The Children's Hospital Corporation

SUPPLEMENT DATED JANUARY 24, 2017

TO THE PRELIMINARY OFFERING MEMORANDUM DATED JANUARY 17, 2017

relating to

$350,000,000* THE CHILDREN’S HOSPITAL CORPORATION TAXABLE BONDS, SERIES 2017A

This Supplement to the Preliminary Offering Memorandum dated January 17, 2017 (the “Preliminary Offering Memorandum”) relating to the above-referenced bonds should be read in conjunction with the Preliminary Offering Memorandum.

The Preliminary Offering Memorandum is hereby amended as follows:

Under the heading “THE BONDS – Redemption – Events of Default and Acceleration of Bonds,” the entire paragraph is deleted and replaced by the following paragraph:

Upon the occurrence of an Event of Default under and as defined in the Bond Indenture, the Bond Trustee may, and upon the written request of the Holders of not less than a majority in aggregate principal amount of Bonds Outstanding shall, declare all Bonds Outstanding to be immediately due and payable. In such event, including in connection with a bankruptcy or insolvency proceeding and whether such acceleration is pursuant to the Bond Indenture or pursuant to applicable law, there shall be due and payable on the Bonds an amount equal to the Make-Whole Redemption Price. See Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Bond Indenture.”

Under the heading “Bondholders’ Risks - Enforceability of Remedies Generally,” the following sentence shall be added after the third sentence thereof:

“Furthermore, under existing law, the obligation to pay the Make-Whole Redemption Price in the event of acceleration of the Bonds may be limited or may not be enforceable.”

In “APPENDIX D – SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Bond Indenture” under the heading “Acceleration; Annulment of Acceleration,” the entire paragraph (a) is deleted and replaced by the following paragraph:

Upon the occurrence of an Event of Default, the Bond Trustee may, and upon the written request of the Holders of not less than a majority in aggregate principal amount of the Bonds Outstanding shall, without any further action, declare all Bonds Outstanding to be immediately due and payable. The Bond Trustee shall declare such acceleration without regard to receipt of prior indemnification under the Bond Indenture. In such event, including in connection with a bankruptcy or insolvency proceeding and whether such acceleration is pursuant to the Bond Indenture or pursuant to applicable law, there shall be due and payable on the Bonds an amount equal to the Make-Whole Redemption Price. The Bond Trustee shall give written notice of such acceleration to the Institution and the Bondholders.

THE CHILDREN’S HOSPITAL CORPORATION

* Preliminary, subject to change. This Preliminary Offering Memorandum and the information contained herein are subject to completion or amendment. Under no circumstances shall this Preliminary Offering Memorandum constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. to makinganinformedinvestmentdecision. security ortermsoftheBonds.InvestorsshouldreadentireOfferingMemorandumtoobtaininformation essential herein. state orlocalincometaxpurposes.See“CERTAINUNITEDSTATESFEDERALTAXCONSIDERATIONS” payable oneachJanuary1andJuly1,commencing2017. mailed onlytoCede&Co.See“BOOK-ENTRY-ONLYSYSTEMANDGLOBALCLEARANCEPROCEDURES”herein. owners oftheBonds,asmorefullydescribedherein,and(ii)allnotices,includinganynoticeredemption, shallbe directly toDTC,whichinturnwillremitsuchpaymentsitsparticipantsforsubsequentdisbursementbeneficial is theregisteredownerofBonds,(i)principalof,RedemptionPrice,ifany,andinterestonBondswillbe payable will be made in book-entry-only form in denominations of $1,000 or any integral multiple thereof. So long as Cede & Co. New York(“DTC”),underthebook-entry-onlysystemmaintainedbyDTC.Purchasesofbeneficialinterestsin the Bonds Center Corporation(the“Guarantor”)inaccordancewiththeprovisionsofGuaranty(asdefinedherein). attached heretoasAppendixD.TheInstitution’sobligationsundertheNoteareguaranteedbyChildren’s Medical and “SECURITYFORTHEBONDS”herein“SUMMARYOFCERTAINPROVISIONSLEGALDOCUMENTS” due the principal of, Redemption Price (as defined herein), if any, and interest on the Bonds. See “INTRODUCTION” Under the Master Indenture, the Institution is obligated to make payments on the Note in amounts sufficient to pay when Trust Company),asmastertrustee(the“MasterTrustee”)andtheMembersofObligatedGroup(asdefinedherein). described below(the“MasterIndenture”),betweenU.S.BankNationalAssociation(assuccessortoStateStreetand April 10,2001,assupplementedandamended,includingbytheSupplementalMasterIndentureforObligationNo.34 34 (“ObligationNo.34”orthe“Note”),issuedunderAmendedandRestatedMasterTrustIndenture,datedasof obligation oftheInstitutiontomakepaymentsunderBondIndentureisevidencedandsecuredbyObligationNo. Indenture”), betweentheInstitutionandU.S.BankNationalAssociation,asbondtrustee(the“BondTrustee”).The payable frompaymentstobemadebytheInstitutionunderabondindenture,datedasofFebruary1,2017(the“Bond Children’s HospitalCorporation,aMassachusettsnon-profitcorporation(the“Institution”),issuedpursuanttoand † * ______, 2017 Dated: DateofDelivery custodial agentonoraboutFebruary1,2017. Massachusetts, counseltotheUnderwriters.Delivery of theBondswilltakeplacethroughfacilitiesDTCorits Certain legalmattersaresubjecttotheapprovalof Mintz, Levin,Cohn,Ferris,GlovskyandPopeo,P.C.,Boston, notice and subject to the approving opinion of Ropes & Gray LLP, Boston, Massachusetts, Counsel to the Institution. NEW ISSUE-BOOK-ENTRYONLY

secondary marketfinancial products. securities based onanumberoffactors,including, butnotlimitedto,therefunding ordefeasanceofsuchsecurities ortheuseof the correctness of theCUSIPnumbersprintedherein. CUSIPnumbersassigned tosecuritiesmaybechanged during thetermofsuch solely for the convenience of Bondholders and the Institution, Guarantor and Underwriters are not responsible for the selection or managed by S&P Global Marketing Intelligence on behalf of The American Bankers Association. The CUSIP numbers are included CUSIP isaregisteredtrademark of the AmericanBankersAssociation.CUSIPdata hereinisprovidedbyCUSIPGlobalServices, Preliminary, subjecttochange This coverpagecontainscertaininformationforgeneralreferenceonly.Itisnotintendedtobeasummaryof the Interest on,andgain,ifany,onthesaleofBondsarenotexcludablefromgrossincomeforfederal, The Bondsaresubjecttooptionalredemptionpriortheirstatedmaturity,asdescribedherein. The Bondswillaccrueinterestfromthedateofdeliveryatratesetforthabovewith The BondswillberegisteredinthenameofCede&Co.,asnomineeDepositoryTrustCompany,NewYork, The Children’sHospitalCorporationTaxableBonds,Series2017A(the“Bonds”)aregeneralobligationsofthe The Bonds are offered when, as and if issued, subject to prior sale,withdrawal or modificationof theoffer without PRELIMINARY OFFERING MEMORANDUM DATED JANUARY 17, 2017 $350,000,000* __%TermBondDueJanuary1,___,Yield __%CUSIPNo.______Citigroup

THE CHILDREN’S HOSPITAL CORPORATION

Taxable Bonds,Series2017A Goldman, Sachs&Co. $350,000,000* See “DescriptionofRatings”herein J.P. Morgan Due:January1,asshownbelow † Moody’s: “Aa2” S&P: “AA” TABLE OF CONTENTS

GENERAL INFORMATION ...... ii

SUMMARY OF THE OFFERING ...... ix

INTRODUCTION ...... 1

THE BONDS ...... 3

BOOK-ENTRY-ONLY SYSTEM AND GLOBAL CLEARANCE PROCEDURES ...... 7

SECURITY FOR THE BONDS ...... 12

DEBT SERVICE REQUIREMENTS ...... 14

DEBT SERVICE COVERAGE RATIOS ...... 16

ADDITIONAL INDEBTEDNESS ...... 16

CONSOLIDATION, MERGER, SALE OR CONVEYANCE ...... 16

ESTIMATED APPLICATION OF BOND PROCEEDS ...... 16

BONDHOLDERS’ RISKS ...... 17

CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS ...... 20

ERISA AND BENEFIT PLAN CONSIDERATIONS ...... 25

CONTINUING DISCLOSURE AND FINANCIAL REPORTS ...... 26

APPROVAL OF LEGALITY ...... 27

LITIGATION ...... 27

FINANCIAL ADVISOR ...... 27

UNDERWRITING ...... 27

DESCRIPTION OF RATINGS ...... 28

MISCELLANEOUS ...... 28

APPENDIX A – CERTAIN INFORMATION CONCERNING THE INSTITUTION AND THE GUARANTOR ...... A-1 APPENDIX B – AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE CHILDREN’S MEDICAL CENTER CORPORATION AND SUBSIDIARIES ...... B-1 APPENDIX C – DEFINITIONS OF CERTAIN TERMS ...... C-1 APPENDIX D – SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS ...... D-1

GENERAL INFORMATION

This Offering Memorandum does not constitute an offer to sell the Bonds in any jurisdiction in which or to any person to whom it is unlawful to make such an offer. No broker, dealer, salesman or other person has been authorized by the Institution, the Guarantor or the Underwriters to give any information or to make any representation other than as contained in this Offering Memorandum, 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 Offering Memorandum does not constitute an offer to sell or a solicitation of an offer to buy any securities other than those identified on the cover page or an offer to sell or a solicitation of an offer to buy such securities in any jurisdiction in which it is unlawful to make such offer, solicitation or sale.

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

Certain information contained in this Offering Memorandum has been obtained from the Institution, the Guarantor, DTC, and other sources that are believed to be reliable. This Offering Memorandum is submitted in connection with the sale of securities referred to herein and may not be used, in whole or in part, for any other purpose. The information and expression of opinions set forth herein are subject to change without notice and neither the delivery of this Offering Memorandum nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in affairs of the parties referred to above since the date hereof.

Certain statements included or incorporated by reference in this Offering Memorandum 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 Securities Act. Such statements are generally identifiable by the terminology used such as “plan,” “expect,” “estimate,” “budget,” “intend,” “projection” or other similar words. Such forward-looking statements include, but are not limited to, certain statements contained in the information in APPENDIX A — “CERTAIN INFORMATION CONCERNING THE INSTITUTION AND THE GUARANTOR.”

A number of important factors, including factors affecting the Institution’s and the Guarantor’s financial condition and factors which are otherwise unrelated thereto, could cause actual results to differ materially from those stated in such forward-looking statements. THE INSTITUTION AND THE GUARANTOR DO NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD- LOOKING STATEMENTS.

The Underwriters have provided the following sentence for inclusion in this Offering Memorandum. The Underwriters have reviewed the information in this Offering Memorandum in accordance with, and as part of, their responsibility to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Offering Memorandum nor any sale made hereunder shall, under any

ii circumstances, create any implication that there has been no change in the affairs of the parties referred to above since the date hereof.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE BONDS, OR DETERMINED THAT THIS OFFERING MEMORANDUM IS ACCURATE OR COMPLETE. THE BONDS AND OBLIGATION NO. 34 HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE ON THE PROVISIONS OF SECTION 3(A)(4) THEREOF. NEITHER THE BOND INDENTURE NOR THE MASTER INDENTURE HAVE BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED, IN RELIANCE UPON EXEMPTIONS CONTAINED THEREIN. THE BONDS ARE NOT EXEMPT IN EVERY JURISDICTION IN THE UNITED STATES; SOME JURISDICTIONS’ SECURITIES LAWS (THE “BLUE SKY LAWS”) MAY REQUIRE A FILING AND A FEE TO SECURE THE BONDS’ EXEMPTION FROM REGISTRATION.

The distribution of this Offering Memorandum and the offer or sale of Bonds may be restricted by law in certain jurisdictions. None of the Institution, the Guarantor or the Underwriters represent that this Offering Memorandum may be lawfully distributed, or that any Bonds may be lawfully offered, in compliance with any applicable registration or other requirements in any such jurisdiction, or pursuant to an exemption available thereunder, or assume any responsibility for facilitating any such distribution or offering. In particular, no action has been taken by the Institution, the Guarantor or the Underwriters which would permit a public offering of any of the Bonds or distribution of this Offering Memorandum in any jurisdiction where action for that purpose is required. Action may be required to secure exemptions from the blue sky registration requirements either for the primary distribution or any secondary sales that may occur. Accordingly, none of the Bonds may be offered or sold, directly or indirectly, and neither this Offering Memorandum nor any advertisement or other offering material may be distributed or published in any jurisdiction, except under circumstances that will result in compliance with any applicable laws and regulations.

IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICES OF THE BONDS AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

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INFORMATION CONCERNING OFFERING RESTRICTIONS IN CERTAIN JURISDICTIONS OUTSIDE THE UNITED STATES

REFERENCES HEREIN TO THE “ISSUER” MEAN THE INSTITUTION AND REFERENCES TO “BONDS” OR “SECURITIES” MEAN THE BONDS OFFERED HEREBY.

MINIMUM UNIT SALES THE BONDS WILL TRADE AND SETTLE ON A UNIT BASIS (ONE UNIT EQUALING ONE BOND OF $1,000 PRINCIPAL AMOUNT). FOR ANY SALES MADE OUTSIDE THE UNITED STATES, THE MINIMUM PURCHASE AND TRADING AMOUNT IS 150 UNITS (BEING 150 BONDS IN AN AGGREGATE PRINCIPAL AMOUNT OF $150,000).

NOTICE TO INVESTORS IN THE EUROPEAN ECONOMIC AREA

THIS OFFERING MEMORANDUM IS NOT A PROSPECTUS FOR THE PURPOSES OF EUROPEAN COMMISSION DIRECTIVE 2003/71/EC (AS AMENDED) (THE “PROSPECTUS DIRECTIVE”) AS IMPLEMENTED IN EACH MEMBER STATE OF THE EUROPEAN ECONOMIC AREA. IT HAS BEEN PREPARED ON THE BASIS THAT ALL OFFERS OF THE BONDS WILL BE MADE PURSUANT TO AN EXEMPTION UNDER ARTICLE 3 OF THE PROSPECTUS DIRECTIVE, AS IMPLEMENTED IN MEMBER STATES OF THE EUROPEAN ECONOMIC AREA, FROM THE REQUIREMENT TO PRODUCE A PROSPECTUS FOR SUCH OFFERS. THIS OFFERING MEMORANDUM IS ONLY ADDRESSED TO AND DIRECTED AT PERSONS IN MEMBER STATES OF THE EUROPEAN ECONOMIC AREA WHO ARE “QUALIFIED INVESTORS” WITHIN THE MEANING OF ARTICLE 2(1)(E) OF THE PROSPECTUS DIRECTIVE AND ANY RELEVANT IMPLEMENTING MEASURE IN EACH MEMBER STATE OF THE EUROPEAN ECONOMIC AREA (“QUALIFIED INVESTORS”). THIS OFFERING MEMORANDUM MUST NOT BE READ, ACTED ON OR RELIED ON IN ANY SUCH MEMBER STATE OF THE EUROPEAN ECONOMIC AREA BY PERSONS WHO ARE NOT QUALIFIED INVESTORS. ANY INVESTMENT OR INVESTMENT ACTIVITY TO WHICH THIS OFFERING MEMORANDUM RELATES IS AVAILABLE ONLY TO QUALIFIED INVESTORS IN ANY MEMBER STATE OF THE EUROPEAN ECONOMIC AREA AND WILL NOT BE ENGAGED IN WITH ANY OTHER PERSONS. EACH PERSON WHO INITIALLY ACQUIRES ANY BONDS OR TO WHOM ANY OFFER OF BONDS MAY BE MADE WILL BE DEEMED TO HAVE REPRESENTED, ACKNOWLEDGED AND AGREED THAT IT IS A "QUALIFIED INVESTOR" WITHIN THE MEANING OF ARTICLE 2(1)(E) OF THE PROSPECTUS DIRECTIVE.

NOTICE TO PROSPECTIVE INVESTORS IN THE UNITED KINGDOM

THIS OFFERING MEMORANDUM HAS NOT BEEN APPROVED FOR THE PURPOSES OF SECTION 21 OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (“FSMA”) AND DOES NOT CONSTITUTE AN OFFER TO THE PUBLIC IN ACCORDANCE WITH THE PROVISIONS OF SECTION 85 OF THE FSMA. IN THE UNITED KINGDOM, THIS OFFERING MEMORANDUM IS FOR DISTRIBUTION ONLY TO, AND IS DIRECTED SOLELY AT, PERSONS WHO (I) ARE INVESTMENT PROFESSIONALS, AS SUCH TERM IS DEFINED IN ARTICLE 19(5) OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL PROMOTION) ORDER 2005, AS AMENDED (THE “FINANCIAL PROMOTION ORDER”), (II) ARE PERSONS FALLING WITHIN ARTICLE 49(2)(A) TO (D) OF THE FINANCIAL PROMOTION ORDER, OR (III) ARE PERSONS TO WHOM AN INVITATION OR INDUCEMENT TO ENGAGE IN INVESTMENT ACTIVITY (WITHIN THE MEANING OF SECTION 21 OF THE FSMA) IN CONNECTION WITH THE ISSUE OR SALE OF ANY SECURITIES MAY OTHERWISE BE LAWFULLY COMMUNICATED OR CAUSED TO BE iv

COMMUNICATED (ALL SUCH PERSONS TOGETHER BEING REFERRED TO AS “RELEVANT PERSONS”). THIS OFFERING MEMORANDUM IS DIRECTED ONLY AT RELEVANT PERSONS AND MUST NOT BE ACTED ON OR RELIED ON BY PERSONS WHO ARE NOT RELEVANT PERSONS, INCLUDING IN CIRCUMSTANCES IN WHICH SECTION 21(1) OF THE FSMA APPLIES TO THE INSTITUTION. ANY INVESTMENT OR INVESTMENT ACTIVITY TO WHICH THIS OFFERING MEMORANDUM RELATES IS AVAILABLE ONLY TO RELEVANT PERSONS AND WILL BE ENGAGED IN ONLY WITH RELEVANT PERSONS. ANY PERSON WHO IS NOT A RELEVANT PERSON SHOULD NOT READ, ACT OR RELY ON THIS OFFERING MEMORANDUM OR ANY OF ITS CONTENTS.

NOTICE TO PROSPECTIVE INVESTORS IN HONG KONG

THIS DOCUMENT HAS NOT BEEN, AND WILL NOT BE, REGISTERED AS A PROSPECTUS UNDER THE COMPANIES (WINDING UP AND MISCELLANEOUS PROVISIONS) ORDINANCE (CAP. 32 OF THE LAWS OF HONG KONG) (“COMPANIES (WINDING UP AND MISCELLANEOUS PROVISIONS) ORDINANCE”), NOR HAS IT BEEN AUTHORIZED BY THE SECURITIES AND FUTURES COMMISSION IN HONG KONG PURSUANT TO THE SECURITIES AND FUTURES ORDINANCE (CAP. 571 OF THE LAWS OF HONG KONG) (“SECURITIES AND FUTURES ORDINANCE”). NO ACTION HAS BEEN TAKEN IN HONG KONG TO AUTHORIZE OR REGISTER THIS DOCUMENT OR TO PERMIT THE DISTRIBUTION OF THIS DOCUMENT OR ANY DOCUMENTS ISSUED IN CONNECTION WITH IT.

ACCORDINGLY, THE BONDS HAVE NOT BEEN AND WILL NOT BE OFFERED OR SOLD IN HONG KONG OTHER THAN (I) IN CIRCUMSTANCES WHICH DO NOT CONSTITUTE AN OFFER TO THE PUBLIC WITHIN THE MEANING OF THE COMPANIES (WINDING UP AND MISCELLANEOUS PROVISIONS) ORDINANCE OR WHICH DO NOT CONSTITUTE AN INVITATION TO THE PUBLIC WITHIN THE MEANING OF THE SECURITIES AND FUTURES ORDINANCE, OR (II) TO “PROFESSIONAL INVESTORS” AS DEFINED IN THE SECURITIES AND FUTURES ORDINANCE AND ANY RULES MADE THEREUNDER, OR (III) IN OTHER CIRCUMSTANCES WHICH DO NOT RESULT IN THE DOCUMENT BEING A “PROSPECTUS” AS DEFINED IN THE COMPANIES (WINDING UP AND MISCELLANEOUS PROVISIONS) ORDINANCE, AND NO ADVERTISEMENT, INVITATION OR DOCUMENT RELATING TO THE BONDS HAS BEEN OR WILL BE ISSUED, OR HAS BEEN OR WILL BE IN THE POSSESSION OF ANY PERSON FOR THE PURPOSE OF ISSUE (IN EACH CASE WHETHER IN HONG KONG OR ELSEWHERE), WHICH IS DIRECTED AT, OR THE CONTENTS OF WHICH ARE LIKELY TO BE ACCESSED OR READ BY, THE PUBLIC IN HONG KONG (EXCEPT IF PERMITTED TO DO SO UNDER THE SECURITIES LAWS OF HONG KONG) OTHER THAN WITH RESPECT TO BONDS WHICH ARE OR ARE INTENDED TO BE DISPOSED OF ONLY TO PERSONS OUTSIDE HONG KONG OR ONLY TO “PROFESSIONAL INVESTORS” IN HONG KONG AS DEFINED IN THE SECURITIES AND FUTURES ORDINANCE AND ANY RULES MADE THEREUNDER.

THE CONTENTS OF THIS DOCUMENT HAVE NOT BEEN REVIEWED BY ANY HONG KONG REGULATORY AUTHORITY. YOU ARE ADVISED TO EXERCISE CAUTION IN RELATION TO THE OFFER. IF YOU ARE IN DOUBT ABOUT ANY CONTENTS OF THIS DOCUMENT, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL ADVICE.

NOTICE TO INVESTORS IN CANADA

THE BONDS MAY BE SOLD IN CANADA ONLY TO PURCHASERS PURCHASING, OR DEEMED TO BE PURCHASING, AS PRINCIPAL THAT ARE ACCREDITED INVESTORS, AS DEFINED IN NATIONAL INSTRUMENT 45-106 PROSPECTUS EXEMPTIONS OR SUBSECTION v

73.3(1) OF THE SECURITIES ACT (ONTARIO), AND ARE PERMITTED CLIENTS, AS DEFINED IN NATIONAL INSTRUMENT 31-103 REGISTRATION REQUIREMENTS, EXEMPTIONS AND ONGOING REGISTRANT OBLIGATIONS. ANY RESALE OF THE BONDS MUST BE MADE IN ACCORDANCE WITH AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE PROSPECTUS REQUIREMENTS OF APPLICABLE SECURITIES LAWS.

SECURITIES LEGISLATION IN CERTAIN PROVINCES OR TERRITORIES OF CANADA MAY PROVIDE A PURCHASER WITH REMEDIES FOR RESCISSION OR DAMAGES IF THIS OFFERING MEMORANDUM (INCLUDING ANY AMENDMENT THERETO) CONTAINS A MISREPRESENTATION, PROVIDED THAT THE REMEDIES FOR RESCISSION OR DAMAGES ARE EXERCISED BY THE PURCHASER WITHIN THE TIME LIMIT PRESCRIBED BY THE SECURITIES LEGISLATION OF THE PURCHASER’S PROVINCE OR TERRITORY. THE PURCHASER SHOULD REFER TO ANY APPLICABLE PROVISIONS OF THE SECURITIES LEGISLATION OF THE PURCHASER’S PROVINCE OR TERRITORY FOR PARTICULARS OF THESE RIGHTS OR CONSULT WITH A LEGAL ADVISOR.

PURSUANT TO SECTION 3A.3 OF NATIONAL INSTRUMENT 33-105 UNDERWRITING CONFLICTS (NI 33-105), THE UNDERWRITERS ARE NOT REQUIRED TO COMPLY WITH THE DISCLOSURE REQUIREMENTS OF NI 33-105 REGARDING UNDERWRITER CONFLICTS OF INTEREST IN CONNECTION WITH THIS OFFERING.

NOTICE TO INVESTORS IN KOREA

THIS OFFERING MEMORANDUM IS NOT, AND UNDER NO CIRCUMSTANCES IS TO BE CONSIDERED AS, A PUBLIC OFFERING OF SECURITIES IN KOREA FOR THE PURPOSES OF THE FINANCIAL INVESTMENT SERVICES AND CAPITAL MARKET ACT OF KOREA. THE BONDS HAVE NOT BEEN AND WILL NOT BE REGISTERED WITH THE FINANCIAL SERVICES COMMISSION OF KOREA FOR PUBLIC OFFERING IN KOREA UNDER THE FINANCIAL INVESTMENT SERVICES AND CAPITAL MARKETS ACT AND ITS SUBORDINATE DECREES AND REGULATIONS (COLLECTIVELY THE “FSCMA”). THE BONDS MAY NOT BE OFFERED, SOLD OR DELIVERED, DIRECTLY OR INDIRECTLY, OR OFFERED OR SOLD TO ANY PERSON FOR RE¬OFFERING OR RESALE, DIRECTLY OR INDIRECTLY, IN KOREA OR TO ANY RESIDENT OF KOREA EXCEPT AS OTHERWISE PERMITTED UNDER THE APPLICABLE LAWS AND REGULATIONS OF KOREA, INCLUDING THE FSCMA AND THE FOREIGN EXCHANGE TRANSACTION LAW AND ITS SUBORDINATE DECREES AND REGULATIONS (COLLECTIVELY, THE “FETL”). WITHOUT PREJUDICE TO THE FOREGOING, THE NUMBER OF INVESTORS OFFERED IN KOREA OR THE NUMBER OF INVESTORS WHO ARE RESIDENTS IN KOREA SHALL BE LESS THAN FIFTY AND FOR A PERIOD OF ONE YEAR FROM THE ISSUE DATE OF THE BONDS, NONE OF THE BONDS MAY BE DIVIDED RESULTING IN AN INCREASED NUMBER OF THE BONDS. FURTHERMORE, THE BONDS MAY NOT BE RESOLD TO KOREAN RESIDENTS UNLESS THE PURCHASER OF THE BONDS COMPLIES WITH ALL APPLICABLE REGULATORY REQUIREMENTS (INCLUDING BUT NOT LIMITED TO GOVERNMENT REPORTING REQUIREMENTS UNDER THE FETL) IN CONNECTION WITH THE PURCHASE OF THE BONDS.

NOTICE TO INVESTORS IN SINGAPORE

THIS OFFERING MEMORANDUM HAS NOT BEEN REGISTERED AS A PROSPECTUS WITH THE MONETARY AUTHORITY OF SINGAPORE. ACCORDINGLY, THIS OFFERING MEMORANDUM AND ANY OTHER DOCUMENT OR MATERIAL IN CONNECTION WITH THE OFFER OR SALE, OR INVITATION FOR SUBSCRIPTION OR PURCHASE, OF THE BONDS MAY NOT BE CIRCULATED OR DISTRIBUTED, NOR MAY THE BONDS BE OFFERED OR SOLD, OR

BE MADE THE SUBJECT OF AN INVITATION FOR SUBSCRIPTION OR PURCHASE, WHETHER DIRECTLY OR INDIRECTLY, TO PERSONS IN SINGAPORE OTHER THAN (I) TO AN INSTITUTIONAL INVESTOR (AS DEFINED IN SECTION 4A OF THE SECURITIES AND FUTURES ACT, CHAPTER 289 OF SINGAPORE (THE "SFA")) UNDER SECTION 274 OF THE SFA, (II) TO A RELEVANT PERSON (AS DEFINED IN SECTION 275(2) OF THE SFA) PURSUANT TO SECTION 275(1) OF THE SFA, OR ANY PERSON PURSUANT TO SECTION 275(1A) OF THE SFA, AND IN ACCORDANCE WITH THE CONDITIONS SPECIFIED IN SECTION 275 OF THE SFA OR (III) OTHERWISE PURSUANT TO, AND IN ACCORDANCE WITH THE CONDITIONS OF, ANY OTHER APPLICABLE PROVISION OF THE SFA, IN EACH CASE SUBJECT TO CONDITIONS SET FORTH IN THE SFA.

ANY SUBSEQUENT OFFERS IN SINGAPORE OF THE BONDS ACQUIRED PURSUANT TO AN INITIAL OFFER MADE IN RELIANCE ON AN EXEMPTION UNDER SECTIONS 274 OR 275 OF THE SFA MAY ONLY BE MADE, PURSUANT TO THE REQUIREMENTS OF SECTION 276 OF THE SFA, FOR THE INITIAL SIX (6) MONTH PERIOD AFTER SUCH ACQUISITION, TO PERSONS WHO ARE INSTITUTIONAL INVESTORS (AS DEFINED IN SECTION 4A OF THE SFA) OR TO ACCREDITED INVESTORS AND CERTAIN OTHER PERSONS (AS SET OUT IN SECTION 275 OF THE SFA). ANY TRANSFER AFTER SUCH INITIAL 6-MONTH PERIOD IN SINGAPORE SHALL BE MADE, PURSUANT TO THE REQUIREMENTS OF SECTION 257 OF THE SFA, IN RELIANCE ON ANY APPLICABLE EXEMPTION UNDER SUBDIVISION (4) OF DIVISION 1 OF PART XIII OF THE SFA.

IN ADDITION, PURSUANT TO THE REQUIREMENTS OF SECTION 276(3) OF THE SFA, WHERE THE BONDS ARE SUBSCRIBED OR PURCHASED UNDER SECTION 275 OF THE SFA BY A RELEVANT PERSON WHICH IS A CORPORATION (WHICH IS NOT AN ACCREDITED INVESTOR (AS DEFINED IN SECTION 4A OF THE SFA)) THE SOLE BUSINESS OF WHICH IS TO HOLD INVESTMENTS AND THE ENTIRE SHARE CAPITAL OF WHICH IS OWNED BY ONE OR MORE INDIVIDUALS, EACH OF WHOM IS AN ACCREDITED INVESTOR, THE SECURITIES (AS DEFINED IN SECTION 239(1) OF THE SFA) OF THAT CORPORATION SHALL NOT BE TRANSFERABLE FOR 6 MONTHS AFTER THAT CORPORATION HAS ACQUIRED THE BONDS UNDER SECTION 275 OF THE SFA EXCEPT: (1) TO AN INSTITUTIONAL INVESTOR (AS DEFINED IN SECTION 4A OF THE SFA) UNDER SECTION 274 OF THE SFA OR TO A RELEVANT PERSON (AS DEFINED IN SECTION 275(2) OF THE SFA), (2) WHERE SUCH TRANSFER ARISES FROM AN OFFER IN THAT CORPORATION’S SECURITIES PURSUANT TO SECTION 275(1A) OF THE SFA, (3) WHERE NO CONSIDERATION IS OR WILL BE GIVEN FOR THE TRANSFER, (4) WHERE THE TRANSFER IS BY OPERATION OF LAW, (5) AS SPECIFIED IN SECTION 276(7) OF THE SFA, OR (6) AS SPECIFIED IN REGULATION 32 OF THE SECURITIES AND FUTURES (OFFERS OF INVESTMENTS) (SHARES AND DEBENTURES) REGULATIONS 2005 OF SINGAPORE (“REGULATION 32”).

IN ADDITION, PURSUANT TO THE REQUIREMENTS OF SECTION 276(4) OF THE SFA, WHERE THE BONDS ARE SUBSCRIBED OR PURCHASED UNDER SECTION 275 OF THE SFA BY A RELEVANT PERSON WHICH IS A TRUST (WHERE THE TRUSTEE IS NOT AN ACCREDITED INVESTOR (AS DEFINED IN SECTION 4A OF THE SFA)) WHOSE SOLE PURPOSE IS TO HOLD INVESTMENTS AND EACH BENEFICIARY OF THE TRUST IS AN INDIVIDUAL WHO IS AN ACCREDITED INVESTOR, THE BENEFICIARIES' RIGHTS AND INTEREST (HOWSOEVER DESCRIBED) IN THAT TRUST SHALL NOT BE TRANSFERABLE FOR 6 MONTHS AFTER THAT TRUST HAS ACQUIRED THE BONDS UNDER SECTION 275 OF THE SFA EXCEPT: (1) TO AN INSTITUTIONAL INVESTOR (AS DEFINED IN SECTION 4A OF THE SFA) UNDER SECTION 274 OF THE SFA OR TO A RELEVANT PERSON (AS DEFINED IN SECTION 275(2) OF THE SFA), (2) WHERE SUCH TRANSFER ARISES FROM AN OFFER IN THAT CORPORATION’S SECURITIES PURSUANT TO SECTION 275(1A) OF THE SFA, (3) WHERE NO CONSIDERATION IS OR WILL BE

vii

GIVEN FOR THE TRANSFER, (4) WHERE THE TRANSFER IS BY OPERATION OF LAW, (5) AS SPECIFIED IN SECTION 276(7) OF THE SFA, OR (6) AS SPECIFIED IN REGULATION 32.

NOTICE TO INVESTORS IN JAPAN

THE OFFER OF THE BONDS HAVE NOT BEEN REGISTERED UNDER ARTICLE 4, PARAGRAPH (1) OF THE FINANCIAL INSTRUMENTS AND EXCHANGE ACT OF JAPAN (ACT NO. 25 OF 1948, AS AMENDED), OR THE FIEA BECAUSE THE OFFER FALLS UNDER ARTICLE 2, PARAGRAPH (3), ITEM (ii), SUB-ITEM (a) OF THE FIEA. THE BONDS MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, IN JAPAN OR TO OR FOR THE BENEFIT OF ANY RESIDENT OF JAPAN AS DEFINED IN THE FOREIGN EXCHANGE AND FOREIGN TRADE ACT OF JAPAN (ACT NO. 228 OF 1949, AS AMENDED) OR TO OTHERS FOR REOFFERING OR RESALE, DIRECTLY OR INDIRECTLY, IN JAPAN OR TO OR FOR THE BENEFIT OF ANY RESIDENT OF JAPAN, EXCEPT TO A QUALIFIED INSTITUTIONAL INVESTOR (TEKIKAKU KIKAN TOSHIKA) AS DEFINED IN THE FIEA AND OTHERWISE IN COMPLIANCE WITH ANY RELEVANT LAWS AND REGULATIONS OF JAPAN.

