139,529 ______* Preliminary, subject to change. (1) The estimated financing expenses include the Underwriters’ discount, certain fees and expenses of legal counsel to the Corporation, Underwriters’ Counsel, Bond Counsel and counsel to the Authority, and certain accounting fees, as well as printing costs, fees and expenses of the Bond Trustee, the Master Trustee and other administrative and miscellaneous expenses.
SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017A BONDS
Limited Liability of the Authority
The Series 2017A Bonds are limited obligations of the Authority and the principal of, premium, if any, and interest on the Series 2017A Bonds are payable solely from payments to be made by the Corporation pursuant to the Loan Agreement, from payments made by the Obligated Group on the 2017A Obligation and from certain funds held under the Bond Indenture.
Neither the State nor any political subdivision or agency thereof, including the Authority, shall be obligated to pay the Series 2017A Bonds or the interest thereon except from payments or other funds made available under the Loan Agreement, and neither the faith and credit nor the taxing power of the State or of any political subdivision or agency thereof, including the Authority, is pledged to the payment of the principal of, the premium, if any, or the interest on the Series 2017A Bonds. The Series 2017A Bonds are not directly or indirectly or contingently an obligation, moral or otherwise, of the State or any political subdivision or agency thereof, to levy or to pledge any form of taxation whatever therefor or to make any appropriation for their payment. The Authority has no taxing power.
The Bond Indenture and Loan Agreement
The Loan Agreement provides that the Corporation shall repay the loan of the proceeds of the Series 2017A Bonds by making payments to the Bond Trustee in amounts sufficient to pay the principal of, premium, if any, and interest on the Series 2017A Bonds when due. Under the Loan Agreement, the Corporation will be obligated to make payments that are fixed as to time of payment and amount so as to enable the Authority to pay the principal or redemption price of and interest on all Series 2017A Bonds as and when due. The Loan Agreement is the general obligation of the Corporation, secured by the 2017A Obligation. The Authority 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 2017A Bonds.
Under the Bond Indenture, the Authority has assigned to the Bond Trustee for the benefit of the holders of the Series 2017A Bonds (a) all of the right, title and interest of the Authority in the 2017A Obligation and the Loan Agreement, except for the right to receive payment of fees and expenses, rights to receive certain notices and give
7 certain consents and any rights of indemnification, and (b) all of the amounts held in any fund or account established pursuant to the Bond Indenture, other than in accounts to pay for such Series 2017A Bonds called for redemption or with respect to which irrevocable instructions to redeem have been given to the Bond Trustee.
The 2017A Obligation and the Master Indenture
The obligations of the Corporation under the Loan Agreement will be secured by the 2017A Obligation issued by the Obligated Group Members in a principal amount equal to the aggregate principal amount of the Series 2017A Bonds. Payments under the 2017A Obligation are scheduled to be made at the times and in the amounts required to pay debt service on the Series 2017A Bonds and will be credited against the applicable loan payment obligations of the Corporation under the Loan Agreement.
The 2017A Obligation will constitute the joint and several obligation of the Obligated Group Members from time to time under the Master Indenture and will be payable in all events, notwithstanding the expiration, invalidity or termination of the Loan Agreement. At the time of issuance of the Series 2017A Bonds, the Corporation will be the only Obligated Group Member.
Pursuant to the Master Indenture, the 2017A Obligation will be secured on a parity basis with the 2017B Obligation and any future Obligation by a lien on and security interest in the Gross Revenues of the Obligated Group Members from time to time under the Master Indenture for the equal and ratable benefit of the holders of all Obligations. “Gross Revenues” means all receipts, revenues, income and other money received by any Member of the Obligated Group, or held under the Master Indenture for the benefit of any Member of the Obligated Group, from any source and investment earnings thereon, including (but not limited to) gifts, grants, bequests, donations and contributions, and all rights to receive the same including, without limitation, patient service revenues (net of contractual allowances and discounts), other operating revenues and nonoperating revenues, whether in the form of accounts, accounts receivable, pledges receivable, contract rights, chattel paper, instruments or other rights, and the proceeds thereof, and any insurance thereon, whether now existing or hereafter coming into existence and whether now owned or held or hereafter acquired by any Member of the Obligated Group, with certain exclusions as described in the Master Indenture. The 2017A Obligation also will be secured by the moneys and investments, if any, from time to time on deposit in the funds established pursuant to the Master Indenture, and any and all other property conveyed, pledged, assigned or transferred as additional security under the Master Indenture by any Obligated Group Member to the Master Trustee.
As of the issuance of the Series 2017A Bonds, the Obligations issued under the Master Indenture will not be secured with a mortgage on any property of the Obligated Group.
The Master Indenture permits other entities, under certain conditions, to become Obligated Group Members, and to have additional Obligations issued thereunder on behalf of such Obligated Group Members. The Master Indenture also permits Obligated Group Members to withdraw from the Obligated Group upon compliance with certain specified conditions. Upon any such withdrawal, the withdrawing Obligated Group Member will no longer be obligated or liable with respect to the 2017A Obligation. Under the Master Indenture, the Corporation may not withdraw from the Obligated Group.
The Obligated Group has agreed, under the Master Indenture, to subject themselves to certain operational and financial restrictions contained therein. Each entity that becomes a Member of the Obligated 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. See “FORM OF SUBSTANTIALLY FINAL MASTER INDENTURE – ARTICLE IV - General Covenants” in Appendix D.
The Master Indenture provides that the 2017A Obligation may, at the election of the Group Representative, be substituted for new or replacement Obligations issued pursuant to a Replacement Master Indenture upon satisfaction of certain conditions, including: (a) delivery of a substitute obligation or obligations (the “Substitute Obligations”) issued by an obligated group under a master trust indenture (the “Replacement Master Indenture”) executed by the members of such obligated group and an independent corporate trustee; (b) written evidence from
8 each Rating Agency then maintaining a rating on any Obligation or any Related Bond, that it will not lower or withdraw the rating on such Obligation(s) and/or Related Bond(s), as applicable, in connection with the issuance of the Substitute Obligations under the Replacement Master Indenture; and (c) certain opinions of counsel described in the Master Indenture. The Master Indenture also provides that the 2017A Obligation may, at the election of the Group Representative, be substituted for new or replacement Obligations upon admission of a new Obligated Group Member; upon withdrawal of an Obligated Group Member; to reflect amendments or supplements effected pursuant to the terms of Article VII of the Master Indenture; and to reflect a merger, consolidation, sale or conveyance pursuant to the Master Indenture, in each case upon delivery of the items required under the respective provisions of the Master Indenture. See “FORM OF SUBSTANTIALLY FINAL MASTER INDENTURE - ARTICLE II - The Obligations” in Appendix D.
For additional information about risks associated with the security and sources of payment for the Series 2017A Bonds, see “BONDHOLDERS’ RISKS – Security and Enforceability – Pledge of Gross Receipts” below.
No Debt Service Reserve Fund
The Series 2017A Bonds will not be secured by a debt service reserve fund.
Rate Covenant
The Obligated Group has agreed in the Master Indenture to establish, charge, and use its reasonable efforts to collect rates, fees, and charges for goods and services furnished by, and for the use of, its properties and services which, if collected, would be sufficient to cause the Historical Debt Service Coverage Ratio of the Obligated Group for such Fiscal Year to be at least 1.10 to 1.0, as measured and determined as of the last day of such Fiscal Year. If the Historical Debt Service Coverage Ratio of the Obligated Group is determined for the Fiscal Year then ended to be less than 1.10:1, the Obligated Group has agreed at its expense to retain a Consultant, within 60 days after the completion of the Obligated Group’s audited financial statements for such Fiscal Year, but in no event later than 90 days from the date such financial statements are required by the Master Indenture to be delivered, to make recommendations with respect to the rates, fees and charges of the Members’ and the Obligated Group’s methods of operation and other factors affecting its financial condition in order to increase the Historical Debt Service Coverage Ratio for the then current Fiscal Year and subsequent Fiscal Years to at least 1.10:1. A copy of the Consultant’s report and recommendations, if any, shall be filed with the Master Trustee within 90 days from the date such consultant was appointed pursuant to the previous section. Under the Master Indenture, the failure of the Obligated Group to achieve a Historical Debt Service Coverage Ratio of at least 1.10 to 1.0 for any Fiscal Year shall not be a default or Event of Default thereunder if a Consultant is so retained and the recommendations of such Consultant are so implemented and the Historical Debt Service Coverage Ratio for two consecutive Fiscal Years is not less than 1.0 to 1.0. See “FORM OF SUBSTANTIALLY FINAL MASTER INDENTURE – ARTICLE IV - General Covenants” in Appendix D.
The Master Indenture defines “Historical Debt Service Coverage Ratio” as, for any period of time, the ratio consisting of (i) a numerator equal to the amount determined by dividing Income Available for Debt Service for that period by the Debt Service Requirements for such period and (ii) a denominator of one; provided, however, that in calculating the Debt Service Requirements for any completed period, the principal amount of any Indebtedness included in such calculation which is paid during such period shall be excluded to the extent such principal amount is paid from the proceeds of other Indebtedness incurred in accordance with the provisions of the Master Indenture or from amounts deposited to provide for such payment pursuant to an amortization schedule established in accordance with the Master Indenture, which amounts were deposited in Fiscal Years prior to the Fiscal Year in which such principal became due.
Financial Statements
The Master Indenture provides that the Obligated Group must provide certain consolidated financial information including the Corporation and any other Obligated Group Members on an annual basis to the Master Trustee and, in certain circumstances, to any requesting owners of Outstanding Bonds. See “FORM OF SUBSTANTIALLY FINAL MASTER INDENTURE – ARTICLE IV - General Covenants” in Appendix D.
9 Disposition of Assets; Liens on Property
Under the Master Indenture, the Obligated Group may not, in any Fiscal Year, sell, lease (as lessor) or otherwise dispose (excluding any involuntary disposition) of Property except as permitted under the Master Indenture, including but not limited to: transfers of Property in the ordinary course of business; if the Current Value of the Property so sold, leased or otherwise disposed of in such Fiscal Year does not, in the aggregate, exceed 10% of the Current Value of the Property of the Obligated Group as reflected in the Financial Statements of the Obligated Group (or at the option of the Obligated Group, the Book Value of the Property so sold, leased or otherwise disposed does not, in the aggregate, exceed 10% of the Book Value of the Property of the Obligated Group); in return for Property of equal or greater value or reasonably equivalent value; or to another Member. See “FORM OF SUBSTANTIALLY FINAL MASTER INDENTURE – ARTICLE IV - General Covenants” in Appendix D.
The Master Indenture also restricts the Obligated Group from creating or permitting to be created or remain and requires the Obligated Group, at its cost and expense, to promptly discharge or terminate all Liens on Property owned by such Member (for purposes of avoidance of doubt, not including Property occupied or used by a Member pursuant to a lease or other occupancy or use agreement, right or arrangement) or any part thereof which are not Permitted Encumbrances. See “FORM OF SUBSTANTIALLY FINAL MASTER INDENTURE – ARTICLE IV - General Covenants” in Appendix D.
Additional Indebtedness
Under the Master Indenture the Obligated Group may incur Additional Indebtedness to be secured on a parity with the 2017 Obligations as provided in the Master Indenture. See “FORM OF SUBSTANTIALLY FINAL MASTER INDENTURE – ARTICLE IV - General Covenants” in Appendix D.
DESCRIPTION OF THE SERIES 2017A BONDS
The following is a summary of certain provisions of the Series 2017A Bonds. Terms not otherwise defined in the following summary have the meanings assigned thereto in Appendix C or Appendix D hereto, as applicable. The Depository Trust Company, New York, New York (“DTC”) will act as the initial securities depository for the Series 2017A Bonds. Ownership interests in the Series 2017A Bonds may be purchased in book-entry form only. The information under this caption, “DESCRIPTION OF THE SERIES 2017A BONDS” is subject in its entirety to the provisions described in Appendix G while the Series 2017A Bonds are in the book-entry only system. So long as DTC acts as securities depository for the Series 2017A Bonds, all references herein to “Bondholder” or “Bondholders” and to “owners” and “holders” of Series 2017A Bonds shall be deemed to refer to Cede & Co., as nominee for DTC, and not to Direct Participants, Indirect Participants or Beneficial Owners (as said terms are defined in Appendix G).
General
The Series 2017A Bonds will be issued in the aggregate principal amount described on the cover page of this Official Statement and will be issued in the denomination of $5,000 or any integral multiple thereof (“Authorized Denominations”). The Series 2017A 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, 2018. Interest on the Series 2017A Bonds will accrue on the basis of a year of 360 days with twelve 30-day months.
Purchase of, and Payments on, the Series 2017A Bonds
The Series 2017A 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 2017A Bonds will be made in book-entry form only, in Authorized Denominations as described herein under the caption, “DESCRIPTION OF THE SERIES 2017A BONDS — General.” Purchasers of such interests will not receive certificates representing their interests in the Series 2017A 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.”
10 So long as Cede & Co. is the registered owner of the Series 2017A Bonds, the Bond Trustee will pay interest on the Series 2017A Bonds to DTC, which will remit interest payments to the Beneficial Owners of the Series 2017A Bonds. See the information under the caption, “Book-Entry Only System.”
Principal of and premium, if any, and interest on the Series 2017A Bonds will be paid on the applicable Payment Dates, in lawful money of the United States of America, 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 2017A 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 2017A Bonds next preceding any Payment Date, shall have provided the Bond Trustee with written wire transfer instructions, amounts payable on such Series 2017A Bonds shall be paid in accordance with the wire transfer instructions provided by the Holder of such Series 2017A Bond.
Redemption of the Series 2017A Bonds
Mandatory Sinking Fund Redemption
The Series 2017A Bonds maturing on July 1, __ and July 1, __ are subject to mandatory sinking fund redemption in part by lot on July 1 of each year listed below in the respective amounts set forth below at 100% of the principal amount of the Series 2017A Bonds being redeemed, plus accrued interest to the redemption date.
Year (July 1) Amount
Year (July 1) Amount
Year (July 1) Amount
______
*Maturity
Optional Redemption. As long as there is no continuing Event of Default under the Bond Indenture, the Series 2017A Bonds maturing on and after July 1, 20__ shall be subject to redemption prior to maturity at the option of the Authority, at the direction of the Corporation, in whole or in part at any time on and after July 1, 20__ in such order of maturity as the Authority may choose at the direction of the Corporation, and within a maturity by lot as selected by the Bond Trustee, upon payment of a redemption price equal to 100% of the principal amount of the Series 2017A Bonds to be redeemed, plus accrued interest to the redemption date.
Extraordinary Optional Redemption. The Series 2017A Bonds (or portions of any such Series 2017A Bonds) are subject to extraordinary optional redemption in whole or in part at any time 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
11 condemnation award relating thereto are not applied to the repair, reconstruction or restoration of the Facilities and the Corporation elects to use such unapplied proceeds for an optional redemption of Series 2017A Bonds. 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 Corporation to redeem Series 2017A Bonds on the earliest possible date after giving the required notice of redemption. If called for such redemption, the Series 2017A Bonds may be redeemed at a redemption price equal to the principal amount of each such Series 2017A Bond to be redeemed, 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 2017A Bonds at maturity or upon mandatory sinking fund redemption will terminate or otherwise limit the Authority’s or the Corporation’s other redemption rights (optional, extraordinary or mandatory), unless the Authority, upon direction of the Corporation, expressly waives such rights in a writing filed with the Bond Trustee.
Notice of Redemption. In the event any of the Series 2017A Bonds are called for redemption, the Bond Trustee will give notice, in the name of the Authority, of the redemption of such Series 2017A Bonds, which notice must (i) specify the Series 2017A 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 designated office of the Bond Trustee) and, if less than all of the Series 2017A Bonds are to be redeemed, the numbers of the Series 2017A Bonds, and the portions of the Series 2017A 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 2017A 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 shall 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 2017A 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 2017A Bonds and provided further that as long as the Series 2017A Bonds are registered in the name of Cede & Co. or are deposited with a Securities Depository, the Trustee may give such notification by electronic notification, facsimile or such other method as is customarily used. The Bond Trustee will send a second notice of redemption by certified mail return receipt requested to any registered Holder who has not submitted Series 2017A Bonds called for redemption 30 days after the redemption date, provided, however, that the failure to give any second notice by mailing, or any defect in such notice, will not affect the validity of any proceedings for the redemption of any of the Series 2017A Bonds and the Bond Trustee will not be liable for any failure by the Bond Trustee to send any second notice.
Any Series 2017A Bonds and portions of Series 2017A Bonds that 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 2017A 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 2017A Bonds called for redemption, such notice may state that the redemption is conditional, that is, subject to the deposit of moneys for the redemption with the Bond Trustee not later than the redemption date, and such notice will be of no effect and the Series 2017A Bonds will not be redeemed unless such moneys are so deposited.
Redemption of Portion of Series 2017A Bonds. The Series 2017A Bonds will be redeemed only in Authorized Denominations. If less than all of the Series 2017A Bonds are called for redemption, the Corporation will select the maturities of the Series 2017A Bonds to be redeemed and the Bond Trustee will select the portions thereof within a maturity by lot, and the remaining Series 2017A Bonds that have not been so called for redemption will be in Authorized Denominations.
So long as the only owner of the Series 2017A Bonds is DTC, such selection will, however, be made by DTC. If a portion of a Series 2017A Bond is called for redemption, a new Series 2017A Bond in the principal amount equal to the unredeemed portion thereof will be issued to the Holder upon surrender thereof.
12 Purchase in Lieu of Redemption. Pursuant to the Bond Indenture, the Authority irrevocably grants to the Corporation the option to purchase, at any time and from time to time, any Series 2017A 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 Corporation to exercise such option, the Corporation must notify the Bond Trustee not less than five Business Days prior to the proposed redemption date that amounts available to pay the redemption price of such Series 2017A Bonds are to be applied to purchase such Series 2017A 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 receipt of a Favorable Opinion of Bond Counsel, the Bond Trustee will purchase the Series 2017A Bonds to be redeemed in lieu of such redemption and, following such purchase, the Bond Trustee will cause such Series 2017A Bonds to be registered in the name of or upon direction of the Corporation and deliver them to or as directed by the Corporation. No purchase of Series 2017A Bonds pursuant to the provisions of the Bond Indenture described in this paragraph will operate to extinguish the indebtedness of the Authority evidenced thereby.
Book-Entry System
The Series 2017A Bonds will be issued in book-entry form. DTC will act as the initial Securities Depository for the Series 2017A Bonds. The Series 2017A Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee). One fully-registered Series 2017A Bond will be issued for each maturity of the Series 2017A Bonds in the total aggregate principal amount due on such maturity and will be deposited with or upon the direction of DTC. See Appendix G ‒ “INFORMATION REGARDING BOOK-ENTRY ONLY SYSTEM.”
For so long as the Series 2017A Bonds are registered in the name of DTC or its nominee, Cede & Co., the Authority and the Bond Trustee will recognize only DTC or its nominee, Cede & Co., as the registered owner of Series 2017A Bonds for all purposes, including payments, notices and voting.
Because DTC is treated as the registered owner of the Series 2017A 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 Authority, DTC and the Bond Trustee, 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 2017A 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 Authority’s obligations under the Bond Indenture, the obligations of the Corporation under the Loan Agreement and the Obligated Group Members’ obligations under the 2017A Obligation, as applicable, to the extent of the payments so made.
Neither the Authority, the Obligated Group Members 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 2017A 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 2017A Bond including, without limitation, any notice of redemption with respect to any Series 2017A 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 2017A Bond; and
13 • the selection of the Beneficial Owners to receive payment in the event of any partial redemption of the Series 2017A Bonds.
Prior to any discontinuation of the book-entry only system with respect to the Series 2017A Bonds as hereinabove described, the Authority and the Bond Trustee may treat DTC as, and deem DTC to be, the absolute owner of the Series 2017A Bonds for all purposes whatsoever, including, without limitation:
• the payment of interest on the Series 2017A Bonds or the redemption price of a Series 2017A Bond;
• giving notices of redemption and other matters with respect to the Series 2017A Bonds;
• registering transfers of the Series 2017A Bonds; and
• the selection of Series 2017A Bonds for redemption.
[Remainder of Page Intentionally Left Blank]
14 ANNUAL DEBT SERVICE REQUIREMENTS
The following table sets forth for each twelve-month period ending July 1: (i) the principal and interest due on the Series 2017A Bonds (whether at maturity or pursuant to sinking fund redemptions) and the total debt service requirements of such Bonds; and (ii) the estimated total debt service requirements on the Series 2017B Direct Purchase Bonds. This table illustrates the estimated total debt service requirements on all Bonds outstanding as of the issuance of the Series 2017 Bonds.
Series 2017A Bonds Estimated Period Total Debt Service on Total Debt Service Estimated Ending Series on Series Total Debt (July 1)* Principal Interest 2017A Bonds 2017B Bonds(1)(2) Service 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044
* Preliminary, subject to change. (1) The interest rate on the Series 2017B Direct Purchase Bonds is assumed at a rate of __% per annum to maturity. (2) Debt service on the Series 2017B Direct Purchase Bonds includes estimated principal and interest payments. These figures exclude estimated cash flows related to any interest rate derivatives.
15 For additional information relating to the liquidity, historic pro forma coverage of debt service and the capitalization ratio for the Corporation, see “OTHER FINANCIAL INFORMATION” in Appendix A.
BONDHOLDERS’ RISKS
General
The Series 2017A Bonds are limited obligations of the Authority and are secured by and payable solely from the funds provided by the Corporation to the Authority under the Loan Agreement and certain funds held by the Bond Trustee. No representation or assurance can be given that the Corporation will generate sufficient revenues to meet its payment obligations under the Loan Agreement.
The ability of the Corporation to generate revenues sufficient to pay debt service on the Series 2017A Bonds is subject to the capabilities of the Corporation’s management, confidence of its physicians, receipt of grants, contributions and interest earnings, the economic conditions of the Hospital Facilities’ service areas, the level of and methods of general reimbursement under Medicare, federal and state reimbursement under Medicaid and reimbursement from other third party payors, demand for the Hospital Facilities’ services, competition with other facilities offering comparable services and with various health plans, government regulation and licensing requirements and future economic and other conditions (including the impact of inflation) that are unpredictable and are not quantifiable or determinable at this time.
Neither the Underwriters nor the Authority nor the Bond Trustee has made any independent investigation of the extent to which any such factors may have an adverse impact on the revenues of the Corporation. The future financial condition of the Corporation could be adversely affected by, among other things, legislation, regulatory actions, increased competition from other health care providers, demand for health care services, demographic changes and malpractice claims and other litigation. Some of the factors that might affect the Corporation’s revenue generating abilities or which could otherwise affect the Bondholders are discussed below.
Nature of Limited Obligations
The Series 2017A Bonds are limited obligations of the Authority, payable solely from moneys pledged thereto under the Master Indenture, including loan payments made by the Corporation to the Authority in respect of debt service requirements on the Series 2017A Bonds under the Loan Agreement. Other than the payments received under the Loan Agreement and other amounts available under the Master Indenture, the Authority is not liable for any payments due with respect to the Series 2017A Bonds of either principal payments, or interest, and the Authority has no legal or moral obligation to make any appropriation of other amounts for such payments.
Lack of Secondary Market
Although the Underwriters may engage in secondary market trading of the Series 2017A Bonds (subject to applicable state securities laws), the Underwriters are not obligated to repurchase any of the Series 2017A Bonds at the request of the owners thereof and cannot assure that there will be a continuing secondary market in the Series 2017A Bonds.
Construction Delays Could Adversely Affect Revenues From Facilities Operated by the Corporation
As described above under the heading “Plan of Finance” and in Appendix A under the heading “MILFORD REPLACEMENT HOSPITAL,” a portion of the proceeds of the Series 2017B Bonds will be applied to pay a portion of the costs of constructing the new Milford Replacement Hospital, currently estimated to cost approximately $314 million. See “MILFORD REPLACEMENT HOSPITAL” in Appendix A. While the Corporation believes that funds available will be sufficient to cover all costs of construction and equipping this project, delays in construction and/or completion of this project may impose financial burdens on the Corporation and reduce revenue produced by the Corporation’s facilities. Delays in construction may occur due to a variety of factors, including delays in obtaining necessary licenses and permits, delays in or shortages of construction materials, weather conditions and other casualties and delays in performance by construction managers and subcontractors.
16 Security and Enforceability
Bankruptcy
In the event any Obligated Group Member files for protection from creditors under the United States Bankruptcy Code, the rights and remedies of the Owners of the Series 2017A Bonds would be subject to various provisions of the United States Bankruptcy Code. If an Obligated Group Member were to commence a proceeding in bankruptcy, payments made by that Obligated Group 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 Obligated Group Member. Security interests and other liens granted by such Obligated Group Member to the Bond Trustee or the Master Trustee and perfected during such preference period may also 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 Obligated Group 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 Obligated Group Member, including such Obligated Group Member’s Gross Revenues and the proceeds thereof, could be used for the financial rehabilitation of such Obligated Group 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 Obligated Group 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 2017A Bonds.
In the event of bankruptcy of an Obligated Group 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 Obligated Group Member, as debtor in possession, or a bankruptcy trustee could take action which might adversely affect the exclusion of interest on the Series 2017A Bonds from gross income for federal income tax purposes.
Pledge of Gross Receipts
The effectiveness of the security interest in the Gross Revenues of the Obligated Group Members pursuant to the Master Indenture may be limited by a number of factors, including (i) the absence of an express provision permitting assignment of receivables due to an Obligated Group Member under governmental programs, and present or future prohibitions against assignment contained in any federal statutes or regulations; (ii) certain judicial decisions that cast doubt upon the right of the Master Trustee, in the event of the bankruptcy of any Obligated Group Member, to collect and retain accounts receivable from Medicare, Medicaid, general assistance and other governmental programs; (iii) statutory liens; (iv) rights arising in favor of the United States of America or any agency thereof; (v) constructive trusts, equitable or other rights impressed or conferred by a federal or state court in the exercise of its equitable jurisdiction; (vi) federal bankruptcy laws which may affect the priority of claims against the assets of the Obligated Group Members and the enforceability of the Master Indenture or the security interest in the Gross Revenues which are earned by any Obligated Group Member within 90 days preceding and after any effectual institution of bankruptcy proceedings by or against such Obligated Group Member; (vii) rights of third parties in the revenues of any Obligated Group Member converted to cash and not in the possession of the Bond Trustee or the Master Trustee;
17 and (viii) claims that might gain priority if appropriate financing or continuation statements are not filed in accordance with the Delaware Uniform Commercial Code as from time to time in effect.
Enforceability of the Master Indenture, the Loan Agreement and the 2017A Obligation
The legal right and practical ability of the Bond Trustee to enforce rights and remedies under the Loan Agreement, of the Master Trustee to enforce its rights and remedies under the Master Indenture and the 2017A Obligation 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 2017A Obligation against any Obligated Group 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 Members on the 2017A Obligation also apply to their obligations on all Obligations. If the obligation of an Obligated Group Member to make payment on an Obligation is not enforceable, and payment is not made on such Obligation when due in full, then Events of Default will arise under the Master Indenture.
An Obligated Group Member may not be required to make payments on or provide amounts for the payment of an Obligation, including the 2017A Obligation, issued by or for the benefit of another entity if and to the extent that any such payment or transfer would render such Obligated Group 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 Obligated Group 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 Obligations (including the 2017A Obligation) by an Obligated Group Member may be voided by a trustee in bankruptcy in the event such Obligated Group 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 for an Obligation (including the 2017A Obligation) that secures related bonds (including the Series 2017A 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 an Obligated Group Member to make a payment on a Obligation (including the 2017A Obligation), a court might not enforce such payment in the event it is determined that sufficient consideration for the Obligated Group Member’s obligation was not received, or that the incurrence of such obligation has rendered or will render the Obligated Group Member insolvent, or the Obligated Group 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
18 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.
Continued Utilization of Hospital’s Facilities
A significant portion of the Corporation’s revenues are derived from the inpatient and outpatient treatment of patients at the Corporation’s facilities by members of the Corporation’s medical staff. Physicians on the Corporation’s medical staff who have clinical privileges at other hospitals or health care facilities may admit or treat patients at other hospitals or health care facilities that are not affiliated with the Corporation, which could result in the decrease of the Corporation’s revenues.
If a significant number of Corporation-affiliated physicians leave the practice of medicine due to lower reimbursement rates and high costs of obtaining adequate malpractice insurance, the revenues of the Corporation could decrease if the patients previously treated by these physicians receive services at another health care facility or if they otherwise do not receive services at the Corporation.
The Corporation faces competition from other hospitals and health care facilities and could face additional competition in the future due to the construction of new, or the renovation of existing, hospitals and health care facilities in the areas served by it. No assurance can be given that occupancy of the Corporation’s facilities will not be adversely affected by the availability of other hospital and health care facilities in the service area of the Corporation and elsewhere.
Managed care companies and insurers are becoming increasingly selective in contracting with health care providers. The Corporation also faces potential competition from alternative health care delivery arrangements, such as HMOs, preferred provider organizations (“PPOs”), ambulatory surgical centers (“ASCs”), freestanding diagnostic imaging centers, accountable care organizations (“ACOs”) and unaffiliated physician group practices, many of which are designed to offer comparable services at lower prices. The federal government and private third-party payors, such as Blue Cross, may increase their efforts to encourage the development and use of such arrangements. The revenues of the Corporation could decrease significantly with the loss of certain third party payor contracts or if the mix of payor sources should change in materially adverse ways.
Health Care Industry Factors Affecting the Obligated Group
The health care industry is highly dependent on a number of factors that may limit the ability of the Obligated Group to meet its obligations under the Loan Agreement and the Master Indenture, a number of which are beyond the control of the Obligated Group. Among other things, participants in the health care industry are subject to the 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. Discussed below are certain of these factors which could have a significant impact on the future operations and financial condition of the Obligated Group.
The descriptions set forth below of certain governmental policies affecting health care and other matters are not intended as a complete discussion of all aspects of laws and regulations and such other matters that may affect the financial performance of health care providers. Health care providers operate in a complicated regulatory environment, many aspects of which may adversely affect the revenues and operations of such providers.
Impact of Current and Future Health Care Reform Efforts Unpredictable; Future of Affordable Care Act Uncertain
Affordable Care Act Generally
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Affordable Care Act” or “ACA”), has significantly changed, and continues to change, how health care services are covered, delivered, and financed in the United States. The primary goal of the
19 ACA - extending health coverage to millions of uninsured legal U.S. residents - has taken place through a combination of private sector health insurance reforms and Medicaid program expansion (discussed below). To fund Medicaid expansion, the ACA includes a broad array of quality improvement programs, cost efficiency incentives, and enhanced fraud and abuse enforcement measures, each designed to generate savings within the Medicare and Medicaid programs. Certain key provisions of the ACA are briefly discussed in more detail below. Additionally, the possible repeal or amendment of the ACA is also discussed below.
Future of ACA Uncertain: Amendment or Repeal Could Negatively Impact the Obligated Group’s Financial Condition
The ACA and its implementation has been, and remains, politically controversial. Accordingly, the ACA has continually faced legal and legislative challenges, including repeated repeal efforts, since its enactment. Management of the Corporation (“Management”) cannot predict the impact any major modification or repeal of the ACA, or any replacement health care reform legislation, might have on the Obligated Group’s business or financial condition, though such effects could be material. In particular, any legal, legislative or executive action that reduces federal health care program spending, increases the number of individuals without health insurance, reduces the number of people seeking health care due to increased insurance premiums, or otherwise significantly alters the health care delivery system or insurance markets could have a material adverse effect on the Obligated Group’s business or financial condition.
Current ACA Repeal Efforts
President Donald J. Trump and Republican leaders of Congress have repeatedly cited health care reform, and particularly, repeal and replacement of the ACA, as a key goal. To date, the Senate has not passed any legislation to repeal the ACA. It is unknown if Congress will enact any legislation to repeal or significantly modify the ACA, and Management cannot predict whether any bill aimed at repealing and replacing all or a portion of the ACA will become law. The potential effects of any legislation to repeal the ACA on federal health care spending and the uninsured rate is unclear but could result in: (1) the uninsured rate increasing and (2) the federal deficit shrinking, largely due to reductions in Medicaid spending. Any legislative action that reduces federal health care program spending, increases the number of individuals without health insurance, reduces the number of people seeking health care due to increased insurance premiums, or otherwise significantly alters the health care delivery system or insurance markets could have a material adverse effect on the Obligated Group’s business or financial condition.
President Trump’s Executive Action and the ACA
In addition to legislative changes, ACA implementation and the ACA insurance exchange markets can be significantly impacted by executive branch actions. On January 20, 2017, President Trump issued an executive order requiring all federal agencies with authorities and responsibilities under the ACA to “exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay” parts of the ACA that place “unwarranted economic and regulatory burdens” on states, individuals or health care providers. While it is impossible to predict the effect of this broad executive order, the Department of Health and Human Services (“HHS”) might interpret the executive order to require it to freely grant exemptions from the individual mandate’s “shared responsibility payment” (discussed below), which has the potential to significantly impact the insurance exchange market by reducing the number of healthy individuals in the ACA health insurance exchanges. On October 12, 2017, President Trump issued a second executive order requiring three federal agencies to consider proposing regulations to promote the expansion of associated health plans among employers, short-term limited-duration insurance, and health reimbursement arrangements. The executive order does not require action by the agencies for 60-120 days following the order, so it is unclear at this time what, if any, regulations will be proposed. Associated health plans would be governed by federal employment law, not state insurance regulations, and would therefore be subject to fewer rules. Trump also announced that the administration would stop paying certain subsidies to insurance companies that were created as part of the ACA. Reductions or halts in cost-sharing subsidies may cause insurers to incur financial losses and stop offering plans through the ACA insurance exchanges. Additionally, the executive branch may elect to cease defending a pending lawsuit (House v. Price) which challenges the legality of cost-sharing subsidies paid by the federal government to insurance companies which offer coverage on the ACA insurance exchanges. Either action has the potential to significantly impact the insurance exchange market by reducing the number of plans available on the ACA health insurance exchanges and/or increase insurance premiums for employers and individuals. Management
20 cannot predict the likelihood or effect of any such executive actions on the Obligated Group’s business or financial condition, though such effects could be material.
ACA Health Insurance Market Reforms/Health Insurance Exchanges
One key provision of the ACA is the “individual mandate,” which requires most Americans to maintain “minimum essential” health insurance coverage. Those who do not comply with the individual mandate must make a “shared responsibility payment” to the federal government in the form of a tax penalty. Individuals who are not exempt from the individual mandate, and who do not receive health insurance through an employer or government program, are expected to satisfy the individual mandate requirement by purchasing insurance from a private company or a “health insurance exchange.” Health insurance exchanges are government-regulated organizations that provide competitive markets for buying health insurance by offering individuals and small employers a choice of different health plans, certifying plans that participate, and providing information to help consumers better understand their options. Some states have elected to operate their own exchanges, including Delaware. Citizens in states without a health insurance exchange may use the federal government’s health insurance exchange found online at Healthcare.gov. Individuals enrolled in an insurance plan purchased through an exchange may be eligible for a premium credit or cost-sharing subsidy. Following legal challenges seeking to limit the availability of premium credits and subsidies only to individuals enrolled in coverage through a state-based exchange, the U.S. Supreme Court upheld U.S. Internal Revenue Service (“IRS”) regulations extending such subsidies to individuals who purchase coverage through the federal government’s health insurance exchange. The health insurance exchanges may have a positive impact for hospitals by increasing the availability of health insurance to individuals who were previously uninsured. Conversely, health insurance exchanges may have a negative financial impact on health care providers to the extent (1) insurance plans purchased on the exchange reimburse providers at lower rates or (2) high deductible plans offered on the exchanges become more prevalent and lead to lower inpatient volumes as patients choose to forgo medical treatment to avoid such high deductibles or increasing numbers of individuals who have high deductible plans are unable to meet their deductible obligations. As the health insurance exchanges are still relatively new, their effect on the reimbursement rates paid by health insurers, and accordingly, on health care providers’ business and financial condition, cannot be predicted. In the past year, many insurance companies decided to cease offering plans through the exchanges due to financial losses on such plans. For example, if the federal government stops making cost-sharing subsidy payments (discussed above) to insurers offering plans on the exchanges, it is predicted that even more insurers will drop out of the exchanges. Accordingly, even without repeal or modification of the ACA as discussed above, the future of the exchanges is uncertain.
The “employer mandate” provision of the ACA requires the imposition of penalties on employers having 50 or more employees who do not offer qualifying health insurance coverage to those working 30 or more hours per week. The ACA also established a number of other health insurance market reforms, including bans on lifetime limits and pre-existing condition exclusions, new benefit mandates, and increased dependent coverage (until the age of 26). Any future legal, legislative, or executive action that results in a reduction of the number of individuals with health insurance coverage, a reduction of the number of people seeking health care due to increased premiums, or a decrease in health care reimbursement rates could have a material adverse effect on the Obligated Group’s business or financial condition.
ACA Medicaid Expansion
Another key provision of the ACA is the expansion of Medicaid coverage. Prior to the passage of the ACA, Medicaid offered federal funding to states to assist limited categories of low-income individuals (including children, pregnant women, the blind, and the disabled) in obtaining medical care. The ACA expanded Medicaid eligibility to virtually all individuals under 65 years old with incomes up to 138% of the federal poverty level beginning in 2014. The ACA provided that the federal government would fund 100% of the Medicaid expansion costs through 2016. Federal funding for state Medicaid expansion will gradually decrease to 90% by 2020 and beyond. The expansion of the Medicaid program in each state is not mandatory and there is no deadline for a state to undertake expansion and qualify for the enhanced federal funding available under the ACA. For states that chose not to participate in the federally funded Medicaid expansion the net effect of ACA reforms has been significantly reduced. Through the ACA, Delaware expanded Medicaid eligibility to adults without dependents with incomes up to 138 percent of the federal poverty level. The coverage effective dates for those qualifying for Delaware’s Medicaid expansion started Jan. 1, 2014.
21 Since the U.S. Supreme Court's 2012 ruling on the ACA allowed states to opt out of the law's Medicaid expansion, each state’s decision to participate is in the hands of the nation's governors and state leaders. As of the date of this Official Statement, Delaware is one of 32 states that have expanded Medicaid under the ACA. The fate of Medicaid expansion, even beyond Delaware, remains uncertain amid the debate over whether to repeal and replace the ACA. Management is unable to predict the ramification on operations if legislation is adopted that changes the current Medicaid program in Delaware.
ACA Spending Reductions
The ACA contains a number of provisions designed to significantly reduce Medicare and Medicaid program spending, including: (1) negative adjustments to the “market basket” updates for Medicare’s inpatient, outpatient, long-term acute and inpatient rehabilitation prospective payment systems, which began in 2010, as well as additional “productivity adjustments” that began in 2011; and (2) reductions to Medicare and Medicaid disproportionate share hospital (“DSH”) payments, which began for Medicare payments in federal fiscal year 2014 and will begin for Medicaid payments in federal fiscal year 2018, as the number of uninsured individuals declines. Any reductions to reimbursement under the Medicare and Medicaid programs could adversely affect the Obligated Group’s financial condition to the extent such reductions are not offset by increased revenues from providing care to previously uninsured individuals.
ACA Quality Improvement and Clinical Integration Initiatives
The ACA mandated the creation of a number of payment reform measures designed to incentivize or penalize hospitals based on quality improvement measures, performance measures and clinical integration, such as the Readmission Reduction Program, the Hospital Value-Based Purchasing Program, and the Hospital Acquired Condition Reduction Program. The Readmission Reduction Program reduces Medicare payments by specified percentages to hospitals with excess or preventable hospital admissions based on historical discharge data. The Hospital Value-Based Purchasing Program, funded through an across the board reduction in payments to hospitals for inpatient services, reallocates and redistributes Medicare reimbursement funds to hospitals based on how well they perform on quality and patient experience measures. The ACA also gave the Center for Medicare & Medicaid Innovation within CMS the authority to develop and test new payment methodologies designed to improve quality of care and lower costs. Management is not currently aware of any situation in which an ACA quality, efficiency or clinical integration program is materially adversely affecting the business and financial condition of the Obligated Group. However, the Obligated Group’s business and financial condition may be adversely affected by such programs in the future.
ACA Fraud and Abuse Enforcement Enhancements
In an attempt to reduce unnecessary health care spending, the ACA included a number of provisions aimed at combating fraud and abuse within the Medicare and Medicaid programs. The ACA provides additional enforcement tools to the government, facilitates cooperation between agencies by establishing mechanisms for the sharing of information, and enhances criminal and administrative penalties for non-compliance with the Medicare and Medicaid fraud and abuse laws, such as the Anti- Kickback Statute, Stark Law and federal False Claims Act (discussed below). For example, the ACA: (1) provides $350 million in increased federal funding over 10 years to fight health care fraud, waste and abuse; (2) authorizes HHS, in consultation with the Office of Inspector General (“OIG”), to suspend Medicare and Medicaid payments to a provider of services or a supplier “pending an investigation of a credible allegation of fraud;” (3) provides Medicare contractors with additional flexibility to conduct random prepayment reviews; and (4) strengthens the rules for returning overpayments made by governmental health programs and expands liability under the federal False Claims Act to include failure to timely repay identified overpayments. Furthermore, the ACA contains provisions relating to recovery audit contractors ("RACs”), which are third-party organizations under contract with CMS that identify underpayments and overpayments under the Medicare program and recoup any overpayments on behalf of the government. The ACA expanded the RAC program’s scope to include Medicaid claims and required all states to enter into contracts with RACs. Management is not currently aware of any pending recovery audit which, if determined adversely to the Obligated Group, would materially adversely affect the business and financial condition of the Obligated Group.
22 Full Impact of ACA Difficult to Predict
It remains difficult to predict the full impact of the ACA on the Obligated Group’s future revenues and operations at this time due to uncertainty regarding a number of material factors, including: (1) how many currently uninsured individuals will ultimately obtain and retain insurance coverage as a result of the ACA (either through private health insurance or Medicaid); (2) what percentage of any newly insured patients will be covered under the Medicaid program versus a commercial plan obtained on a health insurance exchange; (3) the pace at which insurance coverage expands, including the pace of different types of coverage expansion; (4) future changes in the reimbursement rates and market basket updates; (5) the percentage of individuals in the exchanges who select the high-deductible plans, considering that health insurers offering those kinds of products have traditionally sought to pay lower rates to hospitals; (6) the extent to which the enhanced program integrity and fraud and abuse provisions lead to a greater number of civil or criminal actions or impact Medicare and Medicaid payments; (7) the extent to which the ACA puts pressure on the profitability of health insurers, which in turn might cause them to seek to reduce payments to hospitals with respect to both newly insured individuals and their existing business; (8) the amount of overall revenues the Obligated Group will generate from the Medicare and Medicaid programs when the reductions are fully implemented; (9) whether future reductions required by the ACA will be changed by statute prior to becoming effective; (10) the reductions to Medicaid DSH payments; (11) what the losses in revenues, if any, will be from the ACA’s quality initiatives; (12) how successful clinical integration and other pilot programs in which the Obligated Group participates will be at coordinating care and reducing costs; and (13) the scope and nature of potential changes to Medicare reimbursement methods, such as an emphasis on bundling payments or coordination of care programs. Further, as noted above, the future of the ACA is unclear and the impact of any current or future health care reform efforts is unpredictable. It is impossible to predict the impact future health reform efforts might have on the Obligated Group’s business or financial condition, but such effects could be material.
Proposed Rule Affecting the 340B Program
Hospitals that participate in the prescription drug discount program established under Section 340B of the federal Public Health Service Act (the "340B Program") are able to purchase certain outpatient drugs for patients at a reduced cost. The federal agency that administers the 340B Program, HHS's Health Resources and Services Administration ("HRSA"), issued a proposed rule on August 28, 2015 which addressed key policy issues related to the 340B Program, including but not limited to eligibility requirements for participating hospitals, outpatient facilities and patients, registration requirements, drug eligibility, and manufacturer compliance. If adopted as proposed, the proposed rule could, among other things, restrict the Corporation from purchasing drugs from the 340B Program. Such restrictions could have a material adverse effect on the Corporation. On January 5, 2017, HRSA issued a final rule called the 340B Pricing Program Ceiling Price and Manufacturers Civil Monetary Penalties Regulation. On January 30, 2017, the Trump administration withdrew this proposed rule. Similar legislation could, however, be introduced again in the future. Additionally, eligibility for the 340B Program is determined annually and there is no guarantee that eligibility one year will result in eligibility in future years.
Potential Future Legislation
Other legislative proposals that could have an adverse effect on the Corporation include, without limitation: (i) any changes in the taxation of not for profit corporations or in the scope of their exemption from income, sales or property taxes; (ii) limitations on the amount or availability of tax exempt financing for corporations recognized under Section 501(c)(3) of the Code; and (iii) regulatory limitations affecting the Corporation’s ability to undertake capital projects or develop new services.
Legislative bodies have considered proposed legislation on the charity care standards that non-profit, charitable hospitals must meet to maintain their federal income tax exempt status under the Code and legislation mandating non-profit, charitable hospitals to have an open-door policy toward Medicare and Medicaid patients as well as offer, in a non-discriminatory manner, qualified charity care and community benefits. Excise tax penalties on non- profit, charitable hospitals that violate these charity care and community benefit requirements could be imposed or their tax-exempt status under the Code could be revoked. As described above, because of the complexity of health reform generally, legislation beyond the ACA is likely to be considered and enacted over time. The scope and effect of legislation, if any, which may be adopted at the Federal or state levels with respect to charity care of non-profit
23 hospitals cannot be predicted. Any such legislation or similar legislation, if enacted, may have the effect of subjecting a portion of the Obligated Group’s income to Federal or state income taxes or to other tax penalties.
Payment for Health Care Services
Third-Party Payment Programs
Most of the patient service revenues of the Corporation are derived from third-party payors, which reimburse or pay for the services and items provided to patients covered by such third parties for such services, including the federal Medicare program, state Medicaid program and private health plans and insurers, health maintenance organizations (“HMOs”), preferred provider organizations (“PPOs”) and other managed care payors. Many of these third-party payors make payments to the Corporation at rates other than the direct charges of the Corporation, which rates may be determined on a basis other than the actual costs incurred in providing services and items to patients. Accordingly, there can be no assurance that payments made under these programs will be adequate to cover the Corporation’s actual costs of furnishing health care services and items. In addition, the financial performance of the Corporation could be adversely affected by the insolvency of, or other delay in receipt of payments from, third-party payors which provide coverage for services to their patients.
Medicare and Medicaid Programs
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. Medicare is an exclusively federal program, and Medicaid is a combined federal and state program. 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 services and certain other services, and Medicare Part B covers outpatient services, certain physician services, medical supplies and durable medical equipment. Medicaid is designed to pay providers for care given to the medically indigent and others who receive federal aid. Medicaid is funded by federal and state appropriations and is administered by state agencies. CMS, an agency of HHS, administers the Medicare program and works with the states regarding the Medicaid program, as well as other health care programs.
Health care providers have been and continue to be affected significantly by changes made in the last several years in federal and state health care laws and regulations, particularly those pertaining to Medicare and Medicaid. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “MMA”), among other things described below, generally increased reimbursement levels. The Deficit Reduction Act of 2005 (the “DRA”) contained, among other things, a number of provisions to slow the pace of spending growth in the Medicare and Medicaid programs while increasing health care providers’ focus on quality and efficient delivery of health care services. The purpose of much of the recent statutory and regulatory activity, including the MMA, has been to reduce the rate of increase in health care costs, particularly costs paid under the Medicare and Medicaid programs. Diverse and complex mechanisms to limit the amount of money paid to health care providers under both the Medicare and Medicaid programs have been enacted, some of which are being implemented and some of which will be or may be implemented in the future. Management is unable to predict what effect, if any, current and future legislative initiatives related to Medicare and Medicaid may have on operations and financial results of the Corporation.
Medicare
For the fiscal year ended June 30, 2017, approximately 34.1% of the net patient revenue after bad debt of the Corporation was derived from Medicare and Medicare HMO payors. As a consequence, any adverse development or change in Medicare reimbursement could have a material adverse effect on the financial condition and results of operations of the Corporation.
Inpatient Operating Reimbursement under PPS
For acute care hospitals, Medicare Part A pays for most inpatient services under PPS. Separate PPS payments are made for inpatient operating costs and inpatient capital-related costs. The following discussion on Medicare reimbursement relates to hospitals that are reimbursed on a PPS basis.
24 Acute care hospitals that are reimbursed on a PPS basis are paid a specified amount toward their operating costs based on the Diagnosis Related Group (“DRG”) to which each Medicare hospitalization is assigned, which is determined by the diagnosis and procedure and other factors for each particular inpatient stay. The amount paid for each DRG is established prospectively by CMS based on the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis and is not directly related to a hospital’s actual costs. For certain Medicare beneficiaries who have unusually costly hospital stays (“outliers”), CMS will provide additional payments above those specified for the DRG. Outlier payments cease to be available upon the exhaustion of such patient’s Medicare benefits or a determination that acute care is no longer necessary, whichever occurs first. There is no assurance that any of these payments will cover the actual costs incurred by a hospital. In addition, revisions to the outlier regulations could be implemented to curb outlier payment abuse, which may adversely affect hospitals’ ability to receive such subsidies. In addition to outlier payments, DRG payments are adjusted for area wage differentials. These change on a yearly basis.
DRG payments are adjusted each federal fiscal year (which begins October 1) based on the hospital “market basket” index, or the cost of providing health care services. For nearly every year since 1983, Congress has modified the increases and given substantially less than the increase in the “market basket” index. In federal fiscal year 2008, CMS also implemented a documentation and coding adjustment to account for changes in payments under the Medicare Severity Diagnosis Related Group, or MS-DRG system that are not related to changes in case mix. CMS was given the authority to retrospectively determine if the documentation and coding adjustments were adequate to account for changes in payments not related to changes in case mix. The Taxpayer Relief Act requires CMS to recover $11 billion by 2017 to fully recoup documentation and coding overpayments related to the transition to the MS-DRG system.
The ACA reduces the annual Medicare market basket updates each federal fiscal year through federal fiscal year 2019. The ACA also provides that annual Medicare market basket updates will be subject to productivity adjustments, further reducing Medicare payments to hospitals. The reductions in market basket updates and the productivity adjustments will have a disproportionately negative effect upon those providers that rely more upon Medicare. Moreover, certain reductions in market basket updates take effect prior to the expansion of insurance coverage and the number of insured consumers. This sequence of events is expected to have an interim negative effect on revenues and operating income. The combination of reductions to the market basket updates and the imposition of the productivity adjustments may, in some cases and in some years, result in reductions in Medicare payments per discharge on a year-to-year basis. Changes in the payments received for all services, including specialty services, could have an adverse effect on the Corporation. For further information regarding the ACA and its provisions, see “BONDHOLDERS’ RISKS – Impact of Current and Future Health Care Reform Efforts Unpredictable; Future of Affordable Care Act Uncertain” herein.
As required by the DRA, hospitals that do not participate in the Hospital Inpatient Quality Reporting Program (the “Hospital Quality Initiative”) will receive the market basket update, less 2%. CMS continues to update quality measures that hospitals must report in order to qualify for the full market basket update. The Corporation’s hospitals participate in the Hospital Quality Initiative.
The ACA establishes a value-based purchasing program to link payments to quality and efficiency. The inpatient PPS payment amount for all discharges is reduced by between one and two percent (two percent for fiscal year 2017), and the total amount collected from these reductions is pooled and used to fund payments to reward hospitals that meet certain quality performance standards established by HHS. The ACA provides HHS with considerable discretion over the value-based purchasing program. CMS distributes funds to hospitals in each fiscal year based on their overall performance on a set of quality measures that have been linked to improved clinical processes of care and patient satisfaction. For fiscal year 2017, hospitals are scored based on a weighted average of performance across four domains that reflect hospital quality: (1) the clinical care domain, comprised of process and outcomes subdomains, (2) the patient – and caregiver centered experience of care/care coordination domain, (3) the safety domain, and (4) the efficacy and cost reduction domain. CMS will score each hospital based on achievement (relative to other hospitals) and improvement ranges (relative to the hospital’s own past performance) for each applicable measure. Because the ACA provides that the pool will be fully distributed, hospitals that meet or exceed the quality performance standards will receive greater reimbursement under the value-based purchasing program than they would have otherwise. Hospitals that do not achieve the necessary quality performance will receive reduced Medicare inpatient hospital payment. Management of the Corporation is unable to predict how value-based
25 purchasing will affect its results of operations; however, the program could negatively impact the revenues of the Corporation. See also –“Impact of Current and Future Health Care Reform Efforts Unpredictable; Future of Affordable Care Act Uncertain” herein regarding the uncertainty of the future of the ACA.
The Secretary of HHS is required to review annually the DRG categories to take into account any new procedures, to reclassify DRGs and to recalibrate the DRG relative weights that reflect the relative hospital resources used by hospitals with respect to discharges classified within a given DRG category. There is no assurance that the Obligated Group will be paid amounts that will adequately reflect changes in the cost of providing health care or in the cost of making health care technology available to patients. Since the implementation of the MS-DRG system, CMS created new DRGs and revised or deleted others in order to better recognize the severity of illness for each patient. CMS may only adjust DRG weights on a budget-neutral basis.
Inpatient psychiatric services are reimbursed on a PPS basis, as mandated by the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999. The inpatient psychiatric facility PPS (“IPF PPS”) applies to both freestanding psychiatric hospitals and certified psychiatric units in general acute care hospitals.
Inpatient Capital Costs
With limited exceptions, hospitals are reimbursed on a fully prospective basis for capital costs related to the provision of inpatient services to Medicare beneficiaries. Thus, capital costs are reimbursed exclusively on the basis of a standard federal rate (based on average national costs), subject to certain adjustments (such as for disproportionate share, indirect medical education and outlier cases) specific to the hospital. Hospitals are reimbursed at 100% of the standard federal rate for all capital costs. This applies to the standard federal rate before the application of the adjustment factors for outliers, exceptions and budget neutrality.
There can be no assurance that the prospective payments for capital costs will be sufficient to cover the actual capital-related costs of the Corporation allocable to Medicare patient stays or to provide adequate flexibility in meeting the Corporation’s future capital needs.
Disproportionate Share Adjustments
Under PPS, hospitals that serve a disproportionate share of low-income patients may receive an additional disproportionate share hospital adjustment (“DSH”). A hospital may be classified as a DSH hospital based upon any of several circumstances related to the number of beds, the hospital’s location, and its disproportionate patient percentage. DSH adjustments are calculated under several methods, depending upon the basis for the hospital’s classification as a DSH hospital. For the fiscal year ended June 30, 2017, the Corporation received Medicare DSH payments and other reimbursements for uncompensated care totaling approximately $6,544,985. The ACA, provided that, beginning in federal fiscal year 2014, hospitals receiving DSH payments would see their DSH payments reduced significantly over time. This reduction potentially will be offset by new, additional payments based on the volume of uninsured and uncompensated care provided by each such hospital, and may be offset by a higher proportion of covered patients as other provisions of ACA go into effect. The extent to which these reductions are offset depends considerably on whether the state in which the hospital is located has expanded Medicaid eligibility. Medicare DSH payments will continue to decrease as the number of uninsured also decreases. DSH payments are reduced each year. The reduction in DSH payments that would otherwise be paid through Medicare will be effectively pooled, and this pool will be reduced further each year by a formula that reflects reductions in the national level of uninsured who are under 65 years of age. Each DSH hospital will then be paid, out of the reduced DSH payment pool, an amount allocated based upon its level of uncompensated care. On September 13, 2013, CMS issued a final rule confirming its methodology, which accounted for statewide reductions in uninsured and uncompensated care, and reduced Medicaid DSH allotments to each state. Under this final rule, the federal share of Medicaid DSH payments was reduced by $500 million in fiscal year 2014 and $600 million in fiscal year 2015. Such reductions have been delayed several times, most recently under the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), but are scheduled to take effect on October 1, 2018, while extending cuts through 2025. It is difficult to predict the full impact of the DSH reductions. There is no assurance that the Corporation will receive DSH payments in the future.
26 Costs of Outpatient Services
Hospital outpatient services, including hospital operating and capital costs, are reimbursed on a PPS basis. Several Medicare Part B services are specifically excluded from this rule, including certain physician and non- physician practitioner services, ambulance, clinical diagnostic laboratory services and nonimplantable orthotics and prosthetics, physical and occupational therapy, and speech language pathology services.
Under the hospital outpatient PPS (“OPPS”), predetermined amounts are paid for designated services furnished to Medicare beneficiaries. CMS classifies outpatient services and procedures that are comparable clinically and in terms of resource use into ambulatory payment classification (“APC”) groups. Using hospital outpatient claims data from the most recent available hospital cost reports, CMS determines the median costs for the services and procedures in each APC group. Subsequently, a payment rate is established for each APC. Depending on the services provided, a hospital may be paid for more than one APC for a patient visit.
The OPPS rates are adjusted annually (on a calendar year schedule) based on the hospital inpatient market basket percentage increase. There can be no assurance that the hospital OPPS rate, which bases payment on APC groups rather than on individual services, will be sufficient to cover the actual costs of the Corporation allocable to Medicare patient care.
In addition to the APC rate, there is a predetermined beneficiary coinsurance amount for each APC group. There can be no assurance that the beneficiary will pay this amount.
Certain provisions of the ACA relating to OPPS services have been implemented that may impact the reimbursement and operations of hospitals across the country. Some of the specific reforms that have the potential to impact hospitals are: (i) reduction of the OPPS market basket increase factor by a productivity adjustment (effective 2012) and an additional adjustment for payments to hospital outpatient departments (from 2010 through 2019); (ii) application of similar productivity adjustments for payment for ambulatory surgical center (“ASC”) services, which began with calendar year 2011; (iii) new provisions relating to the prohibition against referrals to a hospital by a physician who has an ownership or investment interest in the hospital; (iv) adjustments to the area wage adjustment factor for outpatient department services; and (v) changes related to payment for graduate medical education and indirect medical education.
Physician Payment
Certain physician services are reimbursed by Medicare and commercial insurers on the basis of a national fee schedule called the “resource based-relative value scale” (“RB-RVS”). The RB-RVS fee schedule establishes payment amounts for all physician services, including services of provider-based physicians, and is subject to annual updates. Historically, Medicare payments for physician services have been linked to the Sustainable Growth Rate (“SGR”). The SGR acted as a limit to the growth of Medicare payments and was linked to changes in the U.S. Gross Domestic Product over a ten-year period. The use of the SGR in determining physician fee schedule updates was widely criticized, and was consistently neutralized with Congressional intervention which served to delay considerable decreases to Medicare physician payments. On April 16, 2015, MACRA was placed into law (effective July 2015), replacing the SGR formula with statutorily prescribed physician payment updates and provisions. Specifically, MACRA eliminates the 21.2% cut to physician payments required by the 2015 MPFS, and substitutes annual 0.5% payment increases through 2019. Thereafter, payments rates will be frozen at 2019 levels through 2025. In addition to the base payment methodology, physicians can earn merit-based payments based on factors, including compliance with meaningful use of electronic health records requirements and demonstration of the principals of quality-based medicine. Ultimately, it remains unclear what effect this legislation will have on operations of the Corporation, including whether the reimbursement will cover the actual costs of providing physician services to Medicare beneficiaries.
Provider-Based Standards
Some health care providers bill for services as “provider-based entities” and, as such, are subject to CMS’ provider-based regulations. CMS has stated that prior approval of provider-based status by CMS is not required for
27 an entity to bill as provider-based. Rather, a provider may provide an optional attestation of its status as a provider- based entity. Although such attestation is not required to bill as a provider-based entity, it may provide some overpayment protection in the event that CMS subsequently makes a determination that an entity is not provider- based, assuming accurate representation by the provider to CMS. Any reclassification by CMS may adversely affect the entity’s reimbursement under the Medicare program. Based on current regulations, management of the Corporation believes all of their respective current facilities that bill for services as provider-based entities qualify as “provider-based” entities under the current regulations.
Medicare Advantage
Medicare beneficiaries may obtain Medicare coverage through a managed care Medicare Advantage plan. A Medicare Advantage plan may be offered by a coordinated care plan (such as an HMO or PPO), a provider sponsored organization (“PSO”) (a network operated by health care providers rather than an insurance company), a private fee- for-service plan, or a combination of a medical savings account (“MSA”) and contributions to a Medicare Advantage plan. With the exception of an MSA plan, each Medicare Advantage plan is required to provide benefits approved by the Secretary of HHS. A Medicare Advantage plan receives a monthly capitated payment from HHS for each Medicare beneficiary who has elected coverage under the plan. Health care providers, such as the Corporation, must contract with Medicare Advantage plans to treat Medicare Advantage enrollees at agreed upon rates. Alternatively, they may form a PSO to contract directly with HHS as a Medicare Advantage plan. Covered inpatient and emergency services rendered to a Medicare Advantage beneficiary by a hospital that is an out-of-plan provider (i.e., that has not entered into a contract with a Medicare Advantage plan) will be paid at Medicare fee-for-service payment rates as payment in full.
The ACA provides that, through September 30, 2019, payments under the Medicare Advantage programs will be reduced, which may result in increased premiums or out-of-pocket costs to Medicare beneficiaries enrolled in Medicare Advantage plans. These beneficiaries may terminate their participation in such Medicare Advantage plans and opt instead for the traditional Medicare fee-for-service program. The reduction in payments to Medicare Advantage plans may also lead to decreased payments to providers by managed care companies operating Medicare Advantage plans. There can be no assurance, however, that rates negotiated for the treatment of Medicare Advantage enrollees will be sufficient to cover the cost of providing services to such patients of the Corporation. All or any of these outcomes will have a disproportionately negative effect upon those providers that rely more upon Medicare managed care revenues. For further information regarding the Affordable Care Act and its provisions, see “BONDHOLDERS’ RISKS – Impact on Current and Future Health Care Reform Efforts Unpredictable; Future of Affordable Care Act Uncertain” herein. The Taxpayer Relief Act provided for modifications to the Medicare Advantage coding intensity adjustment, which adjusts Medicare Advantage payments to account for differences between fee-for-service Medicare and Medicare Advantage.
Medical Education Payments
Medicare currently pays for a portion of the direct and indirect costs of medical education (including the salaries of residents and teachers and other overhead costs directly attributable to approved medical education programs). Payment for the direct costs of medical education (“GME”) is made on a “pass-through” basis, not PPS, based on a formula that reflect the hospital’s base year per-resident costs adjusted by inflation and the number of current-year reimbursable resident positions. Payment for indirect costs of medical education (“IME”) is based on the ratio of a hospital’s number of full-time equivalent residents to its number of beds. These payments are vulnerable to reduction or elimination. Further, there can be no assurance that payments to the Corporation for providing medical education will be sufficient to cover the costs associated with their medical education programs.
Medicare Audits
Hospitals participating in Medicare are subject to audits and retroactive audit adjustments with respect to reimbursement claimed under the Medicare program. Medicare regulations also provide for withholding Medicare payment in certain circumstances if it is determined that an overpayment of Medicare funds has been made. In addition, under certain circumstances, payments may be determined to have been made as a consequence of improper claims subject to the federal False Claims Act (the “Federal False Claims Act”) or other federal statutes, subjecting
28 the Corporation to civil or criminal sanctions. Management is not aware of any situation whereby a material Medicare payment is being withheld from the Corporation.
RAC Audits
The Recovery Audit Contractor Program (“RAC Program”) is a CMS program that began in 2003 as a pilot program and became permanent in 2006. The Affordable Care Act expanded the RAC Program to include Medicare Part C (Medicare Advantage plans), Medicare Part D (prescription drug coverage) and the Medicaid program. The goal of the RAC Program is to identify and correct improper payments made to providers. RAC Program activities are executed by contractors selected by CMS, who are compensated on a contingency basis. Contractors have three years from the time a claim is paid to review that claim (or six months for medical necessity reviews).
Management of the Obligated Group aggressively pursues the recovery of any amounts they determine were inappropriately recouped by the RACs. Any additional RAC Program audits or other audit adjustments could be in excess of any reserves maintained by the Corporation, and such excesses could be substantial. Medicare regulations also provide for withholding Medicare payment in certain circumstances, as do the practices of other payors, and such withholds could have an adverse effect on the ability of the Corporation to make payments on their obligations or on their overall financial condition. There is no assurance that a significant payment may not be withheld from the Corporation in the future.
Similarly, as a result of an overpayment by one payor, it is possible that claims may be asserted by other payors. Further, a third-party payor might seek other fines, penalties or damages with respect to the claims resulting in the overpayments, Management cannot anticipate the amount or volume of the Obligated Group’s past Medicare claims that will be reviewed under the RAC Program or what the results of any such audits may be or whether the RAC Program will have a material impact on the results of operations and financial condition of the Obligated Group.
Medicaid
Medicaid (Title XIX of the federal Social Security Act) is a health insurance program for certain low-income and needy individuals that is jointly funded by the federal government and the states. It covers approximately 50 million people, including children, the aged, blind, and/or disabled, and individuals who are eligible to receive federally assisted income maintenance payments. Pursuant to broad federal guidelines, the states and the United States territories (Puerto Rico, Guam, the Virgin Islands, American Samoa, and the Northern Mariana Islands) each (i) establish their own eligibility standards; (ii) determine the type, amount, duration, and scope of services; (iii) set the payment rates for services; and (iv) administer their own programs. Some states operate certain Medicaid programs under a waiver of some of the basic Medicaid requirements. Pursuant to the Medicaid program, the federal government supplements funds provided by the various states for medical assistance to the medically indigent. Payment for such medical and health services is made to hospitals in an amount determined in accordance with procedures and standards established by state law under federal guidelines.
Fiscal considerations of both the federal and state governments in establishing their budgets will directly affect the funds available to providers for payment of services rendered to Medicaid beneficiaries. Currently, Medicaid nursing facility payments are generally made using a prospective per diem payment based on cost, adjusted for various factors, including acuity. In addition, Medicaid inpatient hospital payments are generally made under a DRG, prospective payment system on a per discharge basis. Although the payment systems can be categorized in general terms, the specific methodology varies from state to state.
Medicare and Medicaid Audits
Hospitals participating in Medicare and Medicaid are subject to audits and retroactive audit adjustments with respect to reimbursements claimed under those programs. Although management of the Corporation believes reserves are adequate for the purpose, any such future adjustments could be material. Both Medicare and Medicaid regulations also provide for withholding payments in certain circumstances. Any such withholding with respect to the Corporation could have a material adverse effect on the financial condition and results of operations of the Corporation. In addition, contracts between hospitals and third-party payors often have contractual audit, setoff and withhold language that may
29 cause substantial, retroactive adjustments. Such contractual adjustments also could have a material adverse effect on the financial condition and results of operations of the Corporation. Management of the Corporation is not aware of any situation in which a Medicare or other payment is being, or may in the future be, withheld that would materially and adversely affect the financial condition or results of operations of the Corporation.
Private Health Plans and Managed Care
Managed care plans generally use discounts and other economic incentives to reduce or limit their cost and utilization of health care services. Payments to the Corporation from managed care plans typically are lower than those received from traditional indemnity/commercial insurers. There is no assurance that the Corporation will maintain managed care contracts or obtain other similar contracts in the future. Failure to maintain contracts could have the effect of reducing the market share of the Corporation and the Corporation’s net patient service revenues. Conversely, participation may maintain or increase the patient base but could result in lower net income or operating losses to the Corporation if the Corporation is unable to adequately contain their costs.
Many PPOs and HMOs currently pay providers on a negotiated fee-for-service basis or on a fixed rate per day of care, which, in each case, usually is discounted from the typical charges for the care provided. The discounts offered to HMOs and PPOs may result in payment to a provider that is less than its actual cost. Additionally, the volume of patients directed to a hospital may vary significantly from projections used to formulate the discount, and changes in the utilization of certain services offered by the provider may be significant and unexpected, thus further reducing revenues and jeopardizing the provider’s ability to contain costs.
Some HMOs employ a capitation payment method under which hospitals are paid a predetermined periodic rate for each enrollee in the HMO who is assigned or otherwise directed to receive care at a particular hospital. In a capitation payment system, the hospital assumes a financial risk for the cost and scope of care given to such HMO’s enrollees. In some cases, the capitated payment covers total hospital patient care provided. However, if payment under an HMO or PPO contract is insufficient to meet the hospital’s costs of care or if utilization by such enrollees materially exceeds projections, the financial condition of the hospital could erode rapidly and significantly.
As a consequence of the above factors, the effect of managed care on the Corporation’s financial condition is difficult to predict and may be different in the future than the financial statements for the current periods reflect.
Inadequate Payments and Uncompensated Care
The Corporation is also at risk for the provision of hospital services on an uncompensated basis. Consistent with its status as a tax-exempt 501(c)(3) organization, the Corporation generally pursues a policy of providing care to the poor and indigent without regard to ability to pay. Governmental agencies may also compel the provision of uncompensated care. For example, State law imposes significant fines on a hospital that denies appropriate care on the basis of the patient’s ability to pay or the source of payment. The federal Emergency Medical Treatment and Active Labor Act (“EMTALA”) requires hospitals, without regard to ability to pay, to provide each individual who goes to the emergency department for emergency treatment to receive a screening to determine if the patient is experiencing an emergency condition and, if so, to provide care to stabilize the patient. EMTALA limits the circumstances under which a hospital may transfer a patient that is not stabilized, and increasingly hospitals are compelled to pay physicians to provide coverage for certain on-call specialty services. Moreover, Congress has over the years considered legislation which would require a hospital to perform a certain amount of charity care to maintain its 501(c)(3) status. As a result the Corporation may be required to provide services for which it receives reimbursement below cost, or for which it may receive no reimbursement, from the patient or third party payors. While the Corporation attempts to provide care to the poor and indigent in a prudent manner, the continuation or expansion of such policy, or the inability to properly document its indigent care, could have an adverse financial effect on the Corporation.
Financial Distress of Private Health Plans.
The Corporation may also be affected by the financial instability of the HMOs, PPOs and other third-party payors with which the Corporation contracts and/or from which the Corporation receives reimbursement for furnished
30 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.
Federal Regulatory and Contractual Matters
Existing United States laws governing Medicare and state health care programs such as Medicaid, as well as similar laws enacted in many states, impose a broad variety of prohibitions on soliciting, receiving, offering or paying, directly or indirectly, any form of remuneration, payment or benefit for the referral of a patient for services or products reimbursable by Medicare or a state health care program. The federal government has published regulations that provide exceptions or “safe harbors” for business transactions that will be deemed not to violate these prohibitions. Violation of these prohibitions may result in civil and criminal penalties and exclusion from participation in Medicare and state health care programs.
A federal law, commonly called the “Stark Law”, prohibits a physician from referring certain services that are reimbursed under Medicare and Medicaid to health care facilities with which the physician or a member of the physician’s immediate family have a financial relationship. See “Stark Referral Law” below.
Below is a brief description of several of the regulatory or statutory requirements that relate to healthcare providers such as the Corporation. If the Corporation fails to comply with the laws and regulations relevant to their health care operations, the Corporation could be subject to civil and/or criminal penalties, demands from the government for refunds or recoupment of amounts previously paid to the Corporation by the government, facility shutdowns and possible exclusion from participation in federal health care programs such as Medicare and Medicaid, any of which could have a significant negative impact on the operations of the Corporation. Some statutory and regulatory provisions, principally in the area of billing, have not been interpreted by the courts and may be interpreted or applied in a manner that might adversely affect the Corporation. Changes in health care laws or new interpretations of existing laws may have a dramatic effect on the business and results of operations of the Corporation.
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.
Delaware’s SCHIP program fully covers children and teens in households with income levels up to 100% of the FPL, and subsidizes insurance coverage in households with income levels up to 200% of the FPL.
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 Corporation and its affiliates. Moreover, 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. The Affordable Care Act authorized an extension of the SCHIP program through September 30, 2015. A second extension of SCHIP was authorized in 2015. SCHIP was not extended and expired on September 30, 2017. Individual states will maintain access to remaining funds to keep the program running until legislation is passed to continue the program or create one similar. In response to the expiration of SCHIP, Congress has introduced the Keeping Kids’ Insurance Dependable and Secure Act (the “Kids Act”). There can be no assurance that the Kids Act will be enacted by Congress.
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 Corporation and its affiliates.
31 Third-Party Reimbursement
A significant portion of the net patient service revenue of the Corporation is received from non-governmental agencies, 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 Corporation. 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.
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. 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, 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. As the Affordable Care Act is implemented, hospitals may be placed in different tiers which may impact patient decisions regarding where to seek care.
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 Corporation or their physicians with private insurance company 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 Corporation 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 Corporation. Conversely, participation may maintain or increase the patient base, but may result in reduced payments.
The Corporation also may be affected by the financial instability of HMOs and other third-party payers with which the Corporation 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 payer 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 Corporation.
Any new payment methods implemented by the Medicare and Medicaid programs in response to the Affordable Care 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.
32 Effect of Health Care Reform on the Insurance Market
The Affordable Care Act includes insurance market reforms that, among other things, require individual and group health insurance plans to offer coverage (including renewability) on a guaranteed basis. The Affordable Care Act presently 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. As part of the Affordable Care Act, every individual is 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, or pay a tax penalty. As noted above, Delaware has opted to operate its own health insurance exchange known as Choose Health Delaware in partnership with the federal government. Individuals who do not enroll for coverage, and large employers who do not offer affordable and adequate coverage, will be subject to tax penalties.