NOTICE TO INVESTORS IN FRANCE

THE OFFER DOES NOT REQUIRE A PROSPECTUS TO BE SUBMITTED FOR APPROVAL TO THE AUTORITE DES MARCHES FINANCIERS. PERSONS OR ENTITIES REFERRED TO IN POINT 2, SECTION II OF ARTICLE L. 411-2 OF THE FRENCH MONETARY AND FINANCIAL CODE MAY TAKE PART IN THE OFFER SOLELY FOR THEIR OWN ACCOUNT, AS PROVIDED IN ARTICLES D. 411-1, D. 411-2, D. 734-1, D. 744-1, D. 754-1 AND D. 764-1 OF THE FRENCH MONETARY AND FINANCIAL CODE. THE BONDS THUS ACQUIRED CANNOT BE DISTRIBUTED DIRECTLY OR INDIRECTLY TO THE PUBLIC OTHERWISE THAN IN ACCORDANCE WITH ARTICLES L. 411-1, L. 411-2, L. 412-1 AND L. 621-8 TO L. 621-8-3 OF THE FRENCH MONETARY AND FINANCIAL CODE.

NOTICE TO INVESTORS IN SWITZERLAND

THE BONDS MAY NOT BE PUBLICLY OFFERED, SOLD OR ADVERTISED, DIRECTLY OR INDIRECTLY IN OR FROM SWITZERLAND. NEITHER THIS OFFERING MEMORANDUM NOR ANY OTHER OFFERING OR MARKETING MATERIAL RELATING TO THE BOND CONSTITUTES A PROSPECTUS AS SUCH TERM IS UNDERSTOOD PURSUANT TO ARTICLE 652A OR ARTICLE 1156 OF THE SWISS CODE OF OBLIGATIONS OR A LISTING PROSPECTUS WITHIN THE MEANING OF THE LISTING RULES OF THE SIX SWISS EXCHANGE. NEITHER THIS OFFERING MEMORANDUM NOR ANY OTHER OFFERING OR MARKETING MATERIAL RELATING TO THE BONDS MAY BE PUBLICLY DISTRIBUTED OR OTHERWISE MADE PUBLICLY AVAILABLE IN SWITZERLAND.

viii

SUMMARY OF THE OFFERING∗

This summary contains certain information for general reference only. Investors should read the entire Offering Memorandum to obtain information essential to making an informed investment decision.

Issuer The Children’s Hospital Corporation (“Institution”)

Guarantor The Children’s Medical Center Corporation (the “Guarantor”)

Securities Offered $350,000,000* __% The Children’s Hospital Corporation Taxable Bonds, Series 2017A, due January 1, ____

Initial Interest Accrual Interest will accrue from the date of delivery of the Bonds. Date

Interest Payment Dates January 1 and July 1 of each year, commencing July 1, 2017.

Redemption The Bonds are subject to redemption at the option of the Institution prior to maturity in whole or in part, on any date, at the Make-Whole Redemption Price, together with accrued interest to the redemption date, as further described herein. On and after July 1, ____,** such optional redemption will be at par plus accrued interest, without regard to the Make Whole Redemption Price.

See “THE BONDS – Redemption” herein.

Date of Issue , 2017

Authorized Denominations $1,000 and any integral multiple thereof, provided that any principal amount to which a Bond is reduced as a result of a pro rata redemption shall constitute an authorized denomination with respect to such Bond or any Bond issued in exchange therefor.

Form and Depository The Bonds will be delivered solely in book-entry form through the facilities of DTC.

Use of Proceeds The Institution will use proceeds of the Bonds for its general corporate purposes, as further described herein.

Exemption from The Bonds are exempt from registration under the Securities Act of 1933, as amended, Registration pursuant to Section 3(a)(4) thereof.

Ratings Moody’s: Aa2 S&P: AA

For an explanation of the ratings, see “DESCRIPTION OF RATINGS” herein.

* Preliminary, subject to change. ** Six months prior to maturity. ix

OFFERING MEMORANDUM

Relating to $350,000,000∗ THE CHILDREN’S HOSPITAL CORPORATION Taxable Bonds, Series 2017A

INTRODUCTION

Purpose of This Offering Memorandum

This Offering Memorandum, including the cover page, table of contents and appendices hereto, sets forth certain information in connection with the issuance and sale of the $350,000,000∗ principal amount of Taxable Bonds, Series 2017A (the “Bonds”) by The Children’s Hospital Corporation, a Massachusetts nonprofit corporation (the “Institution”).

The Bonds will be issued pursuant to and secured by a bond indenture, dated as of February 1, 2017 (the “Bond Indenture”), between the Institution and U.S. Bank National Association, as bond trustee (the “Bond Trustee”). The information contained in this Offering Memorandum is provided for use in connection with the sale of the Bonds. The definitions of certain terms used and not otherwise defined herein are contained in Appendix C - “DEFINITIONS OF CERTAIN TERMS.”

Purpose of the Bonds

The proceeds of the Bonds will be used by the Institution for general corporate purposes.

Master Indenture

The Institution and U.S. Bank National Association, as master trustee (the “Master Trustee”) (as successor to State Street Bank and Trust Company), have entered into the Amended and Restated Master Trust Indenture, dated as of April 10, 2001, as amended and supplemented (the “Master Indenture”), setting forth the terms and conditions governing the issuance of “Obligations” by the Institution, including as security for the obligation of the Institution to make payments when due on the Bonds. Under the Master Indenture and pursuant to one or more supplemental master indentures, an obligated group of institutions (the “Obligated Group”) may issue obligations (the “Obligations”), which are joint and several obligations of each member of the Obligated Group (a “Member”) and secured in accordance with the terms of the Master Indenture, as supplemented.

The Institution is the only Member of the Obligated Group. As such, it will cause the Obligated Group to issue Obligation No. 34 (“Obligation No. 34” or the “Note”) under the Master Indenture and the Supplemental Master Indenture for Obligation No. 34, dated as of February 1, 2017 by and between the Institution and the Master Trustee (the “Supplemental Master Indenture”). Under the Bond Indenture, the Note will be registered in the name of the Bond Trustee, and held in trust for the benefit of the owners of the Bonds (the “Bondholders”). The Note is subject to the same prepayment terms as the Institution’s obligations under the Bond Indenture and the Bonds. The Note and the Supplemental Master Indenture pursuant to which it is issued provide that the Institution shall receive credit, to the extent, in the manner and with the effect provided in the Supplemental Master Indenture, for payments of principal, Redemption Price of, and interest required on the Note in amounts equal to (i) amounts paid under the Bond Indenture for the payment of principal of, and Redemption Price of, and interest on the Bonds, and (ii) Bonds purchased and

* Preliminary, subject to change

1 delivered to the Bond Trustee for cancellation. The Institution’s obligations under the Note are secured by the Guaranty as described below.

The Bonds are secured on a parity with regards to any security that may be granted in the future under the Master Indenture with respect to all future and Outstanding Obligations. The Master Indenture does not currently include any mortgage or pledge of revenues as collateral, and all obligations issued thereunder are general obligations of the Obligated Group. There are a number of Outstanding Obligations under the Master Indenture. These include Obligations to secure the Institution’s obligations with respect to interest rate swap transactions with Goldman Sachs Mitsui Marine Derivative Products, L.P. and Bank of America, N.A. and with respect to the Massachusetts Health and Educational Facilities Authority (the “Authority”) Revenue Bonds, Children’s Hospital Issue, Series M (2009), the Authority’s Revenue Bonds, Children’s Hospital Issue, Series N (2010), the Massachusetts Development Finance Agency (the “Agency”) Revenue Bonds, Children’s Hospital Issue, Series O-1 (2013) and Series O-2 (2013), the Agency’s Revenue Bonds, Children’s Hospital Issue, Series P (2014), the Agency’s Revenue Bonds, Children’s Hospital Issue, Series Q (2014) and the Agency’s Revenue Bonds, Children’s Hospital Issue, Series S (2014). See Appendix B – “AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE CHILDREN’S MEDICAL CENTER CORPORATION AND SUBSIDIARIES.” . The Master Indenture contains provisions permitting the addition, withdrawal or consolidation of Members under certain conditions. No Member of the Obligated Group may withdraw from the Obligated Group absent satisfaction of certain conditions. See Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Master Trust Indenture” under the headings “Conditions for Membership,” “Withdrawal From the Obligated Group” and “Consolidation, Merger, Sale or Conveyance,” respectively. The Master Indenture contains provisions permitting the issuance of additional Obligations on a parity with, or in certain cases, senior to, the Note by the Institution and future Members admitted to the Obligated Group, if any. See “ADDITIONAL INDEBTEDNESS” herein and Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Master Trust Indenture” under the headings “Power to Incur Indebtedness on Behalf of Other Members of the Obligated Group” and “Limitations on Incurrence of Additional Indebtedness.”

The Bonds are not secured by a debt service reserve fund, or by a mortgage lien or security interest in any real or tangible personal property or any other property of any Member of the Obligated Group. The Master Indenture contains restrictions on the creation of certain liens and encumbrances with respect to property of the Institution and of any additional future Members of the Obligated Group with certain exceptions. See Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Master Trust Indenture” under the heading “Limitations on Creation of Liens.” The Master Indenture also contains provisions permitting transfers of assets to be made upon compliance with certain tests. See Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Master Trust Indenture” under the heading “Sale, Lease or Other Disposition of Property.”

Attached to the Offering Memorandum as Appendix B are the audited consolidated financial statements of The Children’s Medical Center Corporation and Subsidiaries for the fiscal years ended September 30, 2016 and September 30, 2015 (the “Consolidated Financials”). The Consolidated Financials include entities that are not Members of the Obligated Group. The non-obligated entities represent approximately 37% of the total revenues and 21% of the total assets of the consolidated entities. See Appendix A – “CERTAIN INFORMATION CONCERNING THE INSTITUTION AND THE GUARANTOR” for an additional description.

Guaranty

The Guarantor shall execute and deliver to the Master Trustee its Guaranty of Obligation No. 34 (the “Guaranty”) on the date of issuance of the Bonds. The Guaranty provides an unconditional and absolute guaranty by the Guarantor of the full and punctual payment of all amounts payable pursuant to the Note, including principal, Redemption Price, if any, and interest, whether due at maturity, by proceedings for prepayment, upon acceleration or otherwise. The Guaranty represents a general unsecured obligation of the Guarantor and contains certain financial covenants. The Guaranty may be amended or terminated in accordance with its terms. See “SECURITY FOR THE BONDS – Guaranty” herein and Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Guaranty of Obligation No. 34.”

THE BONDS

The following is a summary of certain provisions of the Bonds. Reference is made to the Bonds for the complete text thereof and to the Bond Indenture for all of the provisions relating to the Bonds. The discussion herein is qualified by such reference.

General

The Bonds will be issued in the principal amount set forth on the cover of this Offering Memorandum. Purchases of beneficial interests in the Bonds will be made in book-entry-only form in denominations of $1,000 or any integral multiple thereof. The Bonds will be delivered in fully registered form without coupons. The Bonds will be dated their date of delivery and will be payable as to principal, subject to the redemption provisions described herein, on the date and in the amount set forth on the cover page hereof. The Bonds will be transferable and exchangeable as set forth in the Bond Indenture and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”). DTC will act as securities depository for the Bonds. See “BOOK-ENTRY- ONLY SYSTEM AND GLOBAL CLEARANCE PROCEDURES.”

The Bonds will accrue interest from the date of delivery at the rate per annum set forth on the cover page hereof with interest payable on each July 1 and January 1, commencing July 1, 2017. Interest on the Bonds will be calculated on the basis of a 360-day year comprised of twelve 30-day months. Interest on all Bonds initially delivered shall accrue from their date of delivery. Thereafter, interest on all Bonds shall accrue from the dated date or from the most recent Bond Payment Date to which interest has been paid.

While the Bonds are book-entry bonds, as described below, payment of the principal of, Redemption Price, if any, and interest on the Bonds will be made by wire transfer to DTC, to the account of Cede & Co. In the event the Bonds are no longer book-entry bonds, interest on the Bonds shall be payable by check or draft drawn upon the Bond Trustee and mailed on the Bond Payment Date to the registered Holders of such Bonds at the addresses of such Holders as they appear on the books of the Bond Trustee on the Record Date; provided, however, that interest may be paid by wire or electronic transfer to the Holder of at least $1,000,000 aggregate principal amount of Bonds to the address designated by written notice by such Holder to the Bond Trustee not less than fifteen days prior to the Record Date for such payment. Any such written request shall remain in effect until rescinded in writing by such Holder. Principal of and Redemption Price, if any, on the Bonds shall be paid when due by check or draft upon presentation and surrender of such Bonds at the Corporate Trust Office of the Bond Trustee.

The “Record Date” means June 15 and December 15, whether or not a Business Day. In the event of a default by the Institution in the payment of interest due on a Bond, such defaulted interest will be payable to the Person in whose name such Bond is registered at the close of business on a special record date for the payment of such defaulted interest established by notice mailed by the Bond Trustee to the registered owners of Bonds not less than ten days preceding such special record date. 3

The Institution or the Bond Trustee may make a charge against any Bondholder sufficient for the reimbursement of any governmental charge required to be paid in the event that such Bondholder fails to provide a correct taxpayer identification number to the Bond Trustee. Such charge may be deducted from any interest or principal payment due to the Bondholder.

Redemption

Optional Redemption. All or any number of the Bonds are subject to redemption at the option of the Institution prior to maturity in whole or in part, at any time, at the Make-Whole Redemption Price.

“Make-Whole Redemption Price” means the greater of:

(1) 100% of the principal amount of any Bonds being redeemed; and

(2) the sum of the present values of the remaining scheduled payments of principal and interest on any Bonds being redeemed (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus __ basis points, plus, in the case of (1) and (2) above, accrued and unpaid interest on the Bonds to be redeemed on the redemption date.

“Treasury Rate” means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity or interpolated (on a day count basis) maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date.

“Comparable Treasury Issue” means the United States Treasury security or securities selected by a Designated Investment Banker as having an actual or interpolated maturity comparable to the remaining term of the Bonds to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of a comparable maturity to the remaining term of such Bonds.

“Comparable Treasury Price” means, with respect to any redemption date, the average of the Reference Treasury Dealer Quotations for such redemption date or, if the Designated Investment Banker obtains only one Reference Treasury Dealer Quotation, such Reference Treasury Dealer Quotation.

“Designated Investment Banker” means one of the Reference Treasury Dealers appointed by the Institution to act in the capacity of “Designated Investment Banker” for purposes of the Bond Indenture.

“Reference Treasury Dealer” means one or more entities appointed by the Institution, which, in each case, is a primary U.S. Government securities dealer in The City of New York, provided that if any of them ceases to be a Reference Treasury Dealer, the Institution will substitute another Reference Treasury Dealer.

“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Designated Investment Banker, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Designated Investment Banker by such Reference Treasury Dealer at 3:30 p.m., New York City time, on the third Business Day preceding such redemption date.

The Make-Whole Redemption Price shall be determined by an independent accounting firm or financial advisor retained by the Institution (which accounting firm or financial advisor shall be subject to the Master Trustee’s approval) and such accounting firm or financial advisor shall perform all actions and make all calculations required to determine the Make-Whole Redemption Price. The Bond Trustee and the Institution may conclusively rely on such accounting firm’s or financial advisor’s calculations in connection with, and determination of, the Make-Whole Redemption Price, and shall bear no liability for such reliance. 4

On and after July 1, ____* the Bonds will be subject to optional redemption at par plus accrued interest, without regard to the Make-Whole Redemption Price.

Notice of Redemption of the Bonds. Notice of redemption of any Bonds shall be mailed by the Bond Trustee, by first-class mail, postage prepaid, not less than 30 nor more than 45 days prior to the date set for redemption, to each registered Holder of a Bond to be so redeemed at the address shown on the books of the Bond Trustee but failure to so mail or any defect in any such notice with respect to any Bond shall not affect the validity of the proceedings for the redemption of any other Bond with respect to which notice was so mailed or with respect to which no such defect occurred, respectively. Each such notice shall set forth the date fixed for redemption, the official name of the issue, date of notice, date of issue, dated date, the Redemption Price to be paid and, if less than all of the Bonds then Outstanding shall be called for redemption, the distinctive numbers and letters, including CUSIP identification numbers and certificate numbers, if any, of such Bonds to be redeemed, the maturity date and interest rate of such Bonds to be redeemed, the name of the Bond Trustee with address, telephone number, and contact person, and, in the case of Bonds to be redeemed in part only, the portion of the principal amount thereof to be redeemed. Failure to give notice by mailing to any Bondholder, or any defect therein, shall not affect the validity of any proceedings for the redemption of any other Bonds.

The Bond Trustee also shall mail a copy of such notice by registered or certified mail (return receipt requested) or overnight delivery service (or by telecopy where permitted) for receipt not less than thirty days before such redemption date to DTC.

Any notice mailed as described under this heading shall be conclusively presumed to have been duly given upon mailing, whether or not the Holder of such Bonds receives the notice.

Any notice of optional redemption given under the Bond Indenture may state that it is conditional, and if so may be rescinded upon written request of the Institution at any time up to and including the date fixed for redemption. The Bond Trustee shall give notice of such rescission in the same manner as for notices of redemption.

Failure to complete a redemption as to which conditional notice has been given does not constitute a default under the Bond Indenture.

So long as the Bonds are held in a Book-Entry-Only System, the Bond Trustee shall send the notice of redemption to DTC or its nominee, or its successor, and if less than all the Bonds are to be redeemed, DTC or its successor and Participants will determine the particular ownership interests in the Bonds to be redeemed. Any failure of DTC or its successor or a Participant to do so, or to notify a Beneficial Owner of a Bond of any redemption, will not affect the sufficiency or the validity of the redemption of the Bonds.

Selection of Bonds for Redemption. If the Bonds are registered in book-entry-only form and so long as DTC or a successor securities depository is the sole registered owner of the Bonds, if less than all of the Bonds are called for redemption, the Bond Trustee shall instruct DTC to effectuate the redemption on a pro rata pass-through distribution of principal basis in accordance with DTC procedures, provided that, so long as the Bonds are held in book-entry form, the selection for redemption of such Bonds shall be made in accordance with the operational arrangements of DTC then in effect.

It is the Institution’s intent that redemption allocations made by DTC be made on a pro rata pass- through distribution of principal basis as described above. However, the Institution can provide no assurance that DTC, DTC’s direct and indirect participants or any other intermediary will allocate the redemption of Bonds on such basis. If the DTC operational arrangements do not allow for the redemption of the Bonds on

* Six months prior to maturity. 5 a pro rata pass-through distribution of principal basis as discussed above, then the Bonds will be selected for redemption, in accordance with DTC procedures, by lot.

If the Bonds are no longer registered in book-entry-only form and less than all Outstanding Bonds are redeemed, the Bond Trustee shall, to the maximum extent practicable, select all Bonds for redemption on a pro rata basis in accordance with the relative principal amounts of each Bond Outstanding.

Effect of Redemption. Notice of redemption having been duly given as provided in the Bond Indenture, and moneys for payment of the Redemption Price being held by the Bond Trustee, the Bonds, or portions thereof, so called for redemption shall, on the redemption date designated in such notice, become due and payable at the Redemption Price specified in such notice, interest on the Bonds, or portions thereof, so called for redemption shall cease to accrue, said Bonds shall cease to be entitled to any lien, benefit or security under the Bond Indenture, and the Holders of said Bonds shall have no rights in respect thereof except to receive payment of the Redemption Price thereof. All Bonds fully redeemed pursuant to the Bond Indenture shall be cancelled upon surrender thereof.

Additional Bonds

The Bond Indenture provides that, subsequent to the issuance of the Bonds, the Institution may issue Additional Bonds pursuant to a supplemental bond indenture, subject to satisfaction of the conditions to the incurrence of additional indebtedness set forth in the Master Indenture. See Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Bond Indenture.” Such Additional Bonds would have the same interest rate, maturity date and redemption provisions as the Bonds, would constitute a part of the issue of the Bonds and, following the first interest payment date after the issuance of the Additional Bonds, would bear the same CUSIP identifier as the Bonds. See Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Bond Indenture.”

Book-Entry Only System and Global Clearance Procedures

When delivered, the Bonds will be registered in the name of Cede & Co., the nominee of The Depository Trust Company (“DTC”). DTC will act as the securities depository for the Bonds. Purchases of the Bonds may be made in book-entry form only, through brokers and dealers who are, or who act through, Direct Participants (as defined herein). Beneficial Owners of the Bonds will not receive physical delivery of certificated securities (except under certain circumstances described in the Bond Indenture). Payment of the principal, Redemption Price or Make-Whole Redemption Price of and interest on the Bonds are payable by the Bond Trustee to DTC, which will in turn remit such payments to the Direct Participants, which will in turn remit such payments to the Beneficial Owners of the Bonds. In addition, so long as Cede & Co. is the registered owner of the Bonds, the right of any Beneficial Owner to receive payment for any Bond will be based only upon and subject to the procedures and limitations of the DTC book-entry system. Beneficial interests in the Bonds may be held through DTC, Clearstream Banking, S.A. (“Clearstream Banking”) or Euroclear Bank S.A./N.V. as operator of the Euroclear System (“Euroclear”), directly as a participant or indirectly through organizations that are participants in such system. See “BOOK-ENTRY ONLY SYSTEM AND GLOBAL CLEARANCE PROCEDURES” herein.

Transfer and Exchange

Except for book-entry Bonds held by DTC in accordance with the terms and provisions of the Bond Indenture, all Bonds shall be negotiable, subject to the provisions for registration and transfer thereof contained in the Bond Indenture or in the Bonds. Each Bond shall be transferable only upon the registration books maintained by the Bond Trustee, by the Holder thereof in person or by his or her attorney duly authorized in writing, upon presentation and surrender of such Bond together with a written instrument of transfer satisfactory to the Bond Trustee duly executed by the registered Holder or his or her duly authorized attorney. Upon surrender for transfer of any such Bond, the Institution shall cause to be executed and the 6

Bond Trustee shall authenticate and deliver, in the name of the transferee, one or more new Bonds of the same aggregate face amount, maturity, series and rate of interest as the surrendered Bond, as fully registered Bonds only.

Except for book-entry Bonds held by DTC in accordance with the terms and provisions of the Bond Indenture, Bonds, upon presentation and surrender thereof to the Bond Trustee together with written instructions satisfactory to the Bond Trustee, duly executed by the registered Holder or his or her attorney duly authorized in writing, may be exchanged for an equal aggregate face amount of fully registered Bonds of any other authorized denominations.

In connection with any such exchange or transfer of Bonds the Holder requesting such exchange or transfer shall as a condition precedent to the exercise of the privilege of making such exchange or transfer remit to the Bond Trustee an amount sufficient to pay any tax or other governmental charge required to be paid with respect to such exchange or transfer. The cost of printing and any services rendered or expenses incurred by the Bond Trustee in connection with any transfer and exchange of Bonds shall be paid by the Institution. Neither the Institution nor the Bond Trustee shall be obligated to (i) issue, exchange or transfer any Bond during the period of 15 days preceding any Bond Payment Date, or (ii) transfer or exchange any Bond which has been or is being called for redemption in whole or in part.

For a description of the registration of transfer or exchange procedures while the Bonds are in the book- entry-only system, see “THE BONDS – Book-Entry-Only System and Global Clearance Procedures” and “BOOK-ENTRY-ONLY SYSTEM AND GLOBAL CLEARANCE PROCEDURES” herein.

Events of Default and Acceleration of Bonds

Upon the occurrence of an Event of Default under and as defined in the Bond Indenture, the Bond Trustee may, and upon the written request of the Holders of not less than a majority in aggregate principal amount of Bonds Outstanding shall, declare all Bonds Outstanding to be immediately due and payable. In such event, there shall be due and payable on the Bonds an amount equal to the total principal amount of all such Bonds, plus interest accrued thereon and which accrues to the date of payment. The Make-Whole Redemption Price would not be payable upon the acceleration of the Bonds. See Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Bond Indenture.”

BOOK-ENTRY-ONLY SYSTEM AND GLOBAL CLEARANCE PROCEDURES

The information set out below is subject to any change in or reinterpretation of the rules, regulations and procedures of DTC, Euroclear or Clearstream Banking (DTC, Euroclear and Clearstream Banking together, the “Clearing Systems”) currently in effect. The information in this section concerning the Clearing Systems has been obtained from sources that the Institution believes to be reliable, but none of the Institution or the Guarantor (collectively, the “Combined Group”), the Underwriters or the Bond Trustee take any responsibility for the accuracy, completeness or adequacy of the information in this section. Investors wishing to use the facilities of any of the Clearing Systems are advised to confirm the continued applicability of the rules, regulations and procedures of the relevant Clearing System. The Combined Group will not have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in the Bonds held through the facilities of any Clearing System or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.

NEITHER THE COMBINED GROUP NOR THE BOND TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATIONS TO DIRECT PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH RESPECT TO THE PAYMENTS TO OR THE PROVIDING OF NOTICE FOR DIRECT PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS.

SO LONG AS CEDE & CO. IS THE REGISTERED OWNER OF THE BONDS, AS NOMINEE OF DTC, REFERENCES HEREIN TO THE BONDHOLDERS OR REGISTERED OWNERS OF THE BONDS SHALL MEAN CEDE & CO. AND SHALL NOT MEAN THE BENEFICIAL OWNERS OF THE BONDS.

Clearing Systems

DTC Book-Entry Only System

DTC acts as securities depository for the Bonds. The Bonds will be offered as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered Bond certificate will be issued for the Bonds in the aggregate principal amount of the Bonds, and deposited with DTC.

DTC, 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, as amended. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company of DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others, such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has S&P Global Ratings rating of AA+. The DTC Rules applicable to its Direct Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.

Purchases of the Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each 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 purchase. Beneficial Owners are however expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 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 beneficial ownership interests in the Bonds, except in the event that use of the book-entry-only system for the Bonds is discontinued.

To facilitate subsequent transfers, all 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 the Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such 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 the Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, defaults, and proposed amendments to the bond documents. For example, Beneficial Owners of the Bonds may wish to ascertain that the nominee holding the 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 copies of notices be provided directly to them.

Redemption notices shall be sent to DTC. If less than all of the Bonds are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in the Bonds to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC’s Money Market Instrument Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Institution 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 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Principal, premium, redemption proceeds and interest payments on the Bonds will be made to Cede & Co. or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts, upon DTC’s receipt of funds and corresponding detail information from the Institution or the Bond Trustee, on a 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 Participants and not of DTC, its nominee, the Bond Trustee, the Institution or the Members of the Obligated Group, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, premium, redemption proceeds and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Bond Trustee. Disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of the Direct and Indirect Participants.

DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the Institution or the Bond Trustee. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. The Institution may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Bond certificates for such Bonds will be printed and delivered to DTC. See “Certificated Bonds” below.

The information herein concerning DTC and DTC’s book-entry system has been obtained from sources that the Institution and the Underwriters believe to be reliable, but the Institution and the Underwriters take no responsibility for the accuracy thereof.

Each person for whom a Participant acquires an interest in the Bonds, as nominee, may desire to make arrangements with such Participant to receive a credit balance in the records of such Participant, and may desire to make arrangements with such Participant to have all notices of redemption or other communications to DTC, which may affect such persons, to be forwarded in writing by such Participant and to have notification made of all interest payments. NONE OF THE COMBINED GROUP, THE UNDERWRITERS OR THE BOND TRUSTEE WILL HAVE ANY RESPONSIBILITY OR

OBLIGATION TO SUCH PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH RESPECT TO THE BONDS.

So long as Cede & Co. is the registered owner of the Bonds, as nominee for DTC, references herein to Bondholders or registered owners of the Bonds shall mean Cede & Co., as aforesaid, and shall not mean the Beneficial Owners of the Bonds.

When reference is made to any action which is required or permitted to be taken by the Beneficial Owners, such reference shall only relate to those permitted to act (by statute, regulation or otherwise) on behalf of such Beneficial Owners for such purposes. When notices are given, they shall be sent by the Bond Trustee to DTC only.

For every transfer and exchange of Bonds, the Beneficial Owner may be charged a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto.

The Institution, in its sole discretion and without the consent of any other person, may terminate the services of DTC with respect to the Bonds if the Institution determines that (i) DTC is unable to discharge its responsibilities with respect to the Bonds, or (ii) a continuation of the requirement that all of the Outstanding Bonds be registered in the registration books kept by the Bond Trustee in the name of Cede & Co., as nominee of DTC, is not in the best interests of the Beneficial Owners. In the event that no substitute securities depository is found by the Institution or restricted registration is no longer in effect, Bond certificates will be delivered.

NONE OF THE COMBINED GROUP, THE UNDERWRITERS OR THE BOND TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DIRECT PARTICIPANTS, TO INDIRECT PARTICIPANTS, OR TO ANY BENEFICIAL OWNER WITH RESPECT TO: (I) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, ANY DIRECT PARTICIPANT, OR ANY INDIRECT PARTICIPANT; (II) ANY NOTICE THAT IS PERMITTED OR REQUIRED TO BE GIVEN TO THE OWNERS OF THE BONDS UNDER THE BOND INDENTURE; (III) THE SELECTION BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT OF ANY PERSON TO RECEIVE PAYMENT IN THE EVENT OF A PARTIAL REDEMPTION OF THE BONDS; (IV) THE PAYMENT BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT OF ANY AMOUNT WITH RESPECT TO THE PRINCIPAL OR REDEMPTION PRICE, OR INTEREST DUE WITH RESPECT TO THE BONDS; (V) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS THE OWNER OF THE BONDS; OR (VI) ANY OTHER MATTER.

Euroclear and Clearstream Banking

Euroclear and Clearstream Banking each hold securities for their customers and facilitate the clearance and settlement of securities transactions by electronic book-entry transfer between their respective account holders. Euroclear and Clearstream Banking provide various services including safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Euroclear and Clearstream Banking also deal with domestic securities markets in several countries through established depositary and custodial relationships. Euroclear and Clearstream Banking have established an electronic bridge between their two systems across which their respective participants may settle trades with each other.

Euroclear and Clearstream Banking customers are worldwide financial institutions, including underwriters, securities brokers and dealers, banks, trust companies and clearing corporations. Indirect access to Euroclear and Clearstream Banking is available to other institutions that clear through or maintain a custodial relationship with an account holder of either system, either directly or indirectly.

Clearing and Settlement Procedures

The Bonds sold in offshore transactions will be initially issued to investors through the book-entry facilities of DTC, or Clearstream Banking and Euroclear in Europe if the investors are participants in those systems, or indirectly through organizations that are participants in the systems. For any of such Bonds, the record holder will be DTC’s nominee Clearstream Banking and Euroclear will hold omnibus positions on behalf of their participants through customers’ securities accounts in Clearstream Banking’s and Euroclear’s names on the books of their respective depositories.

The depositories, in turn, will hold positions in customers’ securities accounts in the depositories’ names on the books of DTC. Because of time zone differences, the securities account of a Clearstream Banking or Euroclear participant as a result of a transaction with a participant, other than a depository holding on behalf of Clearstream Banking or Euroclear, will be credited during the securities settlement processing day, which must be a business day for Clearstream Banking or Euroclear, as the case may be, immediately following the DTC settlement date. These credits or any transactions in the securities settled during the processing will be reported to the relevant Euroclear participant or Clearstream Banking participant on that business day. Cash received in Clearstream Banking or Euroclear as a result of sales of securities by or through a Clearstream Banking participant or Euroclear participant to a Direct Participant, other than the depository for Clearstream Banking or Euroclear, will be received with value on the DTC settlement date but will be available in the relevant Clearstream Banking or Euroclear cash account only as of the business day following settlement in DTC.

Transfers between participants will occur in accordance with DTC rules. Transfers between Clearstream Banking participants or Euroclear participants will occur in accordance with their respective rules and operating procedures. Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through Clearstream Banking participants or Euroclear participants, on the other, will be effected in DTC in accordance with DTC rules on behalf of the relevant European international clearing system by the relevant depositories; however, cross-market transactions will require delivery of instructions to the relevant European international clearing system by the counterparty in the system in accordance with its rules and procedures and within its established deadlines in European time. The relevant European international clearing system will, if the transaction meets its settlement requirements, deliver instructions to its depository to take action to effect final settlement on its behalf by delivering or receiving securities in DTC, and making or receiving payment in accordance with normal procedures for same day funds settlement applicable to DTC. Clearstream Banking participants or Euroclear participants may not deliver instructions directly to the depositories.

The Institution will not impose any fees in respect of holding the Bonds; however, holders of book- entry interests in the Bonds may incur fees normally payable in respect of the maintenance and operation of accounts in the Clearing Systems.

Initial Settlement

Interests in the Bonds will be in uncertified book-entry form. Purchasers electing to hold book- entry interests in the Bonds through Euroclear and Clearstream Banking accounts will follow the settlement procedures applicable to conventional Eurobonds. Book-entry interests in the Bonds will be credited to Euroclear and Clearstream Banking participants’ securities clearance accounts on the business day following the date of delivery of the Bonds against payment (value as on the date of delivery of the Bonds). Direct Participants acting on behalf of purchasers electing to hold book-entry interests in the Bonds through DTC will follow the delivery practices applicable to securities eligible for DTC’s Same Day Funds Settlement system. Direct Participants’ securities accounts will be credited with book-entry interests in the Bonds following confirmation of receipt of payment to the Institution on the date of delivery of the Bonds.

Secondary Market Trading

Secondary market trades in the Bonds will be settled by transfer of title to book-entry interests in the Clearing Systems. Title to such book-entry interests will pass by registration of the transfer within the records of Euroclear, Clearstream Banking or DTC, as the case may be, in accordance with their respective procedures. Book-entry interests in the Bonds may be transferred within Euroclear and within Clearstream Banking and between Euroclear and Clearstream Banking in accordance with procedures established for these purposes by Euroclear and Clearstream Banking. Book-entry interests in the Bonds may be transferred within DTC in accordance with procedures established for this purpose by DTC. Transfer of book-entry interests in the Bonds between Euroclear or Clearstream Banking and DTC may be effected in accordance with procedures established for this purpose by Euroclear, Clearstream Banking and DTC.

General

None of Euroclear, Clearstream Banking or DTC is under any obligation to perform or continue to perform the procedures referred to above, and such procedures may be discontinued at any time.

Neither the Combined Group nor any of its agents will have any responsibility for the performance by Euroclear, Clearstream Banking or DTC or their respective direct or indirect participants or account holders of their respective obligations under the rules and procedures governing their operations or the arrangements referred to above.

The information herein concerning Euroclear, Clearstream Banking and DTC has been obtained from sources that the Combined Group and the Underwriters believe to be reliable, but the Combined Group and the Underwriters take no responsibility for the accuracy thereof.

Certificated Bonds

DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the Institution or the Bond Trustee. In addition, the Institution may determine that continuation of the system of book-entry transfers through DTC (or a successor securities depository) is not in the best interests of the Beneficial Owners. If for either reason the book-entry-only system is discontinued, Bond certificates will be delivered as described in the Bond Indenture, and the Beneficial Owner, upon registration of certificates held in the Beneficial Owner’s name, will become the Bondowner. Thereafter, the Bonds may be exchanged for an equal aggregate principal amount of the Bonds in other authorized denominations and of the same maturity, upon surrender thereof at the principal corporate trust office of the Bond Trustee. The transfer of any Bond may be registered on the books maintained by the Bond Trustee for such purpose only upon assignment in form satisfactory to the Bond Trustee. For every exchange or registration of transfer of the Bonds, the Bond Trustee may make a charge sufficient to reimburse them for any tax or other governmental charge required to be paid with respect to such exchange or registration of transfer, and the Bond Trustee may also require the Bondowners requesting such exchange to pay a reasonable sum to cover any expenses incurred by the Institution in connection with such exchange. The Bond Trustee will not be required to exchange (i) any Bond during the fifteen (15) days next preceding the selection of Bonds for redemption or (ii) any Bond called for redemption.

SECURITY FOR THE BONDS

General

In the Bond Indenture, the Institution agrees to make monthly payments to the Bond Trustee, which payments, in the aggregate, will be in amounts sufficient for the payment in full of all amounts payable with respect to the principal of, Redemption Price, if any, and interest on the Bonds to the date of maturity of the Bonds or earlier redemption, and certain other fees and expenses of the Bond Trustee. The Bonds are also 12 payable from payments made on Obligation No. 34, proceeds of the Bonds and certain amounts on deposit under the Bond Indenture, each in the manner and to the extent set forth in the Bond Indenture.

In the Bond Indenture, the Institution assigns and pledges to the Bond Trustee in trust for the benefit and security of the Bondholders, all of the Institution’ rights in the moneys and investments on deposit in the funds and accounts established under the Bond Indenture.

To further secure payment of the principal of and Redemption Price, if any, and interest on the Bonds, the Institution, as sole Member of the Obligated Group, concurrently with the issuance of the Bonds will issue Obligation No. 34 to the Bond Trustee pursuant to which the Obligated Group and any future Members of the Obligated Group agree to make payments to the Bond Trustee in amounts sufficient to pay, when due, the principal of and Redemption Price, if any, and interest on the Bonds. As of the date of issuance and delivery of the Bonds, the Institution is the only Member of the Obligated Group under the Master Indenture. Each Member is jointly and severally liable for payment of the Obligations issued under the Master Indenture, including Obligation No. 34. See “SECURITY FOR THE BONDS – Obligation of the Institution under the Note and the Master Indenture” below.

Obligation of the Institution under the Note and the Master Indenture

The Bonds are secured by the Note, which is registered in the name of, delivered to, and held by the Bond Trustee for the benefit of the Bondholders. The Note is an Obligation issued by the Obligated Group under the Master Indenture, which provides that any Obligation issued thereunder is a joint and several obligation of all Members of the Obligated Group and a general obligation of each of the Members, payable from any and all sources of revenue available to such Member. The Institution is the only Member of the Obligated Group. The provisions of the Master Indenture concerning the addition, withdrawal or consolidation of the Members are summarized in Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Master Trust Indenture” under the headings “Conditions for Membership,” “Withdrawal From the Obligated Group” and “Consolidation, Merger, Sale or Conveyance.” So long as the Institution remains a Member of the Obligated Group, the Institution will be liable on all Obligations issued and outstanding under the Master Indenture from time to time, including the Note. The Master Indenture contains provisions permitting the issuance by the Obligated Group of additional Obligations on a parity with, or in certain cases, senior to, the Note for the benefit of the Institution and future Members admitted to the Obligated Group, if any. See Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Master Trust Indenture” under the heading “Limitations on Incurrence of Additional Indebtedness.”

The Note is subject to the same payment and prepayment terms as the Institution’s obligations under the Bond Indenture and the Bonds. The Note and the Supplemental Master Indenture provide that the Institution will receive credit, to the extent, in the manner and with the effect provided in the Supplemental Master Indenture, for payments of the principal of, Redemption Price of, or interest required on the Note in amounts equal (i) to amounts paid under the Bond Indenture for the payment of principal of, Redemption Price of, or interest on the Bonds and (ii) to the Bonds purchased and delivered to the Bond Trustee.

For a detailed description of issues concerning the enforceability of the Master Indenture, see “BONDHOLDERS’ RISKS” under the subheading “Enforceability of Master Indenture and the Bond Indenture” herein.

Guaranty

The Guarantor shall execute and deliver to the Master Trustee its Guaranty on the date of issuance of the Bonds. The Guaranty provides an unconditional and absolute guaranty by the Guarantor of the full and punctual payment of all amounts payable pursuant to the Note, including principal, Redemption Price, and interest, whether due at maturity, by proceedings for prepayment, upon acceleration or otherwise. The Guaranty represents a general unsecured obligation of the Guarantor and contains certain financial covenants. All outstanding obligations issued under the Master Indenture are secured by guarantees by the Guarantor.

The Guaranty may be amended under certain circumstances, including with the consent of the Bond Trustee acting upon the consent of the Holders of not less than a majority of the Bonds Outstanding under the Bond Indenture or with the consent of the Holders of not less than a majority in aggregate principal amount of Obligations then Outstanding under the Indenture, so long as all other guarantees of Obligations issued under the Indenture (the “Related Guarantees”) are also amended in the same manner to the extent such Related Guarantees contain comparable provisions to those being amended. In the event that the Guarantor becomes a Member of the Obligated Group, the Guaranty will automatically terminate. See Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Guaranty.”

DEBT SERVICE REQUIREMENTS

The following table sets forth, for each fiscal year ending September 30, the amounts required to be made available for payment of the principal of, and sinking fund installments and estimated interest on, the outstanding indebtedness, after the issuance of the Bonds, of the Obligated Group and the Guarantor (together, the “Combined Group”) and of the Guarantor and all its affiliates consolidated in its financial statements (the “Consolidated Group”). The table does not set forth debt service solely of the Obligated Group. The maximum annual debt service for the Obligated Group is $64.3 million. See Appendix A – “CERTAIN INFORMATION CONCERNING THE INSTITUTION AND THE GUARANTOR” under the heading “Financial Information.” All amounts are rounded to the nearest dollar.

A portion of the interest payable on the variable rate Series N Bonds and Series R Bonds is hedged. For the hedged portion, interest is reflected at a net rate taking into account the interest payable on such bonds and payments made and received under the allocable swaps. An assumed annual interest rate of 0.38% has been used for the unhedged portion, reflecting the average interest actually accrued on the Series N Bonds and the Series R Bonds for the preceding twelve months.

In addition, the Series O Bonds, which constitute balloon debt, are assumed to amortize over 25 years with level debt service at an annual interest rate of 4.02%, reflecting the current market interest rate applicable to 25-year obligations of comparable quality and type. While a portion of the debt service on the Series O Bonds is hedged, the hedge rates have been disregarded in accordance with the Master Indenture.

For the Brookline Place Loan guaranteed by the Guarantor, and for the Term Loan guaranteed by the Institution and the Guarantor, 25% of debt service is reflected for the Combined Group and the remaining 75% is reflected as other long-term indebtedness of the Consolidated Group and both such Loans are amortized over 25 years on the same terms as the Series O Bonds are for the purposes of this table. For a description of the Term Loan and the Brookline Place Loan, see Appendix A – “CERTAIN INFORMATION CONCERNING THE INSTITUTION AND THE GUARANTOR” under the headings “Corporate Structure” and “Financial Information.” 14

Combined Group Other Consolidated Group Year Ending Series 2017A Other Long-Term Other Long-Term September 30, Principal Interest Indebtedness Total Indebtedness Total 2017 $40,104,266 $7,384,981 2018 40,035,710 7,204,564 2019 39,281,596 4,960,972 2020 39,197,221 4,720,097 2021 39,180,346 4,675,222 2022 39,180,346 4,577,722 2023 42,974,824 3,028,972 2024 43,175,082 3,028,972 2025 43,522,511 3,028,972 2026 43,891,648 3,028,972 2027 44,245,259 3,028,972 2028 43,226,857 3,028,972 2029 43,363,492 3,028,972 2030 43,315,634 3,028,972 2031 42,965,363 3,028,972 2032 52,017,309 3,028,972 2033 64,878,813 3,028,972 2034 52,497,212 3,028,972 2035 52,387,249 3,028,972 2036 42,178,050 3,028,972 2037 53,170,216 3,028,972 2038 53,610,759 3,028,972 2039 53,674,026 3,028,972 2040 53,713,890 3,028,972 2041 44,946,194 3,028,972 2042 44,231,896 - 2043 44,998,250 - 2044 48,580,333 - 2045 48,492,574 - 2046 48,400,523 - 2047 48,303,595 - 2048 22,236,851 - 2049 22,801,458 - 2050 23,383,207 -

Total $1,502,162,560 $ 91,074,026

DEBT SERVICE COVERAGE RATIOS

In the Master Indenture, the Obligated Group agrees to use its best efforts to maintain a Historical Debt Service Coverage Ratio of the Obligated Group at least equal to 1.10 in each fiscal year. If such ratio, as calculated at the end of any fiscal year, is less than 1.10, the Obligated Group, under certain circumstances, covenants to retain a Consultant. Failure of the Obligated Group to maintain a Historical Debt Service Coverage Ratio of the Obligated Group of at least 1.00 in any fiscal year shall constitute an Event of Default. The Institution is the only Member of the Obligated Group. For a more complete description, see Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Master Trust Indenture” under the heading “Debt Service Coverage Ratios.”

In the Guaranty, the Guarantor agrees to use its best efforts to maintain a ratio of its Unconsolidated Income Available for Debt Service to its Direct Debt Service Requirement at least equal to 1.10 in each fiscal year. If such ratio, as calculated at the end of any fiscal year, is less than 1.10, the Guarantor covenants to retain a Consultant. For a more complete description, see Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Guaranty of Obligation No. 34” under the heading “Covenants of the Guarantor – Debt Service Coverage Ratio.” The Guaranty may be amended or terminated as described under the heading “SECURITY FOR THE BONDS – Guaranty” herein.

ADDITIONAL INDEBTEDNESS

The Master Indenture permits each Member of the Obligated Group, including the Institution, to incur Obligations on parity with or, in certain cases, senior to, the Note given as security for the Bonds. The incurrence of additional parity Obligations or senior indebtedness is subject to certain conditions, including compliance with the Master Indenture’s limits on Long-Term and Short-Term Indebtedness. For additional information concerning the incurrence of parity Obligations see Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Master Trust Indenture” under the heading “Limitations on Incurrence of Additional Indebtedness.”

The Guaranty sets forth the conditions under which the Guarantor may incur certain additional indebtedness in the future, excluding any Guaranty. See Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Guaranty” under the heading “Covenants of the Guarantor – Additional Indebtedness.” The Guaranty may be amended or terminated as described under the heading “SECURITY FOR THE BONDS – Guaranty” herein.

CONSOLIDATION, MERGER, SALE OR CONVEYANCE

The Master Indenture contains provisions permitting the addition, withdrawal or consolidation of Members under certain conditions. See Appendix D – “SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS – Summary of the Master Trust Indenture” under the headings “Conditions for Membership,” “Withdrawal From the Obligated Group” and “Consolidation, Merger, Sale or Conveyance,” respectively.

ESTIMATED APPLICATION OF BOND PROCEEDS

The proceeds from the sale of the Bonds are expected to be applied as follows (rounded to the nearest dollar):

Sources of Funds Principal amount of the Bonds $ Original Issue Premium Total Sources of Funds $

Uses of Funds General corporate purposes $ Costs of issuance† Total Uses of Funds $ ______† Includes Underwriter’s discount, legal, consulting and printing fees and other associated bond issuance costs related to the Bonds.

BONDHOLDERS’ RISKS

Purchase of the Bonds involves risk. In order to identify risk factors and make an informed investment decision, potential investors should be thoroughly familiar with this entire Offering Memorandum, including the Appendices hereto, in order to make a judgment as to whether the Bonds are an appropriate investment. Certain risks associated with the purchase of the Bonds are described below and in Appendix A under the heading “Bondholders’ Risks and Matters Affecting the Healthcare Industry.” Such lists of possible factors, while not setting forth all the factors that must be considered, contain some of the factors which should be considered prior to purchasing the Bonds. THE DISCUSSION OF RISK FACTORS IS NOT, AND IS NOT INTENDED TO BE, COMPREHENSIVE OR EXHAUSTIVE. Prospective purchasers of the Bonds should give careful consideration to the matters referred to in the following summary. Such summary should not be considered exhaustive, but rather informational only.

General

The principal of and interest on the Bonds are payable solely from the revenues and assets pledged for the payment of the Bonds as described herein. No representation or assurance can be made that revenues will be realized by the Combined Group in the amounts necessary to make payments at the times and in the amounts sufficient to pay the debt service on the Bonds.

The future financial condition of the Combined Group could be adversely affected by, among other things, legislation (including proposed federal repeal or replacement of the Affordable Care Act and state health reform), regulatory actions, increased competition from other health care providers, demand for health care services, technological developments and demographic changes, confidence of physicians and the public in the Institution, the ability of the Institution to provide the services required by patients, management capabilities, the success of the strategic plans of the Institution, economic trends and events, physicians’ relationships with the Institution, the Institution’s ability to control expenses, maintenance of the Institution’s relationships with managed care organizations and other payors, competition, rates, costs, third party payments, legislation, and governmental regulation, malpractice claims and other litigation, changes in the rates, timing and methods of payment for the services of health care providers as well as increased costs and changes in governmental regulations, including Internal Revenue Service (“IRS”) policy regarding tax exemption. Such factors may also consequently affect payment of principal and interest on the Bonds by the Institution. Third-party payment and charge control statutes and regulations are likely to change, and unanticipated events and circumstances may occur which cause variations from the Institution’s expectations, and the variations may be material. There can be no assurance that the financial condition of the Institution or utilization of its facilities will not be adversely affected in the future.

Enforceability of Master Indenture

It is possible that the joint and several obligation of a Member to make payments due under the Note in respect of moneys used by another Member may not be valid and enforceable and could be declared void in an action brought by third-party creditors, or by a trustee in bankruptcy in the event of the bankruptcy of the Member from which payment is requested, or by the Massachusetts Attorney General. The Institution is currently the only Member of the Obligated Group.

To be enforceable under Massachusetts law, a guarantee of the debts of another (or a pledge of the assets by a Member to secure the debts of another) must be in furtherance of the Member’s corporate purposes. Further, some or all of the assets of a Member may be subject to restrictions on use imposed by a donor or may be held by a court to be subject to a charitable trust which prohibits payments in respect of obligations incurred by or for the benefit of others, particularly if the Member has insufficient assets remaining to carry out its own charitable functions, or if such obligations were issued for purposes inconsistent with or beyond the scope of the charitable purposes for which the Member was organized.

The validity of master trust indentures has been challenged in jurisdictions outside of Massachusetts. In one case the Connecticut Attorney General obtained an injunction against a Connecticut convalescent home making any payments pursuant to a proposed master trust indenture with an out-of-state affiliate. The convalescent home was not going to receive any proceeds of the proposed bond issue. In the absence of clear legal precedent in Massachusetts, there can be no assurance as to the validity and enforceability of the agreement of any Member to make payments due under the Note or other Obligations to the extent issued for the benefit of another Member.

In addition, any obligation of a Member of the Obligated Group may be voided under the federal Bankruptcy Code or under the Massachusetts fraudulent conveyance statute, if (a) the obligation was incurred without receipt by the obligor of “fair consideration” or “reasonably equivalent value,” and (b) the obligor is insolvent or the obligation renders the obligor “insolvent,” as such terms are defined under the applicable statute.

Interpretation by the courts of the tests of “insolvency,” “reasonably equivalent value” and “fair consideration” has resulted in a conflicting body of case law. For example, a Member’s joint and several obligation under the Master Indenture to make all payments thereunder, including payments in respect of funds used for the benefit of the other Members, may be held to be a “transfer” that makes such Member “insolvent” in the sense that the total amount due under the Master Indenture could be considered as causing its liabilities to exceed its assets. Also, one of the Members may be deemed to have received less than “fair consideration” for such obligation because none or only a portion of the proceeds of the Bonds are to be used to finance facilities occupied or used by such Member. While the Members may benefit generally from the facilities financed from the Bond proceeds for the other Members, the actual cash value of this benefit may be less than the joint and several obligation. The rights under the Massachusetts fraudulent conveyance statutes may be asserted for a period of up to six years from the incurring of the obligations or granting of security under the Bond Indenture.

Enforceability of the Guaranty

The payment when due of the principal of, Redemption Price of, and interest on the Note securing the Bonds is guaranteed by the Guarantor under the Guaranty. The Guarantor is the sole corporate member of the Institution. Under Massachusetts law, a nonprofit corporation may guarantee the obligations of another corporation only if such guaranty is in furtherance of the corporate purposes of the guarantor nonprofit corporation. In addition, the assets of a Massachusetts not-for-profit corporation may be held by a court to be subject to a charitable trust which prohibits payment in respect of obligations incurred by or for the benefit of others if a guarantor has insufficient assets remaining to carry out its own charitable functions or, under certain circumstances, if the obligations paid by such guarantor were issued for purposes 18 inconsistent with or beyond the scope of the charitable purposes for which the guarantor was organized. Due to the absence of clear legal precedent in this area, the extent to which the assets of any guarantor can be used to pay obligations issued by others cannot be determined at this time. Moreover, it is possible that the obligation of the Guarantor to make payments due under the Guaranty may be declared void in an action brought by third-party creditors pursuant to the Massachusetts fraudulent conveyance statute or may be avoided by the Guarantor or a trustee in bankruptcy in the event of the bankruptcy of the Guarantor. An obligation may be voided under the federal Bankruptcy Code or under the Massachusetts fraudulent conveyance statute, if (a) the obligation was incurred without receipt by the obligor of “fair consideration” or “reasonably equivalent value,” and (b) the obligation renders the obligor “insolvent,” as such terms are defined under the applicable statute. Interpretation by the courts of the tests of “insolvency,” “reasonably equivalent value” and “fair consideration” has resulted in a conflicting body of case law. The Guarantor’s obligation to make all payments thereunder, including payments relating to the Bonds, may be held to be a “transfer” that makes the Guarantor “insolvent” in the sense that the total amount due under the Guaranty could be considered as causing its liabilities to exceed its assets. Also, the Guarantor may be deemed to have received less than “fair consideration” for its obligations under the Guaranty because only a portion of the proceeds of the Bonds are to be used to finance facilities occupied or used by such Guarantor. While the Guarantor may benefit generally from the facilities financed from the proceeds of the Bonds, the actual cash value of this benefit may be less than its obligations under the Guaranty.

Effect of Bankruptcy

The commencement of a proceeding under the Bankruptcy Code can adversely affect the business of the affected Member, including by increasing costs and by deterring recipients of health care services from using such Obligated Group Member for such services. In addition, if the affected Member were to become insolvent or if reorganization under the Bankruptcy Code were to be perceived as being in doubt, accounts receivable could become more difficult or impossible to collect.

In a proceeding under the Bankruptcy Code, payments made in respect of the Bonds or other transfers of property, including the payment of debt or the transfer of any collateral, within 90 days (or with respect to the Guaranty, one year) prior to the date of a bankruptcy case could be avoided as preferential transfers absent the presence of one of the Bankruptcy Code defenses to avoidance. To the extent avoided, the value of such payments or transfers could be recovered from the Bond Trustee or from subsequent transferees and claims in respect of the Note could be disallowed pending recovery of the value of such payments or transfers.

In a Chapter 11 case, an Obligated Group Member could file a plan of reorganization that would adjust its debts and modify the rights of creditors generally, or any class of creditors, secured or unsecured. The plan, if confirmed by the court, binds all creditors and discharges all claims held by creditors who had notice or knowledge of the bankruptcy except as set forth in the plan. No plan may be confirmed unless, among numerous other conditions, the plan is determined to be in the best interest of creditors, is feasible and either has been accepted by each class of claims impaired thereunder, or the court has found sufficient grounds to confirm the plan over the objections of a dissenting class. To accept the plan, at least two-thirds in dollar amount and more than one-half in number of the allowed claims of the class that vote with respect to the plan must accept the plan. Even if the plan is not so accepted, it may still be confirmed if the court finds that the plan does not discriminate unfairly in favor of junior creditors and is “fair and equitable” with respect to each class of non-accepting creditors impaired thereunder. In addition, the court could allow for a sale of assets of the affected Member to which creditors claim a security interest if the court makes certain findings under Section 363(f) of the Bankruptcy Code. With respect to secured claims of holders of the Note, if certain legal requirements were satisfied, a plan could alter substantive rights such as the maturity date and interest rate of the Note.

In 2005, Congress amended the Bankruptcy Code to limit the ability of a charitable corporation to transfer assets to a for profit entity. Specifically, Section 541(f) requires the charitable entity to comply with state laws. This change is a departure from prior law and may have an impact on the ability of a secured creditor to maximize its value.

Extension of Preference Period to One Year

Under certain circumstances, payments and transfers made by the Institution or the Guarantor to the Master Trustee or the Bond Trustee during a specified period of time known as a “preference period” may be subject to avoidance as preferential transfers by a trustee in bankruptcy. Due to the guaranty of the debt service by the Guarantor (an insider of the Institution), the preference period applicable during a bankruptcy proceeding of the Institution would be extended from 90 days to one year.

Enforceability of Remedies Generally

The remedies granted to the Bond Trustee, Master Trustee or the Bondowners upon an event of default under the Bond Indenture or the Master Indenture may be dependent upon judicial actions, which are often subject to discretion and delay. Under existing law, the remedies specified in the Bond Indenture, the Guaranty or the Master Indenture may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the Bonds will be qualified as to the enforceability of the provisions of the Bond Indenture, the Guaranty and the Master Indenture by limitations imposed by state and federal laws, rulings and decisions affecting equitable remedies regardless of whether enforceability is sought in a proceeding at law or in equity and by bankruptcy, reorganization, insolvency, receivership or other similar laws affecting the rights of creditors generally.

CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS

The following discussion summarizes certain U.S. federal tax considerations generally applicable to holders of the Bonds. The discussion below is based upon current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), current final, temporary and proposed Treasury regulations, judicial authority and current administrative rulings and pronouncements of the Internal Revenue Service (the “IRS”). There can be no assurance that the IRS will not take a contrary view, and no ruling from the IRS has been, or is expected to be, sought on the issues discussed herein. Legislative, judicial, or administrative changes or interpretations may occur that could alter or modify the statements and conclusions set forth herein. Any such changes or interpretations may or may not be retroactive and could adversely affect the tax consequences discussed below.

The summary is not a complete analysis or description of all potential U.S. federal tax considerations that may be relevant to, or of the actual tax effect that any of the matters described herein will have on, particular holders of Bonds and does not address U.S. federal gift or (for U.S. Holders, as defined below) estate tax consequences or alternative minimum, foreign, state, local or other tax consequences or the 3.8% tax on net investment income. This summary does not purport to address special classes of taxpayers (such as S corporations, mutual funds, insurance companies, banks and other financial institutions, small business investment companies, regulated investment companies, real estate investment trusts, grantor trusts, former citizens of the United States, broker-dealers, traders in securities and tax-exempt organizations) that are subject to special treatment under the U.S. federal income tax laws, or persons that hold Bonds that are a hedge against, or that are hedged against, currency risk or that are part of a hedge, straddle, conversion or other integrated transaction, or U.S. Holders whose functional currency is not the U.S. dollar. This summary also does not address the tax consequences to an owner of Bonds held through a partnership or other pass-through entity treated as a partnership for U.S. federal income tax purposes or the tax consequences applicable to such partnership or other pass-through entity. In addition, this discussion is limited to persons purchasing the Bonds for cash in this offering at their “issue price” within the meaning of Section 1273 of the Code (i.e., the first price at which a substantial amount of Bonds are sold to the public 20 for cash), and it does not address the tax consequences to holders that purchase the Bonds after their original issuance. This discussion assumes that the Bonds will be held as capital assets within the meaning of section 1221 of the Code.

As used herein, the term “U.S. Holder” means a beneficial owner of Bonds that is (i) an individual citizen or resident of the United States for U.S. federal income tax purposes, (ii) a corporation (or other entity classified as a corporation for U.S. federal tax purposes) created or organized in or under the laws of the United States or any state thereof or the District of Columbia, (iii) an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source, or (iv) a trust if (a) a U.S. court can exercise primary supervision over the administration of such trust and one or more United States persons (within the meaning of the Code) have the authority to control all of the substantial decisions of such trust or (b) the trust has made a valid election under applicable Treasury regulations to be treated as a United States person (within the meaning of the Code). As used herein, the term “Non-U.S. Holder” means a beneficial owner of Bonds that is not a U.S. Holder.

If the liability of the Institution in respect of a Bond ceases as a result of an election by the Institution to pay and discharge the indebtedness on such Bond by depositing with the Bond Trustee sufficient cash and/or obligations to pay or redeem and discharge the indebtedness on such Bond (a “legal defeasance”), under current tax law a Holder will be deemed to have sold or exchanged such Bond. In the event of such a legal defeasance, a Holder generally will recognize gain or loss on the deemed exchange of the Bond. Ownership of the Bond after a deemed sale or exchange as a result of a legal defeasance may have tax consequences different from those described in this “Certain United Stated Federal Income Tax Considerations” section and each Holder should consult its own tax advisor regarding the consequences to such Holder of a legal defeasance of a Bond.

In certain circumstances, the Institution may be obligated to pay amounts in excess of the stated interest or principal on the Bonds and/or to prepay or redeem all or a portion of the Bonds. The obligation to make such payments may implicate the provisions of U.S. Treasury regulations relating to “contingent payment debt instruments” in which case the timing and amount of income inclusions and the character of income recognized may be different from the consequences discussed herein. According to the applicable U.S. Treasury regulations, certain contingencies will not cause a debt instrument to be treated as a contingent payment debt instrument if such contingencies in the aggregate, as of the date of issuance, are either “remote” or “incidental” or if certain other rules apply. Although the matter is not free from doubt, the Institution believes and intends to take the position if required that either such contingencies should be treated as remote and/or incidental or that the rules on “contingent payment debt instruments” otherwise would not be applicable. The determination that the Bonds are not contingent payment debt instruments is binding on a holder unless such holder discloses its contrary position in the manner required by applicable U.S. Treasury regulations. The Institution’s position is not, however, binding on the IRS, and if the IRS were to successfully challenge this position, a holder subject to U.S. federal income taxation might be required to accrue interest income on the Bonds at a rate higher than the stated interest rate and to treat as ordinary interest income (rather than as capital gain) any gain realized on the taxable disposition of a Bond.

BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, PROSPECTIVE HOLDERS OF THE BONDS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR PARTICULAR TAX SITUATIONS AND AS TO ANY FEDERAL, FOREIGN, STATE, LOCAL OR OTHER TAX CONSIDERATIONS (INCLUDING ANY POSSIBLE CHANGES IN TAX LAW) AFFECTING THE PURCHASE, HOLDING AND DISPOSITION OF THE BONDS.

Certain U.S. Federal Income Tax Consequences to U.S. Holders

This section describes certain U.S. federal income tax consequences to U.S. Holders. Non-U.S. Holders should see the discussion under the heading “—Certain Federal Income Tax Consequences to Non- U.S. Holders” for a discussion of certain tax consequences applicable to them.

Interest. Interest on the Bonds will generally be taxable to a U.S. Holder as ordinary interest income at the time such amounts are accrued or received, in accordance with the U.S. Holder’s method of accounting for U.S. federal income tax purposes.

If a Bond is issued at a discount from its stated redemption price at maturity, and the discount is at least the product of one-quarter of one percent (0.25%) of the stated redemption price at maturity of the Bond multiplied by the number of full years to maturity, the Bond will be an “OID Bond.” In general, the excess of the stated redemption price at maturity of an OID Bond over its issue price will constitute original issue discount (“OID”) for U.S. federal income tax purposes. The stated redemption price at maturity of a Bond is the sum of all scheduled amounts payable on the Bond (other than qualified stated interest). The term “qualified stated interest” generally means stated interest that is unconditionally payable in cash or property (other than debt instruments of the Institution), or that is treated as constructively received, at least annually at a single fixed rate. U.S. Holders of OID Bonds will be required to include OID in income for U.S. federal income tax purposes as it accrues, in accordance with a constant yield method based on a compounding of interest (which may be before the receipt of cash payments attributable to such income). Under this method, U.S. Holders generally will be required to include in income increasingly greater amounts of OID in successive accrual periods. If a Bond is issued at a price greater than the principal amount payable at maturity, a U.S. Holder generally will be considered to have purchased the Bond at a premium, and generally may elect to amortize the premium as an offset to interest income otherwise required to be included in respect of the Bond during a taxable year, using a constant-yield method, over the remaining term of the Bond. If a U.S. Holder makes the election to amortize the premium, it generally will apply to all debt instruments held by such U.S. Holder at the time of the election, as well as any debt instruments that are subsequently acquired by such U.S. Holder. In addition, a U.S. Holder may not revoke the election without the consent of the IRS. If such U.S. Holder elects to amortize the premium, such U.S. Holder will be required to reduce its tax basis in the Bond by the amount of the premium amortized during the holding period of the U.S. Holder. If such U.S. Holder does not elect to amortize the premium, the amount of premium will be included in its tax basis in the Bond. Therefore, if a U.S. Holder does not elect to amortize the premium and holds the Bond to maturity, the premium will decrease the amount of gain or increase the amount of loss otherwise recognized on the disposition of such Bond. Special rules for determining the amount of amortizable bond premium attributable to a debt instrument may be applicable if the debt instrument may be optionally redeemed. These rules are complex and prospective purchasers are urged to consult their own tax advisors regarding the application of the amortizable bond premium rules to their particular situation.

Disposition of the Bonds. Unless a nonrecognition provision of the Code applies, the sale, exchange, redemption (including pursuant to an offer by the Institution) or other disposition of a Bond will be a taxable event for U.S. federal income tax purposes. In such event, in general, a U.S. Holder of Bonds will recognize gain or loss equal to the difference between (i) the amount of cash plus the fair market value of property received (except to the extent attributable to accrued but unpaid interest on the Bonds which will be taxed in the manner described above under “Interest”) and (ii) the U.S. Holder’s adjusted tax basis in the Bonds (generally, the purchase price paid by the U.S. Holder for the Bonds, increased by the amount of any original issue discount and decreased by the amount of payments, other than qualified stated interest, and any amortized premium). Any such gain or loss generally will be long-term capital gain or loss, provided the Bonds have been held for more than one year at the time of the disposition. The deductibility of capital losses is subject to limitations.

Information Reporting and Backup Withholding. The Institution or its paying agent, if any (the “payor”) must report annually to the IRS and to each U.S. Holder any interest that is payable to the U.S. Holder, subject to certain exceptions. Under section 3406 of the Code and applicable Treasury Regulations, a non-corporate U.S. Holder of the Bonds may be subject to backup withholding with respect to “reportable payments,” which include interest paid on the Bonds and the gross proceeds of a sale, exchange, redemption or retirement of the Bonds. The applicable payor will be required to deduct and withhold the prescribed amounts if (i) the payee fails to furnish a taxpayer identification number (“TIN”) to the payor in the manner required, (ii) the IRS notifies the payor that the TIN furnished by the payee is incorrect, (iii) there has been a “notified payee underreporting” described in section 3406(c) of the Code or (iv) there has been a failure of the payee to certify under penalty of perjury that the payee is not subject to withholding under section 3406(a)(1)(C) of the Code. Amounts withheld under the backup withholding rules do not constitute an additional tax and may be refunded or credited against the U.S. Holder’s federal income tax liability provided that the required information is timely furnished to the IRS.

Certain U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders

This section describes certain U.S. federal income and estate tax consequences to Non-U.S. Holders. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to non-U.S. Holders in light of their particular circumstances. For example, special rules may apply to a non-U.S. Holder that is a “controlled foreign corporation” or a “passive foreign investment company,” and, accordingly, non-U.S. Holders should consult their own tax advisors to determine the effect of U.S. federal, state, local and non-U.S. tax laws, as well as tax treaties, with respect to an investment in the Bonds.