The Affordable Care 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 Affordable Care 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 Affordable Care Act, as presently enacted, individuals with family income under 400% of the FPL are eligible for subsidized premiums, deductibles and co-pays for coverage purchased on the exchange. Initially, only individuals and small employers will be able to access coverage through the exchanges. By 2017, large employers may also be able to use the exchanges to provide employer-based coverage to their employees in states that elect to permit the sale of health plans to large employers. Although existing health insurance plans may continue to offer coverage in the individual and employer group markets, coverage will not satisfy an individual’s mandate unless the plan meets the Affordable Care Act’s qualified health plan requirements. At this time, it is not possible to project what long-term 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 Corporation will still need to treat.
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
33 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, the Fraud Enforcement Recovery Act (“FERA”) which authorized increased funding for fraud investigation and prosecution, and expanded the scope of the False Claims Act was signed into law. 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 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.
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 Corporation, regardless of the merits of the case.
Anti-Kickback Law
The federal Anti-Kickback Law is a criminal statute that prohibits anyone from knowingly or willfully soliciting, receiving, offering or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for a referral (or to induce a referral) for any item or service that is covered by any federal or state health care program. The Anti-Kickback Law applies to virtually every person and entity with which a hospital does business. Activities subject to the Anti-Kickback Law include almost any arrangement between a hospital and a person or entity in a position to generate business for the hospital or benefit from business from the hospital. Such arrangements may involve physicians (e.g., practice acquisitions, physician recruiting and retention programs, various forms of hospital assistance to individual physicians, medical practices or physician contracting entities, physician referral services, hospital-physician service or management contracts and space or equipment rentals between hospitals and physicians), other providers or suppliers (e.g., referral arrangements with nursing homes or home health agencies) or vendors. In recent years, the Anti-Kickback Law has been aggressively enforced. The Affordable Care Act has amended the Anti- Kickback Statute to clarify that a party need not have knowledge of the Anti-Kickback Statute or a specific intent to violate the Anti-Kickback Statute to nevertheless violate the statute. Health care providers, their subsidiaries and affiliates and physicians all have some exposure relating to the Anti-Kickback Law. There are limited regulatory safe harbors to the Anti-Kickback Law. Arrangements that implicate the Anti-Kickback Law but do not fit within a regulatory safe harbor are not automatic violations of the Anti-Kickback Law, but are analyzed by OIG on a case-by- case basis. However, arrangements that do not meet all of the elements of a safe harbor face a higher risk of running afoul of the Anti-Kickback Law, which may result in substantial penalties.
Violation of the Anti-Kickback Law is a felony, subject to a maximum fine of $25,000 for each criminal act, imprisonment for up to five years and exclusion from the Medicare and Medicaid programs. The OIG, the enforcement arm of DHHS, can also initiate an administrative exclusion of a provider from the Medicare and Medicaid programs. In addition, civil monetary penalties of $50,000 for each act in violation of the Anti-Kickback Law and damages equal to three times the amount of prohibited remuneration may be imposed.
The outcome of any government efforts to enforce the Anti-Kickback Law against health care providers is difficult to predict due, in part, to government discretion in pursuing enforcement and the lack of significant case law. Health care providers may act to reduce their financial exposure for Anti-Kickback violations through prompt
34 repayment of sums received as a result of inaccurate claims, prompt voluntary reporting to the government of illegal arrangements, implementation of effective corporate compliance programs and by taking steps to require that their subsidiaries and affiliates do the same.
Stark Referral Law
Current federal law (the “Stark Law”) prohibits a physician who has a financial relationship, or whose immediate family member has a financial relationship, with an entity from referring certain health care services reimbursed by Medicare and Medicaid 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 called “designated health services” or “DHS”, 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, regardless of intent. Unlike the Anti- Kickback Law, an arrangement must meet every element of an exception in order to be exempt from penalties under the Stark Law.
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 violations 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 Affordable Care Act, CMS has released protocols under which health care providers are encouraged to make self-disclosures of actual and potential Stark violations, with reduced penalties for self- disclosed violations.
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 Corporation will not violate the Stark Law. Further, there can be no guarantee that the list of DHS will not be expanded or that any current exceptions will not be narrowed. 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 Corporation.
HIPAA
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) established criminal sanctions for health care fraud and applies to all health care benefit programs, whether public or private. HIPAA also provides for punishment of a health care provider for knowingly and willfully embezzling, stealing, converting or intentionally misapplying any money, funds, securities, premiums, credits, property or other assets of a health care benefit program. A health care provider convicted of health care fraud could be subject to mandatory exclusion from the Medicare program.
HIPAA also required HHS to adopt national standards for electronic health care transactions, including federal privacy standards for the protection of health information kept by health care providers, health plans and health care clearinghouses, and their business associates (collectively, the “Covered Entities”) that conduct certain financial and administrative transactions electronically (the “Privacy Rule”) and standards relating to the security of such health information (“Security Rule”), and rules regarding notification in the event of breaches of unsecured protected health information (“Breach Notification Rule”). HHS issued corresponding regulations that protect personal health
35 information maintained by Covered Entities. Compliance with the requirements of the Privacy Rule, the Security Rule, and the Breach Notification Rule has required the Corporation to develop and use policies and procedures designed to inform patients about their privacy rights and how their protected health information may be used, to keep protected information secure, to train employees so that they understand the privacy procedures and practices of the Corporation and to designate a privacy officer responsible for seeing that privacy procedures are adopted and followed.
HIPAA imposes civil monetary penalties for violations and criminal penalties for knowingly obtaining or using individually identifiable health information. The penalties are in four tiers, the highest of which imposes a fine of up to $50,000 per violation with a maximum of $1.5 million for all such violations of an identical requirement or prohibition during a calendar year. A civil monetary penalty is not imposed if the violation was due to reasonable cause and was corrected within 30 days. In addition, state Attorney Generals are permitted to bring a civil action in federal district court against individuals who violate the HIPAA privacy and security standards, to enjoin further such violation and seek damages of up to $100 per violation, which are capped at $25,000 for all violations of an identical requirement or prohibition in any calendar year. In the event of a successful action, the court would be permitted to award the costs of the action and reasonable attorneys’ fees to the state. Finally, HIPAA imposes criminal penalties of up to $250,000 and up to 10 years imprisonment.
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. ARRA included the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), which significantly expanded the HIPAA privacy and security provisions applicable to Covered Entities and their business associates. The law provides that individuals must 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. In the event of an unauthorized disclosure of protected health information, Covered Entities now are required to notify the affected individuals as well as HHS if the breach affects 500 or more individuals. If the breach involved over 500 individuals in any state, the Covered Entity must also report to HHS and the local media. All other breaches must be reported annually to HHS.
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, 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.
The Corporation is actively engaged in continuing compliance efforts with HIPAA and HITECH regulations. The financial costs of continuing compliance with HIPAA and the Administrative Simplification regulations are substantial and will increase as a result of the HITECH Act. However, no guarantee can be made that the Corporation will remain compliant in the future.
State Fraud and Abuse Laws
Delaware has parallel criminal and civil health care fraud and abuse laws that prohibit kickbacks, self- referrals and false claims by providers of medical care covered by its public assistance programs and are enforced by the State Attorney General. Violations of these laws can result in substantial financial penalties, exclusion of the Medicaid program and loss of licensure. The Delaware Whistleblowers’ Protection Act protects employees of private employers from adverse actions against an employee in retaliation for a report to a public body of a violation of law.
36 Transparency in Pricing
The Affordable Care Act requires hospitals to establish and make public a list of the hospital’s standard charges for items and services, including MS-DRGs. 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 inpatient PPS rules require hospitals to make public a list of their standard changes in response to an inquiry. The disclosure of proprietary information may have a negative impact on the Corporation’s ability to gain advantages in negotiations with payors. This, in turn, could negatively influence the Corporation’s revenues. The Affordable Care 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 Corporation’s finances.
Exclusions from Medicare or Medicaid Participation
The Secretary is required to exclude from governmental program participation (including Medicare and Medicaid) for not less than five years any individual or entity who has been convicted of a criminal offense relating to the delivery of any item or service reimbursed under Medicare or a state health care program, any criminal offense relating to patient neglect or abuse in connection with the delivery of health care, felony fraud against any federal, state or locally financed health care program or an offense relating to the illegal manufacture, distribution, prescription or dispensing of a controlled substance. HHS also may exclude individuals or entities under certain other circumstances, such as an unrelated conviction of fraud, theft, embezzlement, breach of fiduciary duty or other financial misconduct relating either to the delivery of health care in general or to participation in a federal, state or local government program. Exclusion of the Corporation or one of its vendors from governmental program participation could have a material, adverse effect on the Corporation.
Risks in Healthcare Delivery
General
Efforts by health insurers and governmental agencies to limit the cost of hospital services and to reduce utilization of hospital facilities may reduce future revenues. Hospitals in the United States are considered to have significant excess capacity. Through various combinations of changes in governmental policy, competition, advances in technology and treatment, and changes in payment methodology to reduce incentives for inpatient hospital utilization, inpatient hospitalizations have generally decreased over the past several years. It is probable that these trends will continue, and the factors mentioned above will continue to create operational and economic uncertainty for hospitals. It is now generally acknowledged that hospital operations pose greater complexity and higher risk than in years past, and this trend may also continue. It is not practical to enumerate each and every operating risk which may result from the operations of the Corporation, and certain risks or combinations of risks which are now unanticipated may have material adverse results in the future. Certain risks relating to the operations of the Corporation are enumerated below.
Competition
Increased competition from a wide variety of potential sources, including, but not limited to, other hospitals, inpatient and outpatient healthcare facilities, clinics, physicians and others, may adversely and increasingly affect the utilization and/or revenues of the Corporation. The Corporation operates in a highly competitive environment. Significant capital improvements or strategic alliances involving competitor facilities may have an adverse effect on the Corporation.
Existing and potential competitors may not be subject to various regulations and restrictions applicable to the Corporation, and may be more flexible in their ability to adapt to competitive opportunities and risks. Certain new competitors, such as home health and infusion providers, and certain niche providers, such as specialized cardiology or oncology companies, specifically target hospital patients as their prime source of revenue growth. Some of these companies have aggressive business and marketing plans, and some are well capitalized. Regardless of any
37 moratorium that may be imposed from time to time on such types of competition, if these competitors are successful, some of the most profitable aspects of the inpatient services of the Corporation may be stripped away, and/or overall hospital utilization of the Corporation may decline further. Competition may, in the future, arise from new sources not currently anticipated or prevalent.
Service Area
The financial performance of the Corporation is, to some extent, dependent upon the economic vitality of its service area. If there were a general economic downturn in the Corporation’s extended service area, it could result in a decrease in the population served by the Corporation or a loss of insurance benefits for a portion of the Corporation’s patients, either or both of which could lead to a decrease in revenues of the Corporation. See “APPENDIX A - “SERVICE AREA” for more information about the Corporation’s primary and secondary services areas.
Physician and Registered Nurse Recruitment
Hospitals and health systems are experiencing significant challenges to the recruitment and retention of qualified health care providers.
The health care industry continues to face a nationwide shortage of nursing professionals, including registered nurses and nurse practitioners. Nurses are leaving the profession citing stress, irregular working hours, high patient to nurse ratios, deteriorating working conditions, and low morale as some of the reasons. At the same time, enrollment in nursing programs has declined, and the skill level of those who are enrolling in nursing programs is declining as more individuals opt to enroll in non-baccalaureate programs. Additionally, the average age of the existing workforce has risen substantially over the last two decades. As a result of these factors, the health care industry is facing a severe nursing shortage. A shortage of nursing staff could result in escalating labor costs, delays in providing care, and patient care management issues, among other, adverse effects. Although legislation has been introduced at both the state and federal level to mitigate the impact of the existing and projected nursing shortages, there can be no assurance that a nursing shortage will not adversely affect the operations or financial condition of the Corporation.
Likewise, the ability of the Corporation to generate revenues could be adversely affected should it be unable to attract and retain a sufficient number of qualified physicians, nurses, or other health care professionals.
Physician Relations
The primary relationship between a hospital and physicians who practice in it is through the hospital’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 such membership or privileges curtailed, denied or revoked often file legal actions against hospitals. Such actions 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 its medical staff may result in hospital liability to third parties. All hospitals, including those owned and operated by the Corporation, are subject to such risks.
Physician Contracting
The Corporation contracts 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 Corporation will be partially dependent upon its ability to attract physicians to join the physician organizations and to attract physician organizations to participate in its network, 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 Corporation will be able to attract and retain the requisite number of physicians, or that such physicians will deliver high quality health care services. Without impaneling a
38 sufficient number and type of providers, the Corporation could fail to be competitive, could fail to keep or attract payor contracts, or could be prohibited from operating until their panel provided adequate access to patients. Such occurrences could have a material adverse effect on the business or operations of the Corporation.
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 Corporation 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 Corporation 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. Further, the increased use of technology exposes the Corporation to cybersecurity risks, which may result in substantial disruptions in services and costs in the event of a cybersecurity incident.
Cyber-Security and Unauthorized Releases of Personal Information
Similar to other large organizations, the Corporation relies on electronic systems and technologies to conduct their operations. There have been numerous attempts to gain unauthorized access to electronic systems of large organizations for the purposes of misappropriating assets or personal, operational, financial or other sensitive information, or causing operational disruption. These attempts, which are increasing, include highly sophisticated efforts to electronically circumvent security measures or freeze assets as well as more traditional intelligence gathering aimed at obtaining information necessary to gain access. While the Corporation maintains a security posture designed to deter “cyber-attacks,” no assurances can be given that the Corporation’s security measures will prevent cyber- attacks on their electronic systems, and no assurances can be given that any cyber-attacks, if successful, will not have a material adverse effect on the operations or financial condition of the Corporation.
Federal, state and local authorities are increasingly focused on the importance of protecting the confidentiality of individuals’ personal information, including patient health information. In addition to regulations promulgated under HITECH, many states have enacted their own laws requiring businesses to notify individuals of security breaches that result in the unauthorized release of personal information. In some states, notification requirements may be triggered even where information has not been used or disclosed, but rather has been inappropriately accessed. State consumer protection laws may also provide the basis for legal action for privacy and security breaches and frequently, unlike HIPAA, authorize a private right of action. In particular, the public nature of security breaches exposes health organizations to increased risk of individual or class action lawsuits from patients or other affected persons, in addition to government enforcement. Failure to comply with restrictions on patient privacy or to maintain robust information security safeguards, including taking steps to ensure that contractors who have access to sensitive patient information maintain the confidentiality of such information, could damage a health care provider’s reputation and materially adversely affect business operations.
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 in 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.
39 Integrated Delivery Systems
From time to time, many health care providers have considered exploring ways to develop integrated systems for the delivery of health care services within their geographic service areas. These integrated health care delivery systems involve the coordinated delivery of services by hospitals, physician groups, other health care professionals, managed care organizations, joint ventures and other alternative delivery systems. This coordination may be achieved through formal corporate affiliations such as the merger of existing corporate entities or through contractual agreements to implement and coordinate services or some combination of both. Examples of such integrated delivery systems include medical service organizations, which provide physician and physician groups with a combination of financial and managed care contracting services, physician-hospital organizations, which are typically organizations jointly owned or controlled by a hospital and a physician group for the purpose of managed care contracting and hospital-based clinics or medical practice foundations which purchase and operate physician practices and provide administrative services to physicians. The development of these integrated delivery systems may require that assets be transferred out of the Corporation or that new entities join the Corporation. Although any such transfer or entry would require compliance with the applicable provisions of the Master Indenture, the Bond Indenture and Loan Agreement, such action could nevertheless result in a reduction in the net income available for debt service of the Corporation. Further, such integrated delivery systems also, in some instances depending on the structure and operation of such systems, may raise certain legal or regulatory risks, including questions relating to compliance with the Medicare anti-self-referral laws, anti-kickback laws, antitrust laws and federal or state tax exemption issues. No prediction can be made as to the potential impact of such risks on the Corporation.
Affiliation, Merger, Acquisition and Divestiture
Significant numbers of affiliations, mergers, acquisitions and divestitures have occurred in the health care industry in recent years. As part of its ongoing planning process, the Corporation has considered and will continue to consider the potential acquisition of operations or property which may become affiliated with or become part of the Obligated Group in the future, as well as the potential disposition of certain existing operations or properties of the Obligated Group. As a result, it is possible that the organizations and assets which make up the Obligated Group may change from time to time, subject to the provisions set forth in the Master Indenture and other financing documents which apply to merger, sale, disposition or purchase of assets, or with respect to joining or withdrawing from the Obligated Group.
Health Care Legislative and Regulatory Environment
Effect of Regulation Generally
Hospitals, including the Corporation, are subject to extensive regulation by federal, state and local governmental agencies and by certain nongovernmental agencies such as the Joint Commission. These laws and regulations require that hospitals meet various detailed standards relating to the adequacy of medical care, equipment, personnel, 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. No assurance can be given as to the effect on future operations of the Corporation of existing laws, regulations and standards for certification or accreditation or of any future changes in such laws, regulations and standards.
Licensing, Certification and Accreditation
Health facilities, including those of the Corporation, are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. These include, but are not limited to, requirements for participation in Medicare, requirements for participation in Medicaid, state licensing agencies, private payors and the accreditation standards of the Joint Commission. Renewal and continuation of certain of these licenses, certifications and accreditations are based on inspections, surveys, audits, investigations or other reviews, some of which may require affirmative actions by the Corporation.
40 The Corporation anticipates that it will be able to renew currently held licenses, certifications or accreditations when required. Nevertheless, adverse actions in any of these areas could occur, which could result in the loss of utilization, revenue, or the ability to operate all or a portion of the Corporation’s facilities, and consequently, could have a material and adverse effect on the Corporation.
Civil and Criminal Fraud and Abuse Laws and Enforcement
Federal and state health care fraud and abuse laws regulate both the provision of services to government program beneficiaries and the methods and requirements for submitting claims for services rendered to such beneficiaries. Under these laws, individuals and organizations can be penalized for submitting claims for services that are not provided, billed in a manner other than as actually provided, not medically necessary, provided by an improper person, accompanied by an illegal inducement to utilize or refrain from utilizing a service or product, or billed in a manner that does not otherwise comply with applicable government requirements.
Federal and state governments have a range of criminal, civil and administrative sanctions available to penalize and remediate health care fraud and abuse, including exclusion of the provider from participation in the Medicare or Medicaid programs, fines, civil monetary penalties, and suspension of payments and, in the case of individuals, imprisonment. Fraud and abuse cases may be prosecuted by one or more government entities and/or private individuals, and more than one of the available penalties may be imposed for each violation.
The Corporation has internal policies and procedures and has developed and implemented a compliance program that management of the Corporation believes effectively reduces exposure for violations of these laws. However, because the government’s enforcement efforts presently are widespread within the industry and may vary from region to region, there can be no assurance that the compliance program will significantly reduce or eliminate the exposure of the Corporation to civil or criminal sanctions or adverse administrative determinations.
Exposure to Liability. Due to the nature of its business, the Corporation from time to time may become involved as a defendant in medical malpractice lawsuits, and is subject to the attendant risk of substantial damage awards. The most significant source of potential liability in this regard is the negligence of physicians employed or contracted by the Corporation. To the extent such physicians are employed by the Corporation or regarded as agents of the Corporation in the practice of medicine, the Corporation could be held liable for their negligence. In addition, the Corporation could be found in certain instances to have been negligent in performing its management services under contractual arrangements even if no agency relationship with the physicians were found to exist. The Corporation’s contracts with third party payors generally require the Corporation to indemnify such other parties for losses resulting from the negligence of physicians who were employed or managed by or affiliated with the Corporation. The Corporation maintains professional and general liability insurance on a claims-made basis in amounts deemed appropriate by management, based upon statutory requirements, historical claims and the nature and risks of its business.
There can be no assurance, however, that any insurer will remain solvent and able to meet its obligations to provide coverage for any such claim or claims, or that such coverage will continue to be available or available with sufficient limits and at a reasonable cost to adequately and economically insure the Corporation’s operations in the future. A judgment against the Corporation in excess of such coverage could have a material adverse effect on the Corporation.
Charity Care
Hospitals are permitted to have tax-exempt status under the Code because the provision of health care historically has been treated as a “charitable” enterprise. This treatment arose before most Americans had health insurance, and when charitable donations were required to fund the health care provided to the sick and disabled. Some have posited that, with the onset of employer-sponsored health insurance and government reimbursement programs, there is no longer any justification for special tax treatment for the not-for-profit health care sector, and the availability of tax-exempt status should be eliminated. Management of the Corporation cannot predict the likelihood for such a dramatic change in the law. Federal and state tax authorities are continuing to demand that tax-exempt hospitals justify their tax-exempt status by documenting their charitable care and other community benefits.
41 Although the Affordable Care Act is designed to 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. As a result, the Corporation may be required to provide services for which it receives payment below cost, or for which it may receive no payment, from the patient or third party payors.
Charity care issues also serve as the basis of certain claims against major hospital systems throughout the United States on behalf of uninsured patients. The lawsuits filed against nonprofit hospitals typically raise a number of claims, including, but not limited to, claims that such hospitals: (i) by accepting tax-exempt status, entered into agreements with the federal, state and local governments promising to provide free or reduced care to all those who need it; (ii) engaged in illegal and oppressive tactics against the uninsured; (iii) violated the state consumer fraud statutes; (iv) allowed a portion of their properties to be used by for-profit insiders; (v) transferred monies illegally to their affiliates for non-charitable purposes; and (vi) conspired with the American Hospital Association, another named defendant in many of the lawsuits, to charge illegal prices to the uninsured. Although the Corporation has not been named as a defendant in any charity care lawsuit, there can be no assurance that the Corporation will not be involved in any such suit in the future and there can be no assurance that any such lawsuit will involve any of the claims set forth above.
See also the discussion of Section 501(r) of the Code under “Tax Exemption for Nonprofit Corporations” below.
Other Legislative and Regulatory Actions
Various health and safety laws and regulations enforced by state and local agencies apply to the Corporation. Violations of certain of these standards could result in closure of the Corporation or portions thereof, or requirements that compliance with such standards be immediately achieved. Such standards are subject to change, and there can be no assurances that in the future, the Corporation’s facilities will meet any changed standards or that the Corporation will not be required to expend significant sums to comply with changed standards. No assurance can be given as to the effect on the Corporation’s future operations of existing laws, regulations and standards for certification or accreditation or of any future changes in such laws, regulations and standards.
Among the proposals for health care legislation that have been introduced in Congress previously, are proposals to stimulate competition among health care providers and to regulate or alter methods of delivering and financing health care services, such as ACOs. No assurance can be given as to whether these or any alternative proposals will be enacted at either the federal or the state level or as to the manner in which any such proposals, if enacted, will be administered. Other possible federal or state legislation which could have an adverse effect on the Corporation would include: (i) limitations on the amount of charitable contributions which are deductible for income tax purposes; (ii) limitations on the amount or availability of tax-exempt financing for Section 501(c)(3) corporations; and (iii) regulatory limitations affecting the Corporation’s ability to undertake capital projects or develop new services.
Other regulatory programs which may significantly affect the Corporation are changes in governmental requirements regarding patient treatment. These regulations are embodied in patients’ bill of rights and similar programs being promulgated with greater frequency and changes in licensure requirements. All of these could increase the cost of doing business and consequently adversely affect the financial condition of the Corporation.
Certificate of Public Review Restrictions
In 1999, the State replaced its Certificate of Need program with the Certificate of Public Review (“COPR”) program. Although the application and procedural review process remain the same, the capital expenditure limit was increased to $5 million dollars and replacement of previously-reviewed capital equipment and construction of medical office buildings was deregulated. Under the COPR program, a COPR must be obtained if an entity wishes to construct a new facility, acquire an existing facility or add new beds or services. Failure to obtain a COPR for a proposed transaction could result in the inability to complete the proposed transaction, loss of the Corporation’s license, or imposition of a fine.
42 Tax Exemption for Nonprofit Corporations
The tax-exempt status of nonprofit corporations and exclusion of income earned by them from taxation, has been the subject of review by various federal, state and local legislative, regulatory and judicial bodies. This review has included proposals to broaden and strengthen existing federal tax law with respect to unrelated business income of nonprofit corporations.
It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to the taxation of nonprofit corporations, since past actions and proposals regarding the taxation of non-profit Corporations that have been made have been vigorously challenged and contested. There can be no assurance, however, that future changes in the federal, state and local laws and regulations will not materially and adversely affect the operations and revenues of the Corporation by requiring the Corporation to pay additional income or real estate taxes.
The Affordable Care Act added Section 501(r) to the Code, which contains four specific requirements for hospitals that wish to receive or maintain their tax-exempt status under Section 501(c)(3) of the Code. In addition to the general requirements of Section 501(c)(3) of the Code that hospitals must satisfy in order to safeguard tax-exempt status under Section 501(c)(3), hospitals also must: (1) conduct a “community health needs assessment” at least once every three years and adopt an “implementation strategy” to meet the needs identified by the assessment; (ii) establish, implement, and make widely available written policies regarding emergency medical care and financial assistance; (iii) limit the amount the hospital charges for emergency or other medically necessary care provided to patients eligible for financial assistance to not more than the amounts generally billed to insured patients; and (iv) not take extraordinary collection actions (e.g., lawsuits, liens, or other similar actions) until it has made reasonable efforts to determine whether a patient is eligible for financial assistance.
The Affordable Care Act also added Sections 4959 and 6033(b)(15) to the Code. Section 4959 imposes a $50,000 excise tax for any taxable year in which a tax-exempt hospital fails to meet the needs assessment requirement of new Section 501(r). Section 6033(b)(15) imposes new reporting requirements on a tax-exempt hospital. Now a hospital will have to provide a description of how the organization is addressing the needs identified in the community health needs assessment and a description of any such needs that are not being addressed, together with the reasons why such needs are not being addressed. Hospitals will have to provide this report and their audited financial statements as attachments to the IRS Form 990.
Other legislative changes or judicial actions with respect to the tax-exempt status of nonprofit corporations, including the provision of free care to indigents and the exemption from property taxes of such corporations, could be enacted. There can be no assurance that 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 Corporation.
Federal Income Tax Exemption; IRS Audits and Penalties
Recently, the IRS has devoted additional resources to the auditing of federally tax-exempt organizations, including tax-exempt health care organizations. The IRS intends to focus on, among other matters, the unrelated business income producing activities of health care organizations. The IRS has significantly revised Form 990, Return of Organization Exempt from Income Tax, which greatly increases the disclosure requirement of tax exempt hospitals. The expanded information gathered by the IRS will allow the IRS to more closely monitor the activities of tax-exempt organizations. In addition, this information will be made available to Congress to form the basis for possible future legislation in this area. The Corporation is exempt from federal income taxes under Section 501(c)(3) of the Code. Although management of the Corporation indicate that they believe that its activities comply with currently announced standards, no assurance can be given that such standards will not become more restrictive in the future.
Prior to July, 1996, the only penalty available to the IRS for violations of the types described above was revocation of the entity’s tax-exempt status. Although the IRS has not frequently revoked the 501(c)(3) status of nonprofit health care corporations, it could do so in the future. Loss of tax-exempt status by the Corporation could result in loss of tax exemption of the interest on the Series 2017A Bonds and of any other tax-exempt bond-related debt of the Corporation, and defaults in covenants regarding the exempt status of the interest on the Series 2017A Bonds and other tax-exempt debt which would likely be triggered. Loss of tax-exempt status by the Corporation could
43 also result in substantial tax liabilities on taxable income that would likely have material adverse consequences on its financial condition.
In July 1996, Congress enacted so-called “intermediate sanctions” legislation applicable to transactions engaged in by organizations described in Section 501(c)(3) of the Code (“Tax-Exempt Organizations”), such as the Corporation that result in private inurement. This legislation permits the IRS to impose a penalty tax on (i) “disqualified persons,” such as officers, directors, trustees and other key employees who receive “excess benefits,” such as excessive compensation, from Tax-Exempt Organizations, and (ii) managers of Tax-Exempt Organizations who knowingly participate in transactions that result in the payment of excess benefits to insiders. A penalty tax is imposed on the insiders or managers personally and not on the Tax-Exempt Organization.
The Corporation has not been the subject of a recent audit by the IRS.
Local Governmental Challenges to Tax Exemptions
Local governments in many states have significantly increased efforts to challenge the tax exempt status of nonprofit corporations’ real property. These challenges generally have been based on either nonuse of real property for the charitable object of the tax-exempt organization or inadequate levels of public benefit or uncompensated care. It is not possible to predict the scope or effect of future legislation or regulatory actions with respect to taxation of nonprofit corporations, since such actions and proposals have been vigorously challenged and contested. There can be 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 Corporation by requiring the Corporation to pay income or real estate taxes.
Electronic Health Record Incentive Program
The HITECH Act provides funding for various activities intended to promote the adoption and meaningful use of certified electronic health record (“EHR”) technology. Specifically, beginning in 2011, certain eligible Medicare and Medicaid providers, including acute care and critical access hospitals and other health care professionals (collectively “EPs”), were eligible to receive EHR payment incentives if they demonstrated the meaningful use of certified EHR technology and met other program requirements established by CMS. The Medicaid EHR Incentive Program is offered and administered voluntarily by states and territories. Forty-seven states, including Delaware, have opted into the Medicaid EHR Incentive Program.
Under traditional Medicare and Medicaid fee-for-service programs, the EHR payment incentive amount is equal to 75% of an EP’s fee schedule allowed charges for a particular year, subject to annual limitations. In addition, in 2015, an EP who did not successfully demonstrate “meaningful use” of certified EHR technology became subject to reduced physician fee schedule payments. Specifically, in 2015 and 2016, an EP who did not successfully demonstrate meaningful use of certified EHR technology received only 99% or 98% of its total fee schedule covered amount, respectively. In 2017, an EP who does not successfully demonstrate meaningful use will receive only 97% of its total covered amount. If less than 75% of EPs are using certified EHR technology after 2018, then the payment adjustment will decrease by an additional 1% each year until the payment adjustment reaches 95%.
CMS outlined meaningful use in three stages, each of which contains specific requirements for participation. Stage 1 meaningful use standards, for use in years 2011 and 2012, focused on data capture and sharing. Stage 2, beginning in 2014, emphasized advanced clinical processes. Stage 3 focused on improving health care outcomes and began in 2016.
The Corporation participates in both the Medicare and Medicaid EHR Incentive Programs and has demonstrated meaningful use of certified EHR technology by attesting to Stage 1 Meaningful Use for Medicare and Medicaid. There can be no guarantee that the Corporation will continue to be able to successfully demonstrate its meaningful use of EHR technology. If the Corporation is not able to demonstrate meaningful use by deadlines established by CMS, then it will be subject to reduced Medicare payments.
44 Environmental Matters
Health care providers are subject to a variety of federal, state and local environmental and occupational health and safety laws and regulations which address, among other things, hospital operations, facilities and properties. Among the type of regulatory requirements faced by hospitals are (i) air and water quality control requirements, (ii) waste management requirements, (iii) specific regulatory requirements applicable to asbestos, polychlorinated biphenyls and radioactive substances, (iv) requirements for providing notice to employees and members of the public about hazardous material handled by or located at the Corporation, and (v) requirements for training employees in the proper handling and management of hazardous materials and wastes.
In its role as the owner and operator of properties and facilities, the Corporation may be subject to liability for hazardous substances that may have migrated off its properties including remediation thereof. Typical hospital operations include, but are not limited to, in various combinations, the handling, use, storage, transportation, disposal and discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants and contaminants. As such, hospital operations are particularly susceptible to the practical, financial and legal risks associated with compliance with such laws and regulations. Such risks may (i) result in damage to individuals, property or the environment, (ii) interrupt operations and increase their cost, (iii) result in legal liability, damages, injunctions or fines and (iv) result in investigations, administrative proceedings, penalties or other governmental agency actions. There is no assurance that the Corporation 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 Corporation.
At the present time, management of the Corporation is not aware of any pending or threatened claim, investigation or enforcement action regarding such environmental issues which, if determined adversely to the Corporation, would have a material adverse effect on its financial condition.
Antitrust
Enforcement of the antitrust laws against health care providers is becoming more common, and antitrust liability may arise in a wide variety of circumstances including medical staff privilege disputes, third party contracting, physician relations, and joint venture, merger, affiliation and acquisition activities. In some respects, the application of the federal and state antitrust laws to health care is still evolving, and enforcement activity by federal and state agencies appears to be increasing. At various times, health care providers may be subject to an investigation by a governmental agency charged with the enforcement of the antitrust laws, or may be subject to administrative or judicial action by a federal or state agency or a private party. Violation of the antitrust laws could subject the health care provider to criminal and civil enforcement by federal and state agencies, as well as by private litigants.
Enforceability of Remedies
The remedies available to owners of the Series 2017A Bonds upon an Event of Default under the Bond Indenture, the Master Indenture or the Loan Agreement are in many respects dependent upon judicial action which is subject to discretion or delay. Under existing law and judicial decisions, including specifically Title 11 of the United States Code, the remedies specified in the Master Indenture or the Loan Agreement may not be readily available or may be limited. A court may decide not to order specific performance.
The various legal opinions to be delivered concurrently with the original delivery of the Series 2017A Bonds will be qualified as to enforceability of the various legal instruments by limitations imposed by bankruptcy, reorganization, insolvency or other similar laws or legal or equitable principles affecting creditors’ rights.
Maintenance of Ratings
As further described under “RATINGS,” Fitch Inc. and Standard & Poor’s Ratings Services are expected to assign municipal bond ratings to the Series 2017A Bonds. There is no assurance that any such ratings will continue for any given period of time or that they will not be lowered or withdrawn entirely. A downward revision or withdrawal of any rating may have an adverse effect on the market price of the Series 2017A Bonds.
45 Prepayment Risk
The Series 2017A Bonds are subject to redemption prior to maturity as described under “Description of the Series 2017A Bonds - Redemption of the Series 2017A Bonds.”
Covenants Related to Other Series of Bonds and Equipment Leases
The Corporation has entered into an agreement with the Bank, in connection with the direct purchase of the Series 2017B Direct Purchase Bonds (the “Other Debt”). The agreements with respect to such Other Debt (collectively, the “Bank Agreements”) contain certain covenants and restrictions (collectively, the “Bank Covenants”) solely for the benefit of the Bank. The Bank Covenants are in addition to, and in certain cases more restrictive than, the covenants in the Bond Indenture and the Master Indenture. These Bank Covenants may be waived, modified or amended by the Bank in the Bank’s sole discretion and without notice to or consent by the Bond Trustee, the Master Trustee, the holders of outstanding bonds, including the Series 2017A Bonds, or any other Person. Violation of Bank Covenants may result in an event of default under the related Bank Agreement, which may result in an event of default under the Loan Agreement and the Master Indenture, leading potentially to acceleration of some or all of the Series 2017A Bonds then outstanding. The 2017A Bonds are not insured by a bond insurance policy, or supported by a credit facility or liquidity facility. See “APPENDIX A - MANAGEMENT’S DISCUSSION OF UTILIZATION AND FINANCIAL PERFORMANCE” for additional information related to certain Bank Agreements and Bank Covenants.
Additional Parity Debt
The Master Indenture permits the Corporation to incur additional indebtedness which may be secured on parity with the Series 2017A Bonds. Any such indebtedness would be entitled to share ratably with the holders of the Series 2017A Bonds and any other holder of parity debt in any moneys realized from the exercise of remedies in the event of a default by the Corporation to the extent provided in the Bond Indenture. See “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017A BONDS” herein.
Hedging Transactions
As described in Appendix A under “OTHER FINANCIAL INFORMATION – Interest Rate Swap Agreement,” the Corporation has entered into an interest rate swap agreement (the “Existing Swap Agreement”) with respect to certain outstanding Indebtedness. Under certain circumstances, the Corporation may be required to provide collateral to the counterparty under the Existing Swap Agreement. The obligation to provide collateral could materially adversely affect the financial condition of the Corporation. There can be no assurance that the Existing Swap Agreement will remain in place for the term of such Indebtedness.
In addition to the Existing Swap Agreement, the Obligated Group Members from time to time in the future may enter into other hedging arrangements to hedge the interest payable or manage interest cost on Indebtedness, assets or any other derivative arrangements. Changes in the market value of such agreements could have a negative impact upon the Obligated Group’s operating results and financial condition, and such impact could be material. The Existing Swap Agreement is, and any future hedging agreement may be, subject to early termination upon the occurrence of certain events. If either the Corporation or the counterparty terminates the Existing Swap Agreement under market conditions that are unfavorable to the Corporation, such as current market conditions, the Corporation would be obligated to make a termination payment, which could materially adversely affect the financial condition of the Corporation.
Certain Other Risks
The following factors, among others, may also adversely affect the operation of health care facilities, including the Corporation’s facilities, to an extent that cannot be determined at this time:
(1) increased costs resulting from unionization of the employees of the Corporation or the utilization by nonunion employees of the Corporation of proceedings available under the National Labor Relations Act;
46 (2) difficulty in selling the facilities and equipment of the Corporation should such sale be necessary to raise funds for payment of indebtedness due to the special purpose nature of such property;
(3) future legislation conditioning tax exempt status or access to tax exempt financing on satisfaction of various criteria, such as level of charity care, maintenance of an emergency room or changing the method of taxing unrelated business income;
(4) future medical and scientific advances, the development and requirement of the option for HMOs in labor contracts, state health plans and other health plans, preventive medicine, improved occupational health and safety, and improved outpatient care which could result in decreased usage of inpatient hospital facilities;
(5) the need and inherent challenges to obtain governmental approvals to undertake projects which the Corporation deems necessary to remain competitive as to rates and charges and to maintain the quality and scope of care;
(6) cost of pharmaceuticals, medical supplies, energy and other utilities, and other materials and services necessary to sustain the operations of the Corporation;
(7) the occurrence of terrorist activities or natural disasters, including floods or earthquakes, which could damage the Corporation’s facilities or otherwise impair the operation of, and generation from, the Corporation’s activities;
(8) reduced demand for the services of the Corporation that might result from decreases in population;
(9) increased unemployment or other adverse economic conditions in the service area of the Corporation that would increase the proportion of patients who are unable to pay fully for the cost of their care;
(10) any increase in the quantity of indigent care provided that is mandated by law or required due to increased needs of the community in order to maintain the charitable status of the Corporation; and
(11) any changes in management of the Corporation; and
The above paragraphs discuss Certain Bondholders’ Risks, but are not intended to be a complete enumeration of all risks associated with the purchase or holding of the Series 2017A Bonds.
UNDERWRITING
The Series 2017A Bonds are being purchased pursuant to a bond purchase contract by and among the Authority, the Corporation and PNC Capital Markets LLC on behalf of itself and the other underwriters set forth on the cover of this Official Statement (the “Underwriters”) at a purchase price of $______, which is the principal amount of the Series 2017A Bonds, less the Underwriters’ discount of $______, plus/minus $______net original issue premium/discount. The bond purchase contract provides that the Underwriters will purchase all of the Series 2017A Bonds, if any are purchased, and requires the Corporation to indemnify the Underwriters and the Authority against losses, claims, damages and liabilities arising out of any incorrect statements or information contained in this Official Statement pertaining to the Corporation, its operations, the Hospital Facilities and other matters. The initial offering prices may be changed, from time to time, by the Underwriters.
The Underwriters may offer and sell the Series 2017A Bonds to certain dealers (including dealers depositing the Series 2017A Bonds into investment trusts) and others at prices lower than the offering prices set forth on the inside cover page hereof.
47 LEGALITY OF SERIES 2017A BONDS FOR INVESTMENT AND DEPOSIT
The Series 2017A Bonds are legal investments for all public officers and public bodies of the State and its political subdivisions, all insurance companies, trust companies, savings banks, cooperative banks, banking associations, investment companies, executors, administrators, trustees and other fiduciaries in the State.
LITIGATION
The Authority
There is no litigation of any nature now pending or threatened enjoining the issuance, sale, execution or delivery of the Series 2017A Bonds, or in any way contesting or affecting the validity of the Series 2017A Bonds or any proceedings of the Authority taken with respect to the issuance or sale thereof, or the pledge or application of any money or security provided for the payment of the Series 2017A Bonds or the existence or powers of the Authority.
The Corporation
There is no litigation pending or threatened which in any manner questions the right of the Corporation to enter into the Loan Agreement, the Continuing Disclosure Agreement or to operate the Hospital Facilities in accordance with the provisions of the Master Indenture. See also “LITIGATION” in Appendix A.
TAX MATTERS
Federal Tax Matters
In the opinion of Ballard Spahr LLP, Bond Counsel, interest on the Series 2017A Bonds is excludable from gross income for purposes of federal income tax under existing laws as enacted and construed on the date of initial delivery of the Series 2017A Bonds, assuming the accuracy of the certifications of the Authority and the Corporation and continuing compliance by the Authority and the Corporation with the requirements of the Internal Revenue Code of 1986, as amended (the “Code”). Interest on the Series 2017A Bonds is not an item of tax preference for purposes of either individual or corporate federal alternative minimum tax; however, interest on Bonds held by a corporation (other than an S corporation, regulated investment company, or real estate investment trust) may be indirectly subject to federal alternative minimum tax because of its inclusion in the adjusted current earnings of a corporate holder. Bond Counsel will express no opinion regarding other federal tax consequences of ownership or disposition of, or the accrual or receipt of interest on, the Series 2017A Bonds.
The Code establishes requirements that must be complied with subsequent to the issuance of the Series 2017A Bonds for interest thereon to be and remain excludable from gross income pursuant to Section 103 of the Code. Failure to comply with these requirements could cause the interest on the Series 2017A Bonds to be included in gross income, retroactive to the date of issue of the Series 2017A Bonds or at some later date. The requirements include, but are not limited to, (1) the provisions of Section 148 of the Code which prescribes yield and other limits within which the proceeds of the Series 2017A Bonds are to be invested and may require that certain investment earnings on the foregoing be rebated on a periodic basis to the United States, (2) use of the proceeds of the Series 2017A Bonds, and (3) use of the facilities financed with the Series 2017A Bonds. The Authority and the Corporation have covenanted to comply with the provisions of the Code.
Original Issue Discount. The Series 2017A Bonds being offered at a discount (“original issue discount”) equal generally to the difference between the public offering price and the principal amount are referred to herein as the “Discount Bonds”. For federal income tax purposes, original issue discount on a Discount Bond accrues periodically over the term of such Discount Bond as interest which is excluded from gross income for federal income tax purposes and subject to alternative minimum tax to the same extent as regular interest. The accrual of original issue discount increases the holder’s tax basis in the Series 2017A Bonds for determining taxable gain or loss upon sale or redemption prior to maturity. Holders should consult their tax advisors for an explanation of the accrual rules.
48 Original Issue Premium. The Series 2017A Bonds being offered at a premium (“original issue premium”) equal generally to the excess of their public offering price over their principal amount are referred to herein as the “Premium Bonds”. For federal income tax purposes, original issue premium is amortizable periodically over the term of the Premium Bond through reductions in the holder’s tax basis for such Premium Bond for determining taxable gain or loss upon sale or redemption prior to maturity. Amortization of premium does not create a deductible expense or loss. Holders should consult their tax advisors for an explanation of the amortization rules.
Delaware Tax Matters
By terms of the Act, the Series 2017A Bonds, their transfer and the income therefrom, are free from income taxation by the State of Delaware and by the municipalities and other political subdivisions in the State of Delaware. Bond Counsel will express no opinion regarding State of Delaware franchise or estate tax.
Changes in Federal and State Tax Law
From time to time, there are Presidential proposals, proposals of various federal committees, and legislative proposals in the Congress and in the states that, if enacted, could alter or amend the federal and state tax matters referred to herein or adversely affect the marketability or market value of the Series 2017A Bonds or otherwise prevent holders of the Series 2017A Bonds from realizing the full benefit of the tax exemption of interest on the Series 2017A Bonds. Further, such proposals may impact the marketability or market value of the Series 2017A Bonds simply by being proposed. It cannot be predicted whether or in what form any such proposal might be enacted or whether if enacted it would apply to bonds issued prior to enactment. In addition, regulatory actions are from time to time announced or proposed and litigation is threatened or commenced which, if implemented or concluded in a particular manner, could adversely affect the market value, marketability or tax status of the Series 2017A Bonds. It cannot be predicted whether any such regulatory action will be implemented, how any particular litigation or judicial action will be resolved, or whether the Series 2017A Bonds would be impacted thereby.
Purchasers of the Series 2017A Bonds should consult their tax advisors regarding any pending or proposed legislation, regulatory initiatives or litigation. The opinions expressed by Bond Counsel are based upon existing legislation and regulations as interpreted by relevant judicial and regulatory authorities as of the date of issuance and delivery of the Series 2017A Bonds, and Bond Counsel has expressed no opinion as of any date subsequent thereto or with respect to any proposed or pending legislation, regulatory initiatives or litigation.
The proposed form of the opinion of Bond Counsel is included herein as Appendix E.
RATINGS
The Series 2017A Bonds have been assigned ratings of “AA-” (rating watch: positive) and “AA-” (stable outlook) by Fitch Inc. (“Fitch”) and Standard & Poor’s Rating Services (“S&P”), respectively. The Corporation furnished to Fitch and S&P certain materials and information respecting the Series 2017A Bonds and the Corporation. Generally, rating agencies base their ratings on such materials and information and on investigations, studies and assumptions by such rating agencies. The rating on the Series 2017A Bonds reflects only the view of the respective rating agency. There is no assurance that a particular rating will be maintained for any given period of time or that it will not be lowered or withdrawn entirely, if, in the judgment of the rating agency establishing the rating, circumstances so warrant. The Authority, the Underwriters and the Corporation have undertaken no responsibility to bring to the attention of the Owners of the Series 2017A Bonds any proposed revision or withdrawal of the ratings of the Series 2017A Bonds or to oppose any such proposed revision or withdrawal. Any such change or withdrawal of such ratings could adversely affect the market price of the Series 2017A Bonds.
LEGAL MATTERS
Legal matters incident to the authorization, issuance and sale of the Series 2017A Bonds are subject to the approval of Ballard Spahr LLP, Wilmington, Delaware, Bond Counsel. The opinion of Bond Counsel will be made available to purchasers upon delivery of the Series 2017A Bonds. Certain legal matters in connection with the Series 2017A Bonds will be passed upon for the Corporation by its counsel, Stevens & Lee, P.C., Wilmington, Delaware;
49 for the Authority by its counsel, Potter Anderson & Corroon LLP, Wilmington, Delaware; and for the Underwriters by their counsel, McGuireWoods LLP, Baltimore, Maryland. Neither Stevens & Lee, nor McGuireWoods LLP, is passing upon the validity of or the tax-exempt status of the interest on the Series 2017A Bonds.
CONTINUING DISCLOSURE
In accordance with the requirements of Rule 15c2-12, the Corporation will agree to a continuing disclosure undertaking (the “Continuing Disclosure Agreement”) with respect to the Series 2017A Bonds for the benefit of the registered and Beneficial Owners of the Series 2017A Bonds. Pursuant to the Continuing Disclosure Agreement, the Corporation will agree to provide or cause to be provided (i) certain annual and quarterly financial information and operating data; (ii) timely notice of the occurrence of certain events, if material, with respect to the Series 2017A Bonds; and (iii) timely notice of a failure by the Corporation to provide the required annual and quarterly financial information on or before the date specified in the Continuing Disclosure Agreement. The form of Continuing Disclosure Agreement containing the covenants to be made by the Corporation hereunder for the benefit of the registered and Beneficial Owners of the Series 2017A Bonds is attached hereto as Appendix F.
Pursuant to the provisions of the continuing disclosure undertaking entered into by the Corporation in connection with the Series 2009A Bonds, the Corporation has previously undertaken for the benefit of holders of the Series 2009A Bonds to provide certain financial information or operating data similar in scope to the Continuing Disclosure Agreement in Appendix F. The audited financial statements required to be filed by the Corporation under the continuing disclosure undertaking then in effect were filed with the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access System (“EMMA”) except that the audited financial statements for the fiscal year ending June 30, 2014 was filed 26 days late. In addition, the annual operating data required to be filed by the Corporation with EMMA under the continuing disclosure undertaking was not filed by the Corporation for the fiscal years ending June 30, 2012 through and including June 30, 2016. All such annual and quarterly financial statements, financial information and operating data are currently on file with EMMA. Except as described in this paragraph, the Corporation has complied in all material respects with its other continuing disclosure undertakings. Under the Continuing Disclosure Agreement, the Corporation has retained Digital Assurance Certification, L.L.C. (“DAC”) as dissemination agent and expects to implement new disclosure controls, including the implementation of a continuing disclosure policy, designed to ensure all financial statements, financial information, operating data and event notices are timely filed in compliance with the Corporation’s continuing disclosure requirements.
The Authority is not contractually obligated to supplement or update the information included in the Official Statement after the delivery of the Series 2017A Bonds. The Underwriters have not undertaken either to supplement or update the information included in the Official Statement.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The financial statements of the Corporation as of and for the years ended June 30, 2017 and 2016 included in Appendix B to this Official Statement have been audited by Grant Thornton LLP, independent certified public accountants, as stated in their report appearing in Appendix B.
FINANCIAL STATEMENTS
The Corporation has filed financial information for the fiscal quarter ending September 30, 2017 with EMMA.
FINANCIAL ADVISORS
PFM Financial Advisors LLC has been retained by the Authority as its financial advisor in connection with the financing contemplated by the issuance of the Series 2017A Bonds.
Ponder & Company (“Ponder”), has served as financial advisor to the Corporation in connection with the issuance of the Series 2017A Bonds. Ponder has not been engaged by the Corporation to compile, create, or interpret any information in this Official Statement relating to the Corporation, including without limitation any of the
50 Corporation’s financial and operating data, whether historical or projected. Any information contained in this Official Statement concerning the Corporation has not been independently verified by Ponder and inclusion of such information is not, and should not be construed as, a representation by Ponder as to its accuracy or completeness or otherwise. Ponder is not a public accounting firm and has not been engaged by the Corporation to review or audit any information in this Official Statement in accordance with auditing standards generally accepted in the United States.
Although the financial advisors have assisted in the preparation of this Official Statement, they are neither obligated to undertake, and have not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness, or fairness of the information contained in this Official Statement.
VERIFICATION AGENT
The Arbitrage Group, Inc. (the “Verification Agent”) will deliver a report dated as of the closing date of the Series 2017A Bonds, verifying the accuracy of the mathematical computations of the adequacy of the maturing principal amount of non-callable United States Obligations and the interest income to be realized thereon and/or uninvested cash, if any, to provide for the principal or mandatory sinking fund redemption requirements of and interest on the Series 2009A Refunded Bonds up to and including the Series 2009A Redemption Date as provided for in the 2009A Escrow Agreement.
CERTAIN RELATIONSHIPS
Michael Koppenhaver is a member of the Board of Bayhealth, Inc., the parent company of the Corporation, and is also a Senior Financial Advisor with Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Bank of America Merrill Lynch”), which is serving as the co-managing underwriter for the Series 2017A Bonds.
Ballard Spahr LLP is serving as Bond Counsel in connection with the issuance of the Series 2017A Bonds. Ballard Spahr LLP also represents the Underwriters and their affiliates in unrelated matters.
McGuireWoods LLP is serving as counsel to the Underwriters in connection with the issuance of the Series 2017A Bonds, and also represents the Bank in unrelated matters.
Stevens and Lee, P.C., is serving as counsel to the Corporation in connection with the issuance of the Series 2017A Bonds, and also represents the Underwriters in unrelated matters.
Richards, Layton & Finger, P.A. is serving as counsel to the Bond Trustee in connection with the issuance of the Series 2017A Bonds, and also represents the Underwriters in unrelated matters.
PNC Capital Markets LLC (i) is serving as an underwriter for the Series 2017A Bonds and (ii) affiliates of PNC provide various traditional banking services to the Corporation.
Bank of America Merrill Lynch is serving as co-managing underwriter for the Series 2017A Bonds, and one or more affiliates of Bank of America Merrill Lynch (i) is a counterparty with respect to an interest rate swap agreement with the Corporation and (ii) has committed to purchase the Series 2017B Bonds. See “OTHER FINANCIAL INFORMATION - Interest Rate Swap Agreement” and “- Summary of Certain Provisions of the Series 2017B Financing Agreement” in Appendix A.
MISCELLANEOUS
The references herein to the Act, the Loan Agreement, the Bond Indenture, the Master Indenture and the 2017A Obligation and all references to other materials are brief outlines of certain provisions thereof. Such outlines do not purport to be complete, and for a full and complete statement of such provisions reference is made to such instruments, documents, and other materials, copies of which are on file at the offices of the Corporation, the office of the Authority and the designated corporate trust office of the Bond Trustee.
51 The information contained in this Official Statement has been compiled or prepared from information obtained from the Corporation, government and other sources deemed to be reliable and, while not guaranteed as to completeness or accuracy, is believed to be correct as of this date. Any statements involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. The Authority assumes no responsibility for the accuracy or completeness of such information.
The Corporation has reviewed all information contained in this Official Statement other than the information concerning the Authority, and the Corporation has approved this Official Statement for circulation to prospective purchasers of the Series 2017A Bonds.
52 The execution and delivery of this Official Statement by its Chairman has been duly authorized by the Authority.
DELAWARE HEALTH FACILITIES AUTHORITY
By: ______Chairman
Approved:
BAYHEALTH MEDICAL CENTER, INC.
By: ______Senior Vice President for Financial Services/Chief Financial Officer
53 [THIS PAGE INTENTIONALLY LEFT BLANK]
APPENDIX A
Bayhealth Medical Center, Inc.
The information contained herein as Appendix A to this Official Statement has been obtained from Bayhealth Medical Center, Inc. and other sources deemed to be reliable.
TABLE OF CONTENTS
Page
INTRODUCTION ...... 1
EXISTING FACILITIES ...... 2
SERVICES AND PROGRAMS ...... 3
CORPORATE STRUCTURE ...... 8
GOVERNANCE ...... 12
EXECUTIVE MANAGEMENT ...... 16
THE MEDICAL STAFF ...... 18
MILFORD REPLACEMENT HOSPITAL ...... 21
PLANNING AT BAYHEALTH MEDICAL CENTER ...... 22
SERVICE AREA ...... 24
HISTORICAL UTILIZATION AND PATIENT SERVICE STATISTICS ...... 28
CORPORATE COMPLIANCE ...... 29
SUMMARY STATEMENTS OF OPERATIONS ...... 30
INFORMATION FROM THE BALANCE SHEETS ...... 31
SOURCES OF PATIENT REVENUES ...... 31
MANAGEMENT’S DISCUSSION OF UTILIZATION AND FINANCIAL PERFORMANCE ...... 32
OTHER FINANCIAL INFORMATION ...... 34
FUNDRAISING – BAYHEALTH FOUNDATION ...... 37
EMPLOYEE RELATIONS ...... 38
QUALITY INITIATIVES ...... 40
ACCREDITATIONS AND CERTIFICATIONS ...... 41
QUALITY RECOGNITION ...... 41
ACCREDITATION, LICENSURE AND MEMBERSHIP ...... 42
MALPRACTICE AND OTHER INSURANCE ...... 43
LITIGATION ...... 43
BAYHEALTH MEDICAL CENTER, INC.
INTRODUCTION
Bayhealth Medical Center, Inc. (“BMC” or “Bayhealth Medical Center”), is a Delaware not-for-profit corporation determined by the Internal Revenue Service to be a tax-exempt organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”). Bayhealth Medical Center is the surviving corporation of a merger, effective January 1, 1997, pursuant to which Milford Memorial Hospital, Inc., a Delaware not-for-profit corporation, and the owner of Milford Memorial Hospital (“MMH” or “Milford Memorial”), a 168-bed acute care hospital in Milford, Delaware, was merged into Kent General Hospital (Incorporated) a Delaware not-for-profit corporation, and the owner of Kent General Hospital (“KGH” or “Kent General”), a 266-bed acute care hospital in Dover, Delaware. On the effective date of the merger, Kent General Hospital (Incorporated) changed its name to “Bayhealth Medical Center, Inc.” Bayhealth Medical Center owns and operates Kent General and Milford Memorial. Kent General and Milford Memorial are hereinafter sometimes collectively referred to as the “Hospitals.”
Bayhealth Medical Center is headquartered in the City of Dover, Delaware’s state capital, near Dover Air Force Base and Delaware State University. The primary service area includes Kent County and portions of Sussex and New Castle counties. Bayhealth Medical Center is the sole acute care hospital in Kent County and maintains inpatient market share of 80% in its primary service area. Growth of key service lines along with strategic partnerships to provide state-of-the-art expertise in the local delivery of health services including cardiology, orthopedics and neurosurgery, cardiovascular surgery, and oncology/hematology support Bayhealth Medical Center’s dominant market position. Bayhealth Medical Center currently is licensed to operate 434 beds, as more particularly described herein under the section “EXISTING FACILITIES - Licensed Beds.” Such dominant market position and Bayhealth Medical Center’s strategic partnerships, have led Bayhealth Medical Center to achieve recognition as a leading healthcare provider in the State of Delaware, as further described herein under the section “QUALITY RECOGNITION” herein.
Bayhealth Medical Center is the second-largest healthcare delivery system in Delaware, employs approximately 3,597 people (3,183 full-time equivalent employees) and had 17,133 patient discharges for the year ended June 30, 2017. The BMC Medical Staff (the “Medical Staff”) includes 429 active physicians, 162 who have privileges at both Hospitals and 92 consulting physicians, of which 96% are board-certified or board-eligible. The many outpatient services available include rehabilitation, cancer care, sleep centers, an ambulatory surgery center, a walk-in medical care center, diagnostic testing centers (imaging), wellness centers and many other health resources that are available to the community.
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EXISTING FACILITIES
Licensed Beds
The table below sets forth the licensed bed complement at Kent General and Milford Memorial as of June 30, 2017.
Kent General Milford Memorial BMC Total Medical/Surgical 148 73 221 Intermediate Care 48 26 74 Neurosurgical ICU 7 - 7 Cardiovascular/Surgical Intensive Care Unit 8 - 8 Intensive Care 14 9 23 Obstetrics/Gynecology 26 12 38 Pediatrics 15 4 19 Rehabilitation - 44 44 TOTAL 266 168 434
Kent General Hospital
The Kent General is a 266-bed acute care hospital located on a 12-acre property in a residential and commercial area of Dover, Delaware, approximately one-half mile from the intersection of U.S. Routes 13 and 113, the main north-south highways on the Delmarva Peninsula. Dover is approximately 48 miles south of Wilmington, Delaware; approximately 75 miles east of Baltimore, Maryland; and 75 miles south of Philadelphia, Pennsylvania. The Kent General main campus is located on the major north-south street through the City of Dover and is approximately 20 miles northwest of Milford, Delaware.
Existing Facilities. The original 40-bed hospital facility, constructed with funds contributed by the community and a $20,000 issue of bonds, was completed and opened for service in the fall of 1927. Since then, the facilities have undergone numerous renovations and expansions. Kent General’s buildings, as they exist today, include a complex composed of an original three-story core building recently expanded to seven floors, plus two major wings and a separate six-story patient care building. All of these structures, with the exception of the 1927 building, are steel construction with a brick/metal panel façade. Kent General Hospital contains approximately 858,000 gross square feet.
The most recent expansion at the Kent General campus was completed in 2012 and was financed in part with proceeds of the Series 2009A Bonds. The expansion added four floors to the existing three-story Kent General facility for a total of seven floors, with the fifth and sixth floors dedicated to women’s services, including ten delivery rooms and fifteen neonatal intensive care unit beds, plus twenty-six postpartum, antepartum/gynecology private bedrooms and a newborn nursery. The expansion also relocated and added twenty-eight private universal medical surgical patient rooms, space dedicated for mechanical equipment and a 376-space structured parking garage. The emergency department added a new pavilion, an expanded and comprehensive Cancer Center and shell space for 30 private patient rooms.
Hospital Parking. In addition to the 376-car parking garage opened in 2009, free valet parking is available as well as free off-street surface parking for patients, employees and visitors on the Kent General main campus adjacent to the hospital buildings and on a 1.5-acre parcel south of the main campus which primarily serves Kent General’s outpatient services.
Milford Memorial Hospital
The main campus of Milford Memorial is located on 11.66 acres of property in a residential and commercial area of Milford, Delaware. It is approximately one mile from the intersection of Route 14 and U.S.
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Route 113, approximately 70 miles south of Wilmington, Delaware, 95 miles south of Philadelphia, Pennsylvania and about 20 miles from Delaware’s main beach resort communities. Milford Memorial is approximately 20 miles southeast of the Kent General campus.
Existing Facilities. The present site of Milford Memorial was constructed in the early 1930’s. A fund drive was started at that time and a new 100-bed hospital was constructed and opened in 1938. Since then many renovations and expansion projects have taken place. The initial facility, a four-story, 14,400-square foot structure, has been expanded to approximately 250,000 square feet, with additions of two buildings that house a cancer center, entrance pavilion and conference center. All structures are steel with a brick façade.
Hospital Parking. Valet parking is available and is free of charge. In addition, both off-street and on- street free parking are available for patients, employees and visitors is provided on the Milford Memorial main campus adjacent to the hospital buildings. A parking lot is also available across Kings Highway in the Foster Street lot.
Milford Replacement Hospital. Scheduled to open in the first calendar quarter of 2019 and currently under construction, this new acute care hospital facility will offer a broad range of inpatient and outpatient services to residents of Sussex and Southern Kent Counties. Being built on a 169 acre site, approximately three miles southeast of the existing Milford Memorial campus, the new hospital is strategically located along Delaware Route 1, the major north – south highway in the state and 20 miles south of the Kent General campus. The hospital will offer 128 single inpatient rooms making it the only 100% private room facility in the State. Service enhancements include a significantly expanded Emergency Department, the latest radiation therapy services for the treatment of cancer, a cardiac catheterization lab and state of the art surgical suites. The construction and equipment cost for the new hospital and supporting facilities is approximately $315 million of which approximately 95% is expected to be funded by existing cash reserves, fundraising and cash from operations. Approximately, $15 million of the proceeds of the Series 2017B Bonds (defined below) will be applied to pay for a portion of the new hospital project costs. See “MILFORD REPLACEMENT HOSPITAL” herein for a complete description of the Milford Replacement Hospital.
SERVICES AND PROGRAMS
General
Bayhealth Medical Center serves a primary and secondary service area comprising portions of all three counties in the State of Delaware. It provides a range of healthcare services primarily through the two hospital facilities, Kent General and Milford Memorial. A description of the major services and programs presently provided by Kent General and Milford Memorial is set forth below.
Bayhealth Medical Center’s healthcare system is committed to providing advanced medical technology, progressive treatment options, state-of-the-art equipment, and extensive consumer health education programs. The Joint Commission accredits Kent General and Milford Memorial, while departments throughout Bayhealth Medical Center have earned additional accreditations and certifications which are listed in more detail under the caption “QUALITY RECOGNITION” herein.
BMC’s Service Excellence Program is an organizational philosophy that embraces the art of meeting and exceeding customer service relations among BMC employees, physicians, volunteers, and patients. Recognition programs are in place to reward employees who go above and beyond their normal scope of duties. The program has improved service standards, morale, and patient and staff satisfaction.
Bayhealth Medical Center also utilizes the Planetree Model of Care (“Planetree”), which focuses on delivering services to patients by viewing healthcare from their eyes. The goal is to create “healing environments while demystifying the experience” in all facets of the organization that focus on the mind, body, and spirit. Planetree also promotes partnerships between patients and caregivers and provides staff the ability to heal their patients through various formal and traditional methods of care. Bayhealth Medical Center has been using this model of care for the past twelve years. At present, all newly-hired staff attends a four-hour retreat on the model
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and works hands-on to embrace all aspects of patient centric care. The Planetree organization is a non-profit, world- renowned expert on patient satisfaction and delivery of healthcare services. Its model of care is approved by the Center for Medicare and Medicaid Services (“CMS”) and The Joint Commission. See “QUALITY RECOGNITION” herein for a list of awards and recognitions received by BMC’s employees and Medical Staff.
Kent General Hospital
Kent General provides a wide range of medical, surgical and ambulatory care services to meet the needs of the population in southern New Castle, Kent and northern Sussex Counties, Delaware. Kent General provides the following specialty services:
Surgical Services. Kent General is a provider of surgical services to Delaware residents using advanced surgical technology such as high-powered surgical robotics, microscopes, lasers and laparoscopic video technology. Kent General has a full-service surgical suite with eleven operating rooms, an endoscopy suite, a post-anesthesia care unit and a day surgery suite. As of June 30, 2017, approximately 60% of surgical procedures were performed on an outpatient basis.
Diagnostic Services. Kent General uses modern imaging technology, including magnetic resonance imaging and magnetic resonance angiography. Kent General’s Diagnostic Imaging Department uses a Picture Archiving Communications System (“PACS”) in place of traditional X-ray film. With PACS, multiple clinicians can view patient images simultaneously on their computers, speeding diagnoses and improving detection of abnormalities. A variety of other services are provided, including cardiac catheterization, interventional cardiology, electrophysiology, computerized tomography, nuclear medicine, digital vascular imaging, ultrasonography (including echocardiography), low-dose and 3-D mammography and general radiography and fluoroscopy. The Women’s Center at Kent General’s main campus offers outpatient testing in addition to the Outpatient Services Center also on Kent General’s main campus, and several testing sites located in the surrounding communities. Kent General also offers clinical laboratory and pathology services, neurodiagnostic services and maintains a sleep disorders laboratory.
Cardiac Services. Kent General served over 60,000 cardiac patients in the year ending June 30, 2017. These services range from basic Electrocardiograms (“EKGs”) to digital holter monitoring, stress testing, echocardiography, pacemaker insertions, cardiac catheterization, interventional cardiology, electrophysiology, and cardiopulmonary rehabilitation.
The cardiology suite has two dedicated digital cardiac catheterization laboratories, each laboratory can serve over twelve patients per day and utilizes equipment specifically designed for producing optimized, high quality digital images of the heart. A third laboratory for electrophysiology studies was completed in 2010. Electrophysiology services allows physicians to study and perform procedures dealing with the heart’s electrical system. Electrophysiology studies allow physicians to diagnose causes of abnormal heart rhythms (ie: arrhythmias) and determine appropriate treatment which could include pacemakers, defibrillators, medication or an ablation. The third lab also included a second stress testing room and dedicated physician reading stations for EKGs, stress testing, echocardiography and cardiac catherization testing.
Cardiopulmonary Rehabilitation is a comprehensive program that begins while patients are at Kent General and continues after discharge on an outpatient basis. The program provides education, monitored exercise, stress reduction and dietary counseling.
Critical Care Services. Kent General has both an Intensive Care and a Cardio-Vascular Surgical Intensive Care Unit for critically ill and cardiac patients. These units are equipped with state-of-the-art support equipment combined with intensive nursing care. Kent General also has an Intermediate Care (step-down) Unit equipped with telemetry monitors. An inpatient dialysis unit is located adjacent to the critical care area.
Emergency Services. In fiscal year 2017, Kent General’s Emergency Department served over 65,000 patients – the second-highest volume for any hospital in Delaware. Open 24 hours a day, the Emergency Department provides care with a staff of physicians who are all either board-eligible or board-certified in
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Emergency Medicine. The Emergency Department is certified as a Level III Trauma Center by the American College of Surgeons. ECI Healthcare, a Schumacher clinical partner, oversees Emergency Services at Kent General.
Inpatient Women’s and Children’s Services. Kent General offers many services for women, infants and children requiring inpatient medical care. KGH has 10 modern birthing suites which allow the mother and her family to labor, deliver and recover in a home-like setting. Kent General also has the capacity to triage up to five patients in a designated area within the Birthing Center.
The Birthing Center is supported by 24-hour anesthesia care.
After delivery, the mother and newborn are transferred to Kent General’s Women’s Unit, which has 26 single rooms designed to accommodate the family. Nursing staff are skilled in mother-baby couplet care, and lactation counseling services are also available for the mother’s choosing to breast-feed.
Ongoing outpatient management of the high-risk antepartum patient is provided by Bayhealth Medical Center’s perinatology services. Antepartum patients requiring inpatient care are admitted to the Women’s Unit, where care is provided by their obstetrician in consultation with a board certified perinatologist.
Kent General provides the only Neonatal Intensive Care services in Kent and Sussex Counties, as well as the surrounding Maryland counties. Premature infants and infants requiring intensive monitoring are admitted to Kent General’s 15-bed, Level II, Special Care Nursery. This unit is managed by a private neonatology group of board-certified physicians, including certified neonatal nurse practitioners. These services are provided in collaboration with Christiana Care Health System in Wilmington, Delaware.
If long-term care is required for the newborn or child, Bayhealth Medical Center offers families the opportunity to use the Ronald McDonald Room. In partnership with the Ronald McDonald House of Delaware, the Ronald McDonald Room has living and sleeping quarters for up to two families.
The KGH Pediatric Unit holds 13 beds. Each bed has cardio-respiratory monitoring, allowing Kent General to care for sicker children. Pediatric Hospitalists, available on site 24/7, are able to respond to any emergency and/or pediatric admission.
Oncology Services. In 2008 Bayhealth Medical Center launched the Bayhealth Cancer Institute and affiliation with the University of Pennsylvania Health System (“UPHS”) as a member of the Penn Cancer Network. The Bayhealth Cancer Institute was created to continue and increase Bayhealth Medical Center’s clinical trials, cancer education and prevention, and care coordination programs. Bayhealth Medical Center’s membership in the Penn Cancer Network and affiliation with the Abramson Cancer Center, Philadelphia, Pennsylvania, controlled by UPHS, gives Bayhealth Medical Center’s patients access to expanded cancer treatment, research, and education programs.
The cancer treatment program is accredited through the American College of Surgeons Commission on Cancer, and was re-accredited in 2015 for three years. The cancer treatment program provides advanced technology in cancer treatment to patients in central Delaware, with the numerous cancer support services provided by Kent General.
Bayhealth Medical Center is the sole provider of radiation therapy in its service area. In 2003, Kent General was the first medical facility in Delaware to use Intensity Modulated Radiation Therapy (“IMRT”), a precise and sophisticated radiation technique for cancer treatment that uses computer-generated three-dimensional planning to precisely target patients’ tumor cells with radiation without harming surrounding healthy tissues and organs. Since 2008, Bayhealth Medical Center has offered Trilogy® with Image-Guided Radiation Therapy (“IGRT”) and Stereotactic Radiosurgery (“SRS/SRT”) treatment options, and since 2012, Bayhealth Medical Center has offered TrueBeam®, with advanced linear accelerator technology, increasing the capacity of radiation therapy at Kent General and added high dose rate brachytherapy (HDR) with the GammaMedplus™ iX Afterloader in the Kent Integrated Cancer Center. Bayhealth Medical Center has a formal agreement with Thomas Jefferson University for clinical rotation programs for radiation therapist and dosimetrist students at Kent General.
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In January 2012, Bayhealth Medical Center’s Chemotherapy Suite moved to its newly renovated space on the second floor of the Pavilion Building, Bayhealth Kent Campus. Chemotherapy treatments are now provided in a spacious center featuring natural lighting, a flat screen television for each patient in a more private environment, and certified nurses who continue to provide individualized, expert care.
Rehabilitation Services. Kent General provides a comprehensive array of inpatient and outpatient rehabilitative services. Physical and occupational therapists evaluate patient needs and develop individualized treatment programs aimed at returning each patient to the most independent lifestyle possible. Certified speech pathologists evaluate both adults and children for articulation and voice disorders, stroke and head trauma rehabilitation. Sports medicine provides comprehensive treatment for sport-related injuries under the supervision of orthopedic surgeons, physical therapists and athletic trainers. Kent General provides a three-phase cardiac rehabilitation program for patients recovering from a heart attack or heart surgery. Kent General also has an outpatient rehabilitation center including sports medicine, physical therapy, hydrotherapy and home health services.
Cutting Edge Technology. Bayhealth Medical Center’s Imaging Technology which includes 3T MRI scanners and Volumetric CT scanners dramatically increases the early detection of disease. Bayhealth Medical Center also offers state of the art PET/CT services to help better detect cancer so that it can be treated more effectively. Bayhealth Medical Center offers Pain Management services that can vastly improve a patient’s quality of life. Bayhealth Medical Center’s imaging network permits its physicians to easily share a patient’s studies with specialty hospitals such as the University of Pennsylvania Health System or the Johns Hopkins Health System.
Milford Memorial Hospital
Milford Memorial also provides a wide range of medical, surgical and ambulatory care services designed to meet the needs of the population residing in central and southern Delaware. Substantially all of these services will be transitioned to the replacement hospital. Milford Memorial provides the following specialty services:
Surgical Services. Milford Memorial offers a full complement of surgical services through its five full- service operating suites, one minor procedure room, an endoscopy room and post anesthesia care unit. Major services include orthopedics, general and vascular surgery, ophthalmology, urology, gynecology and plastic surgery. As of June 30, 2017, approximately 67% of Milford Memorial’s surgical procedures were performed on an outpatient basis.
Diagnostic Services. Milford Memorial diagnostic services include advanced computerized tomography, magnetic resonance imaging and magnetic resonance angiography, vascular laboratory, nuclear medicine, ultrasonography, mammography, bone densitometry, general radiography and fluoroscopy. In addition, a Women’s Center located on the main campus provides diagnostic testing services, and clinical laboratory and pathology services are also offered. Milford Memorial’s Diagnostic Imaging Department uses PACS in place of traditional X- ray film.
Emergency Services. In fiscal year 2017, Milford Memorial’s Emergency Department served nearly 29,000 patients. Open 24 hours a day, the Emergency Department provides care with a staff of physicians who are all either board-eligible or board-certified in Emergency Medicine. The Emergency Department is certified as a Level III Trauma Center by the American College of Surgeons. ECI Healthcare, a Schumacher clinical partner, oversees Emergency Services at Milford Memorial.
Oncology Services. Milford Memorial’s Cancer Care Center opened in January 2002, offering a centralized location for comprehensive, customized cancer treatments consisting of a multi-tiered therapy of prevention, radiation therapy, chemotherapy and surgery. The cancer treatment program is accredited through the American College of Surgeons Commission on Cancer, and was re-accredited in 2015 for three years. The cancer treatment program provides advanced technology in cancer treatment to patients in the community, with the cancer support services provided by Milford Memorial.
Rehabilitation Services. Milford Memorial offers a full complement of inpatient and outpatient rehabilitative services designed to restore the patient to his or her maximum functional ability. These services,
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which draw patients from New Jersey, Pennsylvania and Maryland as well as Delaware, include a physiatrist-led inpatient rehabilitative unit which is accredited by CARF. Rehabilitative services are offered in these special disciplines: physical therapy, speech therapy, occupational therapy, sports rehabilitation, cardiac rehabilitation and home health services. Occupational health services include treatment of work-related illness and injury, screenings and examinations, and preventative programs.
Milford Memorial Women’s and Children’s Services. Milford Memorial offers single room maternity care to new mothers. There are 9 private rooms decorated in a home-like fashion and designed to accommodate the family. The mother will labor, deliver, recover and remain in the same room until discharge. The nursing staff are skilled in providing mother-baby couplet care. Lactation counseling services are also available. Milford has also achieved Baby Friendly status and supports and encourages breast feeding. Women’s Services is supported by 24 hour anesthesia care.
Milford has teamed with OB Hospitalists Group to provide OB Hospitalist care. Milford Memorial serves the community with board certified obstetricians, 24 hours a day, 7 days a week. The hospitalists serve in Milford Memorial’s Obstetrical Emergency Department and support the community obstetricians when needed.
Infants requiring intensive care are transferred to Kent General for Level II care and either Nemours/Alfred I. duPont Hospital for Children (“A.I. duPont”) or Christiana Care Health System for Level III care.
Community Based Programs
Bayhealth Medical Center’s wide array of outpatient programs throughout the service area include:
Walk-In Medical Care. Walk-In Medical Care in Milford is Bayhealth Medical Center’s treatment facility for minor illnesses and injuries, completing over 7,000 procedures in the year ending June 30, 2017. Staffed by Bayhealth-employed medical providers, Walk-In Medical Care offers urgent care on a walk-in basis for injury or illness, physical exams, drug and alcohol testing, and imaging and lab services.
Occupational Health. Bayhealth Medical Center provides occupational health services, health screenings and education programs to over 980 companies in southern and central Delaware.
Women’s Center in Dover. The Women’s Center in Dover offers diagnostic treatments such as mammography, ultrasound, lab work, imaging and bone density as well as patient education services such as counseling, resource materials, support groups and educational programs for women of all ages.
Women’s Center in Milford. The Women’s Center in Milford offers diagnostic treatments such as mammography, ultrasound, bone density, pregnancy non-stress tests, second newborn screenings and Rhogam injections as well as patient education services such as counseling, resource materials, support groups and educational programs for women of all ages.
Outpatient Services Centers. Bayhealth Medical Center’s Outpatient Services Centers are located in Dover, Milford, Harrington, Middletown, Milton and Smyrna-Clayton, Delaware and offer pre-admission and routine diagnostic procedures, including lab work, diagnostic imaging, cardiac catheterization, imaging, CT, MRI, ultrasound, mammography/stereotactic biopsy, nuclear medicine, EKG, EEG, sleep studies, pulmonary function tests and biofeedback therapy. In addition, the Middletown Medical Center offers primary and specialty care physician services in cancer care, cardiology, family medicine, general surgery, mental health, obstetrics/gynecology and pediatrics.
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CORPORATE STRUCTURE
Organization Chart
Bayhealth, Inc. is the parent corporation of Bayhealth Medical Center and four other corporate entities, including Bayhealth Foundation, all of which are engaged in healthcare-related activities which support and complement Bayhealth Medical Center’s operations.
The organizational chart for Bayhealth, Inc., Bayhealth Medical Center and the other, affiliated entities is set forth below. Upon the issuance of the Series 2017 Bonds, Bayhealth Medical Center will be the only Member of the Obligated Group.
As the sole initial Member of the Obligated Group, Bayhealth Medical Center will be solely obligated for the payment of debt service on the Delaware Health Facilities Authority Revenue Bonds Bayhealth Medical Center Project Series 2017A (the “Series 2017A Bonds”), as well as for the payment of debt service on the Delaware Health Facilities Authority Revenue Bonds Bayhealth Medical Center Project Series 2017B (the “Series 2017B Bonds” and together with the Series 2017A Bonds, the “Series 2017 Bonds”) to be issued concurrently with the Series 2017A Bonds. See “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017A BONDS” in the forepart of this Official Statement.
Bayhealth, Inc.
Bayhealth, Inc. is a not for profit, non stock Delaware corporation, which serves as the corporate parent to Bayhealth Medical Center and to certain other affiliated corporations discussed below. As corporate parent, Bayhealth, Inc. is responsible for coordinating the activities of its subsidiaries and has certain reserved powers over the subsidiaries. See “Governance” below. In particular, the Board of Directors of Bayhealth, Inc. (the “Bayhealth, Inc. Board”) elects or approves the election of the Boards of Directors of the subsidiaries. Formed to serve as the parent corporation for Kent General Hospital (Incorporated), Milford Memorial Hospital, Inc. and other related entities as part of a corporate reorganization designed to improve the operating effectiveness and efficiency of the Hospitals and the delivery of healthcare services to the residents of central and southern Delaware, it continues to fulfill that role in the Bayhealth organization. Upon the issuance of the Series 2017 Bonds, Bayhealth, Inc. will not be a Member of the Obligated Group and will not be obligated to repay the principal of or interest on the Series 2017 Bonds.
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Affiliated Entities
Bayhealth, Inc. and the other affiliated entities and their respective activities are described on the following pages. No affiliated entities of Bayhealth Medical Center are obligated in any respect under the Master Indenture or the Loan Agreement, and the revenues and assets attributable to such affiliated entities should not be considered to be available to Bayhealth Medical Center for the payment of debt service on the Series 2017A Bonds.
Bayhealth Cancer Institute
Bayhealth Cancer Institute (the “Cancer Institute”) is a not-for-profit, non-stock Delaware corporation established in 2007 to support Bayhealth Medical Center as a nationally-recognized cancer treatment center in Delaware. The Cancer Institute promotes and carries out clinical research, care coordination, community education, outreach and screening, and professional educational activities related to cancer care and prevention. Financial support for the Cancer Institute is provided by contributions, fundraising efforts, and grants from private foundations and government agencies.
Bayhealth Development Corporation
Bayhealth Development Corporation (“Bayhealth Development”) is a for profit Delaware corporation which provides real estate management and development services to Bayhealth Medical Center and its affiliated corporations.
Bayhealth Development owns and maintains a 21,477-square foot professional office building located on the Kent General campus, of which 18,458 square feet are leased by Bayhealth Medical Center for various non-clinical departments and of which 3,019 square feet are leased to a physician. Bayhealth Development also owns and maintains a 30,841-square foot medical office building on 1.875 acres located adjacent to the Kent General main campus, of which 19,122 square feet are leased by Bayhealth Medical Center for various clinical departments and of which 11,719 square feet are leased to physicians. In addition, Bayhealth Development owns an 8.1 acre property east of the Kent General main campus, which includes a facility housing Kent General administrative offices and a child care center; and, a .25 acre parcel leased to Bayhealth Medical Center, on which, Bayhealth Medical Center constructed an ambulatory surgery facility, together with related parking for both facilities. The ambulatory surgery facility is leased to Dover Surgicenter, L.L.C., discussed below.
Bayhealth Foundation
Bayhealth Foundation (the “Foundation”) is a not for profit, non stock Delaware corporation established to provide investment and fundraising services for Bayhealth Medical Center. The Foundation solicits charitable contributions for the support of Bayhealth Medical Center and its programs and sponsors a number of fundraising events each year. In addition, the Foundation is developing long term and planned giving programs to benefit Bayhealth Medical Center and its related healthcare organizations. The Foundation had $16,556,962 in total assets as of June 30, 2017. See “Fundraising – Bayhealth Foundation” below for information about the Foundation and its fundraising goal and campaign for the new Milford Memorial replacement hospital.
Bayhealth Physician Alliance, LLC
Bayhealth Physician Alliance, LLC is a Delaware limited liability company formed by Bayhealth Medical Center and private-practice physician leaders to provide a clinically-integrated network consisting of more than 270 physicians representing 60-plus practices throughout central and southern Delaware. Bayhealth Physician Alliance, LLC is physician-led and administratively and financially supported by Bayhealth Medical Center. Member physicians have developed evidence-based clinical quality initiatives that are aimed at improving quality, enhancing the patient experience and reducing overall health care costs.
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UBPAS, LLC
UBPAS, LLC is a Delaware limited liability company formed to facilitate acquisition of the real property in Sussex County on which the Milford Replacement Hospital is being constructed. Bayhealth Medical Center is the sole member of UBPAS, LLC. All real property acquired by UBPAS, LLC has been assigned to Bayhealth Medical Center upon completion of the purchases.
Sussex Campus Development, LLC
Sussex Campus Development, LLC, a Delaware limited liability company, was formed to coordinate the ownership, development, operation and management of real property, and related properties and investments, in support and furtherance of the tax exempt, charitable activities and mission of Bayhealth Medical Center and its affiliated organizations. Bayhealth Medical Center is the sole member of Sussex Campus Development, LLC.
Joint Ventures and Partnerships
Complementing the activities of Bayhealth Medical Center and its related entities are several healthcare related joint ventures in which Bayhealth Medical Center is a participant. None of the joint ventures described below is obligated in any respect under the Master Indenture or the Loan Agreement or to pay the principal of or interest on the Series 2017A Bonds. The joint ventures are:
Dover Surgicenter, L.L.C. Dover Surgicenter, L.L.C. (the “Dover Surgicenter”) is a Delaware limited liability company, formed in 2005 for the purpose of owning, developing and operating an ambulatory surgery center close to the Kent General campus. The Dover Surgicenter opened in 2007 and leases its facility from Bayhealth Medical Center. Bayhealth Medical Center owns 27.7% of the company and the remainder is owned by physicians in the community.
Health Partners Delmarva, LLC. In 2014, Bayhealth Medical Center and Peninsula Regional Medical Center, which owns and operates a 275-licensed bed acute care tertiary care hospital in Salisbury, Maryland, formed Health Partners Delmarva, LLC. The joint venture is intended to allow each hospital to share the best practices of both organizations. Health Partners Delmarva was developed to better implement the healthcare triple aim of reducing costs, enhancing quality and patient experience and improving health.
Bayada at Bayhealth. In June of 2017, Bayhealth Medical Center formed a joint venture with Bayada Home Health Corporation, a for-profit organization headquartered in Moorestown, N.J. that provides a range of home care services across the United States. Bayhealth Medical Center has a 48% ownership stake in the new entity which services residents in Kent and Sussex Counties in Delaware.
eBright Health. In September of 2016, Bayhealth Medical Center entered into a state-wide strategic partnership with four other Delaware acute care hospital organizations, Beebe Healthcare, Christiana Care Health System and Nanticoke Health Services to form eBright Health with the stated goal of increasing access to care, improving population health and delivering greater quality and value health care to the residents of the State of Delaware. Nemours/Alfred I. duPont Hospital for Children joined the partnership in 2017. The state-wide collaboration aims to share best practices and learning experiences to raise the quality of health care in Delaware.
Significant Professional Service Contracts
Bayhealth Medical Center and UPHS have established and maintain agreements for several clinical programs which expand and enhance the range of services and access to specialized clinical care for patients served by Bayhealth Medical Center. Beginning in 2003, Bayhealth Medical Center worked with Penn Cardiac Care of the University of Pennsylvania Health System, one of the nation’s recognized leaders in cardiac surgical innovation and expertise, to establish a comprehensive cardiovascular surgery program at Kent General providing on-site surgical services such as coronary artery bypass grafts, heart valve repairs and replacements, and interventional cardiology services, including therapeutic cardiac catheterization and balloon angioplasty. An addendum to the contract in
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February 2009 added the development and initiation of an endovascular surgery program, relating to procedures for abdominal aortic aneurysm and thoracic aortic aneurysm.
In July 2008, Bayhealth Medical Center and UPHS entered into an affiliation agreement to become a participant in the Penn Cancer Network in order to provide expanded cancer diagnosis, treatment, research and education to Delaware residents. The cancer affiliation with Bayhealth Medical Center is UPHS’ first in Delaware and represents the further expansion of clinical expertise in advanced cancer care among superior healthcare facilities throughout the region. The relationship also brings university-level expertise in cancer care to Bayhealth Medical Center. The affiliation provides Bayhealth Medical Center’s cancer patients with direct access to the latest medical research and clinical trials. Additionally, patients have access to a full continuum of specialty and subspecialty care and resources.
Additional affiliation agreements have been established for the Orthopedic Service line, Neuro-Rescue, and Telegenetics. On January 1, 2015, Bayhealth and UPHS entered into a Master Agreement to consolidate and standardize the administration of the existing affiliation programs in Cardiovascular Surgery, Endovascular Surgery, the Cancer Network, the Orthopedic Service Line and Telegenetics services and to provide a framework for the establishment of new programs.
The Inpatient Rehabilitation Center at Milford Memorial Hospital contracts with Kindred Healthcare, Inc. to provide quality rehabilitation services for patients following traumatic injuries, non-traumatic neurological insults, and as part of the routine post-operative rehabilitation for total joint replacement patients. Kindred Healthcare, Inc. is a health services company that operates contract rehabilitation services across the United States and is one of the largest diversified post-acute healthcare provider in the United States. This agreement has been in place since 1993, with the most recent contract revision effective in 2016 for a two year period. Bayhealth’s Inpatient Rehabilitation Center is accredited by the Commission for Accreditation of Rehabilitation Facilities (“CARF”), and also received a three-year accreditation from CARF for the Stroke Specialty Program. Services are provided to patients from Delaware and Maryland. The inpatient rehabilitation unit has an average daily census of 32 acute rehabilitation patients with an 83% occupancy rate.
Anesthesia services at Kent General have been provided by Bay Anesthesia Group, L.L.C. (owned by local physicians) since July 2007 and at Milford Memorial since February 2008. All physicians are board-certified.
Under contractual agreement, ECI Healthcare, a Schumacher clinical partner, has overseen Emergency Services at both Kent General and Milford Memorial since February 2001. The contract is up for renewal in January 2018.
Kent General’s Trauma Director, Edward Lee Alexander, III, M.D., has overseen trauma services since January 1998. The 11 participating surgeons are board-eligible or board-certified. Trauma surgeon participation is voluntary.
Milford Memorial Trauma Director, David Cloney, M.D., has overseen trauma services since February, 2014. The five participating surgeons are board-eligible or board-certified. Trauma surgeon participation is voluntary.
Imaging services at Kent General have been the responsibility of Kent Diagnostic Radiology Associates, P.A., since December 1990 and at Milford Memorial since July 2009. Growth in volume and breadth of services has been continuous at both Hospitals.
Bayhealth Medical Center contracts with Christiana Care Health System (“Christiana Care”) and Christiana Neonatal Associates, L.L.C. to staff and administer its Neonatal Intensive Care Unit. Christiana Care is a non-profit, healthcare system headquartered in Wilmington, DE and is the largest healthcare system in the State of Delaware.
Inpatient hospitalist services have been provided at Milford Memorial since 2005 and at Kent General since the summer of 2007. In 2013, Bayhealth Medical Center contracted with Apogee, a physician-based hospitalist group, to provide these services. The contract with Apogee was renewed in 2016 for a 3-year term.
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GOVERNANCE
Board of Directors of Bayhealth, Inc.
The Bayhealth, Inc. Board has governing responsibility for Bayhealth, Inc. and also certain reserved powers and responsibilities for governance of its subsidiaries, including Bayhealth Medical Center. The Bayhealth, Inc. Board reserves the right to approve the following actions of Bayhealth Medical Center:
• sell, purchase or authorize the sale or purchase of the whole assets of Bayhealth Medical Center;
• make any agreement that would provide for the merger or dissolution of Bayhealth Medical Center;
• make any amendment to the Certificate of Incorporation or make any substantive change in the by- laws of Bayhealth Medical Center;
• borrow money or pledge assets of Bayhealth Medical Center;
• implement any operating and capital budget for Bayhealth Medical Center for any fiscal year; and
• adopt current and long range plans.
The Bayhealth, Inc. Board is composed of 20 members, including as voting, ex officio members, the President and Chief Executive Officer of Bayhealth, Inc. and the President of the Medical Staff of Bayhealth Medical Center. At least 25% of the members shall be, at the time of election, members of the active Medical Staff, including the President of the Medical Staff and at least two members whom practice primarily at Kent General and at least two members whom practice primarily at Milford Memorial. Bayhealth, Inc. Board members serve for four- year staggered terms, so that approximately one-third of the members are nominated and elected at each annual meeting. Directors may serve no more than three consecutive four-year terms. Directors are elected at the annual meeting by majority vote of the entire Bayhealth, Inc. Board then serving. The annual meeting of Bayhealth, Inc. is held on the last Monday of January of each year. Regular meetings of the Bayhealth, Inc. Board are held bi-monthly.
The officers of the Bayhealth, Inc. Board consist of a Chair, one (or more) Vice-Chair, a President and Chief Executive Officer, a Secretary, a Treasurer and other officers deemed advisable by the Bayhealth, Inc. Board. The Chair, Vice-Chair(s) and President and Chief Executive Officer are required to be elected by the Bayhealth, Inc. Board from among its own members; the Secretary, Treasurer and any other officers may, but need not, be members of the Bayhealth, Inc. Board. The current Treasurer is the Chief Financial Officer of Bayhealth, Inc. and of Bayhealth Medical Center.
The Bayhealth, Inc. Board has eight standing committees: the Executive Committee, the Governance Committee, the Compensation Committee, the Contract Committee, the Performance Improvement Committee, the Planning Committee, the Real Estate Committee, and the Business and Investment Committee. Persons who are not members of the Bayhealth, Inc. Board may serve on the Performance Improvement Committee, the Planning Committee, the Real Estate Committee, the Business and Investment Committee, or special committees.
The Executive Committee consists of the Chair of the Bayhealth, Inc. Board, the Vice-Chair(s), the President and Chief Executive Officer, the President of the Medical Staff and at least three additional members of the Bayhealth, Inc. Board, at least one of whom must be a member of the active Medical Staff practicing primarily at Kent General and at least one of whom must be a member of the active Medical Staff practicing primarily at Milford Memorial. The Executive Committee meets every other month, when the Board does not regularly meet, and can act on behalf of the Board.
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The current voting members of the Bayhealth, Inc. Board and their principal affiliations, their years of initial election and the date that their term expires, are as follows:
Year of Initial Year Term Members Business or other Affiliation Election Expires (Jan) I.G. Burton III Civic Leader 2006 2019 Chair(1) Sharad C. Patel, MD Physician, Internal Medicine, Partner, 2014 2018 Vice Chair(1) Dover Family Physicians William Strickland President, L & W Insurance, Inc. 2015 2019 Vice Chair(1) Mary Jane Willis, Secretary(1) Civic Leader 2007 2018 Michael J. Antunes, M.D. (1) Physician, Neonatology 2017 Ex officio Connie Fisher Civic Leader 2009 2020 Scott A. Hammer, M.D. Physician, Family Medicine, Southern DE 2010 2018 Medical Group Randy J. Holland, Esq. Attorney, Wilson Sonsini Goodrich & 2017 2021 Rosati Michael Koppenhaver, CRPC(1) Senior Financial Advisor, Bank of 2006 2019 America Merrill Lynch Kathleen Matt Ph.D, Dean, College of Health Sciences, 2016 2020 University of Delaware Gregory V. Moore, PE Vice President, Becker Morgan Group 2015 2020 Douglas E. Morrow Personnel Manager, Seawatch 2008 2019 International LTD, and City Councilman for the City of Milford, Delaware Terence M. Murphy, FACHE(1) President and Chief Executive Officer, Ex officio Ex officio Bayhealth, Inc., and President and Chief Executive Officer, Bayhealth Medical Center, Inc. Charles C. Rodriguez President/CEO, R & R Realty 2016 2020 Michel R. Samaha, M.D.(1) Pulmonologist, Milford Pulmonary & 2012 2020 Sleep Consultants, LLC June S. Turansky, RN, MSN, Ed.D. Vice President/Campus Director, 2008 2020 Delaware Tech Ramesh K. Vemulapalli, M.D. Physician, Infectious Disease, Infusion 2015 2020 Solutions of Delaware, LLC Harry L. Williams, Ed.D(1) President, Delaware State University 2015 2020 William F. Winters, CPA Partner, Mitten & Winters, LLP 2009 2020 Certified Public Accountants Jeffrey A. Young, Esq.(1) Attorney, Young & McNelis 2014 2018
(1) Executive Committee Member
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Board of Directors of Bayhealth Medical Center
The Board of Directors of Bayhealth Medical Center (the “BMC Board”) has governing responsibility for Bayhealth Medical Center, subject to certain limitations and powers reserved to the Bayhealth, Inc. Board, as detailed below. The BMC Board is composed of not less than eight nor more than 12 directors, including, as voting, ex officio members, the President and Chief Executive Officer of Bayhealth, Inc.; the Senior Vice President and Chief Operating Officer of BMC; the Senior Vice President and Chief Financial Officer of BMC; the Senior Vice President and Chief Nursing Executive of BMC; the Senior Vice President and Chief Medical Officer, the President of the Medical Staff, the President of the Kent General Medical Staff, and the President of the Milford Memorial Medical Staff. In addition, two members of the BMC Board shall be members of the active Medical Staff and two members may be elected from the Bayhealth Medical Center management (the “Management”). All ex officio members of the BMC Board serve one-year terms and are eligible for successive terms. All other BMC Board members are elected for three-year terms and may serve no more than three consecutive three-year terms. BMC Board members, other than ex officio members, are nominated and elected by the Bayhealth, Inc. Board. The annual meeting is held on the third Thursday of January each year. Regular meetings of the BMC Board are held bi- monthly.
Pursuant to the by-laws of Bayhealth Medical Center, the President and Chief Executive Officer serves as Chair of the BMC Board, the Senior Vice President and Chief Operating Officer serves as Vice-Chair, and the Senior Vice President and Chief Financial Officer serves as Treasurer. The remaining officers of Bayhealth Medical Center may, but need not, be members of the BMC Board.
The authority of the BMC Board is limited by certain powers expressly reserved to the Bayhealth, Inc. Board. See “Board of Directors of Bayhealth, Inc.” above. In addition, Bayhealth Medical Center must furnish copies of all BMC Board and committee meeting minutes and all financial reports to the Bayhealth, Inc. Board. The Bayhealth, Inc. Board may fill any vacancy on the BMC Board and may remove, with or without cause, any member of the BMC Board.
The BMC Board appoints two standing committees: the Executive Committee and the Performance Improvement Committee. The Executive Committee is composed of the Chair of the BMC Board, the Vice-Chair of the BMC Board, the Treasurer of the BMC Board and the President of the Medical Staff. It is empowered to transact all business of Bayhealth Medical Center during intervals between meetings of the BMC Board, subject to limitations imposed upon the Executive Committee under the BMC by-laws. The Executive Committee meets as necessary.
The Performance Improvement Committee is composed of the Chair of the Bayhealth, Inc. Board, the Chair of the BMC Board, the President of the Medical Staff and at least two additional members of the Medical Staff, one who practices primarily at Kent General, and one who practices primarily at Milford Memorial. The Performance Improvement Committee serves as an advisory body to the BMC Board to monitor and review policies concerning quality assurance throughout Kent General and Milford Memorial. The Performance Improvement Committee reviews, develops and implements policies, when appropriate, in the areas of programs concerning risk management and policies, including personnel policies, which in the view of the Performance Improvement Committee directly or indirectly affect performance improvement and quality assurance issues which impact upon the quality of healthcare services provided by the Hospitals. In addition, the Performance Improvement Committee of the BMC Board, acting as a joint committee with the Performance Improvement Committee of the Bayhealth, Inc. Board, has final authority over credentialing of the Medical Staff.
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The current voting members of the BMC Board and their businesses or other affiliations, are as follows:
Year of Initial Year Term Director Business or other Affiliation Election Expires Terence M. Murphy President and Chief Executive Officer, Ex officio Ex officio Chair Bayhealth Medical Center, and President and Chief Executive Officer, Bayhealth, Inc. Deborah L. Watson Senior Vice President and Chief Operating Ex officio Ex officio Vice Chair Officer, Bayhealth Medical Center Michael J. Tretina Senior Vice President and Chief Financial Ex officio Ex officio Treasurer Officer, Bayhealth Medical Center Michael J. Antunes, M.D. President of Medical Staff, Neonatologist Ex officio Ex officio Michael E. Ashton Vice President of Operations; Administrator, 2012 2018 Milford Memorial Hospital Brenda Blain Senior Vice President and Chief Nursing Ex officio Ex officio Executive, Bayhealth Medical Center Craig D. Hochstein, M.D. President of Kent Medical Staff, Emergency Ex officio Ex officio Medicine Pedro Perez, M.D. President of Milford Medical Staff, Ex officio Ex officio Cardiologist Gary Siegelman, M.D., MSc, CPE Senior Vice President and Chief Medical Ex officio Ex officio Executive, Bayhealth Medical Center
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EXECUTIVE MANAGEMENT
The executive officers of Bayhealth, Inc. and BMC are described below:
Terence M. Murphy, President and Chief Executive Officer
Mr. Murphy has served as President and Chief Executive Officer of Bayhealth, Inc. and Bayhealth Medical Center since October 1, 2009. Mr. Murphy is an ex officio member of the Bayhealth, Inc. Board and BMC Board and is responsible to both Boards for overall management of Bayhealth, Inc. and Bayhealth Medical Center. Mr. Murphy is responsible for the day-to-day oversight of all operations of both Hospitals. Prior to his appointment he served as Executive Vice President and Chief Operating Officer of Bayhealth Medical Center from 2002 to 2009. He currently serves as a member of boards of affiliated entities including Bayhealth Cancer Institute and Bayhealth Development Corporation. Mr. Murphy received a Master’s Degree in Health Services Administration from The George Washington University in 1985 and a Bachelor’s Degree in Biological Sciences from Belmont Abbey College in 1982. Prior to joining the staff at Bayhealth Medical Center, Mr. Murphy served as Vice President of Clinical and Professional Services at Southern Maryland Hospital Center in Clinton, Maryland. Mr. Murphy is a Fellow of the American College of Healthcare Executives and a member of the Healthcare Financial Management Association and the Board of Directors of the Delaware Healthcare Association. He was the recipient of the 2008 Regent’s Award Senior-Level Healthcare Executive by the American College of Healthcare Executives. Mr. Murphy serves as a Chairman of the Delaware Business Roundtable. In addition, he is a member of the Board of Directors of Easterseals Delaware and Maryland’s Eastern Shore, the Board of Trustees for the University of Delaware, the Board of Governors of the Delaware State Chamber of Commerce, and the Greater Kent Committee.
Deborah L. Watson, Senior Vice President and Chief Operating Officer
Ms. Watson has served as the Senior Vice President and Chief Operating Officer of Bayhealth, Inc. and Bayhealth Medical Center since 2010. Prior to that she served as Vice President of Operations, Southern Region since September 2002. She serves as the site administrator for the Milford Memorial campus with system-wide accountability for the organization, coordination, administration and operational planning for Oncology, Cardiovascular and Orthopedics/Rehabilitation Service Lines. Ms. Watson currently serves as the President of the Bayhealth Cancer Institute. Ms. Watson earned a Master’s Degree in Business Administration in 1981 and a Bachelor’s Degree in Medical Technology/Clinical Chemistry in 1976, both from Bloomsburg University in Pennsylvania She completed an Administrative Residency at Geisinger Health System in 1987. Before coming to Bayhealth, Ms. Watson was the Vice President, Operations at Geisinger Health System in Danville, Pennsylvania from 1992 to 2002. Prior to that, she served in a variety of positions at Geisinger Health System from 1976 to 1992 in the capacity of medical technologist, human resources recruiter, and Administrative Director of Operations. Ms. Watson is a Fellow of the American College of Healthcare Executives, Fellow of the American College of Medical Practice Executives, and a member of the Healthcare Financial Management Association.
Michael J. Tretina, Senior Vice President for Financial Services and Chief Financial Officer
Mr. Tretina has served as Senior Vice President for Financial Services and Chief Financial Officer of Bayhealth, Inc. and Bayhealth Medical Center since 2013. Mr. Tretina is responsible for the revenue cycle including patient access (admission, registration and scheduling) and patient financial services (billing, follow-up, collections and related customer services). He is also responsible for accounts payable, budgeting, cost accounting, decision support, financial reporting, capital financing, investments, reimbursement and Information Systems. Prior to joining Bayhealth, Inc. and Bayhealth Medical Center, Mr. Tretina served as Vice President of Finance and Chief Financial Officer of Mary Greeley Medical Center in Ames, Iowa from 2009 to 2013. He also served as Vice President and Senior Vice President of Finance for St. Vincent’s Health System in Jacksonville, Florida from 2000 to 2009. Mr. Tretina holds a Master’s Degree in Business Administration and Healthcare Administration, from LaSalle University. He also completed a Bachelor of Science Degree in accounting at the Pennsylvania State University. Mr. Tretina is a Certified Public Accountant, a member of the American Institute of Certified Public Accountants and a Fellow of the Healthcare Financial Management Association. He is a member of the BMC Board and a board member of various affiliated corporations. He is also a Fellow of the American College of Healthcare Executives.
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Brenda Blain, Senior Vice President and Chief Nursing Executive
Dr. Blain has served as the Senior Vice President and Chief Nursing Executive for Bayhealth Medical Center since July 3, 2017. She is responsible for the organization, coordination, administration and operational planning for Nursing, Emergency & Trauma Services, Pharmacy Services, Peri-Operative Services, Bariatric Services, Wound Care Center, and the Education Department. Before joining Bayhealth Medical Center in July, she was the Chief Nursing Officer/Chief Operating Officer at Baylor Scott & White Medical Center Irving in Irving, Texas from 2009 to 2017. From 2003 to 2008, Dr. Blain was the Chief Operating Officer and Chief Nursing Officer at Skaggs Community Health Center in Branson, Missouri. Prior to these administrator roles, she held increasingly responsible clinical positions at St. John’s Regional Health System, St. John’s School of Nursing in Springfield, Missouri, and Regional West Medical Center in Scottsbluff, Nebraska. She received her Diploma in Nursing from St. John’s School of Nursing, and her Bachelor of Science in Nursing from Southwest Missouri State University. She earned her Master’s in Nursing from the University of Missouri-Columbia, and her Doctorate in Nursing Practice from Texas Christian University. Dr. Blain is also a graduate of the Johnson & Johnson-Wharton Fellows Program in Management for Nurse Executives. Dr. Blain achieved both Nurse Executive Advanced Certification, and the Adult Health Clinical Nurse Specialist Certification from the American Nurses Credentialing Center. She is also a Fellow in the American College of Healthcare Executives since 2005. She is a member of the National Association of Clinical Nurse Specialists, Sigma Theta Tau, and the Golden Key Honor Society.
Gary M. Siegelman, M.D., Senior Vice President and Chief Medical Officer
Dr. Siegelman has served as Senior Vice President and Chief Medical Officer for Bayhealth Medical Center since 2007. In this role, he is responsible for physician development/recruitment, development of an employed physician group, risk management/in-house counsel, most patient safety initiatives, medical staff issues including leadership development, and achieving high levels of CMS core measure compliance. He received his A.B. in biochemistry cum laude from Harvard University in 1981, was a Lady Davis Doctoral Fellow in the Neurology Department at Hebrew University of Jerusalem from 1983 to 1984 and received his Medical Degree from the University of Illinois College of Medicine in 1986 where he was also a James Scholar. He completed an internal medicine internship and residency at Barnes-Jewish Hospital in St. Louis and was in group practice in Highland Park, Illinois from 1990 to 1997. Dr. Siegelman is board-certified and re-certified in Internal Medicine. In 1998, Dr. Siegelman completed a Master’s Degree in Health Administration from the University of Wisconsin. His prior executive experience includes serving as VPMA and subsequently CMO/COO at Rush-Copley Medical Center in Aurora, Illinois from 1997 to 2005, where he was also Associate Dean at Rush University. He has also served as VPMA (the senior physician executive) at AtlantiCare Regional Medical Center in New Jersey. Dr. Siegelman is a member of the American College of Physician Executives, American College of Healthcare Executives and has served on a number of community boards.
John Van Gorp, Senior Vice President for Planning and Business Development
Mr. Van Gorp has served as Senior Vice President for Planning and Business Development for Bayhealth Medical Center since 2007 and is responsible for the overall strategic management and direction over planning and business development functions for Bayhealth Medical Center. Mr. Van Gorp received a Master’s Degree in Hospital and Health Administration, a Master’s Degree in Business Administration from the University of Iowa and a Bachelor’s Degree in Marketing from the University of Iowa. He is also a Certified Public Accountant. He is a member of the Healthcare Financial Management Association and the Society for Healthcare Strategy and Market Development. Before joining Bayhealth, Mr. Van Gorp served as Vice President of Finance and Strategic Planning at Wuesthoff Health Systems, Inc., of Rockledge, Florida.
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THE MEDICAL STAFF
As of June 30, 2017, Bayhealth Medical Center had a total membership, in all categories, of 995 physicians and allied health professionals. Medical Staff members in the Active, Provisional Active and Temporary membership categories are privileged to evaluate and treat patients at BMC facilities. Additionally, the allied health staff membership category (described below) has grown 32% since 2009. The following table summarizes the growth of the Medical Staff by membership category from July 2009 through June 2017.
Medical Staff Categories Bayhealth Physicians 2009 2017 Active – Regular Staff 294 496 Provisional Active – First year of practice 56 95 Temporary with application pending 1 45 Consulting – Subspecialists 44 141 Allied Health 84 218 Courtesy* 2 0 TOTAL** 481 995 * The courtesy staff has been eliminated. ** The total counts practitioners twice if they have privileges at both Hospital campuses.
There are several categories of membership, as follows:
Active – The Active category consists of physicians and oral surgeons who regularly admit patients to or are otherwise regularly involved in the care of patients at the Hospitals. They must have been on the Provisional Active staff for at least one year before being considered for Active staff.
Provisional Active – Physicians seeking membership to the “Active” Medical Staff category are first granted membership to the Provisional staff for a 1-2 year period. Based on meeting performance expectations, they are then advanced to the Active category.
Temporary – Application is pending and approved for temporary Medical Staff privileges.
Consulting – Physicians, typically with a specialized skill, may be granted consulting Medical Staff privileges. They may not be the admitting or attending physician for a patient, nor may they perform a surgery or procedure without the approval of the department chair. Consulting staff members must also hold active privileges at another hospital.
Allied Health – The allied health professional staff category includes CRNAs, NP, psychologists, advanced practiced nurses.
The average age of BMC’s active Medical Staff is 49 and 96% of BMC physicians are board certified or board-eligible. 85% of the BMC active staff are private practitioners. All Medical Staff psychiatrists, pathologists, oncologists, several obstetrics/gynecologists, a plastic surgeon, several family and internal medicine, occupational medicine and walk-in center physicians are employed by BMC.
The following table profiles the active Medical Staff by specialty and age as of June 30, 2017. Note that the table below counts a physician twice if they have membership on both medical staffs.
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Total Total Board Total % Board Total Practice by Specialty Physicians* Certified/Eligible* Certified/Eligible Avg. age Allergy 2 2 100% 67.5 Anesthesia 32 32 100% 50 Critical Care 2 2 100% 65 Pain Management 3 3 100% 40 Cardiology 22 22 100% 52 Interventional Cardiology 5 5 100% 51 Electrophysiology 3 3 100% 49 Diagnostic Imaging 40 40 100% 45 Neuroradiology 4 4 100% 41.5 Vascular and Interventional 4 4 100% 49 Radiation Oncology 8 8 100% 50.3 Emergency Medicine 85 85 100% 42.3 Family Medicine 50 44 88% 51.4 Hospitalists boarded in Family Medicine 5 5 100% 38.5 Internal Medicine 80 73 91% 50.3 Critical Care 10 10 100% 40 Dermatology 1 0 0% 65 Endocrinology 4 3 75% 43 Gastroenterology 8 7 88% 52 Geriatric Medicine 2 2 100% 49 Hematology/Oncology 10 10 100% 44.6 Hospitalists boarded in Internal Medicine 60 60 100% 38.1 Infectious disease 2 2 100% 42 Medical Oncology 14 14 100% 51 Nephrology 8 8 100% 45.6 Occupational Health 1 1 100% 49 Neurology 11 11 100% 48.3 PM&R 9 9 100% 51 Pain Management 2 2 100% 49.5 Pulmonology 12 12 100% 45.3 Rheumatology 4 4 100% 54.3 Sleep Medicine 7 7 100% 58.8 OB/GYN 19 19 100% 53 Maternal Fetal Medicine 2 1 50% 67 Pathology 10 10 100% 56 Pediatrics 39 37 95% 49 Pediatric Dentistry 1 1 100% 32 Pediatric Hospitalist boarded in Pediatrics 36 34 94% 39 Neonatologists 28 28 100% 47 Psychiatry 6 6 100% 58.7 General Surgery 17 16 94% 51 Colorectal Surgery 2 2 100% 53 Cardiothoracic Surgery 3 3 100% 54 Surgical Critical Care 1 1 100% 41 Ophthalmology 2 2 100% 48.5 Oral Surgery 2 2 100% 42 Orthopedic Surgery 13 12 92% 49.8 Otolaryngology 5 5 100% 53 Plastic Surgery 1 1 100% 57 Podiatry 8 7 88% 47.4 Thoracic Surgery 3 3 100% 51.7 Urology 8 8 100% 46 Total 716 692 ______* Note that this table counts a practitioner twice if they have membership on both medical staffs, and a practitioner may appear on this table more than once if they have multiple Board certifications.
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Management believes that its relations with Medical Staff are strong. The Medical Staff assist with compliance-related projects, willingly serve on many operational committees, participate in and enforce unassigned call coverage with no threats to service and provide numerous educational opportunities for medical students and CRNA students.
Employed Physicians
Bayhealth Medical Group (“BMG”) is a rapidly growing multi-specialty medical group of physicians employed by Bayhealth Medical Center and focused on delivering high quality, patient centered care. The BMG has grown from 30 providers to 55 in past three years and includes six mid-level providers. BMG employs seventeen primary care physicians. The primary care providers are supported by a full array of specialty practices which include cardiology, endocrinology, orthopedics, general surgery, gastroenterology, endocrinology, urology, obstetrics and gynecology with maternal fetal medicine, and otolaryngology. BMG also has twenty Radiologists who are specialists in many areas including, but not limited to, Bone Imaging, Neuro Imaging, Nuclear Imaging and Breast Imaging. Currently BMG is actively recruiting two primary care providers and eight specialty care providers to support the expansion of BMC’s physician services in Sussex County and Kent County.
BMC’s employed physician multi-specialty group continues to develop in terms of leadership, collection and practice efficiency, and annual metrics. Active involvement in a state-wide ACO has led to focus on preventive and chronic care measures, as well as cost efficiency. These measures have improved significantly. Year over year loss per physician has decreased for at least three consecutive years. In addition, BMC physicians’ transition to the Epic electronic records management system in calendar years 2016-17 was successful, with higher overall rates of collection. BMC opens or acquires practices judiciously and recruits individuals from the strong community physician base in Bayhealth Medical Center’s service area. Bayhealth Medical Center admissions credited to BMC’s employed physicians for the three years ended June 30, 2017 are shown on the chart below.
Employed Physician Admissions
Number of Percentage of Fiscal Year Admissions Total 2015 2,471 13.3% 2016 2,672 15.4% 2017 2,266 12.1%
Hospitalist Program and Admissions
Bayhealth Medical Center started its hospitalist program in 2007. Since then, the hospitalist program has expanded to 79 physicians as of June 30, 2017. Bayhealth Medical Center’s hospitalists manage admissions and inpatient cares for more than 92 private primary care and specialty physicians located within the BMC’s service area. Admissions credited to the hospitalists are often referrals from family practitioners and other members of the Medical Staff:
Hospitalist Admissions
Number of Percentage of Fiscal Year Admissions Total 2015 8,762 47.1% 2016 8,122 46.7% 2017 8,693 46.3%
Medical Staff Recruitment and Retention
BMC is focused on the retention and recruitment of quality physicians. BMC has fostered growth in its Medical Staff through a targeted physician recruitment program, supporting physicians joining private practices and
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developing employed physician outpatient practices. In 2013, a community needs assessment provided the foundation for determining supply and demand for each specialty area with a major focus on BMC’s southern service area. BMC has recruited approximately 70 new physicians to the community over the last three years, both to independent and employed practices. These include the specialties of family medicine and internal medicine, orthopedic surgery, surgical oncology, obstetrics/gynecology, maternal fetal medicine, occupational medicine, general and interventional gastroenterology, emergency medicine, general and diagnostic radiology, and others.
BMC expects to grow the number of employed and independent physicians in the coming years at a moderate pace, with a focus on primary care and the specialty areas that are still in somewhat short supply. BMC supports and encourages physicians entering private practices by assisting the physician with the recruitment/start- up phase or providing modest income support to the physician in the form of a forgivable loan for demonstrated community service over a 2-3 year period.
MILFORD REPLACEMENT HOSPITAL
General
After completing an evaluation of historical patient data, population forecasts and health care industry utilization projections for BMC’s Milford service area to quantify the current and future demand for services over a ten year time frame for both inpatient and outpatient services, BMC purchased in 2015 a 169 acre site three miles southeast of the existing Milford Memorial facility as the location of a replacement hospital, which is expected to enhance BMC’s efforts to improve access to health care, while providing healthy life style choices and prevention activities to strengthen the health of the Milford service area.
The New Hospital Facility and Ambulatory Care Center. Construction began in November, 2015 on the 440,000 square foot, six-story replacement hospital and adjacent ambulatory care center facility (collectively, the “Milford Replacement Hospital”) and is scheduled to be placed into service in the first calendar quarter of 2019. With a vertical platform, access to each floor and support clinical services is a short elevator away compared to traversing long hallways in hospitals constructed with a horizontal platform. More than 1,150 parking spaces will be available in close proximity to the Milford Replacement Hospital and planned adjacent facilities.
BMC plans to construct a new multi-story ambulatory care center (the “ACC”) connected to the replacement hospital which will house a variety of outpatient services and specialty physician practices. Outpatient services expected to be provided at the ACC include medical oncology, radiation oncology, outpatient physical/occupational and speech therapy, non-invasive cardiac services and phlebotomy. Construction of the ACC project is expected to be completed in the first calendar quarter of 2019 to coincide with the opening of the new hospital facility.
Project Budget. The total cost of constructing the Milford Replacement Hospital is estimated at $314,065,000. BMC expects to fund approximately $299,065,000 of the costs through internal capital reserves and fundraising, and approximately $15,000,000 from the proceeds of the Series 2017B Bonds. The budget for the Milford Replacement Hospital is as follows:
Milford Replacement Hospital Budget ($ in 000’s)
FF&E/ Escallation & Project Land Sitework Construction Owner Costs Contingency Total Hospital $12,285 $12,875 $185,247 $62,092 $3,331 $275,830 ACC 30,208 7,594 432 38,234 Totals $12,285 $12,875 $215,455 $69,686 $3,763 $314,064 Construction of the Milford Replacement Hospital is on budget and is on schedule to open in the first calendar quarter of 2019.
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Construction of the Milford Replacement Hospital
Architect and Engineer. BMC has contracted with CannonDesign of Chicago, IL (Architecture) and Grand Island, NY (Engineering) to provide planning, design and construction administration services for the Milford Replacement Hospital. CannonDesign’s healthcare experience includes greenfield site master planning, replacement hospitals, cancer centers, medical office buildings and related facilities. CannonDesign has also provided advisory services, capital budgeting, campus master planning, equipment planning and site/logistics development.
Construction Manager. BMC has contracted with The Whiting-Turner Contracting Company to provide preconstruction planning, construction management, and site logistics services. WhitingTurner’s healthcare experience includes replacement hospitals, cancer centers, medical office buildings and related facilities.
Integrated Project Delivery Agreement. BMC has entered into a three-party agreement with CannonDesign (Cannon) and Whiting Turner Construction Company (WT) for the design and construction of the Milford Replacement Hospital on an “integrated project delivery” basis. Under the agreement, Cannon and WT have agreed with BMC to complete the design and construction for a “Target Cost” of $211.8 Million, which includes a negotiated profit for Cannon, WT and ten of WT’s primary subcontractors. Cannon, WT and those ten subcontractors have placed that profit at risk. In other words, if the actual cost of construction exceeds $211.8 Million less the negotiated profit, their profit will be reduced dollar for dollar by the amount by which the actual cost of construction exceeds such amount.
Approvals and Permits; Certificate of Public Review. All material permits and approvals required to commence and proceed with construction have been obtained. Additionally, on May 17, 2016, the Delaware Health Resource Board approved BMC’s application for a Certificate of Public Review for the Milford Replacement Hospital.
Project Schedule. The Milford Replacement Hospital started design in October of 2015 and is scheduled to obtain a Certificate of Occupancy by October of 2018. At present, the Milford Replacement Hospital is on budget and on schedule.
Future Development of Real Property. BMC is currently in the process of seeking approval from the City of Milford to subdivide the 169 acre site on which the Milford Replacement Hospital is being constructed. The Milford Replacement Hospital will be located on an approximately 40-acre parcel that will remain in the ownership of BMC. The remaining approximately 129 acres will be owned by Sussex Campus Development, LLC.
Other Planned Ambulatory Services
In addition to the Milford Replacement Hospital, Bayhealth Medical Center is entering into a joint venture with Anchor Properties (a medical facilities development firm) to develop a three-story, 85,000 square foot medical office building on the Milford Replacement Hospital campus. Nemours/Alfred I. duPont Hospital for Children, based in Wilmington, Delaware, will occupy 40,000 square feet of the medical office building and provide outpatient pediatric services that are currently unavailable in Southern Delaware. Bayhealth Medical Center will also be renting space in the building (approximately 25,000 square feet) with the remaining 20,000 square feet being leased to private community physicians. The project will be funded primarily with debt assumed by Anchor Properties with no guaranty required by Bayhealth Medical Center.
PLANNING AT BAYHEALTH MEDICAL CENTER
Strategic Planning
By including BMC Board members, administrative staff, Medical Staff leaders, members of the community, key Bayhealth Medical Center directors and national experts, Bayhealth, Inc. has developed a strategic plan that aims to continue to meet more of the healthcare needs of the region. Bayhealth Inc.’s three-year strategic plan covers the time period from July 2017 through June 2020 and is organized using Bayhealth Inc.’s Four Strategic Imperatives: Organizational Excellence, Culture, Clinical Integration and Growth and Access.
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The Bayhealth, Inc. Board recognizes the importance of maintaining strong financial health and invests in those projects that not only provide needed services to the community, but will also maintain or improve the financial health of the organization. Examples of such projects that are included in the organization’s strategic plan and have been formally approved by the Bayhealth, Inc. Board, in addition to the Milford Memorial replacement hospital project, are (1) the new endoscopy suite for the Kent General campus and (2) new information systems for Bayhealth Medical Center’s hospitals and physicians.
Capital Projects and Future Plans
In addition to the expenditures for the Milford Replacement Hospital, as described in “MILFORD REPLACEMENT HOSPITAL” above, for the years ending June 30, 2015, 2016 and 2017, BMC has spent $38,690,695, $66,024,957, and $83,128,926, respectively, on capital projects, including purchases of property and equipment and information technology, underscoring its commitment to making capital investments that BMC management believes are necessary to sustain and enhance patient care service. Current plans anticipate BMC will spend approximately $197,500,000 on capital projects in fiscal year 2018 of which $170,000,000 is for the Milford Replacement Hospital.
Endoscopy Suite: Bayhealth Medical Center is currently in the process of constructing a 4-room endoscopy suite with additional pre- and post-procedure beds to be located in the former Emergency Department at Kent General Hospital. The project replaces an outdated suite split by a hallway that is inefficient and not customer friendly. This new suite will help attract physicians that perform minor procedures such as gastroenterology physicians that perform colonoscopies. The $4 million project will be funded with operating cash and is scheduled to be completed by summer 2018.
Information Systems Planning
The Information Technology Department at BMC has a comprehensive, flexible, strategic plan. Information technology (“IT”) is governed by a multi-disciplinary IT Steering Committee (ITSC), comprised of management and physician team members. The ITSC meets regularly to review both individual projects and overall progress. Improvements are prioritized and developed with assistance from leadership, staff, physicians and consultants. The objective is to fully support BMC’s strategic business plans and initiatives utilizing an integrated electronic medical record (“EMR”), therefore, enabling BMC to share a single integrated patient record across the continuum of care.
During Fiscal Year 2017, BMC implemented a new EPIC electronic health record system (EHR) which was fully funded with internally generated cash flows. Implementation of the EHR system is under the direction of the ITSC. Effective July 30, 2016, BMC was operational and live with the EPIC system as its ambulatory and inpatient electronic medical record. Each acute care hospital, ambulatory setting and all employed physician practices have the full suite of Epic applications with an integrated health record. BMC accomplished this project on time and on budget. BMC has been recognized by Epic as being in its top 15% percent of installs for revenue cycle based on key performance indicator metrics in relation to all previous Epic customers.
Additionally, BMC is a founding member of the Delaware Health Information Network (“DHIN”), one of the first state-wide clinical information systems in the United States. Over half of Delaware’s physicians have registered to use DHIN and more than 65 million patient result transactions have been transmitted to authorized users of the system.
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SERVICE AREA
Bayhealth Medical Center is located in central Delaware and serves a population of approximately 260,000 in its primary and secondary service areas. BMC’s primary service area (PSA) includes Kent County, a portion of southern New Castle County and a portion of Northern Sussex County. Kent County is the largest county in the State in geographic area. The secondary service area (SSA) extends further into New Castle and Sussex Counties. The map below outlines BMC’s primary and secondary service areas.
Bayhealth Medical Center’s primary and secondary service areas
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Population Growth and Changes
Kent and Sussex Counties saw significant population growth over the last six years and Bayhealth Medical Center continues to expand its services to be able to better meet the needs of the growing communities it serves. Kent County’s population grew at a rate of 7% and Sussex County’s population grew at a rate of 12% from 2010 through 2016. These growth numbers are significantly higher than New Castle County’s growth rate of 3% for the same time period.
Historic Population Trends for State of Delaware by County 2010 to 2016 Area 2010 2016 % Growth Kent County 162,990 174,827 7% Sussex County 197,110 220,251 12% New Castle County 538,477 556,987 3% Delaware Total 898,577 952,065 6% Source: U.S. Census Bureau
BMC defines its primary service area by including certain zip codes within the three counties.
Historic Population Growth for BMC’s Primary Service Area 2010 to 2016 Area 2010 2016 % Growth BMC Primary Service Area 175,105 190,828 9% Delaware Total 898,577 952,065 6% Source: U.S. Census Bureau
The population of persons in BMC’s primary and secondary service area is projected to continue to grow by 6% from 2017 through 2022. The population in the State of Delaware as a whole is projected to grow 5% from 2017 through 2022.
Employment
As of August 2017, the unemployment rate for Kent and Sussex Counties was 6.0% and 4.3% respectively. The national average unemployment rate for the United States was 4.1% for the same time period. The communities BMC serves continue to experience relatively strong demand from employers such as the State of Delaware and Dover Air Force Base, one of the nation’s largest military air logistics centers, located in Dover, Delaware and the diverse economies of Kent and Sussex Counties.
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Major Employers in Service Area
The military, education, state government, health services and food processing dominate Kent County’s economic base. The Dover Air Force Base, the nation’s largest military air logistics center, is located in BMC’s primary service area. Dover is also the location of Delaware State University, the State Capital, and several manufacturing concerns. Retail trade, agriculture, manufacturing, services and government dominate Sussex County’s industry. The top 17 employers in Kent and Sussex County, by number of employees, are listed in the following table.
Major Employers in BMC’s Service Area 2016 Employer Employees Industry County State of Delaware 18,500 State Government Entire State Dover Air Force Base 12,000 Military Kent Mountaire Farms 4,500 Agribusiness Sussex Bayhealth Medical Center 3,597 Healthcare Kent Perdue, Inc. 2,950 Agribusiness Sussex Beebe Medical Center 2,400 Healthcare Sussex Delaware Tech & Community College 2,100 Education Kent Indian River School District 1,434 Education Sussex Dover Downs Hotel & Casino 1,000 Entertainment Kent Nanticoke Health Services 800 Healthcare Sussex Keller Williams Realty 652 Real Estate Kent Eastern Shore Poultry Company, Inc. 388 Agribusiness Sussex City of Dover Utilities Department 350 City Government Kent I.G. Burton 316 Retail Sussex PATS Aircraft Systems 300 Manufacturing Sussex Sources: Delaware Business Times
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Market Share
BMC has and is expected to continue to have strong market share in central and southern Delaware. Inpatient Acute Care market share for BMC’s primary service area has grown from 79.4% in 2010 to 80.6% in 2013, the most recent available data. The majority of this growth in market share comes from the decline in market share that its competition is facing in the service area to the north. BMC’s marketing and business development efforts are expected to continue strengthening its position as the largest healthcare provider in Kent and Sussex County.
Competing Area Hospitals and Market Trends
Kent General is the only acute care hospital in Kent County, which covers approximately 30% of the geographic area of the state of Delaware. The primary competitor to the north is Christiana, located approximately 44 miles to the north of Dover. To the south, Milford Memorial faces competition from Beebe Medical Center (“Beebe”) in Lewes, located approximately 25 miles southeast of Milford, and Nanticoke Memorial Hospital (“Nanticoke”), located approximately 25 miles southwest of Milford.
Bayhealth Medical Center is the largest healthcare system in Kent and Sussex Counties and the second largest in the State of Delaware.
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Delaware Hospitals – Calendar Year 2016 Bayhealth Beebe Medical Nanticoke Medical Center* Christiana Center Health Services Licensed Beds 434 1,196 210 139 Staffed Beds 362 1,098 193 94 Discharges 18,102 54,170 10,679 5,354 Patient Days 90,292 291,328 47,012 20,474 * Comparable data for Bayhealth Medical Center the year ending June 30, 2017 is shown below. Source: Delaware Healthcare Association
HISTORICAL UTILIZATION AND PATIENT SERVICE STATISTICS
The following table presents certain utilization statistics for Bayhealth Medical Center for the five fiscal years ended June 30, 2017.
Utilization and Patient Service Statistics Fiscal Year Ended June 30 2013 2014 2015 2016 2017 Beds - Licensed 402 402 414 434 434 Beds - Staffed 337 355 365 362 359
Average Occupancy (Licensed) 62.6% 65.3% 67.3% 55.1% 58.5 %
Average Occupancy (Staffed) 79.4% 78.8% 80.7 % 69.3% 73.6%
Admissions(1) 18,078 18,420 18,604 17,399 18,760
Equivalent Inpatient Admissions “EIPA’s”(2) 40,270 40,889 41,943 42,868 42,668
Patient Days(1) 91,876 95,794 101,664 87,515 92,620
Average Length of Stay 5.1 5.2 5.5 5.0 4.9
Surgeries 13,427 13,987 14,775 15,240 15,664
Emergency Room Visits(3) 90,142 92,041 91,494 91,890 94,223
Outpatient Visits 553,696 568,266 603,671 626,205 565,654
Major Ancillary Services: Radiology Exams 225,592 228,733 234,590 244,859 202,556 MRI Exams 12,536 13,500 14,610 15,035 13,126 Computed tomography (“CT”) Scans 50,047 52,972 56,108 57,211 57,428 Laboratory Tests 1,200,083 1,241,751 1,303,224 1,282,495 1,276,555 (1) Excludes nursery, Neonatal Intensive Care Unit and Intensive Care Nursery. (2) Outpatient revenue divided by inpatient revenue divided by patient days. (3) Includes ER admits.
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CORPORATE COMPLIANCE
The Bayhealth Medical Center Corporate Compliance Program was originally approved by the Bayhealth, Inc. Board in November 2007. Operational oversight for the program is the responsibility of the Corporate Compliance Committee which includes the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Medical Officer, Chief Nursing Officer and Vice President for Human Resources. Meetings are scheduled to ensure the Chief Executive Officer is in attendance. The Chief Compliance Officer reports to the Chief Medical Officer and has access to and consults with outside counsel as well as the Chief Executive Officer.
The program includes the following:
• New employee orientation, new medical staff orientation and mandatory annual training for all employees
• Annual signed compliance statements by all employees including required disclosure of any known violations of the law
• 24-Hour anonymous hotline
• Compliance Audit Schedule reflecting Office of Inspector General Workplan initiatives and organizational experience
• Outside consultants are retained on an ad hoc basis to review problematic areas and/or provide guidance on individual questions
• Bayhealth Medical Center contracts contain a requirement that all contractors comply with the Corporate Compliance Program, including, when appropriate, the Bayhealth False Claims Prevention Policy
The Director of Patient Financial Services notifies the Chief Compliance Officer of situations that may require disclosure. The cases are reviewed, outside counsel is consulted if necessary, and disclosure made when appropriate. The Corporate Compliance Committee is apprised of situations requiring disclosure.
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SUMMARY STATEMENTS OF OPERATIONS
The following table sets forth the summarized statements of revenues and expenses of Bayhealth Medical Center, Inc. for the five years ended June 30, 2017, 2016, 2015, 2014 and 2013, which were derived from the audited financial statements of Bayhealth Medical Center, Inc. This information should be read in conjunction with the financial statements and the related notes for the fiscal years ended June 30, 2017 and 2016 included as Appendix B to this Official Statement. The audited financial statements for periods ending prior to the fiscal year ended June 30, 2016 have been filed with the Electronic Municipal Market Access system maintained by the Municipal Securities Rulemaking Board (“EMMA”).
Fiscal Year Ended June 30 ($ in 000’s) 2013 2014 2015 2016 2017 REVENUES Net patient service revenue, less $470,950 $492,891 $533,563 $553,687 $567,573 provision for bad debts Other revenue 13,007 18,373 17,581 16,453 16,140 Total revenues $483,957 $511,264 $551,144 $570,140 $583,713
EXPENSES Salaries and benefits $261,562 $282,080 $300,699 $316,943 $320,072 Supplies and other expenses 146,267 156,898 180,779 180,064 183,542 Depreciation and amortization 28,376 28,625 28,751 29,205 37,034 Interest 7,963 7,813 7,680 7,545 5,863
Total expenses $444,168 $475,416 $517,909 $533,757 $546,511
Operating Income $39,789 $35,848 $33,235 $36,383 $37,202
Other, net $34,067 $57,061 $15,963 $(4,298) $42,278
Excess of revenues over expenses $73,856 $92,909 $49,198 $32,085 $79,480
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INFORMATION FROM THE BALANCE SHEETS
Set forth below is a summary of selected information from the balance sheets of Bayhealth Medical Center, Inc. as of June 30, 2017, 2016, 2015, 2014 and 2013, which were derived from the audited financial statements of Bayhealth Medical Center, Inc. This information should be read in conjunction with the financial statements and the related notes for the fiscal years ended June 30, 2017 and 2016 included as Appendix B to this Official Statement. The audited financial statements for periods ending prior to the fiscal year ended June 30, 2016 have been filed with EMMA.
Fiscal Year Ended June 30 ($ in 000’s) 2013 2014 2015 2016 2017 Total cash and investments $446,160 $556,407 $586,805 $605,187 $613,200 Property and Equipment, net $305,206 $296,852 $305,831 $341,882 $396,059 Total assets $866,443 $975,166 $1,028,144 $1,070,217 $1,142,812 Long-term debt, net of current portion $203,231 $199,557 $195,742 $190,054 $186,361 Unrestricted net assets $515,581 $602,059 $640,742 $657,674 $738,400 Total net assets $525,771 $612,650 $651,706 $671,015 $757,907
SOURCES OF PATIENT REVENUES
The table below shows the mix of gross revenue from patients and third-party payors at Bayhealth Medical Center for the five fiscal years ended June 30, 2017.
Fiscal Year Ended June 30
Payor Mix 2013 2014 2015 2016 2017 Medicare 43.8% 45.0% 45.0% 48.5% 49.6% Medicaid 18.6% 18.3% 18.8% 18.4% 19.0% Subtotal 62.4% 63.3% 63.8% 66.9% 68.6%
Blue Cross 17.2% 17.5% 17.4% 17.7% 17.2% Commercial/Managed Care 15.5% 14.6% 14.5% 11.2% 11.3% Self Pay 4.9% 4.6% 4.3% 4.2% 2.9% Subtotal 37.6% 36.7% 36.2% 33.1% 31.4%
TOTAL 100.0% 100.0% 100.0% 100.0% 100.0%
Medicare
Medicare is a federal health insurance program for the elderly. Medicare’s payment system is based upon a fixed rate per injury or illness according to a particular diagnosis-related group (“DRG”) for acute inpatient care services. Certain outpatient services are reimbursed based on an ambulatory payment classification (“APC”) system that is similar. Inpatient non-acute services and defined capital and medical education costs related to Medicare beneficiaries are reimbursed based on a reasonable cost-base system subject to certain limitations.
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Inasmuch as Medicare reimbursement rates have not generally kept pace with the increase in costs of healthcare services, Bayhealth Medical Center has and will continue to respond proactively to manage and provide services in a cost-effective manner. In addition, Bayhealth Medical Center has undertaken internal reviews and audits to ensure compliance with current Medicare regulations and practices.
Medicaid
Medicaid is a jointly-sponsored federal and state health insurance program for indigent individuals meeting certain eligibility requirements. Since January 1, 1996, reimbursement under the Medicaid program for services to Medicaid patients has been made through a managed care system under which the State of Delaware contracts with various third-party payors for the payment of these services. Reimbursement is on a percent of charge, fee schedules and/or per case rate basis.
Managed Care Programs
Bayhealth Medical Center’s current contract with Blue Cross Blue Shield of Delaware is the basis for its providing hospital services to both regular Blue Cross subscribers and members of the Blue Cross HMO. Additionally, Bayhealth Medical Center has entered into contracts with a variety of other major managed care organizations, including but not limited to, Coventry Health Care, AmeriHealth, Aetna, United Healthcare and Health Net Federal Services (the Tri-Care managed care contractor). The basis for payment to Bayhealth Medical Center for covered inpatient and outpatient services under these agreements includes DRGs, fee schedules and/or discount from charges and billed charges subject to co-pay and deductible provisions of policyholders.
Managed care (including Medicaid managed care) represents 23.3% of patient service revenue for the year ended June 30, 2017.
On October 3, 2017, AmeriHealth Caritas announced that it was notified by Delaware’s Department of Health and Social Services, Division of Medicaid and Medical Assistance of its intent to contract with AmeriHealth Caritas to provide managed Medicaid and long-term services and supports in the State of Delaware under the Diamond State Health Plan (DSHP) and Diamond State Health Plan-Plus (DSHP-Plus) programs. The start date will begin January 1, 2018.
MANAGEMENT’S DISCUSSION OF UTILIZATION AND FINANCIAL PERFORMANCE
Utilization
During the last five years ending June 30, 2017, total admissions increased by 3.8% to 18,760. Medical/surgical increased 3.3%, maternity increased 5.7%, pediatric increased 3.5 % and rehabilitation admissions increased 7.2%.
Total patient days increased 0.9% during the last five years ending June 30, 2017. Medical/surgical days increased 1.2% and rehabilitation increased 5.3%. Pediatric days decreased 38.0% and maternity decreased 3.9%. The decrease in pediatric and maternity days was due principally to a lack of obstetric/gynecologist providers in the Milford service area. BMC has addressed this need by recruiting two additional practitioners for the Milford hospital. A decline in inpatient growth is consistent with national trends. Part of that decline is due to increased observation admissions, driven by payors, which is an outpatient classification.
Average length of stay decreased 2.3% during the five years ending June 30, 2017. Medical/surgical and rehabilitation length of stay decreased 1.9%, pediatrics decreased 40.1% and maternity decreased 9.1% over the same period.
Surgeries increased 16.7%, inpatient surgeries increased 8.4% for the five years ending June 30, 2017 and outpatient surgeries increased 22.1% over the same period.
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Equivalent inpatient admissions (outpatient revenue divided by inpatient revenue divided by patient days) increased 5.9% for the five years ending June 30, 2017.
Outpatient visits increased 2.2% during the five years ending June 30, 2017 due to MRI and CT scans (19.5%), laboratory tests (6.4%) and continued growth in cardiac catheterization. Outpatient visits decreased in FY 2017 by 9.6% when compared to FY 2016 due to short-term absences of two cardiologists and an orthopaedic surgeon. Emergency room visits increased 4.5%.
Management expects nominal growth in admissions and patient days going forward, due to population growth and an aging population. Length of stay is expected to remain constant going forward. Growth in outpatient services is expected to slow due to competition, (ambulatory surgery centers and free-standing diagnostic imaging centers). BMC is responding with new technology and services, new offsite locations and an aggressive physician recruitment program. Total growth is expected to continue at historical levels.
Management believes that the growing demand for healthcare services at BMC facilities is the result of not only a growing population, but also Bayhealth Medical Center’s status as the predominant provider in its primary service area and its success in improving the quality of care, additional service offerings and improving service emphasis.
Financial Performance
Net patient service revenue, less provision for bad debts, increased 21.0% during the five years ending June 30, 2017, an average of 4.2% annually. Outpatient revenues increased throughout the same five-year period from 55.0% in for the year ended June 30, 2013 to 56.0% of patient service revenue, less provision for bad debts, for the year ended June 30, 2017.
Other operating revenues include revenues derived from Wellness Centers, Meaningful Use monies, outpatient pharmacy, retail services and various rental properties.
Operating expenses increased in line with revenues in response to the growth and expansion of medical services and facilities during the five-year period ending June 30, 2017. Personnel costs also grew due to the BMC’s policy to pay competitive compensation in order to attract and retain competent staff. Salary and benefit increases averaged 4.6% annually during the five-year period ending June 30, 2017due in large part to nursing and other labor shortages. The cost of supplies and energy also increased due to expansion of services, increasing intensity of services and inflation.
Annual income from operations has decreased from $39,789,000 in 2013 to $37,202,000 in 2017. In 1993, a policy of budgeting and establishing rates and charges designed to produce operating surpluses of 3.0% of total operating revenue was established. This goal has been exceeded each year since. Operating margins during the five years ending June 30, 2017 were 8.2%, 7.0%, 6.0%, 6.4% and 6.4% respectively. However, Management cannot predict whether future events will continue to permit realization of such operating margins or when hospital charges may be increased.
Other income and net change in unrealized gains and losses on investments reflects continued market volatility in the value of equity securities. During fiscal 2017, Bayhealth Medical Center experienced realized and unrealized gains due to the equity component of its investment portfolio.
Bayhealth Medical Center is paid for its services by commercial insurance companies, health maintenance organizations, Delaware Blue Cross/Blue Shield, Medicare, the State of Delaware’s Medicaid Program and private- pay individuals. Bayhealth Medical Center has agreements with third-party payors that provide for payments at amounts other than established rates. See “Sources of Patient Revenues” above.
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Budgeting Process
Bayhealth Medical Center’s operating and capital budget process begins in January of each year and results in an integrated operational and financial plan consistent with Bayhealth Medical Center’s strategic plan. Budget materials are distributed to each department manager for preparation and submission to the appropriate administrator. Senior management is responsible for justification and consistency with the strategic plan. The Business and Investment Committee monitors progress and updates the BMC Board and the Bayhealth, Inc. Board during the process. The operating and capital budgets are consolidated and recommended by Management to the Business and Investment Committee, the BMC Board and Bayhealth, Inc. Board for final approval.
Bayhealth Medical Center maintains a budget variance reporting system that is aided by ongoing cost containment efforts reported periodically to the Bayhealth, Inc. Board. The report summarizes specific cost containment actions taken by Management during the previous six months. Examples of cost containment efforts recently reported are specific group purchasing savings, service contract savings, insurance savings as a result of increased effectiveness in risk management and quality assurance.
OTHER FINANCIAL INFORMATION
Liquidity
The following table presents selected information concerning the combined unrestricted cash and investments position and liquidity ratio for Bayhealth Medical Center and its affiliates for the dates and periods indicated.
For the period commencing July 1, 2017 through September 30, 2017, Bayhealth Medical Center will have spent $32,093,682 (or 23 days cash on hand) for prior capital expenditures with its own funds for various completed, or to be completed, capital projects, including the new Milford Memorial Hospital project. See “MILFORD REPLACEMENT HOSPITAL” above. Such cash expenditure amount will reduce Bayhealth Medical Center’s unrestricted cash and investments shown below as of June 30, 2017.
Liquidity Ratio ($ in 000’s)
Year Ended June 30, 2013 2014 2015 2016 2017 Cash and Cash Equivalents $ 29,761 $ 33,405 $ 28,688 $ 43,905 $ 26,267 Board Designated Investments 189,471 193,110 260,818 255,257 249,261 Other Investments 226,928 329,892 297,299 306,025 337,672 Total Unrestricted Cash $446,160 $556,407 $586,805 $605,187 $613,200 and Investments
Operating Expenses per Day (1) $1,139 $1,224 $1,340 $1,382 $1,396
Days’ of Unrestricted Cash and 392 455 438 438 439 Investments on Hand ______(1) For the 12-month period ending on such date, less all depreciation and amortization expense during such period, divided by 365.
Investment Policies and Procedures
Bayhealth Medical Center retains various professional investment managers to manage its long-term investments in accordance with its investment policy and asset allocation targets. In addition, Bayhealth Medical
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Center retains an investment advisor to provide advice and recommendations on investment manager performance and selection of new managers. The various portfolios have investment guidelines for style objectives, concentration limitations and performance benchmarks. At June 30, 2017, the value of board-designated and other investments was $586.9 million. The target allocations of board-designated and other investments, except for funds raised for specifically designated capital projects, are as follows:
Board Approved Actual Allocations Asset Allocation Ranges Asset Allocation Targets as of 6/30/2017 Equities 24.5-73.5% 49.0% 41.9% Fixed Income 13.0-39.0% 26.0% 38.9% Cash 2.5-7.5% 5.0% 8.3% Alternative Investments 10.0-30.0% 20.0% 10.9% TOTAL 100.0% 100.0% 100.0%
The Business and Investment Committee of the Bayhealth, Inc. Board meets quarterly to review all portfolio performance, including consistency in each manager’s investment philosophy and return relative to objectives and investment risk. The Business and Investment Committee reviews all objectives and policies at least annually for their continued appropriateness.
Outstanding Indebtedness
Except for the capital lease obligations below, upon the issuance of the Series 2017 Bonds and the defeasance of the Series 2009A Bonds and the Series 2012 Bonds, there will be no other long-term indebtedness of Bayhealth Medical Center. See “PLAN OF FINANCE” in the forepart of this Official Statement. The Bayhealth, Inc. Board has not approved the incurrence of any additional long-term indebtedness by Bayhealth Medical Center and none is currently foreseen.
Bayhealth Medical Center leases certain medical and office equipment used in its regular operations under operating lease arrangements. Total rental expenses under operating leases amounted to $3,489,526 and $2,717,264 as of June 30, 2017 and 2016, respectively. Upon the issuance of the Series 2017A Bonds and the Series 2017B Bonds, Bayhealth Medical Center will have the following indebtedness outstanding $183,740,0001.
Summary of Certain Provisions of the Series 2017B Financing Agreement
General. Concurrently with the issuance of the Series 2017A Bonds, the Authority has agreed to issue the Series 2017B Bonds for the benefit of Bayhealth Medical Center. The proceeds of the Series 2017B Bonds will be loaned by the Authority to Bayhealth Medical Center pursuant to a loan agreement between the Authority and Bayhealth Medical Center, and used to (a) currently refund certain bonds previously issued by the Authority for the benefit of Bayhealth Medical Center and (b) pay costs of issuance of the Series 2017B Bonds and the refunding of such previously issued bonds. The Series 2017B Bonds are expected to be purchased by a financial institution (the “Bank”) pursuant to the terms and conditions of a Continuing Covenant Agreement by and between the Bank and Bayhealth Medical Center (the “2017B Financing Agreement”).
Additional Covenants in the 2017B Financing Agreement. Under the Master Indenture, Bayhealth Medical Center is required to maintain a minimum Historical Debt Service Coverage Ratio of 1.10 to 1.0 (the “Rate Covenant”), tested annually. See “SUMMARY OF MASTER INDENTURE—Rates and Charges” in Appendix D. Under the 2017B Financing Agreement, the Bank has required Bayhealth Medical Center to (a) test the Rate Covenant semi-annually and (b) maintain a minimum of 75 days cash on hand (the “Liquidity Covenant”), measured semi-annually. A failure to satisfy either the Liquidity Covenant or the Rate Covenant constitutes an event of default under the 2017B Financing Agreement.
1 Preliminary, subject to change.
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Historic and Pro Forma Coverage of Debt Service
Historic and Pro Forma Debt Service Coverage for Bayhealth Medical Center ($ in 000’s)
Fiscal Year Ended June 30, 2013 2014 2015 2016 2017 Excess of revenues over expenses - adjusted (1) $55,473 $60,846 $55,096 $53,554 $63,784 Depreciation, amortization and interest 36,339 36,438 36,431 36,750 42,897 Revenues available to pay debt service 91,812 $97,284 $91,527 $90,304 $106,681
Maximum annual debt service $12,828 $12,828 $12,828 $12,828 $12,828 on long-term indebtedness Historic coverage ratio 7.2 7.6 7.1 7.0 8.3
Pro forma maximum annual debt service on $12,077 $12,077 $12,077 $12,077 $12,077 Long-term indebtedness (2) Pro forma coverage ratio 7.6 8.1 7.6 7.5 8.8 ______(1) Excludes Change in Fair Value of Interest Rate Swap and Unrealized Gain (Loss) on Trading Securities. (2) For the purposes of calculating these amounts, the Series 2017B Bonds are assumed to bear interest at a long-term average annual rate of 2.0%. Actual rates will vary from the assumed rates. Includes estimated debt service on the proposed Series 2017A and Series 2017B Bonds.