Interest. If, under the Code, interest (including any OID) on the Bonds is “effectively connected with the conduct of a trade or business within the United States” by a Non-U.S. Holder, such interest will be subject to U.S. federal income tax in a similar manner as if the Bonds were held by a U.S. Holder, as described above, and, in the case of Non-U.S. Holders that are corporations, such interest may be subject to U.S. branch profits tax at a rate of up to 30%, unless an applicable tax treaty provides otherwise. Such Non-U.S. Holder will not be subject to withholding taxes, however, if it provides a properly executed IRS Form W-8ECI to the payor (subject to the discussion below under “—Information Reporting and Backup Withholding” and “FATCA”).

Subject to the discussion below under “—Information Reporting and Backup Withholding” and “FATCA,” interest (including any OID) on the Bonds that is not effectively connected with the conduct of a trade or business in the United States by a Non-U.S. Holder may be subject to withholding taxes of up to 30% of each payment made to such Non-U.S. Holder unless the “portfolio interest” exemption applies. In general, interest paid on the Bonds to a Non-U.S. Holder may qualify for the portfolio interest exemption, and thus will not be subject to U.S. federal withholding tax, if (1) such Non-U.S. Holder is not a “controlled foreign corporation” (within the meaning of section 957 of the Code) related, directly or indirectly, to the Institution; (2) the Non-U.S. Holder is not actually or constructively a “10-percent shareholder” under Section 871(h) of the Code; (3) the Non-U.S. Holder is not a bank receiving interest described in Section 881(c)(3)(A) of the Code;; and (4) either (A) the payor receives from the Non-U.S. Holder who is the beneficial owner of the obligation a statement signed by such person under penalties of perjury, on IRS Form W-8BEN or on IRS Form W-8BEN-E (or successor form), certifying that such owner is not a U.S. Holder and providing such owner’s name and address or (B) a securities clearing organization, bank or other financial institution that holds the Bonds on behalf of such Non-U.S. Holder in the ordinary course of its trade or business certifies to the payor, under penalties of perjury, that such an IRS Form W-8BEN or IRS Form W-8BEN-E (or a successor form) has been received from the beneficial owner by it and furnishes the payor with a copy thereof. Alternative methods may be applicable for satisfying the certification requirement described above. Foreign trusts and their beneficiaries are subject to special rules, and such persons should consult their own tax advisors regarding the certification requirements.

If a Non-U.S. Holder does not claim, or does not qualify for, the benefit of the portfolio interest exemption, the Non-U.S. Holder may be subject to a 30% withholding tax on interest payments on the Bonds. However, the Non-U.S. Holder may be able to claim the benefit of a reduced withholding tax rate under an applicable income tax treaty between the Non-U.S. Holder’s country of residence and the United States. Non-U.S. Holders are urged to consult their own tax advisors regarding their eligibility for treaty benefits. The required information for claiming treaty benefits is generally submitted on IRS Form W- 8BEN or on IRS Form W-8BEN-E. In addition, a Non-U.S. Holder may under certain circumstances be required to obtain a U.S. taxpayer identification number.

Disposition of the Bonds. Subject to the discussions below under “—Information Reporting and Backup Withholding” and “FATCA,” a Non-U.S. Holder will generally not be subject to U.S. federal income tax or withholding tax on gain recognized on a sale, exchange, redemption or other disposition of a Bond. (Such gain does not include proceeds attributable to accrued but unpaid interest on the Bonds, which will be treated as interest.) A Non-U.S. Holder may, however, be subject to U.S. federal income tax on such gain if: (1) the Non-U.S. Holder is a nonresident alien individual who was present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met; or (2) the gain is effectively connected with the conduct of a U.S. trade or business, as provided by applicable U.S. tax rules (in which case the U.S. branch profits tax may also apply), unless an applicable tax treaty provides otherwise.

Information Reporting and Backup Withholding. The payor must report annually to the IRS and to each Non-U.S. Holder any interest that is subject to U.S. withholding taxes or that is exempt from U.S. withholding taxes pursuant to an income tax treaty or certain provisions of the Code. Copies of these information returns may also be made available under the provisions of a specific income tax treaty or agreement with the tax authorities of the country in which the Non-U.S. Holder resides.

A Non-U.S. Holder generally will not be subject to backup withholding with respect to payments of interest on the Bonds as long as the Non-U.S. Holder (i) has furnished to the payor a valid IRS Form W- 8BEN or IRS Form W-8BEN-E certifying, under penalties of perjury, its status as a non-U.S. person, (ii) has furnished to the payor other documentation upon which it may rely to treat the payments as made to a non- U.S. person in accordance with Treasury regulations, or (iii) otherwise establishes an exemption. A Non- U.S. Holder may be subject to information reporting and/or backup withholding on a sale of the Bonds through the U. S. office of a broker and may be subject to information reporting (but generally not backup withholding) on a sale of the Bonds through a foreign office of a broker that has certain connections to the United States, unless the Non-U.S. Holder provides the certification described above or otherwise establishes an exemption. Non-U.S. Holders should consult their own tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption.

Amounts withheld under the backup withholding rules may be refunded or credited against the Non- U.S. Holder’s U.S. federal income tax liability, if any, provided that the required information is timely furnished to the IRS.

U.S. Federal Estate Tax. A Bond held or beneficially owned by an individual who, for estate tax purposes, is not a citizen or resident of the United States (as determined for estate tax purposes) at the time of death will not be includable in the decedent’s gross estate for U.S. estate tax purposes, provided that, at the time of death, (i) the interest income on the Bond qualifies for the “portfolio interest exemption” described above under “—Interest” and (ii) payments with respect to such Bond would not have been effectively connected with the conduct by such individual of a trade or business in the United States. In addition, the U.S. estate tax may not apply with respect to such Bond under the terms of an applicable estate tax treaty.

FATCA

Certain withholding rules imposed under Section 1471 through 1474 of the Code (otherwise known as the “Foreign Account Tax Compliance Act” or “FATCA”) generally would impose a 30% U.S withholding tax on payments of interest made, and beginning on January 1, 2019, gross proceeds from the sale or other taxable disposition (including a retirement or redemption) of the Bonds made to non-U.S. financial institutions and certain other non-U.S. financial entities (whether such financial institutions or nonfinancial entities are beneficial owners or intermediaries), unless they satisfy certain due diligence and information reporting requirements. An intergovernmental agreement between the United States and the holder’s jurisdiction may modify these requirements. Investors are encouraged to consult with their own tax advisors regarding the implications of this legislation and the applicable regulations on their investment in a Bond.

THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY AND DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF BONDS IN LIGHT OF THE HOLDER’S PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO ANY TAX CONSEQUENCES TO THEM FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF BONDS, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.

ERISA AND BENEFIT PLAN CONSIDERATIONS

In considering the purchase of a Bond, fiduciaries and managers of employee benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), including U.S. private pension plans, certain insurance company accounts, and entities that are deemed to hold “plan assets” with respect to such plans (collectively, “ERISA Plans”) should have in mind certain considerations under ERISA, including those described below. The Code also has certain provisions that apply to such plans as well as to IRAs and certain other plans not subject to ERISA (such plans, together with the ERISA Plans, “Plans”). Certain other plans, such as governmental plans, church plans, and plans maintained outside of the United States may be subject to other similar state and other local statutory rules and restrictions; fiduciaries of these plans should be familiar with and take into consideration the rules governing those plans.

Fiduciary Duties

Section 404(a)(1) of ERISA sets forth a general standard of behavior and restrictions for fiduciaries of ERISA Plans. It requires that a fiduciary discharge its duties with respect to an ERISA Plan (i) solely in the interest of the participants and beneficiaries, (ii) for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan, (iii) in accordance with a prudent-man rule (that is “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims”), (iv) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so, and (v) in accordance with the documents governing the plan insofar as they are consistent with ERISA.

In determining whether a particular investment is appropriate for a plan subject to ERISA, ERISA Plan fiduciaries are required to give appropriate consideration to, among other things, the role that the investment plays in the plan’s portfolio, taking into consideration whether the investment is designed reasonably to further the plan’s purposes, an examination of the risk and return factors, the portfolio’s composition with regard to diversification, the liquidity and current return of the total portfolio relative to the anticipated cash flow needs of the plan, and the other risks and considerations set forth in this Offering Memorandum. 25

Before investing the assets of a plan, IRA, or similar benefit arrangement in a Bond (whether or not such plan, IRA or arrangement is subject to ERISA), a fiduciary should determine whether such an investment is consistent with its fiduciary responsibilities, including the foregoing rules to the extent applicable, taking into account among other things the limitations and risks pertinent to an investment in a Bond as set forth in this Offering Memorandum.

Prohibited Transactions

Under ERISA, transactions between ERISA Plans and certain “parties in interest” with respect to such plans, including without limitation the purchase or sale between and ERISA Plan and a party in interest, the lending of money or other extension of credit between a plan and a party in interest, and the transfer to or use by or for the benefit of a party in interest of any assets of an ERISA Plan, are prohibited absent a statutory exemption or exemption permitted by the Department of Labor. Similar rules apply to Plans under the Code. For example, if the Institution or an Underwriter were deemed to be a party in interest with respect to an ERISA Plan that is a purchaser or holder of a Bond, a prohibited transaction could occur in the absence of an exemption. Potential exemptive relief in the context of acquiring and holding instruments such as the Bonds, but always subject to their terms and conditions, may be found in ERISA section 408(b)(17), and Prohibited Transaction Class Exemptions 75-1, 84-14, 96-23, 75-1, 86-128, and possibly other administrative exemptions. Fiduciaries of ERISA Plans and other plans subject to the prohibited transaction rules must determine whether any of the foregoing or other exemptions are necessary and applicable.

By acquiring the Bonds, each Holder will be deemed to represent that either (i) it is not acquiring Bonds with assets of an ERISA Plan or other plan subject to the prohibited transaction restrictions of ERISA, the Code, or similar law, or (ii) the acquisition and holding of the Bonds will not give rise to a nonexempt prohibited transaction.

Trustees, investment managers and other fiduciaries of all plan investors (whether or not subject to ERISA) are advised to consult their counsel with respect to questions arising under ERISA and the related provisions of the Code or other similar applicable laws.

CONTINUING DISCLOSURE AND FINANCIAL REPORTS

The Institution has entered into continuing disclosure undertakings (the “Continuing Disclosure Undertakings”) in connection with tax-exempt revenue bonds issued for the benefit of the Institution. See Appendix B – “AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE CHILDREN’S MEDICAL CENTER CORPORATION AND SUBSIDIARIES.” Bondholders and prospective purchasers of the Bonds may obtain copies of the information provided by the Institution under those Continuing Disclosure Undertakings on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system (“EMMA”). Each Continuing Disclosure Undertaking terminates when the related tax- exempt revenue bonds are paid or deemed paid in full.

The Institution covenants in the Bond Indenture to furnish to the Bond Trustee, unless such information is available on EMMA or any successor thereto or to the functions thereof, (i) copies of its audited financial statements not later than 180 days after the close of each of the Institution’s fiscal years and (ii) copies of its unaudited quarterly financial statements not later than 75 days after the close of each of the first, second and third fiscal quarters. Except for providing such annual audited and unaudited quarterly financial statements, the Institution has not undertaken either to supplement or update the information included in this Offering Memorandum. In the event such financial information is not available on EMMA or any successor thereto or to the functions thereof, beneficial owners of the Bonds can obtain copies of such financial information by contacting the Bond Trustee pursuant to the terms of the Bond Indenture.

APPROVAL OF LEGALITY

Legal matters incident to the validity of the Bonds and certain other matters are subject to the approving opinion of Ropes & Gray LLP, Boston, Massachusetts, counsel to the Institution and Guarantor. In addition, certain other legal matters will be passed upon for the Underwriters by their counsel, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts.

LITIGATION

There is not now pending any litigation restraining or enjoining the issuance or delivery of the Bonds or questioning or affecting the validity of the Bonds or the proceedings and authority under which they are to be issued. See Appendix A with respect to any material litigation affecting the Institution or the Guarantor.

FINANCIAL ADVISOR Ponder & Co. (“Ponder”) is serving as financial advisor to the Institution in connection with the issuance of the Bonds. Ponder is not obligated to undertake, and has not undertaken, either to make an independent verification of or to assume responsibility for, the accuracy, completeness, or fairness of the information contained in this Official Statement. Ponder is an independent financial advisory firm and is not engaged in the business of underwriting, trading, or distributing securities.

UNDERWRITING

The Bonds are being purchased by Goldman, Sachs & Co., as representative of the underwriters listed upon the front cover of this Offering Memorandum (collectively, the “Underwriters”) pursuant to a purchase contract between the Institution and Goldman, Sachs & Co., as representative of the Underwriters. The Underwriters will agree to purchase the Bonds at an aggregate discount of $______from the public offering prices for the Bonds. The Underwriters may offer and sell the Bonds to certain dealers (including dealers depositing Bonds into investment trusts, certain of which may be sponsored or managed by the Underwriters) and others at prices lower than the public offering prices stated on the inside cover page hereof. The purchase contract will provide that the Underwriters will purchase all the Bonds if any are purchased, and will require the Institution to indemnify the Underwriters and certain other parties against losses, claims, damages, and liabilities arising out of any incorrect statements or information, including the omission of material facts, contained in this Offering Memorandum pertaining to the Institution and other specified matters. The public offering prices set forth on the cover page of this Official Statement may be changed after the initial offering by the Underwriters.

The Underwriters and their affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services.

In the ordinary course of its various business activities, the Underwriters and their affiliates, officers, directors and employees may purchase, sell or hold a broad array of investments and actively trade securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments for their own account and for the accounts of their customers, and such investment and trading activities may involve or relate to assets, securities and/or instruments of the Institution (directly, as collateral securing other obligations or otherwise) and/or persons and entities with relationships with the Institution. The Underwriters and their respective affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments and may at any time hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments.

J.P. Morgan Securities LLC (“JPMS”), one of the Underwriters of the Bonds, has entered into negotiated dealer agreements (each, a “Dealer Agreement”) with each of Charles Schwab & Co., Inc. (“CS&Co.”) and LPL Financial LLC (“LPL”) for the retail distribution of certain securities offerings at the original issue prices. Pursuant to each Dealer Agreement, each of CS&Co. and LPL may purchase Bonds from JPMS at the original issue price less a negotiated portion of the selling concession applicable to any Bonds that such firm sells.

DESCRIPTION OF RATINGS

Moody’s Investors Service, Inc. and S&P Global Ratings, a division of The McGraw-Hill Companies, Inc., have assigned ratings of Aa2 and AA, respectively, to the Bonds. Such ratings reflect only the views of such organizations and any desired explanation of the significance of such ratings should be obtained from the rating agency furnishing the same, at the following addresses: Moody’s Investors Service, Inc., 99 Church Street, New York, New York 10007 and S&P Global Ratings, 55 Water Street, New York, New York 10041. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance such ratings will continue for any given period of time or that such ratings will not be revised downward or withdrawn entirely by the rating agencies, if in the judgment of such rating agencies, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Bonds.

MISCELLANEOUS

The references to the Bond Indenture and the Master Indenture are brief summaries of certain provisions thereof. Such summaries do not purport to be complete, and reference is made to the Bond Indenture and Master Indenture for full and complete statements of such provisions. The agreements with the Bondholders are fully set forth in the Bond Indenture, and neither any advertisement of the Bonds nor this Offering Memorandum is to be construed as constituting an agreement with the Bondholders. So far as any statements are made in this Offering Memorandum involving matters of opinion, whether or not expressly so stated, they are intended merely as such and not as representations of fact. Copies of the documents mentioned in this paragraph are on file with the Bond Trustee.

Information relating to DTC and the book-entry system described herein under the heading “BOOK- ENTRY-ONLY SYSTEM AND GLOBAL CLEARANCE PROCEDURES” has been furnished by DTC and is believed to be reliable, but neither the Combined Group nor the Underwriters make representations or warranties whatsoever with respect to such information.

Appendix A attached hereto contains certain information related to the Combined Group which has been prepared by the Institution. While such information is believed to be reliable and has been relied on by the Underwriters, the Underwriters do not make any representations or warranties whatsoever with respect to the information contained therein.

Attached hereto as Appendix B are the Audited Consolidated Financial Statements of The Children’s Medical Center Corporation and Subsidiaries for the fiscal years ended September 30, 2016 and 2015. The financial statements included in Appendix B have been audited by Ernst & Young LLP, independent accountants, as stated in their report appearing therein.

Appendix C - “Definitions of Certain Terms” and Appendix D - “Summary of Certain Provisions of the Legal Documents” have been prepared by Ropes & Gray LLP, Counsel to the Institution and Guarantor.

The Appendices are incorporated herein as an integral part of this Offering Memorandum.

The Institution has reviewed the portions of this Offering Memorandum describing the Institution, the Debt Service Requirements, Estimated Application of Bond Proceeds, Continuing Disclosure and 28

Financial Reports and Bondholders’ Risks and has furnished Appendix A and Appendix B to this Offering Memorandum, and has approved all such information for use with this Offering Memorandum. At the closing, the Institution will certify that such portions of this Offering Memorandum, except for any projections and opinions contained in such portions, do not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading.

Except as otherwise stated herein, the Underwriters do not make any representations or warranties with respect to the information contained herein.

[Remainder of Page Intentionally Left Blank]

The execution and delivery of this Offering Memorandum has been duly authorized by the Institution and the Guarantor.

THE CHILDREN’S HOSPITAL CORPORATION and

THE CHILDREN’S MEDICAL CENTER CORPORATION

By ______Sandra L. Fenwick Chief Executive Officer

By ______Doug M. Vanderslice Senior Vice President and Chief Financial Officer

Appendix A

TABLE OF CONTENTS

BOSTON CHILDREN’S HOSPITAL – INTRODUCTION ...... A-1

CORPORATE STRUCTURE ...... A-3

GOVERNANCE AND MANAGEMENT ...... A-7

SERVICE AREA AND MARKET SHARE ...... A-11

PATIENT CARE CAPABILITIES ...... A-14

MEDICAL AND HOUSE STAFF ...... A-18

RESEARCH PROGRAMS AND FUNDING ...... A-20

FACILITIES ...... A-24

PHILANTHROPY ...... A-26

UTILIZATION ...... A-27

FINANCIAL INFORMATION ...... A-29

SOURCES OF PATIENT SERVICE REVENUE ...... A-42

EMPLOYEES ...... A-47

ACCREDITATION AND MEMBERSHIPS ...... A-48

INSURANCE ...... A-48

LITIGATION ...... A-49

CYBERSECURITY ...... A-50

BONDHOLDERS’ RISKS AND MATTERS AFFECTING THE HEALTHCARE INDUSTRY ...... A-50

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The Children’s Hospital Corporation (“Boston Children’s Hospital,” or the “Hospital”) as borrower, and its parent corporation, The Children’s Medical Center Corporation (the “Medical Center”) as guarantor, provide the following information for inclusion in this Offering Memorandum. Unless otherwise indicated, all references to financial and statistical data refer to the fiscal year ended September 30th, and the source for all data is Medical Center or Hospital records.

BOSTON CHILDREN’S HOSPITAL – INTRODUCTION

Boston Children’s Hospital is a leading center of pediatric clinical care and research, and serves as the primary pediatric teaching hospital of the Harvard Medical School, at which substantially all members of the active medical staff hold faculty appointments. The Hospital is a not-for-profit Massachusetts corporation that operates a 415 licensed-bed acute care hospital in the Longwood Medical Area, on a campus adjacent to Harvard Medical School and near several other Harvard-affiliated adult and specialty teaching hospitals. In the 2016– 2017 edition of U.S. News & World Report’s “Best Children’s Hospitals” survey, the Hospital ranked #1 in 8 of the 10 evaluated specialties and #2 in the others. The Hospital offers a complete range of health care services for children from birth through 21 years of age, with several programs continuing to see adult patients. The Hospital’s 228 specialized clinical programs account for more than 600,000 patient visits per year and include approximately 24,000 annual discharges and almost 28,000 surgical procedures performed. The Medical Center’s health system includes the Hospital and multiple ambulatory centers with total 2016 system revenue of over $2 billion.

In addition to the main hospital campus in the Longwood Medical Area, Boston Children’s Hospital has a large “Community of Care” network, including three suburban satellite facilities that handle over 175,000 visits per year and a community health center located in Jamaica Plain, Massachusetts. Approximately 100 of the Hospital’s physicians staff the inpatient units, neonatal intensive care units (“NICUs”) and emergency departments of eight community hospitals in the greater Boston area. The Hospital also maintains relationships with 83 community-based practices comprising 308 pediatricians. In addition, the Hospital and its physicians have contractual and teaching relationships with other academic medical centers, community health centers and healthcare organizations in Boston and throughout New England.

The Hospital has a full-time medical staff of more than 1,100 specialists. It has 36 Accreditation Council for Graduate Medical Education-accredited training programs with 190 residents and 296 clinical fellows. Approximately 900 additional residents rotate through the Hospital each year. The Hospital employs more than 10,000 full time employees (“FTEs”), including 1,950 nurse FTEs and more than 1,400 ancillary clinical staff FTEs.

The Boston Children’s Hospital Trust (the “Trust”), an unincorporated division of the Hospital dedicated to fundraising, has 135 staff members and 45 board members. The Trust embarked on an eight year, $1.3 billion campaign in 2011, for which it has raised approximately $900 million in pledges and cash through October, 2016.

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Strategic Initiatives

Boston Children’s Hospital differentiates itself through cutting edge research, innovation and compassion, which enable it to provide extraordinary treatment outcomes for children with the most complex and rare medical conditions, while delivering value to all patients. The Hospital’s current strategic plan was developed and approved by the Board of Trustees in 2013. The strategic plan has three components: (1) be the destination for complex patients; (2) foster accountable care capabilities through integrated relationships; and (3) drive transformative research and clinical innovation.

Be a Destination for Complex Patients

The Hospital leverages its capabilities in research and clinical innovation to grow clinical programs, with unique expertise in rare and complex care, through:

• Recruitment and retention of expert clinical talent • Extensive benchmarked quality and outcome measures • Expanded relationships (including with referring physicians, insurers, employers and foreign countries) • Enhanced infrastructure and patient experience (such as a focused patient access program, comprehensive family education and support services, a formalized second opinion service, and an international services function) • Acceleration of innovative clinical therapies and services with appropriate market introduction • Expansion of ten multi-disciplinary clinical programs with perceived growth potential by investing in business development and operational resources. • Targeted marketing and communications providing information about advances to help prospective patients and families in their care decision process

This component of the Hospital’s strategy is designed to grow referrals of patients from national and international origins, while also acknowledging that the Hospital is and intends to remain a tertiary and quaternary referral center for complex patients of local and regional origin. Recent growth and anticipated future growth related to this strategy have led to the need to expand capacity with a new Longwood campus bed tower.

Foster Accountable Care Capabilities through Integrated Relationships

The Hospital strives to ensure integration of care in the local community though affiliated primary care physician networks. This includes providing care in the most cost effective and appropriate setting through sustainable relationships with community hospitals and satellites. The Hospital is also developing population health management capabilities and expanding its presence in the region through partnerships and, when appropriate, through acquisitions. The Hospital is currently participating in a pilot MassHealth accountable care organization (“ACO”) program and is in the development stage of an ACO in response to MassHealth’s planned transition to risk arrangements in January 2018. See “SOURCES OF PATIENT SERVICE REVENUE—Medicaid.”

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Drive Transformative Research and Clinical Innovation

The Hospital endeavors to maintain and expand its position as the world’s leader in pediatric research by providing funding, facilities and an environment for basic science as well as translational research with a growing emphasis on first time human trials. Completion of a multiyear $1.3 billion fund raising campaign is a key element of this strategy. The Hospital seeks digital and technological advances to enable more effective treatment as well as to allow more patients easier access to the Hospital’s physicians. A portion of the Hospital’s 10-year, $3 billion capital plan is dedicated to strategic initiatives, which include, research, clinical innovation and digital solutions. The Hospital seeks to benefit from the strength of the Boston life sciences industry to attract and retain the top pediatric and basic science research talent in the world.

CORPORATE STRUCTURE

The Hospital is the only member of the Obligated Group, as defined in the forepart of this Offering Memorandum. The Medical Center is the guarantor of the Hospital’s payment obligations with respect to the Bonds being issued and all other bonds of the Hospital secured by obligations issued under the Master Trust Indenture, as defined in the forepart of this Offering Memorandum. The Hospital and the Medical Center are the only corporations whose assets are available for payment of the debt service on the Bonds, and none of the assets of any of the other affiliates are available to make payments with respect to the Bonds.

The Medical Center is a not-for-profit Massachusetts corporation that is the sole corporate member of the Hospital and several other corporations. The Medical Center holds and manages investments for the benefit of the Hospital and, to a lesser extent, other affiliates. The following are summary descriptions of the general activities of the other material non- hospital corporations controlled, directly or indirectly, by the Medical Center, or in the case of PPOC and CHICO (defined below), that are closely affiliated with the Medical Center.

Non-Obligated Corporations:

The Foundations

The members of the Hospital’s Departments of Anesthesia, Cardiology, Cardiovascular Surgery, Medicine, Neurology, Neurosurgery, Ophthalmology, Orthopedic Surgery (including Sports Medicine), Otolaryngology, Pathology, Plastic and Oral Surgery, Radiology, Surgery and Urology are employed by separate, not-for-profit group practices, all of which are qualified as exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code (collectively, the “Foundations”). While the Medical Center is not the sole corporate member or parent of the Foundations, the Hospital appoints a Chief for each of its major services, and the individuals serving as Chief of a service at the Hospital also serve as Presidents of the corresponding Foundations. The Chief serves as a director of each Foundation and appoints fifty percent or more of the remaining directors. The Medical Center retains certain reserved powers over the Foundations. Accordingly, in 2012, the

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Medical Center began to consolidate the Foundations and the PO (as defined below) for financial statement purposes.

Substantially all members of the Hospital’s active medical staff hold faculty appointments at Harvard Medical School. The Foundations perform their own billing for professional services and pay salaries and fringe benefits to their employees. The Hospital makes payments to the Foundations for administrative, supervisory and training activities provided by their members for the Hospital. Though revenues of the Foundations are not assets of or available to the Hospital, management of the Hospital believes the economic health of the Foundations is important to the Hospital’s overall strategy.

Physicians’ Organization at Children’s Hospital, Inc.

Physicians’ Organization at Children’s Hospital, Inc. (the “Physicians’ Organization” or the “PO”) is a not-for-profit Massachusetts corporation formed in 1995 to support the Foundations and other entities affiliated with the Hospital in developing an integrated pediatric health care delivery system and providing cost-effective, comprehensive pediatric care to the communities served by the Hospital and its Foundations.

The PO is funded by contributions from its members in the form of dues support, assessed annually pursuant to an annual dues formula. In 2000, the PO completed a corporate reorganization as a result of which the Medical Center became the sole Class A member of the PO with reserved powers over the PO.

Pediatric Physicians’ Organization at Children’s, LLC

Pediatric Physicians’ Organization at Children’s, LLC (“PPOC”), a Massachusetts limited liability company, is a network of independent primary care pediatricians closely affiliated with the Hospital. The Hospital and the PO are two of the three corporate members of the PPOC with certain defined rights and reserved powers. A Massachusetts non-profit organization whose members are the individual PPOC physicians is the third corporate member of the PPOC. The Hospital does not control a majority of the board. The PPOC represents community-based primary care pediatricians and pediatric medical groups who practice in a variety of settings, including solo practices, groups and health centers. The PPOC includes 83 pediatric primary care practices with 308 physicians in eastern, central and western Massachusetts, including 55 group and 28 solo practices. PPOC practices are responsible for approximately 350,000 covered lives and have more than one million office visits annually.

Children’s Hospital Integrated Care Organization, LLC

The Hospital, the PO and the PPOC are members of Children’s Hospital Integrated Care Organization, LLC (“CHICO”). CHICO aims to support the provision of high-value care, emphasizing the continuum of services provided by the PPOC, pediatric subspecialists in the PO, the Hospital and its Community of Care (see “PATIENT CARE CAPABILITIES— Community Locations and Other Affiliations”). The Hospital does not control a majority of the board. Through CHICO, the Hospital, the PO and the PPOC collaborate in several areas of clinical relevance, including cross-organizational development of protocols for quality of

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care, healthcare delivery mechanisms, collaboration on patient care and shared management of electronic health records. CHICO also plays a key role in third party payor relationships, serving as the contracting party for the Hospital, the PO and Foundations, and the PPOC and its physician members.

Longwood Corporation

Longwood Corporation is a tax-exempt, not-for-profit corporation, which owns certain real property for the benefit of the Medical Center. Longwood Corporation owns a 99% interest in 333 Limited Partnership, a Massachusetts for-profit partnership (the other 1% of which is owned by the Medical Center). 333 Limited Partnership and CHB Properties each own a 50% interest in an approximately 90,000 square foot medical office property with a garage located in the Longwood Medical Area of Boston, Massachusetts. The property is primarily used by the Hospital for clinical, administrative and research services.

CHB Properties, Inc.

CHB Properties is a tax-exempt, not-for-profit subsidiary of the Medical Center, which owns an approximately 400,000 gross square foot medical/office building in Waltham, Massachusetts. The property is situated on 11 acres of land and approximately 309,000 square feet of the existing building is leased to and operated by the Hospital for clinical and related purposes (see “FACILITIES—Existing Facilities”). CHB Properties also owns an approximately 365,000 gross square foot office/manufacturing/warehouse/medical building in Peabody, Massachusetts. The property is situated on 26 acres of land, and approximately 47,000 square feet of the building is leased to and operated by the Hospital for clinical and related purposes (see “FACILITIES—Existing Facilities”). The balance of the Waltham and Peabody properties are rented to unrelated tenants or are currently vacant, although the Hospital may ultimately use such space to meet future expansion needs if market demand warrants such use. As previously mentioned, CHB Properties, as a tenant-in-common with 333 Limited Partnership, also owns the remaining equity interest of the approximately 90,000 square foot medical office property with a garage located in the Longwood Medical Area of Boston, Massachusetts. On October 1, 2013, CHB Properties entered into a three-year term loan with a bank in the amount of $27,000,000 to pay off the balance of an outstanding mortgage on this property (the “Term Loan”). The Term Loan was extended for another three years on November 30, 2016 and is guaranteed by the Medical Center and the Hospital.

Longwood Research Institute, Inc.

Longwood Research Institute, Inc. is a tax-exempt, not-for-profit corporation that owns real property primarily for the benefit of the Hospital’s research mission. Specifically, it owns the land and development rights for a planned 440,000 square foot research building adjacent to the Hospital’s campus located at 340 Brookline Avenue in Boston, Massachusetts. In addition, BCH 819 Beacon Street LLC is a wholly-owned Massachusetts limited liability company subsidiary of Longwood Research Institute, Inc., which owns an employee parking lot at 819 Beacon Street in Boston, Massachusetts, near the Hospital’s campus.

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Brookline Place Real Estate Entities

Three wholly-owned Delaware limited liability company subsidiaries of the Hospital each own the fee interest in parcels located at One Brookline Place, Two-Four Brookline Place and Five Brookline Place in Brookline, Massachusetts, respectively. Three wholly-owned Massachusetts limited liability company subsidiaries of the Hospital, Children’s One Brookline Place, LLC, Children’s Brookline Place, LLC and Children’s Five Brookline Place, LLC, each own the tenancy interest in long-term ground leases of such parcels, respectively.

On August 1, 2008, Children’s One Brookline Place LLC and Children’s Five Brookline Place LLC entered into a leasehold mortgage financing in the original principal amount of $43,250,000.00, with a maturity date of August 1, 2018 (the “Brookline Place Loan”), which was secured by a leasehold mortgage on One and Five Brookline Place. In connection with obtaining the consent of the lender to allow the Hospital to commence the construction activities currently underway at One Brookline Place, the Medical Center issued a Guaranty on August 17, 2016, guaranteeing the repayment of the Brookline Place Loan. See “FACILITIES—Capital Plan.”

Organizational Chart Children’s Medical Center Corporation and Certain Affiliates(1)

The Children’s Medical Center Corporation

Physician’s Organization at The Children’s Hospital Children’s Hospital, Inc.(2) Corporation

Longwood Research Affiliated Institute, Inc. Foundations(3)

Pediatric Physicians’ Organization at Longwood Corporation Children’s, LLC(4)

Children’s Hospital Integrated Care CHB Properties, Inc. Organization, LLC(5)

Children’s Brookline Place LLCs(6) Blood Research Institute, Inc.

Sole corporate member Obligated Group Affiliated or controlled other than by sole corporate Guarantor membership Tax-Exempt Organization

Taxable or Pass-Through Organization

(1) Excludes certain affiliates that are not obligated on the Bonds. (2) The Medical Center is the Class A Member. Class B members are the elected officers and two at large elected members. (3) The Class A member of each Foundation is the chief of the corresponding department at the Hospital. The employed physicians of each Foundation typically serve as the Class B members. The Physicians’ Organization is a Class C member of each Foundation. (4) The Hospital is the Class C member and the Physicians’ Organization is the Class B member. PPOC is the Class A member. (5) The Hospital and the Physicians’ Organization each hold a 40% ownership interest, and PPOC holds a 20% interest. (6) Includes Children’s One Brookline Place, LLC, Children’s Brookline Place, LLC, and Children’s Five Brookline Place, LLC. A-6

GOVERNANCE AND MANAGEMENT

Board of Trustees and Officers: The Medical Center

The Medical Center is governed by a Board of Trustees (the “Board” or the “Trustees”). The Trustees, other than certain designated physician officers and ex officio Trustees, are elected to staggered three-year terms by the Trustees then holding office. The Board consists of the President and Chief Executive Officer, the Chief Operating Officer of the Medical Center, the President of the PO, the Chair of the Board of the PO, the Physician-in-Chief of the Hospital, the Surgeon-in-Chief of the Hospital, the Chief Nursing Officer of the Hospital, and the President of the PPOC, all ex officio, together with a minimum of 13 and a maximum of 17 other individuals. The Board meets approximately six times each year.