Historic and Pro forma Capitalization Ratio
The following table sets forth the capitalization ratio for Bayhealth Medical Center as of June 30, 2017, and the pro forma capitalization ratio, assuming the Series 2017A and Series 2017B Bonds were issued and the Refunded Bonds were defeased as of such date.
Pro Forma Giving Effect to Issuance of (1) June 30, 2017 Series 2017 Bonds* ($ in 000’s)
Total indebtedness………………. $192,057 $184,515 Unrestricted net assets 738,400 738,400 Total capitalization………………. $930,457 922,915
Ratio of indebtedness to 26.0% 25.0% unrestricted net assets………….
Indebtedness as a percentage of 20.6% 20.0% total capitalization…………….. ______(1) Derived from Bayhealth Medical Center audited financial statements for year ended June 30, 2017. Source: Bayhealth Medical Center. *Preliminary, subject to change.
Debt and Swap Management Policy
The Bayhealth, Inc. Board has adopted a Debt and Swap Management Policy for Bayhealth Medical Center and all of its affiliates (the “Debt and Swap Policy”) that allow the use of interest rate swaps and other financial instruments as part of an overall debt and investment management policy. Some instances in which Bayhealth Medical Center may use these instruments include, but are not necessarily limited to: reduction of debt service;
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hedging or actively managing interest rate, tax, basis and other risks; optimization of capital structure, achievement of appropriate asset/liability match; and enhancement of investment returns. Bayhealth Medical Center does not speculate using derivative instruments.
To date, Bayhealth Medical Center has entered into one interest rate related derivative instrument to manage the exposure on its debt instruments, described below. By using derivative instruments to hedge exposures to changes in interest rates, Bayhealth Medical Center exposes itself to credit risk and market risk. Bayhealth Medical Center minimizes the credit risk in derivative instruments by entering into transactions with highly rated counterparties. Bayhealth Medical Center manages its market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
Bayhealth Medical Center uses variable rate debt to finance a portion of its capital needs. The debt obligations expose it to variability in interest payments due to changes in interest rates. Conversely, fixed rate debt obligations can be more expensive to Bayhealth Medical Center in times of declining interest rates. Management believes it is prudent to monitor and manage its cost of capital on a regular basis. To meet this objective, Bayhealth Medical Center from time to time may enter into interest rate swaps to manage fluctuations in cash flows resulting from changes in interest rates.
Interest Rate Swap Agreement
During fiscal year 2003, Bayhealth Medical Center entered into a floating-to-fixed rate swap with Bank of America, N.A. The swap expires on July 1, 2023 and reduces annually on July 1 of each year. The notional amount is $13,620,000 as of September 30, 2017. The transaction requires Bayhealth Medical Center to periodically pay a fixed rate of 3.5315% in exchange for receipt of 68.00% of USD-LIBOR-BBA. Bayhealth Medical Center’s swap payments are unsecured. The swap agreement will serve as a partial hedge for the Series 2017B Bonds upon their issuance. Bayhealth Medical Center is required to post collateral for the swap in the event its long-term bond ratings by Standard & Poor’s Rating Services or Fitch Inc. fall below “A”.
FUNDRAISING – BAYHEALTH FOUNDATION
The Bayhealth Foundation (the “Foundation”) is an exempt organization under Section 501(c)(3) of the Code. The sole purpose of the organization is the philanthropic support of Bayhealth Medical Center. The Foundation achieves its mission in four specific ways on an ongoing basis and through a new capital program that began development in June 2009.
The Foundation has established an aggressive program of grants acquisitions. These funds are for specific projects that assist in consumer education of patients and families in Bayhealth Medical Center’s service area. They were developed and funded for diabetes, cardiovascular disease and oncology. One other grant specifically assists patients unable to afford costs associated with diagnostic treatments for cancer.
In the capital program, Phase III, the Campaign goal for the Milford Replacement Hospital is $15 million. As of June 30, 2017, the Foundation has exceeded that goal, with grants, gifts and commitments totaling $15.2 million. As of June 30, 2017, the Foundation’s had $16,556,962 in total assets. The Foundation is not a Member of the Obligated Group and its assets are not pledged to secure the Series 2017 Bonds.
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EMPLOYEE RELATIONS
Employees
As of June 2017, Bayhealth Medical Center had approximately 3,183 full-time equivalent employees. Presently, Bayhealth Medical Center employees are not represented by a collective bargaining agreement and Management is not aware of any recent union organizing activities involving any group of its employees. Management considers its employee relations to be good. Management is proactive in initiating several programs aimed at improving employee relations, including:
• Employee recognition and rewards programs such as Driven that rewards employees for their delivery of service excellence and exceptional patient – family centric care; • Planetree Affiliation; and • Training and development courses on leadership, work methods, career development, etc. are offered to employees including the Leadership Development Institute and Studer training program.
Included in Bayhealth Medical Center’s employee base are approximately 700 full-time equivalent nursing professionals. As of June 2017, Bayhealth Medical Center employed 827 registered nurses and 41 licensed practical nurses. The current vacancy rate for registered nurses and licensed practical nurses as of June 2017 was approximately 6%. The vacancy rate for all employees is approximately 13%. Management recognizes the on- going nursing shortage and has taken action to reduce turnover and the number of vacant positions. The actions include the following:
• A complete nurse driven recruitment team. • Achievement of Magnet Designation through the American Nurse Credentialing Center. • Development of a Collegial Nurse Technician role and program. • Development of a Recognition and Reward Program. • Training and Development through paid registered nurse fellowships. • Paid tuition reimbursement. • Establishment of nurse recruitment team. • Career development. • Creation of innovative nursing roles. • Free continuing education.
Employee Pension Plan and Other Benefits
Bayhealth Medical Center sponsors a noncontributory defined benefit pension plan (“Pension Benefits”), covering substantially all employees. Bayhealth Medical Center’s policy is to fund accrued pension costs subject to limitations under the Employee Retirement Income Security Act of 1974.
Effective January 1, 2008, the accrued benefits for the Pension Benefits were frozen for all participants except those whose age and years of vesting service total 65 or more as of December 31, 2007. These grandfathered participants will continue to add to the Pension Benefit in the future based on current plan provisions. For all other employees, Pension Benefits will not increase after December 31, 2007. Effective January 1, 2008, employees who are not grandfathered in the Pension Benefits were eligible to receive a 3% annual retirement saving contribution and an improved matching contribution of 50% up to the first 6% of eligible compensation for the Bayhealth Medical Center 401(k) Savings Plan.
Continuing Medical Education
Bayhealth Medical Center provides various on-site Continuing Medical Education (“CME”) programs for physicians. They include the monthly Southern Delaware Lecture Series, the A.I. DuPont Pediatric Series, the Bayhealth Interesting Case program, the Trauma lectures, and the weekly Tumor Conferences. A total of 92 hours
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of CME opportunities are provided at the Kent General campus every year and a total of 82 hours of CME opportunities are provided at the Milford Memorial campus. All of the CME programs (except for the A.I. DuPont Pediatric Series) are co-sponsored with the Medical Society of Delaware. Bayhealth Medical Center sponsors a regional trauma seminar annually in May, which is attended by clinical personnel from the Delmarva Peninsula area, the Baltimore-Washington area and Southeastern Pennsylvania. A one-day regional cardiology program is also held annually in the fall.
Library services are provided by a librarian with a Master’s Degree and who is a member of two regional consortiums. Computers are available for use by the staff, patients and visitors at both campuses. The Internet is accessible to staff and other online library resources can be used to find information.
Bayhealth Medical Center’s Education Department provides clinical educational programs, collateral teaching materials and other appropriate learning resources to patients, consumers and staff.
The Education Department offers a wide range of educational courses for patients and consumers with information on several diagnostic areas and diseases. By analyzing corporate data collected through patient satisfaction surveys, community needs assessments, community focus groups and program evaluations, the Education Department identifies and develops future programs. In calendar year 2009, approximately 200 programs will be offered to consumers within Bayhealth Medical Center’s service area. Community programs include Labor and Child Birth, Infant Care, Steps to Healthy Aging, and Osteoporosis, Cholesterol and Diabetes Screenings. In addition to educational programs, Bayhealth Medical Center sponsors numerous support groups which include Living with Cancer, Breastfeeding, Bereavement, Ostomy, Stroke, Parkinson’s Disease, Diabetes and Prostate Cancer. Consumer education programs are designed to assist consumers along the continuum of care and present research-based information.
To further support the consumer, Bayhealth Medical Center has successfully secured and implemented several local, regional and national healthcare grants. Bayhealth Medical Center has been awarded these grants to identify consumers who are at risk for developing chronic diseases that can be prevented or well managed. Some of these grants involve diabetes, cardiovascular disease, colon, breast and prostate cancer.
Bayhealth Medical Center’s central location in Delaware, combined with a wide range of patient acuity, allows it to facilitate valuable clinical education experiences with various colleges and universities in Delaware and the surrounding states. Current academic affiliations with a nursing emphasis include:
• University of Delaware, College of Health Sciences
• Delaware State University, Department of Nursing
• Wesley College, Department of Nursing
• Delaware Technical & Community College, Terry and Owens campuses, Nursing Departments
• Chesapeake College, Nursing Department
• Beebe Medical Center, School of Nursing
Other academic departments that affiliate with Bayhealth Medical Center include Biomedical Engineering, Diagnostic Imaging, Clinical Nutrition, Respiratory Therapy and Physical Therapy.
Bayhealth Medical Center’s physical commitment to staff education includes a technology lab. The lab consists of 35 desktop computers (24 at the Kent General Campus; 11 at the Milford Memorial campus). The technology training center is available to staff and the community. Additionally, the Education Department maintains a Medical/Nursing Library, as well as a virtual Medical/Nursing Library. Other benefits available to staff include routine webinars with The Joint Commission and a Micromedex database complete with options to
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customize for each patient. For staff, tuition reimbursement and complimentary on-line continuing education credit for licensed and non-licensed healthcare staff via Health Stream Learning Management System and CE Direct are provided.
Volunteer Programs
BMC volunteer programs are active at both campus locations as well as many off-site, outpatient locations. Volunteers serve in various programs at both Hospitals. In addition to hospital-based volunteer services, community volunteer services are provided through the Neighbor-to-Neighbor Cherub Volunteer program. Approximately 394 volunteers provide over 48,183 volunteer hours in departments throughout Kent General and Milford Memorial, and in the communities they serve. In addition, over 28,371 volunteer hours are provided by the Neighbor-to- Neighbor Cherub Volunteer program.
Founded in 1947, the Junior Board is Kent General’s oldest volunteer organization. Junior Board volunteers serve many valuable roles in Dover, including delivering patient mail, bringing the hospital cart to patient floors, and holding fundraising events such as lobby sales and the Black & White Gala, in conjunction with the MMH Auxiliary.
The MMH Auxiliary began in the early 1920’s. Auxiliary members volunteer in the gift shop and plan special events such as the annual Milford Memorial Hospital Fair and the Black & White Gala, in conjunction with the KGH Junior Board.
The volunteers assist BMC on a regularly scheduled basis in many departments and units including such areas as the Medical/Surgical units, Diagnostic Imaging, Emergency Department, Surgical Waiting Room, Perioperative units, Outpatient Services, Patient Escort and Physical Therapy.
A special program implemented in 1983 utilizes volunteers in the Emergency Department as liaisons between the Emergency Department staff, patients and families. These volunteers have helped to enhance communication and the image of the Emergency Department within the community. Volunteers also serve in the Surgical Waiting Room, Outpatient Services, and at the North Entrance Information Desk, assisting patients, family members and visitors.
QUALITY INITIATIVES
BMC is committed to quality care through several clinical quality initiatives. BMC’s quality initiatives include (i) ongoing safety and quality education where BMC Management participates in several half-day leadership development institutes on patient safety and quality each year; (ii) an active “Patient Safety Committee” led by the Director of Risk Management and the Chief Medical Officer; (iii) the development of a “Magnet Nursing Program” focused on nursing education and leadership training on safety goals such as patient rescue, patient falls and decubitus ulcer prevention; (iv) the hiring of a physician liaison for patient safety; and (v) a “Culture of Safety” survey for clinical staff and physicians every 18 months that has shown improvement in all areas over the last three years. BMC also provides a “Feedback Report” to over 300 Medical Staff members every six months, assessing six different areas of performance including technical quality, patient safety and professionalism.
BMC’s commitment to clinical excellence is evidenced by the physician peer review process, efforts to improve operational performance of perioperative services, and physician performance improvement committees. The physician peer review process is designed to ensure greater transparency in peer review and greater opportunity for bilateral feedback and education. BMC also formed a Surgical Services Executive Committee (“SSEC”) to improve operational performance of perioperative services. Through the SSEC, Kent General has achieved high rates of on-time starts, a rationalized system for operating room “block time,” moderately decreased turnaround time between cases and improved surgeon satisfaction. A similar group was also created at Milford Memorial. In addition, the physician performance improvement committees at Kent General and Milford Memorial are physician- driven and well-attended according to management.
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BMC is also in the process of implementing the principles of “high reliability” in an effort to improve its quality and safety. The system-wide implementation has started with the assistance of HPI (Healthcare Performance Improvement) and is anticipated to take twenty-four months. The principles of “high reliability” promoted by HPI advocate an approach that establishes zero harm as an uncompromising core value and guiding principle and provides reliability coaching that addresses both human behavior and process improvement.
Through these and other quality improvement efforts, BMC has achieved composite scores on CMS “Core Measures” in the 97% to 99% range.
ACCREDITATIONS AND CERTIFICATIONS
Bayhealth Medical Center’s healthcare system is committed to providing advanced medical technology, progressive treatment options, state-of-the-art equipment, and extensive consumer health education programs. This drive has been recognized by a number of accreditations and certifications. The Joint Commission accredits Kent General and Milford Memorial, while departments throughout Bayhealth Medical Center have earned additional accreditations and certifications, including:
• The Joint Commission Gold Seal of Approval (Kent General and Milford Memorial) • The Joint Commission Advanced Certification as Primary Stroke Centers (Kent General and Milford Memorial) • Commission on Cancer Community Hospital Comprehensive Cancer Program (Kent General and Milford Memorial) • American College of Radiology — Mammography, Ultrasound, and Vascular accreditation (Diagnostic Imaging — Kent General, Milford Memorial, Middletown, Outpatient, and MOB) • “Comprehensive” accreditation under the Metabolic and Bariatric Surgery Accreditation and Quality Improvement Program (MBSAQIP®), a joint program of the American College of Surgeons (ACS) and the American Society for Metabolic and Bariatric Surgery (ASMBS) (Surgical Weight Loss Program) • Nuclear Regulatory Commission (Kent General and Milford Memorial) • Commission on Accreditation of Rehabilitation Facilities (Inpatient Rehabilitation) • American Association of Blood Banks (Laboratory Services) • The Joint Commission (Pathology and Clinical Laboratory Services) • American Society of Health-System Pharmacists Pharmacy Residency Program (Pharmacy) • DEA Controlled Substance Certificate (Pharmacy) • Certification with State of Delaware Division of Professional Regulation (Pharmacy) • Uniform Controlled Substance Certificate (Pharmacy) • American College of Surgeons (Trauma) • American Academy of Sleep Medicine (Sleep Disorders Center, Kent General) • Intersocietal Accreditation Commission — Vascular (Cardiac Diagnostic Center)
QUALITY RECOGNITION
As a nationally-recognized provider of patient care, BMC continues to improve services, expand programs and reach out to new communities. Guided by Service Excellence and Planetree Model of Care principles, the dedication and drive of BMC’s employees and Medical Staff are recognized with various awards from national and international organizations alike, including:
• Magnet® recognition by the American Nurses Credentialing Center’s (ANCC) Magnet Recognition Program® which recognizes the excellence of our nursing practice. • Planetree Bronze Recognition for Meaningful Progress in Patient-Centered Care. Bayhealth is the first healthcare organization in Delaware to be awarded bronze-level recognition since Planetree first introduced the recognition level in 2012. • Mission: Lifeline® Bronze Quality Achievement Award by the American Heart Association
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• Baby-Friendly® status from Baby-Friendly USA, Inc. (Kent General and Milford Memorial) • Gold Safe Sleep Champion designation by Cribs for Kids® National Safe Sleep Hospital Certification Program (Kent General and Milford Memorial) • Human Rights Campaign Foundation “Top Performer in LGBTQ Healthcare Equality” that encourages equal care for and inclusive policies and practices related to LGBTQ patients, visitors, and employees. • Healthgrades® America’s 50 Best Hospitals for Cardiac Surgery™ 2015 and Cardiac Surgery Excellence Award™ • Ranked Among the Top 5% in the Nation for Cardiac Surgery 2015 • Five-Star Recipient for Coronary Bypass Surgery • Five-Star Recipient for Valve Surgery 2015 • Top Performer on Key Quality Measures® Recognition from The Joint Commission (Kent General) • American Heart Association and American Stroke Association Get With the Guidelines Bronze Award® 2014 (Stroke Center) • Academy of Medical-Surgical Nurses (AMSN) PRISM Award™ for Exemplary Practice (Medical- Surgical Unit 1A) • Blue Distinction® Center designation for Bariatric Surgery from Highmark Blue Cross Blue Shield Delaware (Kent General) • Blue Distinction® Center designation for Cardiac Care from Highmark Blue Cross Blue Shield Delaware (Kent General) • Blue Distinction® Center designation for Maternity Care from Highmark Blue Cross Blue Shield Delaware (Kent General) • HealthCare Chaplaincy Network’s “Excellence in Spiritual Care” award (Kent General and Milford Memorial)
ACCREDITATION, LICENSURE AND MEMBERSHIP
The Hospitals are fully accredited by The Joint Commission. The most recent three-year accreditation was received in November 2015 and expires in November 2018 for Kent General, and received in March 2016 for Milford Memorial and expires in March 2019. Bayhealth Medical Center has several Joint Commission certified programs, including Total Joints (Hip and Knee) and Advanced Primary Stroke Program at both Kent General and Milford Memorial. Bayhealth Medical Center is Magnet certified and is Planetree designated for patient centered care.
Bayhealth Medical Center is a member of the American Hospital Association, the Delaware Healthcare Association, and the Delaware Health Information Network. These memberships provide Bayhealth Medical Center with access to local, regional and nationwide information networks that help improve performance, reduce costs and increase innovations for the people and communities served.
In addition to its medical center-wide accreditations and memberships, many departments enjoy special accreditations or educational alliances. Bayhealth Medical Center’s laboratories are accredited by The Joint Commission for a two-year period that will expire in May 2018. The American Association of Blood Banks accredited the laboratories for a two-year period, until September 2019. Bayhealth’s Rehabilitation Center is accredited by CARF until December 2018. The Hospitals’ cancer programs are accredited by the American College of Surgeons, Commission on Cancer (“COC”) through June 2018. The American College of Surgeons Commission on Trauma (“COT”) has certified the Kent General Trauma Program through December 2018, and the Milford Memorial Trauma Program through June 2020.
Bayhealth Medical Center’s Cancer Center is licensed by the Delaware Department of Health and Social Services, Division of Public Health, Office of Radiation Control through 2024. Diagnostic Imaging Services are licensed by the Nuclear Regulatory Commission for Kent General Hospital through July 2024, and Milford Memorial Hospital through May 2023. Many other Bayhealth programs are certified for Diagnostic Imaging by the Center for Medicare and Medicaid Services.
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Bayhealth Medical Center’s Free Standing Emergency Center (FSEC) is also licensed by Delaware’s Department of Health and Social Services Office of Health Facilities Licensing for participation in Medicare. Bayhealth Medical Center’s Pharmacy is accredited by the American Society of Health-System Pharmacists for the Pharmacy Residency Program. Many other Bayhealth departments, including the Laboratory, Nursing, Physical Therapy, Radiology and Respiratory Care, are affiliated with colleges and universities in the region and function as clinical training sites for a variety of college curricula.
MALPRACTICE AND OTHER INSURANCE
Bayhealth Medical Center has in effect a multi-cover catastrophe liability policy including professional liability coverage (i.e., claims made) and general liability coverage (i.e., occurrence) under a policy with Zurich American of Illinois with limits of $20,000,000 each occurrence/$20,000,000 aggregate subject to a $3,000,000 per occurrence/$9,000,000 aggregate self-insured retention. The employed physicians of Bayhealth Medical Center are insured for professional liability by Healthcare Providers Insurance Exchange with individual limits of $1,000,000 per incident/$3,000,000 aggregate with no deductible.
Bayhealth Medical Center has in effect Directors’ and Officers’ Coverage, including employment practices coverage, with Travelers Casualty & Surety Company with limits of $10,000,000 subject to a $100,000 deductible.
Bayhealth Medical Center is self-insured for Workers Compensation with specific excess insurance provided by Midwest Insurance Company for claims in excess of $500,000.
Property Coverage is provided by Zurich American with a total policy limit of $475,000,000, including $100,000,000 Flood and Earthquake Coverage.
LITIGATION
The nature of Bayhealth Medical Center’s business generates claims and litigation against Bayhealth Medical Center arising in the ordinary course of its activities. Bayhealth Medical Center is a defendant in various civil actions seeking damages for alleged medical malpractice or other civil litigation. These actions are being defended by Bayhealth Medical Center’s insurance carriers or counsel selected by Bayhealth Medical Center. Counsel to Bayhealth Medical Center in those matters and management are of the opinion that the failure of Bayhealth Medical Center to prevail in these various actions will not materially adversely affect the financial position of Bayhealth Medical Center.
The healthcare industry is subject to numerous federal, state and local laws, ordinances and regulations. See “BONDHOLDER’S RISKS” in the front portion of this Official Statement for more information regarding the regulatory environment. Compliance with these laws is subject to government review and interpretation, thus Bayhealth Medical Center is involved from time to time in a variety of compliance and regulatory matters.
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[THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX B
BAYHEALTH MEDICAL CENTER, INC. AUDITED FINANCIAL STATEMENTS, JUNE 30, 2017 AND 2016
[THIS PAGE INTENTIONALLY LEFT BLANK] Financial Statements and Report of Independent Certified Public Accountants
Bayhealth Medical Center, Inc.
June 30, 2017 and 2016 Contents
Page
Report of Independent Certified Public Accountants 3
Financial statements
Balance sheets 5
Statements of operations and changes in net assets 6
Statements of cash flows 7
Notes to financial statements 8
Grant Thornton LLP Two Commerce Square 2001 Market St., Suite 700 Philadelphia, PA 19103 Report of Independent Certified Public Accountants T 215.561.4200 F 215.561.1066 GrantThornton.com linkd.in/GrantThorntonUS Board of Directors twitter.com/GrantThorntonUS Bayhealth Medical Center, Inc.
We have audited the accompanying financial statements of Bayhealth Medical Center, Inc. (the Medical Center), which comprise the balance sheets as of June 30, 2017 and 2016, and the related statements of operations and changes in net assets and cash flows for the years then ended, and the related notes to the financial statements.
Management’s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bayhealth Medical Center, Inc. as of June 30, 2017 and 2016, and the results of its operations and changes in net assets and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.
Philadelphia, Pennsylvania
September 27, 2017 Bayhealth Medical Center, Inc.
BALANCE SHEETS
June 30,
2017 2016 ASSETS
CURRENT ASSETS Cash and cash equivalents $ 26,267,030 $ 43,904,846 Assets limited as to use, held by trustees 4,771,060 4,800,020 Patient accounts receivable, less allowance for uncollectibles of $40,238,000 in 2017 and $28,693,000 in 2016 61,532,615 59,875,577 Supplies 14,165,392 11,431,988 Prepaid expenses and other assets 9,659,384 10,808,562
Total current assets 116,395,481 130,820,993
Assets limited as to use Internally designated 249,260,861 255,257,055 Held by trustees 12,407,469 11,379,479
261,668,330 266,636,534
Other investments 337,671,681 306,025,165 Prepaid expenses and other assets 8,111,050 5,094,250 Property and equipment, net 396,058,936 341,881,622 Beneficial interest in net assets of Bayhealth Foundation 16,499,669 13,751,289 Beneficial interest in perpetual trusts 6,407,165 6,007,066
TOTAL $ 1,142,812,312 $ 1,070,216,919
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES Accounts payable and other accrued expenses $ 41,431,099 $ 45,620,193 Construction and retainage payable 7,626,150 - Accrued salaries, wages and benefits 42,883,956 49,209,447 Current portion of long-term debt 3,810,000 3,685,000 Accrued interest payable 3,183,702 3,188,876 Estimated settlements due to third-party payors 10,298,827 12,263,451
Total current liabilities 109,233,734 113,966,967
Construction and retainage payable 577,259 238,322 Interest rate swap 1,149,966 1,957,420 Accrued postretirement benefit costs 73,428,139 77,331,815 Estimated professional liability costs 9,873,205 10,976,750 Estimated workers’ compensation costs 4,281,869 4,676,568 Long-term debt, net of current portion 186,361,263 190,053,925
Total liabilities 384,905,435 399,201,767
NET ASSETS Unrestricted 738,400,415 657,674,292 Temporarily restricted 13,099,297 7,333,794 Permanently restricted 6,407,165 6,007,066
Total net assets 757,906,877 671,015,152
TOTAL $ 1,142,812,312 $ 1,070,216,919
The accompanying notes are an integral part of these statements.
5 Bayhealth Medical Center, Inc.
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
For the year ended June 30,
2017 2016 UNRESTRICTED NET ASSETS Revenues Net patient service revenue $ 606,456,958 $ 583,783,128 Less: provision for bad debts (38,883,840) (30,096,015) Net patient service revenue less provision for bad debts 567,573,118 553,687,113 Other revenue 16,139,578 16,452,519
Total revenues 583,712,696 570,139,632
Expenses Salaries and benefits 320,072,070 316,942,895 Supplies and other expenses 183,542,407 180,063,791 Interest 5,862,677 7,545,547 Depreciation and amortization 37,034,037 29,204,562
Total expenses 546,511,191 533,756,795
Operating income 37,201,505 36,382,837
Other Investment return, net 41,188,889 (3,430,529) Change in fair value of interest rate swap 807,454 47,779 Change in beneficial interest in net assets of Bayhealth Foundation (23,283) (1,315,240) Other, net 304,983 400,176
Total other 42,278,043 (4,297,814)
Excess of revenues over expenses 79,479,548 32,085,023
OTHER CHANGES IN UNRESTRICTED NET ASSETS Transfers from affiliate - Bayhealth Development Corp. - 1,000,000 Other changes in benefit obligations 1,246,575 (16,152,262)
Increase in unrestricted net assets 80,726,123 16,932,761
TEMPORARILY RESTRICTED NET ASSETS Other (2,580) (1,797) Change in beneficial interest in net assets of Bayhealth Foundation 5,768,083 2,755,743
Increase in temporarily restricted net assets 5,765,503 2,753,946
PERMANENTLY RESTRICTED NET ASSETS Change in beneficial interest in perpetual trusts 400,099 (377,571)
Increase (decrease) in permanently restricted net assets 400,099 (377,571)
INCREASE IN NET ASSETS 86,891,725 19,309,136 NET ASSETS, beginning of year 671,015,152 651,706,016
NET ASSETS, end of year $ 757,906,877 $ 671,015,152
The accompanying notes are an integral part of these statements.
6 Bayhealth Medical Center, Inc.
STATEMENTS OF CASH FLOWS
For the year ended June 30,
2017 2016 OPERATING ACTIVITIES Increase in net assets $ 86,891,725 $ 19,309,136 Adjustments to reconcile increase in net assets to net cash provided by operating activities Other changes in benefit obligations (1,246,575) 16,152,262 Change in fair value of interest rate swap (807,454) (47,779) Net realized and unrealized (gains) losses on investments (30,524,791) 14,370,976 Depreciation and amortization 37,034,037 29,204,562 Provision for bad debts 38,883,840 30,096,015 Change in beneficial interest in perpetual trusts (400,099) 377,571 Change in beneficial interest in net assets of Bayhealth Foundation (5,748,380) (1,440,504) Transfers from affiliate - Bayhealth Development Corp. - (1,000,000) Changes in assets and liabilities Patient accounts receivable - net (40,540,878) (18,792,033) Supplies (2,733,404) (545,937) Prepaid expenses and other assets 151,380 (1,686,078) Accounts payable and other accrued expenses (3,759,591) 11,186,809 Accrued salaries, wages and benefits (6,525,491) 4,129,177 Accrued interest payable (5,174) (16,897) Estimated settlements due to third-party payors (1,964,624) 1,263,423 Accrued postretirement benefit costs (2,457,101) (1,940,339) Estimated professional liability costs (1,407,531) (1,295,187) Estimated workers’ compensation costs (520,218) 48,384
Net cash provided by operating activities before trading securities 64,319,671 99,373,561
Change in investments - trading securities 3,846,479 (18,308,417)
Net cash provided by operating activities 68,166,150 81,065,144
INVESTING ACTIVITIES Capital expenditures, net (83,128,926) (66,024,957) Distribution from Bayhealth Foundation 3,000,000 3,000,000 Investment unconsolidated joint ventures (2,019,000) - Change in investments - other than trading securities 28,960 25,520
Net cash used in investing activities (82,118,966) (62,999,437)
FINANCING ACTIVITIES Transfers from affiliate - Bayhealth Development Corp. - 1,000,000 Repayment of long-term debt (3,685,000) (3,848,730)
Net cash used in financing activities (3,685,000) (2,848,730)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (17,637,816) 15,216,977
CASH AND CASH EQUIVALENTS - beginning of year 43,904,846 28,687,869
CASH AND CASH EQUIVALENTS - end of year $ 26,267,030 $ 43,904,846
SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest, net of amounts capitalized $ 5,867,851 $ 7,562,444
SUPPLEMENTAL NONCASH INVESTING ACTIVITIES Increase (decrease) in accrual for the purchase of property and equipment $ 7,965,088 $ (887,193)
The accompanying notes are an integral part of these statements.
7 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS
June 30, 2017 and 2016
NOTE A - DESCRIPTION OF ORGANIZATION
Organization
Bayhealth Medical Center, Inc. (the Medical Center) is a not-for-profit, tax-exempt corporation under the control of its parent, Bayhealth, Inc., a not-for-profit Delaware corporation whose primary activities are to provide development and planning support to the Medical Center’s two acute care hospitals: Kent General Hospital, Dover, Delaware, and Milford Memorial Hospital, Milford, Delaware. The Medical Center’s primary service area includes Kent and portions of Sussex Counties in Delaware. Other entities affiliated with the Medical Center through common control by Bayhealth, Inc. are Bayhealth Foundation (the Foundation) and Bayhealth Development Corporation.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant management estimates and assumptions relate to the determination of allowance for doubtful accounts and contractual allowances for patient accounts receivable, estimated settlements with third-party payors, fair value of the interest rate swap, useful lives of property and equipment, actuarial estimates for the postretirement benefit plans, professional liability and workers’ compensation costs, the assets retirement obligation and the reported fair values of certain of the Medical Center’s assets and liabilities. Actual results could differ from those estimates.
2. Fair Value of Financial Instruments
Financial instruments consist of cash equivalents, patient accounts receivable, investments and assets limited as to use, beneficial interest in perpetual trusts, accounts payable and accrued expenses, interest rate swap agreements and long-term debt. The carrying amounts reported in the balance sheets for cash equivalents, patient accounts receivable, investments and assets limited as to use, beneficial interest in perpetual trusts, accounts payable and accrued expenses and the interest rate swap agreement approximate fair value. Management’s estimate of the fair value of other financial instruments is described elsewhere in the notes to the financial statements.
3. Cash and Cash Equivalents
Cash and cash equivalents include short-term investments purchased with original maturities of three months or less and are stated at fair value.
The Medical Center routinely invests its surplus funds in repurchase agreements and money market funds. These funds generally are collateralized by, or invested in, highly liquid U.S. Government and agency obligations.
(Continued)
8 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. Allowance for Doubtful Accounts
The Medical Center provides an allowance for doubtful accounts for estimated losses resulting from the unwillingness or inability of patients to make payments for services. The allowance is determined by analyzing specific accounts and historical data and trends. Patient accounts receivable are charged off against the allowance for doubtful accounts when management determines that recovery is unlikely and the Medical Center ceases collection efforts.
In evaluating the collectability of accounts receivable, the Medical Center 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. Management reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. For receivables associated with services provided to patients who have third-party coverage, the Medical Center analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for bad debts, if necessary (for example, for expected uncollectible deductibles and copayments on accounts for which the third-party payor has not yet paid). For receivables associated with self-pay patients, the Medical Center records a significant provision for bad debts 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 internal collection efforts have been exhausted is charged off against the allowance for doubtful accounts. During 2017 the allowance for doubtful accounts increased $11,545,000 and 40%, due to an increase in overall volume and an increase in older self-pay balances for deductibles and co- insurance. These self-pay accounts were provided for in contractual allowances in prior years.
5. Supplies
Supplies are stated at the lower of cost or market. Cost is determined by using the first-in, first-out method of accounting.
6. Investments and Assets Limited as to Use
Investments in debt and equity securities are measured at fair value based on quoted market prices, if available, or estimated quoted market prices for similar securities. The Medical Center’s investments are designated as trading securities, except for assets limited as to use under bond indentures - held by trustee, which are considered other- than-trading securities.
Investment income includes dividend and interest income; realized gains and losses and unrealized gains and losses on trading securities are included in other income as a component of excess of revenues over expenses unless such earnings are subject to donor-imposed restrictions; and unrealized gains and losses on other-than-trading securities are recorded as other changes in unrestricted net assets. Realized gains and losses for all investments are determined by the average cost method.
(Continued)
9 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Assets limited as to use include internally designated assets set aside by the Board of Directors (the Board) for future capital improvements, over which the Board retains control and may at its discretion subsequently use for other purposes, assets held by trustees under bond indenture agreements and assets held by a trustee under a malpractice funding arrangement. Amounts required to meet current liabilities have been classified as current assets in the accompanying balance sheets.
Investment securities, in general, are exposed to various risks, such as interest rate, credit and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the financial statements.
7. Beneficial Interest in Perpetual Trusts
The Medical Center is an irrevocable income beneficiary of certain perpetual trusts administered by independent trustees. Because the trusts are perpetual and the original corpus cannot be violated, these funds are reported at fair value based on the Medical Center’s interest in the trusts, as permanently restricted net assets.
8. Property and Equipment
Property and equipment acquisitions are recorded at cost. Donated assets are recorded at their fair value at the date of donation. Depreciation is provided over the estimated useful life of each class of depreciable assets and is computed using the straight-line method. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Interest in the amount of $1,559,049 was capitalized for the year ended June 30, 2017.
Expenditures for renewals and improvements are charged to the property accounts. Replacements, maintenance and repairs that do not improve or extend the life of the respective assets are expensed when incurred. The Medical Center removes the cost and the related accumulated depreciation from the accounts for assets sold or retired, and resulting gains or losses are included in the accompanying statements of operations and changes in net assets.
Gifts of long-lived assets such as land, building 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 unspent 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.
9. Deferred Financing Costs
Deferred financing costs are amortized over the life of the related bond issue. The accumulated amortization totaled $813,933 and $707,971 at June 30, 2017 and 2016, respectively.
(Continued)
10 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
10. Derivative Financial Instruments
The Medical Center recognizes all derivative financial instruments in the balance sheets at fair value. Management has determined that the interest rate swap agreement does not qualify as a hedge for financial reporting purposes. Consequently, the change in the fair value of the Medical Center’s interest rate swap agreement is included in other income as a component of excess of revenues over expenses in the statements of operations and changes in net assets.
The interest rate swap agreement is used by the Medical Center to manage interest rate exposures and to hedge the changes in cash flows on variable rate revenue bonds. Derivative financial instruments involve, to a varying degree, elements of market and credit risk. The market risk associated with these instruments resulting from interest rate movements is expected to offset the market risk of the liability being hedged.
11. Estimated Professional Liability Costs
The reserve for estimated medical malpractice claims includes estimates of the ultimate costs for both reported claims and claims incurred but not reported.
12. Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets are those whose use by the Medical Center has been limited by donors to a specific time period or purpose and amounted to $44,065 and $50,225 as of June 30, 2017 and 2016, respectively. In addition, a portion of the beneficial interest in the net assets of Bayhealth Foundation is included in temporarily restricted net assets based on the donors’ intention. The temporarily restricted net assets are primarily restricted for capital acquisitions.
Permanently restricted net assets represent the Medical Center’s beneficial interest in perpetual trusts. Income received from these trusts is unrestricted.
13. Excess of Revenues over Expenses
The statements of operations and changes in net assets include the excess of revenues over expenses. Changes in unrestricted net assets that are excluded from the excess of revenues over expenses, consistent with industry practice, are permanent transfers with affiliates and other changes in benefit obligations.
(Continued)
11 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
14. Donor-Restricted Gifts
Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received, which is then treated as cost. 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 statements of operations and changes in net assets as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions, including amounts received and held by Bayhealth Foundation for the benefit of the Medical Center in the accompanying financial statements.
15. Net Patient Service Revenue
The Medical Center has agreements with third-party payors that provide for payments to the Medical Center at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered, including estimated retroactive adjustments due to future audits, reviews and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews, or investigations.
16. Electronic Health Records Incentives
The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments for eligible hospitals and professionals that implement and achieve meaningful use of certified electronic health record (EHR) technology. For Medicare and Medicaid EHR incentive payments, the Medical Center utilizes a grant accounting model to recognize revenue. Under this accounting policy, EHR incentive payments are recognized as revenue when attestation that the EHR meaningful use criteria for the required period of time is demonstrated. Accordingly, the Medical Center recognized $1,014,049 and $2,259,771 of EHR revenue for the years ended June 30, 2017 and 2016, respectively. These amounts are included in other revenue on the statements of operations and changes in net assets.
The Medical Center’s attestation of compliance with the meaningful use criteria is subject to audit by the federal government or its designee. Additionally, Medicare EHR incentive payments received are subject to retrospective adjustment.
(Continued)
12 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
17. Charity Care and Community Service
The Medical Center provides services to patients who meet the criteria of its charity service policy without charge or at amounts less than its established rates. Criteria for charity care include the patient’s family income and net worth. Because the Medical Center does not pursue collection of amounts determined to qualify as charity care, they are not reported as net revenue.
The Medical Center maintains records to identify and monitor the level of charity care and community service it provides. These records include the amount of charges foregone based on established rates for services and supplies furnished under its charity care and community service policies and the number of patients receiving services under these policies. The Medical Center provided approximately $7,744,000 and $8,453,000 for the years ended June 30, 2017 and 2016, respectively, of charity care at full cost including direct and indirect costs, based on the actual charity population using a cost accounting system.
Additionally, the Medical Center provides a wide range of community services to the general public. These include but are not limited to the following: free health screenings for breast cancer, prostate cancer, skin cancer, diabetes, high blood pressure, high blood cholesterol, hearing loss and glaucoma; free educational programs on a variety of health care topics; health fairs and demonstrations; and networking and coordination of services for the needy, elderly, and disabled. These community services are offered at the Medical Center and at schools, businesses, and other locations throughout the Medical Center’s service area.
The Medical Center also participates in the Medicaid program, which makes payment for services provided to financially needy patients at rates which are less than the established charges for such services.
18. Tax Status
The Medical Center is a Delaware nonprofit corporation and is exempt from federal income taxes pursuant to Section 501(c)(3) of the Internal Revenue Code.
The Medical Center follows the accounting guidance for uncertainties in income tax positions, which requires that a tax position be recognized or derecognized based on a “more likely than not” threshold. This applies to positions taken or expected to be taken in a tax return. The Medical Center does not believe its financial statements include any material uncertain tax positions. At June 30, 2017, the Medical Center’s tax years ended June 30, 2014 through 2017 for the federal tax jurisdiction remain open.
19. Recently Adopted Accounting Pronouncement
During 2017, the Medical Center implemented Accounting Standards Update (ASU) 2015-03, Simplifying the Presentation of Debt Issuance Costs. This standard requires all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the associate debt liability. As a result of the implementation of ASU 2015-03, deferred financing costs were presented as a direct reduction to long-term debt in the amount of $1,885,781 and $1,991,743 as of June 30, 2017 and 2016, respectively.
(Continued)
13 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
20. Pending Accounting Pronouncement
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers, to clarify the principles for recognizing revenue and to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods and services. This standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. An entity will apply the amendments in this update using either a full retrospective application, which applies the standard to each prior period presented, or under the modified retrospective application, in which an entity recognizes the cumulative effect of initially applying the new standard as an adjustment to the opening balance sheet of retained earnings at the date of initial application. Revenue in periods presented before that date will continue to be reported under guidance in effect before the change. Currently, the American Institute of Certified Public Accountants Healthcare Revenue Recognition Task Force is interpreting this standard and its effects on the health care industry.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires that most leased assets be recognized on the balance sheet as assets and liabilities for the rights and obligations created by these leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. Early application is permitted. An entity is required to apply the amendments in the standard under the modified retrospective transition approach. This approach includes a number of optional practical expedients, which are described in the final standard. Under these practical expedients, an organization will continue to account for leases that commence before the effective date in accordance with current U.S. GAAP, unless the lease is modified. However, lessees are required to recognize on the balance sheet leased assets and liabilities for operating leases at each reporting date.
In August 2016, the FASB issued ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. This standard intends to make certain improvements to the current reporting requirements for not-for-profit entities including: (1) the presentation for two classes of net assets at the end of the period, rather than the currently required three classes, as well as the annual change in each of the two classes; (2) the removal of the requirement to present or disclose the indirect method (reconciliation) when using the direct method for the statement of cash flows; and (3) the requirement to provide various enhanced disclosures relating to various not-for-profit specific topics. The new standard is effective for annual financial statements beginning after December 15, 2017.
In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This standard intends to make changes to employers that sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. Employers will present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. Employers will present the other components of the net periodic benefit cost separately from the line item(s) that include(s) the service cost and outside of any subtotal of operating income, if one is presented. The new standard is effective for annual financial statements after December 15, 2017. Early application is permitted.
The Medical Center has not determined the impact of these new standards at this time.
14 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE C - NET PATIENT SERVICE REVENUE
The Medical Center has agreements with third-party payors that provide for payments to the Medical Center at amounts different from its established rates. A summary of the payment arrangements with major third-party payors follows:
Medicare and Medicaid - Inpatient acute care services provided to Medicare and Medicaid 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. The Medical Center is reimbursed for certain cost-reimbursable items at a tentative rate, with final settlement determined after submission of annual cost reports by the Medical Center and audits thereof by Medicare. Medicare reimburses for most outpatient services on the Outpatient Prospective Payment System (OPPS). Medicaid outpatient services are paid based on a fee schedule. The Medical Center’s Medicare cost reports have been audited and finalized by the Medicare fiscal intermediary through June 30, 2015 with the exception of the 2005 for Kent General Hospital and the 2007, 2009 and 2015 for Milford Memorial Hospital.
Blue Cross of Delaware - Inpatient and outpatient services rendered to Blue Cross subscribers are reimbursed primarily on a discount from established charge basis.
Net revenue from the Medicare and Medicaid programs accounted for approximately 35% and 20%, and 35% and 15%, respectively, of the Medical Center’s net patient service revenue for the years ended June 30, 2017 and 2016, respectively. Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. For the years ended June 30, 2017 and 2016, net patient service revenue reflects net increases (decreases) of approximately $3,268,000 and $(665,000), respectively, due to final settlements or estimate changes.
The Medical Center has also entered into payment agreements with certain commercial insurance carriers, HMOs and preferred provider organizations. The basis for payment to the Medical Center under these agreements is primarily on a discount from established charges but also includes prospectively determined daily rates and prospectively determined fee schedules.
For uninsured patients who do not qualify for charity care, the Medical Center recognizes revenue based on established rates, subject to certain discounts as determined by the Medical Center. An estimated provision for bad debts is recorded that results in net patient service revenue being reported at the net amount expected to be received. The Medical Center has determined that patient service revenue is primarily recorded prior to assessing the patient’s ability to pay and, as such, the entire provision for bad debts related to patient revenue is recorded as a deduction from patient service revenue in the accompanying statements of operations and changes in net assets.
(Continued)
15 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE C - NET PATIENT SERVICE REVENUE - Continued
Patient service revenue for both years ended June 30, 2017 and 2016, net of contractual allowances and discounts (but before the provision for bad debts), recognized in the period from these major payor sources based on primary insurance designation, is as follows:
Third-Party Total Payors Self-Pay All Payors
Patient service revenue (net of contractual allowances and discounts) 93% 7% 100%
Deductibles and copayments under third-party payment programs within the third-party payor amount above are patients’ responsibility, and the Medical Center considers these amounts in its determination of the provision for bad debts based on collection experience.
NOTE D - ASSETS LIMITED AS TO USE AND OTHER INVESTMENTS
Assets Limited as to Use
As of June 30, assets limited as to use consisted of:
2017 2016 Internally designated Cash and cash equivalents $ 35,790,118 $ 46,709,933 Government securities and corporate bonds 149,139,515 143,207,814 Equity securities 63,617,964 64,610,108 Accrued interest receivable 713,264 729,200
$ 249,260,861 $ 255,257,055 Held by trustees Under bond indenture agreements Cash and cash equivalents $ 5,031,091 $ 5,000,051
Under malpractice funding arrangement Cash and cash equivalents 920,199 844,142 Government securities and corporate bonds 4,464,974 4,330,683 Equity securities 6,762,265 6,004,623
12,147,438 11,179,448
Total held by trustees 17,178,529 16,179,499
Less amounts required for current liabilities (4,771,060) (4,800,020)
$ 12,407,469 $ 11,379,479
(Continued)
16 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE D - ASSETS LIMITED AS TO USE AND OTHER INVESTMENTS - Continued
Other Investments
Other investments at June 30, consisted of:
2017 2016
Cash and cash equivalents $ 19,546,276 $ 26,740,526 Government securities and corporate bonds 52,109,097 52,765,896 Equity securities 265,676,413 226,180,125 Accrued interest receivable 339,895 338,618
$ 337,671,681 $ 306,025,165
Investment Return
The following schedule summarizes the Medical Center’s investment return on assets limited as to use and other investments in other income on the statements of operations and changes in net assets for the years ended June 30:
2017 2016
Investment return, net Interest and dividend income $ 12,503,291 $ 12,390,638 Net realized gains on sales of securities 15,635,717 7,146,147 Change in net unrealized gains and losses on trading securities 14,889,074 (21,517,123) Investment fees (1,839,193) (1,450,191)
$ 41,188,889 $ (3,430,529)
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NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment at June 30, consisted of:
Estimated useful lives 2017 2016
Land $ 23,250,934 $ 23,250,934 Land improvements 2 to 25 years 3,451,928 3,451,928 Buildings and improvements 5 to 40 years 273,669,972 274,843,736 Major movable and fixed equipment 3 to 20 years 329,595,710 279,863,472 629,968,544 581,410,070 Construction in progress 98,555,635 60,967,902 728,524,179 642,377,972 Less accumulated depreciation and amortization (332,465,243) (300,496,350)
$ 396,058,936 $ 341,881,622
Depreciation and amortization expense for the years ended June 30, 2017 and 2016 totaled $36,916,700 and $29,087,224, respectively.
The Medical Center has a commitment for the construction of the Milford Memorial replacement hospital for $227,389,293 as of June 30, 2017. The replacement hospital is currently under construction and is to be funded primarily through internally designated funds and is targeted to be completed by January 1, 2019.
NOTE F - LONG-TERM DEBT
Long-term debt as of June 30, consisted of:
2017 2016
Project Revenue Bonds, Series 2009A, net of unamortized discount of $647,956 and $659,332 at June 30, 2017 and 2016, respectively $ 128,022,044 $ 129,820,668 Variable Rate Refunding Revenue Bonds, Series 2012 64,035,000 65,910,000
192,057,044 195,730,668 Less: Unamortized deferred financing costs, net (1,885,781) (1,991,743) Current portion of long-term debt (3,810,000) (3,685,000)
$ 186,361,263 $ 190,053,925
(Continued)
18 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE F - LONG-TERM DEBT - Continued
Fair Value
The Medical Center uses quoted market prices in estimating the fair value of the revenue bonds. The fair value of the Medical Center’s long-term debt was $198,841,000 and $209,460,000 at June 30, 2017 and 2016, respectively.
Bonds
Series 2009A Bonds
In October 2009, the Medical Center entered into a financing arrangement with the Delaware Health Facilities Authority (the Authority) to issue $138,490,000 Revenue Bonds, Bayhealth Medical Center Project, Series 2009A (Series 2009A). The Series 2009A bonds proceeds were used to extinguish the Series 1999 bonds and finance construction projects and renovations to the Medical Center.
The Series 2009A bonds include serial bonds bearing interest at rates ranging from 3.50% to 5.00%, with maturities annually through July 1, 2024, with principal payment ranging from $250,000 to $2,515,000. Term bonds, bearing interest at rates ranging from 4.50% to 5.00%, with maturities occurring on July 1, 2026 through July 1, 2044, are subject to mandatory sinking fund (principal) payments beginning July 1, 2025, ranging from $1,170,000 to $12,215,000 as set forth in the bond indenture agreements. The Series 2009A interest is payable semiannually on each January 1 and July 1.
Series 2012 Bonds
In June 2012, the Medical Center replaced the $37,865,000 Variable Rate Refunding Revenue Bonds, Bayhealth Medical Center Project, Series 2009B (Series 2009B); and $37,865,000 Variable Rate Refunding Revenue Bonds, Bayhealth Medical Center Project, Series 2009C (Series 2009C) with Series 2012 $72,250,000 Variable Rate Refunding Bonds (Series 2012), that are Direct Bank Purchase Bonds with a national bank.
The Series 2012 bonds have annual sinking fund (principal) payments through July 1, 2039 ranging from $1,940,000 to $3,835,000 and bear interest based on a daily LIBOR rate (as defined) (1.29% and 0.90% at June 30, 2017 and 2016, respectively), payable monthly until July 1, 2019, at which time the Direct Bank Purchase Agreement expires and can either be extended or the bonds may be repurchased by the Medical Center. Interest was 1.29% and 0.90% at June 30, 2017 and 2016, respectively.
Under the terms of the Loan Agreement, the Medical Center has granted the Authority a mortgage lien on certain Medical Center facilities and has pledged its gross revenues, to the extent permitted by law, to the Authority. The Loan Agreement requires the Medical Center to maintain certain financial covenants, including a debt service coverage ratio and days cash on hand, as defined. At June 30, 2017 and 2016, the Medical Center has complied with all financial covenants in the Loan Agreement.
(Continued)
19 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE F - LONG-TERM DEBT - Continued
As of June 30, 2017, the principal payments on the Medical Center’s long-term debt are as follows:
2018 $ 3,810,000 2019 3,955,000 2020 4,115,000 2021 4,270,000 2022 4,425,000 Thereafter 172,130,000
$ 192,705,000
Interest Rate Swap
The Medical Center entered into an interest rate swap agreement in April 2003 to manage its exposure to fluctuations in interest rates relating to the Series 2003 bonds. The interest rate swap does not qualify for hedge accounting. The Series 2003 bonds were extinguished in October 2009; however, the interest rate swap agreement remains in place. The notional amount declines annually until the termination of the agreement on July 1, 2023. As of June 30, 2017 and 2016, the notional amount was $16,035,000 and $18,375,000, respectively. Under the agreement, the Medical Center receives a floating rate based on 68% of the 30-day U.S. dollar LIBOR rate and pays a fixed rate of 3.53% each month. The Medical Center recorded a noncash gain on the fair value of the swap of $807,453 and $47,779 for the years ended June 30, 2017 and 2016, respectively, with such amounts recorded as other income in the accompanying statements of operations and changes in net assets. The Medical Center has recorded the fair value of the interest rate swap as a liability of $1,149,966 and $1,957,420 at June 30, 2017 and 2016, respectively.
The Medical Center has established policies and procedures to limit the potential for counterparty credit risk, including establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. As a matter of practice, the Medical Center will enter into transactions only with counterparties whose obligations are rated “A-” or above as rated by Standard & Poor’s, or “A3” or above as rated by Moody’s.
The Medical Center’s exposure to credit risk, associated with its derivative financial instruments, is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. As of September 27, 2017 the Medical Center was not exposed to any risk of loss.
20 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE G - POSTRETIREMENT BENEFIT PLANS
The Medical Center sponsors a noncontributory defined benefit pension plan (Pension Plan), covering substantially all employees, which was frozen for all participants effective January 1, 2008, except those whose age and years of vesting service total 65 or more as of December 31, 2007. These grandfathered participants will continue to add to the Pension Plan benefits in the future based on current plan provisions. For all other employees, Pension Plan benefits will not increase after December 31, 2007. The Medical Center’s policy is to fund benefit costs accrued subject to limitations under the Employee Retirement Income Security Act of 1974. The actuarial cost method used to compute funding levels is the Projected Unit Credit Method. The mortality table used for projecting the benefit obligations is the RP-2014 Generational Mortality Table with annual updates for projected improvements.
In addition, the Medical Center provides certain reimbursement for health care benefits for eligible retirees (Other benefits). Certain employees who retire at age 65, or at age 55 with 10 consecutive years of service, and who are insured under the Medical Center’s health insurance plan while an active employee, are eligible for coverage. Effective June 30, 2012, the Medical Center revised its assumption related to the percentage of future retirees that elect coverage and continue to elect coverage post-age 65 based on the updated historical experience. Effective January 1, 2013, the other benefit plans were amended to exclude all new hires, including rehires.
(Continued)
21 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE G - POSTRETIREMENT BENEFIT PLANS - Continued
The following table summarizes information about the benefit plans:
Pension benefits Other benefits June 30 2017 2016 2017 2016
Accumulated benefit obligation $ 214,138,234 $ 213,086,234 $ N/A $ N/A
Change in benefit obligation Benefit obligation at beginning of year $ 216,384,468 $ 196,396,456 $ 14,710,379 $ 13,634,964 Service cost 1,954,757 1,938,293 393,826 444,050 Interest cost 8,140,398 8,763,882 510,921 575,806 Actuarial (gain) loss (1,151,737) 16,137,945 3,946,357 1,033,362 Benefits paid (7,456,176) (6,852,108) (967,284) (977,803)
Benefit obligation at end of year 217,871,710 216,384,468 18,594,199 14,710,379
Change in plan assets Fair value of the plan assets at beginning of year 152,723,032 145,851,528 - - Actual return on plan assets 11,529,750 8,723,612 - - Contributions by the Medical Center 5,000,000 5,000,000 967,284 977,803 Benefits paid (7,456,176) (6,852,108) (967,284) (977,803) Fair value of the plan assets at end of year 161,796,606 152,723,032 - -
Funded status at year end $ (56,075,104) $ (63,661,436) $ (18,594,199) $ (14,710,379)
Net amounts recognized in the balance sheets consist of Current liabilities, as accrued salaries, wages and benefits $ - $ - $ (1,241,164) $ (1,040,000) Noncurrent liabilities (56,075,104) (63,661,436) (17,353,035 (13,670,379)
Accrued retirement benefits $ (56,075,104) $ (63,661,436) $ (18,594,199) $ (14,710,379)
Amounts recognized in unrestricted net assets but not yet recognized in net periodic benefit costs consist of Net actuarial loss $ 83,736,778 $ 88,939,636 $ 6,501,813 $ 2,634,740 Prior service cost (credit) - - (818,951) (908,161)
$ 83,736,778 $ 88,939,636 $ 5,682,862 $ 1,726,579
(Continued)
22 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE G - POSTRETIREMENT BENEFIT PLANS - Continued
Pension benefits Other benefits June 30 2017 2016 2017 2016
Components of net periodic benefit cost Service cost $ 1,954,757 $ 1,938,293 $ 393,826 $ 444,050 Interest cost 8,140,398 8,763,882 510,921 575,806 Expected return on plan assets (9,753,570) (9,342,681) - - Amortization of prior service cost (credit) - 8,398 (89,210) (89,210) Amortization of actuarial loss 2,274,941 1,696,901 79,284 22,025 2,616,526 3,064,793 894,821 952,671
Other changes in benefit obligations recognized in other changes in unrestricted net assets Prior service (cost) credit - (8,398) 89,210 89,210 Net (gain) loss (5,202,858) 15,060,113 3,867,073 1,011,337 (5,202,858) 15,051,715 3,956,283 1,100,547
Total recognized in net benefit cost and other changes in unrestricted net assets $ (2,586,332) $ 18,116,508 $ 4,851,104 $ 2,053,218
At June 30, 2017, the expected estimated amount from unrestricted net assets into net periodic benefit cost for the next year is:
Pension Other benefits benefits
Net actuarial loss $ 2,100,000 $ 386,866 Prior service credit - (89,210)
$ 2,100,000 $ 297,656
Pension benefits Other benefits June 30 2017 2016 2017 2016
Weighted-average assumptions used to determine benefit obligations were Discount rate 3.93% 3.82% 3.84% 3.65% Rate of compensation increase 3.00% 3.00% N/A N/A Measurement date June 30 June 30 June 30 June 30
(Continued)
23 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE G - POSTRETIREMENT BENEFIT PLANS - Continued
Pension benefits Other benefits June 30 2017 2016 2017 2016
Weighted-average assumptions used to determine net periodic benefit costs were Discount rate 3.82% 4.58% 3.65% 4.30% Expected long-term return on plan assets 6.50% 6.50% N/A N/A Rate of compensation increase 3.00% 3.00% N/A N/A
The expected long-term rate of return on the Pension benefits’ total assets is developed based on applying historical average total returns by asset class to the Pension benefits’ current asset allocation.
The current health care cost trend rates used to measure the future benefits under the postretirement health care plans are: (1) 8% for pre-65 year old retirees, decreasing to 5% by 2021 and remaining at that level thereafter; and (2) 7.6% for retirees age 65 and older, decreasing to 5% by 2019 and remaining at that level thereafter. A one percentage-point change in assumed health-care cost trend rates would have the following effects on the year ended June 30, 2017:
1% increase 1% (decrease)
Incremental effect on total service and interest cost components of benefit cost $ 37,910 $ (32,184) Incremental effect on postretirement benefit obligation $ 410,618 $ (354,876)
The Pension benefits’ weighted average asset allocation as of the measurement dates of June 30, 2017 and 2016, by asset category, follows:
2017 2016 Asset category Cash and cash equivalents 5% 4% Fixed income 44 45 Equity securities 51 51
Total 100% 100%
The target asset allocation is 60% in equity securities and 40% in fixed income.
(Continued)
24 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE G - POSTRETIREMENT BENEFIT PLANS - Continued
Fair Value of the Plan Assets
The following fair value hierarchy table presents information about each major category of the Pension benefits’ financial assets measured at fair value using the market approach on a recurring basis as of June 30, 2017 and 2016:
Fair value measurement at report date using Quoted prices Significant in active other Significant markets for observable unobservable identical assets inputs inputs Total (Level 1) (Level 2) (Level 3)
2017
Cash and cash equivalents $ 8,893,185 $ 8,893,185 $ - $ - Fixed income (a) 70,754,518 - 70,754,518 - Equity securities (b) 82,148,903 82,148,903 - -
$ 161,796,606 $ 91,042,088 $ 70,754,518 $ -
2016
Cash and cash equivalents $ 6,111,720 $ 6,111,720 $ - $ - Fixed income (a) 68,437,416 - 68,437,416 - Equity securities (b) 78,173,896 78,173,896 - -
$ 152,723,032 $ 84,285,616 $ 68,437,416 $ -
(a) Comprised of investment grade bonds of U.S. issuers from various industries and a commingled trust fund. (b) Comprised of mutual funds investing in at least 90% of assets in common stock of companies with large market capitalizations similar to companies in the Standard & Poor’s (S&P) 500 Index.
Investment Strategies
The funding obligations of the Pension benefits are long-term in nature; consequently, the investment of the Pension benefits’ assets should have a long-term focus. The Pension benefits’ assets are invested in accordance with sound investment practices that emphasize long-term fundamentals. The investment objectives for the plan’s assets are:
To achieve a positive rate of return over the long term that significantly contributes to meeting the Pension benefits’ obligations, including actuarial interest and benefit payment obligations;
(Continued)
25 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE G - POSTRETIREMENT BENEFIT PLANS - Continued
To earn long-term returns that keep pace with or exceed the long-run inflation rate;
To diversify the Pension benefits’ assets in order to reduce the risk of wide swings in market value from year to year, or of incurring large losses; and
To achieve investment results over the long term that compare favorably with those of other benefit plans and of appropriate market indices.
It is expected that these objectives can be obtained through a well-diversified portfolio structure in a manner consistent with this investment policy.
Cash Flows
The Medical Center expects to contribute $8,000,000 to the Pension Plan and $1,240,000 to the Other benefits for the year ending June 30, 2018. The following benefit payments, which reflect expected future service, as appropriate, are expected to be made in future years:
Pension Other Year ending June 30, benefits benefits
2018 $ 9,458,000 $ 1,240,000 2019 10,155,000 1,310,000 2020 10,875,000 1,350,000 2021 11,597,000 1,350,000 2022 12,165,000 1,370,000 2023-2027 66,243,000 5,890,000
The Medical Center also offers a defined contribution savings plan to all full-time and part-time employees of the Medical Center. The Medical Center matches participant contributions for active participants as of December 31, who have completed at least 1,000 hours of service during the calendar year. The match is 50% of the first 4% of compensation. Effective on January 1, 2008, grandfathered participants will continue to receive a match of 50% of the first 4% of compensation, and for non-grandfathered participants, 50% of the first 6% of compensation. Additionally, non-grandfathered participants also receive a 3% contribution of compensation. The Medical Center’s expense for the defined contribution savings plan for the years ended June 30, 2017 and 2016 was $9,664,439 and $10,615,916, respectively.
26 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE H - ESTIMATED INSURANCE LIABILITY COSTS
Medical Professional Liability Insurance
The Medical Center maintains medical malpractice insurance coverage under an annual claims-made policy with a deductible amount of $3,000,000 on a per-claim basis and $9,000,000 in the aggregate. The Medical Center provides for estimated losses which have been reported and losses which have been incurred but not reported. At June 30, 2017 and 2016, the malpractice claims liability totaled $11,230,335 and $12,554,994, respectively, including the estimated current portion of this liability, totaling $1,357,130 and $1,578,244 reported in accounts payable and other accrued expenses.
Workers’ Compensation Insurance
The Medical Center has a self-insured workers’ compensation program subject to a self-insured retention of $800,000 per claim for the years ended June 30, 2017 and 2016. Claims exceeding the self-insured retention are covered under an excess insurance policy, the maximum limit of indemnity is statutory and the employers’ liability maximum limit of indemnity per occurrence and aggregate is $1,000,000 for 2017 and 2016. At June 30, 2017 and 2016, the workers’ compensation liability totaled $5,529,210 and $6,049,428, respectively, including the estimated current portion of this liability, totaling $1,247,341 and $1,372,860, respectively, reported in accounts payable and other accrued expenses.
NOTE I - COMMITMENTS AND CONTINGENCIES
Litigation
The Medical Center is involved in litigation and regulatory investigations arising in the course of business. After consultation with legal counsel, management estimates that these matters will be resolved without a material adverse effect on the Medical Center’s financial position or results of operations.
Operating Leases
The Medical Center leases equipment through lease agreements expiring on various dates through June 2025. Certain of these leases contain options to extend the lease terms. Lease expense for the years ended June 30, 2017 and 2016 was $3,489,526 and $2,717,264, respectively. Future minimum lease payments are as follows for the years ending June 30:
2018 $ 3,264,367 2019 2,181,077 2020 1,924,963 2021 1,752,915 2022 1,165,188 Thereafter 1,700,135
$ 11,988,645
27 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE J - CONCENTRATIONS OF CREDIT RISK
The Medical Center grants credit without collateral to patients, most of whom are local residents and are insured under third-party agreements. The mix of net accounts receivable from patients and third-party payors at June 30, 2017 and 2016 was as follows:
2017 2016
Medicare 29% 23% Blue Cross 12 18 Medicaid 20 23 Self-pay 16 9 Workers’ compensation 3 8 Commercial and other 20 19
Total 100% 100%
In addition, the Medical Center invests its cash and cash equivalents primarily with banks and financial institutions. These deposits may be in excess of federally insured limits. Management believes that the credit risk related to these deposits is minimal.
NOTE K - FUNCTIONAL EXPENSES
The Medical Center provides general health-care services to residents within its geographic location. Expenses related to providing these services for the years ended June 30, 2017 and 2016 are as follows:
2017 2016
Healthcare services $ 380,798,194 $ 369,331,149 General and administrative services 165,712,997 164,425,646
$ 546,511,191 $ 533,756,795
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Medical Center measures fair value as the price that would be received to sell an asset or paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures.
The fair value hierarchy is broken down into three levels based on the source of inputs: Level 1 - defined as observable inputs such as quoted prices in active markets; Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 - defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.
(Continued)
28 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
In determining fair value, the Medical Center uses the market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
In determining fair value, the Medical Center uses quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the assets or liabilities based on market data obtained from sources independent of the Medical Center.
Financial assets and liabilities carried at fair value are classified in the table below:
Level 1 Level 2 Level 3 Total June 30, 2017
Assets Cash and cash equivalents $ 88,607,873 $ - $ - $ 88,607,873 Government securities and corporate bonds - 205,713,586 - 205,713,586 Equity securities 336,056,642 - - 336,056,642 Beneficial interest in perpetual trusts - - 6,407,165 6,407,165
Total assets $ 424,664,515 $ 205,713,586 $ 6,407,165 $ 636,785,266
Liabilities Interest rate swap $ - $ 1,149,966 $ - $ 1,149,966
Total liabilities $ - $ 1,149,966 $ - $ 1,149,966
Level 1 Level 2 Level 3 Total June 30, 2016
Assets Cash and cash equivalents $ 123,541,861 $ - $ - $ 123,541,861 Government securities and corporate bonds - 200,304,393 - 200,304,393 Equity securities 296,452,493 - - 296,452,493 Beneficial interest in perpetual trusts - - 6,007,066 6,007,066
Total assets $ 419,994,354 $ 200,304,393 $ 6,007,066 $ 626,305,813
Liabilities Interest rate swap $ - $ 1,957,420 $ - $ 1,957,420
Total liabilities $ - $ 1,957,420 $ - $ 1,957,420
(Continued)
29 Bayhealth Medical Center, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2017 and 2016
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Net unrealized gains (losses) on the Level 3 assets were $400,099 and $(377,571) for the years ended June 30, 2017 and 2016, respectively.
NOTE M - SUBSEQUENT EVENTS
The Medical Center evaluated its June 30, 2017 financial statements for subsequent events through September 27, 2017, the date the financial statements were available to be issued. The Medical Center is not aware of any subsequent events which would require recognition or disclosure in the financial statements.
30 APPENDIX C
SUMMARY OF BOND INDENTURE AND LOAN AGREEMENT
TABLE OF CONTENTS
Page
DEFINITIONS OF CERTAIN TERMS ...... C-1 THE BOND INDENTURE ...... C-6 Funds and Accounts ...... C-6 Investment of Moneys in Funds ...... C-6 Avoidance of Arbitrage ...... C-7 Covenant Against Encumbrances ...... C-7 Events of Default ...... C-7 Acceleration ...... C-8 Other Remedies; Rights of Bondholders ...... C-8 Right of Bondholders to Direct Proceedings ...... C-9 Application of Moneys ...... C-10 Rights and Remedies of Bondholders ...... C-11 Waivers of Events of Default ...... C-11 Trustee and Bondholders Entitled to all Remedies Under Act ...... C-12 Resignation by Trustee; Removal ...... C-12 Appointment of Successor Trustee ...... C-12 Trustee Authorized to Vote Master Indenture Obligations; Exercise of Remedies ...... C-12 Supplemental Indentures Not Requiring Consent of Bondholders ...... C-13 Supplemental Indentures Requiring Consent of Bondholders ...... C-13 Borrower Consent and Notice ...... C-14 Modification by Unanimous Consent ...... C-14 Execution of Amendments and Supplements by Trustee ...... C-14 Amendments to Loan Agreement and Master Note Not Requiring Consent of Bondholders ...... C-14 Amendments to Loan Agreement and Master Note Requiring Consent of Bondholders ...... C-15 Supplements to the Master Indenture...... C-15 Execution of Amendments and Supplements by Trustee ...... C-16 Defeasance of Lien ...... C-16 Bonds Owned by Issuer or Borrower ...... C-17 THE LOAN AGREEMENT ...... C-17 Certain Covenants of the Borrower ...... C-17 The Loan; Repayment ...... C-19 Defaults and Remedies ...... C-20 Unassigned Issuer Rights ...... C-21 Amendments, Changes and Modifications ...... C-21
DEFINITIONS OF CERTAIN TERMS
In addition to the terms defined in the Official Statement, the following terms, when used in this Appendix C, have the meanings ascribed to them below:
“Act” means the Delaware Health Facilities Act (16 Del. Code Ann. Sec. 9201 et. seq.).
“Authorized Denominations” means $5,000 or any integral multiple thereof.
“Beneficial Owner” means any Person who (a) 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 (b) is treated as the owner of any Bond for federal income tax purposes.
“Bond Counsel” means any attorney at law or firm of attorneys selected by the Borrower and reasonably acceptable to the Trustee and the Issuer of nationally 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 created in 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 Trustee as bond registrar.
“Bond Indenture” or “Indenture” means the Trust Indenture dated as of December 1, 2017 between the Issuer and the Trustee pursuant to which the 2017A Bonds will be issued, and any amendments and supplements thereto.
“Bond Year” means the period beginning on December 1, 2017 and ending on the day prior to each December 1 thereafter.
“Bonds,” “2017A Bonds” or “Series 2017A Bonds” means the 2017A Bonds from time to time Outstanding under the Bond Indenture.
“Bond Purchase Contract” means the Bond Purchase Contract among the Issuer, the Borrower and the Underwriters executed in connection with the sale of the 2017A Bonds.
“Borrower” means Bayhealth Medical Center, Inc., a Delaware corporation organized not for pecuniary profit.
“Borrower Bonds” means Bonds registered in the name of the Borrower or one or more of its affiliates.
“Borrower Representative” means the person or each alternate designated to act for the Borrower by written certificate furnished to the Issuer and the Trustee, containing the specimen signature of such person and signed on behalf of the Borrower by the Chief Financial Officer, the Treasurer or any Executive Vice President, Senior Vice President or Vice President of the Borrower.
“Borrower Security Instruments” means each of (a) the Loan Agreement, (b) the Master Note and (c) each of such additional or supplemental notes and other instruments as the Borrower or any other Person from time to time may enter into in favor of the Trustee for the purpose of securing or supporting the obligations of the Borrower to pay all or any portion of the Loan Payments or for the purpose of
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securing all or any portion of the 2017A Bonds and as shall be identified as a “Borrower Security Instrument” for the purpose of the Bond Indenture by written agreement of the Borrower and the Trustee, each as from time to time in effect.
“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 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.
“Code” means the Internal Revenue Code of 1986, as from time to time amended, and any regulations promulgated thereunder.
“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.
“Costs of Issuance Account” means the account created pursuant to the Bond Indenture.
“Co-Trustee” means any Co-Trustee appointed by the Trustee pursuant to the provisions of the Bond Indenture.
“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 the Borrower or one of its affiliates, the Issuer, the Master Trustee or the Trustee.
“DTC” means The Depository Trust Company, New York, New York.
“Electronic Notice” means notice transmitted through a time-sharing terminal, if operative as between any two parties, or if not operative, by telecopier, tested telex, facsimile transmission, in writing or by telephone (promptly confirmed in writing or by facsimile transmission).
“Event of Default” means any of the events listed under the subheading “THE BOND INDENTURE – Events of Default” contained in this Appendix C.
“Facilities” means the facilities owned and operated by the Borrower, the costs of which were financed or refinanced with the proceeds of the 2017A Bonds.
“Favorable Opinion of Bond Counsel” means, with respect to any action relating to the 2017A Bonds, the occurrence of which requires such an opinion, a written legal opinion of Bond Counsel addressed to the Issuer, the Trustee and the Borrower, to the effect that such action will not impair the exclusion of interest on the 2017A Bonds from gross income for purposes of federal income taxation or the exemption of interest on the 2017A Bonds from personal income taxation under the laws of the State of Delaware (subject to customary exceptions).
“Fitch” means Fitch Ratings, 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 Borrower by notice to the Issuer and the Trustee.
“Fund” means any of the Bond Fund, the Rebate Fund, and the Costs of Issuance Account, all as established and created under the Indenture, including any accounts and subaccounts created thereunder.
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“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 an employee of the Issuer or the Borrower.
“Interest Payment Date” means each January 1 and July 1, commencing on July 1, 2018.
“Issuer” means the Delaware Health Facilities 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 Borrower and the 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.
“Loan” means the loan by the Issuer to the Borrower of the proceeds of the 2017A Bonds pursuant to the Loan Agreement.
“Loan Agreement” means the Loan Agreement dated as of December 1, 2017 between the Issuer and the Borrower, and any amendments and supplements thereto.
“Loan Payment” means a payment by the Borrower 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 2017A Bonds, plus related fees and expenses, all in accordance with the Loan Agreement and the Master Note.
“Majority of the Bondholders” means the Holders of more than 50 percent of the aggregate principal amount of the Outstanding Bonds.
“Master Indenture” means the Master Trust Indenture dated as of December 1, 2017 between the Borrower and the Master Trustee, as amended or supplemented at the time in question.
“Master Note” means the Master Note (Bayhealth Medical Center Obligated Group), Series A of 2017, dated the date of issuance of the 2017A Bonds, delivered by the Obligated Group pursuant to the Master Indenture or any replacement or amended master note or other obligation issued in substitution therefor pursuant to the Master Indenture.
“Master Trustee” means Wilmington Trust, National Association, acting not in its individual capacity but solely in its capacity as master trustee under the Master Indenture and its successors thereunder.
“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 Borrower by notice to the Issuer and the Trustee.
“Obligated Group” and “Members of the Obligated Group” have the meanings given such terms in the Master Indenture.
“Official Statement” means this Official Statement relating to the 2017A Bonds, including all appendices hereto.
“Outstanding”, “Outstanding Bonds” or “Bonds Outstanding” means the amount of principal of the 2017A Bonds which has not at the time been paid, exclusive of (a) Bonds in lieu of which others have been authenticated under the Bond Indenture, (b) principal of any Bond which has become due (whether
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by maturity, call for redemption or otherwise) and for which provision for payment as required in the Bond Indenture has been made, and (c) for purposes of any direction, consent or waiver under the Bond Indenture, Bonds deemed not to be outstanding pursuant to 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 the Trustee or any other paying agent appointed in accordance with the Bond Indenture.
“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 Bonds pursuant to the Bond Indenture.
“Person” means a corporation, association, partnership, limited liability company, joint venture, trust, organization, business, individual or government or any governmental agency or political subdivision thereof.
“Project” means the (a) advance refunding of a portion of the outstanding Series 2009A Bonds; and (b) payment of certain costs of issuance of the 2017A Bonds.
“Qualified Investments” means investments identified in Exhibit A to the Bond Indenture.
“Rating Agency” means, as of any date, each of Moody’s, if the applicable Series of 2017A Bonds are then rated by Moody’s, Fitch, if the applicable Series of 2017A Bonds are then rated by Fitch, and S&P, if the applicable Series of 2017A Bonds are then rated by S&P.
“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.
“Rebate Fund” means the fund created pursuant to the Bond Indenture.
“Record Date” means each June 15 and December 15.
“Responsible Officer” means, with respect to the Trustee, any officer or authorized representative in its corporate trust department or similar group administering the trusts under the Bond Indenture or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers to whom a particular matter is referred by the Trustee because of such officer’s or authorized representative’s knowledge of and familiarity with the particular subject, in each case with direct responsibility for administering the Bond Indenture.
“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 Borrower by notice to the Issuer and the Trustee.
“Securities Act” means the Securities Act of 1933, as amended, and any successor thereto.
“Securities Depository” means DTC or, if applicable, any successor securities depository appointed pursuant to the Bond Indenture.
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“Securities Exchange Act” means the Securities Exchange Act of 1934, as amended, and any successor thereto.
“State” means The State of Delaware.
“Supplemental Master Indenture” means the First Supplemental Master Trust Indenture dated as of December 1, 2017 between the Borrower as the Initial Obligated Group Member and the Master Trustee pursuant to which the Master Note is being issued.
“Trust Estate” means the property and other rights assigned by the Issuer to the 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.
“Trustee” means Wilmington Trust, National Association, and its successors and assigns, not in its individual capacity but solely as Trustee under the Bond Indenture.
“2017A Bonds” means the Issuer’s Revenue Bonds, Bayhealth Medical Center Project, Series 2017A.
“Unassigned Issuer Rights” means 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 give the approval described in 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.
“Underwriters” means PNC Capital Markets LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
“United States Obligations” means direct general obligations of, or obligations the payment of the principal of and interest on which are unconditionally guaranteed as to full and timely payment by, the United States of America, which obligations are noncallable.
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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.
Funds and Accounts
Costs of Issuance Account. There will be established with the Trustee a Costs of Issuance Account. Moneys on deposit in the Costs of Issuance Account shall be expended in accordance with the provisions of a closing statement.
Bond Fund. There will be established with the Trustee a Bond Fund, which shall be used to pay when due the principal of, premium, if any, and interest on the 2017A 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 2017A Bonds, as set forth in the Bond Indenture.
Rebate Fund. There will be established with the Trustee a Rebate Fund. Moneys held in the Rebate Fund shall be held separate and apart from all other funds and accounts established under the Bond Indenture. The Borrower has agreed to pay or provide the Trustee with funds sufficient to pay the amounts (if any) payable pursuant to Section 148(f) of the Code with respect to the 2017A Bonds.
Investment of Moneys in Funds
Any moneys held as a part of the funds established under the Bond Indenture shall be invested or reinvested by the Trustee, to the extent permitted by law, at the written request of and as directed by a Borrower Representative, in any Qualified Investments. In the absence of such direction, the Trustee shall deposit such moneys in the fund described in the Bond Indenture.
The Trustee may settle any and all such investments through its own bond or investment department or the bond or investment department of any bank or trust company under common control with the Trustee. All such investments shall at all times be a part of the fund or account from which the moneys used to acquire such investments shall have come and all income and profits on such investments shall be credited to, and losses thereon shall be charged against, such fund. All investments hereunder shall be registered in the name of the Trustee, as trustee under the Bond Indenture. All investments hereunder shall be held by or under the control of the Trustee. The Trustee shall settle and reduce to cash a sufficient amount of investments of funds in any account of the Bond Fund whenever the cash balance in such account of the Bond Fund is insufficient, together with any other funds available therefor, to pay the principal of, premium, if any, and interest on the 2017A Bonds when due. The Trustee shall not be liable or responsible for any reduction in value or loss with respect to any investment made in accordance with the instructions received from a Borrower Representative.
The Issuer covenants and certifies to and for the benefit of the Owners of the 2017A Bonds Outstanding that so long as any of the 2017A Bonds remain Outstanding, the Issuer shall not direct that moneys on deposit in any fund or account in connection with the 2017A Bonds (whether or not such moneys were derived from the proceeds of the sale of the 2017A Bonds or from any other sources), be used in a manner which will cause the 2017A 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 Borrower relating to maintaining the exclusion of interest on the 2017A 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.
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The Issuer covenants that it will file such returns and make payments as directed by the Borrower (but only from moneys provided to the Issuer by or on behalf of the Borrower 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 2017A Bonds from gross income for federal income tax purposes.
Avoidance of Arbitrage
In reliance upon the covenant of the Borrower 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 2017A 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 Borrower to comply with the provisions of Section 148 of the Code, provided, however, that the Borrower and not the Issuer or the Trustee shall be responsible for the computation of all amounts required to be paid pursuant to Section 148 of the Code and for directing the Trustee to pay such amounts as and when the same are due and payable from funds provided by the Borrower.
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 2017A 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 2017A 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 Borrower by the Trustee; provided, however, if the failure stated in such notice cannot be corrected within the applicable period, the 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; or
(d) the occurrence of a Loan Default under the Loan Agreement as defined in the Bond Indenture after giving effect to any notice or rights to cure applicable thereto.
Within five days after actual knowledge by a Responsible Officer of the Trustee of an Event of Default under subsection (a), (b), or (d) above, the Trustee shall give written notice, by registered or certified mail, to the Issuer, the Borrower, the Master Trustee, and the Bondholders, and upon notice as provided in the Bond Indenture, shall give similar notice of any other Event of Default.
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Acceleration
Upon the happening of an Event of Default, then and in every such case, the Trustee may, and upon written request of a Majority of the Bondholders, the Trustee shall, by notice delivered to the Issuer and the Borrower, declare the principal of all 2017A Bonds then Outstanding and the interest accrued thereon to be immediately due and payable. The Trustee shall give notice of any Event of Default and any such declaration as soon as practicable to the Master Trustee by telephone or telecopy, promptly confirmed in writing.
However, the right of the Trustee or the Holders 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 2017A Bonds shall have been paid in full, all overdue installments of interest upon such 2017A 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 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 2017A 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 Trustee shall be made for such payment, all defaults under the 2017A 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 Trustee or provision deemed by the Trustee to be adequate shall be made therefor, then and in every such case, the 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 Trustee shall give notice of any such rescission to the Master Trustee.
In lieu of or in addition to a declaration of acceleration, the Trustee also may 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 Delaware Uniform Commercial Code.
Other Remedies; Rights of Bondholders
Whenever any Event of Default shall have happened and be continuing, the Trustee may, and upon the written request of a Majority of the Bondholders, the Trustee shall take any or all of the following remedial steps:
(a) In the case of an Event of Default described in clauses (a) and (b) under “Events of Default” above, the 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 “Events of Default” above, the 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 “Events of Default” above, the 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;
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(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 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) Bring suit upon the 2017A Bonds.
If an Event of Default shall occur and be continuing, then in each and every such case the Trustee may, and upon the written request of a Majority of the Bondholders, the Trustee shall, by notice to the Issuer and the Borrower: (a) proceed to protect and enforce the rights of the Holders of the 2017A Bonds under the laws of the State 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 Trustee, being advised by Counsel, shall deem most effectual to protect and enforce the rights aforesaid; and (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.
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 Trustee or the Bondholders of any Event of Default shall extend to any subsequent Event of Default.
Right of Bondholders to Direct Proceedings
Anything 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 Trustee, to direct the method and place of conducting all remedial proceedings to be taken by the Trustee under the Bond Indenture or under the Borrower Security Instruments in respect of the 2017A Bonds, including without limitation, the giving of any direction to the Master Trustee under the Master Indenture in its capacity as Holder of the Master Note; provided that such direction shall not be otherwise than in accordance with law and the Bond Indenture and, if applicable, the Borrower Security Instruments and the Trustee shall be indemnified to its satisfaction against the costs, expenses and liabilities which may be incurred therein or thereby.
The Trustee’s obligation to exercise any rights or remedies at the request or direction of Bondholders is subject to the right of the Trustee to require, as a condition precedent to the taking of any action in compliance with such request or direction, indemnification to its satisfaction against all costs, expenses and liabilities, including legal fees, which might be incurred by the Trustee in complying with such request or direction.
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Application of Moneys
All moneys received by the Trustee pursuant to any right given or action taken under the provisions of this heading shall, after payment of the costs and expenses of the proceedings resulting in the collection of such moneys and of the expenses, indemnities, liabilities and advances owing to or incurred or made by the Trustee, 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 2017A 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 2017A 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 2017A 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 2017A Bonds which shall have become due (other than 2017A 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 2017A Bonds) and, if the amount available shall not be sufficient to pay in full the unpaid principal of all 2017A Bonds, and the premium, if any thereon, due on any particular date, then to the payment ratably according to the amount of principal and premium, if any, 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 2017A Bonds which may thereafter become due and, if the amount available shall not be sufficient to pay in full 2017A 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 2017A 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 2017A 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 2017A Bonds over any other 2017A 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 2017A Bonds.
Whenever moneys are to be applied pursuant to the provisions of the Bond Indenture, such moneys shall be applied at such times, and from time to time, as the Trustee shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Trustee shall apply such
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funds, it shall fix the date (which shall be an Interest Payment Date unless it shall deem another date more suitable) upon which such application is to be made and upon such date interest on the amounts of principal to be paid on such date shall cease to accrue. The Trustee shall give such notice as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date, and shall not be required to make payment to the Holder of any 2017A Bonds until such 2017A Bonds shall be presented to the Trustee for appropriate endorsement or for cancellation if fully paid.
Rights and Remedies of Bondholders
No Holder of any of the 2017A Bonds shall have any right to institute any suit, action or proceeding in equity or in law for the execution of any trust under the Bond Indenture, or for any other remedy under the Bond Indenture or on the 2017A Bonds unless (a) such Holder previously shall have given to the Trustee written notice of an Event of Default as above provided, (b) a Majority of the Bondholders shall have made written request of the 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 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 Trustee security and indemnity satisfactory to it against the costs, expenses and liabilities which may be incurred therein or thereby, and (d) the Trustee shall have refused or neglected to comply with such request within a reasonable period of time. The parties to the Bond Indenture intend that no one or more Holders of the 2017A 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 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 2017A Bonds.
However, nothing in the Bond Indenture shall affect or impair the right of any Holder of a 2017A Bond, which is absolute and unconditional, to enforce the payment of the principal of and interest on such Holder’s 2017A 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 and in such 2017A Bonds.
Waivers of Events of Default
The 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; and provided that there shall not be waived any Event of Default specified in clauses (a) or (b) under “Events of Default” above unless prior to such waiver or rescission, the Borrower shall have caused to be paid to the Trustee (i) all arrears of principal and interest (other than principal of or interest on the 2017A Bonds, which became due and payable by declaration of acceleration), with interest at the rate then borne by the 2017A Bonds on overdue installments, to the extent permitted by law, and (ii) all expenses of the Trustee in connection with such Event of Default. In case of any waiver or rescission described above, or in case any proceeding taken by the 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 Trustee and the Holders of 2017A 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.
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Trustee and Bondholders Entitled to all Remedies Under Act
It is the purpose of the Bond Indenture to provide such remedies to the Trustee and the Bondholders as may be lawfully granted under the provisions of the Act; but should any remedy granted in the Bond Indenture be held unlawful, the 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 trustee or receiver appointed under the Act.
Resignation by Trustee; Removal
The 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 Borrower and to each Bondholder, but such resignation shall not take effect until the appointment of a successor Trustee, acceptance by the successor Trustee of such trusts and assignment to such successor Trustee of the rights of the predecessor Trustee under the Borrower Security Instruments. The Trustee may be removed at any time by an instrument or concurrent instruments in writing delivered to the Trustee, the Issuer and the Borrower and signed by (i) provided that no Event of Default under the Bond Indenture shall have occurred and be continuing, the Borrower Representative or (ii) a Majority of the Bondholders, but such removal shall not take effect until the appointment of a successor Trustee and acceptance by the successor Trustee of such trusts. The Trustee also may 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 Trustee, by any court of competent jurisdiction upon the application of the Issuer, the Borrower or a Majority of the Bondholders.
Appointment of Successor Trustee
If the 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 Borrower. If the Borrower does not appoint a successor Trustee within 45 days of the Trustee providing notice of its resignation, the Trustee may petition a court of competent jurisdiction to appoint a successor Trustee. At any time within six months after any such vacancy shall have occurred and provided a court has not appointed a successor Trustee as provided above, a Majority of the Bondholders may appoint a successor Trustee by an instrument or concurrent instruments in writing signed by or on behalf of such Holders, which appointment shall supersede any Trustee theretofore appointed by the Borrower. Each successor 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 $50,000,000. Any such successor Trustee shall become Trustee upon giving notice to the Borrower, the Issuer and the Bondholders, if any, of its acceptance of the appointment, vested with all the property, rights and powers of the Trustee under the Bond Indenture, without any further act or conveyance. Any predecessor Trustee shall execute, deliver and record and file such instruments as the Trustee may reasonably require to confirm or perfect any such succession.
Trustee Authorized to Vote Master Indenture Obligations; Exercise of Remedies
Except as provided below, the 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 or consent (hereinafter in this paragraph referred to as an “amendment”) to or in respect of the Master Indenture. The Trustee may agree to any such amendment, without obtaining the consent of or the provision of notice to the Holders of the 2017A Bonds as provided in the Bond
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Indenture. The 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 2017A Bonds.
Supplemental Indentures Not Requiring Consent of Bondholders
The Issuer and the 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 Borrower, 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 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 under the Trust Indenture Act of 1939 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 or similar federal statute or such state securities or trust indenture law;
(d) to grant additional rights and powers to the Trustee;
(e) to create such accounts or subaccounts within the funds and accounts created under the Bond Indenture as the Borrower shall deem necessary or desirable to enable the Borrower to account for expenditures of 2017A Bond proceeds or as otherwise shall be requested by the Borrower;
(f) to provide for, or modify existing provisions to, a book-entry system of registration for the 2017A Bonds;
(g) to obtain, maintain or improve a rating on the 2017A Bonds from any Rating Agency; or
(h) to make any change that, in the judgment of the Trustee, does not materially adversely affect the right of any Bondholder.
Each Rating Agency or Rating Agencies, as the case may be, shall receive prior written notice from the 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 Borrower, the Issuer and the 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
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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 Holders of each bond so affected, or (b) reduce the aforesaid percentage of owners of 2017A Bonds required to approve any such supplemental indenture, or (c) deprive the Holders of the 2017A Bonds (except as aforesaid) of the lien created by the Bond Indenture without the consent of all of the 2017A Bonds then Outstanding affected thereby, or (d) adversely affect the tax-exempt status of the 2017A Bonds, without the consent of the Bondholders of all the 2017A Bonds then Outstanding affected thereby.
Each Rating Agency or Rating Agencies, as the case may be, shall receive prior written notice from the Trustee of the proposed amendment but such notice shall not be a condition of the effectiveness of such amendment.
Borrower Consent and Notice
Anything in the Bond Indenture to the contrary notwithstanding, a supplemental indenture under the Bond Indenture shall not become effective unless and until the Borrower shall have consented to the execution and delivery of such supplemental indenture. In this regard, the Trustee shall cause notice of the proposed execution of any such supplemental indenture together with a copy of the proposed supplemental indenture to be mailed to the Borrower at least fifteen Business Days (or such shorter period as may be acceptable to the Borrower) prior to the proposed date of execution and delivery of any such supplemental indenture.
Modification by Unanimous Consent
Notwithstanding anything contained elsewhere in the Bond Indenture, the rights and obligations of the Borrower, the Issuer, the Trustee and the Holders of the 2017A Bonds and the terms and provisions of the 2017A Bonds and the Bond Indenture or any supplemental indenture may be modified or altered in any respect with the consent of the Borrower, the Issuer, the Trustee and the Holders of all of the 2017A Bonds then Outstanding.
Execution of Amendments and Supplements by Trustee
The Trustee shall not be obligated to sign any amendment or supplement to the Bond Indenture or the 2017A Bonds if the amendment or supplement, in the judgment of the Trustee, could adversely affect the rights, duties, liabilities, protections, privileges, indemnities or immunities of the Trustee. In signing an amendment or supplement, the 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 2017A Bonds.
Amendments to Loan Agreement and Master Note Not Requiring Consent of Bondholders
The Issuer and the Borrower or the Members of the Obligated Group, as the case may be, may from time to time and at any time, with the consent of the 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:
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(a) to add to the covenants and agreements of the Borrower 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 Borrower;
(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 Borrower or the Members of 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 interests of the Holders of the 2017A 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 or the issuance of a replacement master note of other obligation issued in substitution for the Master Note, in each case authorized pursuant to the terms thereof;
(d) to grant additional rights and powers to the Trustee or the Issuer; or
(e) to make revisions to the Loan Agreement or the Master Note which shall be effective only upon, and in connection with, the remarketing of all of the 2017A Bonds then Outstanding.
Any supplemental loan agreement authorized by the foregoing provisions of this Section may be executed by the Issuer and the Borrower or the Members of the Obligated Group, as the case may be, and consented to by the Trustee, without the consent or notice to the owners of any of the 2017A Bonds at the time Outstanding.
Amendments to Loan Agreement and Master Note Requiring Consent of Bondholders
Without limiting the provisions described under the subheading “Amendments to Loan Agreement and Master Note Not Requiring Consent of Bondholders” above, if the Issuer and the Borrower or the Members of the Obligated Group, as the case may be, propose to amend the Loan Agreement or the Master Note in such a manner as would adversely affect the interests of the Bondholders, the 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 Trustee shall not, without the unanimous consent of the owners of all 2017A 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 or the Loan Agreement.
Supplements to the Master Indenture
If the consent of the Trustee, as the registered owner of the Master Note, is required for any supplement to the Master Indenture pursuant to the terms thereof, the Trustee shall consent to any such supplement if (a) the Trustee determines that such supplement is not of a type described in the Bond Indenture (as to which no Bondholder consents is required), and (b) the Trustee has received the consent of a Majority of the Bondholders affected thereby, and (c) in the opinion of Bond Counsel, the tax-exempt status of the 2017A 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
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are being made to the provisions of the 2017A Bonds pursuant to a Supplemental Indenture authorized pursuant to the Bond Indenture.
Execution of Amendments and Supplements by Trustee
The Trustee shall not be obligated to sign any amendment or supplement to the Master Indenture, the Loan Agreement or the Master Note or give any consent thereto if the amendment or supplement or giving any consent thereto, in the judgment of the Trustee, could adversely affect the rights, duties, liabilities, protections, privileges, indemnities or immunities of the Trustee. In signing an amendment or supplement, the 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 2017A Bonds.
Defeasance of Lien
When the Issuer has paid or has been deemed to have paid to the Holders of all of the 2017A Bonds, the principal and interest and premium, if any, due or to become due with respect to the 2017A Bonds at the times and in the manner stipulated therein and in the Bond Indenture, and all other obligations owing to the Trustee under the Bond Indenture or under the Loan Agreement have been paid or provided for with respect to the 2017A Bonds, the lien of the Bond Indenture on the Trust Estate with respect to the 2017A Bonds shall terminate. Upon the written request of the Issuer or the Borrower, the Trustee shall, upon the termination of the lien of the Bond Indenture, promptly execute and deliver to the Issuer, with a copy to the Borrower, an appropriate discharge of the Bond Indenture except that, subject to the provisions of the Bond Indenture, the Trustee shall continue to hold in trust amounts held pursuant to the Bond Indenture for the payment of the principal of, premium, if any, and interest on the 2017A Bonds.
Outstanding 2017A Bonds shall be deemed to have been paid within the meaning of the Bond Indenture if the Trustee shall have paid to the Holders of such 2017A 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 2017A Bonds to the date of maturity or redemption, as the case may be; provided that if any such 2017A Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been duly given to the Bondholders and the Borrower or irrevocable provision satisfactory to the Trustee shall have been duly made for the giving of such notice.
Outstanding 2017A Bonds also shall be deemed to have been paid for the purposes of the Bond Indenture if the Trustee shall be holding in trust for and shall have irrevocably committed to the payment of such Outstanding 2017A Bonds cash and/or 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 2017A Bonds to the date of maturity or redemption, as the case may be; provided, that if any of such 2017A Bonds are deemed to have been paid prior to the earlier of the redemption or the maturity thereof, the Trustee, the Issuer and the Borrower shall have received a report in form and substance acceptable to the Trustee and the Borrower of a firm of independent public accountants or other experts acceptable to the Borrower, and to whom the Trustee has no objection, 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 2017A Bonds to the date of maturity or redemption, as the case may be; and provided, further, that if any such 2017A Bonds are to be redeemed prior to the maturity thereof, unconditional notice of such
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redemption shall have been duly given or irrevocable provision satisfactory to the Trustee shall have been duly made for the giving of such notice.
Any moneys held by the Trustee in the manner provided by the provisions of the Bond Indenture shall be invested by the Trustee at the written request of the Issuer or the Borrower and in the manner provided by the Bond Indenture (but only to the extent that such investments are available) only in United States Obligations, 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.
Bonds Owned by Issuer or Borrower
In determining whether Holders of the requisite aggregate principal amount of the 2017A Bonds have concurred in any direction, consent or waiver under the Bond Indenture, Borrower Bonds (unless all of the 2017A Bonds which are then Outstanding are Borrower 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 Trustee shall be protected in relying on any such direction, consent or waiver, only 2017A Bonds which the Trustee knows are Borrower Bonds shall be so disregarded. Borrower Bonds which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee’s right so to act with respect to such 2017A Bonds and that the pledgee is not the Issuer or the Borrower (unless all of the 2017A Bonds which are then Outstanding are Borrower Bonds, determined without regard to this paragraph). In case of a dispute as to such right, any decision by the Trustee taken in good faith upon the advice of Counsel shall be full protection to the Trustee in accordance with its standards of performance under the Bond Indenture.
THE LOAN AGREEMENT
The following is a summary of certain provisions of the Loan Agreement. This summary does not purport to be complete and is qualified in its entirety by reference to the Loan Agreement.
Certain Covenants of the Borrower
Assignment of Loan Agreement
The Borrower may assign its interest in the Loan Agreement, in whole or in part, to another Person, subject to the prior written consent of the Issuer, which consent shall be granted by the Issuer if the Borrower shall provide the Trustee and the Issuer with: (i) in the case of an assignment by a Member of the Obligated Group, a certificate of a Borrower Representative to the effect that such assignment will not result in any event of default, or event which, with the passage of time or the giving of notice or both, would constitute such event of default under the Master Indenture, (ii) a Favorable Opinion of Bond Counsel and (iii) a true and complete copy of each such assignment and assumption of obligation.
Preservation of Tax-Exempt Status. The Borrower agrees that throughout the term of the Loan Agreement:
(a) Notwithstanding any provision in the Loan Agreement or in the Bond Indenture to the contrary, it will not take any action or permit any action to be taken on its behalf or cause or permit any circumstance within its control to arise or continue (including, without limitation, any action or circumstance which would result in the revocation or modification of its status as an organization described in Section 501(c)(3) of the Code), if such action or circumstance would adversely affect the
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validity of the 2017A Bonds or cause the interest on the 2017A Bonds to be included in the gross income of the Holders thereof for purposes of federal income taxation.
(b) Neither it nor any Person related to it within the meaning of Section 147(a)(2) of the Code shall purchase bonds of the Issuer in an amount related to the total amount payable under and secured by the Loan Agreement.
(c) It shall not carry on or permit to be carried on in the Facilities, or any other property now or hereafter owned by the Borrower (or with the proceeds of Bonds, or the proceeds of any loan refinanced with the proceeds of Bonds), any trade or business the conduct of which would cause the interest on the 2017A Bonds to be included in the gross income of the Holders thereof for purposes of federal income taxation.
(d) It will cooperate with the Issuer in the preparation and filing of any information, report or other document with respect to the 2017A Bonds which may at any time be required, in the judgment of the Issuer, to be filed with the Internal Revenue Service pursuant to the Code.
(e) It will comply with the provisions of the Tax Certificate executed and delivered in connection with the issuance of the 2017A Bonds, as required under the Loan Agreement.
Arbitrage Rebate. As provided in the Bond Indenture, the Trustee will invest moneys held by the Trustee as directed in writing by the Borrower. The Issuer and the Borrower covenant with each other and with the holders of the 2017A Bonds that, notwithstanding any other provision of the Loan Agreement or any other instrument, they will neither make nor instruct the Trustee to make any investment or other use of the proceeds of the 2017A Bonds, or take or omit to take any other action which would cause the 2017A Bonds to be arbitrage bonds under Section 148 of the Code and the regulations thereunder, and that they will comply with the requirements of the Code and regulations throughout the terms of the 2017A Bonds.
The Borrower shall determine or retain an experienced arbitrage rebate consultant (a “Rebate Consultant”) to determine, within 60 days after each fifth Bond Year, commencing with December 1, 2022, the amount required to be rebated to the United States pursuant to Section 148(f) of the Code, as calculated from the date of original delivery of the 2017A Bonds. Notwithstanding the foregoing, the Borrower shall not be required to make such determination, except as required in connection with making the payments to the United States Treasury described under the next paragraph, if during the preceding five Bond Years there have been no investments made of amounts on deposit in any fund or account established under the Bond Indenture in “nonpurpose investments” (as defined in Section 148(f)(6) of the Code) having a yield higher than the yield of the 2017A Bonds and the Borrower shall not be required to make such determination with respect to any portion of the 2017A Bonds which is, or is reasonably expected to be, exempt from rebate by virtue of the six-month, twelve-month, eighteen-month, or two- year construction issue rebate exemptions of Section 148 of the Code. The Borrower shall notify the Trustee in writing if such determination is not required to be made and the basis therefor.
The Borrower shall at its option either pay to the Trustee for deposit in the Rebate Fund, or pay, or cause to be paid, to the United States Treasury (a) not less frequently than 60 days after the end of every fifth Bond Year, an amount, as determined by the Borrower or a Rebate Consultant, at least equal to 90% of the amount required to be rebated pursuant to Section 148(f) of the Code, with respect to the 2017A Bonds, giving effect to any prior payments made pursuant to this paragraph, and (b) not later than 60 days after the retirement of the last 2017A Bonds, 100% of the aggregate amount required to be rebated pursuant to Section 148(f) of the Code.
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If the Borrower has directed the Issuer to elect that in lieu of arbitrage rebate, a portion of the 2017A Bonds shall be subject to penalties on unspent proceeds in the event of failure to comply with the two-year schedule of expenditures for construction issues pursuant to Section 148(f)(4)(C) of the Code, the Borrower or the Rebate Consultant shall calculate the penalty as of the end of each six-month period from the date of issuance of the 2017A Bonds and shall pay over such amount to the United States Treasury Department within 90 days after each six-month period any penalty amount due.
The Borrower will pay to or for the account of the Issuer all amounts needed to comply with the requirements of Section 148 of the Code, concerning arbitrage bonds, including Section 148(f), which requires generally a rebate payment to the United States of arbitrage profit from investment of the proceeds of tax-exempt bonds in obligations other than tax-exempt obligations. The obligation of the Borrower to make such payments is unconditional and is not limited to funds representing the proceeds of the 2017A Bonds or income from the investment thereof or any other particular source.
Concerning the Project. The proceeds of the 2017A Bonds shall be applied by the Trustee to the payment of the Costs of the Project or other purposes for which the 2017A Bonds were issued in accordance with the Bond Indenture, and pending such application, such money shall be invested and reinvested in accordance with the Bond Indenture. The Borrower shall pay that portion of the Costs of the Project as may be in excess of the money available therefor under the Bond Indenture.
Borrower to Perform Certain Covenants Under Indenture. The Borrower acknowledges that it has received an executed copy of the Bond Indenture, that it is familiar with its provisions and agrees to be bound to the fullest extent permitted by law to all provisions thereof directly or indirectly relating to it, that it will take all such actions as are required or contemplated of it under the Bond Indenture to preserve and protect the rights of the Trustee and of the Holders thereunder and that it will not take or effect any action which would cause a default thereunder or jeopardize such rights.
The Loan; Repayment
Repayment of Loan. The obligation to pay the Loan shall be a direct, general unconditional obligation of the Borrower. The Borrower shall pay or cause to be paid to the Trustee, as assignee of the Issuer, for deposit in the Bond Fund the following sums as repayments of the Loan at the following times:
(a) On or before the close of business on the Business Day preceding each Interest Payment Date for the 2017A Bonds, the amount which, together with other available funds in the Bond Fund established under the Bond Indenture, is necessary to provide for the payment of interest on the 2017A Bonds becoming due on such Interest Payment Date.
(b) On or before the close of business on the Business Day preceding each principal Payment Date or mandatory sinking fund redemption Payment Date for the 2017A Bonds, the amount which, together with other available funds in the Bond Fund established under the Bond Indenture, is necessary to provide for the payment of the principal amount of the 2017A Bonds becoming due on such principal Payment Date or mandatory sinking fund redemption Payment Date, as the case may be.
Master Note. In order to evidence the Loan and the obligation of the Borrower to repay the same, the Obligated Group shall execute and deliver to the Trustee, as assignee and pledgee of the Issuer, the Master Note. The Master Note shall be dated the date of the initial authentication of the 2017A Bonds and shall provide for payment of amounts, which among other things, correspond as to time and amount with payments due on the 2017A Bonds. The Master Note shall be an obligation secured under the Master Indenture. All payments received under the Master Note shall be credited against the loan payment obligations of the Borrower set forth in the Loan Agreement.
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Obligations Unconditional. All payment and other obligations of the Borrower under the Loan Agreement and of the Obligated Group under the Master Note are and shall be a general obligation of the Borrower or the Obligated Group, as applicable, to which their full faith and credit are pledged. The Borrower or the Obligated Group, as applicable, will pay without abatement, diminution or deduction (whether for taxes, loss of use, in whole or in part, of the Facilities or otherwise) all such amounts regardless of any cause or circumstance whatsoever, which may now exist or may arise, including without limitation, any defense, set-off, recoupment or counterclaim which the Borrower or any Member of the Obligated Group may have or assert against the Issuer, the Trustee, any Bondholder or any other person.
Prepayment. The Borrower shall be permitted, at any time and from time to time, upon 30 days’ written notice to the Issuer and the Trustee (or such shorter notice period as is acceptable to the Trustee), to prepay all or any part of the amounts payable under the Loan Agreement together with such other amounts as shall be sufficient to purchase or redeem all or a portion of the 2017A Bonds in accordance with the Bond Indenture. All sums prepaid in accordance with this paragraph shall be applied to the redemption or purchase of the 2017A Bonds in the manner and to the extent provided in the Bond Indenture. At the request of the Borrower or the Trustee, the Issuer shall take all steps required of it under the applicable provisions of the Bond Indenture or the 2017A Bonds to effect the redemption of all or a portion of the 2017A Bonds.
Defaults and Remedies
Loan Defaults. Each of the following shall constitute a “Loan Default” under the Loan Agreement:
(a) failure by the Borrower to pay any Loan Payment or other payment required to be paid under the Loan Agreement or under the Master Note on the date on which such Loan Payment is due and payable;
(b) failure by the Borrower to observe and perform any covenant, condition or agreement on their part to be observed or performed under the Loan Agreement other than the failure referred to in the Loan Agreement for a period of 30 days after written notice specifying such failure and requesting that it be remedied, is given to the Borrower by the Issuer or the Trustee, unless the Issuer and the Trustee shall agree in writing to an extension of such time prior to its expiration; provided, however, that if the failure stated in the notice is correctable but cannot be corrected within the applicable period, no Loan Default shall be deemed to have occurred or to exist if, and so long as, the Borrower shall commence such observance or performance within such 30-day period and shall diligently and continuously prosecute the same to completion (the Issuer and the Trustee will not unreasonably withhold their consent to an extension of such time if corrective action is instituted by the Borrower within the applicable period and diligently pursued until such failure is corrected);
(c) the filing by the Borrower of a petition seeking relief for itself under Title 11 of the United States Code, as now constituted or hereafter amended, or the filing by the Borrower of an answer consenting to, admitting the material allegations of or otherwise not controverting, or the failure of the Borrower to timely controvert, a petition filed against it seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or the filing of such petition or answer by the Borrower or the failure of the Borrower to timely controvert such a petition, with respect to relief under the provisions of any other now existing or future applicable bankruptcy, insolvency or other similar law of the United States of America or any state thereof;
(d) the entry of an order for relief, which is not stayed, against the Borrower under Title 11 of the United States Code, as now constituted or hereafter amended, or the entry of an order,
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judgment or decree by operation of law or by a court having jurisdiction, which is not stayed, adjudging any of the Borrower bankrupt or insolvent under, or ordering relief against the Borrower under, or approving as properly filed a petition seeking relief against the Borrower under, the provisions of any other now existing or future applicable bankruptcy or insolvency or other similar law of the United States of America or any state thereof, or appointing a receiver, liquidator, assignee, sequestrator, trustee or custodian of the Borrower or of all or any substantial portion of the property of any of the Borrower, or ordering the reorganization, winding up or liquidation of any of the affairs of the Borrower, or the expiration of 60 days after the filing of any involuntary petition against the Borrower seeking any of the relief described in this subheading without the petition being dismissed prior to that time;
(e) an “event of default” shall occur under the Bond Indenture, after giving effect to any notice and right to cure applicable thereto, and remains uncured pursuant to the terms of the Bond Indenture; or
(f) receipt of notice from the Master Trustee to the effect that an “event of default” under the Master Indenture shall have occurred, after giving effect to any notice and right to cure applicable thereto, and remains uncured pursuant to the terms of the Master Indenture.
Remedies. Whenever any Loan Default shall have occurred and be continuing, the Issuer and the Trustee may, in addition to any other remedies provided in the Loan Agreement or by law, without any further demand or notice, to take one or any combination of the following remedial steps:
(a) declare all amounts due under the Loan Agreement to be immediately due and payable, and upon notice to the Borrower the same shall become immediately due and payable without further notice or demand; or
(b) proceed to protect and to enforce the rights of the Trustee as a holder of the Master Note, on behalf of the Bondholders, in accordance with the Master Indenture; or
(c) take whatever other action at law or in equity may appear necessary or desirable to collect the amounts then due and thereafter to become due under the Loan Agreement or under the Master Note or to enforce any other rights of the Trustee or the Issuer under the Loan Agreement or as the owner of an Obligation (as defined in the Master Indenture) issued under the Master Indenture. Any amounts collected pursuant to action under this heading shall be paid into the Bond Fund and applied in accordance with the provisions of the Bond Indenture.
Unassigned Issuer Rights
Notwithstanding anything in the Loan Agreement to the contrary, upon the occurrence of an Event of Default thereunder that constitutes a breach of a provision of the Loan Agreement that is an Unassigned Issuer Right, the Issuer reserves the right to exercise (or refrain from exercising) remedies under the Loan Agreement with respect to such Event of Default; provided however that the Issuer shall give the Borrower at least ten days prior written notice of its intent to exercise such remedies. Any Event of Default occurring under the Loan Agreement that constitutes a breach of a provision thereof that is an Unassigned Issuer Right may not be waived without first obtaining the prior written consent of the Issuer.
Amendments, Changes and Modifications
The Loan Agreement may not be amended by the Issuer and the Borrower unless such amendment is consented to in writing by the Trustee and made in accordance with the Bond Indenture.
C-21 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX D
FORM OF SUBSTANTIALLY FINAL MASTER INDENTURE
[THIS PAGE INTENTIONALLY LEFT BLANK] SUMMARY OF MASTER INDENTURE
This Appendix D provides the substantially final form of the Master Indenture. The form of the Master Indenture is substantially final; however, certain typographical, corrective and other minor revisions may be made prior to execution in connection with the issuance of the Series 2017A Bonds.
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Table of Contents Page
ARTICLE I DEFINITIONS ...... 3
ARTICLE II THE OBLIGATIONS ...... 25
Section 201. Series, Designation and Amount of Obligations ...... 25 Section 202. Payment of Obligations ...... 25 Section 203. Execution ...... 26 MASTER TRUST INDENTURE Section 204. Authentication ...... 27 Section 205. Form of Obligations and Temporary Obligations ...... 27 Section 206. Mutilated, Lost, Stolen or Destroyed Obligations ...... 28 Between Section 207. Registration; Negotiability; Cancellation upon Surrender; Exchange of Obligations ...... 28 BAYHEALTH MEDICAL CENTER, INC., as the Initial Member of the Obligated Group Section 208. Security for Obligations ...... 29 Section 209. Issuance of Obligations in Forms Other than Notes ...... 29 and Section 210. Substitute Obligations Upon Withdrawal of an Obligated Group Member ...... 30 WILMINGTON TRUST, NATIONAL ASSOCIATION, as Master Trustee Section 211. Appointment of Group Representative ...... 30 Section 212. Substitution of Obligations ...... 30 Dated as of December 1, 2017 D-1 ARTICLE III PREPAYMENT OR REDEMPTION OF OBLIGATIONS ...... 32
Section 301. Redemption or Prepayment...... 32 Section 302. Election to Redeem or Prepay; Notice to Master Trustee ...... 33 Section 303. Deposit of Redemption or Prepayment Price ...... 33
Section 304. Master Notes Payable on Redemption or Prepayment Date ...... 33 Section 305. Obligations Redeemed or Prepaid in Part ...... 34
ARTICLE IV GENERAL COVENANTS ...... 34
Section 401. Payment of Required Payments ...... 34 Section 402. Performance of Covenants ...... 34 Section 403. Representations and Warranties by the Obligated Group ...... 34 Section 404. Entrance Into the Obligated Group ...... 35 Section 405. Cessation of Status as a Member of the Obligated Group ...... 37 Section 406. Covenants as to Corporate Existence, Maintenance of Properties, and Similar Matters; Right of Contest ...... 38 Section 407. Insurance ...... 41 Section 408. Right to Perform Members’ Covenants; Advances ...... 41 Section 409. Rates and Charges ...... 42 Section 410. Damage or Destruction ...... 43 Section 411. Condemnation ...... 44 Section 412. Other Provisions with Respect to Net Proceeds ...... 45 Section 413. Merger, Consolidation, Sale or Conveyance ...... 46 Section 414. Financial Statements ...... 47
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Section 415. Permitted Additional Indebtedness ...... 49 Section 701. Supplemental Master Indentures Not Requiring Consent of Section 416. Calculation of Debt Service and Debt Service Coverage ...... 51 Obligation Holders ...... 74 Section 417. Sale, Lease or Other Disposition of Property ...... 54 Section 702. Supplemental Master Indentures Requiring Consent of Obligation Section 418. Liens on Property ...... 55 Holders ...... 75 Section 419. List of Obligation Holders ...... 55 Section 703. Execution of Supplemental Master Indenture ...... 77 Section 420. Designation of Additional Paying Agents ...... 55 Section 421. Further Assurances; Additional Property...... 55 ARTICLE VIII SATISFACTION OF THE MASTER INDENTURE ...... 77 Section 422. Indemnity ...... 56 Section 423. Pledge of Gross Revenues; Filing of Financing Statements by the Section 801. Defeasance ...... 77 Obligated Group...... 57 Section 802. Provision for Payment of a Particular Series of Obligations or Section 424. Accounting Terms ...... 58 Portion Thereof ...... 79 Section 803. Satisfaction of Related Bonds ...... 80 ARTICLE V EVENTS OF DEFAULT AND REMEDIES ...... 58 ARTICLE IX MANNER OF EVIDENCING OWNERSHIP OF OBLIGATIONS ...... 80 Section 501. Extension of Payment; Penalty ...... 58 Section 502. Events of Default ...... 59 Section 901. Proof of Ownership ...... 80 Section 503. Acceleration ...... 60 Section 504. Remedies; Rights of Obligation Holders ...... 60 ARTICLE X MISCELLANEOUS ...... 81 Section 505. Direction of Proceedings by Holders ...... 61 Section 1001. Limitation of Rights ...... 81 Section 506. Appointment of Receivers ...... 62 Section 1002. Unclaimed Moneys ...... 81 Section 507. Application of Moneys ...... 62 Section 1003. Severability ...... 81 Section 508. Remedies Vested in Master Trustee ...... 63 Section 1004. Notices ...... 81
D-2 Section 509. Rights and Remedies of Obligation Holders ...... 64 Section 1005. Master Trustee as Paying Agent and Obligation Registrar ...... 82 Section 510. Termination of Proceedings ...... 64 Section 1006. Counterparts ...... 82 Section 511. Waiver of Events of Default ...... 64 Section 1007. Applicable Law ...... 82 Section 512. Members’ Rights of Possession and Use of Property ...... 65 Section 1008. Immunity of Officers, Employees and Members of Members ...... 82 Section 513. Related Bond Trustee or Bondholders Deemed To Be Obligation Section 1009. Holidays ...... 82 Holders ...... 65 Section 1010. UCC Financing Statements ...... 83 Section 514. Undertaking for Costs ...... 65
Section 515. No Recourse Against Others ...... 65 Section 516. Master Trustee Administrative Fund ...... 66 EXHIBIT A — List of Obligated Group Members EXHIBIT B — List of Exceptions ARTICLE VI THE MASTER TRUSTEE ...... 66 EXHIBIT C — Subordinated Indebtedness Section 601. Duties and Liabilities of Master Trustee...... 66 Section 602. Notice of Defaults ...... 67 Section 603. Certain Rights of Master Trustee...... 68 Section 604. Not Responsible For Recitals or Issuance of Obligations ...... 70 Section 605. Master Trustee May Own Obligations ...... 70 Section 606. Moneys to Be Held in Trust ...... 70 Section 607. Compensation and Expenses of Master Trustee...... 71 Section 608. Corporate Master Trustee Required; Eligibility ...... 71 Section 609. Resignation and Removal; Appointment of Successor...... 72 Section 610. Acceptance of Appointment by Successor...... 73 Section 611. Merger or Consolidation ...... 73
ARTICLE VII SUPPLEMENTAL MASTER INDENTURES ...... 74
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MASTER TRUST INDENTURE DIVISION II
THIS MASTER TRUST INDENTURE (this “Master Indenture”), dated as of December Any and all other property of every kind and nature from time to time hereafter, by 1, 2017, is by and among BAYHEALTH MEDICAL CENTER, INC. (the “Corporation”), a delivery or by writing of any kind, conveyed, pledged, assigned or transferred as and for Delaware non-profit corporation, (collectively with any future entity agreeing to the terms and additional security hereunder by any Member or by anyone on its behalf to the Master Trustee, conditions hereof in accordance with Section 404 of this Master Indenture and without any entity and the moneys and investments on deposit in the funds established pursuant hereto, including withdrawing in accordance with Section 405 of this Master Indenture, the “Obligated Group” or without limitation, funds of any Member held by the Master Trustee as security for the the “Members of the Obligated Group”), and WILMINGTON TRUST, NATIONAL Obligations; ASSOCIATION, a national banking association, having a corporate trust office in Wilmington, Delaware, not in its individual capacity but solely as master trustee (the “Master Trustee”). TO HAVE AND TO HOLD, all and singular, the properties, the rights and privileges hereby conveyed, assigned and pledged by the Members or intended so to be, unto the Master Trustee its WITNESSETH: successors and assigns forever, in trust, nevertheless, for the equal and pro rata benefit and security of all Obligations issued hereunder, without preference, priority or distinction as to WHEREAS, the Corporation is authorized and deems it necessary and desirable to enter participation in the lien, benefit and protection hereof of one Obligation over or from the others, into this Master Indenture for the purpose of providing for the issuance from time to time by the by reason of priority in the issue or negotiation or maturity thereof, or for any other reason Corporation or other Persons electing to become Members of the Obligated Group (as defined whatsoever, except as herein otherwise expressly provided, so that each and all of such herein) of Obligations (as defined herein) to finance or refinance the acquisition or betterment of Obligations shall have the same right, lien and privilege under this Master Indenture and shall be healthcare facilities or for other lawful and proper purposes; and equally secured hereby with the same effect as if the same had all been made, issued and negotiated simultaneously with the delivery hereof and were expressed to mature on one and the WHEREAS, all acts and things necessary to constitute this Master Indenture a valid same date; indenture and agreement according to its terms have been done and performed, the Corporation has duly authorized the execution and delivery of this Master Indenture, and the Corporation, in PROVIDED, HOWEVER, that at the written request of the Group Representative, the Master the exercise of the legal right and power invested in it, executes this Master Indenture and D-3 Trustee will execute and deliver, at the cost of the Obligated Group, such appropriate documents, proposes to make, execute, issue and deliver Obligations hereunder; and including without limitation, releases and termination statements releasing and/or terminating the Lien created hereunder on those Gross Revenues that are sold or factored to the extent expressly WHEREAS, the Master Trustee agrees to accept and administer this Master Indenture permitted by this Master Indenture; and provided further that Gross Revenues pledged hereunder upon the terms set forth herein; may be made subject to a Lien to the extent expressly permitted hereunder;
GRANTING CLAUSES PROVIDED, NEVERTHELESS, and these presents are upon the express condition, that if the Members or their successors or assigns shall well and truly pay or cause to be paid all Required That each Member of the Obligated Group in consideration of the premises and of the Payments according to the provisions set forth in the Obligations and each of them shall pay or acceptance of the Obligations and of other good and lawful consideration, the receipt of which is shall provide for the payment or redemption of such Obligations by depositing or causing to be hereby acknowledged, and to secure the payment of Required Payments and the performance and deposited with the Master Trustee the entire amount of funds or securities requisite for payment observance of all of the covenants and conditions herein or therein contained, has executed and or redemption thereof when and as authorized by the provisions hereof, and shall also pay or delivered this Master Indenture and has conveyed, mortgaged, granted, assigned, transferred, cause to be paid all other sums payable hereunder by the Members, then these presents and the pledged, set over and confirmed and granted a security interest in, and by these presents does estate and rights hereby granted shall cease, determine and become void, and thereupon the hereby convey, mortgage, grant, assign, transfer, pledge, set over and confirm and grant a Master Trustee, on payment of its lawful charges and disbursements then unpaid, on demand of security interest in, unto the Master Trustee, its successor or successors and its or their assigns the Members and upon the payment of the cost and expenses thereof, shall duly execute, forever, with power of sale, all and singular the property, real and personal, hereinafter described acknowledge and deliver to the Members such instruments of satisfaction or release as may be (said property being herein sometimes referred to as the “Trust Estate’’’), to wit: necessary or proper to discharge this Master Indenture of record, and if necessary shall grant, reassign and deliver to the Members, their successors or assigns, all and singular the property, DIVISION I rights, privileges and interests by them hereby granted, conveyed and assigned, and all All Gross Revenues (defined herein); substitutes therefor, or any part thereof, not previously disposed of or released as herein provided; otherwise this Master Indenture shall be and remain in full force.
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ARTICLE I agreements or other affiliation relationships between a Member or Members of the Obligated DEFINITIONS Group and a hospital or health care system, university, college, medical school or other health care academic institution, and/or any of their respective Affiliates, which is not a Member of the In addition to the words and terms elsewhere defined in this Master Indenture, the Obligated Group. following words and terms as used in this Master Indenture shall have the following meanings unless the context or use indicates another or different meaning or intent: “Balloon Indebtedness” means Put Indebtedness or Long-Term Indebtedness, 25% or more of the original principal of which matures during any consecutive twelve-month period, if “Academic Support Payments” means payments made by any Member of the Obligated such maturing principal amount is not required to be amortized below such percentage by Group to support the operations of a university, college, medical school or other educational mandatory redemption or prepayment prior to such twelve-month period. institution/or any Affiliate thereof, with which such Member maintains a professional or educational-relationship, including, without limitation, through an Affiliation, whether or not an “Board Resolution” of any specified Person means a copy of a resolution certified by the Affiliate of any Member or a Member of the Obligated Group. 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 “Additional Indebtedness” means Indebtedness incurred by any Member subsequent to date of such certification and delivered to the Master Trustee. the issuance of the Series 2017 Obligations. “Bondholder" or "holder" or “owner of the Bonds” means the registered owner of any “Additional Obligation” means any Obligation issued after the issuance of the Series Related Bond. 2017 Obligations and authorized to be issued by a Member pursuant to this Master Indenture which has been authenticated as an Obligation by the Master Trustee pursuant to Section 204 “Book Value” when used with respect to Property of the Obligated Group, means the hereof. value of such Property, net of accumulated depreciation and amortization, as reflected in the Financial Statements of the Obligated Group, provided that such aggregate shall be calculated in “Affiliate” means (i) a corporation, partnership, joint venture, trust, or other entity (the such a manner that no portion of the value of any Property of any Member is included more than “secondary entity”) in which another entity (the “primary entity”) holds, directly or indirectly, once. D-4 (A) shares of stock or other equity interest or interest convertible into equity or (B) any other type of ownership or membership interest that (x) exceeds fifty percent (50%) of the total equity “Business Day” means a day which is not (a) a Saturday, Sunday or legal holiday on ownership or membership of the secondary entity or (y) confers upon the primary entity, directly which banking institutions in the State of Delaware or the State of New York are authorized by or indirectly, the power to elect more than fifty percent (50%) of the group of persons having law to close or (b) a day on which the New York Stock Exchange is closed or the payment authority to manage the operations of the secondary entity, and also means (ii) any secondary system of the Federal Reserve System is not operational. entity organized as a corporation without stock or membership which has Governing Instruments that give the primary entity, directly or indirectly, such power. An Affiliate is generally defined “Capitalized Interest” means amounts irrevocably deposited in escrow to pay interest on hereinafter with respect to its primary entity. The definition of Affiliate hereunder also includes Funded Indebtedness or Related Bonds and interest earned on amounts irrevocably deposited in any member of an affiliated group with the primary entity which files or is entitled to file escrow to the extent such interest earned is required to be applied to pay interest on Funded consolidated federal returns with respect to Taxes with the primary entity, or prepares or is Indebtedness or Related Bonds. entitled to prepare consolidated financial statements with the primary entity under generally accepted accounting principles. For purposes of this definition, “Governing Instrument” means “Capitalized Lease” means any lease of real or personal property which, in accordance the document or documents creating or governing an entity and includes, as applicable, articles with accounting principles generally accepted in the United States, is required to be capitalized or certificates of incorporation, bylaws (other than bylaws governing the operation of medical on the balance sheet of the lessee. staffs), partnership agreements, limited liability company agreements or trust agreements. “Capitalized Rentals” means, as of the date of determination, the amount at which the “Affiliate Controlling Obligations” means Affiliate Obligations equal to or in excess of aggregate Net Rentals due and to become due under a Capitalized Lease under which a Person is the principal amount or percentage of Obligations required or permitted to take or direct any a lessee would be reflected as a liability on a balance sheet of such Person. action hereunder. “Code” means the Internal Revenue Code of 1986, as amended from time to time. Each “Affiliate Obligations” means Obligations held or owned by or for the benefit of any reference to a section of the Code herein shall be deemed to include the United States Treasury Affiliate of any Obligated Group Member. Regulations, including temporary and proposed regulations, relating to such section which are applicable to a series of Related Bonds or the use of the proceeds thereof. “Affiliation” means an affiliation, whether through merger, consolidation, joint venture, membership, board seat appointment rights or other control arrangements, contractual
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“Commitment Indebtedness” means the obligation of any Member to repay amounts devises originally received in a form other than cash or marketable securities by any Person disbursed pursuant to a commitment from a financial institution, insurer, surety or similar entity which are converted in such fiscal year to cash or marketable securities. to pay, refinance or purchase when due, when tendered or when required to be purchased or tendered, or to advance funds for any such purpose (a) other Indebtedness or other obligations of “Counsel” means any attorney duly admitted to practice law before the highest court of such Member, or (b) Indebtedness or other obligations of a Person who is not a Member, which any state and, without limitation, may include any such attorney who is an employee of any Indebtedness is guaranteed by a Guaranty of such Member or secured by or payable from Related Issuer, any Member, the Master Trustee or any Related Bond Trustee. amounts paid on Indebtedness of such Member, in either case which Indebtedness or Guaranty of such Member was incurred in accordance with the provisions of Section 415 hereof, and the “Cross-over Date” means, with respect to Cross-over Refunding Indebtedness, the date obligation of any Member to pay interest payable on amounts disbursed for such purposes, plus on which the principal portion of the Cross-over Refunded Indebtedness is paid or redeemed, or any fees, costs or expenses payable to such financial institution, insurer, surety or similar entity on which it is anticipated that such principal portion will be paid or redeemed, from the proceeds for, under or in connection with such commitment, in the event of disbursement pursuant to such of such Cross-over Refunding Indebtedness. commitment or in connection with enforcement thereof, including without limitation any penalties payable in the event of such enforcement and any indemnification or contribution “Cross-over Refunded Indebtedness” means Indebtedness of a Person refunded by obligation related thereto. Crossover Refunding Indebtedness.
“Completion Funded Indebtedness” means any Funded Indebtedness for borrowed “Cross-over Refunding Indebtedness” means Indebtedness of a Person issued for the money: (a) incurred for the purposes of financing the completion of the acquisition, construction, purpose of refunding other Indebtedness of such Person if the proceeds of such Cross-over remodeling, renovation or equipping of Facilities with respect to which Funded Indebtedness for Refunding Indebtedness are irrevocably deposited in escrow to secure the payment on the borrowed money has been incurred in accordance with the provisions hereof; and (b) with a applicable Cross-over Date of the Cross-over Refunded Indebtedness and earnings on such principal amount not in excess of the amount required to provide a completed and equipped escrow deposit are required to be applied to pay interest or principal on either or both of such Facility of substantially the same type and scope contemplated at the time such prior Funded Cross-over Refunding Indebtedness or such Cross-over Refunded Indebtedness until the Indebtedness was originally incurred, to provide for Capitalized Interest during the period of Crossover Date.
D-5 construction, to provide any reserve fund relating to such Completion Funded Indebtedness and “Current Value” means (i) with respect to Property, Plant and Equipment: (a) a bona fide to pay the costs and expenses of issuing such Completion Funded Indebtedness. offer for the purchase of such property made on an arm’s length basis within one year of the date “Consent” “Order” and “Request” of any specified Person or Persons means, of determination as established by an Officer’s Certificate (a “Bona Fide Offer”) or (b) to the respectively, a written consent, order or request signed in the name of such Person or Persons extent such a Bona Fide Offer does not exist, or is not reasonably acceptable to the Group and delivered to the Master Trustee by the chairman of the Governing Body, the president, an Representative as the measure of current value, the aggregate fair market value of such Property, executive or senior vice president, the chief financial officer or any other Person or Persons Plant and Equipment as reflected in the most recent written report of an appraiser selected by the designated by any of such Persons to execute any such instrument as evidenced by an Officer’s Group Representative and who is not objected to by the Master Trustee and, in the case of real Certificate. Any Consent, Order or Request of the Members of the Obligated Group shall be property, who is a member of the American Institute of Real Estate Appraisers (MAI), delivered signed in the name of the Group Representative. to the Master Trustee (which report shall be dated not more than three years prior to the date as of which Current Value is being determined), and (ii) with respect to any other Property, the fair “Consultant” means a professional consulting, financial advisory, accounting, investment market value of such Property, which fair market value shall be evidenced in a manner not banking or commercial banking firm selected by the Group Representative and not objected to objected to by the Master Trustee. by the Master Trustee, having the skill and experience necessary to render the particular report required and having a favorable reputation for such skill and experience, which firm does not “Debt Service Requirements” means, with respect to the period of time for which control any Obligated Group Member and is not controlled by or under common control with calculated, the aggregate of the payments required to be made during such period in respect of any Obligated Group Member. principal (whether at maturity, as a result of mandatory sinking fund redemption, mandatory prepayment or otherwise) and interest on outstanding Funded Indebtedness of each Person or a “Consultant’s Report” means a written report of a Consultant, which report, including group of Persons with respect to which calculated; provided that: (a) the amount of such without limitation the scope, form and other aspects thereof, is not objected to by the Master payments for a future period shall be calculated in accordance with the assumptions contained in Trustee. Sections 415 and 416 hereof; (b) interest shall be excluded from the determination of the Debt Service Requirements to the extent that Capitalized Interest is available to pay such interest; (c) “Contributions” means the aggregate amount of all contributions, grants, gifts, donations, principal of and interest on Funded Indebtedness shall be excluded from the determination of bequests and devises actually received in cash or marketable securities by any Person in the Debt Service Requirements to the extent that amounts are on deposit in an irrevocable escrow applicable fiscal year of such Person and any such contributions, grants, gifts, bequests and and such amounts (including, where appropriate, the earnings or other increment to accrue
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thereon) are required to be applied to pay such principal and interest, and such amounts so made and secured by irrevocable deposit of money or United States Obligations with a bank or required to be applied are sufficient to pay such principal and interest; (d) reserved; (e) principal trust company acting as trustee or escrow agent for the holders of such obligations, the maturing and interest of Funded Indebtedness during a particular past period shall be excluded if the principal of and interest on which escrowed United States Obligations, when due and payable obligation to pay such principal and interest was created by a Guaranty and such Guaranty did without reinvestment, will provide money sufficient to pay the debt service on such obligations not require the Person acting as guarantor to pay such principal or interest during such period when due, or (d) after 30 days’ prior written notice to each Rating Agency then maintaining a because conditions precedent such as, but not limited to, a demand for payment from such rating on any Obligations or Related Bonds, shares or certificates in any short-term investment Person or default by the Primary Obligor were not met, provided, however, in calculating the fund which is maintained by the Master Trustee or a Related Bond Trustee. Maximum Annual Debt Service Requirement on Indebtedness guaranteed by a Member, such calculation shall take into account an amount equal to 20% of such Maximum Annual Debt “Excluded Property” means (a) any assets of “employee pension benefit plans” as defined Service Requirement on the Indebtedness which is guaranteed; provided, however, if the in the Employee Retirement Income Security Act of 1974, as amended, (b) any assets of a self- guarantor has made a payment on its guaranty with respect to such Indebtedness in the prior 12 insurance trust which prohibits any application of such assets for purposes which are not related months it shall be an amount equal to 100% of such Maximum Annual Debt Service to claims as defined in the governing trust document, and (c) all endowment funds and property Requirement on the Indebtedness which is guaranteed, (f) in calculating Debt Service derived from research contracts and Contributions heretofore or hereafter made to or with any Requirements for any completed period, the principal amount of any Funded Indebtedness Member which are specifically restricted by the donor, testator or grantor to a particular purpose, included in such calculation which is paid during such period shall be excluded to the extent such and the income and gains derived therefrom, including Restricted Contributions. principal amount is paid from the proceeds of other Indebtedness; (g) in calculating Debt Service Requirements for the purposes of applying the provisions of Section 409, the principal amount of “Expenses” means, for any period of time for which calculated, the total of all operating any Funded Indebtedness included in such calculation which is paid during the year with respect and non-operating expenses or losses before depreciation, amortization and interest expense on to which historical debt service coverage is being calculated shall be excluded to the extent such Funded Indebtedness (adjusted for Interest Rate Agreement Payments and Interest Rate principal amount is paid from the proceeds of other Indebtedness incurred in compliance with the Agreement Receipts pursuant to Section 416) incurred during such period by the Member or provisions of this Master Indenture or from amounts deposited to provide for such payment group of Members for which such calculation is made, determined in accordance with generally pursuant to an amortization schedule established and maintained in accordance with the accepted accounting principles, but not taking into account (a) amounts paid as Interest Rate D-6 provisions of Section 416, which amounts were deposited in Fiscal Years prior to the Fiscal Year Agreement Extraordinary Payments or similar payments, (b) any loss resulting from either the in which such principal was paid; and (h) principal and interest payments on Funded early extinguishment of Indebtedness or refinancing of Indebtedness, (c) any loss resulting from Indebtedness due on the first day or first Business Day of a month shall be deemed payable the sale, exchange or other disposition of capital assets not made in the ordinary course of during the preceding month if they are required to be fully deposited with a trustee for such business, (d) any loss resulting from pension terminations, settlements or curtailments, (e) any Indebtedness during such preceding month. unusual charges for employee severance, (f) any loss resulting from any discontinued operations, (g) extraordinary non-cash items, (h) adjustments to the value of assets or liabilities resulting “Defaulted Interest” means interest on any Related Bond of a particular series which is from changes in applicable accounting principles, (i) unrealized losses on investments, including payable but not duly paid on the date due. “other than temporary” declines in Book Value, (j) asset impairment charges, (k) unrealized losses of any kind, (l) any expenses resulting from a forgiveness of or the establishment of “Event of Default” means any of the events listed in Section 502 hereof. reserves against Indebtedness of an Affiliate that does not constitute an extraordinary expense, (m) unrealized losses resulting from changes in valuation of any Interest Rate Agreement and (n) “Escrow Obligations” means, (i) with respect to any Obligation which secures a series of any nonrecurring item which does not involve the receipt, expenditure or transfer of cash or other Related Bonds, the obligations permitted to be used to refund or advance refund such series of assets. No amount shall be included in or excluded from Expenses more than once. Related Bonds under the Related Bond Indenture, or (ii) in all other cases (a) United States Government Obligations, (b) certificates of deposit issued by a bank or trust company which are “Facilities” means all land, leasehold interests and buildings and all fixtures and (1) fully insured by the Federal Deposit Insurance Corporation or similar corporation chartered equipment (as defined in the Uniform Commercial Code or equivalent statute in effect in the by the United States or (2) secured by a pledge of any United States Government Obligations state where such fixtures or equipment are located) of a Person. Facilities shall not include the having an aggregate market value, exclusive of accrued interest, equal at least to the principal land, leasehold interests, buildings, fixtures or equipment constituting Excluded Property. amount of the certificates so secured, which security is held in a custody account by a custodian satisfactory to the Master Trustee, (c) (1) evidences of a direct ownership interest in future “Financial Statements of the Obligated Group” means the audited financial statements interest or principal payments on obligations of the type described in (a) above, which including the Obligated Group most recently delivered pursuant to the requirements of Section obligations are held in a custody account by a custodian not objected to by the Master Trustee 414(A) hereof. pursuant to the terms of a custody agreement and (2) obligations issued by any state of the United States or any political subdivision, public instrumentality or public authority of any state as to which provision for the payment of principal of and interest on such obligations has been
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“Fiscal Year” means any twelve-month period beginning on July 1 of any calendar year (but not limited to) gifts, grants, bequests, donations and Contributions, and all rights to receive and ending on June 30 of the following calendar year or such other consecutive twelve-month the same including, without limitation, patient service revenues (net of contractual allowances period selected by the Group Representative as the fiscal year for the Members. and discounts), other operating revenues and nonoperating revenues, whether in the form of accounts, accounts receivable, pledges receivable, contract rights, chattel paper, instruments or “Fitch” means Fitch Ratings, its successors and assigns, and, if such corporation shall be other rights, and the proceeds thereof, and any insurance thereon, whether now existing or dissolved or liquidated or shall no longer perform the functions of a securities rating agency, hereafter coming into existence and whether now owned or held or hereafter acquired by any “Fitch” shall be deemed to refer to any other nationally recognized securities rating agency Member of the Obligated Group; provided, however, that Restricted Contributions heretofore or designated by the Group Representative by written notice to the Master Trustee. hereafter made (and the income derived therefrom, to the extent required by the related designation), and not subsequently designated as unrestricted, shall be excluded from Gross “Funded Indebtedness” means, with respect to any Person, (a) all Indebtedness of such Revenues. Person for money borrowed or credit extended which is not Short-Term Indebtedness; (b) all Short-Term Indebtedness of such Person incurred pursuant to the provisions of Section 415(E) “Group Representative” means, initially, the Corporation, and thereafter any other hereof; (c) all Indebtedness of such Person incurred or assumed in connection with the Member as may be designated from time to time pursuant to written notice to the Master Trustee acquisition or construction of Property which is not Short-Term; (d) all Indebtedness whether or executed by the President, Chief Executive Officer or Senior Vice President of the Group not incurred or assumed by such Person which is not Short-Term secured by any Lien on Representative or the Chairman or Vice Chairman of the Governing Body of the current Group Property of such Person; (e) all Guaranties by such Person of Indebtedness of another Person Representative or its legal successor in interest or, if such current Group Representative or its which would be considered Funded Indebtedness of such Person under this definition; and (f) all successor is no longer a Member of the Obligated Group, of each Member of the Obligated Capitalized Rentals under Capitalized Leases entered into by such Person; provided, however, Group. that Funded Indebtedness that could be described by more than one of the foregoing categories shall not in any case be considered more than once for the purpose of any calculation made “Guaranty” means all obligations of a Person guaranteeing, or in effect guaranteeing, any pursuant to this Master Indenture; and provided further that Funded Indebtedness shall not Indebtedness, dividend or other obligation of any Primary Obligor in any manner, whether include (i) Indebtedness of one Obligated Group Member to another Obligated Group Member, directly or indirectly, including but not limited to obligations incurred through an agreement,
D-7 (ii) the joint and several liability of any Obligated Group Member on Funded Indebtedness contingent or otherwise, by such Person: (l) to purchase such Indebtedness or obligation or any issued by another Obligated Group Member, (iii) Interest Rate Agreements, (iv) any obligation Property constituting security therefor; (2) to advance or supply funds: (i) for the purchase or to repay moneys deposited by patients or others with an Obligated Group Member as security for payment of such Indebtedness or obligation, or (ii) to maintain working capital or other balance or as prepayment of the cost of patient care or any rights of residents of life care, elderly housing sheet condition; (3) to purchase securities or other Property or services primarily for the purpose or similar facilities to endowment or similar funds deposited by or on behalf of such residents, of assuring the owner of such Indebtedness or obligation of the ability of the Primary Obligor to (v) any guaranty by any Obligated Group Member of Indebtedness of any other Obligated Group make payment of the Indebtedness or obligation; or (4) otherwise to assure the owner of such Member or (vi) Academic Support Payments or Intercompany Services Payments. In addition, Indebtedness or obligation against loss in respect thereof. reimbursement or other payment obligations arising under a letter of credit or other credit enhancement or liquidity arrangements or facilities securing or supporting Funded Indebtedness “Historical Debt Service Coverage Ratio” means, for any period of time, the ratio shall not constitute Funded Indebtedness in addition to or separate from the enhanced or consisting of (i) a numerator equal to the amount determined by dividing Income Available for supported Funded Indebtedness. Debt Service for that period by the Debt Service Requirements for such period and (ii) a denominator of one; provided, however, that in calculating the Debt Service Requirements for “Governing Body” means, with respect to a Member, the board of directors, board of any completed period, the principal amount of any Indebtedness included in such calculation trustees or similar group in which the right to exercise the powers of corporate directors or which is paid during such period shall be excluded to the extent such principal amount is paid trustees is vested. from the proceeds of other Indebtedness incurred in accordance with the provisions of this Master Indenture or from amounts deposited to provide for such payment pursuant to an “Government Obligations” means securities which consist of (a) United States amortization schedule established in accordance with the provisions of Section 416, which Government Obligations or (b) evidences of a direct ownership interest in future interest or amounts were deposited in Fiscal Years prior to the Fiscal Year in which such principal became principal payments on obligations of the type described in subparagraph (a) above, which due. obligations are held in a custody account by a custodian not objected to by the Master Trustee pursuant to the terms of a custody agreement. “Historical Pro Forma Debt Service Coverage Ratio” means, for any period of time, the ratio consisting of (i) a numerator equal to the amount determined by dividing Income Available “Gross Revenues” means all receipts, revenues, income and other money received by any for Debt Service for that period by the Maximum Annual Debt Service Requirement for the Member of the Obligated Group, or held under this Master Indenture for the benefit of any Funded Indebtedness then outstanding after giving effect to the specific transaction being Member of the Obligated Group, from any source and investment earnings thereon, including measured by the application of any related Transaction Test and (ii) a denominator of one. In the
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case of a Transaction Test being calculated for purposes of qualifying additional Funded “Independent Counsel” means an attorney duly admitted to practice law before the Indebtedness, Funded Indebtedness then outstanding shall be determined by excluding any highest court of any state, which attorney is not objected to by the Master Trustee and which Funded Indebtedness being refunded with the Funded Indebtedness then proposed to be issued attorney is not an employee of any Related Issuer, any Member, the Master Trustee or any and including the Funded Indebtedness then proposed to be issued . Related Bond Trustee. Such attorney may include independent legal counsel representing any Related Issuer, any Member, the Master Trustee or any Related Bond Trustee. “Holder” or “holder” means a Bondholder or an Obligation Holder, as the case may be, unless the context requires otherwise. “Insurance Consultant” means a person or firm who, in the case of an individual, is not an employee or officer of any Member or any Related Issuer and which, in the case of a firm, shall “Income Available for Debt Service” means, for any period, the excess of Revenues over not have a partner, member, director, officer or employee who is a member, director, officer or Expenses of the Person or group of Persons involved. employee of any Member or any Related Issuer, appointed by the Group Representative and not objected to by the Master Trustee, including an actuary with experience in malpractice liability “Indebtedness” means, for any Person, (a) all Guaranties by such Person and (b) all and self-insurance, qualified to survey risks and to recommend insurance coverage for hospital or obligations for the payment of money incurred or assumed by such Person and required to be health care facilities and services of the type involved, and having a favorable reputation for skill recorded as a liability on the audited financial statements of such Person in accordance with and experience in such surveys and such recommendations, and which may include a broker or accounting principles generally accepted in the United States (i) due and payable in all events or agent with whom any Member transacts business. (ii) if incurred or assumed primarily to assure the repayment of money borrowed or credit extended, due and payable upon the occurrence of a condition precedent or upon the “Intercompany Services Payments” means, upon consummation of an Affiliation, those performance of work, possession of Property as lessee, rendering of services by others or contractual or other payment or support obligations of a Member of the Obligated Group to a otherwise, provided, however, that the obligations described in clause (b)(i) shall not include university, college, hospital or health care system, or any of their Affiliates, pursuant to the terms obligations under leases or other occupancy agreements or arrangements (including operating of an Affiliation, including, without limitation, payments and obligations in regard to leases or equivalent) or payments for similar occupancy rights under any other agreement or intercompany services rendered, shared lease or occupancy agreement payments, facility arrangement not required to be recorded or treated as a Capitalized Lease under accounting improvement contribution or cost-sharing payments, medical services facilities support,
D-8 principles generally accepted in the United States (but subject to the proviso set forth in Section physician services, faculty allocation payments, maintenance costs, insurance costs, management 424), and shall include, without limitation, Non-Recourse Indebtedness but only to the extent of or other operating expense payments and other payments, other than payments with respect to any payments required to be made by a Member; provided that Indebtedness shall not include (a) intercompany loans constituting Indebtedness. indebtedness of one Member to another Member, any Guaranty by any Member of Indebtedness of any other Member or the joint and several liability of any Member on Indebtedness issued by “Interest Rate Agreement” means an interest rate exchange, hedge or similar agreement, another Member, (b) any obligation of a Member under any Interest Rate Agreement, or any entered into in order to hedge or manage the interest payable on all or a portion of any obligation to reimburse a bond insurer, financial institution or other Person which has guaranteed Indebtedness whether then existing or to be incurred, which agreement may include, without or otherwise assured the performance of a Member’s obligations under an Interest Rate limitation, an interest rate, asset or basis swap, a forward or futures contract or an option (e.g. a Agreement, (c) any obligation to repay moneys deposited by patients or others with a Member as call, put, cap, floor or collar) and which agreement does not constitute an obligation to repay security for or as prepayment of the cost of patient care or any rights of residents of life care, money borrowed, credit extended or the equivalent thereof. Obligations of a Member under an elderly housing or similar facilities to endowment or similar funds deposited by or on behalf of Interest Rate Agreement shall not constitute Indebtedness hereunder. such residents, (d) the amount of securities subject to a securities lending program (to the extent included in “Assets” on the balance sheet of the Obligated Group) or repurchase obligations of “Interest Rate Agreement Extraordinary Payments” means any payments required to be any Member under an accounts receivable factoring or other financing program or arrangement paid to a counterparty by a Member of the Obligated Group or any Affiliate pursuant to an (to the extent not required to be included in “Liabilities” on the balance sheet of the Obligated Interest Rate Agreement in connection with the termination thereof, tax gross-up payments, Group), (e) the amount of pension liabilities reflected as “Liabilities” on the balance sheet of the expenses, default interest and any other payments or indemnification obligations to be paid to a Obligated Group and (f) any particular Indebtedness if, upon or prior to the maturity thereof, counterparty under an Interest Rate Agreement, which payments are not Interest Rate Agreement there shall have been deposited with the proper depository in trust the necessary funds (or Payments. evidences of such Indebtedness or investments that will provide sufficient funds, if permitted by the instrument creating such Indebtedness) for the payment, redemption or satisfaction of such “Interest Rate Agreement Payments” means the regularly scheduled payments required to Indebtedness, and thereafter such funds, evidences of Indebtedness and investments so deposited be paid to a counterparty by a Member of the Obligated Group or any Affiliate pursuant to an shall not be included in any computation of the assets of such Person, and the income from any Interest Rate Agreement. such deposits shall not be included in the calculation of Revenues or Income Available for Debt Service. No amount shall be included as Indebtedness more than once. “Interest Rate Agreement Extraordinary Receipts” means any payments required to be paid to a Member of the Obligated Group or any Affiliate by a counterparty pursuant to an
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Interest Rate Agreement in connection with the termination thereof, tax gross-up payments, designated as rents or additional rents) on account of maintenance, repairs, insurance, taxes and expenses, default interest and any other payments or indemnification obligations, which similar charges. Net Rentals for any future period under any so-called “percentage lease” shall payments are not Interest Rate Agreement Receipts. be computed on the basis of the amount reasonably estimated to be payable thereunder for such period, but in any event not less than the amount paid or payable thereunder during the “Interest Rate Agreement Receipts” means the regularly scheduled payments required to immediately preceding period of the same duration as such future period; provided that the be paid to a Member of the Obligated Group or any Affiliate by a counterparty pursuant to an amount estimated to be payable under any such percentage lease shall in all cases recognize any Interest Rate Agreement. change in the applicable percentage called for by the terms of such lease.