Standing committees of the Medical Center’s Board of Trustees include the Executive, Audit and Compliance, Compensation, Finance, Investment and Nominating and Governance committees.

Current Trustees of the Medical Center and their respective principal business or civic affiliations and years of appointment to the Board are as follows:

The Medical Center Board of Trustees

Year of Name Business or Civic Affiliation Appointment

Stephen R. Karp, Chairman Chairman and Chief Executive Officer, New England 1989 Development Corporation

Douglas Berthiaume, Vice Chairman and Chief Executive Officer, Waters Corporation 2003 Chair Allan Bufferd Treasurer Emeritus, Massachusetts Institute of Technology 2012

Kevin B. Churchwell, M.D., ex Executive Vice President of Health Affairs and Chief 2013 officio* Operating Officer, The Medical Center, Boston Children’s Hospital Sandra L. Fenwick, ex officio* President and Chief Executive Officer, The Medical Center 1999 and Boston Children’s Hospital

Steven Fishman, M.D., ex President, Physicians’ Organization; Senior Vice President 2015 officio* of Business Services and Access, Surgeon, Department of General Surgery Gary Fleisher, M.D., ex officio* Physician-in-Chief and Pediatrician-in-Chief, Boston 2002 Children’s Hospital Winston Henderson Vice President and General Counsel, Surface Logix 2012

Paul Hickey, M.D.,, ex officio* Anesthesiologist-in-Chief, Department of Anesthesia, 2015 Boston Children’s Hospital; Chairman, Physicians’ Organization James Kasser, M.D., ex officio* Surgeon-in-Chief, Boston Children’s Hospital 2008

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Year of Name Business or Civic Affiliation Appointment

Steven Krichmar Former Senior Managing Director and Chief Operations 2014 Officer, Putnam Investments Robert Langer, Sc.D. Professor, Massachusetts Institute of Technology 2015

Harvey Lodish, Ph.D. Member, Whitehead Institute for Biomedical Research; 2006 Professor, Massachusetts Institute of Technology Gary Loveman, Ph.D. President of Consumer and Health Services, Aetna, Inc. 2010

Sheila Lirio Marcelo Founder, Chairwoman & Chief Executive Officer, 2017 Care.com Ralph Martin, II General Counsel, Northeastern University; Former District 2009 Attorney, Suffolk County

Thomas Melendez Investment Officer, MFS Investment Management 2012

Kathleen Regan Executive Vice President & Chief Operating Officer, The 2016 Commonwealth Fund

Robert A. Smith Managing Partner, Castanea Parters 2000

Alison Taunton-Rigby, Ph.D. Former President and Chief Executive Officer, Ribonovix, 2002 Inc. Marc B. Wolpow Co-Chief Executive Officer, Audax Group 2001

Laura Wood, ex officio* Senior Vice President, Patient Care Operations and Chief 2013 Nursing Officer, Boston Children’s Hospital

Gregory Young, M.D., ex President and Chief Executive Officer, Pediatric Physicians’ 2007 officio* Organization at Children’s Hospital; Primary Care * Salaried employee of the Hospital, a foundation or another affiliated entity.

Board of Trustees, Member, Overseers and Officers: The Hospital

The Bylaws of the Hospital provide that its Board of Trustees consists of those persons who are then serving as Trustees of the Medical Center. In addition, the Medical Center is the sole member of the Hospital. A president and chief executive officer and chief operating officer of the Hospital are elected annually by the Medical Center in its capacity as sole corporate member, and other officers, including a treasurer and secretary, are elected annually by the Trustees of the Hospital with the approval of the Medical Center. Currently, the officers of the Medical Center also serve in the same officer capacities for the Hospital. The Hospital’s Board of Trustees meets approximately six times each year.

Standing Committees of the Hospital’s Board of Trustees include the Executive, Audit and Compliance, Compensation, Finance, Patient Care Assessment, Community Service, and Research committees.

The Boston Children’s Hospital Board of Overseers currently consists of 96 individuals who are committed to active involvement in the Hospital. They have no voting power with respect to operations of the Hospital, but they are invited to participate in continuing

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education opportunities related to the Hospital through special education and research presentations and to serve on committees of the Trust, the Hospital and/or one of Boston Children’s Hospital Trust’s Philanthropic Leadership Councils (see “PHILANTHROPY”).

Each of the Hospital and the Medical Center has a conflict of interest policy that requires disclosure by Trustees of any conflicts of interest and abstention from voting on matters related thereto.

Management of The Medical Center and The Hospital

Officers of the Medical Center and Hospital are elected annually. All officers hold office for one year and until their successors are chosen and qualified.

The following are biographies of Senior Management personnel. Ages listed are as of February 1, 2017:

Sandra L. Fenwick, age 66, became Chief Executive Officer of Boston Children’s Hospital and The Medical Center in October 2013, and serves on each entity’s Board of Trustees. Ms. Fenwick had been the Chief Operating Officer of the Medical Center and Boston Children’s Hospital since November 1999 and in October 2008 was named President. Ms. Fenwick joined the Hospital in June 1999 as Senior Vice President for Strategy, Business Development and Ambulatory Care Services. Previously, Ms. Fenwick served as Senior Vice President of System Development for CareGroup, Inc. for three years. Prior to the 1996 merger of Beth Israel Hospital and New England Deaconess Hospital and the formation of CareGroup, Inc., she served for 20 years in a number of roles at Beth Israel Hospital, including as Senior Vice President, System Development, Vice President, Network Development and Vice President, Clinical and Support Services. Ms. Fenwick received a Bachelor of Science degree from Simmons College in Boston, Massachusetts and a Master of Public Health degree from the University of Texas in Houston, Texas. She currently serves on the Board of Directors of CRICO, Ltd (Cayman), Wyss Institute, Children’s Hospital Association, National Solutions for Patient Safety, Jobs for Massachusetts, Greater Boston Chamber and the Medical, Academic and Scientific Community Organization, Inc. She is also a member of the Massachusetts Women’s Forum and Women Corporate Directors/Boston.

Kevin B. Churchwell, M.D., age 55, became Executive Vice President of Health Affairs and Chief Operating Officer in August 2013. He serves on the Board of Trustees of both Boston Children’s Hospital and the Medical Center. Prior to joining the Hospital, Dr. Churchwell served as Chief Executive Officer for the Nemours/Alfred I. duPont Hospital for Children, in Wilmington, Delaware, overseeing all patient operations since 2010. Before his tenure at Nemours/duPont, Dr. Churchwell was Chief Executive Officer and Executive Director for the Monroe Carell Jr. Children’s Hospital, part of the Vanderbilt University Medical Center in Nashville, Tennessee. A graduate of the Massachusetts Institute of Technology (“MIT”) and Vanderbilt Medical School, Dr. Churchwell completed his pediatric residency and a clinical fellowship in Anesthesia and Pediatric Critical Care at Boston Children’s Hospital.

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Doug M. Vanderslice, age 55, became Senior Vice President and Chief Financial Officer in January 2013. He also serves as the Treasurer of the Medical Center and the Hospital. Mr. Vanderslice spent the previous nine years as Vice President and Chief Financial Officer of St. Louis Children’s Hospital, in St. Louis, Missouri, where he concurrently served in several leadership capacities at BJC HealthCare (the corporate parent of St. Louis Children’s Hospital) (“BJC”), including as Chief Financial Officer of BJC’s Home Care and Behavioral Health service lines. He also spent 12 years at the Children’s Medical Center of Dallas in Dallas, Texas, as Controller and Director of Patient Financial Services. Mr. Vanderslice began his professional career on the audit staff of Deloitte and Touche and also served as the Director of Finance for a suburban municipality outside of Dallas, Texas. He received his Bachelor of Business Administration in Accounting at Baylor University, completed the Advanced Management Program at University of Chicago’s Booth School of Business and is a Certified Public Accountant.

Laura J. Wood, DNP, MS, RN, NEA-BC, age 61, became Senior Vice President for Patient Care Operations and Chief Nursing Officer at the Hospital in May 2013. Prior to joining Boston Children’s Hospital, Dr. Wood held pediatric nursing and health care industry leadership positions in four organizations: The Johns Hopkins Hospital Children’s Center, The Children’s Hospital of Philadelphia, The University of Pennsylvania Health System, and Siemens Medical Solutions. She holds a Bachelor of Science degree in Nursing (BSN) from West Virginia University, a Master’s of Science (MS) degree in maternal-child nursing from the University of Maryland, Baltimore, and a Doctor of Nursing Practice (DNP) degree from Johns Hopkins University. In 2012, Dr. Wood was named a Robert Wood Johnson Foundation Nurse Executive Fellow, joining a cohort of 20 members of a three-year development program to enhance nurse leaders’ effectiveness in improving the nation’s health care system. She serves as a member of numerous national advisory boards including: Johns Hopkins University School of Nursing; Harvard Medical School, Hospital Advisory Council Member, Center for Bioethics; Press Ganey, Chief Nursing Officer Patient Experience Advisory Council; Robert Wood Johnson Foundation, ENF Alumni Association Strategic Planning Committee; and American Medical Informatics Association, Nursing Informatics Public Policy Committee (National Co-Chair).

Lynn Susman, age 57, is President and Chief Development Officer of the Trust. She has led the Hospital’s fundraising program since October 2011 and prior to this role served as the Trust’s Vice President, Campaign & Major Gifts for eight years. Before joining the Hospital in 1989, Ms. Susman worked in fundraising for the arts and was Director of Development at New England Conservatory of Music in Boston, Massachusetts for eight years. She currently serves on the board of the Woodmark Group (an association of North American independent children’s hospitals), and is an active member in numerous professional organizations including the Association of Fundraising Professionals and the Council for the Advancement and Support of Education. She is also a member of The Boston Club and the Massachusetts Women’s Forum.

Philip Rotner, age 53, became the Hospital’s first Chief Investment Officer in May 2010 and established the Hospital’s investment office. He is responsible for overseeing the investment assets of the endowment and pension plan. Prior to joining the Hospital, Mr. Rotner was a Managing Director in the MIT Investment Management Company, which is responsible for

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the management of MIT’s investment assets. He was primarily responsible for evaluating and investing in private equity opportunities globally as well as for Asian public equity manager relationships for the MIT Endowment and the MIT Retirement Plan. Mr. Rotner was also President of the MIT Private Equity Funds. Prior to joining MIT in 1992, Mr. Rotner was employed as a Vice President in Bank of Boston’s Corporate Finance Department and as a Lending Officer with Bank of Tokyo Trust Company. Mr. Rotner received a Bachelor of Arts from Amherst College and a Master of Business Administration from the University of Chicago.

Michele Garvin, age 64, became Senior Vice President and General Counsel of the Hospital and Secretary of the Medical Center in September 2014. She is a member of the senior leadership team reporting to the President and Chief Executive Officer, with oversight responsibilities for the legal department, compliance, immigration, and internal audit. Prior to joining Boston Children’s Hospital, Ms. Garvin was a Partner and chair of Ropes & Gray’s Health Care Group where her practice focused on general health care corporate and regulatory matters. During her 27-year practice, she represented a wide range of health care organizations including academic medical center and faculty practice plans, community hospitals, physician group practices, managed care plans, and pharmaceutical manufacturers. Ms. Garvin is the recipient of numerous honors and awards, including: The Best Lawyers in America, Chambers Leading Healthcare Lawyers, Expert Guides: Guide to the World’s Leading Healthcare Lawyers, and Massachusetts Super Lawyers. She is also a past recipient of the John and John Quincy Adams Pro Bono Publico Award of the Massachusetts SJC. Ms. Garvin obtained her B.A. in 1974 from The College of William and Mary, her MA/PhD in Sociology in 1981 from Boston College and her J.D. in 1987 from Suffolk University Law School.

SERVICE AREA AND MARKET SHARE

Boston Children’s Hospital Locations

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Service Area

Boston Children’s Hospital serves patients from the local, regional, national and international areas defined as follows:

Local: Eastern Massachusetts Regional: New England National: U.S. outside of New England International: outside the U.S.

Patient Service Revenue by Region*

% of % of % of (in thousands) 2014 total 2015 total 2016 total

Local $ 588,218 57% $ 604,544 57% $ 614,624 54% Regional 249,018 24% 243,008 23% 250,402 22% National 127,792 12% 124,554 12% 159,347 14% International 63,435 6% 89,638 8% 113,819 10% $1,028,464 100% $1,061,744 100% $1,138,192 100% ______* Numbers may not total due to rounding.

Local (Eastern Massachusetts)

In 2016, approximately 54% of the Hospital’s patient service revenue was from patients originating in eastern Massachusetts, an area that includes the more than 250 towns located east of Route 495, together with the Cape Cod and Islands areas. Based on Truven data, the Hospital estimates that the pediatric population in eastern Massachusetts is approximately 1.15 million, and has slightly declined from 1,165,620 in 2010 to 1,155,229 in 2015 (a decline of approximately 0.9%). The Hospital provides a full range of services for patients in the local region, but also partners with a number of community hospitals to provide access to the Hospital’s physicians while seeking to keep lower acuity care in closer proximity to patient homes and in lower cost settings of care, where appropriate.

Regional

The Hospital is a regional referral center for tertiary and quaternary care serving all of New England. In July 2015, the Hospital acquired control of Children’s and Women’s Physicians of Westchester, an approximately 300 member physician group providing pediatric inpatient, outpatient and primary care to patients throughout New York’s Westchester County and the Hudson Valley, as well as in Connecticut and New Jersey.

National and International

The Hospital’s capabilities to care for patients with rare and complex conditions have contributed to an increase in revenues from patients from around the U.S. and the world. The following chart summarizes this growth for the past three years:

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Net Patient Service Revenue – National and International (in thousands of dollars)

Eastern Massachusetts Patients: Boston Children’s Hospital and Select Massachusetts Hospitals Total Pediatric Discharges and Inpatient Market Share* 2013–2015

Hospital Pediatric Discharges Inpatient Market Share 2013 2014 2015 2013 2014 2015 Boston Children’s Hospital 8,737 7,958 8,161 41.5 % 43.2 % 44.7 % Partners HealthCare System 2,966 2,793 2,821 14.1 15.2 15.4 Brigham and Women’s Hospital 28 30 38 0.1 0.2 0.2 Massachusetts General Hospital 1,847 2,000 2,104 8.8 10.9 11.5 North Shore Medical Center 736 496 397 3.5 2.7 2.2 Newton-Wellesley Hospital 355 267 282 1.7 1.5 1.5 Tufts Medical Center 2,026 1,653 1,593 9.6 9.0 8.7 Boston Medical Center 1,216 1,228 1,204 5.8 6.7 6.6 UMass Memorial Medical Center 302 234 216 1.4 1.3 1.2 All Other Massachusetts Hospitals 5,784 4,545 4,265 27.5 24.7 23.4 Total 21,031 18,411 18,260 100 % 100 % 100 %

*Excludes patients age 18 and older, obstetrics, neonates, normal newborns and mental health. ______Source: Truven database for Massachusetts hospitals

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Inpatient Market Share: Local (Eastern Massachusetts) Patients

Management believes that the overall decline in the size of the inpatient market from 2013 to 2015 was due in part to decreasing utilization of inpatient services, as the Hospital and other hospitals have shifted care from inpatient to outpatient settings (e.g., for observation or day surgery) when appropriate, particularly for less acute and complex patients. Management attributes the increase from 42% to 45% in the Hospital’s eastern Massachusetts inpatient market share to the shift from inpatient settings to lower-cost settings (e.g., for observation or day surgery) having a relatively more significant effect on the Hospital’s competitors than on the Hospital. The Hospital provides care to a greater proportion of high acuity patients, who have not been as directly affected by these trends. Management believes that as in all other parts of the country, high acuity and complex pediatric patients are increasingly consolidating at pediatric hospitals with breadth and depth of clinical and technical expertise and availability. The Hospital’s reduction in pediatric discharges reflects efforts, in conjunction with community hospital partners, to keep lower-acuity care closer to patients’ homes and at community hospitals when appropriate.

PATIENT CARE CAPABILITIES

Tertiary/Quaternary Care Services

The Hospital provides pediatric inpatient medical and surgical care, intensive care and neonatal intensive care, as well as emergency services and more than 150 ambulatory programs and clinics. Among its wide range of services, the Hospital has unique capabilities, programs and specialists such as the following:

Heart Center

The Heart Center at Boston Children’s Hospital has a long history of innovative care, including the initiation of the field of pediatric cardiovascular surgery following the first surgical correction of a congenital heart defect in 1938. Its specialists treat the full spectrum of cardiac disorders, including the rarest and most complex congenital heart defects. The Center utilizes minimally invasive approaches where possible and has been a pioneer in pediatric cardiac catheterization and cardiac surgery. The patients range from babies still in the womb to adults.

Boston Children’s/Dana Farber Cancer and Blood Disorders Center

The Hospital partners with the Dana Farber Cancer Institute in providing Cancer and Blood Disorders services. The service seeks to apply precision cancer medicine to individualize treatments by tailoring them to the genetic characteristics of the patient’s cancer. It has also been a leader in stem cell transplants, gene therapy and immunotherapy.

Orthopedics

The Hospital’s Orthopedics Center treats both commonly occurring and rare/complex conditions. The Center offers services to a national and international patient base, including

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brachial plexus, complex spine and skeletal disorders, cerebral palsy and spina bifida, among other conditions.

Transplant

The Hospital offers specialized, uniquely collaborative programs dedicated to heart, lung, heart-lung, liver, kidney, intestine and multivisceral and stem cell transplants, often treating cases others turn away. This program has been a leader in the development of innovative surgical techniques as well as transplant research in areas such as improved immunosuppression protocols.

Rare and Complex Diseases

The Hospital has a variety of programs that specialize in rare and complex conditions. These programs include vascular anomalies, esophageal atresia, rare genetic syndromes such as mitochondrial disorders, and rare neurological disorders such as forms of epilepsy and Moya- Moya disease.

In order to provide care for infants, children and adolescents with the most complex or critical conditions, the Hospital currently maintains specialized inpatient facilities that include the following:

• a 42-bed cardiac intensive care unit, dedicated to treating critically ill children with congenital and acquired heart disease; • a 29-bed medical-surgical intensive care unit, with facilities for treatment of critically ill or injured patients, including equipment and staff for their emergency transport; • a 12-bed medical intensive care unit, with facilities for treatment of critically ill or injured patients, including equipment and staff for their emergency transport; • a 16-bed psychiatric care unit, dedicated to treating children with severe psychiatric illness with a focus on children with co-morbid medical conditions; • a 24-bed NICU for treatment of critically ill and premature newborns with complex surgical and metabolic/genetic conditions, and equipment and staff for their emergency transport; and • a 13-bed bone marrow and stem cell transplant unit. The Hospital’s remaining 279 medical/surgical beds for infants, toddlers, school-age children and adolescents include specialized units for solid organ transplant, tumor therapy, orthopedics and neuroscience. Most patient rooms include accommodations for a parent to stay overnight, and all floors have lounges and activity areas for patients and families.

Ambulatory Services

With more than 150 outpatient programs and clinics, the Hospital provides specialized medical services to deal with a wide variety of patients’ needs. During 2016, more than 676,000 patient visits were made to the emergency department and various outpatient clinic programs provided by the Hospital and Foundations, such as:

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• a Level I Trauma Center for pediatric emergency cases that is open 24 hours per day, 7 days per week, the largest pediatric service of its kind in New England; • a multidisciplinary developmental evaluation clinic that evaluates children with developmental disorders, intellectual disabilities or multiple handicaps, and identifies appropriate services for them and their families; • a growth and nutrition clinic that assesses and treats children with organic and non- organic growth deficiencies; • a sports medicine clinic that focuses on the prevention and treatment of pediatric athletic injuries, including a comprehensive concussion program; and • a communication enhancement clinic that uses computers and other devices to enable non-speaking children to communicate and a first of its kind voice banking program for adults with ALS.

Neurosurgery/Neurology

The Hospital’s Brain Center helps children and families facing a broad spectrum of conditions, including cerebral palsy, brain and spinal cord tumors, head trauma, multiple sclerosis, epilepsy, hydrocephalus, spinal cord injuries, and spina bifida. These services offer innovative therapies and surgical techniques as well as advanced imaging capabilities.

Community Services

The Hospital remains committed to its local community, providing primary and preventive care, as well as inpatient care for complex illnesses, to many of the children living in Boston’s urban core. The Hospital is one of the largest providers of health care to low- income families in Massachusetts. Community health efforts have evolved from targeted services for individual families living in Boston into innovative models proven to address health disparities and improve health outcomes for children. The Hospital has focused on community programs in areas in which the Hospital has clinical expertise, resources and partnerships. Examples of a few key programs include the following:

• The Community Asthma Initiative provides case-management services, offers home visits, educates caregivers and providers, distributes asthma control supplies and connects families to local resources. • Fitness in the City is a community-based approach to address obesity that supports ten Boston community health centers in providing case-management support, as well as access to nutrition and physical activity programs. • The Advocating Success for Kids Program provides services for children experiencing school-functioning problems and learning delays through Boston Children’s Hospital primary care clinic and in three Boston community health centers. • Boston Children’s Hospital Neighborhood Partnerships Program is the Hospital’s community mental health program, and places clinicians in Boston schools

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and community health centers to provide a comprehensive array of mental health services. Through the primary care services provided at Martha Eliot Health Center, the Hospital’s owned community health center in Jamaica Plain, and at its main campus, the Hospital offers a number of avenues for access to primary care services, which are vital to community health efforts. In total, in 2016, these programs provided over 90,000 visits for traditional primary care as well as a wide range of services to address the health and social welfare needs of the patients and families. Programs range from optometry, nutrition and substance abuse, to home visiting services, HIV education counseling and testing and a youth street outreach program.

During 2016, the Hospital provided charity care and uncompensated care in an aggregate amount of $55.9 million. In 2015, it provided such care in an aggregate amount of $42.0 million (see note 4 to the audited consolidated financial statements included as Appendix B to this Offering Memorandum).

Community Locations and Other Affiliations

The Hospital has established community locations for ambulatory care and maintains a variety of relationships with local and regional institutions to support pediatric care. Examples of these include:

• Boston Children’s at Lexington – jointly owned with Beth Israel Deaconess Medical Center, this location provides convenient access to Hospital specialists for patients residing north and west of Boston. In 2016, the Hospital’s volume at the Lexington center consisted of over 24,000 pediatric patient visits across 26 outpatient specialty programs. • Boston Children’s at Peabody – this location provides convenient access to Hospital specialists for patients residing in northeast Massachusetts and, to a lesser extent, New Hampshire and southern Maine. In 2016, volume at the Peabody location was over 34,000 visits. • Boston Children’s at Waltham – this location offers more than 20 subspecialty programs in the Massachusetts MetroWest area servicing patients through eastern Massachusetts. In 2016, volume at the Waltham facility consisted of over 120,000 pediatric patient visits and 6,761 surgical cases. • Boston Children’s Community of Care – Hospital physicians offer inpatient and outpatient specialty care, including emergency services, inpatient and neonatology services at locations throughout Massachusetts and in select Connecticut, New Jersey, and Westchester County and Hudson Valley, New York areas through an initiative known as Boston Children’s Hospital “Community of Care,” including, but not limited to the following sites (in Massachusetts except as noted): ° Beverly Hospital (Beverly) ° Boston Children’s Physicians Brockton (Brockton) ° Charlton Memorial Hospital (Fall River)

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° Milford Regional Medical Center (Milford) ° Boston Children’s Physicians Milford (Milford) ° St. Luke’s Hospital (New Bedford) ° Boston Children’s Physicians North Dartmouth (North Dartmouth) ° Boston Children’s Physicians Norwood (Norwood) ° Tobey Hospital (Wareham) ° Boston Children’s Physicians Westchester, NY (Westchester, NY) ° South Shore Hospital (Weymouth) ° Boston Children’s Physicians at Weymouth (Weymouth) ° Winchester Hospital (Winchester) Regional Outreach

The Hospital has formal transfer agreements for pediatric referrals with more than 30 hospitals throughout Massachusetts and New England. In addition, in recognition of the importance of managing a regional referral network, the Hospital has established a physician relations liaison to support physician outreach activities. The members of the Hospital’s medical staff are active on a number of editorial boards, make frequent media appearances and conduct grand rounds at area hospitals and other continuing medical education events. Finally, the number of Hospital-trained physicians practicing both inside and outside the region is an additional source of ongoing support for Hospital activities.

MEDICAL AND HOUSE STAFF

As of November 2016, Boston Children’s Hospital medical and house staff numbered 2,915, comprised of an active staff of 1,136 physicians and dentists, 194 medical staff members with affiliate staff status, 508 associated scientific (research and clinical) staff members holding Ph.D.’s and other non-medical advanced degrees, 591 adjunct staff members and 486 interns, residents and clinical fellows.

The Hospital has 17 major services, each with a Chief who is certified by his or her respective specialty board. Each Chief also has an appointment at the Harvard Medical School.

Substantially all members of the Active Staff hold faculty appointments at the Harvard Medical School.

The Active Staff is organized into the following departments with the corresponding number of active staff as of November 2016.

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Active Medical Staff

Number of Department Active Staff Anesthesiology, Perioperative and Pain 121 Medicine Cardiology 75 Cardiovascular Surgery 10 Dentistry 19 Laboratory Medicine 7 Medicine Adolescent Medicine 21 Community Medicine 39 Critical Care Program 14 Immunology/Dermatology 11 Developmental Medicine 18 Emergency Medicine 68 Endocrinology 37 General Pediatrics 80 Genetics 21 Gastroenterology/Nutrition 51 Hematology/Oncology 88 Immunology/Rheumatology/Allergy 37 Infectious Diseases 24 Nephrology 9 Newborn Medicine 35 Pulmonary Medicine 23 Radiation Oncology 6 Unassigned 1 Neurology 64 Neurosurgery 11 Ophthalmology 21 Orthopedic Surgery 50 Otolaryngology 19 Pathology 26 Plastic and Oral Surgery 18 Psychiatry 27 Radiology 43 Surgery 29 Urology 13 Total 1,136

The Hospital’s Foundations and internal departments are described under “CORPORATE STRUCTURE—Non-Obligated Corporations—The Foundations.”

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Training Programs

Substantially all members of the active medical staff have teaching appointments at the Harvard Medical School. As of November 2016, 1,064 interns, residents and clinical fellows and research fellows from the Hospital participate in research and patient care. The following is a list of the accredited training programs at the Hospital:

Adolescent Medicine Pediatric Endocrinology Allergy/Immunology Pediatric Gastroenterology Child/Adolescent Psychiatry Pediatric Hematology/Oncology Child Neurology Pediatric Infectious Diseases Congenital Cardiac Surgery Pediatric Nephrology Developmental-Behavioral Pediatrics Pediatric Orthopedics Medical Biochemical Genetics Pediatric Pathology Medical Genetics and Genomics Pediatric Pulmonology Medical Toxicology Pediatric Radiology Neonatal-Perinatal Medicine Pediatric Rheumatology Neurodevelopmental Disabilities Pediatric Sports Medicine Orthopedic Sports Medicine Pediatric Surgery Pain Medicine Pediatric Transplant Hepatology Pediatric Anesthesiology Pediatric Urology Pediatric Cardiology Pediatrics Pediatric Critical Care Medicine Pediatrics/Anesthesiology Pediatric Dentistry Pediatrics/Medical Genetics Pediatric Emergency Medicine Surgical Critical Care

The Hospital also has established training programs with various schools of nursing and other allied health professionals.

RESEARCH PROGRAMS AND FUNDING

The Hospital is home to a research enterprise with annual research expenditures of over $330 million. More than 1,300 scientists comprise the Hospital’s research community, including seven members of the National Academy of Sciences, 12 members of the Institute of Medicine, 12 members of the Howard Hughes Medical Institute and 28 members of the American Society for Clinical Investigation. The Hospital has established research programs focusing on vascular biology, neurobiology, cellular and molecular medicine, stem cells, and informatics.

The Hospital recently completed a research strategic plan in which its long-term goals include strengthening translation of basic scientific discoveries into first-in-human clinical trials to accelerate new therapies for the most devastating human diseases. Scientific advances at the Hospital have allowed for the first human clinical trials exploring a novel

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way to repair the ACL using the bodies’ own collagen and proteins found in ligaments, as well as novel human gene-therapy trials for rare genetic diseases leading to the Food and Drug Administration (“FDA”) registration of new biologics. A number of the Hospital’s scientific discoveries have been licensed and have led to FDA approved drugs. The recently launched Precision Link program aims to build a knowledge base of both genomic and phenotypic data for use in population research and patient care. In November 2016, the Hospital appointed David A. Williams, M.D., a member of the National Academy of Medicine and former Howard Hughes Medical Institute investigator, as Chief Scientific Officer and Senior Vice President for Research.

Funding Breakdown

Funded research expenditures in 2016 were $333.4 million, compared to $313.4 million in 2015. The U.S. Government, primarily through the National Institutes of Health (“NIH”), sponsored $164.5 million of the Hospital’s research funding in 2016, making its program the most highly NIH-funded pediatric program and the Hospital the fourth highest NIH-funded research hospital in the U.S. Medical research foundations, such as the National American Heart Association, International Juvenile Diabetes Foundation, National Multiple Sclerosis Society, Cystic Fibrosis Foundation and the March of Dimes (the “Major Foundations”), also have provided significant support to the Hospital’s research funding. In 2016, these Major Foundations accounted for approximately 13% of research funding. Other sources provide additional funding. The following chart illustrates the diversity of research funding sources:

2016 Sources of Research Funding

Commercialization/Technology Transfer

The Hospital—through its Technology & Innovation Development Office and the Innovation and Digital Health Accelerator Program and through health care and life sciences industry

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partnerships—facilitates the translation of the Hospital’s laboratory research and clinical expertise into biomedical products, devices, software and algorithms.

Facilities

The Hospital’s research facilities include more than 800,000 square feet of pre-clinical research space and 50,000 square feet of clinical research space. Facilities include the following:

Enders Research Building: The John F. Enders Pediatric Research Laboratories, named for the Boston Children’s Hospital researcher and Nobel Prize recipient who cultured the polio and measles viruses, is a 14-story building constructed in 1971, with 389,184 gross square feet dedicated to research and utilized by hundreds of laboratory researchers and physician investigators.

Karp Research Building: The Karp Family Research Laboratories, opened in 2003 and funded by a philanthropic gift from the Karp Family, is a 12-story biomedical research and laboratory building with 295,000 gross square feet dedicated to research.

Center for Life Sciences: Constructed in 2008, the Center for Life Sciences is an 18-story, 700,000 gross square foot biotechnology building with office/laboratory space. Approximately 208,000 square feet of the building is leased to and operated by the Hospital. It features Universal Flex Lab™ space for flexibility and adaptability and has achieved the Leadership in Energy & Environmental Design (LEED®) Gold Certification by the U.S. Green Building Council.

1 and 21 Autumn Street: Autumn Street buildings are 6-story and 5-story buildings with a total of 115,211 gross square feet dedicated to supporting clinical research – scientific investigation conducted with human subjects or on material of human origin such as tissues, specimens, cognitive phenomena or other data. Clinical research includes patient-oriented, community and population-based research studies.

Major Research Advances

Since its founding in 1869, the Hospital has played a significant role in the advancement of pediatric medicine through basic discovery research, the introduction of new surgical or clinical techniques, the investigation of disease processes and development of appropriate treatments, and the development and application of new technologies. The following chronology presents some of the major advances that have occurred at the Hospital:

1922 The first research laboratory at the Hospital was established. This laboratory contributed to the development of effective intravenous feeding methods.

1947 Sidney Farber, M.D., then Pathologist-in-Chief at the Hospital, discovered the effectiveness of a drug in bringing about a remission of leukemia. Soon thereafter, he achieved the first successful remission

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in the treatment of acute leukemia. Subsequently, successful treatment of Wilm’s tumor, a form of kidney cancer in children, was achieved.

1949 John Enders, M.D., then chief of the Division of Infectious Diseases, and his colleagues, became the first to successfully culture the polio virus. Their work, for which they were awarded the Nobel Prize in 1954, made possible the development of the Salk and Sabin vaccines. In 1954, Dr. Enders succeeded in culturing the measles virus.

1986 Scientists at the Hospital identified the gene that causes Duchenne muscular dystrophy, a severe, degenerative muscle disease. Clinical application of the discovery now allows identification of carriers of the disease and prenatal diagnosis of the condition. Today, the Hospital’s researchers are using muscle stem cells to deliver normal copies of the gene and help restore dystrophin to diseased muscles.

1997 Endostatin, a potent inhibitor of angiogenesis, was discovered by Hospital researchers. In mice, endostatin was able to halt tumor growth without side effects or inducing drug resistance—two drawbacks to conventional cancer treatments. In addition, when endostatin was used in combination with angiostatin, another inhibitor of angiogenesis discovered at the Hospital, it was able to eradicate tumors in mice. This discovery stemmed from 30 years of laboratory work at the Hospital that established the field of angiogenesis.

The FDA approved Neumega (Oprevlekin) for treatment of chemotherapy-induced thrombocytopenia, based on gene discovery and use patent developed by hematologist at the Hospital.

1998 A Hospital neuroscientist cloned the first neural stem cells from the human central nervous system, providing a critical step toward the goal of developing cell replacement and gene therapies for patients with neurodegenerative disease, neural injury or paralysis.

2004 The first angiogenesis inhibitor to treat cancer was approved by the FDA based on data relying on work done at the Hospital. Today, five biomarkers (angiogenic factors released by tumors) are being validated as diagnostic or prognostic indicators of cancer in clinical trials at 35 hospitals and the National Cancer Institute.