“Lien” means any mortgage, pledge or lease of, security interest in or lien, charge, “Non-Recourse Indebtedness” means any Indebtedness the liability for which is restriction or encumbrance on any Property of the Person involved in favor of, or which secures effectively limited to the Property, Plant and Equipment financed with the proceeds of such any Indebtedness to, any Person other than any Member. Indebtedness and the income therefrom, with no recourse, directly or indirectly, to any other Property of any Member. “Long-Term Indebtedness” means Indebtedness (which also may constitute Balloon Indebtedness or Put Indebtedness) having an original stated maturity or term greater than one “Obligated Group” means the corporations listed on Exhibit A and any other Person year, or renewable at the sole option of the debtor for a period greater than one year, from the which has fulfilled the requirements for entry into the Obligated Group set forth in Section 404 date of original issuance. hereof and which has not ceased such status pursuant to Section 405 hereof.
“Master Indenture” means this Master Trust Indenture, from the Members to the Master “Obligations” means the Series 2017 Obligations and all Additional Obligations issued Trustee, as it may from time to time be amended or supplemented in accordance with the terms by an Obligated Group Member pursuant to this Master Indenture which has been authenticated hereof. by the Master Trustee pursuant to Section 204 hereof and which may be in any form set forth in a Supplemental Master Indenture, including, but not limited to, Obligations to (i) evidence “Master Trustee” means Wilmington Trust, National Association, not in its individual Indebtedness, (ii) evidence any payment obligation under an Interest Rate Agreement, (iii) capacity but solely as Master Trustee under the Master Indenture, or any successor trustee under
D-9 evidence payment obligations arising under bonds, notes, debentures, loan agreements, the Master Indenture. reimbursement agreements, guaranties or leases, (iv) evidence a reimbursement obligation arising as a result of the issuance of a surety bond, letter of credit, standby bond purchase “Maximum Annual Debt Service Requirement” means the largest total Debt Service agreement, liquidity agreement or other instrument guaranteeing or in effect guaranteeing (A) Requirements for the current or any succeeding Fiscal Year. any payments under any Indebtedness or Interest Rate Agreement, or (B) the payment of principal, purchase price or interest with respect to any Obligations or any issue of Related “Member” or “Member of the Obligated Group” means any Person who is listed on Bonds. An Obligation may secure payment obligations that do not constitute Indebtedness. Exhibit A hereto after designation as a Member of the Obligated Group pursuant to the terms of this Master Indenture, and as of the date hereof consists of the Corporation until any Member “Obligation holder” or "holder" or “owner of the Obligation” means the registered owner ceases to be a Member pursuant to Section 405 hereof. of any fully registered or book entry Obligation unless alternative provision is made in the Supplemental Master Indenture pursuant to which such Obligation is issued for establishing “Moody’s” means Moody’s Investors Service, Inc., and its successors and assigns and, if ownership of such Obligation, in which case such alternative provision shall control. such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities agency, any other nationally recognized securities rating agency designated by the “Obligation Registrar” means the Master Trustee. Group Representative by written notice to the Master Trustee. “Officer’s Certificate” means a certificate signed, in the case of a certificate delivered by “Net Proceeds” means, when used with respect to any insurance or condemnation award a corporation, by the president, any vice president, chief executive officer, chief financial officer or sale consummated under threat of condemnation, the gross proceeds from the insurance or or any other officer authorized to sign by resolution of the Governing Body of such corporation condemnation award or sale with respect to which that term is used less all expenses (including or, in the case of a certificate delivered by any other Person, the chief executive or chief financial attorney’s fees, adjuster’s fees and any expenses of the Master Trustee) incurred in the collection officer of such other Person, in either case whose authority to execute such Certificate shall be of such gross proceeds. evidenced to the satisfaction of the Master Trustee. Each “Officer’s Certificate” (i) shall state that the terms thereof are in compliance with the requirements of the section or subsection “Net Rentals” means all fixed rents (including as such all payments which the lessee is pursuant to which such Officer’s Certificate is delivered, or shall state in reasonable detail the obligated to make to the lessor on termination of the lease or surrender of the Property other than nature of any non-compliance and the steps being taken to remedy such non-compliance; (ii) upon termination of the lease for a default thereunder) payable under a lease or sublease of real shall state it is being delivered together with any opinions, schedules, statements or other or personal Property excluding any amounts required to be paid by the lessee (whether or not
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documents required in connection therewith; and (iii) shall be in scope, form, substance and (e) For the purposes of all directions, covenants, approvals, waivers and other aspects thereof, not objected to by the Master Trustee. notices required to be obtained or given under this Master Indenture (other than the rights of holders of Obligations to give or withhold the consents (A) set forth in clauses (a), (b) “Opinion of Bond Counsel” means an opinion of nationally recognized municipal bond and (c) of Section 702 hereof or any other provision requiring specific consent or counsel selected by the Group Representative, which counsel and opinion, including without approval holders of all affected Obligations as a condition to any act or action by Holders limitation the scope, form, substance and other aspects thereof, are not objected to by the Master of Obligations or the Master Trustee, or (B) under Section 702 in instances where Trustee. Obligations held by a Member and/or Affiliate Controlling Obligations comprise the sole affected series of Obligations as to which action is proposed to be taken or consent is “Opinion of Independent Counsel” or “Opinion of Counsel” means a written opinion of being sought), (i) Obligations held or owned by a Member and (ii) Affiliate Controlling Independent Counsel, or Counsel, as applicable, which opinion, including without limitation, the Obligations. Notwithstanding the foregoing, any Obligation securing Related Bonds scope, form, substance and other aspects thereof, are not objected to by the Master Trustee. shall be deemed outstanding if such Related Bonds are Outstanding and shall no longer be deemed outstanding if the Related Bonds are not Outstanding. “Outstanding” means, in the case of Indebtedness of a Person other than Related Bonds or Obligations, all such Indebtedness of such Person which has been issued except any such “Outstanding Related Bonds” or “Related Bonds outstanding” means all Related Bonds portion thereof canceled after purchase on the open market or surrendered for cancellation or which have been duly authenticated and delivered by the Related Bond Trustee under the Related because of payment at or redemption prior to maturity, any such Indebtedness in lieu of which Bond Indenture and are deemed outstanding under the terms of such Related Bond Indenture or, other Indebtedness has been duly issued and any such Indebtedness which is no longer deemed if such Related Bond Indenture does not specify when Related Bonds are deemed outstanding outstanding under its terms and with respect to which such Person is no longer liable under the thereunder, all such Related Bonds which have been so authenticated and delivered, except: terms of such Indebtedness. (a) Related Bonds cancelled after purchase in the open market or because of “Outstanding Obligations” or “Obligations outstanding” or any similar reference to payment at or prepayment or redemption prior to maturity; Obligations that are then outstanding for any purpose of this Master Indenture means all
D-10 Obligations, including the Series 2017 Obligations, which have been duly authenticated and (b) Related Bonds for the payment or redemption of which cash or Escrow delivered by the Master Trustee under the Master Indenture, except: Obligations of the type described in clause (i) of the definition thereof shall have been theretofore deposited with the Related Bond Trustee (whether upon or prior to the (a) Obligations delivered to the Master Trustee for cancellation for any maturity or redemption date of any such Bonds) in accordance with the Related Bond reason; Indenture; provided that if such Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given or arrangements satisfactory to the (b) (i) Obligations for the payment or redemption of which cash or Escrow Related Bond Trustee shall have been made therefor, or waiver of such notice satisfactory Obligations shall have been theretofore deposited with the Master Trustee (whether upon in form to the Related Bond Trustee shall have been filed with the Related Bond Trustee; or prior to the maturity or redemption date of any such Obligations); provided that if such Obligations are to be prepaid or redeemed prior to the maturity thereof, notice of such (c) Related Bonds in lieu of which others have been authenticated under the prepayment or redemption shall have been given or irrevocable arrangements satisfactory Related Bond Indenture; and to the Master Trustee shall have been made therefor, or waiver of such notice satisfactory in form to the Master Trustee shall have been filed with the Master Trustee and (ii) (d) For the purposes of all directions, covenants, approvals, waivers and Obligations securing Related Bonds for the payment or redemption of which cash or notices required or permitted to be obtained or given under the Related Bond Indenture, Escrow Obligations shall have been theretofore deposited with the Related Bond Trustee Related Bonds held or owned by a Member to the extent excluded pursuant to the terms (whether upon or prior to the maturity or redemption date of any such Obligations); of the Related Bond Indenture. Unless otherwise provided in a Related Bond Indenture, provided that if such Obligations are to be redeemed prior to the maturity thereof, notice Related Bonds held or owned by a non-Member Affiliate of a Member shall not be of such redemption shall have been given or arrangements satisfactory to the Related deemed to be held or owned by such Member. Bond Trustee shall have been made therefor, or waiver of notice satisfactory in form to the Related Bond Trustee shall have been filed with the Related Bond Trustee; “Paying Agent” means the bank or banks, if any, designated pursuant to a Related Bond Indenture to receive and disburse the principal of and interest on any Related Bonds or (c) Obligations in lieu of which others have been authenticated hereunder; designated pursuant to the Master Indenture to receive and disburse the Required Payments on any Obligations. (d) Obligations securing Interest Rate Agreements, to the extent provided in Section 209 hereof; and
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“Permitted Encumbrances” means the Lien of the Master Indenture and, as of any as of the date of this Master Indenture and any renewals and extensions thereof; and any particular time: leases, licenses or similar rights to use Property whereunder a Member is lessee (or has similar rights to use or occupy Property), licensee or the equivalent thereof; (a) Liens arising by reason of good faith deposits with a Member in connection with tenders, leases of real estate, bids or contracts (other than contracts for (g) Liens for taxes and special assessments which are not then delinquent, or the payment of money), deposits by any Member to secure public or statutory if then delinquent are being contested in accordance with Section 406 hereof and any obligations, or to secure, or in lieu of, surety, stay or appeal bonds, and deposits as Related Loan Documents; security for the payment of taxes or assessments or other similar charges; any Lien arising by reason of deposits with, or the giving of any form of security to, any (h) utility, access and other easements and rights-of-way, restrictions, governmental agency or any body created or approved by law or governmental regulation encumbrances and exceptions which do not materially interfere with or materially impair for any purpose at any time as required by law or governmental regulation as a condition the operation of the Property affected thereby (or, if such Property is not being then to the transaction of any business or the exercise of any privilege or license, or to enable operated, the operation for which it was designed or last modified); any Member to maintain self-insurance or to participate in any funds established to cover any insurance risks or in connection with workers’ compensation, unemployment (i) any mechanic’s, laborer’s, materialman’s, supplier’s or vendor’s Lien or insurance, pensions or profit sharing plans or other social security plans or programs, or right in respect thereof (i) if payment is not yet due under the contract in question or (ii) if to share in the privileges or benefits required for corporations participating in such such Lien is being contested in accordance with the provisions of this Master Indenture or arrangements; (iii) if such Lien does not materially interfere with or materially impair the operations of the Property affected thereby; (b) any Lien on Property other than the Facilities and Gross Revenues if, at the time the Indebtedness secured thereby is issued or incurred by any Member, or in the (j) such Liens, defects, irregularities of title and encroachments on adjoining case of Property acquired subject to an existing Lien, at the time of such acquisition, the property as normally exist with respect to property similar in character to the Property aggregate amount remaining unpaid on the Indebtedness secured thereby (whether or not involved and which do not materially adversely affect the value of, or materially impair, D-11 assumed by the Member) shall not exceed the fair market value or (if such Property has the Property affected thereby for the purpose for which it was acquired or is held by the been purchased) the lesser of the acquisition price or the fair market value of the Property owner thereof; subject to such Lien; (k) any Lien representing rights of setoff and banker’s liens arising in the (c) any Lien on the Property of any Member granted in favor of or securing ordinary course of business with respect to funds on deposit in a financial institution, and Indebtedness to any other Member; common law or statutory rights of set-off, but only with respect to ordinary transaction and processing fees (and not with respect to Indebtedness) unless such financial (d) Liens on Property of a Member as of the date of this Master Indenture or institution has entered into an agreement for the benefit of the Master Trustee agreeing to of any Person which are existing at the time such Person becomes a Member; provided remit to the Master Trustee any funds realized as a result of such setoff for the benefit of that no such Lien (or the amount of Indebtedness secured thereby) may be increased or the Holders of all Obligations pursuant to the terms of this Master Indenture; modified to apply to any Property of any Member not previously subject to such Lien on such date, unless such Lien following such increase or modification otherwise qualifies (l) zoning laws and similar material restrictions which are not violated, in a as a Permitted Encumbrance hereunder; material respect, by the Property affected thereby;
(e) any security agreement or document securing the Master Trustee and any (m) statutory rights under Section 291, Title 42 of the United States Code, as a Lien on Property other than Gross Revenues if such Lien equally and ratably secures all result of what are commonly known as Hill-Burton grants, and similar rights under other of the Obligations and the other Indebtedness secured by such Lien; federal statutes or statutes of the state in which the Property involved is located;
(f) leases, licenses or similar use agreements which relate to Property of the (n) all right, title and interest of the state where the Property involved is Obligated Group which is of a type that is customarily the subject of such leases, license located, municipalities and the public in and to tunnels, bridges and passageways over, or similar use agreement, such as office space for physicians and educational institutions, under or upon a public way; food service facilities, parking facilities, gift shops and radiology or other hospital-based specialty services, pharmacy and similar departments; leases entered into in accordance (o) Liens on or in Property given, granted, bequeathed or devised by the with the disposition of Property provisions of this Master Indenture; and leases, licenses owner thereof existing at the time of such gift, grant, bequest or devise, provided that or similar rights to use Property to which any Member of the Obligated Group is a party such Liens consist solely of restrictions on the use thereof or the income therefrom, or such Liens secure Indebtedness which is not assumed by any Member and such Liens
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attach solely to the Property (including the income therefrom) which is the subject of (y) Liens upon the Property, Plant and Equipment financed with the proceeds such gift, grant, bequest or devise; of Non-Recourse Indebtedness;
(p) Liens of or resulting from any judgment or award, the time for the appeal (z) Any Lien on Property other than Gross Revenues if, after giving effect to or petition for rehearing of which shall not have expired, or in respect of which any such Lien and all other Liens classified as Permitted Encumbrances under this clause (z), Member shall at any time in good faith be prosecuting an appeal or proceeding for a the principal amount of the Indebtedness secured by such Liens is not more than 25% of review and in respect of which a stay of execution pending such appeal or proceeding for the value (Book Value or Current Value as may be elected by the Group Representative) review shall be in existence; of all of the Property of the Obligated Group;
(q) Liens on moneys deposited by patients or others with a Member as (aa) Liens on Property other than Gross Revenues of a Member securing the security for or as prepayment of the cost of patient care or any rights of residents of life obligation of a Member to repay amounts owing under Interest Rate Agreements or care, elderly housing or similar facilities to endowment or similar funds deposited by or otherwise serving as collateral with respect thereto; on behalf of such residents; (bb) Liens on any Property of a Member to secure any Indebtedness incurred (r) Liens on Excluded Property; for the purpose of financing all or any part of the lease, purchase price or the cost of constructing or improving the Property subject to such Liens; provided, that such Liens (s) Liens on Property due to rights of third party payors for recoupment of shall not apply to any Property theretofore owned by a Member, other than any excess reimbursement paid; theretofore unimproved real property on which the Property so constructed or improved is or is to be located; (t) any security interest in any construction fund, rebate fund, any depreciation reserve, debt service or interest reserve, debt service fund or any similar (cc) rights reserved to or vested in any municipality or public authority by the fund established pursuant to the terms of any Supplemental Master Indenture, Related terms of any right, power, franchise, grant, license, permit, or provision of law affecting
D-12 Bond Indenture or Related Loan Document in favor of the Master Trustee, a Related any Property (a) to terminate such right, power, franchise, grant, license, or permit; Bond Trustee, a Related Issuer or the holder of the Indebtedness issued pursuant to such provided that the exercise of such right would not in the opinion of the Governing Body Supplemental Master Indenture, Related Bond Indenture or Related Loan Document or of the applicable Member materially impair the use of such property for its intended the holder of any related Commitment Indebtedness; purpose or materially and adversely affect the value thereof, or (b) to purchase, condemn, appropriate, recapture, or designate a purchaser of such property, or (c) to control, (u) any Lien on any Related Bond or any evidence of Indebtedness of any regulate, or zone such property or the use of such property in any manner that in the Member acquired by or on behalf of any Member which secures Commitment opinion of the Governing Body of the applicable Member, does not and will not Indebtedness and only Commitment Indebtedness; materially impair the use of such property for its intended purposes or materially and adversely affect the value thereof; (v) Reserved; (dd) leases made, or existing on property acquired, in the ordinary course of (w) Liens on accounts receivable arising as a result of the sale, purported sale business and other leases not required to be capitalized on the financial statements of a or other transfer or financing of or involving accounts receivable; provided, that the Member; leases entered into in accordance with the disposition of property provisions of principal amount of Indebtedness secured by such Lien does not exceed the aggregate this Master Indenture; and leases, licenses or similar rights to use property, under which a amount of accounts receivable of a Member so sold, purportedly sold or otherwise Member is lessor, licensor or grantor, that are existing as of the date of this Master transferred or financed; Indenture or the date of entrance of a new Member into the Obligated Group and any renewals and extensions thereof; (x) Liens on Property of a Person existing at the time such Person is merged into or consolidated with a Member, or at the time of a sale, lease or other disposition of (ee) statutory landlords’ liens under leases to which such Person is a party; the properties of a Person as an entirety or substantially as an entirety to a Member which becomes part of a Property that secures Indebtedness that is assumed by a Member as a (ff) Reserved; result of any such merger, consolidation or acquisition; provided, that no such Lien may be increased, extended, renewed or modified after such date to apply to any Property of a (gg) with respect to any Property in which a Member holds a leasehold interest Member not subject to such lien on such date unless such Lien as so increased, extended, as lessee, or any other right to use or occupy Property pursuant to leases or other renewed or modified is otherwise permitted under this Master Indenture; agreements or arrangements, Liens arising upon the lessor’s or owner’s title;
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(hh) For purpose of avoidance of doubt, ownership and all related rights and “Property, Plant and Equipment” means all Property of each Member which is classified interests of third parties to Property not owned in fee simple by a Member and not held as as property, plant and equipment under accounting principles generally accepted in the United security for Indebtedness of a Member, including, without limitation, those arising in States. connection with an Affiliation. “Put Date” means (i) any date on which an owner of Put Indebtedness may elect to have “Permitted Investments” means (i) with respect to any Obligation which secures a series such Put Indebtedness paid, purchased or redeemed by or on behalf of the underlying obligor of Related Bonds, the obligations in which the Related Bond Trustee may invest funds under the prior to its stated maturity date or (ii) any date on which Put Indebtedness is required to be paid, Related Bond Indenture, (ii) with respect to any Obligations for which a Supplemental Master purchased or redeemed from the owner by or on behalf of the underlying obligor (other than at Indenture specifies certain permitted investments, the investments so specified and (iii) in all the option of the owner) prior to its stated maturity date, other than pursuant to any mandatory other cases such legal and prudent investments as selected or designated by the Group sinking fund or other similar fund or other than by reason of acceleration upon the occurrence of Representative, in each case reasonably acceptable to the Master Trustee or the Related Bond an event of default. Trustee. “Put Indebtedness” means Indebtedness which is (i) payable or required to be purchased “Person” means any natural person, firm, joint venture, association, partnership, business or redeemed by or on behalf of the underlying obligor, at the option of the owner thereof, prior to trust, corporation, limited liability company, public body, agency or political subdivision thereof its stated maturity date or (ii) payable or required to be purchased or redeemed from the owner or any other similar entity. by or on behalf of the underlying obligor (other than at the option of the owner) prior to its stated maturity date, other than pursuant to any mandatory sinking fund or other similar fund or other “Primary Obligor” means the Person who is primarily obligated on an obligation which is than by reason of acceleration upon the occurrence of an event of default. guaranteed by another Person. “Rating Agency” means Fitch, Moody’s or Standard & Poor’s and their respective “Projected Debt Service Coverage Ratio” means, for any future period, the ratio successors and assigns. consisting of (i) a numerator equal to the amount determined by dividing the projected Income
D-13 Available for Debt Service for that period by the Maximum Annual Debt Service Requirement “Related Bond Indenture” means any indenture, trust agreement, bond resolution or for the Funded Indebtedness expected to be outstanding during such period and (ii) a similar instrument pursuant to which any series of Related Bonds is issued. denominator of one. “Related Bond Trustee” means the trustee under any Related Bond Indenture and any “Projected Rate” means, at the option of the Group Representative, (i) in the case of successor trustee thereunder or, if no trustee is appointed under a Related Bond Indenture, the obligations the interest on which is expected to be exempt from federal income taxes, the higher Related Issuer. of (a) the interest rate which equals the most recently available tax-exempt variable rate demand obligations, as produced by Municipal Market Data and published or made available by SIFMA “Related Bonds” means any bonds, notes or other or similar debt obligations issued by a or any Person acting in cooperation with or under the sponsorship of SIFMA (the “SIFMA Member of the Obligated Group, any state of the United States or any municipal corporation or Index”) and effective from such date, or if the SIFMA index is no longer available an index other political subdivision formed under the laws thereof or any constituted authority, agency or recommended by a banking or investment banking institution knowledgeable in matters of health instrumentality of any of the foregoing empowered to issue obligations on behalf thereof, which care finance which index is reasonably comparable to the SIFMA Index and is acceptable to the are secured, whether in whole or in part, by an Obligation or Obligations. Group Representative and (b) the average rate for the most recent 12 months of the Indebtedness in question, (ii) for taxable indebtedness, the rate on U.S. Treasuries with a maturity as close as “Related Issuer” means any issuer of a series of Related Bonds. available to the proposed indebtedness plus a spread provided by a Consultant which spread will result in a Projected Rate that is reasonably comparable in the view of the Consultant to the “Related Loan Document” means any loan agreement or other document or documents current market rate for other similar taxable indebtedness or (iii) the projected yield at par of an (including without limitation any lease, sublease or installment sales contract) pursuant to which obligation as set forth in the report of a Consultant (which Consultant and report, including any proceeds of any Related Bonds are advanced to any Member (or any Property financed or without limitation the scope, form, substance and other aspects thereof, are not objected to by the refinanced with such proceeds is leased, subleased or sold to a Member). Master Trustee). “Required Payments” means any amount required to be paid under or upon an “Property” means any and all rights, titles and interests in and to any and all property Obligation, whether at maturity, by acceleration, upon proceeding for prepayment, redemption or (including cash) whether real or personal, tangible or intangible, wherever situated and whether otherwise including, without limitation, principal, interest, premium, Interest Rate Agreement now owned or hereafter acquired, other than Excluded Property. Payments, Interest Rate Agreement Extraordinary Payments, amounts due under a reimbursement agreement, standby bond purchase agreement or similar ancillary agreement, and
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the purchase price of Related Bonds tendered or deemed tendered for purchase pursuant to the “Short-Term”, when used in connection with Indebtedness, means having an original terms of a Related Bond Indenture. maturity less than or equal to one year and not renewable at the sole option of the debtor for a term greater than one year beyond the date of original issuance. “Responsible Officer” when used with respect to the Master Trustee means the chairman and vice chairman of the board of directors, the chairman and vice chairman of the executive “Standard & Poor’s” or “S&P” means Standard & Poor’s Ratings Service, a division of committee of the board of directors, the president, the chairman of the trust committee, any vice The McGraw Hill Companies Inc., a corporation organized and existing under the laws of the president (whether or not designated by a number or a word or words added before or after the State of New York, its successors and assigns, and, if such corporation shall be dissolved or title “vice president”), any assistant vice president, the secretary or any assistant secretary or the liquidated or shall no longer perform the functions of a securities rating agency, “Standard & treasurer or any assistant treasurer or the cashier or any assistant cashier, any trust officer or Poor’s” or “S&P” shall be deemed to refer to any other nationally recognized securities rating assistant trust officer, any banking officer, the controller and any assistant controller or any other agency designated by the Group Representative by written notice to the Master Trustee. officer of the Master Trustee customarily performing functions similar to those performed by any of the above designated officers, and with respect to a particular corporate trust matter, any other “Subordinated Indebtedness” means Indebtedness which meets the requirements set forth officer to whom such matter is referred because of his or her knowledge of and familiarity with a in Exhibit C hereto. particular subject, in each case with direct responsibility for administering the Master Indenture. “Supplemental Master Indenture” means an indenture amending or supplementing this “Restricted Contributions” means Contributions which are restricted in any way that Master Indenture entered into pursuant to Article VII hereof. would prevent their application to the payment of debt service on Indebtedness of the Person receiving such Contributions. “Tax Exemption Agreements” means, collectively, agreements addressing federal income tax requirements applicable to Related Bonds designed to have the interest on which excludable “Revenues” means, for any period, (i) in the case of any Person providing health care from gross income of the holders thereof for federal income tax purposes, executed in connection services, the sum of (a) net patient service revenues, plus (b) other operating revenues, plus non- with the issuance of each series of tax-exempt Related Bonds. operating revenues (taking into account all Interest Rate Agreements as provided in Section 416
D-14 hereof), including unrestricted Contributions, investment income from unrestricted funds and net “Tax-Exempt Organization” means a Person organized under the laws of the United assets released from Restricted Contributions or investment income released from restricted States of America or any state thereof which is an organization described in Section 501(c)(3) of funds, all as determined in accordance with accounting principles generally accepted in the the Code, which is exempt from federal income taxes under Section 501(a) of the Code, and United States; and (ii) in the case of any other Person, gross revenues less sale discounts and sale which is not a “private foundation” within the meaning of Section 509(a) of the Code, or returns and allowances, as determined in accordance with accounting principles generally corresponding provisions of federal income tax laws from time to time in effect. accepted in the United States; but excluding for purposes of both clause (i) and (ii) above (a) any gains on the sale or other disposition of investments or fixed or capital assets not in the ordinary “Transaction Test” means, with respect to any specified transaction, that the Group course and any gains on the extinguishment of debt or other extraordinary items, (b) earnings Representative shall have delivered to the Master Trustee either: resulting from any reappraisal, revaluation or impairment of assets (including, without limitation, (a) an Officer’s Certificate from the Group Representative stating that the intangibles and pension adjustments related to market value fluctuations and discount rates), (c) Historical Pro Forma Debt Service Coverage Ratio of the Obligated Group for the gains or changes in the valuation of investment securities or Interest Rate Agreements (including immediately preceding Fiscal Year, derived from the Financial Statements of the any change in the value of the termination value thereof), (d) Interest Rate Agreement Obligated Group, was not less than 1.10 to 1.00, calculated as if such transaction had Extraordinary Receipts, (e) earnings which constitute Capitalized Interest, (f) earnings on occurred on the first day of such Fiscal Year; or amounts which are irrevocably deposited in escrow to pay the principal of or interest on Indebtedness and (g) adjustments to the value of assets or liabilities resulting from changes in (b) (i) An Officer’s Certificate from the Group Representative stating that the accounting principles generally accepted in the United States; provided, however, that if such Historical Debt Service Coverage Ratio of the Obligated Group for the immediately calculation is being made with respect to the Obligated Group, such calculation shall be made in preceding Fiscal Year, derived from the Financial Statements of the Obligated Group was such a manner so as to exclude any Revenues attributable to transactions between any Member not less than 1.10 to 1.00; and (ii) an Officer’s Certificate from the Group Representative and any other Member; provided, however, that the provisions of (a) through (g) in a form acceptable to the Master Trustee to the effect that the Projected Debt Service notwithstanding, no amount shall be added to Revenues more than once. Coverage Ratio of the Obligated Group, when calculated as if such transaction had occurred, for each of the next two succeeding Fiscal Years or, if relating to incurrence of “Series 2017 Obligations” means the initial Obligations issued by the Obligated Group Additional Indebtedness and such Indebtedness is being incurred in connection with the pursuant to the terms hereof and the First Supplemental Indenture hereto. financing of Facilities, the first two full Fiscal Years succeeding the projected completion date of such Facilities, is not less than 1.10 to 1.00.
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“United States Government Obligations” means noncallable direct obligations of the Indenture. Unless contrary provision is made in the Supplemental Master Indenture pursuant to United States of America or obligations of any agency or instrumentality thereof, the timely which such Obligation is issued or the election referred to in the next sentence is made, payment payment of the principal of and interest on which is fully guaranteed by, the United States of of the interest on the Obligations shall be made to the person appearing on the Obligation America. registration books of the Obligated Group (kept in the corporate trust office of the Master Trustee as Obligation Registrar) as the registered owner thereof and shall be paid by check or “Written Request” means with reference to a Related Issuer, a request in writing signed draft mailed to the registered owner at his address as it appears on such registration books or at by the Chairman, Vice-Chairman, Chief Executive, Clerk, President, Vice President, Executive such other address as is furnished to the Master Trustee in writing by such holder; provided, Director, Associate Executive Director, Interim Executive Director, Secretary or Assistant however, that any Supplemental Master Indenture creating any Additional Obligation may Secretary of the Related Issuer and with reference to any Member means a request in writing provide that interest on such Additional Obligation may be paid, upon the written request of the signed by the Chairman, Vice-Chairman, Chief Executive Officer, President, Vice President or holder of such Additional Obligation, by wire transfer. The foregoing notwithstanding, if a Chief Financial Officer of such Member, or any other officers designated by the Related Issuer Member so elects and notifies the Master Trustee in writing, payments on such Obligation shall or such Member, as the case may be. be made directly by such Member, by check or draft hand delivered to the holder thereof or its designee or shall be made by such Member by wire transfer to such holder, in either case Words of the masculine gender shall be deemed and construed to include correlative delivered on or prior to the date on which such payment is due. Except with respect to words of the feminine and neuter genders. Unless the context shall otherwise indicate, words Obligations directly paid, the Members agree to deposit with the Master Trustee prior to each importing the singular number shall include the plural and vice versa. All accounting terms not due date of the Required Payments on any of the Obligations a sum sufficient to pay such otherwise defined herein have the meanings assigned to them in accordance with accounting Required Payments so becoming due. Any such moneys shall upon Written Request and principles generally accepted in the United States. Headings of articles and sections herein and direction of the Group Representative be invested in Permitted Investments specified in such the table of contents hereof are solely for the convenience of reference, do not constitute a part Written Request. The foregoing notwithstanding, the Group Representative shall not specify or hereof and shall not affect the meaning, construction or effect hereof. direct that amounts deposited with the Master Trustee to provide for the payment of Obligations pledged to the payment of Related Bonds be invested and/or settled other than in accordance ARTICLE II with, or not contrary to, the provisions of the Related Bond Indenture and Related Loan D-15 THE OBLIGATIONS Document. The Master Trustee shall not be liable or responsible for any loss or adverse tax consequences to any Related Bonds resulting from any such investments. Investments in Section 201. Series, Designation and Amount of Obligations. No Obligations may be Permitted Investments which are United States Government Obligations may be made through issued under the provisions of this Master Indenture except in accordance with this Article. repurchase agreements with banks or other financial institutions, including but not limited to the Obligations may be issued for any purpose, including to (i) evidence Indebtedness, (ii) evidence Master Trustee or any Related Bond Trustee, provided that each such repurchase agreement is in any payment obligation under an Interest Rate Agreement or (iii) evidence a reimbursement a commercially reasonable form, is for a commercially reasonable period, in the opinion of obligation arising as a result of the issuance of a surety bond, letter of credit, standby bond counsel acceptable to the Master Trustee results in the transfer of legal title to identified United purchase agreement, liquidity agreement or other instrument guaranteeing or in effect States Government Obligations which are segregated in a custodial or trust account for the guaranteeing (A) any payments under any Indebtedness or Interest Rate Agreement, as provided benefit of the Master Trustee, and further provided that United States Government Obligations in Section 209 hereof, or (B) the payment of Required Payments with respect to any Obligations acquired pursuant to such repurchase agreements shall be valued at the lower of the then current or any issue of Related Bonds. The total principal or notional amount of Obligations, the number market value thereof or the repurchase price thereof set forth in the applicable repurchase of Obligations and the series of Obligations that may be created under this Master Indenture is agreement. Supplemental Master Indentures may create such security including debt service not limited except as shall be set forth with respect to any series of Obligations in the reserve funds and other funds as are necessary to provide for payment or to hold moneys Supplemental Master Indenture providing for the issuance thereof. Each series of Obligations deposited for payment or as security for a related series of Additional Obligations. shall be issued pursuant to a Supplemental Master Indenture. Each series of Obligations shall be designated so as to differentiate the Obligations of such series from the Obligations of any other Section 203. Execution. Obligations shall be executed on behalf of a Member by the series. Unless provided to the contrary in a Supplemental Master Indenture, Obligations shall be manual or, if permitted by law, facsimile signature of its Chairman or Vice Chairman of the issued as fully registered Obligations with the Obligations of each series to be lettered and Governing Body, the President, the Chief Executive Officer, any Vice President or other numbered R-1 and upward. authorized officer and may (but shall not be required to) have impressed or printed by facsimile thereon the corporate seal of such Member, if required by law or the initial Obligation holder, Section 202. Payment of Obligations. Required Payments on the Obligations shall be which may (but shall not be required to) be attested by the manual or, to the extent permitted by payable in any currency of the United States of America which, at the respective dates of law, facsimile signature of its Secretary, any Assistant Secretary or other authorized officer. In payment thereof, is legal tender for the payment of public and private debts, and such Required case any officer whose signature or facsimile of whose signature shall appear on the Obligations Payments shall be payable at the corporate trust office of the Master Trustee or at the office of shall cease to be such officer before the delivery of such Obligations, such signature or such any alternate Paying Agent or agents named in any such Obligations or in a Related Bond facsimile shall nevertheless be valid and sufficient for all purposes, the same as if he or she had
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remained in office until delivery. The Group Representative is hereby authorized to execute any manner as the definitive Obligations. If any Member issues temporary Obligations it will Obligation on behalf of any other Obligated Group Member. execute and furnish definitive Obligations without delay and thereupon the temporary Obligations may be surrendered for cancellation in exchange therefor at the designated corporate Section 204. Authentication. No Obligation shall be valid or obligatory for any purpose trust office of the Master Trustee, and the Master Trustee shall authenticate and deliver in or entitled to any security or benefit under this Master Indenture unless and until a certificate of exchange for such temporary Obligations an equal aggregate principal amount of definitive authentication on such Obligation substantially in the form set forth below shall have been duly Obligations of the same series and maturity of authorized denominations. Until so exchanged, executed by the Master Trustee, and such executed certificate of the Master Trustee upon any the temporary Obligations shall be entitled to the same benefits under this Master Indenture as such Obligation shall be conclusive evidence that such Obligation has been authenticated and definitive Obligations authenticated and delivered hereunder. delivered under this Master Indenture. The Master Trustee’s certificate of authentication on any Obligation shall be deemed to have been executed by it if signed by an authorized officer or Section 206. Mutilated, Lost, Stolen or Destroyed Obligations. In the event any signer of the Master Trustee, but it shall not be necessary that the same officer or signer sign the temporary or definitive Obligation is mutilated, lost, stolen or destroyed, the Member issuing certificate of authentication on all of the Obligations issued hereunder. such Obligation may execute and the Master Trustee may authenticate a new Obligation of like form, date, maturity and denomination as that mutilated, lost, stolen or destroyed; provided that, The Master Trustee’s authentication certificate shall be in substantially the following in the case of any mutilated Obligation, such mutilated Obligation shall first be surrendered to the Master Trustee, and in the case of any lost, stolen or destroyed Obligation, there shall be first form: furnished to such Member and the Master Trustee evidence of such loss, theft or destruction MASTER TRUSTEE’S AUTHENTICATION CERTIFICATE satisfactory to such Member and the Master Trustee, together with indemnity satisfactory to them. In the event any such Obligation shall have matured, instead of issuing a duplicate This Obligation is one of the Obligations described in the within-mentioned Master Obligation the Obligated Group may pay the same without surrender thereof. The Obligated Indenture. Group and the Master Trustee may charge the holder or owner of such Obligation with their reasonable fees and expenses in this connection.
D-16 WILMINGTON TRUST, NATIONAL Section 207. Registration; Negotiability; Cancellation upon Surrender; Exchange of ASSOCIATION, not in its individual Obligations. Upon surrender for transfer of any Obligation at the designated corporate trust capacity but solely as Master Trustee office of the Master Trustee, the Member issuing such Obligation shall execute and the Master Trustee shall authenticate and deliver in the name of the transferee or transferees a new fully registered Obligation or Obligations of the same series, designation and maturity without coupons for a like aggregate principal amount. By: Authorized Officer The execution by a Member of any Obligation of any denomination shall constitute full and due authorization of such denomination and the Master Trustee shall thereby be authorized Section 205. Form of Obligations and Temporary Obligations. All Additional to authenticate and deliver such Obligation. Obligations issued under this Master Indenture shall be substantially in the form set forth in the Supplemental Master Indenture pursuant to which such Obligations are issued, in each case with The Master Trustee shall not be required to transfer or exchange any Obligation during such appropriate variations, omissions and insertions as are permitted or required by this Master the period of 15 days next preceding any interest payment date of such Obligation or to transfer Indenture or deemed necessary by the Master Trustee to reflect the terms and conditions thereof or exchange any Obligation after the notice calling such Obligation or portion thereof for as established hereby and by any Supplemental Master Indenture. Unless Obligations of a series redemption has been given as herein provided, or during the period of 15 days next preceding the have been registered under the Securities Act of 1933, as amended, each Obligation of such mailing of such notice of redemption with respect to any Obligation of the same series and series shall be endorsed with a legend which shall read substantially as follows: “This Obligation maturity. has not been registered under the Securities Act of 1933, as amended.” As to any Obligation, the person in whose name the same shall be registered shall be Obligations of any series may be initially issued in temporary form exchangeable for deemed and regarded as the absolute owner thereof for all purposes, and payment of or on definitive Obligations of the same series when ready for delivery. The temporary Obligations account of the principal of any such Obligation shall be made only to or upon the order of the shall be of such denomination or denominations as may be determined by the Member executing registered owner thereof or his legal representative, but such registration may be changed as the same, and may contain such reference to any of the provisions of this Master Indenture as herein provided. All such payments shall be valid and effectual to satisfy and discharge the may be appropriate. Every temporary Obligation shall be executed by a Member and be liability upon such Obligation to the extent of the sum or sums so paid. authenticated by the Master Trustee upon the same conditions and in substantially the same
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Any Obligation surrendered for the purpose of payment or retirement or for replacement under this Master Indenture with all other Obligations except as otherwise provided in this pursuant to Section 206 hereof shall be canceled upon surrender thereof to the Master Trustee or Master Indenture, any Obligation securing an Interest Rate Agreement or any related any Paying Agent. Unless contrary provision is made in the Supplemental Master Indenture Supplemental Master Indenture; provided, however, that the holder of an Obligation evidencing pursuant to which such Obligation is issued, if any Member shall acquire any of the Obligations, and securing an Interest Rate Agreement shall have no rights with respect to any authorization, such Member shall deliver such Obligations to the Master Trustee for cancellation and the direction, waiver, consent or other action provided by this Master Indenture to be given or taken Master Trustee shall cancel the same. Any such Obligations canceled by any Paying Agent other by the holders of Obligations or with respect to any notice to be given by the holders of than the Master Trustee shall be promptly transmitted by such Paying Agent to the Master Obligations. Obligations evidencing and securing Interest Rate Agreements shall be deemed to Trustee. Certification of Obligations canceled by the Master Trustee and Obligations canceled be not Outstanding in determining whether the holders of a sufficient percentage of the aggregate by a Paying Agent other than the Master Trustee which are transmitted to the Master Trustee principal amount of Obligations Outstanding have authorized, directed, waived, consented or shall be made to the Group Representative. Canceled Obligations may be destroyed by the given notice with respect to any action. Master Trustee unless written instructions to the contrary are received from the Group Representative. Section 210. Substitute Obligations Upon Withdrawal of an Obligated Group Member. In the event any Obligated Group Member which has issued an Obligation which is outstanding The Obligated Group and the Master Trustee may charge each Obligation holder proposes to withdraw as a Member of the Obligated Group pursuant to Section 405, prior to such requesting an exchange, registration, change in registration or transfer of an Obligation any tax, withdrawal the original Obligation executed by the withdrawing Obligated Group Member shall fee or other governmental charge required to be paid with respect to such exchange, registration be surrendered to the Master Trustee in exchange for a substitute Obligation issued by another or transfer. Member (without, in the case of any Obligation issued to secure a series of Related Bonds, notice to or consent of any Related Bondholder or any other Obligation holder) in accordance with Section 208. Security for Obligations. Each Obligation issued hereunder shall be Section 212 hereof, which such substitute Obligations shall provide for payments of Required secured by the security provided hereunder pursuant to the Granting Clauses hereof. In addition, Payments identical to the surrendered Obligation. any one or more series of Obligations issued hereunder may, so long as any Liens created in connection therewith constitute Permitted Encumbrances, be secured by additional security Section 211. Appointment of Group Representative. Each Member, as a Member of the D-17 (including without limitation letters or lines of credit, insurance or Liens on Property, including Obligated Group, irrevocably appoints the Group Representative as its agent and true and lawful health care facilities of the Obligated Group, or security interests in depreciation reserve, debt attorney in fact and grants to the Group Representative (a) full power and authority to execute service or interest reserve or debt service or similar funds). Such security need not extend to any Supplemental Master Indentures authorizing the issuance of Obligations or series of Obligations, other Indebtedness (including any other Obligations or series of Obligations). Consequently, the or to otherwise amend the Master Indenture, to execute and deliver Obligations on behalf of such Supplemental Master Indenture pursuant to which any one or more series of Obligations is issued Member, to execute and deliver Related Loan Documents and to execute and deliver any other may provide for such supplements or amendments to the provisions hereof, including without documents or instruments relating to or securing any borrowings, indebtedness, obligations or limitation Articles II and V hereof, as are necessary to provide for such security and to permit the like, including without limitation any documents secured by an Obligation, credit realization upon such security solely for the benefit of the Obligations entitled thereto. agreements, notes, bonds, debentures, Capitalized Leases, Interest Rate Agreements, mortgages, deeds of trust, security agreements, and financing statements, (b) full power to prepare, or Section 209. Issuance of Obligations in Forms Other than Notes. To the extent that any authorize the preparation of, any and all documents, certificates or disclosure materials Indebtedness, Interest Rate Agreement or other obligation which is permitted or required to be reasonably and ordinarily prepared in connection with the issuance of Obligations hereunder, or issued pursuant to this Master Indenture is not in the form of a promissory note, an Obligation in Related Bonds associated therewith, or Interest Rate Agreements and to execute and deliver such the form of a promissory note may be issued hereunder and pledged as security for the payment items on behalf of such Member to the appropriate parties in connection therewith and (c) full of such Indebtedness in lieu of directly issuing such Indebtedness, Interest Rate Agreement or authority to exercise all other powers granted hereunder to the Group Representative. other obligation as an Obligation hereunder. Obligations issued hereunder may secure Interest Notwithstanding the foregoing, the Group Representative may direct that an individual Member Rate Agreement Payments and Interest Rate Agreement Extraordinary Payments under any of the Obligated Group execute any and all documents related to Indebtedness incurred for the Interest Rate Agreement. Consequently, the Supplemental Master Indenture pursuant to which benefit of such Member. any Obligation is issued may provide for such supplements or amendments to the provisions hereof, including without limitation Articles II and V hereof, as are necessary to permit the Section 212. Substitution of Obligations. Obligations issued under this Master issuance of such Obligation hereunder and as are not inconsistent with the intent hereof that, Indenture or any Supplemental Master Indenture, may, from time to time at the election of the except as otherwise expressly provided herein, all Obligations issued hereunder be equally and Group Representative, be substituted for new or replacement Obligations issued pursuant to a ratably secured by any lien created hereunder. Supplemental Master Indenture or (in the case of Substitute Obligations issued in connection with clause (iv), below, a supplemental indenture to the Replacement Master Indenture, as those Any Interest Rate Agreement which is secured by an Obligation or is authenticated as an terms are herein defined) (i) to reflect amendments or supplements effected pursuant to the terms Obligation under this Master Indenture shall be equally and ratably secured by any lien created of Article VII, (ii) to reflect admission of a new Person as a Member of the Obligated Group
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pursuant to Section 404 hereof or the cessation of a Member as a Member of the Obligated (ii) All requirements and conditions to the issuance of the Substitute Group pursuant to Section 405 hereof (but subject to Section 210 hereof), (iii) to reflect a Obligations set forth in this Master Indenture or the Replacement Master merger, consolidation, sale or conveyance pursuant to Section 413 hereof, or (iv) upon an Indenture, as applicable, have been complied with and satisfied; amendment, restatement or substitution of this Master Indenture by a Replacement Master Indenture (defined below). All such Series 2017 Obligations shall, upon the request of the (iii) Registration of the Substitute Obligations under the Securities Act Group Representative, be surrendered by the holders thereof to the Master Trustee for exchange of 1933, as amended, is not required or, if such registration is required, the and substitution of Substitute Obligations, defined below, upon presentation to the Master Obligated Group or the New Group, as applicable, has complied with all Trustee of: applicable provisions of said Act; and
(a) One or more original replacement obligations (the “Substitute (iv) Qualification of the Replacement Master Indenture, if applicable, Obligations”) issued by or on behalf of the members of the Obligated Group or a new under the Trust Indenture Act of 1939, as amended, is not required, or if such credit group (collectively, the “New Group”) under and pursuant to and secured by this qualification is required, the New Group has complied with all applicable Master Indenture or (in the case of clause (iv), above) a substitute or restated master trust provisions of such Act; indenture (the “Replacement Master Indenture”) executed by or on behalf of the New Group and an independent corporate trustee, which may be the existing Master Trustee (e) In the case of Substitute Obligations issued pursuant to clauses (ii) or (iii) (the “New Trustee”), meeting the eligibility requirements of the Master Trustee as set initially appearing in this Section 212, above, such deliverables as are set forth in the forth in Article VI hereof, which Substitute Obligations have been duly authenticated, as applicable sections of this Master Indenture; applicable, by the Master Trustee under this Master Indenture or the New Trustee under the terms of the Replacement Master Indenture; (f) In the case of Substitute Obligations issued pursuant to clause (iv) initially appearing in this Section 212, above, the Master Trustee shall have received written (b) In the case of Substitute Obligations issued pursuant to clauses (i) or (iv), evidence from each Rating Agency then maintaining a rating on any Obligation or above, an Opinion of Bond Counsel to the effect that the surrender of the Obligations and Related Bond, that it will not lower or withdraw the rating on such Obligation(s) and/or D-18 the acceptance by the respective Holders thereof of the Substitute Obligations will not Related Bond(s), as applicable, in connection with the issuance of the Substitute adversely affect the validity of the Related Bonds or any exemption for the purposes of Obligations under the Replacement Master Indenture; and federal income taxation to which interest on any Obligations or any Related Bonds would otherwise be entitled; (g) Such other opinions and certificates as the Master Trustee may reasonably require, together with payment of all outstanding fees and expenses of the Master Trustee (c) An executed counterpart of the related Supplemental Master Indenture or and with such reasonable indemnities as are satisfactory to it. the Replacement Master Indenture, as applicable; ARTICLE III (d) In the case of Substitute Obligations issued pursuant to clauses (i) or (iv) PREPAYMENT OR REDEMPTION OF OBLIGATIONS above, an opinion of Independent Counsel to the Obligated Group addressed to the Master Trustee, the Related Bond Trustees, the Related Issuers, the Holder of each Section 301. Redemption or Prepayment. Obligations of each series shall be subject to Obligation and any credit enhancer for the Related Bonds to the effect that: optional and mandatory redemption or prepayment (subject to Section 503) in whole or in part and may be redeemed prior to maturity only as provided in the Supplemental Master Indenture (i) The related Supplemental Master Indenture or the Replacement creating such series. Unless otherwise provided by the Supplemental Master Indenture creating a Master Indenture, as applicable, has been duly authorized, executed and delivered series of Obligations, the provisions of Sections 302 through 305 of this Master Indenture shall by each member of the Obligated Group or the New Group (as applicable), each also apply to the redemption of Obligations. Substitute Obligation has been duly authorized, executed and delivered by or on behalf of a member of the Obligated Group or the New Group (as applicable) and To the extent not otherwise provided herein or in a Supplemental Master Indenture, the each of the related Supplemental Master Indenture or Replacement Master Obligated Group shall have the right to prepay or redeem all or such portion of the Obligations Indenture (as applicable) and each Substitute Obligation is a legal, valid and of any particular series as shall be necessary to effect the payment, prepayment, redemption, binding obligation of each member of the Obligated Group or the New Group, as refunding or advance refunding of the series of Related Bonds secured by such Obligations or applicable, subject in each case to customary exceptions for bankruptcy, any portion thereof in the manner provided in the Related Bond Indenture. If called for insolvency and other laws generally affecting enforcement of creditors’ rights and prepayment or redemption in such events, the Obligations of such series shall be subject to application of general principles of equity and other customary and usual prepayment or redemption in such amount, and at such times, in the manner and with the exceptions and qualifications, including the matters described in Exhibit B hereto; premium necessary to effect the refunding, advance refunding or redemption of all or the portion of the series of Related Bonds to be refunded, advance refunded or redeemed.
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Obligations of any series with respect to which a sinking fund has been established shall outstanding. Upon surrender of any such Obligation for redemption or prepayment in be redeemed by the Master Trustee pursuant to the provisions of such sinking fund and accordance with said notice, such Obligation shall be paid by the Obligated Group at the Obligations to be mandatorily redeemed or paid at maturity shall be redeemed or paid at redemption or prepayment price. Installments of interest whose maturity date is on or prior to maturity, as the case may be, in accordance herewith and with any Supplemental Master the redemption date shall be payable to the registered Obligation Holders on the relevant record Indenture pursuant to which such Obligations were issued, in both cases without any notice from dates according to their terms. or direction of any Member. Section 305. Obligations Redeemed or Prepaid in Part. Any Obligation which is to be In lieu of prepaying or redeeming Obligations pursuant to this Section 301, the Master redeemed or prepaid only in part shall be surrendered to the Master Trustee (with, if the Group Trustee may, at the written request of the Group Representative, use funds otherwise available Representative or the Master Trustee so requires, due endorsement by, or a written instrument of hereunder for the redemption of such Obligations to purchase such Obligations in the open transfer satisfactory in form to, the Group Representative and the Master Trustee, and duly market at a price not exceeding the redemption price then applicable hereunder. executed by the Holder thereof or by his attorney who has been duly authorized in writing) and the Group Representative shall execute and the Master Trustee shall authenticate and deliver In addition to the redemptions herein provided which are applicable to all Obligations, without service charge a new Obligation or Obligations of the same series, interest rate, each series of Additional Obligations shall be redeemable in the manner, at the time or times, at authorized denominations and maturity to the Holder of such Obligation as requested by such the premiums, if any, and upon the terms specified in the Supplemental Master Indenture Holder in aggregate principal amount equal to and in exchange for the unredeemed or unpaid pursuant to which such Obligations were issued or in a Related Loan Document. portion of the principal of the Obligation so surrendered.
The Obligated Group may, at its option and subject to the limitations of the Related Bond ARTICLE IV Indenture, prepay an Obligation in whole or in part from time to time in order to effect a GENERAL COVENANTS redemption of Related Bonds pursuant to the Related Bond Indenture. Such prepayments shall be made by paying to the Related Bond Trustee, prior to the applicable redemption date, an Section 401. Payment of Required Payments. Each Member unconditionally and amount sufficient to redeem (when redeemable) all or a portion of the Related Bonds at the irrevocably (subject to the right of such Member to cease its status as a Member of the Obligated
D-19 redemption price specified therefor in the Related Bond Indenture. Group pursuant to the terms and conditions of Section 405 hereof), jointly and severally covenants that it will promptly pay the Required Payments evidenced or secured by, any Section 302. Election to Redeem or Prepay; Notice to Master Trustee. The Group Obligation issued under this Master Indenture at the place, on the dates and in the manner Representative shall notify the Master Trustee in writing of the election of the Obligated Group provided herein and in said Obligation according to the true intent and meaning thereof. to redeem or prepay all or any portion of the Obligations of any series, together with the Notwithstanding any schedule of payments upon the Obligation set forth herein or in the redemption or prepayment date, and the principal amount of Obligations of each maturity and Obligation, each Member unconditionally and irrevocably (subject to the right of such Member series to be redeemed or prepaid, at least 45 days prior to the redemption or prepayment date to cease its status as a Member of the Obligated Group pursuant to the terms and conditions of fixed by the Group Representative, unless a shorter notice shall be satisfactory to the Master Section 405 hereof), jointly and severally agrees to make payments upon each Obligation and be Trustee. liable therefor at the times and in the amounts (including principal, interest and premium, if any) equal to the amounts to be paid as interest, principal at maturity or by mandatory sinking fund Section 303. Deposit of Redemption or Prepayment Price. On or prior to any redemption, or premium, if any, upon any Related Bonds from time to time outstanding. redemption or prepayment date, the Obligated Group shall deposit with the Master Trustee or with its designated agent, or in the case of a redemption or prepayment in connection with the Section 402. Performance of Covenants. Each Member covenants that it will faithfully redemption or prepayment of Related Bonds, the Related Bond Trustee under the Related Bond perform at all times any and all covenants, undertakings, stipulations and provisions contained in Indenture, an amount of money sufficient to pay the redemption or prepayment price of all the this Master Indenture and in each and every Obligation executed, authenticated and delivered Obligations or Related Bonds, as applicable, which are to be redeemed or prepaid on such date. hereunder.
Section 304. Master Notes Payable on Redemption or Prepayment Date. Notice of Section 403. Representations and Warranties by the Obligated Group. Each Member redemption or prepayment having been given as aforesaid, and the monies for redemption or of the Obligated Group makes the following representations and warranties with respect to itself prepayment having been deposited as described in Section 303, the Obligations to be redeemed as the basis for its covenants herein: or prepaid shall become due and payable on the redemption or prepayment date at the redemption or prepayment price therein specified, and from and after such date such Obligations (a) It is a not-for-profit corporation or a corporation, as the case may be, duly shall cease to bear interest and to be entitled to any benefit or security hereunder except the right incorporated under the laws of the state of its organization, is in good standing and duly to receive payment from the moneys held by the Master Trustee, and the amount of such authorized to conduct its business and affairs in all jurisdictions in which such Obligations so called for prepayment or redemption shall be deemed paid and no longer authorization is required, is duly authorized and has full power under all applicable
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provisions of law and its articles of incorporation and by-laws to create, issue, enter into, by the Master Trustee and the Group Representative, containing (i) the agreement of such execute and deliver this Master Indenture and any Obligations, and all action on its part Person (A) to become a Member of the Obligated Group and thereby to become subject necessary for the valid execution and delivery of this Master Indenture and the valid to compliance with all provisions of this Master Indenture and (B) unconditionally and creation, issuance and delivery of any Obligations, as the case may be, has been duly and irrevocably (subject to the right of such Person to cease its status as a Member of the effectively taken; and the Obligations in the hands of the holders thereof will be the legal Obligated Group pursuant to the terms and conditions of Section 405 hereof) to jointly and valid obligations of the Members of the Obligated Group. and severally make payments upon each Obligation at the times and in the amounts provided in each such Obligation and (ii) representations and warranties by such Person (b) The execution and delivery of the Obligations and this Master Indenture, substantially similar to those set forth in Section 403 other than those contained in the consummation of the transactions contemplated hereby, and the fulfillment of the Section 403(d) if such Person is not a Tax-Exempt Organization (but with such terms and conditions hereof do not and will not conflict with or result in a breach of any deviations as are not objected to by the Master Trustee); of the terms or conditions of any corporate restriction or of any agreement or instrument to which it is now a party, and do not and will not constitute a default under any of the (b) The Group Representative shall, by appropriate action of its Governing foregoing, or result in the creation or imposition of any Lien of any nature upon any of its Body, have approved the admission of such Person to the Obligated Group; Property except for Permitted Encumbrances. It has good and marketable fee simple title to all of its Property constituting real property (other than leased property in which it has (c) The Master Trustee shall have received (1) an Officer’s certificate of the a valid leasehold estate) and good and marketable title to all of its other Property, in both Group Representative which certifies that, immediately upon such Person becoming a cases, free and clear of all Liens except for Permitted Encumbrances. The easements, Member of the Obligated Group, (A) prior to and immediately after such admission, no rights-of-way, liens, encumbrances, covenants, conditions, restrictions, exceptions, minor Event of Default exists hereunder and no event shall have occurred which with the defects, irregularities of title and encroachments on adjoining real estate, if any, now passage of time or the giving of notice, or both, would become such an Event of Default, existing with respect to its Property do not and will not materially adversely affect the and (B) that, immediately following the admission of such Person to the Obligated value of the Property currently affected thereby, materially impair the same, or materially Group, the Transaction Test would be met, (2) an Opinion of Independent Counsel to the impair or materially interfere with the operation and usefulness thereof for the purpose effect that (x) the instrument described in paragraph (a) above has been duly authorized, D-20 for which it was acquired or is held by it. Its Property does not violate any applicable executed and delivered and constitutes a legal, valid and binding agreement of such zoning, land use or similar law or restriction in any material manner. Person, enforceable in accordance with its terms, subject to customary exceptions for bankruptcy, insolvency, fraudulent conveyance, and other laws generally affecting (c) It has all necessary and material licenses and permits to occupy and enforcement of creditors’ rights and application of general principles of equity and other operate its existing Facilities. customary and usual exceptions and qualifications, including those exceptions set forth in Exhibit B hereto and (y) the addition of such Person to the Obligated Group will not (d) It is a Tax-Exempt Organization; has received determination letters from adversely affect the status as a Tax-Exempt Organization of any Member which the Internal Revenue Service to the effect that it is a Tax-Exempt Organization which otherwise has such status, and (3) either an Officer’s certificate of the Group letters are still in full force and effect; and has no “unrelated business taxable income” as Representative certifying that all amounts due or to become due on all Related Bonds defined in Section 512 of the Code which could have a material adverse effect on its have been paid to the holders thereof and provision for such payment has been made in status as a Tax-Exempt Organization or which, if such income were subject to federal such manner as to have resulted in the defeasance of all Related Bond Indentures or an income taxation, would have a material adverse effect on its condition, financial or Opinion of Bond Counsel to the effect that under then existing law the consummation of otherwise. such transaction, whether or not contemplated on the date of delivery of any such Related Bond, would not adversely affect the validity of any Related Bond or any exemption (e) It has not heretofore engaged in, and the consummation of the transactions from federal income taxation of interest payable on any Related Bond otherwise entitled herein provided for and compliance by it with the provisions of this Master Indenture and to such exemption; provided that in making the Transaction Test calculation called for by the Obligations issued hereunder will not involve, any prohibited transaction within the subsection (c)(l)(B) above, (i) there shall be excluded from Revenues (a) any Revenues meaning of the Employee Retirement Income Security Act of 1974, as amended (herein generated by Property of such Person transferred or otherwise disposed of by such Person sometimes referred to as “ERISA”) or Section 4975 of the Code. since the beginning of the Fiscal Year during which such Person’s entry into the Obligated Group occurs and (b) any Revenues generated by Property of the new Member Section 404. Entrance Into the Obligated Group. Any Person may become a Member which at the time of such Member’s entry into the Obligated Group will be categorized as of the Obligated Group if: Excluded Property and (ii) there shall be excluded from Expenses (a) any Expenses related to Property of such Person transferred or otherwise disposed of by such Person (a) Such Person shall execute and deliver to the Master Trustee a since the beginning of the Fiscal Year during which such Person’s entry into the Supplemental Master Indenture acceptable to the Master Trustee which shall be executed Obligated Group occurs and (b) any Expenses related to Property of the new Member
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which at the time of such Member’s entry into the Obligated Group will be categorized as immediately following the withdrawal of such Member, the Transaction Test would be Excluded Property and (4) certified copies of the actions of the Group Representative and met; each of the Members (if required by the applicable organizational documents) described in subsection (b) above; (d) prior to such cessation there is delivered to the Master Trustee an Opinion of Independent Counsel to the effect that the cessation by such Member of its status as a (d) Following the entrance of such new Member, the computations required Member will not adversely affect the status as a Tax-Exempt Organization of any by any provision of this Master Indenture shall be made on a consolidated or combined Member which otherwise has such status; and basis, and shall include the new Member in accordance with generally accepted accounting principles consistently applied, with the elimination of material intercompany (e) prior to cessation of such status, the Group Representative consents in balances and transactions; and writing to the withdrawal by such Member.
(e) (i) The definition of Excluded Property is amended as appropriate to Upon such cessation in accordance with the foregoing provisions, (i) Exhibit A shall be include a description of the Property of the Person becoming a Member which is to be amended to delete therefrom the name of such Person, and (ii) the Master Trustee shall be considered Excluded Property, and (ii) Exhibit A is amended to add such Person as a authorized to release any Lien held by the Master Trustee upon the Property of such Member Member. which has ceased being a Member of the Obligated Group. Notwithstanding any provision of this section or any other provisions of this Master Indenture, the Corporation may not withdraw Each successor, assignee, surviving, resulting or transferee of a Member must agree to from the Obligated Group. become, 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 entity status. Section 406. Covenants as to Corporate Existence, Maintenance of Properties, and Similar Matters; Right of Contest. Each Member hereby covenants to: Section 405. Cessation of Status as a Member of the Obligated Group. Each Member covenants that it will not take any action, corporate or otherwise, which would cause it or any (a) Except as otherwise expressly provided herein (i) preserve its entity or
D-21 successor thereto into which it is merged or consolidated under the terms of the Master Indenture other separate legal existence, (ii) preserve all its rights and licenses to the extent to cease to be a Member of the Obligated Group unless: necessary or desirable in the operation of its business and affairs and (iii) be qualified to do business and conduct its affairs in each jurisdiction where its ownership of Property or (a) if such Member proposing to withdraw from the Obligated Group is a the conduct of its business or affairs requires such qualification; provided, however, that party to any outstanding Obligation securing Related Loan Documents with respect to nothing herein contained shall be construed to obligate such Member to retain, preserve Related Bonds which remain outstanding, (i) (A) unless one or more other remaining or keep in effect the rights, licenses or qualifications no longer used or useful in the Members have also executed the outstanding Obligation, another Member of the conduct of its business. Obligated Group, in its sole discretion, has executed and delivered a replacement Obligation and (B) there is delivered an Opinion of Counsel to the effect that such (b) With respect to any Member which is, on the date it becomes a Member, a replacement Obligation has been duly authorized, executed and delivered and is not-for-profit corporation, maintain its status as a not-for-profit corporation throughout enforceable in accordance with its terms against such other Member, subject to standard the term of this Master Indenture. enforceability limitations and exceptions, or (ii) such Member so proposing to withdraw has paid, or caused to be paid, in full, all Obligations owed by it; (c) At all times use its Facilities only in furtherance of its lawful corporate purposes and cause its business to be carried on and conducted and its Property and each (b) prior to cessation of such status, there is delivered to the Master Trustee an part thereof to be maintained, preserved and kept in good repair, working order and Opinion of Bond Counsel to the effect that, under then existing law, the cessation by the condition and in as safe condition as its operations will permit, including maintaining Member of its status as a Member will not adversely affect the validity of any Related access to all necessary utilities, and make all necessary and proper repairs (interior and Bond or any exemption from federal income taxation of interest payable thereon to which exterior, structural and non-structural, ordinary as well as extraordinary and foreseen as any Related Bond would otherwise be entitled; well as unforeseen), renewals and replacements thereof in a timely manner, so that its operations and business shall at all times be conducted in an efficient, proper and (c) the Master Trustee shall have received (1) a certificate of the Group advantageous manner; provided, however, that nothing herein contained shall be Representative that certifies that, immediately upon such Member withdrawing from the construed (i) to prevent it from ceasing to operate any portion of its Property that, in the Obligated Group, (A) prior to and immediately after such withdrawal, no Event of reasonable judgment of the Group Representative, is not material to the overall Default exists hereunder and no event shall have occurred which with the passage of time operations or financial condition of the Obligated Group, (ii) to prevent it from ceasing to or the giving of notice, or both, would become such an Event of Default, and (B) that, operate any material portion of its Property, if in its reasonable judgment it is advisable
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not to operate the same, or if it intends to sell or otherwise dispose of the same and within been fully paid to the holders thereof or provision for such payment has not been made, a reasonable time endeavors to effect such sale or other disposition, or (iii) to obligate it to take no action or suffer any action to be taken by others, including any action which to retain, preserve, repair, renew or replace any Property, leases, rights, privileges or would result in the alteration or loss of its status as a Tax-Exempt Organization, which licenses no longer used or useful in the conduct of its business. could result in any such Related Bond being declared invalid or result in the interest on any Related Bond, which is otherwise exempt from federal or state income taxation, (d) Pay or cause to be paid, when due: (i) all taxes, levies, assessments and becoming subject to such taxation. charges on account of the use, occupancy or operation of its Property, including but not limited to all sales, use, occupation, real and personal property taxes, all permit and (j) In the case of each Member which is a Tax-Exempt Organization at the inspection fees, occupation and license fees and all water, gas, electric, light, power or time it becomes a Member, not distribute any of its revenues, income or profits, whether other utility charges assessed or charged on or against its Property or on account of its use realized or unrealized, to any of its members, directors or officers or allow the same to or occupancy thereof or the activities conducted thereon or therein; and (ii) all taxes, inure to the benefit of any private person, association or corporation, other than for the assessments and impositions, general and special, ordinary and extraordinary, of every lawful corporate purposes of such Member, as the case may be; provided, further, that no name and kind, which shall be taxed, levied, imposed or assessed during the term of this such distribution shall be made which is not permitted by the legislation pursuant to Master Indenture upon all or any part of its Property, or its interest or the interest of any which such Member is governed or which would result in the loss or alteration of its Related Issuer or either of them in and to its Property, or upon its interest or the interest status as a Tax-Exempt Organization. of any Related Issuer or the interest of either of them in this Master Indenture or the amounts payable hereunder or under the Obligations. If under applicable law any such The foregoing notwithstanding, any Member may (i) cease to be a not-for-profit tax, levy, charge, fee, rate, imposition or assessment may at the option of the taxpayer be corporation, (ii) take actions which could result in the alteration or loss of its status as a Tax- paid in installments, any Member may exercise such option. Exempt Organization or (iii) distribute its revenues, income or profits to any of its members, directors or officers or allow the same to inure to the benefit of a private person, association or (e) At its sole cost and expense, promptly comply with all present and future corporation if (1) prior thereto there is delivered to the Master Trustee an Opinion of Bond laws, ordinances, orders, decrees, decisions, rules, regulations and requirements of every Counsel to the effect that such actions would not adversely affect the validity of any Related D-22 duly constituted governmental authority, commission and court and the officers thereof Bond, the exemption from federal or state income taxation of interest payable on any Related which may be applicable to it or any of its affairs, business, operations and Property, any Bond otherwise entitled to such exemption or adversely affect the enforceability in accordance part thereof, any of the streets, alleys, passageways, sidewalks, curbs, gutters, vaults and with its terms of the Master Indenture against any Member and (2) with respect to clause (iii) vault spaces adjoining any of its Property or any part thereof or to the use or manner of above, after such action the Transaction Test would be met. use, occupancy or condition of any of its Property or any part thereof. For the purposes of this Section 406 (other than subparagraphs (d), (e) and (g) hereof), (f) Promptly pay or otherwise satisfy and discharge all of its obligations and the terms Property and Facilities shall be deemed to include Excluded Property. Indebtedness and all demands and claims against it as and when the same become due and payable which if not so paid, satisfied or discharged would constitute a default or an No Member shall be required to pay any tax, levy, charge, fee, rate, assessment or Event of Default under Section 502(d) or Section 502(e) hereof. imposition referred to herein above, to remove any Lien required to be removed under this Section, pay or otherwise satisfy and discharge its obligations, Indebtedness (other than any (g) At all times comply with all terms, covenants and provisions of any Liens Obligations), demands and claims against it or to comply with any Lien, law, ordinance, rule, at such time existing upon its Property or any part thereof or securing any of its order, decree, decision, regulation or requirement referred to in this Section, so long as such Indebtedness. Member shall contest, in good faith and at its cost and expense, in its own name and behalf, the amount or validity thereof, in an appropriate manner or by appropriate proceedings which shall (h) Procure and maintain all necessary and material licenses and permits and operate during the pendency thereof to prevent the collection of or other realization upon the tax, use its best efforts to maintain the status of its health care Facilities (other than those not levy, charge, fee, rate, assessment, imposition, obligation, Indebtedness, demand, claim or Lien currently having such status or not having such status on the date a Person becomes a so contested, and the sale, forfeiture, or loss of its Property or any part thereof, provided, that no Member hereunder) as providers of health care services eligible for payment under those such contest shall subject any Related Issuer, any Obligation holder or the Master Trustee to the third-party payment programs which the Group Representative determines are risk of any liability. While any such matters are pending, such Member shall not be required to appropriate. pay, remove or cause to be discharged the tax, levy, charge, fee, rate, assessment, imposition, obligation, Indebtedness, demand, claim or Lien being contested unless such Member agrees to (i) In the case of any Member which is a Tax-Exempt Organization at the settle such contest. Each such contest shall be promptly prosecuted to final conclusion (subject time it becomes a Member, so long as the Master Indenture shall remain in force and to the right of such Member engaging in such a contest to settle such contest), and in any event effect and so long as all amounts due or to become due on all Related Bonds have not the Member will save all Related Issuers, all Related Bond Trustees, all Obligation holders and
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the Master Trustee harmless from and against all losses, judgments, decrees and costs (including hereunder, (ii) remove any Lien (other than Permitted Liens) or terminate any lease to the extent attorneys’ fees and expenses in connection therewith) as a result of such contest and will, required hereunder, (iii) maintain its Property in repair to the extent required hereunder, (iv) promptly after the final determination of such contest or settlement thereof, pay and discharge procure the insurance required hereby, in the manner herein described, or (v) fail to make any the amounts which shall be levied, assessed or imposed or determined to be payable therein, other payment or perform any other act required to be performed hereunder, and is not contesting together with all penalties, fines, interests, costs and expenses thereon or incurred in connection the same in accordance with Section 406 hereof, then and in each such case the Master Trustee therewith. Each Member hereby waives, to the extent permitted by law, any right which it may may (but shall not be obligated to) remedy such failure for the account of such Member and have to contest (i) any Obligation issued for the benefit of another Member or (ii) any Obligation make advances for that purpose. No such performance or advance shall operate to release such issued to secure or in connection with Related Bonds. Member from any such failure and any sums so advanced by the Master Trustee shall be repayable by such Member on demand and shall bear interest at the Master Trustee’s announced If the Master Trustee shall notify such Member that, in the opinion of Counsel, by prime rate per annum from time to time in effect, from the date of the advance until repaid. The nonpayment of any of the foregoing items the Property of such Member or any substantial part Master Trustee shall have the right of entry on such Member’s Property or any portion thereof, in thereof will be subject to imminent loss or forfeiture, then such Member shall promptly pay all order to effectuate the purposes of this Section, subject to the permission of a court of competent such unpaid items and cause them to be satisfied and discharged. jurisdiction, if required by law.
Section 407. Insurance. Each Member shall maintain, or cause to be maintained at its Section 409. Rates and Charges. In each Fiscal Year, the Obligated Group shall sole cost and expense, insurance with respect to its Property, the operation thereof and its establish, charge, and use its reasonable efforts to collect rates, fees, and charges for goods and business which are of an insurable nature against such casualties, contingencies and risks services furnished by, and for the use of, its properties and services which, if collected, would be (including but not limited to public liability and employee dishonesty) and in amounts not less sufficient to cause the Historical Debt Service Coverage Ratio of the Obligated Group for such than is customary in the case of corporations engaged in the same or similar activities and Fiscal Year to be at least 1.10 to 1.0, as measured and determined as of the last day of such similarly situated or as is adequate to protect its Property and operations, including any Excluded Fiscal Year. Property. The Group Representative shall, not less than 120 days after beginning of each Fiscal Year, or at such other times during such Fiscal Year as determined by the Group Representative If the Historical Debt Service Coverage Ratio of the Obligated Group is determined for D-23 (but at least annually), review the insurance (including self-insurance) each Member maintains as the Fiscal Year then ended to be less than 1.10:1, then, within 60 days after the completion of the to whether such insurance is customary or adequate. In addition, the Group Representative shall Obligated Group’s audited financial statements for such Fiscal Year, but in no event later than 90 at least once every two Fiscal Years cause a certificate of an Insurance Consultant or Insurance days from the date such financial statements are required by Section 414 to be delivered, the Consultants to be delivered to the Master Trustee on or before the last day of the second fiscal Obligated Group shall at its expense retain a Consultant to make recommendations with respect quarter of every second Fiscal Year, with the first such certificate being due in the Fiscal Year to the rates, fees and charges of the Members’ and the Obligated Group’s methods of operation ending June 30, 2019 which indicates that the insurance then being maintained by the Members and other factors affecting its financial condition in order to increase the Historical Debt Service is customary in the case of corporations engaged in the same or similar activities and similarly Coverage Ratio for the then current Fiscal Year and subsequent Fiscal Years to at least 1.10:1. situated or is adequate to protect the Obligated Group’s Property and operations. The Group Written notice of the retention of a Consultant shall be provided promptly by the Group Representative shall cause copies of its review, or the certificates of the Insurance Consultant or Representative to the Master Trustee. Insurance Consultants, as the case may be, to be delivered promptly to the Master Trustee and to each Related Bond Trustee. The Obligated Group or any Member may self-insure (including A copy of the Consultant’s report and recommendations, if any, shall be filed with the through a captive insurance company) if the Insurance Consultant or Insurance Consultants Master Trustee within 90 days from the date such Consultant was appointed pursuant to the determine that such self-insurance meets the standards set forth in the first sentence of this previous paragraph. Each Member shall follow each recommendation of the Consultant paragraph and is prudent under the circumstances. Any self-insurance programs existing as of applicable to it to the extent feasible (as determined by such Member) and permitted by law. the date of this Master Indenture of the Members of the Obligated Group are hereby deemed This Section shall not be construed to prohibit any Member from serving indigent patients to the acceptable. The foregoing notwithstanding, it is agreed by the parties hereto that: (i) this extent required for such Member to continue its qualification as a Tax-Exempt Organization or to provision does not limit the form in which insurance may be maintained so long as the above otherwise comply with requirements of the laws of the State of Delaware, or from serving any requirements as to insurance against risks and insurance in customary or adequate types and other class or classes of patients without charge or at reduced rates so long as such service does amounts are satisfied; and (ii) nothing herein contained shall be deemed to prevent the Members not prevent the Obligated Group from satisfying the other requirements of this Section. of the Obligated Group from maintaining insurance against risks (including without limitation risks affecting Persons other than Members of the Obligated Group) or in amounts greater than The failure of the Obligated Group to achieve a Historical Debt Service Coverage Ratio are customary or that are more than adequate. of at least 1.10 to 1.0 for any Fiscal Year shall not be a default or Event of Default hereunder if a Consultant is so retained and the recommendations of such Consultant are so implemented and Section 408. Right to Perform Members’ Covenants; Advances. In the event any the Historical Debt Service Coverage Ratio for two consecutive Fiscal Years is not less than 1.0 Member shall fail to (i) pay any tax, charge, assessment or imposition to the extent required to 1.0.
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The foregoing provisions notwithstanding, if for any Fiscal Year the Historical Debt Obligations or to the redemption and prepayment of Related Bonds as the Group Service Coverage Ratio is less than 1.10 to 1, the Obligated Group shall not be required to retain Representative may direct. a Consultant to make such recommendations if: (a) there is filed with the Master Trustee a Consultant’s Report which contains an opinion of such Consultant that applicable laws or (c) Option C-Partial Restoration and Partial Prepayment of Obligations. Such regulations have prevented the Obligated Group from generating Income Available for Debt Member may elect to have a portion of such Net Proceeds applied to the replacement, Service during such Fiscal Year in an amount sufficient to equal or exceed 110% of its Debt repair, reconstruction, restoration and improvement of the Facilities of the Obligated Service Requirements; (b) the report of such Consultant indicates that the rates charged by the Group or the acquisition of additional Facilities for the Obligated Group or the Obligated Group are such that, in the opinion of the Consultant, the Obligated Group has repayment of Indebtedness incurred for any such purpose pending the receipt of such generated the maximum amount of Revenues reasonably practicable given such laws or Net Proceeds, with the remainder of such Net Proceeds to be applied to prepay regulations; and (c) the Historical Debt Service Coverage Ratio of the Obligated Group for such Obligations or to prepay and redeem Related Bonds, in which event such Net Proceeds Fiscal Year was no less than 1.0 to 1.0. The Obligated Group shall not be required to cause the to be used for replacement, repair, reconstruction, restoration, improvement and Consultant’s Report referred to in the preceding sentence to be prepared more frequently than acquisition shall be applied as set forth in subparagraph (a) of this Section 410 and such once every two Fiscal Years. Net Proceeds to be used for prepayment of the Obligations or the prepayment and redemption of Related Bonds shall be applied as set forth in subparagraph (b) of this Section 410. Damage or Destruction. Each Member agrees to notify the Master Section. Trustee immediately in writing in the case of the destruction of its Facilities or any portion thereof as a result of fire or other casualty, or any damage to such Facilities or portion thereof as The foregoing notwithstanding, no Member will be required to comply with this Section a result of fire or other casualty, the Net Proceeds of which are estimated to exceed $50,000,000. 410 to the extent (i) that the damage or loss does not exceed $50,000,000 or (ii) Facilities damaged or destroyed were pledged as security for Non-Recourse Indebtedness incurred in In such event, the Member suffering such casualty or loss shall within 12 months after the accordance with Section 415(F) hereof or Indebtedness secured by Liens imposed in accordance date on which such Net Proceeds are finally determined elect by written notice of such election with paragraph (z) of the definition of Permitted Encumbrances and the documents pursuant to to the Master Trustee one of the following three options: which such Indebtedness was incurred require Net Proceeds to be applied in a manner D-24 inconsistent with this Section 410. Nothing contained herein shall preclude the Obligated Group (a) Option A-Repair and Restoration. Such Member may elect to replace, from redeeming any Related Bonds pursuant to the terms of any Related Bond or any Related repair, reconstruct, restore or improve any of the Facilities of the Obligated Group or Bond Indenture, or from replacing, repairing, reconstructing, restoring or improving any of the acquire additional Facilities for the Obligated Group or repay Indebtedness incurred for Facilities of the Obligated Group, or acquiring additional Facilities for the Obligated Group, with any such purpose pending the receipt of such Net Proceeds. In such event, such Member Net Proceeds below the $50,000,000 threshold. shall proceed forthwith to replace, repair, reconstruct, restore or improve Facilities of the Obligated Group or to acquire additional Facilities and will apply such Net Proceeds of Section 411. Condemnation. The Master Trustee shall cooperate fully with the any insurance relating to such damage or destruction to the payment or reimbursement of Members in the handling and conduct of any prospective or pending condemnation proceedings the costs of such replacement, repair, reconstruction, restoration, improvement or with respect to their Facilities or any part thereof. Each Member hereby irrevocably assigns to acquisition or to the repayment of such Indebtedness. the Master Trustee, as its interests may appear, all right, title and interest of such Member in and to any Net Proceeds of any award, compensation or damages payable in connection with any It is further understood and agreed that in the event such Member shall elect this such condemnation or taking, or payment received in a sale transaction consummated under Option A, such Member shall complete the replacement, repair, reconstruction, threat of condemnation (any such award, compensation, damages or payment being hereinafter restoration, improvement and acquisition of the Facilities, whether or not the Net referred to as an “award”), which exceeds $50,000,000. Proceeds of insurance received for such purposes are sufficient to pay for the same. In the event such Net Proceeds exceed the amount of $50,000,000, the Member in (b) Option B-Prepayment of Obligations. Subject to the obligations of the question shall within 12 months after the date on which the Net Proceeds are finally determined Members under Section 406 hereof, such Member may elect to have all of such Net elect by written notice of such election to the Master Trustee one of the following three options: Proceeds payable as a result of such damage or destruction applied to the prepayment of the Obligations in accordance with Article III hereof, including without limitation, (a) Option A-Repairs and Improvements. The Member may elect to use the prepayment or redemption of Related Bonds under the terms of Related Bond Indentures Net Proceeds of the award for restoration or replacement of or repairs and improvements as provided in Section 301. In such event such Member shall pay over to the Master to the Facilities of the Obligated Group or the acquisition of additional Facilities for the Trustee or the Related Bond Trustee, as applicable, such Net Proceeds, and shall in its Obligated Group or the repayment of Indebtedness incurred for any such purpose pending notice of election to the Master Trustee, direct the Master Trustee or the Related Bond the receipt of such Net Proceeds. In such event, so long as the Obligated Group is not in Trustee to apply such Net Proceeds, when and as received, to the prepayment of the default hereunder, such Member shall have the right to use and apply such Net Proceeds
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toward the restoration, replacement, repairs, improvements and acquisitions of the Section 413. Merger, Consolidation, Sale or Conveyance. (a) Each Member agrees Facilities subject to the condemnation that it will not merge into, or consolidate with, one or more corporations or other entities which are not Members, or allow one or more of such corporations or other entities to merge into it, or (b) Option B-Prepayment of Obligations. Subject to the obligation of such sell or convey all or substantially all of its Property to any Person who is not a Member, unless: Member under Section 406 hereof, such Member may elect to have such Net Proceeds of the award applied to the prepayment of the Obligations in accordance with Article III (i) Any successor corporation or other entity to such Member hereof, including without limitation, prepayment or redemption of Related Bonds under (including without limitation any purchaser of all or substantially all the Property the terms of Related Bond Indentures as provided in Section 301. In such event such of such Member) is a Person organized and existing under the laws of the United Member shall pay over to the Master Trustee or the Related Bond Trustee, as applicable, States of America or a state thereof and shall become a Member of the Obligated such Net Proceeds, and shall in its notice of election to the Master Trustee, direct the Group in accordance with the terms of this Master Indenture or otherwise execute Master Trustee or the Related Bond Trustee to apply such Net Proceeds, when and as and deliver to the Master Trustee an appropriate instrument, satisfactory to the received, to the prepayment of the Obligations or to the redemption and prepayment of Master Trustee, containing the agreement of such successor to assume, jointly and Related Bonds as directed by the Group Representative. severally, the due and punctual payment of the Required Payments on all Obligations according to their tenor and the due and punctual performance and (c) Option C-Partial Restoration and Partial Prepayment of Obligations. Such observance of all the covenants and conditions of this Master Indenture, to be kept Member may elect to have a portion of such Net Proceeds of the award applied to the and performed by such Member; repair, replacement, restoration and improvement of the Facilities of the Obligated Group or the acquisition of additional Facilities for the Obligated Group or the repayment of (ii) The Group Representative provides to the Master Trustee an Indebtedness incurred for any such purpose pending the receipt of such Net Proceeds, Officer’s Certificate, (i) demonstrating that, immediately following the merger, with the remainder of such Net Proceeds to be applied to the prepayment of Obligations consolidation, sale or conveyance, the Transaction Test would be met and (ii) or to prepayment and redemption of Related Bonds, in which event such Net Proceeds to certifying that, immediately following the merger, consolidation, sale or be used for repair, replacement, restoration, improvement and acquisition shall be applied conveyance, no Member would be in default in the performance or observance of D-25 as set forth in subparagraph (a) of this Section 411 and such Net Proceeds to be used for any covenant or condition of any Related Loan Document or this Master prepayment of the Obligations or the prepayment and redemption of Related Bonds shall Indenture; and be applied as set forth in subparagraph (b) of this Section. (iii) If all amounts due or to become due on all Related Bonds have not The foregoing notwithstanding, no Member will be required to comply with this Section been fully paid to the holders thereof or fully provided for, there shall be 411 to the extent that (i) that the condemnation award does not exceed $50,000,000 or (ii) the delivered to the Master Trustee an Opinion of Bond Counsel to the effect that Facilities condemned were pledged as security for Non-Recourse Indebtedness incurred in under then-existing law the consummation of such merger, consolidation, sale or accordance with Section 415(F) hereof or Indebtedness secured by Liens imposed in accordance conveyance, whether or not contemplated on the original date of delivery of such with paragraph (z) of the definition of Permitted Encumbrances and the documents pursuant to Related Bonds, would not adversely affect the validity of such Related Bonds or which such Indebtedness was issued require Net Proceeds to be applied in a manner inconsistent the exemption otherwise available from federal income taxation of interest with this Section 411. Nothing contained herein shall preclude the Obligated Group from payable on such Related Bonds. redeeming any Related Bonds pursuant to the terms of any Related Bond or any Related Bond Indenture, or from replacing, repairing, reconstructing, restoring or improving any of the (b) In case of any such consolidation, merger, sale or conveyance and upon Facilities of the Obligated Group or acquiring additional Facilities for the Obligated Group, with any such assumption by the successor, such successor shall succeed to and be substituted Net Proceeds below the $50,000,000 threshold. for its predecessor, with the same effect as if it had been named herein as such Member. Any successor to such Member thereupon may cause to be signed and may issue in its Section 412. Other Provisions with Respect to Net Proceeds. Amounts received by the own name Obligations hereunder and the predecessor shall be released from its Master Trustee in respect of any awards pursuant to Section 411 shall, at the Written Request of obligations hereunder and under any Obligations, if such predecessor shall have the Group Representative, be deposited in a special trust account and be invested or reinvested conveyed all Property owned by it (or all such Property shall be deemed conveyed by by the Master Trustee in Permitted Investments as specified in such Written Request. operation of law) to such successor. All Obligations so issued by such successor Notwithstanding anything herein to the contrary, any moneys on deposit with the Master Trustee hereunder shall in all respects have the same legal rank and benefit under this Master shall be invested in accordance with, and subject to the terms of, the Tax Exemption Agreements Indenture as Obligations theretofore or thereafter issued in accordance with the terms of to the extent applicable. this Master Indenture as though all of such Obligations had been issued hereunder by such prior Member without any such consolidation, merger, sale or conveyance having occurred.
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(c) In case of any such consolidation, merger, sale or conveyance, Substitute (B) At the time of delivery of the financial report referred to in subsection (A) Obligations may, but shall not be required to, be issued to reflect the obligations of any above, a certificate of the Group Representative signed by its President, Chief Financial successor to a Member following a merger, consolidation, sale or conveyance, but no Officer, Treasurer or any Vice President, together with a written calculation prepared by change in substance of any Obligation may be made other than in accordance with Article the Group Representative of the Obligated Group’s Historical Debt Service Coverage VII of this Master Indenture. Ratio for said Fiscal Year, and stating that the Group Representative has made a review of the activities of each Member during the preceding Fiscal Year for the purpose of (d) The Master Trustee may rely upon an Opinion of Counsel as conclusive determining whether or not the Members have complied with all of the terms, provisions evidence that any such consolidation, merger, sale or conveyance, and any such and conditions of this Master Indenture and that each Member has kept, observed, assumption, complies with the provisions of this Section and that it is proper for the performed and fulfilled each and every covenant, provision and condition of this Master Master Trustee under the provisions of Article VII and of this Section to join in the Indenture on its part to be performed and is not in default in the performance or execution of any instrument required to be executed and delivered by this Section. observance of any of the terms, covenants, provisions or conditions hereof, or if any Member shall be in default such certificate shall specify all such defaults and the nature Section 414. Financial Statements. The Members covenant that they will keep or cause thereof. Such certificates may be given in reliance on certificates provided to the Group to be kept proper books of records and accounts in which full, true and correct entries will be Representative by individual Members of the Obligated Group. included of all dealings or transactions of or in relation to the business and affairs of the Obligated Group in accordance with accounting principles generally accepted in the United The Members also agree that, within 10 days after its receipt thereof, the Group States consistently applied except as may be disclosed in the notes to the audited financial Representative will file with the Master Trustee a copy of each Consultant’s Report or counsel’s statements referred to in subparagraph (A) below. The financial statements provided may be opinion required to be prepared under the terms of this Master Indenture. consolidated financial statements which include, but are not limited to, Members of the Obligated Group. To the extent that accounting principles generally accepted in the United Without limiting the foregoing each Member will permit the Master Trustee (or such States would require that the financial statements provided consolidate certain financial persons as the Master Trustee may designate) to visit and inspect, at the expense of such Person, information of entities which are not Members of the Obligated Group with financial information its Property and to discuss the affairs, finances and accounts of the Obligated Group with its D-26 of one or more Members, consolidated financial statements prepared in accordance with officers and independent accountants, all at such reasonable times during normal business hours accounting principles generally accepted in the United States which include information with following reasonable written advance notice, and as often as the Master Trustee may reasonably respect to entities which are not Members of the Obligated Group may be delivered in desire. satisfaction of the requirements of this Section 414 provided that the Obligated Group provide an Officer’s Certificate stating that the total revenues of the Obligated Group constitute 80% or Each Member agrees that, whenever requested by any Related Issuer, it shall provide and more of the revenues reflected in such consolidated financial statements. If such certificate is not certify, or cause to be provided and certified, in form satisfactory to such Related Issuer, such delivered, then the Obligated Group shall deliver to the Master Trustee with the audited financial information concerning such Member and the other Members, their property, their operation and statements, supplemental information in sufficient detail to separately identify the information finances and other matters that such Related Issuer reasonably considers necessary to enable it to with respect to the Members of the Obligated Group in such statements. If such supplemental complete and publish an official statement relating to its Related Bonds when any of such information with respect to the Members of the Obligated Group is provided, then such Related Bonds are to be offered for sale or to enable it to make any reports required by law, supplemental information shall be used for purposes of all covenants, tests, requirement and governmental regulations or the Related Bond Indenture in connection with any such Related reporting required hereunder and if no such supplemental information is required or provided, Bonds. the financial information from the consolidated financial statements shall be used for purposes of all covenants, tests, requirement and reporting required hereunder. The Members further The Group Representative may designate a different Fiscal Year for the Members of the covenant that they will furnish to the Master Trustee, subject to the foregoing provisions: Obligated Group by delivering a notice to the Master Trustee designating the first day and the last day of such new Fiscal Year and whether there will be any interim fiscal period (the “Interim (A) As soon as practicable after they are available, but in no event more than Period”) preceding such new Fiscal Year. No Interim Period shall exceed 18 months in duration. 150 days after the last day of each Fiscal Year, an audited financial report for such Fiscal The Members covenant that they will furnish to the Master Trustee, as soon as practicable after Year certified by a firm of nationally or regionally recognized independent certified they are available, but in no event more than 150 days after the last day of the Interim Period, a public accountants experienced in health care covering the operations of the Obligated financial report for such Interim Period certified by a firm of nationally or regionally recognized Group for such Fiscal Year and containing combined/consolidated statements of financial independent certified public accountants experienced in health care covering the operations of position, statements of operations, statements of changes in net assets and a statement of the Obligated Group for such Interim Period and containing combined/consolidated statements cash flows as of the end of such Fiscal Year, showing in each case in comparative form of financial position, statements of operations, statements of changes in net assets and a the financial figures for the preceding Fiscal Year. statement of cash flows as of the end of such Interim Period, showing in each case in comparative form the financial figures for the comparable period in the preceding Fiscal Year.
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Section 415. Permitted Additional Indebtedness. So long as any Obligations are balance at the Projected Rate and is payable on a level annual debt service basis outstanding, the Obligated Group will not incur any Additional Indebtedness (whether or not over a 30-year period. incurred through the issuance of Additional Obligations) other than: (F) Non-Recourse Indebtedness without limit. (A) Funded Indebtedness, if prior to incurrence thereof or, if such Funded Indebtedness was incurred in accordance with another subsection of this Section 415 and (G) Balloon Indebtedness if the conditions set forth in subsection (A) above any Member wishes to have such Funded Indebtedness classified as having been issued are met with respect to such Balloon Indebtedness when it is assumed that such Balloon under this subsection (A), prior to such classification, the Transaction Test has been Indebtedness bears interest at the Projected Rate and is payable on a level annual debt satisfied. service basis over 30 years from the date of the incurrence of such Balloon Indebtedness (or, if the term thereof exceeds 30 years, over a period equal to such term): (B) Completion Funded Indebtedness without limit. (H) Put Indebtedness if the conditions set forth in subsection (A) above are (C) Funded Indebtedness for the purpose of refinancing or refunding (whether met with respect to such Put Indebtedness when it is assumed that such Put Indebtedness in advance or otherwise, including refunding through the issuance of Cross-over bears interest at the Projected Rate and is payable on a level annual debt service basis Refunding Indebtedness) any outstanding Funded Indebtedness without limit. over a 30-year period commencing with the next succeeding Put Date.
(D) Short-Term Indebtedness (other than Short-Term Indebtedness incurred in (I) Guaranties of the payment by another Person not a Member of the accordance with subsection (E) hereof) in a total principal amount which at the time Obligated Group of a sum certain if the conditions set forth in subsection (A) of this incurred does not exceed 20% of Revenues of the Obligated Group; provided, however Section 415 are satisfied when it is assumed that the obligation guaranteed is that the total principal amount of Short-Term Indebtedness incurred pursuant to this Indebtedness of the Obligated Group; provided, however, that if the obligation subsection (D) and the total principal of Indebtedness incurred under subsection (M) guaranteed is Short-Term Indebtedness, Balloon Indebtedness or Put Indebtedness, the hereof, excluding, in each case, such principal to the extent that amounts are on deposit in assumptions set forth in subsection (E), (G) or (H), as the case may be, of this Section
D-27 an irrevocable escrow and such amounts (including, where appropriate, the earnings or 415 shall be utilized in making such determination; provided further, that for the purpose other increments to accrue thereon) are required to be applied to pay such principal and of so determining whether the conditions set forth in subsection (A) of this Section 415 such amounts so required to be applied are sufficient to pay such principal, does not are satisfied, and for all other purposes of this Master Indenture, the Maximum Annual exceed 35% of Revenues reflected in the Financial Statements of the Obligated Group. Debt Service Requirement on Indebtedness of a Person other than a Member guaranteed For the purposes of this subsection, Short-Term Indebtedness shall not include overdrafts by a Member shall be an amount equal to 20% of such Maximum Annual Debt Service to banks to the extent there are immediately available funds of the Obligated Group Requirement on the Indebtedness which is guaranteed; provided, however, if the sufficient to pay such overdrafts and such overdrafts are incurred and corrected in the guarantor has made a payment on its guaranty with respect to such Indebtedness in the normal course of business. prior 12 months it shall be an amount equal to 100% of such Maximum Annual Debt Service Requirement on the Indebtedness which is guaranteed; and provided further that (E) Short-Term Indebtedness if: the Obligated Group’s Income Available for Debt Service shall not be deemed to include
any Revenues of the Primary Obligor. (1) There is in effect at the time the Short-Term Indebtedness provided for by this subsection (E) is incurred a binding commitment (including without (J) Liabilities for contributions to self-insurance or shared or pooled-risk limitation letters or lines of credit or insurance) which may be subject only to insurance programs required or permitted to be maintained under this Master Indenture. commercially reasonable contingencies, by a financial institution, surety or insurance company generally regarded as responsible, which commitment and (K) Commitment Indebtedness without limit. financial institution, surety or insurance company are not objectionable to the Master Trustee, to provide financing sufficient to pay such Short-Term (L) Indebtedness consisting of accounts payable incurred in the ordinary Indebtedness at its maturity; and course of business and other Indebtedness not incurred or assumed primarily to assure the repayment of money borrowed or credit extended which Indebtedness is incurred in the (2) The conditions described in subsection (A) are met with respect to ordinary course of business. such Short-Term Indebtedness when it is assumed that such Short-Term Indebtedness is Funded Indebtedness maturing over 30 years from the date of (M) Indebtedness the principal amount of which at the time incurred, together issuance of the Short-Term Indebtedness, bears interest on the unpaid principal with the aggregate principal amount of all other Indebtedness then outstanding which was issued pursuant to the provisions of this subsection (M) and which has not been subsequently reclassified as having been issued under subsection (A), (D), (E), (G) or
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(H), plus Short-Term Indebtedness incurred under subsection (D) does not exceed 35% of Indebtedness be paid, purchased or redeemed prior to its stated maturity date (other than at the the Revenues reflected in the Financial Statements of the Obligated Group. option of such holder and other than pursuant to any mandatory sinking fund or any similar fund), has expired or lapsed as of the date of calculation, such Put Indebtedness shall be deemed (N) Indebtedness incurred in connection with a sale, purported sale, pledge, payable in accordance with its terms. mortgage or other transfer or financing of accounts receivable with or without recourse. In determining the amount of debt service payable on Indebtedness in the course of the (O) Subordinated Indebtedness without limit. various calculations required under certain provisions of this Master Indenture, if the terms of the Indebtedness being considered are such that interest thereon for any future period of time is (P) Liabilities (other than those of the types described in subsections (A) expressed to be calculated at a varying rate per annum, a formula rate or a fixed rate per annum through (O), inclusive, of this Section 415) incurred in the ordinary course of the based on a varying index, then for the purpose of making such determination of debt service, Obligated Group’s business, including without limitation payments for goods and interest on such Indebtedness for such period (the “Determination Period”) shall be computed by services, operating leases, general and hospital or health system professional liability assuming that the rate of interest applicable to the Determination Period is equal to the average claims and, in the event of consummation of an Affiliation, Academic Support Payments of the rate of interest (calculated in the manner in which the rate of interest for the Determination and Intercompany Services Payments. Period is expressed to be calculated) which was in effect on the last date of each of the six consecutive calendar months immediately preceding the month in which such calculation is It is agreed and understood by the parties hereto that various types of Indebtedness may made; provided that if the index or other basis for calculating such interest was not in existence be incurred under any of the above-referenced subsections with respect to which the tests set for at least six full calendar months next preceding the date of calculation, the rate of interest for forth in such subsection are met and need not be incurred under only a subsection specifically such portion of such period shall be deemed to be the rate of interest borne by such Indebtedness referring to such type of Indebtedness (e.g., Balloon Indebtedness and Put Indebtedness may be when issued. The provisions of this paragraph shall not apply to Put Indebtedness or Balloon incurred under subsection (A) above if the tests therein are satisfied). Indebtedness unless such Put Indebtedness or Balloon Indebtedness is incurred pursuant to the provisions of Section 415(A) or is thereafter reclassified as issued pursuant to such Section. Each Member covenants that Indebtedness of the type permitted to be incurred under Such rate shall be adjusted to take into consideration any Interest Rate Agreement pursuant to the
D-28 subsection (L) above will not be allowed to become overdue for a period in excess of that which last paragraph of this Section. is ordinary for similar institutions without being contested in good faith and by appropriate proceedings. Obligations issued to secure Indebtedness permitted to be incurred under Section 415 shall not be treated as Additional Indebtedness separate from or in addition to the Indebtedness Each Member covenants that prior to, or as soon as reasonably practicable after, the secured thereby, such that no Indebtedness shall be required to be qualified more than once. incurrence of Indebtedness by such Member for money borrowed or credit extended, or the equivalent thereof, it will deliver to the Master Trustee an Officer’s Certificate which identifies No debt service shall be deemed payable with respect to Commitment Indebtedness until the Indebtedness incurred, identifies the subsection of this Section 415 pursuant to which such such time as funding occurs under the commitment which gave rise to such Commitment Indebtedness was incurred, demonstrates compliance with the provisions of such subsection and Indebtedness. From and after such funding, the amount of such debt service shall be calculated attaches a copy of the instrument evidencing such Indebtedness; provided, however, that this in accordance with the actual amount required to be repaid on such Commitment Indebtedness requirement shall not apply to Indebtedness incurred pursuant to subsection (J), (L) or (N) of this and the actual interest rate and amortization schedule applicable thereto. No Additional Section. Indebtedness shall be deemed to arise when any funding occurs under any such commitment or any such commitment is renewed upon terms which provide for substantially the same terms of Section 416. Calculation of Debt Service and Debt Service Coverage. The various repayment of amounts disbursed pursuant to such commitment as obtained prior to such renewal. calculations of the amount of Indebtedness of a Person, the amortization schedule of such Indebtedness and the Debt Service Requirements with respect to such Indebtedness required None of (i) conversion of variable rate Indebtedness to bear interest at a fixed rate in under certain provisions of this Master Indenture shall be made in a manner consistent with that accordance with its terms, (ii) a conversion of variable rate Indebtedness to bear interest in adopted in Section 415 and in this Section 416. In the case of Balloon or Put Indebtedness another variable rate interest mode or any other shift in the method of computing interest on issued pursuant to subsection (B), (G), (H) or (M) of Section 415 hereof, unless such Indebtedness or the terms on which Indebtedness may be tendered which shift is made in Indebtedness is reclassified pursuant to this Section 416 as having been issued pursuant to accordance with the terms of such Indebtedness, or (iii) a change in the interest rate in another subsection of Section 415, the amortization schedule of such Indebtedness and the debt accordance with the terms of the Related Bond Indenture or Related Loan Documents shall be service payable with respect to such Indebtedness for future periods shall be calculated on the deemed to constitute the issuance or incurrence of such Indebtedness for the purposes of assumption that such Indebtedness is being issued simultaneously with such calculation. With applying the various tests under this Master Indenture. respect to Put Indebtedness, if the option of the holder to require that such Indebtedness be paid, purchased or redeemed prior to its stated maturity date, or if the requirement that such
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Balloon Indebtedness incurred as provided under subsection (B) or (M) of Section 415, to be made or received by such Member regardless of the rating of the provider of such Interest unless reclassified pursuant to this Section 416, shall be deemed to be payable in accordance Rate Agreement. with the assumptions set forth in subsection (G) of Section 415. Put Indebtedness incurred as provided under subsection (B) or (M) of Section 415, unless reclassified pursuant to this Section Section 417. Sale, Lease or Other Disposition of Property. Each Member agrees that it 416, shall be deemed to be payable in accordance with the assumptions set forth in subsection will not, in any Fiscal Year, sell, lease (as lessor) or otherwise dispose (excluding any (H) of Section 415. involuntary disposition) of Property except:
Except for the purpose of determining whether any particular Guaranty of a Person other (A) For transfers of Property in the ordinary course of business, which, for than a Member guaranteed by a Member may be incurred, in which case it shall be assumed that purposes of this Master Indenture following consummation of an Affiliation, shall the Indebtedness to be incurred is Funded Indebtedness of the guarantor under such Guaranty, include Academic Support Payments and Intercompany Services Payments; and except for the purpose of calculating any historical Debt Service Requirements, in which case the guarantor’s Debt Service Requirements under such Guaranty shall be deemed to be the (B) If the Current Value of the Property so sold, leased or otherwise disposed actual amount paid on such Guaranty by the guarantor, a guarantor shall be considered liable for of in such Fiscal Year in reliance on the clause (B) does not, in the aggregate, exceed the annual debt service requirement on the Indebtedness guaranteed only for an amount equal to 10% of the Current Value of the Property of the Obligated Group as reflected in the 20% of such Maximum Annual Debt Service Requirement on the Indebtedness guaranteed; Financial Statements of the Obligated Group (or at the option of the Obligated Group, the provided, however, if the guarantor has made a payment on its Guaranty with respect to such Book Value of the Property so sold, leased or otherwise disposed does not in the Indebtedness in the prior 12 months it shall be considered liable for an amount equal to 100% of aggregate exceed 10% of the Book Value of the Property of the Obligated Group); such Maximum Annual Debt Service Requirement on the Indebtedness which is guaranteed. (C) In return for other Property of equal or greater value; For the purpose of the various calculations required under this Master Indenture, the Capitalized Rentals under a Capitalized Lease at the time of such calculation will be deemed to (D) To any Person, if the Property to be transferred is determined in good faith be the principal payable thereon. by the transferring Member to be, or within the next succeeding 24 calendar months is
D-29 reasonably expected to, become inadequate, obsolete, worn out, unsuitable, unprofitable, Each Member may elect to have Indebtedness issued pursuant to one provision of Section undesirable or unnecessary and the sale, lease or other disposition thereof will not impair 415, including without limitation subsection (M) of Section 415, reclassified as having been the structural soundness, efficiency or economic value of the remaining Property; incurred under another provision of Section 415, by demonstrating compliance with such other provision on the assumption that such Indebtedness is being reissued on the date of delivery of (E) To another Member, except that any Property financed with the proceeds the materials required to be delivered under such other provision including the certification of from the sale of Related Bonds may not be transferred to a Member that is not a Tax- any applicable Projected Rate. From and after such demonstration, such Indebtedness shall be Exempt Organization unless on Opinion of Bond Counsel is delivered to the Master deemed to have been incurred under the provision with respect to which such compliance has Trustee and Related Bond Trustee to the effect that such transfer will not adversely affect been demonstrated until any subsequent reclassification of such Indebtedness. the exclusion from gross income for federal income tax purposes of the interest on such Related Bonds; Anything herein to the contrary notwithstanding, any portion of any Indebtedness of any Member for which an Interest Rate Agreement has been obtained by such Member shall be (F) To any Person, for reasonably equivalent value; deemed to bear interest for the period of time that such Interest Rate Agreement is in effect at a (G) To any Person, if such Property consists solely of assets which are net rate which takes into account Interest Rate Agreement Payments made or to be made by such specifically restricted by the donor or grantor to a particular purpose which is inconsistent Member under such Interest Rate Agreement and the Interest Rate Agreement Receipts received with their use for payment on the Obligations; or to be received by such Member on such Interest Rate Agreement; provided that the long-term credit rating of the provider of such Interest Rate Agreement (or any guarantor thereof) is in one (H) Pursuant to Section 423 hereof, to the extent applicable; of the three highest rating categories of any Rating Agency (without regard to any refinements of gradation of rating category by numerical modifier or otherwise) or is at least as high as that of (I) To any Person, if the transfer or other disposition has not been qualified the Obligated Group. In addition, so long as any Indebtedness is deemed to bear interest at a rate under any other provision of this Section 417 and an Officer’s Certificate of the Group taking into account an Interest Rate Agreement, any Interest Rate Agreement Payments made or Representative is delivered to the Master Trustee demonstrating that the Transaction Test to be made by a Member on such Interest Rate Agreement shall be excluded from Expenses and shall have been met for, and giving effect to, such proposed disposition as if such any Interest Rate Agreements Receipts received or to be received by a Member on such Interest disposition had occurred on the first day of such Fiscal Year. Rate Agreement shall be excluded from Revenues, in each case, for all purposes of this Master Indenture. The net rate shall apply to regularly scheduled payments actually made or received or
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The foregoing provisions of this Section notwithstanding, each Member further agrees such acquisition, and without any further mortgaging, conveyance or assignment, shall that it will not sell, lease, donate or otherwise dispose of Property (a) which could reasonably be become and be part of the “trust estate” and shall be subject, if applicable to Property of expected at the time of such sale, lease, donation or disposition to result in a reduction of the such type, to the security interest of this Master Indenture and/or any subsequently Historical Debt Service Coverage Ratio for the Obligated Group such that the Obligated Group created liens and security interest securing the Obligations as fully and completely and would be required to retain a Consultant pursuant to Section 409 hereof, or (b) if a Consultant with the same effect as though owned by the Members at the time this Master Indenture has been retained in the circumstances described in Section 409 hereof, such action, in the was executed or any and all such other liens and security interests were created, but at opinion of such Consultant, will have an adverse effect on the Income Available for Debt Service any and all times the Members will execute and deliver to the Master Trustee any and all of the Obligated Group. such further assurances, mortgages, conveyances or assignments thereof and other instruments with respect thereto as the Master Trustee may reasonably require for the For purposes of avoidance of doubt, transfers of cash, investments or other cash- purpose of expressly and specifically subjecting the same to the security interest of the equivalents to a non-Member manager, agent, representative or other Affiliate, solely for Master Indenture or such other subsequently created liens and security interests. purposes of effecting or maintaining centralized accounting, cash and investment management operations and services by or on behalf of one or more Members of the Obligated Group and Section 422. Indemnity. Each Member will jointly and severally pay, and will protect, their Affiliates (whether or not Members), including, without limitation, in connection with an indemnify and save the Master Trustee harmless from and against any and all liabilities, losses, Affiliation, shall not constitute a disposition of assets as contemplated by, or in violation of, this damages, costs and expenses (including attorneys’ fees and expenses of such Member and the Section. Master Trustee and legal fees and expenses in connection with enforcement of its rights hereunder), causes of action, suits, claims, demands and judgments of whatsoever kind and Section 418. Liens on Property. Each Member covenants not to create or permit to be nature (including those arising or resulting from any injury to or death of any person or damage created or remain and, at its cost and expense, to promptly discharge or terminate all Liens on to Property) arising from or in any manner directly or indirectly growing out of or connected Property owned by such Member (for purposes of avoidance of doubt, not including Property with the following: occupied or used by a Member pursuant to a lease or other occupancy or use agreement, right or arrangement) or any part thereof which are not Permitted Encumbrances. (1) the use, non-use, condition or occupancy of any of the Property of D-30 any Member, any repairs, construction, alterations, renovation, relocation, Section 419. List of Obligation Holders. The Master Trustee will keep on file at its remodeling and equipping thereof or thereto or the condition of any of such corporate trust office a list of the names and addresses of the last known holders of all Property including adjoining sidewalks, streets or alleys and any equipment or Obligations and the serial numbers of such Obligations held by each of such holders. At Facilities at any time located on such Property or used in connection therewith but reasonable times and under reasonable regulations established by the Master Trustee, said list which are not the result of the gross negligence of the Master Trustee; may be inspected and copied by any Member, any Obligation holder or the authorized representative thereof, provided that the ownership of such holder and the authority of any such (2) violation of any agreement, warranty, covenant or condition of this designated representative shall be evidenced to the satisfaction of the Master Trustee. Master Indenture, except by the Master Trustee;
Section 420. Designation of Additional Paying Agents. The Group Representative may, (3) violation of any contract, agreement or restriction by any Member in its discretion, cause the necessary arrangements to be made through the Master Trustee and to relating to its Property; be thereafter continued for the designation of alternate Paying Agents, if any, and for the making available of funds hereunder for the payment of such of the Obligations as shall be presented (4) violation of any law, ordinance, regulation or court order affecting when due at the designated corporate trust office of the Master Trustee, or its successor in trust any Property of any Member or the ownership, occupancy or use thereof; hereunder, or at the principal corporate trust office of said alternate Paying Agents. (5) any statement or information contained in any official statement or Section 421. Further Assurances; Additional Property. (a) The Members will do, other offering document furnished to the Master Trustee or the purchaser of any execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, Obligations or any Related Bonds, that is untrue or incorrect in any material all such further acts, deeds, conveyances, assignments, transfers and assurances as the Master respect, and any omission from such official statement or other offering document Trustee reasonably may require for the better assuring, assigning and confirming unto the Master of any statement or information which should be contained therein for the purpose Trustee, its successors and assigns, all and singular the security granted hereunder. for which the same is to be used or which is necessary to make the statements therein not misleading in any material respect; and (b) All right, title and interest of the Members in and to all improvements, betterments, renewals, substitutions and replacements of the Property constituting the (6) the Master Trustee’s acceptance or administration of the Master “trust estate” or any part thereof, hereafter acquired by a Member, immediately upon Indenture, including the costs and expenses of defending itself against any claim
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or liability in connection with the exercise or performance of any of its powers or pledged hereunder for the benefit of the holders of Obligations outstanding is or remains duly duties hereunder (other than costs and expenses as a result of the Master Trustee’s perfected, as to items comprising Gross Revenues in which a security interest may perfected gross negligence or willful misconduct). under the Uniform Commercial Code as in effect in the State of Delaware and to the extent such security interest may be perfected by the filing of a financing statement in the Office of the In the event of settlement of any litigation commenced or threatened, such indemnity Secretary of State of the State of Delaware. shall be limited to the aggregate amount paid under a settlement effected with the written consent of the Group Representative. Section 424. Accounting Terms. Unless otherwise defined or specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall The Master Trustee shall promptly notify the Group Representative in writing of any be made, all financial statements required to be delivered hereunder shall be prepared, and all claim or action brought against the Master Trustee or any controlling person, as the case may be, financial records shall be maintained, in accordance with generally accepted accounting in respect of which indemnity may be sought against any Member, setting forth the particulars of principles in the United States as in effect from time to time, applied on a basis consistent such claim or action, and the Obligated Group will assume the defense thereof, including the (except for such changes approved by the Obligated Group’s independent public accountants) employment of counsel satisfactory to the Master Trustee or such controlling person, as the case with the audited financial statements of the Obligated Group as of and for the Fiscal Year ending may be, and the payment of all expenses; provided that the failure to provide such notice shall June 30, 2017; provided that, if there is any change in generally accepted accounting principles not eliminate the obligation to indemnify the Master Trustee. The Master Trustee or any such in the United States which results in a material change in the method of calculation of any controlling person, as the case may be, may employ separate counsel in any such action and covenant or obligation herein, including without limitation, in Article IV and, as a result thereof, participate in the defense thereof, and the reasonable fees and expenses of such counsel shall not the Group Representative notifies the Master Trustee in writing that the Obligated Group wishes be payable by the Obligated Group unless such employment has been specifically authorized by to amend any covenant to eliminate the effect of any such change on the operation of such the Group Representative, which authorization shall not be unreasonably withheld; provided that covenant, then the Obligated Group and the Master Trustee shall amend this Master Indenture so in the event of a conflict of interest or potential imposition of criminal liability, the Master as to equitably reflect such change, with the desired result that the criteria for calculating such Trustee shall be authorized to retain separate counsel, the fees and expenses of which shall be covenant shall be the same after such change as if such change had not been made and, until such paid as indemnity under the terms of this Master Indenture. The obligations of the Members set notice is withdrawn or such covenant is amended in a manner satisfactory to the Group D-31 forth in this Section 422 shall survive the termination of this Master Indenture or the resignation Representative, the Obligated Group’s compliance with such covenant shall be determined on or removal of the Master Trustee. the basis of generally accepted accounting principles in the United States in effect immediately before the relevant change became effective. Section 423. Pledge of Gross Revenues; Filing of Financing Statements by the Obligated Group. The Obligated Group hereby covenants to cause to be executed and filed such Further, for purposes of calculating the Historical Debt Service Coverage Ratio, the financing statements, continuation statements, amendments to or terminations of existing Historical Pro-Forma Debt Service Coverage Ratio or any other financial calculation requiring financing statements and other instruments as may be necessary to perfect the security interest in an historical or look-back calculation based upon the Financial Statements of the Obligated Gross Revenues granted by each existing or future Member of the Obligated Group pursuant to Group for any period for which audited financial statements do not include all Members as this Master Indenture insofar as the same can be perfected by filing. Evidence of the filing of constituted on the date of the related calculation, the calculations shall be made on the basis of any such financing statements, continuation statements or other instruments shall be provided to the actual audited financial statements as prepared and adjusted to give pro forma effect to the Master Trustee; provided, however, that at the written request of the Group Representative, joinder, assets, liabilities and operations of the Members as constituted on the related calculation the Master Trustee will execute and deliver, at the cost of the Obligated Group, such appropriate date. documents presented to it in final execution form, including without limitation, releases and termination statements releasing and/or terminating the Lien created hereunder on those Gross ARTICLE V Revenues that are sold or factored to the extent expressly permitted by this Master Indenture; and EVENTS OF DEFAULT AND REMEDIES provided further that Gross Revenues pledged hereunder may be made subject to a Lien to the extent expressly permitted hereunder. Section 501. Extension of Payment; Penalty. In case the time for the payment of Required Payments on any Obligation shall be extended pursuant to a written instrument To the fullest extent permitted by applicable law, the Master Trustee may conclusively executed by the Holder of such Obligation and delivered to the Master Trustee following (i) the rely on the obligations of the Obligated Group under this Section 423 in the performance and occurrence and during the continuance of an Event of Default and (ii) the provision of notice satisfaction of its obligations and duties hereunder, without requirement of independent inquiry thereof to the Holders of Obligations by the Master Trustee, whether or not such extension be by or investigation. In addition, the Master Trustee may, from time to time, but without any or with the consent of the Master Trustee, such Required Payments so extended shall not be obligation to do so, request that the Group Representative, at the expense of the Obligated entitled in case of default hereunder to the benefit or security of this Master Indenture except Group, provide the Master Trustee with an Opinion of Counsel confirming that the Master subject to the prior payment in full of the principal of all Obligations then outstanding and of all Trustee’s security interest in the Gross Revenues of each Member of the Obligated Group interest thereon, the time for the payment of which shall not have been extended.
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Section 502. Events of Default. Each of the following events is hereby declared an Indebtedness that entitles the holder thereof to accelerate the amounts due and payable “Event of Default”: thereunder or (ii) the failure of any Member to pay when due any Interest Rate Agreement Extraordinary Payments due under an Interest Rate Agreement to which it is a (a) failure of the Obligated Group to pay any Required Payments on any party; provided however, that any such event of default or failure to pay will not Obligation when the same shall become due and payable, whether at maturity, upon any constitute an Event of Default under this paragraph (f) if the aggregate unpaid principal date fixed for prepayment or by acceleration or otherwise and the continuance of such amount of all Indebtedness as to which any such event of default exists, together with failure beyond any applicable grace or cure period set forth in the applicable Obligation; amounts due and unpaid under an Interest Rate Agreement as described in clause (ii), or does not exceed 5% of the Revenues reflected in the Financial Statements of the Obligated Group. (b) failure of any Member to comply with, observe or perform any of the covenants, conditions, agreements or provisions hereof (other than as described in (g) any Member admits in writing to insolvency or bankruptcy or its inability subparagraph (a) above) and to remedy such default within 60 days after written notice to pay its debts as they mature, or makes an assignment for the benefit of creditors or thereof to such Member and the Group Representative from the Master Trustee or the applies for or consents to the appointment of a trustee, custodian or receiver for such holders of at least 25% in aggregate principal amount of the outstanding Obligations; Member, or for the major part of its Property; or provided, that if such default cannot with due diligence and dispatch be wholly cured within 60 days but can be wholly cured, the failure of the Member to remedy such default (h) a trustee, custodian or receiver is appointed for any Member or for the within such 60-day period shall not constitute a default hereunder if the Member shall major part of its Property and is not discharged within 90 days after such appointment; or immediately upon receipt of such notice commence with due diligence and dispatch the curing of such default and, having so commenced the curing of such default, shall (i) bankruptcy, dissolution, reorganization, arrangement, insolvency or thereafter prosecute and complete the same with due diligence and dispatch; or liquidation proceedings, proceedings under Title 11 of the United States Code, as amended, or other proceedings for relief under any bankruptcy law or similar law for the (c) any representation or warranty made by any Member herein or in any relief of debtors are instituted by or against any Member (other than bankruptcy or
D-32 statement or certificate furnished to the Master Trustee or the purchaser of any Obligation similar proceedings instituted by any Member against third parties), and if instituted in connection with the sale of any Obligation or furnished by any Member pursuant against any Member are allowed against such Member or are consented to or are not hereto proves untrue in any material respect as of the date of the issuance or making dismissed, stayed or otherwise nullified within 90 days after such institution. thereof and shall not be corrected or brought into compliance within 60 days after written notice thereof to the Group Representative by the Master Trustee or the holders of at least Section 503. Acceleration. If an Event of Default has occurred and is continuing, the 25% in aggregate principal amount of the outstanding Obligations; provided, however, Master Trustee may, and if requested in writing by the holders of not less than 25% in aggregate that the failure of any such representation or warranty to be true in any material respect principal amount of outstanding Obligations, shall, by notice in writing delivered to the Group shall not constitute an Event of Default hereunder if such Member shall immediately Representative, declare the Required Payments on all Obligations then outstanding hereunder upon receipt of a notice that such representation or warranty has failed to be true in any immediately due and payable, and the Required Payments shall thereupon become immediately material respect commence with due diligence and dispatch to take such actions to cause due and payable, subject, however, to the provisions of Section 511 hereof with respect to such representation or warranty to be true in all material respects; or waivers of Events of Default.
(d) any defined event of default shall occur and be continuing under any Section 504. Remedies; Rights of Obligation Holders. Upon the occurrence of any Related Bond Indenture or any Related Loan Document after giving effect to any notice Event of Default, the Master Trustee may pursue any available remedy including a suit, action or or right to cure applicable thereto, or any waivers thereof; or proceeding at law or in equity to enforce the payment of the Required Payments on the Obligations outstanding hereunder and any other sums due hereunder, and may collect such sums (e) any final, non-appealable judgment not fully covered by policies of in the manner provided by law out of the Property or, to the extent permitted by applicable law, insurance or self-insurance, writ of execution or attachment or of any similar process, in the Excluded Property of any Member wherever situated. an amount greater than or equal to 5% of the Revenues reflected in the Financial Statements of the Obligated Group, shall be entered or filed against any Member or If an Event of Default shall have occurred, and if it shall have been requested so to do by against any Property of any Member and remains unvacated, unpaid, unbonded, unstayed the holders of 25% or more in aggregate principal amount of Obligations outstanding upon or uncontested in good faith for a period of 90 days; or whose request pursuant to Section 503 hereof the Master Trustee has accelerated the Obligations and if it shall have been indemnified as provided in Section 603(e) hereof, the Master Trustee (f) (i) the occurrence of an event of default as defined in any mortgage, shall be obligated to exercise such one or more of the rights and powers conferred by this Section indenture, loan agreement or other instrument under which any Member has incurred as the Master Trustee shall deem most expedient in the interests of the holders of Obligations;
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provided, however, that the Master Trustee shall have the right to decline to comply with any direction shall not be otherwise than in accordance with the provisions of law and of this Master such request if the Master Trustee shall be advised by counsel (who may be its own counsel) that Indenture. the action so requested may not lawfully be taken or the Master Trustee in good faith shall determine that such action would be unjustly prejudicial to the holders of Obligations not parties Section 506. Appointment of Receivers. Upon the occurrence of an Event of Default, to such request. and upon the filing of a suit or other commencement of judicial proceedings to enforce the rights of the Master Trustee and the holders of Obligations under this Master Indenture, the Master No remedy by the terms of this Master Indenture conferred upon or reserved to the Trustee shall be entitled, as a matter of right, to the appointment of a receiver or receivers of the Master Trustee (or to the holders of Obligations) is intended to be exclusive of any other remedy, rights and properties pledged hereunder and of the revenues, issues, payments and profits but each and every such remedy shall be cumulative and shall be in addition to any other remedy thereof, pending such proceedings, with such powers as the court making such appointment shall given to the Master Trustee or to the holders of Obligations hereunder now or hereafter existing confer. at law or in equity or by statute. Section 507. Application of Moneys. All moneys received by the Master Trustee No delay or omission to exercise any right or power accruing upon any default or Event pursuant to any right given or action taken under the provisions of this Article (except moneys of Default shall impair any such right or power or shall be construed to be a waiver of any such held for the payment of Obligations called for prepayment or redemption which have become default or Event of Default, or acquiescence therein; and every such right and power may be due and payable) shall, after payment of the cost and expenses of the proceedings resulting in the exercised from time to time and as often as may be deemed expedient. collection of such moneys and of the fees of, expenses, liabilities and advances incurred or made by the Master Trustee, any Related Issuers and any Related Bond Trustees, be applied as No waiver of any default or Event of Default hereunder, whether by the Master Trustee follows: or by the holders of Obligations, shall extend to or shall affect any subsequent default or Event of Default or shall impair any rights or remedies consequent thereon. (a) Unless the principal of all the Obligations shall have become or shall have been declared due and payable, all such moneys shall be applied: Section 505. Direction of Proceedings by Holders. Subject to the provisions of Section
D-33 513 of this Master Indenture, the holders of a majority in aggregate principal amount of the First: To the payment to the persons entitled thereto of all installments of Obligations then outstanding which have become due and payable in accordance with their terms interest on the Obligations then due and Interest Rate Agreement Payments then due or have been declared due and payable pursuant to Section 503 hereof and have not been paid in which are secured by Obligations (unless a different payment priority is otherwise full in the case of remedies exercised to enforce such payment, or the holders of a majority in provided in the Obligation securing the Interest Rate Agreement or the Supplemental aggregate principal amount of the Obligations then outstanding in the case of any other remedy, Master Indenture related thereto), in the order of the maturity of the installments of such shall have the right, at any time, by an instrument or instruments in writing executed and interest and Interest Rate Agreement Payments, and, if the amount available shall not be delivered to the Master Trustee, to direct the method and place of conducting all proceedings to sufficient to pay such amounts in full, then to the payment thereof ratably, according to be taken in connection with the enforcement of the terms and conditions of this Master the amounts due thereon, to the persons entitled thereto, without any discrimination or Indenture, or for the appointment of a receiver or any other proceedings hereunder; provided, privilege; and that such direction shall not be otherwise than in accordance with the provisions of law and of this Master Indenture and that the Master Trustee shall have the right to decline to comply with Second: To the payment to the persons entitled thereto of the unpaid any such request if the Master Trustee shall be advised by counsel (who may be its own counsel) principal and other current payment obligations on the Obligations and Interest Rate that the action so directed may not lawfully be taken or the Master Trustee in good faith shall Agreement Extraordinary Payments then due under any Obligation securing an Interest determine that such action would be unjustly prejudicial to the holders of the Obligations not Rate Agreement (unless a different payment priority is otherwise provided in the parties to such direction. Obligation securing the Interest Rate Agreement or the Supplemental Master Indenture related thereto) which shall have become due (other than Obligations called for The foregoing notwithstanding, the holders of a majority in aggregate principal amount redemption or payment for payment of which moneys are held pursuant to the provisions of the Obligations then outstanding which are entitled to the exclusive benefit of certain security of this Master Indenture), in the order of the scheduled dates of their payment, and, if the in addition to that intended to secure all or other Obligations shall have the right, at any time, by amount available shall not be sufficient to pay in full Obligations due on any particular an instrument or instruments in writing executed and delivered to the Master Trustee, to direct date, then to the payment ratably, according to the amount of such principal, other current the method and place of conducting all proceedings to be taken in connection with the payment obligations and Interest Rate Agreement Extraordinary Payments, due on such enforcement of the terms and conditions of this Master Indenture, the Supplemental Master date, to the persons entitled thereto without any discrimination or privilege; and Indenture or Indentures pursuant to which such Obligations were issued or so secured or any separate security document in order to realize on such security; provided, however, that such
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Third: To the payment to the persons entitled thereto of all unpaid any recovery of judgment shall be for the equal benefit of the holders of the Outstanding principal and interest on Obligations, payment of which was extended by such persons as Obligations. described in Section 501 hereof. Section 509. Rights and Remedies of Obligation Holders. No holder of any Obligation (b) If the Required Payments on all the Obligations shall have become due or shall have any right to institute any suit, action or proceeding in equity or at law for the shall have been declared due and payable, all such moneys shall be applied to the enforcement of this Master Indenture or for the execution of any trust hereof or for the payment of the Required Payments then due and unpaid upon the Obligations without appointment of a receiver or any other remedy hereunder, unless a default shall have become an preference or priority over the others, or of any installment of interest over any other Event of Default and the holders of 25% or more in aggregate principal amount (i) of the installment of interest, or of any Obligation over any other Obligation, ratably, according Obligations which have become due and payable in accordance with their terms or have been to the amounts due respectively for such Required Payments to the persons entitled declared due and payable pursuant to Section 503 hereof and have not been paid in full in the thereto without any discrimination or privilege; provided that no amount shall be paid to case of powers exercised to enforce such payment or (ii) the Obligations then outstanding in the any Obligation holder who has extended the time for payment of Required Payments as case of any other exercise of power shall have made written request to the Master Trustee and described in Section 501 until all other Required Payments owing on Obligations have shall have offered it reasonable opportunity either to proceed to exercise the powers hereinbefore been paid; and granted or to institute such action, suit or proceeding in its own name, and unless also, in each case, such holders have offered to the Master Trustee indemnity as provided in Section 603(e), (c) If the Required Payments on all the Obligations shall have been declared and unless the Master Trustee shall thereafter fail or refuse to exercise the powers hereinbefore due and payable, and if such declaration shall thereafter have been rescinded and granted, or to institute such action, suit or proceeding in its own name; and such notification, annulled under the provisions of this Article, then, subject to the provisions of paragraph request and offer of indemnity are hereby declared in every case at the option of the Master (b) of this Section in the event that the Required Payments on all the Obligations shall Trustee to be conditions precedent to the execution of the powers and trusts of this Master later become due or be declared due and payable, the moneys shall be applied in Indenture and to any action or cause of action for the enforcement of this Master Indenture, or accordance with the provisions of paragraph (a) of this Section. for the appointment of a receiver or for any other remedy hereunder; it being understood and intended that no one or more holders of the Obligations shall have any right in any manner D-34 Whenever moneys are to be applied by the Master Trustee pursuant to the provisions of whatsoever to affect, disturb or prejudice the lien of this Master Indenture by its, his or their this Section, such moneys shall be applied by it in accordance with the order of priorities set action or to enforce any right hereunder except in the manner herein provided, and that all forth above and at such times, and from time to time, as the Master Trustee shall determine. proceedings at law or in equity shall be instituted, had and maintained in the manner herein Whenever the Master Trustee shall apply such moneys, it shall fix the date (which shall be an provided and for the equal benefit of the holders of all Obligations outstanding. Nothing in this interest payment date unless it shall deem another date more suitable) upon which such Master Indenture contained shall, however, affect or impair the right of any holder to enforce the application is to be made and upon such date interest on the amounts of principal to be paid on Required Payments on any Obligation at and after the maturity thereof, or the obligation of the such date shall cease to accrue. The Master Trustee shall give such notice as it may deem Members to pay the Required Payments on each of the Obligations issued hereunder to the appropriate of the deposit with it of any such moneys and of the fixing of any such date, and respective holders thereof at the time and place, from the source and in the manner in said shall not be required to make payment to the holder of any unpaid Obligation until such Obligations expressed. Obligation shall be presented to the Master Trustee for appropriate endorsement or for cancellation if fully paid. Section 510. Termination of Proceedings. In case the Master Trustee shall have proceeded to enforce any right under this Master Indenture by the appointment of a receiver, or Whenever all Required Payments on Obligations have been paid under the provisions of otherwise, and such proceedings shall have been discontinued or abandoned for any reason, or this Section 507 and all expenses and charges of the Master Trustee have been paid, any balance shall have been determined adversely to the Master Trustee, then and in every case the Members remaining shall be paid to the person entitled to receive the same; if no other person shall be and the Master Trustee shall, subject to any determination in such proceeding, be restored to entitled thereto, then the balance shall be paid to the Group Representative on behalf of the their former positions and rights hereunder with respect to the Property pledged and assigned Members. hereunder, and all rights, remedies and powers of the Master Trustee shall continue as if no such proceedings had been taken. Section 508. Remedies Vested in Master Trustee. All rights of action including the right to file proof of claims under this Master Indenture or under any of the Obligations may be Section 511. Waiver of Events of Default. If, at any time after the Required Payments enforced by the Master Trustee without the possession of any of the Obligations or the on all Obligations shall have been so declared due and payable, and before any judgment or production thereof in any trial or other proceedings relating thereto and any such suit or decree for the payment of the moneys due shall have been obtained or entered as hereinafter proceeding instituted by the Master Trustee shall be brought in its name as Master Trustee provided and before the acceleration of any Related Bond (or in the event such acceleration has without the necessity of joining as plaintiffs or defendants any holders of the Obligations, and been rescinded or waived pursuant to the applicable Related Bond Indenture), any Member shall pay or shall deposit with the Master Trustee a sum sufficient to pay all Required Payments upon
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all such Obligations that shall have become due otherwise than by acceleration (with interest on against any incorporator or organizer, or against any past, present or future director, trustee, overdue installments of interest and on such principal and premium, if any, at the rate borne by officer, member, manager, limited partner or employee, as such, of the Master Trustee or any such Obligations to the date of such payment or deposit, to the extent provided in such Member of the Obligated Group or of any successor entity, either directly or through the Group Obligation and permitted by law) and the expenses of the Master Trustee, and any and all Events Representative, whether by virtue of any constitution or statute or rule of law, or by the of Default under this Master Indenture, other than the nonpayment of Required Payments on enforcement of any assessment or penalty or otherwise; it being expressly understood that this such Obligations that shall have become due by acceleration, shall have been remedied, then and Master Indenture and the Obligations are solely corporate or other entity obligations, and that no in every such case the Master Trustee may, and upon written direction of the holders of a such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, majority in aggregate principal amount of all Obligations then outstanding, the Master Trustee organizers directors, trustees, officers, members, managers, limited partners or employees, as shall, by written notice to the Group Representative, waive all Events of Default and rescind and such, of the Master Trustee or any Member of the Obligated Group or any successor entity, or annul such declaration and its consequences; but no such waiver or rescission and annulment any of them, because of the creation of indebtedness hereby authorized, or under or by reason of shall extend to or affect any subsequent Event of Default, or shall impair any right consequent the obligations, covenants or agreements contained in this Master Indenture or in any of the thereon. Obligations or implied therefrom; and that any and all such personal liability, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, Section 512. Members’ Rights of Possession and Use of Property. Unless an Event of every such incorporator, organizer, director, trustee, officer, member, manager, limited partner or Default has occurred and not been rescinded or cured, each Member shall be suffered and employee, as such, are hereby expressly waived and released as a condition of, and as a permitted to possess, use and enjoy its Property and appurtenances thereto free of claims of the consideration for, the execution of this Master Indenture and the issue of such Obligations. Master Trustee. Section 516. Master Trustee Administrative Fund. There is hereby created and Section 513. Related Bond Trustee or Bondholders Deemed To Be Obligation Holders. established with the Master Trustee a special fund designated as the “Obligated Group For the purposes of this Master Indenture, unless contrary provision is made in a Related Bond Administrative Fund” (herein referred to as the “Administrative Fund”), into which the Master Indenture, each Related Bond Trustee shall be deemed the holder of the Obligation or Trustee shall deposit all monies and amounts that shall hereafter be received by, or come into Obligations pledged to secure the Related Bonds with respect to which such Related Bond possession of, the Master Trustee from any source in connection with the administration, D-35 Trustee is acting as trustee. If such Related Bond Indenture so provides, the holders of each performance or exercise of the Master Trustee’s duties, obligations, rights or remedies series of Related Bonds shall be deemed the holders of the Obligations to the extent of the hereunder. All moneys and amounts on deposit in the Administrative Fund shall be either (i) principal amount of the Obligations to which their Related Bonds relate; provided that if such held without investment or (ii) invested in Permitted Investments, as may be directed by Written Related Bonds are secured by credit enhancements of an insurance company or financial Request of the Group Representative, pending their use and disbursements in amounts, at the institution, then the provider of any credit enhancement with respect to such Related Bonds shall times and for the purposes provided in this Master Indenture. The Master Trustee may create, or be deemed the holder of the Obligations in lieu of the holders of such Related Bonds. as directed by the Group Representative to create, such accounts or subaccounts within the Administrative Fund as the Master Trustee deems necessary or appropriate for the efficient and Section 514. Undertaking for Costs. All parties to this Master Indenture agree, and effective performance of its duties and obligations hereunder, including, without limitation, each Holder of any Obligation by acceptance thereof shall be deemed to have agreed, that any special escrow accounts necessary for deposit of Escrow Obligations or uninvested cash pursuant court may in its discretion require, in any suit for the enforcement of any right or remedy under to Section 801 or 802 hereof. this Master Indenture, or in any suit against the Master Trustee for any action taken or omitted by it as Master Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs ARTICLE VI of such suit, and that such court may in its discretion assess reasonable costs, including THE MASTER TRUSTEE reasonable attorneys’ fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 601. Duties and Liabilities of Master Trustee. Section shall not apply to any suit instituted by the Master Trustee, to any suit instituted by any Holder of Obligations, or group of Holders of Obligations, holding in the aggregate more than (a) The Master Trustee accepts and agrees to execute the trusts imposed upon 25% in principal amount of the Outstanding Obligations, or to any suit instituted by any Holder it by this Master Indenture, but only upon the terms and conditions set forth herein. The of Obligations for the enforcement of the payment of the Required Payments on any Obligation Master Trustee, prior to the occurrence of an Event of Default and after the curing of all on or after the respective stated maturity expressed in such Obligation (or, in the case of Events of Default which may have occurred: redemption, on or after the redemption date). (1) undertakes to perform such duties and only such duties as are Section 515. No Recourse Against Others. No recourse under or upon any obligation, specifically set forth in this Master Indenture and no implied covenants or covenant or agreement contained in this Master Indenture or any indenture supplemental hereto, obligations shall be read into this Master Indenture against the Master Trustee; or in any Obligation, or for any claim based thereon or otherwise in respect thereof, shall be had and
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(2) in the absence of bad faith on its part, the Master Trustee may transmit by mail to all Holders of Outstanding Obligations notice of such default, unless such conclusively rely, as to the truth of the statements and the correctness of the default shall have been cured or waived or unless corrective action to cure such default has been opinions expressed therein, upon any certificates or opinions furnished to the instituted and is being pursued such that such default does not constitute an Event of Default; Master Trustee and conforming to the requirements of this Master Indenture; but provided, however, that except in the case of a default in the payment of the Required Payments in the case of any such certificates or opinions which by any provision hereof are on any Obligations, the Master Trustee shall be protected in withholding such notice if and so specifically required to be furnished to the Master Trustee, the Master Trustee long as the board of directors, the executive committee or a trust committee of directors and/or shall be under a duty to examine the same to determine whether or not they Responsible Officers of the Master Trustee in good faith determine that the withholding of such conform to the specific requirements of this Master Indenture. notice is in the interest of the Holders of Obligations; and provided, further, that in the case of any default of the character specified in Section 502(b), no such notice to Holders of Obligations (b) In case any Event of Default has occurred and is continuing (of which the shall be given until at least 60 days after the occurrence thereof. For the purpose of this Section, Master Trustee has actual knowledge or is deemed to have actual knowledge under the term “default” means any event which is, or after notice or lapse of time or both would Section 603(h) hereof), the Master Trustee shall exercise such of the rights and powers become, an Event of Default. vested in it by this Master Indenture, and use the same degree of care and skill in their exercise, as a reasonably prudent man would exercise or use under the circumstances in Section 603. Certain Rights of Master Trustee. the conduct of his own affairs. (a) The Master Trustee may rely and shall be protected in acting or refraining (c) No provision of this Master Indenture shall be construed to relieve the from acting upon any resolution, certificate, statement, instrument, opinion, report, Master Trustee from liability for its own grossly negligent action, its own grossly notice, request, direction, consent, order, approval, bond, debenture or other paper or negligent failure to act, or its own willful misconduct, except, that: document believed by it to be genuine and to have been signed or presented by the proper party or parties and shall not be required to verify the accuracy of any information or (1) this Subsection shall not be construed to limit the effect of calculations required to be included therein or attached thereto. Subsection (a) of this Section or Section 603 hereof;
D-36 (b) Any request or direction of any Person mentioned herein shall be (2) the Master Trustee shall not be liable for any error of judgment sufficiently evidenced by a Request of such Person; and any resolution of the Governing made in good faith by a Responsible Officer, unless it shall be proved that the Body of any Person may be evidenced to the Master Trustee by a Board Resolution of Master Trustee was grossly negligent in ascertaining the pertinent facts; such Person.
(3) the Master Trustee shall not be liable with respect to any action (c) Whenever in the administration of this Master Indenture the Master taken or omitted to be taken by it in good faith in accordance with the direction of Trustee shall deem it desirable that a matter be proved or established prior to taking, the Holders of not less than a majority in aggregate principal amount of the suffering or omitting any action hereunder, the Master Trustee (unless other evidence be Outstanding Obligations relating to the time, method and place of conducting any herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an proceeding for any remedy available to the Master Trustee, or exercising any trust Officer’s Certificate. or power conferred upon the Master Trustee, under this Master Indenture; and (d) The Master Trustee may consult with counsel, and the written advice of (4) no provision of this Master Indenture shall require the Master such counsel or any Opinion of Counsel shall be full and complete authorization and Trustee to expend or risk its funds or otherwise incur any financial liability in the protection in respect of any action taken, suffered or omitted by it hereunder in good faith performance of any of its duties hereunder or in the exercise of any of its rights or and in reliance thereon; powers, if it shall have reasonable grounds for believing that the repayment of such funds or adequate indemnity against such risk or liability or the payment of (e) The Master Trustee shall be under no obligation to exercise any of the its fees and expenses is not reasonably assured to it. rights or powers vested in it by this Master Indenture at the request or direction of any of the Holders of the Obligations pursuant to the provisions of this Master Indenture, unless (d) Whether or not therein expressly so provided, every provision of this such Holders shall have offered to the Master Trustee reasonable security or indemnity Master Indenture relating to the conduct or affecting the liability of or affording satisfactory to it against the costs, expenses and liabilities which might be incurred by it protection to the Master Trustee shall be subject to the provisions of this Section and in connection with such request or direction and for the payment of the Master Trustee’s Section 603. fees in connection therewith.
Section 602. Notice of Defaults. Within 30 days after the occurrence of any default of which the Master Trustee is deemed to have knowledge hereunder, the Master Trustee shall
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(f) The Master Trustee shall not be bound to make any investigation into the nationalization, strikes, expropriation, devaluation, seizure, or similar action by any facts or matters stated in any resolution, certificate, statement, instrument, opinion, governmental authority, de facto or de jure; or enactment, promulgation, imposition or report, notice, request, direction, consent, order, approval, bond, debenture or other paper enforcement by any such governmental authority of currency restrictions, exchange or document, but the Master Trustee, in its discretion, may make such further inquiry or controls, levies or other charges affecting property held by the Master Trustee; or the investigation into such facts or matters as it may see fit, and, if the Master Trustee shall breakdown, failure or malfunction of any utilities or telecommunications systems; or any determine to make such further inquiry or investigation, it shall be entitled to examine the order or regulation of any banking or securities industry including changes in market books, records and premises of the Obligated Group Members, personally or by agent or rules and market conditions affecting the execution or settlement of transactions; or acts attorney. of war, terrorism, insurrection or revolution; or acts of God; or any other similar event.
(g) The Master Trustee may execute any of the trusts or powers hereunder or (n) Each of the parties hereto hereby agrees and, as evidenced by its perform any duties hereunder or under any Supplemental Master Indenture authorizing acceptance of any benefits hereunder, any Holder agrees that the Master Trustee in any any series of Obligations, either directly or by or through agents or attorneys and shall not capacity (x) has not provided and will not provide in the future, any advice, counsel or be answerable for any act or omission of any such agent or attorney selected by it with opinion regarding the tax, regulatory, financial, investment, securities law or insurance due care and the Master Trustee shall not be liable for any negligence or misconduct of implications and consequences of the formation, funding and ongoing administration of any agent or attorney appointed with due care. the Obligations, including, but not limited to, income, gift and estate tax issues, insurable interest issues, risk retention issues, doing business or other licensing matters and the (h) The Master Trustee shall not be required to take notice or be deemed to initial and ongoing selection and monitoring of financing arrangements, (y) has not made have notice of any Event of Default hereunder unless the Master Trustee shall be any investigation as to the accuracy of any representations, warranties or other specifically notified of such Event of Default in writing by a Member or by the Holder of obligations of the Obligated Group or any party under this Master Indenture or any other an Outstanding Obligation, and in the absence of such notice the Master Trustee may transaction document and shall have no liability in connection therewith and (z) the conclusively assume that no Event of Default exists; provided, however, that the Master Master Trustee has not prepared or verified, and shall not be responsible or liable for, any Trustee shall be required to take and be deemed to have notice of its failure to receive the information, disclosure or other statement in any disclosure or offering document or in D-37 moneys necessary to make payments when due of Required Payments on any Obligation. any other document issued or delivered in connection with the sale or transfer of the Obligations. (i) The Master Trustee shall not be liable for any error of judgment made in good faith by its officers, unless it shall be proved that the Master Trustee was grossly (o) The Master Trustee shall not be deemed to have knowledge or notice of negligent in ascertaining the pertinent facts. any fact or event unless a Responsible Officer of the Master Trustee has actual knowledge thereof or unless written notice of such fact or event is received by a (j) The Master Trustee shall not be liable with respect to any action taken or Responsible Officer and such notice references the fact or event. omitted to be taken by it in good faith in accordance with any direction of the Holders of the Outstanding Obligations permitted to be given by them under this Master Indenture. Section 604. Not Responsible For Recitals or Issuance of Obligations. The recitals contained herein and in the Obligations (other than the certificate of authentication on such (k) No provision of this Master Indenture shall require the Master Trustee to Obligations) shall be taken as the statements of the Members and the Master Trustee assumes no expend or risk its own funds or otherwise incur any financial liability in the performance responsibility for their correctness. The Master Trustee makes no representations as to the of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall validity or sufficiency of this Master Indenture or of the Obligations. The Master Trustee shall have reasonable grounds for believing that repayment of such funds or adequate not be accountable for the use or application by the Obligated Group of any of the Obligations or indemnity against such risk or liability is not reasonably assured to it. of the proceeds of such Obligations. The Master Trustee shall have no obligation or liability with respect to the creation, attachment, validity or perfection of any lien, security interest or (l) To the fullest extent permitted by law and notwithstanding anything in this encumbrance on any Property. Agreement to the contrary, the Master Trustee shall not be personally liable for special, consequential or punitive damages, however styled, including, without limitation, lost Section 605. Master Trustee May Own Obligations. The Master Trustee or other agent profits. of any Members, in its individual or any other capacity, may become the owner or pledgee of Obligations and may otherwise deal with any Member with the same rights it would have if it (m) Notwithstanding anything in this Master Indenture to the contrary, the were not Master Trustee or such other agent. Master Trustee shall not be responsible or liable for its failure to perform under this Master Indenture or for any losses resulting from any event beyond the reasonable Section 606. Moneys to Be Held in Trust. All moneys received by the Master Trustee control of the Master Trustee, its agents or subcustodians, including but not limited to shall, until used or applied as herein provided, be held in trust for the purposes for which they
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were received, but need not be segregated from other funds except to the extent required by law. Section 609. Resignation and Removal; Appointment of Successor. The Master Trustee shall be under no liability for interest on any moneys received by it hereunder other than such interest as it expressly agrees to pay. (a) No resignation or removal of the Master Trustee and no appointment of a successor Master Trustee pursuant to this Article shall become effective until the Section 607. Compensation and Expenses of Master Trustee. acceptance of appointment by the successor Master Trustee under Section 610.