2007 Researchers in the Hospital’s Stem Cell Program converted adult skin cells into cells that look and act like embryonic stem cells. The resulting induced pluripotent stem cells (“iPS”) can form any cell type in the body and allow scientists to model a variety of human diseases. In 2008, the program produced ten iPS cell lines carrying the genes or genetic components for ten different diseases, including Parkinson’s disease, type I diabetes, Huntington’s disease, Down syndrome,

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combined immunodeficiency and muscular dystrophy, among others, allowing researchers to study the basis for these diseases in vitro.

2011 Working with zebrafish, researchers discovered that a number of existing drugs may help restore muscle in Duchenne muscular dystrophy. The Hospital is now partnering with Pfizer, Inc. to develop the most promising compounds as treatments.

Researchers mapped the “translocatome”—spots in the genome where chromosomes are likely to rejoin after breaking. This knowledge could help guide understanding of cancer genomics and efforts to develop gene therapies.

2013 Researchers discovered they can triple blood stem cells’ production of red blood cells by shutting off the gene SH2B3. The work could lead to better, cheaper methods of manufacturing red blood cells for transfusion and for use as drug delivery vehicles.

2016 The Bridge-Enhanced ACL Repair surgery, which uses a sponge bridge to connect the two ends of the torn ligament, is proving to be a viable less-invasive option for ACL repairs. In a clinical trial, 10 patients had their ACLs successfully repaired.

FDA approval of Vonvendi, a recombinant von Willebrand’s factor for treatment of bleeding disorders, including von Willebrand’s Disease, based on gene patent and discovery by a Hospital hematologist.

FACILITIES

Existing Facilities

The Hospital’s main campus is located in Boston’s Longwood Medical Area and covers nearly 12 acres. The Hospital owns or rents approximately 4.2 million gross square feet of space at its various facilities. The main campus consists of 15 buildings owned by the Hospital that were built or substantially renovated between 1914 and 2016. Over the course of its history, the Hospital’s physical plant has continued to evolve and grow to meet the changing needs of patient care and research. The main campus is adjacent to the Harvard Medical School and has direct physical connections to Brigham and Women’s Hospital and the Dana-Farber Cancer Institute. The Beth Israel Deaconess Medical Center and the Joslin Diabetes Center are located within two blocks of the Hospital’s main campus. The Hospital added a Lexington campus in 1992, a Peabody campus in 1994 and a Waltham campus in 2005.

The Hospital’s recent major construction projects include:

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Longwood Campus:

In 2003, the Hospital completed construction of the Karp Family Research Center, a 12-story biomedical research and laboratory building.

In 2005, the Hospital completed construction on an 11-story building (the “Clinical Expansion Building”) to house imaging, surgical, intensive care and other patient care and related facilities. In 2008, the Hospital renovated the eleventh floor of the Clinical Expansion Building and added 22 additional beds.

In 2013, the Hospital completed the Mandell Building, a 10-story, approximately 117,000 square foot addition to its main clinical building (the “Main Building”). The new Mandell Building space accommodated 44 additional beds and 20 short-stay beds, which are used primarily to relieve double occupancy rooms in the Main Building. The project included expanded facilities for pharmacy, surgery, radiology, neuro-imaging and emergency services.

Satellites:

Between 2005 and 2007, the Hospital made various improvements to its Waltham Campus, including the renovation of an approximately 22,500 square foot medical/surgical specialty clinic, the renovation of more than 200,000 square feet of the facility for the expansion of clinical programs, the addition of six operating rooms, the expansion of radiology services and the opening of an 11-bed short stay surgical unit.

In 2011, the Hospital completed the renovation of an approximately 47,000 gross square foot portion of a mixed use (office/manufacturing/warehouse/medical) building in Peabody, Massachusetts to serve as an ambulatory care center in the suburban North Shore area, approximately 20 miles from the Hospital’s main campus. This approximately 365,000 square foot site is owned by the Hospital’s affiliate, CHB Properties (see “CORPORATE STRUCTURE—Non-Obligated Corporations”), which leases out the remaining space in the building to other unrelated tenants.

The Hospital’s commitment to its physical plant is demonstrated in the following summary of capital expenditures from 2014 through 2016, derived from Hospital records:

Summary of Capital Expenditures

2014 2015 2016 $136,007,000 $148,954,000 $202,217,000

Capital Plan

The Hospital’s capital plan for the 2016-2025 fiscal years includes new facilities, major renovations, routine capital and strategic initiatives with a cost of approximately $3 billion. The most significant project is the construction of an 11-story, approximately 610,000 square foot clinical building (the “Expansion Project”), which will contain an expanded NICU and

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an interdisciplinary Heart Center with increased intensive care capacity, will allow for the elimination of all remaining double rooms, will replace 27 undersized inpatient rooms and 12 operating rooms, and will enable procedural growth. The new space will add 71 net new beds. Site preparation is in progress with construction expected to begin in the summer of 2017. The estimated date of completion is the winter of 2021 at an estimated project cost of approximately $1 billion. For a discussion of litigation relating to the Expansion Project, see “LITIGATION.”

Management believes the existing facility is inadequate and too old to support the growing demand for complex care. Current occupancy rates range from 85 to 90%, and 80% is optimal to prevent over-capacity and delayed surgeries. The Expansion Project will offer new technology, including information sharing hubs that will enhance clinical collaboration and new hybrid operating rooms and an interventional radiology suite. The Expansion Project is designed to enable better coordination of care and enhance the patent and family experience.

The capital plan also includes an eight-floor outpatient center at a site near the Hospital’s campus in Brookline, Massachusetts, as well as renovations to its Waltham campus subject to regulatory approval from the City of Waltham. Management is in a programmatic planning stage for improvements to the Waltham campus, but has not yet determined the size or timing of any enhancements. The capital plan is expected to be financed by a combination of debt, operating cash flow, unrestricted cash and investments, and philanthropy over the ten-year period.

PHILANTHROPY

In 1997, the Hospital established the Trust as an unincorporated fundraising division. The Trust’s mission is to promote philanthropy in support of the Hospital’s missions of patient care, research, education and community service. The Trust now has a 135-person staff operating six primary fundraising programs: major gifts, corporate development, special events, planned giving, leadership giving and foundations. An active voluntary board of trustees composed of 45 local business leaders and philanthropists provides oversight to the Trust.

The following table summarizes philanthropy, including pledges made, in accordance with generally accepted accounting principles for 2014–2016. The Hospital is not aware of any significant uncollectible pledges.

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Summary of Philanthropic Revenue (including pledges) 2014-2016 (in thousands of dollars)

Purpose of Donation/Pledge 2014 2015 2016 Total

Unrestricted $19,750 $16,955 $21,620 $58,325

Restricted 91,504 80,934 93,426 265,864

Total $111,254 $97,889 $115,046 $324,189

The sources of donations for 2014-2016 are shown in the following comparative summaries:

2014 2015 2016 Number Number Number of of of Category Donations Amount Donations Amount Donations Amount Individuals* 91,421 $30,674 84,075 $10,795 91,202 $18,203 Foundations 1,076 63,074 802 66,057 1,136 75,335 Corporations 3,619 12,482 3,205 12,446 3,950 15,710 Estates & Trusts 72 3,658 42 6,477 45 3,788 Associations 672 1,366 630 2,114 517 2,010 Total 96,860 $111,254 88,754 $97,889 96,850 $115,046 *Includes family foundations.

UTILIZATION

Total discharges, including observation discharges, grew by under 1% over the three year period, but inpatient days increased by 6.5% from 2014 to 2016. Management believes that this is due primarily to higher patient acuity as a result of greater volume of more complex cases being treated at the Hospital (see “BOSTON CHILDREN’S HOSPITAL – INTRODUCTION—Strategic Initiatives”).

Hospital outpatient clinic visits increased by 5.2% from 2014 to 2016, while combined Hospital and Foundation outpatient clinic visits increased by 34,894, or 6%, from 2014 to 2016, resulting primarily from additional clinical capacity at the Hospital’s suburban locations and the recruitment of additional physicians. The Hospital has intentionally grown the outpatient clinical visits at the suburban locations in connection with the Hospital’s overall strategy to distribute patient volumes from overcrowded Hospital facilities on its main campus. Management believes this strategy benefits the Hospital by eliminating bottlenecks and enhancing timeliness of care delivery across the Hospital, thus improving access, convenience and service to patients.

The following chart summarizes certain significant utilization data for the Hospital for each of the three years ended September 30, 2014, 2015 and 2016:

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Utilization Statistics for 2014-2016

2014 2015 2016 Inpatient Statistics Number of Licensed Beds 395 415 415 Inpatient Discharges 14,878 15,634 15,255 Observation Discharges 9,043 8,715 8,795 Total Discharges 23,921 24,349 24,050 Inpatient Days 111,099 113,969 118,345 Observation Days 11,654 10,891 10,773 Average Length of Stay (days) 5.13 5.13 5.37

Case Mix Index 1.95 1.90 1.97 Percent Occupancy of Beds in 88.5 87.8 86.0 Operation

Outpatient Visits Hospital Clinic Visits 151,075 151,843 158,945 Foundation Clinic Visits* 430,179 435,314 457,203 Total Clinic Visits 581,254 587,157 616,148

Outpatient Clinic Visits by Location Longwood Campus 345,290 343,935 357,212

Martha Eliot Health Center 29,594 30,036 32,396

Lexington 24,027 23,673 24,418

Peabody 30,756 31,963 34,178

Waltham 110,285 115,371 120,161

All Other Locations 41,302 42,179 47,783

Total Clinic Visits 581,254 587,157 616,148

Emergency Room Visits 56,008 59,191 60,337

* The members of the Departments of Anesthesia, Cardiology, Cardiovascular Surgery, Medicine, Neurology, Neuro-surgery, Ophthalmology, Orthopedic Surgery, Otolaryngology, Pathology, Plastic and Oral Surgery, Radiology, Sports Medicine, Surgery and Urology belong to the Foundations. As the Foundations are not members of the Obligated Group, revenues attributable to these visits are not included in the financial statistics of the Hospital, nor are they available to pay debt service on the Bonds.

For further discussion of the financial effect of utilization from 2014 through 2016, see “FINANCIAL INFORMATION—Management’s Discussion and Analysis of Recent Financial Performance of the Consolidated Enterprise.”

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FINANCIAL INFORMATION

Introduction

The Medical Center is the sole corporate member of the Hospital and certain other subsidiary organizations. The Hospital is the only member of the Obligated Group, as defined in the forepart of this Offering Memorandum. The Medical Center, which is the guarantor of the Hospital’s payment obligations with respect to the Bonds and all other bonds secured by obligations issued under the Master Trust Indenture, holds and manages substantially all of the investments for the benefit of the Hospital and its affiliates. These investments are described more fully under the subsection below entitled “Investments.”

Appendix B to this Offering Memorandum includes the audited consolidated financial statements of the Medical Center and all of its subsidiaries, including, but not limited to, the Hospital, for the fiscal years ended September 30, 2015 and September 30, 2016, together with supplemental consolidating information reflecting the results of operations of the Hospital and the Medical Center. The Hospital and the Medical Center are the only corporations liable for payment of debt service on the Bonds. In the fiscal year ended September 30, 2016, subsidiaries not obligated with respect to the Bonds accounted for 21% of the total assets and 37% of the total revenues of the consolidated assets and revenues of the Medical Center and subsidiaries.

Summary Financial Statements

The summaries of the consolidated statements of Revenues and Expenses (“Consolidated Enterprise”) and the combined Hospital and Medical Center statements of Revenues and Expenses (the “Combined Group”) presented below have been derived from information included in the audited consolidated financial statements and supplementary information of the Medical Center and its subsidiaries (including the Hospital) for fiscal years 2014 through 2016 (see Appendix B for fiscal years 2015 and 2016). This summary should be read in conjunction with the audited financial statements and supplementary information for the years ended September 30, 2015 and 2016 for the Medical Center and its subsidiaries and the Notes thereto, which are presented in Appendix B of this Offering Memorandum.

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Summary Consolidated Statements of Revenues and Expenses of the Consolidated Enterprise (in thousands of dollars)1

2014 2015 2016 Revenues:

Patient services revenue $1,584,555 $1,663,435 $1,886,425

Less: provision for bad debts (43,123) (44,535) (65,264)

Net patient services revenue 1,541,432 1,618,900 1,821,161

Research grants and contracts 180,531 177,310 185,706

Recovery of indirect costs on grants and contracts 65,145 63,166 71,322

Other operating revenue 79,994 87,252 110,829

Unrestricted contributions, net of fundraising expenses2 12,242 8,939 12,724

Net assets released from restriction used for operations 37,047 46,740 65,487

Total revenues $1,916,391 $2,002,307 $2,267,229

Expenses:

Salaries and benefits $1,052,677 $1,133,483 $1,345,889

Supplies and other expenses 421,977 467,232 537,310

Direct research expenses of grants 180,531 177,310 185,706

Health Safety Net Assessment 8,217 8,570 10,101

Depreciation and amortization 110,541 114,046 125,435

Interest 29,598 34,234 34,200

Total expenses $1,803,541 $1,934,875 $2,238,641

Gain from operations $112,850 $67,432 $28,588

Non-operating gains (losses):

Income and net realized gain on investment transaction $112,856 $148,450 $84,678

Unrealized gain (loss) on investments classified as trading securities 26,335 (26,408) 10,011

Increase (decrease) in value of alternative investments 119,091 (1,890) 97,959

Recognition of unrealized losses on investments (11,257) (96,227) (27,188)

Adjustment of interest rate swaps to fair value (12,669) (33,579) (30,780)

Fundraising expenses on restricted contributions (17,130) (18,542) (20,349)

Other non-operating losses (9,038) (7,788) (4,475) Total non-operating gains (losses) $208,188 ($35,984) $109,856

Excess of revenues over expenses $321,038 $31,448 $138,444

______1 Includes entities not liable for payment of the debt service on the Bonds. 2 Fundraising expenses netted against unrestricted contributions are as follows: $7,341,000 in 2014, $7,947,000 in 2015 and $8,721,000 in 2016.

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Summary Combined Statements of Revenues and Expenses of the Combined Group (in thousands of dollars)1

2014 2015 2016 Revenues:

Patient services revenue $1,051,575 $1,088,733 $1,179,426

Less: provision for bad debts (23,111) (26,989) (41,234)

Net patient services revenue 1,028,464 1,061,744 1,138,192

Research grants and contracts 188,802 187,023 195,721

Recovery of indirect costs on grants and contracts 67,674 65,864 74,213

Other operating revenue 48,990 53,485 54,737

Unrestricted contributions, net of fundraising expenses2 12,409 9,009 12,805

Net assets released from restriction used for operations 56,516 47,875 75,362

Total revenues $1,402,855 $1,425,000 $1,551,030

Expenses:

Salaries and benefits $580,148 $618,881 $687,762

Supplies and other expenses 421,631 427,981 464,656

Direct research expenses of grants 188,802 187,023 195,721

Health Safety Net Assessment 8,217 8,570 10,101

Depreciation and amortization 104,686 107,542 115,075

Interest 29,598 34,228 33,975

Total expenses $1,333,082 $1,384,225 $1,507,290

Gain from operations $69,773 $40,775 $43,740

Non-operating gains (losses):

Income and net realized gain on investment transaction $71,125 $99,766 $45,953

Increase in value of alternative investments 84,755 6,514 65,431

Recognition of unrealized losses on investments (9,535) (81,702) (24,339)

Adjustment of interest rate swaps to fair value (12,669) (33,579) (30,780)

Fundraising expenses on restricted contributions (17,130) (18,542) (20,349)

Other non-operating losses (9,004) (7,742) (8,200) Total non-operating gains (losses) $107,542 ($35,285) $27,716

Excess of revenues over expenses $177,315 $5,490 $71,456

______1 Includes the Hospital and the Medical Center (excluding subsidiaries other than the Hospital). 2 Fundraising expenses netted against unrestricted contributions are as follows: $7,341,000 in 2014, $7,947,000 in 2015 and $8,721,000 in 2016.

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Management’s Discussion and Analysis of Recent Financial Performance of the Consolidated Enterprise

Review of Financial Trends

The excess of revenues over expenses for the Consolidated Enterprise was $321.0 million in 2014, $31.4 million in 2015 and $138.4 million in 2016. For the same three years, the gain from operations was $112.9 million, $67.4 million and $28.6 million, respectively.

By comparison, the excess of revenues over expenses for the Combined Group was $177.3 million in 2014, $5.5 million in 2015 and $71.5 million in 2016. For the same three years, the gain from operations for the Combined Group was $69.8 million, $40.8 million and $43.7 million, respectively.

The general budgetary philosophy of the Medical Center Board is to achieve a gain sufficient to support the capital investments necessary to maintain a modern and technologically- advanced facility while adhering to its strategic plan to remain a leader in pediatric care (see “BOSTON CHILDREN’S HOSPITAL – INTRODUCTION—Strategic Initiatives”).

2016

The Consolidated Enterprise generated a gain from operations of $28.6 million in 2016 compared to a $67.4 million gain for the prior year. Non-operating gains amounted to $109.9 million compared to a loss of $36.0 million for the prior year.

Total operating revenues for the Consolidated Enterprise was $2.267 billion in 2016, and increased by $264.9 million, or 13%, compared to the prior year. Net patient services revenue of $1.821 billion increased by $202.3 million due primarily to growth in volume, particularly in complex and high acuity patients from local, national and international origins as compared to the prior year, coupled with a full year of net patient services revenue from the Hospital’s physician group subsidiary in Westchester, New York that was purchased in July 2015 (see “BOSTON CHILDREN’S HOSPITAL – INTRODUCTION—Strategic Initiatives”). Net assets released from restriction and used for operations of $65.5 million increased by $18.7 million as a result of an increase in overall spending of philanthropic funds for research and endowed chairs. Total research grants and contracts, including the recovery of indirect costs, increased by $16.6 million, or 6.9%, resulting mainly from higher federal research grants that pay the highest overhead rate.

Total expenses for the Consolidated Enterprise increased by $303.8 million, or 16%, attributable primarily to an increase in salaries and benefits, supplies and other expenses, depreciation, and direct research expenses. The increase in salaries and benefits was reflective mainly of increased benefit cost, market increases, staffing related to higher patient volume as compared to the prior year, and the purchase of the physician group in Westchester, New York. The increase in supplies and other expenses was due primarily to increased medical and surgical supplies, higher pharmaceutical costs, greater rental expenses for incremental leased space, and other strategic expenditures related to recruitment and innovation. Depreciation expense increased as a consequence of the greater investment in

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expanded Hospital facilities and information technology. The increase in direct research expenses of grants parallels the research grant revenue increase described above.

Non-operating gains for the Consolidated Enterprise totaled $109.9 million compared to a $36.0 million loss for the prior year. The principal components of the $145.9 million change were as follows: a $99.8 million increase in the gain on alternative investments resulting from higher performance returns of the underlying investments; a $69.0 million decrease in the recognition of unrealized losses on investments, as well as a $36.4 million increase in the unrealized gain on investments classified as trading securities, due to more favorable market conditions as compared to the prior year; partially offset by a $63.8 million decrease in income and net realized gains, the timing of which is dependent on asset allocation changes made during the year and individual security sales.

2015

The Consolidated Enterprise generated a gain from operations of $67.4 million for 2015 compared to a $112.9 million gain for the prior year. Non-operating losses amounted to $36.0 million compared to a gain of $208.2 million for the prior year.

Total operating revenues for the Consolidated Enterprise of $2.002 billion increased by $85.9 million, or 4%, compared to the prior year. Net patient services revenue of $1.619 billion increased by $77.5 million due primarily to higher inpatient and outpatient volume coupled with increases in rates from payors compared to the prior year. This was partially offset by a $5.2 million decrease in total research grants and contracts, including the recovery of indirect costs, resulting primarily from lower federal research and training grants.

Total expenses for the Consolidated Enterprise increased by $131.3 million, or 7%, attributable primarily to an increase in salaries and benefits, supplies and other expenses, and interest, offset in part by a decrease of direct research expenses. The increase in salaries and benefits was reflective primarily of staffing related to increased patient volume and acuity, market rate adjustments and the filling of vacant positions as compared to the prior year. The increase in supplies and other expenses was due primarily to increased patient utilization as well as higher costs for pharmaceuticals. Interest expense rose due to the issuance of bonds during the second half of the prior year. The decrease in direct research expenses of grants parallels the research grant revenue decrease described above.

Non-operating losses for the Consolidated Enterprise totaled $36.0 million compared to a $208.2 million gain for the prior year. The principal components of the $244.2 million change were as follows: a $121.0 million decrease in the gain on alternative investments resulting from lower performance returns of the underlying investments; a $85.0 million increase in the recognition of unrealized losses on investments due to less favorable market conditions as compared to the prior year, particularly in the energy sector; a $52.7 million change in unrealized loss on investments classified as trading securities due to less favorable market conditions; and a $20.9 million unfavorable swing of the adjustment to fair value of the Hospital’s interest rate swap agreements due to a decline in long-term interest rates during the year, offset by a $35.6 million increase in income and net realized gain on

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investment transactions, the timing of which is dependent on asset allocation changes made during the year and individual security sales.

2014

The Consolidated Enterprise generated a gain from operations of $112.9 million for the fiscal year ended September 30, 2014 compared to a $87.8 million gain for the prior year. Non- operating gains amounted to $208.2 million compared to a gain of $294.4 million for the prior year.

Total operating revenues of $1.916 billion increased by $111.3 million, or 6%, compared to the prior year primarily as a result of an increase in net patient services revenue, partially offset by a reduction in endowment support. Net patient services revenue of $1.541 billion increased by $131.3 million due primarily to higher patient acuity, which led to an increase in inpatient reimbursement as compared to the prior year. Endowment support for mission related activities declined by $24.2 million due to a decision to no longer support hospital operating activities with a portion of the investment return on unrestricted investments.

Total expenses increased by $86.2 million, or 5%, attributable to increases in salaries and benefits, supplies and other expenses, and depreciation expense. The increase in salaries and benefits was reflective primarily of staffing related to higher patient acuity, market rate adjustments and the filling of vacant positions as compared to the prior year. The increase in supplies and other expenses was due to increased inpatient utilization and the incurrence of certain one-time strategic expenditures related to retention and recruitment of personnel. Depreciation expense increased as a consequence of the greater investment in expanded Hospital facilities and IT.

In 2014, non-operating gains totaled $208.2 million compared to $294.4 for the prior year. The $86.2 million net decrease resulted primarily from a $68.2 million unfavorable swing of the adjustment to market value of the Hospital’s interest rate swap agreements and a $31.6 million decrease in the fair value of alternative investments due to lower performance returns of the underlying investments.

Historical and Pro Forma Capitalization

The tables below were prepared by the Hospital’s management and represent the capitalization of the Combined Group and the Consolidated Enterprise as of September 30, 2014, 2015, and 2016, and on a pro forma basis as of September 30, 2016. The pro forma column assumes that the Bonds have been issued.

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Boston Children’s Hospital Combined Group and Consolidated Enterprise Capitalization ($ in thousands) As of September 30, 2014 2015 2016 2016 Historical Historical Historical Pro-Forma Combined Group Debt Series M $126,110 $126,110 126,110 126,110 Series N 216,590 216,590 216,590 216,590 Series O 200,640 200,640 200,640 200,640 Series P 136,685 136,685 136,685 136,685 Series Q 50,255 50,255 50,255 50,255 Series R 125,350 125,350 125,350 125,350 Series 2017A1 - - - 350,000 Capital Leases 537 271 - - Total long-term debt for Combined Group2,3 $856,167 $855,901 $855,630 $1,205,630 Additional Consolidated Enterprise Debt Series A4 - - $8,000 $8,000 Brookline Place Loan 39,720 39,001 38,235 38,235 Term Loan 27,000 27,000 27,000 27,000 Total long-term debt for Consolidated Enterprise Group2,3 $922,887 $921,902 $928,865 $1,278,865 Combined Group5 Unrestricted net assets $2,476,825 $2,341,393 $2,461,651 $2,461,651 Total Capitalization $3,332,992 $3,197,294 $3,317,281 $3,667,281 Debt to Capitalization (%) 25.7% 26.8% 25.8% 32.9% Consolidated Enterprise6 Unrestricted net assets $4,086,373 $3,918,267 $4,102,103 $4,102,103 Total Capitalization $5,009,260 $4,840,169 $5,030,968 $5,380,968 Debt to Capitalization (%) 18.4% 19.0% 18.5% 23.8%

1 Preliminary and subject to change. 2 Including current maturities. 3 Does not include Original Issue Discount or Premium. 4 Consolidated as a result of the Hospital becoming the sole corporate member of Blood Research Institute, Inc. 5 The Hospital and the Medical Center are the only corporations liable for payment of the debt service on the Bonds. 6 Includes entities not liable for payment of the debt service on the Bonds.

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Days Cash on Hand

A calculation of the days cash on hand of the Combined Group and Consolidated Enterprise as of September 30, 2014, 2015, and 2016 is set forth below.

Boston Children’s Hospital Calculation of Days Cash on Hand ($ in thousands)

As of September 30, As of September 30,

2014 2015 2016 2014 2015 2016 Historical Historical Historical Historical Historical Historical Combined Group1 Consolidated Enterprise2

Total Unrestricted Cash Position3 $2,497,926 $2,440,359 $2,562,264 $4,104,542 $3,984,465 $4,221,042 Average Daily 3,365 3,498 3,814 4,638 4,989 5,790 Expenses4

Days Cash on 742.3 697.6 671.8 885.0 798.7 729.0 Hand

1 The Hospital and the Medical Center are the only corporations liable for payment of the debt service on the Bonds. 2 Includes entities not liable for payment of the debt service on the Bonds. 3 Cash and cash equivalents, investments unrestricted as to use and assets whose use is limited by Board designation. 4 Total operating expenses less extraordinary items, infrequently occurring items or unusual items and the cumulative effect of changes in accounting principles, depreciation and amortization or other non-cash charges divided by 365. Does not include interest on the Bonds.

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Historical Actual Debt Service Coverage Ratio of the Hospital

The following table sets forth, for the fiscal years ended September 30, 2014, 2015 and 2016, the income of the Hospital available to pay its debt service and the extent to which such income covered actual annual debt service requirements on the actual long-term indebtedness of the Hospital outstanding during the period. There can be no assurance that the Hospital will generate income available for debt service in future years comparable to historical performance.

Historical Annual Debt Service Coverage ($ in thousands)

Fiscal Year Ended September 30,

2014 2015 2016

Income Available for Debt Service1 $191,491 $172,014 $176,775

Actual Debt Service $29,873 $34,493 $34,235

Historical Annual Debt Service Coverage 6.41 x 4.99 x 5.16 x ______1 Calculated in accordance with the requirements of the Master Trust Indenture.

Historical and Pro Forma Maximum Annual Debt Service Coverage

The following table sets forth, for the fiscal years ended September 30, 2014, 2015 and 2016, the income of the Obligated Group available to pay its debt service and the extent to which such income covered maximum annual debt service requirements on the actual long-term indebtedness of the Obligated Group outstanding during the period. The table also sets forth, for the fiscal years ended September 30, 2014, 2015 and 2016, the calculations on a Combined Group and Consolidated Enterprise basis. The table also indicates the extent to which such historical income available for debt service would provide coverage of pro forma maximum annual debt service requirements of long-term indebtedness after giving effect to the issuance of the Bonds.

In addition, the Series O Bonds, which constitute balloon debt, are assumed to amortize over 25 years with level debt service at an annual interest rate of 4.02%, reflecting the current

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market interest rate applicable to 25-year obligations of comparable quality and type. While a portion of the debt service on the Series O Bonds is hedged, the hedge rates have been disregarded in accordance with the Master Trust Indenture.

The Brookline Place Loan guaranteed by the Guarantor, and the Term Loan guaranteed by the Hospital and the Guarantor, which constitute balloon debt, are assumed to amortize over 25 years with level debt service at an annual interest rate of 4.02%, reflecting the current market interest rate applicable to 25-year obligations of comparable quality and type. For the Obligated Group, 25% of debt service for the Term Loan is reflected as other long-term indebtedness. For the Combined Group, 25% of the debt service for the Term Loan and the Brookline Place Loan is reflected as other long-term indebtedness. For the Consolidated Group, 100% of the Term Loan and the Brookline Place Loan is reflected as other long-term indebtedness.

There can be no assurance that the Obligated Group, the Combined Group, and the Consolidated Enterprise will generate income available for debt service in future years comparable to historical performance.

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Boston Children’s Hospital Historical and Pro Forma Maximum Annual Debt Service Coverage ($ in thousands)

Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended September 30, September 30, September 30,

2014 2015 2016 2014 2015 2016 2014 2015 2016 Obligated Group1 Combined Group1 Consolidated Enterprise2

Income Available for $191,491 $172,014 $176,775 $249,048 $256,027 $210,194 $339,677 $337,832 $248,077 Debt Service3

Historical Maximum $64,298 $64,298 $64,298 $64,879 $64,879 $64,879 $67,908 $67,908 $67,908 Annual Debt Service Historical Maximum Annual Debt 2.98 x 2.68 x 2.75 x 3.84 x 3.95 x 3.24 x 5.00 x 4.97 x 3.65 x Service Coverage

Pro forma Maximum $87,130 $87,130 $87,130 $87,711 $87,711 $87,711 $90,740 $90,740 $90,740 Annual Debt Service4 Pro Forma Maximum Annual Debt 2.20 x 1.97 x 2.03 x 2.84 x 2.92 x 2.40 x 3.74 x 3.72 x 2.73 x Service Coverage 1 The Hospital and the Medical Center are the only corporations liable for payment of the debt service on the Bonds. 2 Includes entities not liable for payment of the debt service on the Bonds. 3 Includes for the Combined Group or the Consolidated Enterprise, as applicable, the excess of revenues over expenses, excluding therefrom depreciation and amortization, interest on long-term indebtedness, increase in value of investments in limited partnership interests, recognition of other-than-temporary losses on investments, unrealized gain on investments classified as trading, and adjustment of interest swap to fair market value. 4 Preliminary and subject to change. Pro forma for the Bonds is amortized over 25 years for level debt service in accordance with the requirements for the Master Trust Indenture.

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Investments

The Investment Office, under the governance of the Investment Committee, oversees the investment portfolios for the benefit of the Hospital and its affiliates. As of September 30, 2016, the investments of the Combined Group totaled $3.711 billion. For additional information regarding the valuation of the Combined Group’s investments, see note 2 to the audited consolidated financial statements included as Appendix B to this Offering Memorandum.

The three-year trend of the Combined Group’s investments is presented in the following table:

Combined Group Investments 2014-2016 (in thousands of dollars) As of Board-designated Donor September 30 and Unrestricted Restricted Total 2014 $2,453,607 $1,081,906 $3,535,513 2015 2,408,418 1,090,951 3,499,369 2016 2,529,181 1,181,827 3,711,008

Board-designated and unrestricted investments are available for purposes determined by the Medical Center’s Board of Trustees. Donor restricted investments consist of permanently restricted funds and temporarily restricted funds. As directed by the donors, the principal of permanently restricted funds must not be expended. Income from these funds may be unrestricted or restricted for specific operating or capital purposes. Both the principal and interest of temporarily restricted funds may be expended only in accordance with the donors’ intentions.

The Medical Center retains approximately 45 active investment managers and invests in over 90 funds, as well as exchange traded funds, for its largest investment portfolio, the Endowment Fund (“Endowment”). The portfolio is managed with a long-term view and is based on four primary strategies: (1) a market strategy, which includes U.S. and Global equities; (2) an enhanced strategy, which includes emerging market equities and private equity; (3) a diversified strategy, which includes real asset funds and long/short funds; and (4) an income strategy, which includes primarily bond funds. The allocation of these strategies as of September 30, 2016, at fair value, according to Medical Center records, is shown on the following chart:

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Percent of Endowment’s Fair Value at Sept. 30, 2016

Allocation Strategy ($3.1 billion) Range Market 31 % 15-35 % Enhanced 19 15-35 Diversified 35 30-50 Income 15 0-20

As of September 30, 2016, approximately 36% of the Combined Group’s investments could be liquidated within 30 days, and 39% could be liquidated from 30 to 365 days depending on exit dates and notice periods. Management estimates that the Combined Group’s future commitments on primarily alternative investments such as private equity are approximately $190 million as of September 30, 2016 and are anticipated to be incurred over approximately three to nine years.

Performance returns and asset allocation of the investment portfolios are reported to the Investment Committee on a monthly basis and formally reviewed by the Investment Committee along with portfolio liquidity at quarterly meetings relative to established policy targets. A summary of the Endowment’s performance for each of the previous three years ended September 30, 2016 follows:

Investment Portfolio Performance Summary 2014-2016 Three Year Ten Year Compound Compound 2014 2015 2016 Annual Return Annual Return Medical Center 8.4 % (2.5) % 8.7 % 4.7 % 5.9 % Investment Portfolio MSCI Net World 12.2 (5.1) 11.4 5.8 4.5 Barclays U.S. 4.0 2.9 5.2 4.0 4.8 Aggregate Bond Index HFRI* Fund of Funds 6.1 2.9 .5 2.2 1.8 Composite Index * Hedge Funds Return Index ______Source: Medical Center Records and Third Party Fund Administrator.

Long-Term Debt

For a description of the Hospital’s long-term debt and its existing swap agreements, see footnote 9 to the Audited Financial Statements included as Appendix B to the Offering Memorandum. The Hospital has not posted collateral with respect to any of its swap agreements. However, in the event the Hospital’s credit ratings are downgraded below “Baa3” by Moody’s or “BBB-” by S&P, the counter-party to such swap agreements could elect to terminate the swap (which could require the Hospital to make a material termination payment to the counter-party) or negotiate collateral terms with the Hospital. Moody’s and

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S&P have assigned ratings of “Aa2” (outlook: stable) and “AA” (outlook: stable), respectively, to the Bonds.

SOURCES OF PATIENT SERVICE REVENUE

The Hospital maintains participating provider agreements with private insurers and managed care programs, the state Medical Assistance Program (“Medicaid”) administered by the Executive Office of Health and Human Services for the Commonwealth (“EOHHS”), and the federal Medicare program administered by Centers for Medicare and Medicaid Services (“CMS”), an agency of the United States Department of Health and Human Services (“DHHS”). These agreements, together with applicable federal and state law, govern payments to the Hospital for services rendered to patients covered by these programs.

The following table shows the percentage distribution of gross patient service revenue by payor for the three most recent fiscal years:

Hospital Payor Mix as a Percentage of Gross Patient Services Revenue1

2014 2015 2016 Private Sector Blue Cross 27 % 26 % 26 % Harvard Pilgrim 9 8 8 Tufts 5 4 4 International 6 8 9 Commercial/Other HMO 16 16 16 Other 2 3 3 Total Private Sector 65 % 65 % 66 %

Government Sector Medicaid2 17 17 17 Medicaid Managed Care 14 14 13 Other Government3 4 4 4 Total Government Sector 35 % 35 % 34 %

Total 100 % 100 % 100 %

1 Totals may not sum correctly due to rounding. 2 Medicaid includes Massachusetts and out-of-state Medicaid. 3 Includes Medicare and uncompensated care.

Commercial Insurance and Managed Care Programs

The Hospital contracts with all the major commercial insurers in the region, many of which have multiple product offerings and act as managed care organizations (“MCOs”). MCOs are increasingly offering health plans with limited networks (small, generally low cost networks of providers) or tiered networks (that classify providers, services or both into tiers based on cost and quality criteria). Since 2010, Massachusetts law has required that each commercial insurer that offers health plans to individuals and small groups must offer at least one limited or tiered network plan in each of its geographic markets. While tiered plans have had little impact on the Hospital to date, this impact could increase over time.

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Payments to the Hospital for inpatient services under commercial insurance contracts are based on either diagnosis related groups (“DRGs”) (i.e., a global payment for an inpatient stay based on the diagnosis at admission), negotiated per diems or discounted charges. Payments for outpatient services are on the basis of fee schedules or discounted charges. Contracts with commercial insurers increasingly feature risk and gain sharing, as well as quality-based incentive payments designed to incentivize high-quality, cost-effective care. The Hospital currently has no capitated arrangements, though it is possible that the Hospital will negotiate capitated arrangements in the future.

Services to health plan patients account for approximately 66% of all of Hospital provided services in 2016. The Hospital negotiates most contracts as a single enterprise including the Hospital, PO and PPOC.

Boston Children’s Hospital successfully negotiated a contract with Harvard Pilgrim Health Care through December 31, 2018, with Blue Cross and Blue Shield of Massachusetts through December 31, 2017, and with Tufts Health Plan through December 31, 2019.

Medicaid

Under Title XIX of the Social Security Act, the federal government provides matching funds to the Commonwealth for expenditures made under Medicaid. EOHHS administers the Massachusetts Medicaid program, also known as “MassHealth.”

Hospitals receive payments for MassHealth members in a number of different ways. Medicaid rates for acute hospitals for MassHealth members not enrolled in a Medicaid MCO are set by annual contracts between the hospitals and EOHHS. For MassHealth members enrolled in Medicaid MCOs, hospitals receive payments according to their contracts with MCOs or according to the terms of the MCO contracts with EOHHS.

For services provided to MassHealth members not enrolled in a Medicaid MCO, MassHealth’s payment for acute inpatient admissions is based upon an Adjudicated Payment Amount per Discharge (“APAD”). The APAD reimburses hospitals a DRG payment that is specific to each case based on APR-DRG assignment. The APAD is derived from the 2012 statewide average hospital cost per admission, standardized for case mix differences and area wage variation. An efficiency standard is determined by capping hospital costs, weighted by MassHealth discharges, at the 65% level of costs. The statewide average is adjusted for inflation and outliers. MassHealth also provides an outlier adjustment that provides an additional payment for unusually high-cost cases that are not fairly represented in the grouping methodology. The fixed cost threshold for which an inpatient case will qualify for an outlier payment is $24,000. The percent cost that will be paid above the APR-DRG payment and outlier threshold is 80%.

Capital payments are paid on an APR-DRG case mix adjusted per-discharge basis, and are efficiency-adjusted. Capital costs are based on each hospital’s 2012 Massachusetts Division of Health Care Finance and Policy 403 Cost Report, updated for the hospital’s case mix index and inflation to the current year.

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In addition to the APR-DRG, EOHHS pays for certain inpatient services on a per diem basis. Psychiatric services delivered in Department of Mental Health-licensed psychiatric beds of acute hospitals are paid an all-inclusive statewide psychiatric per diem rate and acute hospitals are paid a rehabilitation per diem for services delivered in rehabilitation units. Services delivered to individuals who transfer between hospitals or between certain settings within a hospital are paid adjusted per diem rates.

Effective December 1, 2016, the Adjudicated Payment per Episode of Care (“APEC”) methodology replaced the Payment Amount Per Episode methodology in providing a payment rate for most MassHealth acute outpatient hospital services. The hospital-specific and episode-specific APEC is based on an outpatient statewide standard payment (see below) adjusted by each claim’s Enhanced Ambulatory Patient Grouping (“EAPG”) and outlier payments for episodes in which the product of the episode’s total allowed charges and the hospital’s fiscal year 2014 outpatient cost-to-charge ratio exceeds the sum of the total EAPG payment and a fixed outlier threshold. The Hospital receives a disproportionate share of outlier payments due to the nature of its patient population. Certain services, including laboratory services are carved out of the APEC calculation and payment. Laboratory and other carve-out services are paid for in accordance with the applicable EOHHS fee schedules.

Calculation of the outpatient statewide standard payment is based on MassHealth payments for outpatient services in hospital rate year 2014, as adjusted by (1) including outlier payments, (2) excluding payments for laboratory services, and (3) bundling services received on the same day. The result of this calculation is adjusted for inflation to obtain the outpatient statewide standard factor for hospital rate year 2017.

Hospitals may be reimbursed under MassHealth for physician services provided by hospital- based physicians. This reimbursement is the lower of the physician fee schedule established by EOHHS, the hospital’s usual and customary charge, or 100 percent of the hospital’s actual charge submitted.

MassHealth also has a Pay-for-Performance program, which provides a method for quality scoring and converting quality scores to payments that are contingent upon hospital adherence to quality standards and achievement of performance thresholds and benchmarks in accordance with Massachusetts statute.

A portion of the Massachusetts Medicaid program operates as a demonstration program under what is referred to as an 1115 Waiver that encompasses waivers of certain federal Medicaid requirements. Originally approved in 1995, on November 4, 2016, CMS approved the amendment and extension of the 1115 Waiver through June 30, 2022.

Under the Patient Protection and Affordable Health Care Act (as amended, the “ACA”), Medicaid DSH allotments to each state will be reduced beginning in FFY 2018, based on a methodology to be determined by DHHS, accounting for statewide reductions in uninsured and uncompensated care. The Commonwealth continues to consider and implement initiatives to reform the delivery of care through MassHealth and payment for that care. Health care providers that participate in such initiatives may receive preferential reimbursement. In 2016, the Hospital received no Medicaid DSH payments.

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The Hospital also receives Medicaid Supplemental Funds. Effective October 1, 2016, the Hospital no longer receives one category of supplemental Medicaid payments that was based on its high volume of Medicaid patients and the complexity of cases. The failure to maintain the current level of expected Medicaid Supplemental Funds to the Hospital in future years could have a material adverse effect on the Hospital. The Commonwealth’s provision of Medicaid Supplemental Funds is dependent on many factors, and there can be no assurance that future funding levels will be sufficient to meet the Hospital’s financial needs.

Also under the ACA, states have the option to expand the Medicaid program to all individuals whose incomes are less than 133% of the federal poverty level. States who expand their Medicaid programs to this population will receive enhanced federal assistance for expenditures for the newly eligible beneficiaries. Massachusetts has elected to expand its Medicaid program, resulting in the shift to MassHealth of certain portions of populations that had been covered under the 1115 Waiver, which included the former state-subsidized Commonwealth Care program as well as the Health Safety Net Trust Fund (the “Fund”). Given the coverage expansions already accomplished in Massachusetts through state health reform, Massachusetts will be eligible for more limited, phased-in federal assistance until 2020, at which point Massachusetts will receive the same federal match percentage as other states for this population. This was a source of additional federal funding to the Commonwealth beginning in 2014. Medicaid eligibility for children cannot be reduced until after 2019, which, while it could contribute to budget pressures, will also ensure continued coverage for many patients.

Chapter 224 of the Acts of 2012 (“Chapter 224”) directed the Massachusetts Medicaid Office to pay for health care based on alternative payment methodologies for at least 25% of its enrollees beginning July 1, 2013 and increasing to at least 80% by July 1, 2015. Alternative payment methodologies may include bundled payments, global payments, shared savings and other innovative methods of paying for health care services. Chapter 224 also directs MassHealth to amend its MCO contracts to implement this project. Chapter 224 provides that, beginning July 1, 2014, other Massachusetts public payors, should, to the extent feasible, implement alternative payment methodologies. The recently approved 1115 Waiver will allow MassHealth to deliver health care services through new ACO models in addition to existing MCOs and fee-for-service programs. Providers participating in the new ACO models may be eligible to receive $1.8 billion in one-time Delivery System Reform Incentive Payments (“DSRIP”). CHICO is currently participating in MassHealth’s ACO pilot program, and the Medical Center or one of its affiliates anticipates applying to participate in one of the new ACO models. If selected to participate, the Medical Center or its affiliate may become eligible for DSRIP funding. The amount and availability of funding is not guaranteed.

Future actions by the federal and state governments could reduce funding for the Medicaid program. See “BONDHOLDERS’ RISKS AND MATTERS AFFECTING THE HEALTHCARE INDUSTRY—Massachusetts Cost Control Initiatives” and “—Federal Health Care Reform.” Particularly in light of the changes in administration resulting from the recent U.S. presidential election, there is no assurance that federal and state funding is, or will continue to be, adequate to cover the Hospital’s costs of providing services.

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Children’s Health Insurance Program (“CHIP”)

MassHealth also includes individuals covered under CHIP. Under Title XXI of the SSA, the Commonwealth also receives matching funds from the federal government for expenditures under this program. National health reform preserves the CHIP program, provides greater federal funding assistance to states beginning in 2016, and prohibits states from reducing eligibility for children under CHIP through 2019. It is possible that changes in administration and policy resulting from the recent U.S. presidential election could reduce funding for the CHIP program.

Graduate Medical Education

In 2016, in connection with special federal appropriations, the Hospital received additional reimbursement in the amount of $20.4 million from the Federal Children’s Hospital Graduate Medical Education Training Program established by the Health Research and Quality Act of 1999. In 2017, based on a similar appropriation by Congress as the prior year for the Children’s Hospital Graduate Medical Education Payment Program, the Hospital estimates that it will receive approximately $20.3 million. Funding for graduate medical education in future years is uncertain and has been the subject of significant differences in approach by various legislative and executive groups.

Medicare

Title XVIII of the SSA is designated “Health Insurance for the Elderly and Disabled” and is commonly known as “Medicare.” Medicare covers both hospital and physician services for eligible individuals who are elderly, disabled or subject to certain chronic conditions. Because Children’s Hospital is a pediatric hospital, Medicare accounts for less than 2% of patient revenue, primarily for treatment related to kidney failure and other chronic diseases, which are covered under the Medicare program. While Medicare generally pays acute care hospitals under an inpatient prospective payment system, Pediatric hospitals are exempt from such prospective payments and are reimbursed on a cost basis, with certain exceptions, up to a hospital-specific per discharge cap. The Hospital’s allowable cost per discharge has not exceeded the cap. The Hospital receives reimbursement for its outpatient services based on its reasonable costs as determined by an annually filed cost report. Over the past several years, various laws have modified Medicare payment methodologies and levels. See “BONDHOLDERS’ RISKS AND MATTERS AFFECTING THE HEALTH CARE INDUSTRY—Patient Service Revenues.”

Beginning in October 2010, acute care hospitals have been eligible for Medicare incentive payments if they qualify under CMS’s regulations as “meaningful users” of electronic health records (“EHR”). Beginning in fiscal year 2015, however, acute care hospitals have been penalized if they do not qualify as meaningful users. Boston Children’s Hospital has qualified as a meaningful user and has received incentive payments in each year available, receiving approximately $5.9 million in 2014, $4.8 million in 2015, and $1.3 million in 2016.

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Health Safety Net

The Office of Medicaid within EOHHS administers the Health Safety Net, a health care program that pays for certain health care services provided to eligible low-income uninsured and underinsured individuals. The Fund is funded primarily through assessments on hospitals, commercial health insurers and employers, along with state and federal matching funds. The Hospital made net payments of $4.7 million and $6.3 million to the Fund for 2015 and 2016, respectively. There can be no assurance of the level of such payments in the future. The annual process of setting the state budget determines the level and sources of funding for the Health Safety Net. To the extent that funding is inadequate, hospitals may be responsible for paying an increased portion of the shortfall in the form of reduced Health Safety Net payments.

Accruals for Estimated Amounts Due to Third Party Payors

An annual cost report is required by both the Medicare program and the Massachusetts Center for Health Information and Analysis. Both of these cost reports are subject to an annual audit. Additionally, certain third-party payment arrangements require that an annual cost report be submitted or that an annual settlement process be completed, which may involve retroactive adjustments or dispute resolution under the terms of the applicable contract. The Medicare and Medicaid rules and regulations change periodically, as do the terms of agreements with third party payors. The data used to estimate amounts due to third parties also change. The Hospital reviews such changes and, as appropriate, establishes accruals for estimated settlements with Medicare and other third-party payors. The difference between the estimated accrual and the actual final settlement is recorded as an adjustment to net patient service revenue; however, since some changes are made retroactively effective, it is difficult to predict accurately the level of net patient service revenue or third-party settlements. Management believes that adequate accruals for estimated settlements with payors have been established based on assumptions consistent with the current regulatory environment.

EMPLOYEES

As of September 30, 2016, the Hospital employed 10,245 FTE workers, of whom 5,605 were involved in patient care and hospital services (excluding research, philanthropy and certain other non-hospital activities). The total FTEs include 1,951 FTE registered nurses. For 2016, annual turnover for full-time employees was approximately 13%, and annual turnover for FTE registered nurses was approximately 5%. The vacancy rate for nurses is approximately 5%.

The Department of Nursing achieved Magnet® designation by the American Nurses Credentialing Center in January 2008 and was redesignated in September 2012. The Magnet Recognition Program® was developed by the American Nurses Credentialing Center to recognize health care organizations that provide nursing excellence. The Nursing/Patient Services Department is organized according to a decentralized specialty model. Care is managed across the continuum to include ambulatory services. As of November 2016, 90% of leadership and advanced practice nurses held advanced degrees. As of the same date, of

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the direct care nursing staff, 81% held a bachelor’s degree in nursing and 5% held a master’s or doctoral degree. During the academic year 2015, Boston Children’s Hospital maintained affiliations with 36 schools of nursing resulting in 1,183 total nursing student placements at the Hospital. In addition, the Physical Therapy, Pharmacy and Social Work departments have accredited residency and/or training programs.

The Hospital offers salaries and benefits that management believes are competitive with those of other area providers. Fringe benefits include tuition reimbursement, health and dental insurance, life insurance, disability insurance, paid time-off programs, pension plans, reimbursement accounts, on-site childcare and tax-sheltered annuities.

The Hospital maintains two non-contributory defined benefit plans for its employees. As of September 30, 2016, the plans were underfunded by $124 million (see “Supplementary Information” to the audited financial statements included as Appendix B to this Offering Memorandum).

The Hospital has a labor contract with a trade union, the International Union of Operating Engineers, Local 877, AFL-CIO and the Area Trades Council, covering 73 employees. The contract expires on September 30, 2017. The Hospital also has a labor contract with the same trade union for its facility in Waltham that expires on September 30, 2017 and relates to approximately nine employees. Management is not aware of any organizing activities being conducted at the present time, and the Hospital has no history of work stoppages due to labor relations issues.

ACCREDITATION AND MEMBERSHIPS

The Hospital is licensed by the Massachusetts Department of Public Health (“DPH”) and is accredited by The Joint Commission for a period of 36 months beginning October 2015.

The Hospital is a member of the Massachusetts Health & Hospital Association, American Hospital Association, the Children’s Hospital Association, the Conference of Boston Teaching Hospitals, and the Council of Teaching Hospitals of the Association of American Medical Colleges.

The Accreditation Council programs of the American Medical Association accredit the Hospital for 36 Graduate Medical Education programs.

INSURANCE

The Hospital maintains a comprehensive insurance program. A summary of the major coverage is as follows:

General and Professional Liability

The Hospital and Medical Center maintain claims-made General Liability and Professional Liability (medical malpractice) coverage with Controlled Risk Insurance Company, Ltd. (“CRICO”). The Professional Liability primary coverage limits are $5 million for each claim and $10 million annual aggregate for individual medical personnel and the institution. The

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General Liability limits are $5 million for each claim with no annual aggregate limit. Additional coverage, which is shared by the CRICO member institutions, of $105 million is provided over general liability and professional liability.

CRICO is a captive insurance company chartered in the Grand Cayman, British West Indies and Vermont, United States, which is jointly owned by Harvard University, ten of its affiliated medical institutions (including the Hospital) and MIT. In addition to insuring its participating institutions, CRICO also insures over 13,000 physicians and dentists associated with those institutions.

Property

Comprehensive all risk coverage including business interruption coverage is maintained on all buildings and contents in the amount of $1 billion. The coverage is subject to a $100,000 deductible per occurrence for property damage, water damage, flood and earthquake.

Other Coverage

The Medical Center and its subsidiaries also maintain insurance coverage for the following: directors and officers’ liability, environmental impairment liability, network security and privacy liability, fiduciary liability, crime, automobile and garagekeepers liability, nonowned aircraft liability (with war coverage), products liability, international coverage and excess workers’ compensation.

LITIGATION

The Hospital and the Medical Center are involved from time to time as both plaintiffs and defendants in a variety of litigation matters and reviews and investigations by government agencies. Management considers such litigation and regulatory matters to be a routine part of health care operations.

In April 2016, a group of Massachusetts taxpayers filed suit challenging the Expansion Project and claiming, among other allegations, that the Hospital unlawfully began work on the project before obtaining a Determination of Need (“DoN”). On October 20, 2016, DoN approval was received for the Expansion Project, and the court dismissed all claims in December 2016. The period to appeal the dismissal expired on January 6, 2017, and the taxpayer group did not appeal. The group filed a separate suit on November 18, 2016, seeking judicial review of DPH’s decision to grant the DoN. The group sought to stay the DoN until the judicial review process was complete. The court denied the request for stay, and the plaintiffs sought interlocutory relief from the single justice of the Appeals Court. That interlocutory appeal is currently pending. The Hospital is contesting plaintiffs’ appeal, and is proceeding with the Expansion Project during the judicial review of the DoN issuance.

The ultimate effect, if any, of the matter described above on the Hospital or the Obligated Group cannot currently be determined. Adverse resolution of any of the above matters could have a material adverse effect on the Obligated Group.

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CYBERSECURITY

In April 2014, the Hospital was targeted by cyber-attacks aimed at disabling its website and seeking to gain access to and disrupt the Hospital’s internal computer network. While the attacks did not disable the website or compromise any internal systems or data, the attacks were disruptive to normal operations and required significant management time and expense. In October 2016, federal officials charged an individual with computer hacking and conspiracy related to distributed denial-of-service attacks on the Hospital. The individual cited a patient case as his motivation.

In general, maintaining, protecting and enhancing information systems to keep pace with changes in IT, regulatory standards, and external threats requires significant resources. There can be no assurance that efforts to upgrade and expand information systems capabilities, protect and enhance these systems, and develop new systems will be successful or that additional issues will not arise in the future. Malfunctions in or the improper or unauthorized use of information systems may result in technical issues, delays, disruptions in operations, and additional expense.

BONDHOLDERS’ RISKS AND MATTERS AFFECTING THE HEALTHCARE INDUSTRY

In addition to the risks set forth in the forepart of this Offering Memorandum, the following factors, among others, constitute risks with respect to the Bonds. The ability of the Obligated Group to pay amounts due with respect to the Bonds is subject to significant risks relating to the health care industry generally and, more specifically, to the enforceability of the Master Trust Indenture against the Obligated Group and the enforceability of the Guaranty against the Medical Center.

In General

Future revenues and expenses of the Hospital will be affected by events and conditions relating generally to, among other things, state and federal health reform, demand for the services of the Hospital, the ability of the Hospital to provide the services required by patients, physicians’ relationships with the Hospital, reimbursement rates under agreements with third-party payors as well as the Medicare and Medicaid programs, research grant funding, management capabilities, the correctness of the design and success of the Hospital’s strategic plans, the degree of cooperation among and competition with other hospitals in the Hospital’s area, changes in private philanthropy, malpractice claims and other litigation, economic developments in the Hospital’s service area, the Hospital’s ability to control expenses and maintain relationships with health maintenance organizations (“HMOs”), sponsors of research, and other managed health care organizations and third-party payors, competition, rates, costs, third-party reimbursement, legislation, investment performance and government regulation. Although the Hospital reasonably expects to generate sufficient revenues in the future to cover its expenses, third-party payments, regulation and unanticipated events and circumstances may occur that cause variations from this expectation, and the variations may be material.

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Accordingly, there can be no assurance that the financial condition of the Hospital and/or utilization of the Hospital’s facilities will not be adversely affected, and there can be no guarantee that there will be sufficient revenues to make payments with respect to the Bonds. The following general factors, among others, could affect the level of revenues to the Hospital or its financial condition or otherwise result in risks for Bondholders in addition to the risks set forth in the Offering Memorandum under “Bondholders’ Risks.”

Significant Risk Areas Summarized

Certain of the primary risks associated with the operations of the Hospital are briefly summarized in general terms below and are explained in greater detail in subsequent sections. The occurrence of one or more of these risks could have a material adverse effect on the financial condition and results of operations of the Hospital and, in turn, the ability of the Obligated Group to make payments under the Master Trust Indenture and of principal of and interest on the Bonds.

General Economic Conditions, Bad Debt, Indigent Care and Investment Performance – Health care providers are affected by the economic environment in which they operate. To the extent that employers reduce their workforces or budgets for employee health care coverage or private and public insurers seek to reduce payments to health care providers or curb utilization of health care services, health care providers may experience decreases in insured patient volume and reductions in payments for services. In addition, to the extent that state, county or city governments are unable to provide a safety net of medical services, pressure is applied to local health care providers to increase free care. Furthermore, economic downturns, increased employee health insurance cost share obligations, and lower funding of Medicare and state Medicaid and other state health care programs may increase the number of patients who are unable to pay for their medical and hospital services. These conditions may give rise to increases in health care providers’ uncollectible accounts, or “bad debt,” and, consequently, to reductions in operating income. Declines in investment portfolio values may reduce or eliminate non-operating revenues. Losses in pension and benefit funds may result in increased funding requirements. Potential failure of lenders, insurers or vendors may negatively affect the results of operations and the overall financial condition of health care providers. Philanthropic support may also decrease or be delayed. For a discussion of these risks with regard to the Hospital, see “FINANCIAL INFORMATION.”

Dependence on Medicaid Supplemental Funds – The Hospital depends materially on Medicaid Supplemental Funds. The Commonwealth’s provision of Medicaid Supplemental Funds is dependent on many factors, including federal/state negotiations and future cost containment efforts. There can be no assurance that future funds will be comparable to the current level of funding or sufficient to meet the Hospital’s financial needs. Beginning October 1, 2016, the Commonwealth eliminated the Freestanding Pediatric Acute Hospital High Complexity Supplemental Payment and the Pediatric Specialty Unit High Complexity Supplemental Payment, which together accounted for $14.8 million in supplemental payments to qualifying pediatric hospitals, including Boston Children’s Hospital, between October 1, 2015 and September 30, 2016. Future delays or reductions in state supplemental funding could have a materially adverse effect on the Hospital.

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Dependence on 340B Drug Pricing – Hospitals such as Boston Children’s Hospital that serve a high percentage of low-income patients are eligible for reduced pricing on drugs. This program contributed materially to the Hospital’s operating income in 2016. Any reduction in eligibility for, or changes to, the 340B program generally could have a materially adverse effect on the Hospital.

Nonprofit Health Care Environment – The significant tax benefits received by nonprofit, tax- exempt hospitals may cause the business practices of such hospitals to be subject to scrutiny of public officials and the press, and to legal challenges of the ongoing qualification of such organizations for tax-exempt status. Practices that have been examined, criticized, or challenged have included pricing practices, billing and collection practices, charitable care, and executive compensation. Challenges to entitlement to exemption of property from real property taxation have succeeded from time to time. Multiple governmental authorities, including state attorneys general, the Internal Revenue Service (“IRS”), the United States Congress and state legislatures have held hearings and carried out audits regarding the conduct of tax-exempt organizations, including tax-exempt hospitals. These efforts will likely continue in the future. Citizen organizations, such as labor unions and patient advocates, have also focused public attention on the activities of tax-exempt hospitals and raised questions about their practices. Proposals to increase the regulatory requirements for nonprofit hospitals’ retention of tax-exempt status, such as by establishing a minimum level of charity care, have also been introduced repeatedly in Congress. Significant changes in the obligations of nonprofit, tax-exempt hospitals, and challenges to or loss of the tax-exempt status of non-profit hospitals generally or the Hospital in particular could have a material adverse effect on the Hospital.

Federal Health Care Reform – The ACA includes numerous provisions affecting the delivery of health care services, the financing of health care costs, payments to health care providers, and the legal obligations of health insurers, providers, employers, and consumers. These provisions are slated to take effect at specified times over approximately the next decade, and, therefore, the full consequences of the ACA on the health care industry are still being realized. In addition, it is possible that changes in administration and policy resulting from the recent U.S. presidential election could result in additional proposals and/or changes to the ACA, including the potential repeal of all or parts of that law. In addition, the uncertainties regarding the implementation of the ACA create unpredictability for the strategic and business planning efforts of health care providers, which in itself creates risk. See “—Health Care Environment” below.

Rate Pressure from Insurers and Purchasers – Certain health care markets, including eastern Massachusetts, are strongly affected by large health insurers and, in some cases, by major purchasers of health services. In those areas, health insurers may have significant influence over the rates, utilization and competition of hospitals and other health care providers. Rate pressure imposed by health insurers or other major purchasers, including managed care payors, may have a material adverse impact on health care providers, particularly if major purchasers put increasing pressure on payors to restrain rate increases. Business failures by health insurers also could have a material adverse impact on contracted hospitals and other health care providers in the form of payment shortfalls or delay, and continuing obligations

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to care for managed care patients without receiving payment. In addition, disputes with non- contracted payors may result in an inability to collect billed charges from these payors.

Capital Needs vs. Capital Capacity – Hospital and other health care operations are capital intensive. Regulation, technology and expectations of physicians and patients require constant and often significant capital investment. Total capital needs may exceed capital capacity.

Medicare Trust Funds – Two trust funds are maintained as part of the Medicare Program. Hospital Insurance (“HI”) or Medicare Part A, helps to pay for hospital, home health, skilled nursing facility, and hospice care for the aged and disabled and is financed primarily by payroll taxes paid by workers and employers. The Medicare Board of Trustees’ annual report to Congress in June 2016 indicated that the HI Trust Fund is not financed adequately and is projected to be exhausted in 2028, two years earlier than in the prior year report. The other trust fund and various other components of the Medicare Program also have significant funding challenges. The trustees recommended that Congress and the executive branch work closely together with a sense of urgency to address the depletion of the HI Trust Fund and the projected growth in hospital and other expenditures. Accordingly, it is likely that statutory and regulatory attempts to contain increases in Medicare costs will continue in the future.

State Medicaid Programs – State Medicaid programs constitute an important payor source for many hospitals, but these programs often pay hospitals and other health care providers at levels that are substantially below the actual cost of the care provided. As Medicaid is partially funded by states, the financial condition of such states is likely to result in lower funding levels or payment delays. This could have a material adverse impact on hospitals and other health care providers.

Increasing Consumer Choice – Hospitals and other health care providers face increased pressure to be transparent and provide information about cost and quality of services, which may lead to a loss of business as consumers and others make choices about where to receive health care services based upon reports about cost and quality.

Costs and Restrictions from Governmental Regulation – Nearly every aspect of hospital operations and health care delivery is regulated, in some cases by multiple agencies of government. The level and complexity of regulation and compliance audits appear to be increasing, imposing greater operational limitations, enforcement and liability risks, and significant and sometimes unanticipated costs.

Government “Fraud” Enforcement – “Fraud” in government funded health care programs is a significant concern of federal and state regulatory agencies overseeing health care programs and is one of the federal government’s prime law enforcement priorities. The federal government and, to a lesser degree, state governments impose a wide variety of extraordinarily complex and technical requirements intended to prevent over-utilization based on economic inducements, misallocation of expenses, overcharging and other forms of “fraud” in the Medicare and Medicaid programs, as well as other state and federally-funded health care programs. This body of regulation affects a broad spectrum of hospital and other health care provider commercial activity, including billing, accounting, recordkeeping,

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medical staff oversight, physician contracting and recruiting, cost allocation, clinical trials, discounts, and other functions and transactions.

Violations and alleged violations may be deliberate, but also frequently occur in circumstances where management is unaware of the conduct in question, as a result of mistake, or where the individual participants do not know that their conduct is in violation of law. Violations may occur and be prosecuted in circumstances that do not have the traditional elements of fraud, and enforcement actions may extend to conduct that occurred in the past. Violations may carry significant sanctions. The government periodically conducts widespread investigations covering categories of services or certain accounting or billing practices.

Violations and Sanctions – The government or private “whistleblowers” often pursue aggressive investigative and enforcement actions. The government has a wide array of civil, criminal, monetary and other penalties, including the suspension of essential hospital and other health care provider payments from the Medicare or Medicaid programs, or exclusion from those programs. Aggressive investigation tactics, negative publicity and threatened penalties can be, and often are, used to force health care providers to enter into monetary settlements in exchange for releases of liability for past conduct, as well as agreements imposing prospective restrictions or mandated compliance requirements on health care providers. Such negotiated settlement terms may have a materially adverse impact on hospital and other health care provider operations, financial condition, results of operations and reputation. Multi-million dollar fines and settlements for alleged intentional misconduct, fraud or false claims are not uncommon in the health care industry. These risks are generally uninsured. Government enforcement and private whistleblower suits may increase in the hospital and health care sector. Many large hospital and other health care provider systems are likely to be adversely affected.

Personnel Shortage – From time to time, shortages of physicians and nursing and other technical personnel occur, which may have its primary impact on hospitals and health care systems. Various studies have predicted that physician and nurse shortages will become more acute over time, as practitioners retire and patient volume exceeds the growth in new professionals. Shortages of other professional and technical staff such as pharmacists, therapists, laboratory technicians and others may occur. Hospital operations, patient and physician satisfaction, financial condition and future growth could be negatively affected by personnel shortages, resulting in a material adverse impact on hospitals and health care systems.

Technical and Clinical Developments – New clinical techniques and technology, as well as new pharmaceutical and genetic developments and products, may alter the course of medical diagnoses and treatments in ways that are currently unanticipated, and that may dramatically change medical and hospital care. These could result in higher health care costs, reductions in patient populations, lower utilization of hospital service and new sources of competition for hospitals.

Proliferation of Competition – Hospitals face competition from specialty providers of care and ambulatory care facilities. This competition may cause hospitals to lose essential

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inpatient or outpatient market share. Competition may be focused on services or payor classifications where hospitals realize their highest margins, thus negatively affecting programs that are economically important to hospitals. Specialty hospitals may attract specialists as investors and may seek to treat only profitable classifications of patients, leaving full-service hospitals with higher acuity and lower paying patient populations. These new sources of competition may have a material adverse impact on hospitals, particularly where principal physician admitters may curtail their use of a hospital service in favor of a competitor’s facilities.

Labor Costs and Disruption – The delivery of health care services is labor intensive. Labor costs, including salary, benefits and other liabilities associated with the workforce, have a significant impact on hospital and health care provider operations and financial condition. Hospital and health care employees are increasingly organized in collective bargaining units and may be involved in work actions of various kinds, including work stoppages and strikes. Overall costs of the hospital workforce and turnover are high. Pressure to recruit, train and retain qualified employees is expected to accelerate. These factors may materially increase hospital costs of operation. Workforce disruption may negatively affect hospital revenues and reputation.

Pension and Benefit Funds – As large employers, hospitals and health care providers may incur significant expenses to fund pension and benefit plans for employees and former employees, and to fund required workers’ compensation benefits. Plans are often underfunded, or may become underfunded and funding obligations in some cases may be erratic or unanticipated and may require significant commitments of available cash needed for other purposes.

Medical Liability Litigation and Insurance – Medical liability litigation is subject to public policy determinations and legal and procedural rules that may be altered from time to time, with the result that the frequency and cost of such litigation, and resultant liabilities, may increase in the future. Health systems may be affected by negative financial and liability impacts on physicians. Costs of insurance, including self-insurance, may increase dramatically.

Construction Risks – Construction projects are subject to a variety of risks, including but not limited to delays in issuance of required building permits or other necessary approvals or permits, including environmental approvals, strikes, shortages of materials and labor, and adverse weather conditions. Such events could delay project completion and use. Cost overruns may occur due to change orders, delays in the construction schedule, scarcity of building materials and labor, and other factors. Cost overruns could cause the costs of any project to exceed available funds.

Facility Damage – Hospitals and health care providers are highly dependent on the condition and functionality of their physical facilities. Damage from earthquakes, floods, fires, other natural causes, deliberate acts of destruction, or various facilities system failures may have a material adverse impact on operations, financial conditions and results of operations.