(a) Each Member, jointly and severally, hereby agrees: (b) The Master Trustee may resign at any time by giving written notice thereof to the Group Representative. If an instrument of acceptance by a successor (1) to pay to the Master Trustee from time to time reasonable Master Trustee shall not have been delivered to the Master Trustee within 30 days after compensation for all services rendered by it hereunder (which compensation shall the giving of such notice of resignation, the resigning Master Trustee may petition any not be limited by any law limiting the compensation of the trustee of an express court of competent jurisdiction for the appointment of a successor Master Trustee. trust); (c) The Master Trustee may be removed at any time by act of the Holders of a (2) except as otherwise expressly provided herein, to reimburse the majority in principal amount of the Outstanding Obligations, delivered to the Master Master Trustee upon its request for all reasonable expenses, disbursements and Trustee and the Group Representative. advances incurred or made by the Master Trustee in accordance with any provision of this Master Indenture (including the reasonable compensation and the (d) If at any time: expenses and disbursements of its agents and counsel) except any such expense, disbursement or advance as may arise from its gross negligence or bad faith; and (1) the Master Trustee shall cease to be eligible under Section 608 and shall fail to resign after written request therefor by the Group Representative or by (3) to indemnify the Master Trustee for, and to defend and hold it any Holder of an Obligation; or harmless against, any loss, liability or expenses incurred without gross negligence
D-38 or bad faith on its part, arising out of or in connection with the acceptance or (2) the Master Trustee shall become incapable of acting or shall be administration of this trust, including the costs and expenses of defending itself adjudged a bankrupt or insolvent or a conservator or a receiver of the Master against any claim or liability in connection with the exercise or performance of Trustee or of its property shall be appointed or any public officer shall take charge any of its powers or duties hereunder. The foregoing is in addition to any other or control of the Master Trustee or of its property or affairs for the purpose of rights, including rights to indemnification, to which the Master Trustee may rehabilitation, conservation or liquidation; otherwise be entitled. then, in any such case, (i) the Group Representative by a Request may remove the Master (b) As security for the performance of the obligations of the Members under Trustee, or (ii) subject to Section 514, any Holder of Obligations who has been a bona fide this Section the Master Trustee shall have a lien prior to the Obligations upon all property Holder of an Obligation for at least 6 months may, on behalf of himself and all others similarly and funds held or collected by the Master Trustee as such. The payment obligations set situated, petition any court of competent jurisdiction for the removal of the Master Trustee and forth above shall include all such fees and expenses of the Master Trustee and its agents the appointment of successor Master Trustee. under any Supplemental Master Indenture. (e) The Master Trustee may be removed by the Group Representative giving Section 608. Corporate Master Trustee Required; Eligibility. There shall at all times at least 30 days’ written notice to the Master Trustee of its selection of a successor be a Master Trustee hereunder which shall be a corporation organized and doing business under qualified trustee so long as no Event of Default or default which with the passage of time the laws of the United States of America or of any state, authorized under such laws to exercise would be a default has occurred and is continuing. corporate trust powers, having a combined capital and surplus of at least $50,000,000, subject to supervision or examination by Federal or state authority. If such corporation publishes reports of (f) If the Master Trustee shall resign, be removed or become incapable of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or acting, or if a vacancy shall occur in the office of Master Trustee for any cause, the examining authority, then for the purposes of this Section, the combined capital and surplus of Group Representative shall promptly appoint a successor Master Trustee. If, within three such corporation shall be deemed to be its combined capital and surplus as set forth in its most months after such resignation, removal or incapability, or the occurrence of such recent report of condition so published. If at any time the Master Trustee shall cease to be vacancy, a successor Master Trustee shall not have been appointed by the Group eligible in accordance with the provisions of this Section, it shall resign immediately in the Representative, a successor Master Trustee shall be appointed by the Holders of a manner and with the effect hereinafter specified in this Article. majority in principal amount of the Outstanding Obligations by written notice delivered to the Group Representative and the retiring Master Trustee. In either such case, the successor Master Trustee so appointed shall, forthwith upon its acceptance of such
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appointment, become the successor Master Trustee. If no successor Master Trustee shall ARTICLE VII have been so appointed by the Group Representative or the Holders of Obligations and SUPPLEMENTAL MASTER INDENTURES accepted appointment in the manner hereinafter provided, the Master Trustee or any Holder of Obligations who has been a bona fide Holder of an Obligation for at least 6 Section 701. Supplemental Master Indentures Not Requiring Consent of Obligation months may, on behalf of himself and all others similarly situated, petition any court of Holders. Subject to the limitations set forth in Section 702 hereof with respect to this Section competent jurisdiction for the appointment of a successor Master Trustee. 701, the Members and the Master Trustee may, without the consent of, or notice to, any of the Obligation holders, amend or supplement this Master Indenture, for any one or more of the (g) The Group Representative shall give notice of each resignation and each following purposes: 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 (a) To cure any ambiguity or defective provision in or omission from this Obligations at their addresses as shown in the registration books and records for the Master Indenture in such manner as is not inconsistent with and does not impair the Obligations maintained by the Master Trustee as Obligation Registrar. Each notice shall security of the Master Indenture or adversely affect the holder of any Obligation; include the name and address of the designated corporate trust office of the successor Master Trustee. (b) To grant to or confer upon the Master Trustee for the benefit of the Obligation holders any additional rights, remedies, powers or authority that may lawfully Section 610. Acceptance of Appointment by Successor. be granted to or conferred upon the Obligation holders and the Master Trustee, or either of them, to add to the covenants of the Members for the benefit of the Obligation holders (a) Every successor Master Trustee appointed hereunder shall execute, or to surrender any right or power conferred hereunder upon any Member; acknowledge and deliver to the Group Representative and to the retiring Master Trustee an instrument accepting such appointment, and thereupon the resignation or removal of (c) To assign and pledge under this Master Indenture any additional revenues, the retiring Master Trustee shall become effective and such successor Master Trustee, properties or collateral; without any further act, deed or conveyance, shall become vested with all the rights,
D-39 powers, trusts and duties of the retiring Master Trustee; but, on Request of the Group (d) To evidence the succession of another corporation to the agreements of a Representative or the successor Master Trustee, such retiring Master Trustee shall, upon Member or the Master Trustee, or the successor of any thereof hereunder; payment of its charges, execute and deliver an instrument transferring to such successor Master Trustee all the rights, powers and trusts of the retiring Master Trustee, and shall (e) To permit the qualification of this Master Indenture under the Trust duly assign, transfer and deliver to the successor Master Trustee all property and money Indenture Act of 1939, as then amended, or under any similar federal statute hereafter in held by such retiring Master Trustee hereunder. Upon request of any such successor effect or to permit the qualification of any Obligations for sale under the securities laws Master Trustee, the Group Representative shall execute any and all instruments for more of any state of the United States; fully and certainly vesting in and confirming to such successor Master Trustee all such (f) To provide for the refunding or advance refunding of any Obligation; rights, powers and trusts. (g) To provide for the issuance of (i) Additional Obligations or (ii) Substitute (b) No successor Master Trustee shall accept its appointment unless at the Obligations pursuant to Sections 210 or 212 hereof; time of such acceptance such successor Master Trustee shall be qualified and eligible under this Article. (h) To reflect the addition to or withdrawal of a Member from the Obligated Group; Section 611. Merger or Consolidation. Any corporation into which the Master Trustee may be merged or with which it may be consolidated, or any corporation resulting from any (i) Reserved. merger or consolidation to which the Master Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Master Trustee, shall (j) To make any amendment to any provision of this Master Indenture or to be the successor Master Trustee hereunder, provided such corporation shall be otherwise any Supplemental Indenture which is only applicable to Obligations issued thereafter or qualified and eligible under this Article, to the extent operative, without the execution or filing of which will not apply so long as any Obligations then Outstanding remains Outstanding; any paper or any further act on the part of any of the parties hereto. In case any Obligations shall have been authenticated, but not delivered, by the Master Trustee then in office, any successor by (k) To provide for amendments resulting from changes to generally accepted merger or consolidation to such authenticating Master Trustee may adopt such authentication and accounting principles as described in Section 424 hereof; deliver the Obligations so authenticated with the same effect as if such successor Master Trustee had itself authenticated such Obligations.
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(l) To permit the issuance of Obligations which are not in the form of a not less than a majority in aggregate principal amount of the Obligations which are outstanding promissory note; and hereunder at the time of the execution of such Supplemental Master Indenture, or, in case less than all of the secured series of Obligations outstanding are affected thereby, the holder of not (m) To make any other change which, in the opinion of the Master Trustee, less than a majority in aggregate principal amount of the Obligations of the series affected does not materially adversely affect the holders of any of the Obligations and, in the thereby which are outstanding hereunder at the time of the execution of such Supplemental opinion of each Related Bond Trustee, does not materially adversely affect the holders of Master Indenture, shall have the right, from time to time, anything contained in this Master the Related Bonds with respect to which it acts as trustee, including without limitation Indenture to the contrary notwithstanding, to consent to and approve the execution by the any modification, amendment or supplement to this Master Indenture or any indenture Members and the Master Trustee of such Supplemental Master Indentures as shall be deemed supplemental hereto or any amendment thereto in such a manner as to establish or necessary and desirable by the Members for the purpose of modifying, altering, amending, maintain exemption of interest on any Related Bonds under a Related Bond Indenture adding to or rescinding, in any particular, any of the terms or provisions contained in this Master from federal income taxation under applicable provisions of the Code. Indenture or in any Supplemental Master Indenture; provided, however, that nothing contained in this Section or in Section 701 hereof shall permit, or be construed as permitting, (a) an extension In addition to Supplemental Master Indentures entered into for the purposes set forth in of the stated maturity or reduction in the principal amount of or reduction in the rate or extension (a) through (m) above, the Members and the Master Trustee may, without the consent of the of the time of paying of interest on or reduction of any premium payable on the redemption of, Obligation holders, enter into a Supplemental Master Indenture in connection with any other any Obligation, without the consent of the holder of such Obligation, (b) a reduction in the amendment hereto provided that no such amendment shall become effective until (i) all aforesaid aggregate principal amount of Obligations the holders of which are required to consent Obligations outstanding (or Related Bonds secured by Obligations outstanding) are subject to to any such Supplemental Master Indenture or any such amending or supplementing instruments, optional tender at the option of the holders thereof or have been unconditionally called for without the consent of the holders of all the Obligations at the time outstanding which would be redemption prior to the proposed effective date of such Supplemental Master Indenture, a date affected by the action to be taken, (c) except as otherwise permitted by Section 405 hereof, which is not less than 45 days after notice of the proposed Supplemental Master Indenture is sent modification of the joint and several obligations of the Members to make payment on or provide to each beneficial owner of such Obligations (or Related Bonds secured by Obligations funds for the payment of any Obligation, without the consent of the holder of such Obligation, outstanding) or (ii) if all such Obligations outstanding (or Related Bonds secured by Obligations (d) modification of the rights, duties or immunities of the Master Trustee, without the written D-40 outstanding) are subject to mandatory tender or have been conditionally called for redemption consent of the Master Trustee, or (e) a modification to the Trust Estate pledged hereunder. prior to the proposed effective date of such Supplemental Master Indenture, the mandatory tender or redemption date or (iii) if some of the Obligations (or Related Bonds secured by If at any time the Group Representative shall request the Master Trustee to enter into any Obligations) are subject to optional tender and some of the Obligations (or Related Bonds such Supplemental Master Indenture for any of the purposes of this Section, the Master Trustee secured by Obligations) are subject to mandatory tender, the date of the mandatory or optional shall cause notice of the proposed execution of such Supplemental Master Indenture to be mailed tender. by first class mail postage prepaid to each holder of an Obligation. Such notice shall briefly set forth the nature of the proposed Supplemental Master Indenture and shall state that copies Any Supplemental Master Indenture providing for the issuance of Additional Obligations thereof are on file at the principal corporate trust office of the Master Trustee for inspection by shall set forth the date thereof, the date or dates upon which Required Payments on such all Obligation holders. The Master Trustee shall not, however, be subject to any liability to any Obligations shall be payable, the other terms and conditions of such Obligations, the form of Obligation holder by reason of its failure to mail such notice, and any such failure shall not affect such Obligations and the conditions precedent to the delivery of such Obligations which shall the validity of such Supplemental Master Indenture when consented to and approved as provided include, among other things: in this Section. If the holders of not less than a majority in aggregate principal amount of the Obligations which are outstanding hereunder at the time of the execution of any such (i) delivery to the Master Trustee of all materials required to be Supplemental Master Indenture shall have consented to and approved the execution thereof as delivered as a condition precedent to the incurrence of the Additional herein provided, no holder of any Obligation shall have any right to object to any of the terms Indebtedness evidenced by such Obligations; and and provisions contained therein, or the operation thereof, or in any manner to question the propriety of the execution thereof, or to enjoin or restrain the Master Trustee or the Members (ii) delivery to the Master Trustee of an Opinion of Independent from executing the same or from taking any action pursuant to the provisions thereof. Upon the Counsel acceptable to the Master Trustee to the effect that all requirements and execution of any such Supplemental Master Indenture as in this Section permitted and provided, conditions to the issuance of such Obligations, if any, set forth herein and in the this Master Indenture shall be and be deemed to be modified and amended in accordance Supplemental Master Indenture have been complied with and satisfied. therewith. Section 702. Supplemental Master Indentures Requiring Consent of Obligation For the purpose of obtaining the foregoing consents, the determination of who is deemed Holders. In addition to Supplemental Master Indentures covered by Section 701 hereof and the holder of an Obligation held by a Related Bond Trustee shall be made in the manner subject to the terms and provisions contained in this Section, and not otherwise, the holders of provided in Section 513.
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As an alternative method of evidencing notice to, and consent of Holders to any (e) by depositing with the Master Trustee, in trust, before maturity, Escrow Supplemental Master Indenture, the purchasers of (i) Related Bonds secured by Obligations that Obligations selected by the Group Representative and in amounts verified in accordance are sold following a mandatory tender, or pursuant to a remarketing, (ii) Related Bonds sold to with clause (ii) of the immediately following paragraph that will, together with the refund or advance any other Related Bonds, or (iii) any other Related Bonds that will be secured income or increment to accrue thereon, without consideration of any reinvestment by an Obligation upon their issuance, and in each case that are sold pursuant to a Disclosure thereof, and any uninvested cash deposited in trust with the Master Trustee, be fully Document (as described below) shall be deemed, upon their purchase of such Related Bonds, to sufficient to pay or redeem (when redeemable) and discharge the indebtedness on all have received notice of the proposed Supplemental Master Indenture and to have provided their Obligations outstanding at or before their respective maturity dates; consent to such Supplemental Master Indenture and no written consent shall be required to be provided by such purchasers. Any Disclosure Document shall (i) describe the substance of the and if the Obligated Group shall also pay or cause to be paid all other sums payable hereunder by proposed Supplemental Master Indenture and the modifications and/or amendments set forth the Obligated Group and, if any such Obligations are to be redeemed prior to the maturity therein and state that copies of the draft Supplemental Master Indenture are available from the thereof, notice of such redemption shall have been given in accordance with the requirements of Master Trustee upon written request therefor and (ii) state that the purchaser of such Related this Master Indenture or provisions satisfactory to the Master Trustee shall have been made for Bonds, by their purchase of such Related Bonds, are deemed to have consented to such the giving of such notice, then and in that case (but subject to the provisions of Section 803 modifications and/or amendments and the related Supplemental Master Indenture. hereof) this Master Indenture and the estate and rights granted hereunder (other than rights that are expressly stated to survive termination of this Master Indenture) shall cease, determine, and Section 703. Execution of Supplemental Master Indenture. Any Supplemental Master become null and void, and thereupon the Master Trustee shall, upon Written Request of the Indenture authorized by this Article VII may be executed on behalf of the Obligated Group by Group Representative, and upon receipt by the Master Trustee of (i) an Officer’s Certificate from only the Group Representative. the Group Representative and an Opinion of Independent Counsel acceptable to the Master Trustee, each stating that in the opinion of the signers all conditions precedent to the satisfaction ARTICLE VIII and discharge of this Master Indenture have been complied with, and (ii) if effected by deposit of SATISFACTION OF THE MASTER INDENTURE Escrow Obligations, a verification report of a nationally recognized verification agent or firm of nationally recognized verification agents (which verification report may be accepted by the D-41 Section 801. Defeasance. If the Members shall pay or provide for the payment of the Master Trustee as conclusive evidence of the sufficiency of the amount of such deposit) to the entire indebtedness on all Obligations (including, for the purposes of this Section 801, any effect that the Escrow Obligations together, if applicable, with the income or increment to accrue Obligations owned by a Member) outstanding in any one or more of the following ways: thereon, without consideration of any reinvestment thereof, and any uninvested cash, will be fully sufficient to pay or redeem (when redeemable) and discharge the indebtedness on such (a) by paying or causing to be paid the Required Payments on all Obligations Obligations at or before their respective maturity dates, forthwith execute proper instruments outstanding, as and when the same become due and payable; acknowledging satisfaction of and discharging this Master Indenture and the lien hereof. The satisfaction and discharge of this Master Indenture shall be without prejudice to the rights of the (b) with respect to Obligations securing Related Bonds, by causing such Master Trustee to charge and be reimbursed by the Obligated Group for any expenditures which Related Bonds to be paid or deemed paid in full or otherwise defeased in accordance with it may thereafter incur in connection herewith. Upon defeasance hereof in accordance with the the requirements and procedures set forth in the applicable Related Bond Indenture; foregoing clauses (c) or (e), holders of Obligations shall thereafter be entitled to payment only (c) by depositing with the Master Trustee, in trust, at or before maturity, out of the moneys or Escrow Obligations deposited with the Master Trustee as aforesaid. No moneys in an amount sufficient to pay or redeem (when redeemable) all Obligations verification report need be required if all Obligations are to be paid in full within 90 days of the outstanding (including the payment of premium, if any, and interest payable on such date of deposit of the Escrow Obligations, and based on a certificate of the chief financial officer Obligations to the maturity or redemption date thereof), provided that such moneys, if of the Group Representative, the principal amount of the Escrow Obligations, without regard to invested, shall be invested at the direction of the Group Representative in Escrow any interest earnings or reinvestment, plus any uninvested cash, is sufficient to pay in full all Obligations, in an amount and maturing at such times, without consideration of any principal and interest to be paid on the Obligations to and including the repayment date. income or increment to accrue thereon, sufficient to pay or redeem (when redeemable) With respect to any Interest Rate Agreement which has been authenticated as an and discharge the indebtedness on all Obligations outstanding at or before their respective Obligation hereunder and unless such Obligation has been released or cancelled by the holder maturity dates; it being understood that the investment income on such Escrow thereof, the Obligated Group shall cause such Interest Rate Agreement to be terminated and pay Obligations may be used at the direction of the Group Representative for any other all termination amounts owed as a result thereof. purpose permitted by law; Any moneys, funds, securities, or other property remaining on deposit under this Master (d) by delivering to the Master Trustee, for cancellation by it, all Obligations Indenture (other than said Escrow Obligations or other moneys deposited in trust as above outstanding; or
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provided) shall, upon the full satisfaction of this Master Indenture, forthwith be transferred, paid be fully sufficient to pay or redeem (when redeemable) and discharge the indebtedness on over and distributed to the Obligated Group. all Obligations of such series or portion thereof at or before their respective maturity dates; The Obligated Group may at any time surrender to the Master Trustee for cancellation by it any Obligations previously authenticated and delivered which the Obligated Group may have and if the Obligated Group shall also pay or cause to be paid all other sums payable hereunder by acquired in any manner whatsoever, and such Obligations, upon such surrender and cancellation, the Obligated Group with respect to such series of Obligations or portion thereof, and, if any shall be deemed to be paid and retired. such Obligations of such series or portion thereof are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given in accordance with the requirements of Notwithstanding the satisfaction and discharge of this Master Indenture, the obligations the Master Indenture or provisions satisfactory to the Master Trustee shall have been made for of the Obligated Group to the Master Trustee under Section 422 hereof, the provisions of this the giving of such notice, then in that case (but subject to the provisions of Section 803 hereof) Master Indenture affording protections to the Master Trustee and the provisions of Article VI such Obligations shall cease to be entitled to any lien, benefit or security under the Master hereof granting immunities, limitations upon liability and protections to the Master Trustee shall Indenture. In determining whether the Escrow Obligations deposited with the Master Trustee survive. together, if applicable, with the income or increment to accrue thereon, without consideration of any reinvestment thereof, and any uninvested cash, will be fully sufficient to pay or redeem Section 802. Provision for Payment of a Particular Series of Obligations or Portion (when redeemable) and discharge the indebtedness on such Obligations or portions thereof at or Thereof. If the Obligated Group shall pay or provide for the payment of the entire indebtedness before their respective maturity dates, the Group Representative shall provide to the Master on all Obligations of a particular series or a portion of such a series (including, for the purpose of Trustee, who may conclusively rely on, a verification report of a nationally recognized this Section 802, any such Obligations owned by a Member or an Affiliate of a Member) in one verification agent or firm of nationally recognized verification agents to the effect that the of the following ways: Escrow Obligations together, if applicable, with the income or increment to accrue thereon, without consideration of any reinvestment thereof, and any uninvested cash, will be fully (a) by paying or causing to be paid the Required Payments on all Obligations sufficient to pay or redeem (when redeemable) and discharge the indebtedness on all Obligations of such series or portion thereof outstanding, as and when the same shall become due and of such series or portion thereof at or before their respective maturity dates. Upon defeasance D-42 payable; hereof in accordance with the foregoing clauses (c) or (e), holders of Obligations shall thereafter be entitled to payment only out of the moneys or Escrow Obligations deposited with the Master (b) with respect to Obligations securing Related Bonds, by causing such Trustee as aforesaid. No verification report need be required if all Obligations are to be paid in Related Bonds to be paid or deemed paid in full or otherwise defeased in accordance with full within 90 days of the date of deposit of the Escrow Obligations, and based on a certificate of the requirements and procedures set forth in the applicable Related Bond Indenture; the chief financial officer of the Group Representative, the principal amount of the Escrow (c) by depositing with the Master Trustee, in trust, at or before maturity, Obligations, without regard to any interest earnings or reinvestment, plus any uninvested cash, is moneys in an amount sufficient to pay or redeem (when redeemable) all Obligations of sufficient to pay in full all principal and interest to be paid on the Obligations to and including such series or portion thereof outstanding (including the payment of premium, if any, and the repayment date. interest payable on such Obligations to the maturity or redemption date), provided that Section 803. Satisfaction of Related Bonds. The provisions of Section 801 and Section such moneys, if invested, shall be invested at the direction of the Group Representative in 802 of this Master Indenture notwithstanding, any Obligation which secures a Related Bond shall Escrow Obligations in an amount and maturing at such times, without consideration of be deemed paid and shall cease to be entitled to the lien, benefit and security under the Master any income or increment to accrue thereon, sufficient to pay or redeem (when Indenture in the circumstances described in subsection (b)(ii) of the definition of “Outstanding redeemable) and discharge the indebtedness on all Obligations of such series or portion Obligations” contained in Article I. thereof outstanding at or before their respective maturity dates; it being understood that the investment income on such Escrow Obligations may be used at the direction of the ARTICLE IX Group Representative for any other purpose permitted by law; MANNER OF EVIDENCING OWNERSHIP OF OBLIGATIONS
(d) by delivering to the Master Trustee, for cancellation by it, all Obligations Section 901. Proof of Ownership. Any request, direction, consent or other instrument of such series or portion thereof outstanding; or provided by this Master Indenture to be signed and executed by the Obligation holders may be in any number of concurrent writings of similar tenor and may be signed or executed by such (e) by depositing with the Master Trustee, in trust, Escrow Obligations Obligation holders in person or by an agent appointed in writing. No particular form of request, selected by the Group Representative and in amounts verified in accordance with the direction, consent or other instrument shall be required. The ownership of Obligations shall be immediately following paragraph, in such amount and maturing at such times that will, proved by the registration of such Obligations. together with the income or increment to accrue thereon without consideration of any reinvestment thereof, and any uninvested cash deposited in trust with the Master Trustee,
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Any action taken or suffered by the Master Trustee pursuant to any provision of this electronic means acceptable to the parties, or (c) duly mailed by registered or certified mail Master Indenture, upon the request or with the assent of any person who at the time is the holder addressed as follows: of any Obligation or Obligations, shall be conclusive and binding upon all future holders of the same Obligation or Obligations or any Obligation or Obligations issued in exchange therefor. To the Group Representative:
ARTICLE X Bayhealth Medical Center, Inc. MISCELLANEOUS 640 South State Street Dover, Delaware 19901 Section 1001. Limitation of Rights. With the exception of rights herein expressly Attention: President conferred, nothing expressed or mentioned in or to be implied from this Master Indenture or the Obligations is intended or shall be construed to give to any Person other than the parties hereto, To the Master Trustee: and the holders of the Obligations, any legal or equitable right, remedy or claim under or in respect to this Master Indenture or any covenants, conditions and provisions herein contained; Wilmington Trust, National Association this Master Indenture and all of the covenants, conditions and provisions hereof being intended 1100 N. Market Street to be and being for the sole and exclusive benefit of the parties hereto and the holders of the Wilmington, Delaware 19890 Obligations as herein provided. Attention: Vice President
Section 1002. Unclaimed Moneys. Any moneys deposited with the Master Trustee by Section 1005. Master Trustee as Paying Agent and Obligation Registrar. The Master the Obligated Group in accordance with the terms and covenants of this Master Indenture, in Trustee is hereby designated and agrees to act as principal Paying Agent and Obligation order to redeem or pay any Obligation in accordance with the provisions of this Master Registrar for and in respect to the Obligations. The Obligated Group may also appoint one or Indenture, and remaining unclaimed by the owners of the Obligation for two years after the date more other banks as Paying Agent. The Paying Agent shall be entitled to the immunities and fixed for redemption or of maturity, as the case may be, shall, if the Obligated Group is not at the protections afforded the Master Trustee in acting hereunder.
D-43 time to the knowledge of the Master Trustee in default with respect to any of the terms and conditions of this Master Indenture, or in the Obligations, be repaid by the Master Trustee to the Section 1006. Counterparts. This Master Indenture may be simultaneously executed in Group Representative upon its written request therefor on behalf of the Members; and thereafter several counterparts, each of which shall be an original and all of which shall constitute but one the registered owners of the Obligation shall be entitled to look only to the Obligated Group for and the same instrument. payment thereof. The Obligated Group hereby covenants and agrees to indemnify and save the Master Trustee harmless from any and all losses, costs, liability and expense suffered or incurred Section 1007. Applicable Law. This Master Indenture shall be governed exclusively by by the Master Trustee by reason of having returned any such moneys to the Members as herein the applicable laws of the State of Delaware. provided. Section 1008. Immunity of Officers, Employees and Members of Members. No recourse Section 1003. Severability. If any provision of this Master Indenture shall be held or shall be had for the payment of the principal of or premium or interest on any of the Obligations deemed to be or shall, in fact, be inoperative or unenforceable as applied in any particular case in or for any claim based thereon or upon any obligation, covenant or agreement in this Master any jurisdiction or jurisdictions or in all jurisdictions, or in all cases because it conflicts with any Indenture contained against any past, present or future officer, director, trustee, manager, limited other provision or provisions or any constitution or statute or rule of public policy, or for any partner, employee, member or agent of any Member, or of any successor corporation or other other reason, such circumstances shall not have the effect of rendering the provision in question entity, as such, either directly or through any Member or any successor corporation or other inoperative or unenforceable in any other case or circumstance, or of rendering any other entity, under any rule of law or equity, statute or constitution or by the enforcement of any provision or provisions herein contained invalid, inoperative, or unenforceable to any extent assessment or penalty or otherwise, and all such liability of any such officers, directors, trustees, whatever. managers, limited partners, employees, members or agents as such is hereby expressly waived and released as a condition of and consideration for the execution of this Master Indenture and The invalidity of any one or more phrases, sentences, clauses or Sections in this Master the issuance of such Obligations. Indenture contained, shall not affect the remaining portions of this Master Indenture, or any part thereof. Section 1009. Holidays. If the date for making any payment or the date for performance of any act or the exercising of any right, as provided in this Master Indenture, is not a Business Section 1004. Notices. It shall be sufficient service of any notice, complaint, demand or Day, such payment may be made or act performed or right exercised on the next succeeding other paper on the Group Representative if the same shall be delivered (a) in person, (b) via Business Day with the same force and effect as if done on the nominal date provided in this Master Indenture.
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Section 1010. UCC Financing Statements. Without limiting the operation or effect of In Witness Whereof, intending to be legally bound, the Members of the Obligated Group Section 423 hereof, the Members of the Obligated Group hereby expressly grant to the Master have caused these presents to be signed in their names and on their behalf by their duly Trustee the full right and authority to cause to be filed any Uniform Commercial Code financing authorized officers, and to evidence its acceptance of the trusts hereby created the Master Trustee statement, continuation or amendment that may be required by law or is advised by Counsel as has caused these presents to be signed in its name and on its behalf by one of its authorized necessary to maintain any security interest granted by the Obligated Group to the Master Trustee officers, all as of the day and year first above written. pursuant to the Master Indenture; provided that the Master Trustee shall have no duty or obligation to file any financing statement, continuation statement or amendment without Bayhealth Medical Center, Inc. direction by the Obligated Group Representative.
By:______Name: [SIGNATURE PAGE IMMEDIATELY FOLLOWS] Title:
Wilmington Trust, National Association, not in its individual capacity but solely as Master Trustee
By:______Vice President
D-44
MASTER TRUST INDENTURE
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STATE OF DELAWARE) EXHIBIT A ) ss: COUNTY OF NEW CASTLE ) MEMBERS OF THE OBLIGATED GROUP
On this, the ___ day of ______, 2017, before me, a Notary Public, the undersigned officer, personally appeared ______, who acknowledged himself to Bayhealth Medical Center, Inc. be the ______of BAYHEALTH MEDICAL CENTER, INC., a Delaware corporation, and that he, in such capacity, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing on behalf of said corporation and further acknowledged that he executed the same with the knowledge and intent that the foregoing instrument contains a grant by the corporation of powers of attorney to and in favor of the Group Representative.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
______Notary Public
D-45 My commission expires:
MASTER TRUST INDENTURE A-1 DMEAST #30741167 DMEAST #30741167 v6
EXHIBIT B Exhibit C
Exceptions Subordinated Indebtedness
(a) Any liability of a Member with respect to any Obligation in excess of its liability Any issue of Subordinated Indebtedness shall be evidenced by instruments, or issued in proportion to the portion of the proceeds thereof received by or otherwise applied for the under an indenture or other document, containing provisions for the subordination of such benefit of such Member shall be limited to the maximum amount that would not (i) cause such Indebtedness (to which appropriate reference shall be made in the instruments evidencing such liability to be avoidable as a fraudulent transfer or fraudulent conveyance under applicable Indebtedness) substantially as follows (the term “debentures” being, for convenience, used in the bankruptcy, insolvency or similar laws or (ii) cause such Member, in making any payment with provisions set forth below to designate the instruments issued to evidence Subordinated respect to such liability, to be in violation of any law (including, without limitation, the Indenture and the term “this Indenture” to designate the instrument, indenture or other document applicable corporation or not-for-profit corporation laws of the State of its incorporation and any containing such provisions): State in which such Member is registered as a foreign corporation) restricting the purposes for which its assets may be used. “All debentures issued under this Indenture shall be issued subject to the following provisions and each person taking or holding any such debenture whether upon original issue or (b) the provisions of the Master Indenture pursuant to which each Member of the upon transfer or assignment thereof accepts and agrees to be bound by such provisions. Obligated Group covenants to pay any Obligation issued by a Member other than itself may not be enforceable if any such payment (1) is to be made on any such Obligation which was issued All debentures issued hereunder and any coupons thereto appertaining shall, to the extent for a purpose which is not consistent with the charitable purpose of the Member from which such and in the manner hereinafter set forth, be subordinated and subject in right to the prior payment payment is sought, (2) with respect to Members that are Tax-Exempt Organizations, is to be in full of Superior Indebtedness as defined in this Section. For all purposes of this Section the made on any such Obligation which was issued for the benefit of any entity other than a not-for- term “Superior Indebtedness” shall mean all Obligations now or hereafter issued under that profit corporation which is exempt from federal income taxes under Section 501(a) of the Code certain Master Trust Indenture (the “Master Indenture”), dated as of December 1, 2017 among by virtue of being described in Section 501(c)(3) of the Code and is not a “private foundation” as Bayhealth Medical Center, Inc. and Wilmington Trust, National Association, as Master Trustee
D-46 defined in Section 509(a) of the Code, (3) is to be made from any moneys or assets which are (the “Master Trustee”), as supplemented and modified to the date hereof, or as the same may donor restricted or which are subject to a direct or express trust which does not permit the use of hereafter from time to time be further supplemented and modified. such moneys or assets for such a payment, (4) would result in the cessation or discontinuation of any material portion of the health care or related services previously provided by the Member No payment on account of principal, premium, if any, sinking funds or interest on the from which such payment is sought, or (5) is to be made pursuant to any loan violating debentures shall be made, nor shall any property or assets be applied to the purchase or other applicable usury laws. acquisition or retirement of the debentures, unless full payment of amounts then due and payable for principal, premium, if any, sinking funds and interest on Superior Indebtedness has been made or duly provided for in accordance with the terms of such Superior Indebtedness. No payment on account of principal, premium, if any, sinking funds or interest on the debentures shall be made, nor shall any property or assets be applied to the purchase or other acquisition or retirement of the debentures, if, at the time of such payment or application or immediately after giving effect thereto, (i) there shall exist a default in the payment of principal, premium, if any, sinking funds or interest with respect to any Superior Indebtedness, or (ii) there shall have occurred an event of default (other than a default in the payment of principal, premium, if any, sinking funds or interest) with respect to any Superior Indebtedness, as defined therein or in the instrument under which the same is outstanding, permitting the holders thereof to accelerate the maturity thereof and such event of default shall not have been cured or waived or shall not have ceased to exist.
Upon (i) any acceleration of maturity of the principal amount due on the debentures or (ii) any payment of distribution of any kind or character, whether in cash, property or securities, upon any dissolution or winding-up or total or partial liquidation, reorganization or arrangement of any Member (as defined in the Master Indenture), whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all principal, premium, if any, and interest due or to become due upon all Superior Indebtedness shall first be paid in full, or
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payment thereof provided for in accordance with the terms of such Superior Indebtedness, before delivered to said trustee for the purpose of ascertaining the persons entitled to participate in such any payment is made on account of the principal, premium, if any, or interest on the distribution, the holders of “Superior Indebtedness” and other indebtedness of such Member, the indebtedness evidenced by the debentures, and upon any such dissolution or winding-up or amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all liquidation, reorganization or arrangement, any payment or distribution of any kind or character, other facts pertinent thereto or to the foregoing provisions, and (iii) that the trustee under any whether in cash, property or securities, to which the holders of the debentures or the trustee indenture relating to Subordinated Indebtedness and any paying agent therefor shall not be under this Indenture would be entitled, except for the provisions hereof, shall be paid by the charged with knowledge of the existence of any facts which would prohibit the making of any Members, or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person payment of moneys to or by such trustee or such paying agent, unless and until such trustee or making such payment or distribution, to the Master Trustee to the extent necessary to pay all such paying agent, as the case may be, shall have received written notice thereof from any Superior Indebtedness in full after giving effect to any concurrent payment or distribution to the Member or from one or more holders of “Superior Indebtedness”, or from the Master Trustee.” Master Trustee for the holders of Superior Indebtedness, before any payment or distribution is made to the holders of the indebtedness evidenced by the debentures or to the trustee under this Indenture.
In the event that, in violation of any of the foregoing provisions, any payment or distribution of any kind or character, whether in cash, property or securities, shall be received by the trustee under this Indenture or by the holders of the debentures before all Superior Indebtedness is paid in full, or provision made for such payment in accordance with the terms of such Superior Indebtedness, such payment or distribution shall be held in trust for the benefit of, and shall be paid over or delivered to the Master Trustee for application to the payment of all Superior Indebtedness remaining unpaid to the extent necessary to pay all such Superior Indebtedness in full in accordance with its terms, after giving effect to any concurrent payment or distribution to the Master Trustee for the holders of such Superior Indebtedness. D-47 No present or future holder of Superior Indebtedness shall be prejudiced in his right to enforce subordination of the indebtedness evidenced by the debentures by any act or failure to act on the part of any Member or anyone in custody of its assets or property."
The foregoing subordination provisions shall be for the benefit of the holders of Superior Indebtedness and may be enforced by the Master Trustee against the holders of debentures or any trustee thereof; provided, however, that the indentures or other instruments creating or evidencing subordinated debt or pursuant to which any subordinated debt is issued shall provide: (i) that the foregoing provisions are solely for the purpose of defining the relative rights of the holders of “Superior Indebtedness” on the one hand and the holders of the Subordinated Indebtedness on the other hand, and that nothing therein shall impair, as between the Members and the holders of the Subordinated Indebtedness, the obligation of the Members, which is unconditional and absolute, to pay to the holders thereof the principal thereof, premium, if any, and interest thereon in accordance with its terms, nor shall anything therein prevent the holders of the Subordinated Indebtedness or any trustee on their behalf from exercising all remedies otherwise permitted by applicable law or thereunder upon default thereunder, subject to the rights set forth above of the holders of “Superior Indebtedness” to receive cash, property or securities otherwise payable or deliverable to the holders of the Subordinated Indebtedness, (ii) that upon any payment or distribution of assets of any Member of the character referred to in the fourth paragraph of the foregoing provisions, the trustee under any indenture relating to Subordinated Indebtedness shall be entitled to rely upon any order or decree of a court of competent jurisdiction in which such dissolution, winding-up, liquidation, reorganization or arrangement proceedings are pending, and upon a certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other person making any such payment or distribution,
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APPENDIX E
FORM OF OPINION OF BOND COUNSEL
______, 20____
Delaware Health Facilities Authority Wilmington Trust, National Association, P.O. Box 951 as Trustee 1313 N. Market St., 6th Floor 1100 N. Market Street Wilmington, Delaware 19899 Wilmington, Delaware 19890
PNC Capital Markets LLC, Bayhealth Medical Center, Inc. as underwriter 640 South State Street 1600 Market Street, 21st Floor Dover, Delaware 19901 Philadelphia, Pennsylvania 19103
Re: $______Delaware Health Facilities Authority Revenue Bonds, (Bayhealth Medical Center Project), Series 2017A
Ladies and Gentlemen:
We have acted as bond counsel to the Delaware Health Facilities Authority (the “Authority”) in connection with the issuance by the Authority of $______aggregate principal amount of its Revenue Bonds, (Bayhealth Medical Center Project), Series 2017A (the “Bonds”), issued as fully registered bonds. The Bonds are issued under and pursuant to the Delaware Health Facilities Act, being Title 16, Section 9201 et. seq. of the Delaware Code (the “Act”) and a Trust Indenture dated as of December 1, 2017 (the “Bond Indenture”) between the Authority and Wilmington Trust, National Association, as trustee (the “Bond Trustee”). The Bonds have been authorized by a resolution of the Authority duly adopted on October 23, 2017.
The Authority is issuing the Bonds at the request of Bayhealth Medical Center, Inc. (“Bayhealth”) for the purpose of lending the proceeds thereof to Bayhealth to assist in the financing of a portion of the costs of a project consisting generally of: (a) the advance refunding of a portion of the outstanding principal amount of the Authority’s Revenue Bonds, Bayhealth Medical Center Project, Series 2009A; and (b) the payment of certain costs of issuing the Bonds.
The Bonds are secured by the Bond Indenture, by an assignment to the Bond Trustee of certain rights of the Authority under a Loan Agreement dated as of December 1, 2017 (the “Loan Agreement”) between the Authority and Bayhealth, and by a promissory note (the “Master Note”) of Bayhealth issued in favor of the Bond Trustee. The Master Note is being issued under a Master Trust Indenture dated as of December 1, 2017 (as supplemented by the First Supplemental Master Trust Indenture dated as of December 1, 2017, collectively, the “Master Indenture”) between Bayhealth and Wilmington Trust, National Association, as master trustee. Payments by Bayhealth under the Master Note will be credited against the obligations of Bayhealth under the Loan Agreement and applied to the principal or redemption price of and interest on the Bonds.
Bayhealth has represented in the Loan Agreement that it is an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”), is not a “private
E-1 foundation” within the meaning of Section 509(a) of the Code and is exempt from federal income tax under Section 501(a) of the Code, except for unrelated business income subject to taxation under Section 511 of the Code. Bayhealth has covenanted that, throughout the term of the Loan Agreement, it will not carry on or permit to be carried on in any property now or hereafter owned by it any trade or business if the conduct of such trade or business would adversely affect the validity of the Bonds or cause the interest paid by the Authority on the Bonds to be includible in gross income for purposes of federal income tax.
The Code sets forth certain other requirements which must be met subsequent to the issuance and delivery of the Bonds for interest thereon to remain excludable from the gross income of the owners of the Bonds for federal income tax purposes. The Authority and Bayhealth have covenanted to comply with such requirements in the Bond Indenture and the Loan Agreement. Noncompliance with such requirements may cause the interest on the Bonds to be includable in the gross income of the owners of the Bonds for federal income tax purposes, retroactive to the date of issue of the Bonds or as of some later date. Bayhealth has also covenanted in the Loan Agreement that it will comply with the requirements of Section 148(f) of the Code which provides for the rebate of certain arbitrage profits to the United States. For the purposes of the opinions set forth below, we have assumed that the Authority and Bayhealth will comply with the covenants set forth in the Bond Indenture and the Loan Agreement relating to the tax-exempt status of the Bonds.
The Authority will cause to be filed with the Internal Revenue Service a report of the issuance of the Bonds as required by the Code as a condition of the exclusion from gross income of the interest on the Bonds for federal income tax purposes. In addition, an officer of the Authority responsible for issuing the Bonds has executed a certificate stating the reasonable expectations of the Authority on the date of issue of the Bonds as to future events that are material for the purposes of Section 148 of the Code pertaining to arbitrage bonds. We have reviewed such certificate and, in our opinion, the Bonds are not “arbitrage bonds” within the meaning of Section 148 of the Code.
In our capacity as bond counsel we have examined such documents, records of the Authority and other instruments as we deemed necessary to enable us to express the opinions set forth below, including original counterparts or certified copies of the Bond Indenture, the Loan Agreement, the Master Indenture, the Master Note and the other documents listed in the closing index in respect of the Bonds filed with the Bond Trustee. We also have examined an executed Bond, and assume that all other Bonds have been similarly executed and have been authenticated by the Bond Trustee.
Based on the foregoing, it is our opinion that:
1. The issuance and sale of the Bonds have been duly authorized by the Authority and, on the assumption as to execution and authentication stated above, the Bonds have been duly executed and delivered by the Authority and authenticated by the Bond Trustee, are valid and binding obligations of the Authority and are entitled to the benefit and security of the Bond Indenture, except as the rights created thereunder and the enforcement thereof may be limited by bankruptcy, insolvency or other laws or equitable principles affecting the enforcement of creditors’ rights generally.
2. By terms of the Act, the Bonds, their transfer and the income therefrom, are free from income taxation by the State of Delaware and by the municipalities and other political subdivisions in the State of Delaware. Bond Counsel will express no opinion regarding State of Delaware franchise or estate tax.
3. Interest on the Bonds [(including original issue discount on certain of the Bonds)] is excludable from gross income for purposes of federal income tax under existing laws as enacted and construed on the date of initial delivery of the Bonds, assuming the accuracy of the certifications of the Authority and Bayhealth and continuing compliance by the Authority and Bayhealth with the requirements of the Code. Interest on the Bonds is not an item of tax preference for purposes of either
E-2 individual or corporate federal alternative minimum tax (“AMT”); however, interest on the Bonds held by a corporation (other than an S corporation, regulated investment company, or real estate investment trust) may be indirectly subject to AMT because of its inclusion in the adjusted current earnings of a corporate holder. We express no opinion regarding other federal tax consequences relating to ownership or disposition of, or the accrual or receipt of interest on, the Bonds.
[Certain Bonds were offered at a premium (“original issue premium”) over their principal amount. For federal income tax purposes, original issue premium is amortizable periodically over the term of a Bond through reductions in the holder’s tax basis for the Bond for determining taxable gain or loss from sale or from redemption prior to maturity. Amortization of premium does not create a deductible expense or loss.]
We express no opinion herein with respect to the adequacy of the security for the Bonds or the sources of payment for the Bonds or with respect to the accuracy or completeness of the Official Statement prepared in respect of the Bonds or as to any other matter not set forth herein.
We call your attention to the fact that the Bonds are limited obligations of the Authority, payable only out of certain revenues of the Authority and certain other moneys available therefor as provided in the Bond Indenture, and that the Bonds do not pledge the credit or taxing power of the Authority, the State of Delaware or any political subdivision, agency or instrumentality thereof. The Authority has no taxing power.
Very truly yours,
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APPENDIX F
FORM OF CONTINUING DISCLOSURE AGREEMENT
This CONTINUING DISCLOSURE AGREEMENT, dated as of December 1, 2017 (this “Disclosure Agreement”), is executed and delivered by Bayhealth Medical Center, Inc., a Delaware nonprofit corporation (the “Corporation”), as Group Representative on behalf of the Members of the Obligated Group (as each term is hereinafter defined), and accepted by Digital Assurance Certification, L.L.C., as Dissemination Agent (“DAC” or the “Dissemination Agent”), in connection with the issuance of $______in aggregate principal amount of the Delaware Health Facilities Authority Revenue Bonds, Bayhealth Medical Center Project, Series 2017A (the “Bonds”). The Bonds are being issued under a Bond Indenture, dated as of December 1, 2017 (the “Bond Indenture”), between the Delaware Health Facilities Authority (the “Authority”) and Wilmington Trust, National Association, as bond trustee (the “Bond Trustee”). The proceeds of the Bonds are being loaned to the Corporation, pursuant to a Loan Agreement, dated as of December 1, 2017 (the “Loan Agreement”), between the Authority and the Corporation. To evidence the obligation to make payments under the Loan Agreement, the Corporation will issue its 2017A Obligation, under the Master Trust Indenture, dated as of December 1, 2017 (as supplemented and amended, the “Master Indenture”), between the Corporation and Wilmington Trust, National Association, as master trustee (the “Master Trustee”). The Corporation covenants and agrees as follows:
Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the Corporation, as Group Representative on behalf of the Members of the Obligated Group, for the benefit of the Holders and Beneficial Owners of the Bonds and in order to assist the Participating Underwriters (as defined below) in complying with the Rule (as defined below). The Corporation acknowledges that the Authority has undertaken no responsibility with respect to any reports, notices or disclosures provided or required under this Disclosure Agreement, and has no liability to any person, including any Holder or Beneficial Owner of the Bonds, with respect to the Rule.
Definitions. In addition to the definitions set forth above and in the Master Indenture, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined in this Section 2, the following capitalized terms shall have the following meanings:
“Annual Report” means any Annual Report relating to the Corporation and its affiliates provided by the Corporation to the Dissemination Agent pursuant to, and as described in, Sections 4 and 5 of this Disclosure Agreement.
“Beneficial Owner” or “Holder” means any person that (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries) or (b) is treated as the owner of any Bonds for federal income tax purposes.
“Business Day” has the meaning assigned to such term in the Bond Indenture.
“Disclosure Representative” means the Senior Vice President for Financial Services and Chief Financial Officer of the Corporation or his or her designee, or such other person as the Corporation shall designate in writing to the Dissemination Agent from time to time.
“Dissemination Agent” means Digital Assurance Certification, L.L.C., acting in its capacity as Dissemination Agent hereunder or any successor Dissemination Agent which is appointed pursuant to Section 3 hereof or to which the responsibilities of Dissemination Agent under this Disclosure Agreement shall have been assigned in accordance with Section 13 hereof.
“Financial Statements” means the audited combined balance sheet and related combined statements of operations, changes in net assets and cash flows including the Corporation and any other Obligated Group Members presented in accordance with generally accepted accounting principles as then in effect (including footnotes) in comparison with the comparable information for the prior fiscal year.
F-1 “Listed Events” means any of the events listed in Section 6(a) of this Disclosure Agreement.
“MSRB” shall mean the Municipal Securities Rulemaking Board established pursuant to Section 15B(b)(1) of the Securities Exchange Act of 1934, as amended, or any successor thereto or to the functions of the MSRB contemplated by this Disclosure Agreement.
“Obligated Group” has the meaning assigned to such term in the Master Indenture.
“Obligated Person” has the meaning assigned to such term in the Rule.
“Official Statement” means the Official Statement, dated November __, 2017, relating to the Bonds.
“Outstanding” has the meaning assigned to such term in the Loan Agreement.
“Participating Underwriters” means PNC Capital Markets LLC and Merrill Lynch, Pierce Fenner & Smith Incorporated, as the underwriters of the Bonds required to comply with the Rule in connection with the offering of the Bonds.
“Quarterly Financial Statements” means (a) an unaudited combined balance sheet as of the end of each of the Corporation’s fiscal quarters (commencing with the fiscal quarter ending December 31, 2017), (b) an unaudited combined statement of operations and changes in net assets for each of the Corporation’s fiscal quarters (commencing with the fiscal quarter ending December 31, 2017) and (c) an unaudited combined statement of cash flows for each of the Corporation’s fiscal quarters (commencing with the fiscal quarter ending December 31, 2017) with comparative financial information for the same period in the preceding fiscal year. Such interim financial statements shall include the Corporation and any other Obligated Group Members. Such interim financial statements shall include all adjustments which, in the opinion of management of the Corporation, are necessary for a fair presentation of the results of operations for the periods specified therein.
“Rule” means Rule 15c2-12 adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.
“State” means the State of Delaware.
Appointment of Dissemination Agent; Removal or Resignation. Digital Assurance Certification, L.L.C., is appointed to act as the initial Dissemination Agent hereunder.
The Corporation may, from time to time, appoint a successor Dissemination Agent or discharge any then acting Dissemination Agent, with or without cause, provided that if at any time there shall be no Dissemination Agent appointed and acting hereunder or the then appointed and acting Dissemination Agent shall fail to perform its obligations hereunder, the Corporation shall discharge such obligations until such time as it shall appoint a successor Dissemination Agent or the then appointed and acting Dissemination Agent shall resume the performance of such obligations. The Dissemination Agent may resign by providing 30 days’ written notice to the Corporation.
Provisions of Annual Reports.
(a) The Corporation shall, within 150 days after the end of each fiscal year of the Corporation (presently ending June 30), commencing with the fiscal year ending June 30, 2018, provide to the Dissemination Agent, and cause the Dissemination Agent to provide to the MSRB, an Annual Report which is consistent with the requirements of Section 5 of this Disclosure Agreement. 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 as provided in Section 5 of this Disclosure Agreement; provided that the Financial Statements may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date, as provided in Section 5.
F-2 (b) The Dissemination Agent shall provide the Corporation written confirmation that the Annual Report and, if received separately in accordance with Section 4(a) hereof, the Financial Statements were provided to the MSRB in accordance with Section 4(a) hereof.
(c) If the Dissemination Agent shall not have received the Annual Report by the date specified in Section 4(a) hereof, the Dissemination Agent shall so notify the Corporation and the MSRB in substantially the form attached hereto as Exhibit A within five (5) Business Days of the date specified in Section 4(a), regardless of whether the Dissemination Agent shall have received the Annual Report during the period between the date specified in Section 4(a) and such fifth (5th) Business Day.
Content of Annual Reports. The Annual Report shall contain or include by reference the following:
(d) The Financial Statements for the prior fiscal year prepared in accordance with generally accepted accounting principles, together with an opinion from an independent auditor relating to the audited financial statements included in the Financial Statements. If such Financial Statements are not available by the time the Annual Report is required to be filed pursuant to Section 4(a), the Annual Report shall contain preliminary Financial Statements in a format similar to the format to be submitted as the Financial Statements and the final Financial Statements (including any accountants’ report) shall be filed in the same manner as the Annual Report when they become available.
(e) Operating data and information for the prior fiscal year of the same type as included in Appendix A of the Official Statement in the charts under the captions “Historical Utilization and Patient Service Statistics,” “Summary Statements of Operations,” “Sources of Patient Revenues,” “Other Financial Information -- Liquidity Ratio,” “-- Historic and Pro Forma Coverage of Debt Service” and “--Historic and Pro Forma Capitalization Ratio” and under the caption “Management’s Discussion of Utilization and Financial Performance -- Utilization” and “--Financial Performance.”
Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues with respect to which any Member of the Obligated Group is an Obligated Person, which have been filed with MSRB or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the MSRB. The Corporation shall clearly identify each such other document so included by reference.
Reporting of Listed Events.
(f) The Corporation shall, or shall cause the Dissemination Agent to, give notice of the occurrence of any of the following Listed Events relating to the Bonds to the MSRB in a timely manner not later than ten (10) Business Days after the occurrence of any such Listed Event:
1. Principal and interest payment delinquencies;
2. Non-payment related defaults, if material;
3. Unscheduled draws on debt service reserves reflecting financial difficulties;
4. Unscheduled draws on credit enhancements reflecting financial difficulties;
5. Substitution of credit or liquidity providers or their failure to perform;
6. Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices of determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds;
7. Modifications to the rights of the Bondholders, if material;
F-3 8. Bond calls, if material, and tender offers;
9. Defeasances;
10. Release, substitution or sale of property securing repayment of the Bonds, if material;
11. Rating changes;
12. Bankruptcy, insolvency, receivership or similar event of any Member of the Obligated Group1;
13. The consummation of a merger, consolidation, or acquisition involving any Member of the Obligated Group or the sale of all or substantially all of the assets of any Member 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
14. Appointment of a successor or additional trustee or the change of the name of the trustee, if material.
(g) The Dissemination Agent shall, promptly after obtaining actual knowledge of the occurrence of any of the Listed Events from a source other than the Corporation, notify the Corporation of the occurrence thereof in writing. For purposes of this Disclosure Agreement, “actual knowledge” of the occurrence of such Listed Events shall mean actual knowledge by the officer at the office of the Dissemination Agent with regular responsibility for the administration of matters related to this Disclosure Agreement.
(h) Whenever the Corporation obtains actual knowledge of the occurrence of any of the Listed Events identified in clause (2), (7), (8) (solely relating to bond calls), (10), (13) or (14) above, whether from the Dissemination Agent pursuant to Section 6(b) hereof or otherwise, the Corporation shall, on a timely basis and in any event within five (5) Business Days, determine whether the occurrence of such event is material to any of the Holders or Beneficial Owners of the Bonds.
(i) If the Corporation determines that (i) the occurrence of any of the Listed Events identified in clause (2), (7), (8) (solely relating to bond calls), (10), (13) or (14) above is material to any of the Holders or Beneficial Owners of the Bonds or (ii) a Listed Event identified in clause (1), (3), (4), (5), (6), (8) (solely relating to tender offers), (9), (11), or (12) above has occurred, the Corporation shall promptly notify the Dissemination Agent in writing and instruct the Dissemination Agent to report the occurrence of such event in accordance with Section 6(f) hereof.
(j) If, in response to a notice from the Dissemination Agent pursuant to Section 6(b) hereof relating to a Listed Event identified in clause (2), (7), (8), (solely relating to bond calls), (10), (13) or (14) above, the Corporation determines that the occurrence of such Listed Event is not material, the Corporation shall notify the
1 For the purposes of the event identified in clause (12) above, the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for any Member of the Obligated Group in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or government authority has assumed jurisdiction over substantially all of the assets or business of any Member of the Obligated Group, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of any Member of the Obligated Group.
F-4 Dissemination Agent of such determination, and the occurrence of such Listed Event shall not be reported pursuant to Section 6(f) hereof.
(k) If the Corporation instructs the Dissemination Agent to report the occurrence of any of the Listed Events pursuant to Section 6(d) hereof, the Dissemination Agent shall, promptly thereafter, file a notice of the occurrence of such event with the MSRB, the Bond Trustee and the Authority. The Dissemination Agent shall provide the Corporation written confirmation that such notice was provided to the MSRB in accordance with this Section 6(f).
(l) Notwithstanding the foregoing, notice of the occurrence of any of the Listed Events described in clause (8) or (9) above shall not be given under this Section 6 any earlier than the notice (if any) of such event is given to the affected Holders pursuant to the Bond Indenture.
(m) Notwithstanding the foregoing, whenever a change in either the fiscal year of an Obligated Person or the accounting principles by which its Financial Statements are prepared occurs, the Corporation shall notify the Dissemination Agent of such change in writing and instruct the Dissemination Agent to report such change to the MSRB, and the Dissemination Agent shall, promptly thereafter, file a notice of such change with the MSRB. The Dissemination Agent shall provide the Corporation written confirmation that such notice was provided to the MSRB in accordance with this Section 6(h).
Quarterly Financial Statements. Not later than 60 days after the end of the first three fiscal quarters of the Corporation and not later than 105 days after the end of the fourth fiscal quarter of the Corporation (commencing with the fiscal quarter ending December 31, 2017), the Corporation shall deliver Quarterly Financial Statements for such fiscal quarter, to the Dissemination Agent, for filing with the MSRB. The Dissemination Agent shall provide the Corporation written confirmation that the Quarterly Financial Statements were provided to the MSRB in accordance with this Section 7.
Coordination of Dissemination of Information. The Corporation shall act as its disclosure representative for purposes of disseminating to the Dissemination Agent (a) the information related to the Corporation and its affiliates which is required by this Disclosure Agreement to be included in the Annual Report, the Financial Statements and the Quarterly Financial Statements and operating data and (b) notices of the occurrence of any Listed Events related to the Members of the Obligated Group and with respect to the inclusion of the information and notices with respect to a Member of the Obligated Group. If deemed necessary by the Corporation in its sole discretion, the Corporation shall, pursuant to separate agreements, contract with any other Obligated Person with respect to which the Corporation is required by this Disclosure Agreement to include information related to such Person in the Annual Report, the Financial Statements and Quarterly Financial Statements for any future fiscal period or with respect to which the Corporation is required to provide the Dissemination Agent notice of the occurrence of any Listed Events related to such Person.
Any such contract between the Corporation and an Obligated Person shall provide the following:
1. that such Person shall appoint the Corporation as its agent for purposes of distributing to the Dissemination Agent (a) the information related to such Person which is required by this Disclosure Agreement to be included in the Annual Report, (b) the Financial Statements and Quarterly Financial Statements and operating data of such Person and (c) notices of the occurrence of any Listed Events related to such Person using the means of notification set forth in this Disclosure Agreement;
2. that, in the case of the information related to such Person which is required by this Disclosure Agreement to be included in the Annual Report, the Financial Statements and the Quarterly Financial Statements and operating data, such Person shall agree not to distribute such information, Financial Statements or Quarterly Financial Statements and operating data (or any such information related to other Obligated Persons) to any Person other than the Corporation or another Obligated Person prior to the time that the Corporation notifies such Person that the Dissemination Agent has provided the Annual Report, the Financial Statements or the Quarterly Financial Statements and operating data, as the case may be, to the MSRB in accordance with Sections 4 and 7 hereof; and
F-5 3. in the case of a Listed Event related to such Person or another Obligated Person, such Person shall agree not to distribute notice of the occurrence thereof to any Person other than the Corporation or another Obligated Person prior to the time that the Corporation notifies such Person that the Dissemination Agent has given notice to the MSRB of the occurrence of such Listed Event in accordance with Section 6 hereof.
The Corporation agrees to distribute such information and notices of the occurrence of any Listed Events related to itself in the same manner as provided in Section 7 with respect to other Obligated Persons.
Termination of Reporting Obligation. The Corporation’s obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. If any Member of the Obligated Group’s obligations under the Loan Agreement are assumed in full by some other entity, such Person or Persons shall be responsible for compliance with this Disclosure Agreement in the same manner as if it were such Member of the Obligated Group, and the original Member of the Obligated Group shall have no further responsibility hereunder. If such termination or substitution occurs prior to the termination of the Corporation’s obligations in accordance with the first sentence of this Section 9, the Corporation shall give notice of such termination or substitution in the same manner as for a Listed Event under Section 6(d)(i). The Dissemination Agent shall be fully discharged at the time any such termination is effective.
Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Corporation may amend this Disclosure Agreement and any provisions of this Disclosure Agreement may be waived, provided that the following conditions are satisfied (unless otherwise permitted by the Rule, in which case such conditions need not be satisfied):
(n) If the amendment or waiver relates to the provisions of Sections 4(a), 5, or 6(a), it may only be made in connection with a change in circumstances that arises from a change in legal (including regulatory) requirements, change in law (including rules and regulations), or change in the identity, nature or status of an obligated person with respect to the Bonds (including, but not limited to, affiliations, mergers, acquisitions, divestitures or dispositions affecting the Obligated Group, the Combined Group or the Corporation, or additions to or withdrawals from the Obligated Group or Combined Group), or the type of business conducted;
(o) The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized disclosure counsel, have complied with the requirements of the Rule at the time of the original issuance of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and
(p) The amendment or waiver either (i) is approved by the Holders and Beneficial Owners of the Bonds in the same manner as provided in the Bond Indenture for amendments to the Bond Indenture with the consent of Holders, or (ii) does not, in the opinion of the Bond Trustee, which may be based in whole or in part upon its reliance on an opinion of counsel or nationally recognized disclosure counsel, materially impair the interests of the Holders and Beneficial Owners of the Bonds.
In the event of any amendment or waiver of a provision of this Disclosure Agreement, the Corporation shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or, in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the Corporation in accordance with this Disclosure Agreement. In addition, if the amendment relates to the accounting principles to be followed in preparing Financial Statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 6(d)(i), and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the Financial Statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles.
Limitations, Disclaimers and Additional Information. The Corporation undertakes to provide only the financial information, operating data, financial statements, and notices which it has expressly agreed to provide pursuant to this Disclosure Agreement and does not hereby undertake to provide any other information that may be relevant or material to a complete presentation of any Obligated Group Member’s or Restricted Affiliate’s financial
F-6 results, condition, or prospects or hereby undertake to update any information provided in accordance with this Disclosure Agreement or otherwise, except as expressly provided herein. The Corporation does not make any representation or warranty concerning such information or its usefulness to a decision to invest in or sell Bonds at any future date.
UNDER NO CIRCUMSTANCES SHALL THE CORPORATION BE LIABLE TO THE HOLDER OR BENEFICIAL OWNER OF ANY BOND OR ANY OTHER PERSON, IN CONTRACT OR TORT, FOR DAMAGES RESULTING IN WHOLE OR IN PART FROM ANY BREACH BY THE CORPORATION, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, OF ANY COVENANT SPECIFIED IN THIS DISCLOSURE AGREEMENT, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, IN CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE LIMITED TO AN ACTION FOR SPECIFIC PERFORMANCE.
Nothing in this Disclosure Agreement is intended or shall act to disclaim, waive, or otherwise limit the duties of the Obligated Group Members and the Restricted Affiliates under federal and state securities laws. Nothing in this Disclosure Agreement shall be deemed to prevent the Corporation from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the Corporation chooses to include any information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is specifically required by this Disclosure Agreement, the Corporation shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.
Defaults.
(q) In the event of a failure by the Corporation to comply with any of its obligations under this Disclosure Agreement, the Dissemination Agent or any Holder may and, upon the direction of any Holders (or the Bond Trustee representing Holders of Bonds) owning not less than 50% in aggregate principal amount of all of the Bonds then Outstanding, the Dissemination Agent shall take such actions as it may deem necessary and appropriate, including seeking mandamus or specific performance by court order, to cause the Corporation to comply with such obligations, but only to the extent funds in an amount satisfactory to the Dissemination Agent have been provided to it or it has been otherwise indemnified to its satisfaction from any reasonable cost, liability, expense or additional charges of the Dissemination Agent whatsoever, including, without limitation, fees and expenses of its attorneys.
(r) In the event of a failure by the Dissemination Agent to comply with any of its obligations under this Disclosure Agreement, the Corporation or any Holder may and, upon the direction of any Holders (or the Bond Trustee representing Holders of Bonds) owning not less than 50% in aggregate principal amount of all of the Bonds then Outstanding, the Corporation shall take such actions as the Corporation may deem necessary and appropriate, including seeking mandamus or specific performance by court order, to cause the Dissemination Agent to comply with such obligations.
(s) A default under this Disclosure Agreement shall not be deemed to be a default or an event of default under the Master Indenture, the Bond Indenture or the Loan Agreement, and the sole remedy for a default hereunder shall be an action to compel performance.
Assignment. The Dissemination Agent may assign this Disclosure Agreement to a third party with the prior written consent of the Corporation.
Compensation of the Dissemination Agent. As compensation for providing services to the Corporation pursuant to this Disclosure Agreement, the Corporation agrees to pay all reasonable fees and all reasonable expenses of the Dissemination Agent including, without limitation, all reasonable expenses, charges, costs and other disbursements in the administration and performance of its duties hereunder, and shall indemnify and save the Dissemination Agent and its officers, directors, attorneys, agents and employees harmless from and against any costs, expenses, damages or other liabilities (including attorney’s fees) which it (or they) may incur in the exercise of its (or their) powers and duties hereunder, except with respect to its (or their) willful misconduct or negligence.
F-7 Concerning the Dissemination Agent. The Dissemination Agent is not answerable for the exercise of any discretion of power under this Disclosure Agreement or for anything whatever in connection herewith, except only its own willful misconduct or negligence. The Dissemination Agent shall have no liability to the Holders or Beneficial Owners of Bonds or any other person with respect to the undertakings described in Section 1 hereof, except as expressly set forth in this Disclosure Agreement regarding its own willful misconduct or negligence.
The Corporation acknowledges that, notwithstanding any other provision in this Disclosure Agreement, the Corporation shall be solely responsible for the contents of all reports and notices prepared pursuant to this Disclosure Agreement. In the case of any Annual Report disclosure or any Listed Events disclosure, or any opinions which by any provision hereof are specifically required to be furnished to the Dissemination Agent, the Dissemination Agent shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Disclosure Agreement, but shall be under no duty to verify independently or investigate the accuracy or completeness of any information contained therein or the correctness of any opinion furnished hereunder.
The Dissemination Agent shall not be responsible for any failure to file any report or notice prepared pursuant to this Disclosure Agreement within any time constraints imposed by this Disclosure Agreement or the Rule to the extent that such failure was occasioned by the failure of the Corporation to provide such report or notice to the Dissemination Agent in a timely manner and in a form suitable for filing.
The Dissemination Agent undertakes to perform such duties and only such duties as are specifically set forth in this Disclosure Agreement, and no implied covenants or obligations shall be read into this Disclosure Agreement against the Dissemination Agent.
In the absence of bad faith on its part, the Dissemination Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Dissemination Agent and conforming to the requirements of this Disclosure Agreement.
No provision of this Disclosure Agreement shall require the Dissemination Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder.
The Dissemination Agent may rely, and shall be protected in acting or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties, including without limitation any written direction signed by the Corporation.
The Dissemination Agent may consult with counsel of its choice and the written advice of such counsel or any opinion of 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 reliance thereon, it being understood that, for purposes of this provision and except as otherwise specifically provided herein, such counsel may be counsel to one or more Obligated Persons.
Notices. Any notices or communications to or among any of the parties to this Disclosure Agreement may be given as follows:
To the Corporation: Bayhealth Medical Center, Inc. 640 South State Street Dover, DE 19901 Attention: Senior Vice President for Financial Services and Chief Financial Officer Telephone: 302-744-7162 Facsimile:
To the Authority: Delaware Health Facilities Authority P.O. Box 951 Wilmington, DE 19899
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With a copy to: Matthew J. O’Toole Potter Anderson & Corroon LLP 1313 North Market Street Wilmington, DE 19899
Telephone: 302-984-6114 Facsimile:
To the Dissemination Agent: Digital Assurance Certification, L.L.C., as Dissemination Agent [Address] Attention: Telephone: Facsimile:
Any person may, by written notice to the other persons listed above, designate a different address or telephone number(s) to which subsequent notices or communications should be sent.
Method of Filing. Whenever providing information to the MSRB, including, but not limited to, Annual Reports, Financial Statements, notices of Listed Events and Quarterly Financial Statements, the Corporation or the Dissemination Agent, as the case may be, shall provide such information to the MSRB in an electronic format as prescribed by the MSRB and accompanied by identifying information as prescribed by the MSRB. The Corporation or the Dissemination Agent, as the case may be, may also discharge any undertaking described in this Disclosure Agreement by transmitting such information in any other manner subsequently authorized or required by the United States Securities and Exchange Commission.
Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the Corporation, the Bond Trustee, the Dissemination Agent, the Participating Underwriter and the Holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity.
Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute one and the same instrument.
Governing Law. This Disclosure Agreement shall be governed by the laws of the State of Delaware.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the Corporation and the Dissemination Agent have caused this Disclosure Agreement to be executed and delivered as of the date first written above.
BAYHEALTH MEDICAL CENTER, INC., as Group Representative on behalf of the Members of the Obligated Group
By: ______Its: Senior Vice President of Financial Services and Chief Financial Officer
DIGITAL ASSURANCE CERTIFICATION, L.L.C., as Dissemination Agent
By: ______Its: Vice President
[Signature Page for Continuing Disclosure Agreement]
F-10 EXHIBIT A
NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT
Name of Issuer: Delaware Health Facilities Authority
Name of Bond Issue: Revenue Bonds, Bayhealth Medical Center Project, Series 2017A
CUSIP: ______
Date of Issuance: December __, 2017
NOTICE IS HEREBY GIVEN that Bayhealth Medical Center, Inc. (the “Corporation”) has not yet provided an Annual Report with respect to the above-named Bonds as required by the Continuing Disclosure Agreement, dated as of December 1, 2017, by and between the Corporation and Digital Assurance Certification, L.L.C. (the “Dissemination Agent”). The Corporation has informed the Dissemination Agent that the Annual Report will be filed with the Dissemination Agent by .
DIGITAL ASSURANCE CERTIFICATION, L.L.C.
By: Name: Title: cc: Corporation Authority
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APPENDIX G
INFORMATION REGARDING BOOK-ENTRY ONLY SYSTEM
Information concerning the Depository Trust Company, New York, New York (“DTC”) and the Book-Entry Only System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by, the Authority, the Underwriters, the Bond Trustee, or the Corporation.
Bonds in Book-Entry Form
DTC, will act as securities depository for the Series 2017A Bonds. The Series 2017A 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 certificate will be issued for each maturity of the Series 2017A Bonds, in the aggregate principal amount of such Series 2017A Bonds, and will be deposited with DTC.
DTC and its Participants
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 United States and non-United States 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 United States and non-United States 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 United States and non-United States securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC’s rating from Standard & Poor’s is 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.
Ownership of the Series 2017A Bonds
Purchases of the Series 2017A Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for such Series 2017A Bonds on DTC’s records. The ownership interest of each actual purchaser of each Series 2017A Bond (“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 purchases. 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 Participants through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2017A 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 the Series 2017A Bonds, except in the event that use of the book-entry system for the Series 2017A Bonds is discontinued.
To facilitate subsequent transfers, all Series 2017A 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 2017A Bonds with DTC and their registration in the name of
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Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2017A Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Series 2017A 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. Beneficial Owners of Series 2017A Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Series 2017A Bonds, such as redemptions, tenders, defaults and proposed amendments to the security documents. For example, Beneficial Owners of Series 2017A Bonds may wish to ascertain that the nominee holding the Series 2017A Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Bond Trustee and request that notices be provided directly to them.
Redemption notices shall be sent to DTC. If less than all of the Series 2017A Bonds within a maturity are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Series 2017A Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Series 2017A Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).
Payments on the Series 2017A Bonds
Payments of the principal of, premium, if any, and interest on, the Series 2017A 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 information from the Bond Trustee, on the applicable payment date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with 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 the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of the principal of, premium, if any, and interest on the Series 2017A Bonds to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Bond Trustee, or the Authority, 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.
None of the Authority, the Bond Trustee, the Underwriters or the Corporation can give any assurances that DTC or the Direct or Indirect Participants will distribute payments of the principal of, premium, if any, and interest on the Series 2017A Bonds paid to DTC or its nominee, as the registered owner of the Series 2017A Bonds, or that they will do so on a timely basis or that DTC will serve and act in the manner described in the Official Statement.
Discontinuance of Book-Entry Only System
DTC may discontinue providing its services as depository with respect to the Series 2017A Bonds at any time by giving reasonable notice to the Bond Trustee, the Corporation and the Authority. Under such circumstances, in the event that a successor depository is not obtained, the Series 2017A Bond certificates are required to be printed and delivered in fully certificated form to the Participants shown on the records of DTC provided to the Bond Trustee, or to the extent requested by any Participant, to the Beneficial Owners of the Series 2017A Bonds shown on the records of such Participant provided to the Bond Trustee.
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DELAWARE HEALTH FACILITIES AUTHORITY • Revenue Bonds, Bayhealth Medical Center Project, Series 2017A