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Impact of Market Turmoil and General Economic Factors

The disruption of the credit and financial markets since 2008 resulted in volatility in the securities markets, significant losses in investment portfolios, increased business failures and consumer and business bankruptcies. In response to this disruption of the credit and financial markets, federal legislation was enacted, including the Recovery Act and the Dodd-Frank Act (defined below).

In February 2009, the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) was enacted and included several provisions intended to provide financial relief to the health care sector by providing approximately $150 billion in new funds. The funds were used to, among other things, provide a temporary increase in Federal payments to fund state Medicaid programs and provided subsidies to the recently unemployed for health insurance premium costs. The Recovery Act and resulting regulations established a framework for the implementation of a nationally-based health IT program. For more information regarding this program, see “—Regulatory Environment—The HITECH Act” below.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd- Frank Act”) was enacted in an effort to stabilize the credit and financial markets. Regulatory action is being considered by various federal agencies and the Federal Reserve Board and foreign governments which are intended to increase the regulation of financial institutions and domestic and global credit and securities markets. The effects of these legislative, regulatory and other governmental actions, including the Dodd-Frank Act, upon the Hospital and, in particular upon its access to capital markets and its investment portfolios, cannot be predicted.

Nonprofit Health Care Environment

The Hospital is a nonprofit corporation, exempt from federal income taxation as an organization described in Section 501(c)(3) of the Code. As a nonprofit, tax-exempt organization, the Hospital is subject to federal, state and local laws, regulations, rulings and court decisions relating to its organization and operation, including its operation for charitable purposes. At the same time, the Hospital conducts large-scale, complex business transactions and is a major employer in eastern Massachusetts. There can often be a tension between the rules designed to regulate a wide range of charitable organizations and the day- to-day operations of a complex health care organization.

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

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attorneys general, the IRS, labor unions, Congress, state legislatures, and patients, and in a variety of forums, including hearings, audits and litigation. The challenges and examinations, and any resulting legislation, regulations, judgments or penalties, could have a material adverse effect on the Hospital. These challenges or examinations include the following, among others:

Congressional Hearings – Senate and House committees have conducted several nationwide investigations of hospital billing and collection practices and prices charged to uninsured patients and have considered reforms to the nonprofit sector, including proposed reform in the area of tax-exempt health care organizations, as part of health care reform generally. See “—IRS Examination of Compensation Practices,” “—IRS Community Benefit Initiative” and “—Challenges to Real Property Tax Exemption” below.

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

IRS Examination of Compensation Practices – In 2004, the IRS began a new program to measure compliance by tax-exempt organizations with requirements that they not pay excessive compensation and benefits to their officers and other insiders. In 2009, the IRS issued its Hospital Compliance Project Final Report (the “IRS Final Report”) that examined tax-exempt hospitals’ practices and procedures with regard to compensation and benefits paid to their officers and other defined “insiders.” The IRS Final Report indicates that the IRS will continue to heavily scrutinize executive compensation arrangements, practices and procedures of tax-exempt hospitals and other tax-exempt organizations and, in certain circumstances, may conduct further investigations or impose fines on tax-exempt organizations.

IRS Community Benefit Initiative – The IRS has undertaken a community benefit initiative directed at hospitals. An IRS report on this initiative determined that a lack of uniformity in definitions of community benefit used by reporting hospitals, including those regarding uncompensated care and various types of community benefit, make it difficult for the IRS to assess whether any particular hospital is in compliance with current law. Form 990 includes Schedule H, which hospitals and health systems must use to report their community benefit activities, including the cost of providing charity care and other tax-exemption related information. Proposals have also been made within Congressional committees to codify the requirements for hospitals’ tax-exempt status, including requirements to conduct a regular community needs analysis and to provide minimum levels of charity care.

ACA Requirements for Tax-Exempt Status – As part of the ACA, Congress enacted Section 501(r) of the Code which imposes additional requirements for hospitals and other designated health care organizations to be treated as tax-exempt organizations. Under these rules, in order to maintain their tax-exempt status hospitals must establish and publicize written

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financial assistance policies, conduct community health needs assessments at least once every three years and describe in their annual tax returns how they are addressing the needs identified in such assessments. See “—Health Care Environment—Tax Exemption Requirements” below.

Challenges to Real Property Tax Exemption – Recently, the real property tax exemptions afforded to certain nonprofit health care providers by state and local taxing authorities have been challenged on the grounds that the health care providers were not engaged in sufficient charitable activities as to warrant exemption from taxation as a charitable institution. For example, the Illinois Supreme Court upheld a decision relating to a local taxing authority’s decision to deny a request for property tax exemption for a nonprofit hospital on the basis that the hospital had not proven with clear and convincing evidence that it was operating within a charitable purpose under applicable Illinois law. Additionally, similar challenges have been based on a variety of grounds, including allegations of aggressive billing and collection practices and excessive financial margins. Several of these disputes have been determined in favor of the taxing authorities or have resulted in settlements. See “—Tax- Exempt Status and Other Tax Matters—Real Property Tax Exemption” below.

Indigent Care – Tax-exempt health care providers often treat large numbers of indigent patients who are unable to pay in full for their medical care. Typically, urban, inner-city hospitals and other health care providers may treat significant numbers of indigents. These hospitals and health care providers may be susceptible to economic and political changes that could increase the number of indigents or their responsibility for caring for this population. General economic conditions affect the number of employed individuals who have health coverage and the ability of patients to pay for their care. Similarly, changes in governmental policy, which may result in coverage exclusions under local, county, state and federal health care programs (including Medicare and Medicaid) may increase the frequency and net cost of indigent treatment by such hospitals and other providers. It also is possible that future legislation could require that tax-exempt hospitals and other providers maintain minimum levels of indigent care as a condition to federal income tax exemption or exemption from certain state or local taxes.

Class Actions – Nonprofit hospitals and health systems have long been subject to a wide variety of litigation risks, including liability for care outcomes, employer liability, property and premises liability, and peer review litigation with physicians, among others. In recent years, consumer class action litigation has emerged as a potentially significant source of litigation liability for nonprofit hospitals and health systems. These class action suits have most recently focused on hospital billing and collections practices and breaches of privacy, and they may be used for a variety of currently unanticipated causes of action. Since the subject matter of class action suits may involve uninsured risks, and since such actions often involve alleged large classes of plaintiffs, they may have material adverse consequences on hospitals and health systems in the future. See “—Business Relationships and Other Business Matters—Wage and Hour Class Actions and Litigation” and “—Business Relationships and Other Business Matters—Other Class Actions” below.

The foregoing are some examples of the challenges and examinations facing nonprofit health care organizations. They are indicative of a greater scrutiny of the billing, collection and

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other business practices of these organizations and may indicate an increasingly difficult operating environment for health care organizations, including the Hospital. The challenges and examinations, and any resulting legislation, regulations, judgments, or penalties, could have a material adverse effect on hospitals and health care providers, including the Hospital, and, in turn, its ability to make payments under the Master Trust Indenture and the Bonds.

Health Care Environment

The ACA has been subject to opposition in the political and judicial arenas, and President- Elect Donald Trump and republican members of Congress have vowed to renew repeal efforts in 2017. A number of Congressional proposals have already been advanced for repealing the ACA. If a full repeal proves impractical, legislators may instead dismantle portions of the ACA through various legislative efforts (including replacement or amendment) and funding measures. The effect of any major modification or repeal of the ACA on the financial conditions of the members of the Obligated Group cannot be predicted with certainty, but could be materially adverse.

Additionally, many of the reductions in reimbursement to health care providers included in the ACA have yet to take full effect, and the increased health care coverage contemplated under the ACA has not yet been realized. The practical consequences of the ACA and its potential repeal, as well as of other future federal and state actions to cut costs and change the health care delivery system, cannot be foreseen.

Some of the specific provisions of the ACA that may affect the Hospital’s operations, financial performance or financial condition are described below.

Hospital Acquired Conditions Penalty – Beginning in FFY 2015, Medicare inpatient payments to hospitals that are in the top quartile nationally for frequency of certain “hospital- acquired conditions” will be reduced by 1% for all discharges for the applicable FFY. While children’s hospitals are not subject to this penalty, the ACA also provides that, as of July 1, 2011, CMS will no longer provide federal funding to states for any amounts expended by providers in treating so-called provider-preventable conditions. EOHHS also issued regulations effective for dates of service on or after July 1, 2012 denying Medicaid payment for costs associated with provider preventable conditions, which include those identified as “Health Care Acquired Conditions” and “Other Provider Preventable Conditions” as defined in federal regulations. Notably, DPH promulgated regulations prohibiting health care facilities, including children’s hospitals, from charging or seeking reimbursement for services provided as a result of a “serious reportable event” when a preventability analysis determines that the event was preventable. The conditions included under these DPH regulations are far more extensive than those included in the Medicare “hospital-acquired conditions.”

DSH Funding – Beginning in FFY 2017, hospitals receiving supplemental DSH payments from Medicare (i.e., those hospitals that care for a disproportionate share of Medicare beneficiaries) are slated to have their DSH payments reduced by potentially 75% (offset however, by the reduced levels of uninsured requiring services). The base 25% will be supplemented by additional payments based on the volume of uninsured and uncompensated care provided by each such hospital, and is anticipated to be partially offset by a higher

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proportion of covered patients as other provisions of the ACA go into effect. Separately, beginning in FFY 2017, Medicaid DSH allotments to each state also will be reduced based on a methodology that takes into account statewide reductions in uninsured and uncompensated care.

Tax Exemption Requirements – The ACA also contains new requirements for tax-exempt hospitals. Under the ACA, each tax-exempt hospital facility is required to (i) conduct a community health needs assessment at least every three years and adopt an implementation strategy to meet the identified community needs, (ii) adopt, implement and widely publicize a written financial assistance policy and a policy to provide emergency medical treatment without discrimination, (iii) limit charges to individuals who qualify for financial assistance under such tax-exempt hospital’s financial assistance policy to no more than the amounts generally billed to individuals who have insurance covering such care and refrain from using “gross charges” when billing such individuals, and (iv) refrain from taking extraordinary collection actions without first making reasonable efforts to determine whether the individual is eligible for assistance under such tax-exempt hospital’s financial assistance policy. In addition, the Treasury Department is required to review information about each tax-exempt hospital’s community benefit activities at least once every three years, as well as to submit an annual report to Congress with information regarding the levels of charity care, bad debt expenses, unreimbursed costs of government programs, and costs incurred by tax-exempt hospitals for community benefit activities. The periodic reviews and reports to Congress regarding the community benefits provided by 501(c)(3) hospitals may increase the likelihood that Congress will require such hospitals to provide a minimum level of charity care in order to retain tax-exempt status and may increase IRS scrutiny of particular 501(c)(3) hospital organizations.

Patient Service Revenues

Medicare Program – Medicare is the federal health insurance system under which hospitals are paid for services provided to eligible elderly and disabled persons. Medicare is administered by CMS, which delegates to the states the process for certifying hospitals to which CMS will make payment. In order to achieve and maintain Medicare certification, hospitals must meet CMS’s “Conditions of Participation” on an ongoing basis, as determined by the states and The Joint Commission. The requirements for Medicare certification are subject to change, and, therefore, it may be necessary for hospitals to effect changes from time to time in their facilities, equipment, personnel, billing, policies and services. As the population ages, more people will become eligible for the Medicare program. Current projections indicate that demographic changes and continuation of current cost trends will exert significant and negative forces on the overall federal budget.

Hospital Inpatient Reimbursement – While hospitals are generally paid for inpatient services provided to Medicare beneficiaries based on established categories of treatments or conditions known as DRGs, children’s hospitals are exempt from such prospective payments and are reimbursed on a cost basis, with certain exceptions, up to a hospital-specific per discharge cap. The Hospital’s allowable cost per discharge has not exceeded this cap to date. There is no guarantee that Medicare will continue to reimburse children’s hospitals on a cost basis.

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Hospital Outpatient Reimbursement – Children’s hospitals are generally paid for outpatient services provided to Medicare beneficiaries based on its reasonable costs as determined by an annually filed cost report. The actual cost of care, including capital costs, may be more or less than the reimbursements.

Physician Payments – Medicare pays for physician services using a national fee schedule. The fee schedule establishes payment amounts for all physician services rendered to Medicare patients, including services of provider-based physicians, and is subject to annual updates. On April 16, 2015, President Obama signed into law the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”). MACRA repeals the sustainable growth rate formula for calculating updates to Medicare payment rates to physicians and establishes an alternative set of annual updates. In addition, the act introduces a new merit-based incentive payment system and puts in place processes for developing, evaluating, and adopting alternative payment models. It is unclear how these changes may affect the Hospital.

Other Medicare Service Payments – Medicare payment for skilled nursing services, psychiatric services, inpatient rehabilitation services, general outpatient services and home health services are based on regulatory formulas or pre-determined rates. There is no guarantee that these rates, as they may change from time to time, will be adequate to cover the actual cost of providing these services to Medicare patients.

Reimbursement of Hospital Capital Costs – Hospital capital costs apportioned to Medicare patient use (including depreciation and interest) are paid by Medicare exclusively on the basis of a standard federal rate (based upon average national costs of capital), subject to limited adjustments specific to the hospital. There can be no assurance that future capital- related payments will be sufficient to cover the actual capital-related costs of facilities applicable to Medicare patient stays or will provide flexibility for hospitals to meet changing capital needs.

Medical Education Payments – Medicare currently pays for a portion of the costs of medical education at hospitals that have teaching programs. These payments are vulnerable to reduction or elimination. The direct and indirect medical education reimbursement programs have repeatedly emerged as targets in the legislative efforts to reduce the federal budget deficit.

Medicaid Program – Medicaid is a program of medical assistance, funded jointly by the federal government and the states, for certain needy individuals and their dependents. Under Medicaid, the federal government provides limited funding to states that have medical assistance programs that meet federal standards. Attempts to balance or reduce federal and state budgets will likely negatively affect Medicaid and other state health care program spending.

Historically Medicaid has reimbursed at rates below the cost of care. Therefore, increases in the overall proportion of Medicaid patients pose a risk. It is uncertain to what extent this risk may be mitigated if the increased Medicaid utilization replaces previously uncompensated patients.

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Certain states selectively contract with acute care hospitals to provide services to participants in the Medicaid program of the state and may not provide payment to hospitals that do not have such a contract. Payment under the contracts may not cover the cost of providing services or may be reduced by the states. Reductions in payments by state Medicaid programs or loss of such contracts could materially adversely affect the financial condition of the Hospital.

Medicare and Medicaid Audits – Hospitals that participate in the Medicare and Medicaid programs are subject from time to time to audits and other investigations relating to various aspects of their operations and billing practices, as well as to retroactive audit adjustments with respect to reimbursements claimed under these programs. Medicare and Medicaid regulations also provide for withholding reimbursement payments in certain circumstances. New billing rules and reporting requirements for which there is no clear guidance from CMS or state Medicaid agencies could result in claims submissions being considered inaccurate. The penalties for violations may include an obligation to refund money to the Medicare or Medicaid program, payment of criminal or civil fines and, for serious or repeated violations, exclusion from participation in federal health programs.

Authorized by HIPAA (as defined below), the Medicare Integrity Program (“MIP”) was established to deter fraud and abuse in the Medicare program. Funded separately from the general administrative contractor program, MIP allows CMS to enter into contracts with outside entities and insure the “integrity” of the Medicare program. These outside entities, Medicare zone program integrity contractors (“ZPICs”) are contracted by CMS to review claims and medical charts, both on a prepayment and post-payment basis, conduct cost report audits and identify cases of suspected fraud. ZPICs have the authority to deny and recover payments as well as to refer cases to the Office of Inspector General of the DHHS (the “OIG”). CMS is also planning to enable ZPICs to compile claims data from multiple sources in order to analyze the complete claims histories of Medicare beneficiaries for inconsistencies.

CMS also enlists recovery audit contractors (“RACs”) to conduct periodic annual audits of Medicare payments to search for potentially improper Medicare payments from prior years that were not detected through CMS’s routine program integrity efforts. The RACs are private contractors, paid on a contingency fee basis, and use their own software and review processes. Although required to identify both overpayments and underpayments, RACs have in practice collected significantly more in overpayments from health care providers in proportion to the underpayments to the providers. Under the ACA, recovery audits were expanded to include Medicaid by requiring states to contract with RACs to conduct those audits.

In addition, CMS has instituted a Medicaid Integrity Program, modeled on MIP. Medicaid Integrity Program contractors assist state Medicaid agencies by analyzing Medicaid claims data to identify high-risk areas and potential vulnerabilities and conducting post-payment field audits and desk reviews audits of Medicaid provider payments.

Audits may result in reduced reimbursement or repayment obligations related to past alleged overpayments and may also delay Medicare or Medicaid payments to health care providers

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pending resolution of the appeals process. The ACA explicitly gives DHHS the authority to suspend Medicare and Medicaid payments to a health care provider or supplier during a pending investigation of fraud. The ACA also amended certain provisions of the False Claims Act (“FCA”) (as defined below) to include retention of overpayments as a violation. It also added provisions respecting the timing of the obligation to identify, report and reimburse overpayments. See “—Regulatory Environment—False Claims Act” below. The effect of these changes on existing programs and systems of the Hospital cannot be predicted.

Disproportionate Share Hospitals – The federal Medicare and state Medicaid programs each provide additional payment to “disproportionate share hospitals” (or “DSHs”), which are hospitals that serve a disproportionate share of certain low-income patients. The Hospital qualifies as a DSH. See also “—Health Care Environment—DSH Funding” above. There can be no assurance that payments to the Hospital will continue to qualify for DSH status.

State and Local Budgets – The Commonwealth has incurred financial challenges, including erosion of general fund tax revenues, falling real estate values, slowing economic growth, and higher unemployment, each of which may continue to worsen or resist improvement over the coming years.

The financial challenges facing the Commonwealth may negatively affect hospitals in a number of ways, including elimination or reduction of health care safety net programs (causing a greater number of indigent, uninsured or underinsured patients) and reductions in Medicaid reimbursement rates. The financial challenges may also result in a greater number of indigent, uninsured or underinsured patients who are unable to pay for their care or gain access to primary care facilities, a greater number of individuals who qualify for Medicaid and reductions in Medicaid reimbursement rates.

On July 8, 2016, the Governor signed into law the budget for state fiscal year 2017, which begins July 1, 2016. The Governor’s budget includes a new $250 million assessment to be levied on the Commonwealth’s acute care hospitals, including Boston Children’s Hospital. The additional $250 million assessment will be deposited into a newly created “MassHealth Delivery System Reform Trust.” The budget will offset this $250 million assessment by increasing MassHealth reimbursement rates to acute care hospitals, as a group, by $250 million, but there are no assurances that any individual hospital’s rate increase offset would cover its share of the $250 million assessment.

Health Plans and Managed Care – Most private health insurance coverage is provided by various types of “managed care” plans, including HMOs and preferred provider organizations (“PPOs”) that generally use discounts and other economic incentives to reduce or limit the cost and utilization of health care services. Medicare and Medicaid also purchase hospital care using managed care options. Payments to hospitals from managed care plans typically are lower than those received from traditional indemnity or commercial insurers.

In many markets, managed care plans have replaced indemnity insurance as the primary source of non-governmental payment for hospital services, and hospitals must be capable of attracting and maintaining managed care business, often on a regional basis. Regional coverage and aggressive pricing may be required. However, it is also essential that

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contracting hospitals be able to provide the contracted services without significant operating losses, which may require multiple forms of cost containment.

Many HMOs and PPOs currently pay providers on a negotiated fee-for-service basis or, for institutional care, on a fixed rate per day of care, which, in each case, usually is discounted from the usual and customary charges for the care provided. As a result, 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 provider may vary significantly from projections, and changes in the utilization may be dramatic and unexpected, thus jeopardizing the provider’s ability to manage this component of revenue and cost.

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. The hospital may assume financial risk for the cost and scope of institutional care given. If payment is insufficient to meet the hospital’s actual costs of care, or if utilization by enrollees materially exceeds projections, the financial condition of the hospital could erode rapidly and significantly. The Hospital currently has no capitated arrangements, though it is possible that the Hospital will negotiate capitated arrangements in the future.

Often, HMO contracts are enforceable for a stated term, regardless of hospital losses and may require hospitals to care for enrollees for a certain time period, regardless of whether the HMO is able to pay the hospital. The Hospital from time to time has disputes with HMOs, PPOs and other managed care payors concerning payment and contract interpretation issues. Such disputes may result in mediation, arbitration or litigation. Management expects that these types of issues ultimately will be resolved.

Defined broadly, for the fiscal year ended September 30, 2016, managed care contracts constituted approximately 54% of discharges at the Hospital, but there is no assurance that the Hospital will maintain managed care contracts or obtain other similar contracts in the future. See “SOURCES OF PATIENT SERVICE REVENUE.”

Failure to maintain contracts could have the effect of reducing the Hospital’s market share and net patient services revenues. Conversely, participation may result in lower net income to the Hospital if it is unable to contain adequately its costs. Thus, managed care poses one of the most significant business risks (and opportunities) the Hospital faces.

Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures – Health plans, Medicare, Medicaid, employers, trade groups and other purchasers of health services, private standard-setting organizations and accrediting agencies increasingly are using statistical and other measures in efforts to characterize, publicize, compare, rank and change the quality, safety and cost of health care services provided by hospitals and health care providers. Published rankings such as “score cards,” “pay for performance” and other financial and non-financial incentive programs are being introduced to affect the reputation and revenue of hospitals, the members of their medical staffs and other providers and to influence the behavior of consumers and providers such as the Hospital. Currently prevalent are measures of quality based on clinical outcomes of

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patient care, reduction in costs, patient satisfaction and investment in health IT. Measures of performance set by others that characterize a hospital or a health care provider negatively may adversely affect its reputation and financial condition.

Massachusetts Cost Control Initiatives

In 2012, the Massachusetts legislature enacted Chapter 224 in an effort to control the rate of increase of public and private health care costs in the Commonwealth. Chapter 224 created two new state agencies, the Health Policy Commission (the “HPC”) and the Center for Health Information and Analysis (“CHIA”), each with a variety of duties and powers. Among other things, CHIA is mandated to calculate and monitor per capita total medical expenditures (“TME”) in the Commonwealth, and to monitor the relative prices paid by health insurers to hospitals and large medical groups. The HPC will compare the growth in TME to the rate of the growth of the Massachusetts economy. If the growth in medical expenditures exceeds the rate of growth of the economy, the HPC will hold public hearings, and may require certain high cost health care providers to develop and execute “performance improvement plans” in order to moderate the growth of health care expenditures. The HPC has the authority to license and regulate “accountable care organizations” in Massachusetts and those regulations could have a material impact on the financial performance of Massachusetts hospitals. Chapter 224 also empowers the Commonwealth’s Division of Insurance to oversee the financial solvency of health care providers that enter into risk contracts with health insurers or with government agencies. Chapter 224 has a variety of other provisions increasing state government’s ability to monitor and regulate the health care system and to increase its financial transparency.

The Massachusetts Attorney General has engaged in a variety of initiatives intended to restrain the growth of health care costs in the Commonwealth and has published reports critical of the contracting practices of large health care systems and health insurers. The new HPC, acting in concert with other state agencies and officials, may put pressure on health insurers and health care providers to restrain the growth of health care costs, especially if the growth in TME exceeds the growth rate of the state economy. Various legislative proposals are filed in the legislature each year to further regulate the health care system and some of these proposals could, if enacted, have an adverse impact on Massachusetts hospitals.

Regulatory Environment

“Fraud” and “False Claims” – Health care “fraud and abuse” laws have been enacted at the federal and state levels to regulate broadly the provision of services to government program beneficiaries and the methods and requirements for submitting claims for services rendered to the beneficiaries. Under these laws, hospitals and others can be penalized for a wide variety of conduct, including: submitting claims for services that are not provided; billing in a manner that does not comply with government requirements or includes inaccurate billing information; billing for services deemed to be medically unnecessary; or billing accompanied by an illegal inducement to utilize or refrain from utilizing a service or product.

Federal and state governments have a broad range of criminal, civil and administrative sanctions available to penalize and remediate health care fraud, including the exclusion of a

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hospital from participation in the Medicare/Medicaid programs, civil monetary penalties, and suspension of Medicare/Medicaid payments. Fraud and abuse cases may be prosecuted by one or more government entities and private individuals, and more than one of the available sanctions may be, and often are, imposed for each violation.

Laws governing fraud and abuse may apply to a hospital and to nearly all individuals and entities with which a hospital does business. Fraud investigations, settlements, prosecutions and related publicity can have a material adverse effect on hospitals. See “—Enforcement Activity” below. Major elements of these often highly technical laws and regulations are generally summarized below.

The Secretary of DHHS may exclude a provider’s participation in Medicare and Medicaid, as well as suspend payments to a provider pending an investigation or prosecution of a credible allegation of fraud against the provider.

False Claims Act – The federal FCA makes it illegal to submit or present a false, fictitious or fraudulent claim for payment or approval for payment for which the federal government provides, or reimburses at least some portion of, the requested money or property. Pursuant to the ACA, failure to report and return to a federal health care program a known overpayment within 60 days of having identified the overpayment or, for cost-reporting entities, the date (if later) on which a hospital cost report is due can give rise to an FCA claim. FCA investigations and cases have become common in the health care field and may cover a range of activity from intentionally inflated billings, to highly technical billing infractions, to allegations of inadequate care. Violation or alleged violation of the FCA most often results in settlements that require multi-million dollar payments and compliance agreements. The FCA also permits individuals to initiate civil actions on behalf of the government in lawsuits called “qui tam” actions. Qui tam plaintiffs, or “whistleblowers,” can share in the damages recovered by the government or recover independently if the government does not participate. The FCA has become one of the government’s primary weapons against health care fraud. FCA violations or alleged violations could lead to settlements, fines, exclusion or reputation damage that could have a material adverse impact on a hospital.

Anti-Kickback Law. – The federal “Anti-Kickback Law” is a criminal statute that prohibits anyone from 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 paid by any federal or state health care program. The Anti-Kickback Law applies to many common health care transactions between persons and entities with which a hospital does business, including hospital-physician joint ventures, medical director agreements, physician recruitment agreements, physician office leases and other transactions. The ACA amended the Anti-Kickback Law to provide that a claim that includes items or services resulting from a violation of the Anti-Kickback Law now constitutes a false or fraudulent claim for purposes of the FCA.

Violation or alleged violation of the Anti-Kickback Law most often results in settlements that require multi-million dollar payments and mandatory compliance agreements that typically include costly audit requirements. The Anti-Kickback Law can be prosecuted either

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criminally or civilly. Violation is a felony, subject to a fine of up to $25,000 for each act (which may be each item or each bill sent to a federal program), imprisonment and exclusion from the Medicare and Medicaid programs. In addition, civil monetary penalties of $10,000 per item or service in noncompliance (which may be each item or each bill sent to a federal program) or an “assessment” of three times the amount claimed may be imposed. The IRS has taken the position that hospitals which are in violation of Anti-Kickback Law may also be subject to revocation of their tax-exempt status.

Stark Referral Law – The federal “Stark” statute prohibits the referral by a physician of Medicare and Medicaid patients for certain designated health services (including inpatient and outpatient hospital services, clinical laboratory services, and radiation and other imaging services) to entities with which the referring physician has a direct or indirect financial relationship. It also prohibits a hospital furnishing the designated services from billing Medicare, or any other payor or individual, for services performed pursuant to a prohibited referral. The government does not need to prove that the entity knew that the referral was prohibited to establish a Stark violation. If certain substantive and technical requirements are not met, many ordinary business practices and economically desirable arrangements between hospitals and physicians will likely constitute “financial relationships” within the meaning of the Stark statute, thus triggering the prohibition on referrals and billing. Most providers of designated health services with physician relationships have some exposure to liability under the Stark statute.

Medicare may deny payment for all services related to a prohibited referral, and a hospital that has billed for prohibited services is obligated to notify and refund the amounts collected from the Medicare program. For example, if an office lease between a hospital and a large group of heart surgeons is found to violate Stark, the hospital could be obligated to repay CMS for the payments received from Medicare for all of the heart surgeries performed by all of the physicians in the group for the duration of the lease; a potentially significant amount. The government may also seek substantial civil monetary penalties, and in some cases, a hospital may be liable for fines up to three times the amount of any monetary penalty, and be excluded from the Medicare and Medicaid programs. Potential repayments to CMS, settlements, fines or exclusion for a Stark violation or alleged violation could have a material adverse impact on a hospital.

Civil Monetary Penalties Law – The federal Civil Monetary Penalties Law (“CMPL”) provides for administrative sanctions, including civil money penalties and treble damages, against health care providers for a broad range of billing and other financial abuses. For example, a health care provider is liable under the CMPL if it knowingly presents, or causes to be presented, improper claims for reimbursement under Medicare, Medicaid, and other federal health care programs or if it gives benefits or other inducements to Medicare or Medicaid beneficiaries that the provider knows or should know are likely to induce the beneficiaries to choose the provider for their care. In addition, a hospital that participates in arrangements under which a physician is paid to limit or reduce medically necessary services to Medicare fee-for-service beneficiaries would be subject to CMPL penalties. The ACA added new exceptions to the CMPL permitting, among other things, arrangements that promote access to care and pose a low risk of harm to patients and the federal health care programs.

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Health care providers may be found liable under the CMPL even when they did not have actual knowledge of the impropriety of their action. It is sufficient to knowingly undertake the action. Ignorance of the CMPL is no defense. The imposition of civil money penalties on a health care provider could have a material adverse impact on the provider’s financial condition.

State “Fraud” and “False Claims” Laws – Hospital providers in the Commonwealth also are subject to Massachusetts state laws related to false claims (similar to the FCA or that are generally applicable false claims laws), anti-kickback (similar to the federal Anti-Kickback Law or that are generally applicable anti-kickback or fraud laws), and physician referral (similar to Stark). These prohibitions, although similar in public policy and scope to the federal laws, have not in all instances been avidly enforced to date. However, in the future they could pose the possibility of a material adverse impact on a hospital for the same reasons as the federal statutes. See “—False Claims Act,” “—Anti-Kickback Law” and “— Stark Referral Law” above.

Antitrust – Antitrust liability may arise in a wide variety of circumstances, including medical staff privilege disputes, payor contracting, physician relations, joint ventures, merger, affiliation and acquisition activities, certain pricing or salary setting activities, as well as other areas of activity. The application of the federal and state antitrust laws to health care is evolving (especially as the ACA is implemented), and therefore not always clear. Currently, the most common areas of potential liability are joint action among providers with respect to payor contracting and medical staff credentialing disputes. From time to time, the Hospital is or may be involved with all of these types of activities, and the Hospital cannot predict when or to what extent liability, if any, may arise. Liability in any of these or other trade regulation areas may be substantial, depending upon the facts and circumstances of each case.

Violation of the antitrust laws could result in criminal and/or civil enforcement proceedings by federal and state agencies, as well as actions by private litigants. In certain actions, private litigants may be entitled to treble damages, and in others, governmental entities may be able to assess substantial monetary fines.

HIPAA – The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) adds additional 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, 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 Medicare.

HIPAA also addresses the confidentiality of individuals’ health information. Disclosure of certain broadly defined “protected health information” is prohibited unless expressly permitted under the provisions of HIPAA and applicable regulations or authorized by the patient. HIPAA’s confidentiality provisions extend not only to patient medical records, but also to a wide variety of health care clinical and financial settings where patient privacy

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restrictions often impose new communication, operational, accounting and billing restrictions. These add costs and create potentially unanticipated sources of legal liability.

HIPAA imposes civil monetary penalties for violations and criminal penalties for knowingly obtaining or using individually identifiable health information. The penalties range from $50,000 to $250,000 and/or imprisonment for up to 10 years if the information was obtained or used with the intent to sell, transfer or use for commercial advantage, personal gain or malicious harm.

The Recovery Act includes broad, sweeping changes to the HIPAA provisions regarding confidentiality of patient medical records. In general, the Recovery Act increases penalties for violations of patient medical record confidentiality and strengthens enforcement and oversight.

The HITECH Act – Provisions in the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), enacted as part of the Recovery Act, increase the maximum civil monetary penalties for violations of HIPAA and grant enforcement authority of HIPAA to state attorneys general. The HITECH Act also (i) extends the reach of HIPAA beyond “covered entities,” (ii) imposes a breach notification requirement on HIPAA covered entities, (iii) limits certain uses and disclosures of individually identifiable health information, and (iv) restricts covered entities’ marketing communications.

The HITECH Act also established programs under Medicare and Medicaid to provide incentive payments for demonstrating the “meaningful use” of certified EHR technology. Health care providers demonstrate their meaningful use of EHR technology by meeting objectives specified by CMS for using health IT and by reporting on specified clinical quality measures. Beginning in 2015, hospitals and physicians who have not satisfied the performance and reporting criteria for demonstrating meaningful use had their Medicare payments significantly reduced.

Security Breaches and Unauthorized Releases of Personal Information – Federal, State and local authorities are increasingly focused on the importance of protecting the confidentiality of individuals’ personal information, including patient health information. Many states have enacted 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 consequently damage a health care provider’s reputation and materially adversely affect business operations.

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Specifically, Massachusetts has state laws relating to the privacy and security of personal information. The so-called Data Breach Notification Law requires businesses to notify the Massachusetts Attorney General’s Office (the “AGO”), the Director of Consumer Affairs and Business Regulation, and the affected individual in the event of a data breach. Businesses, including hospitals, must implement and document compliance with certain security standards such as vendor contracting provisions and encryption of portable devices. The AGO may bring an action under the unfair trade practices statute for violation of the Data Breach Notification Law. Additionally, the so-called Data Disposal Law requires businesses, including hospitals, to employ certain safeguards when disposing of or destroying personal information. The penalties for violation of the Data Disposal Law include a maximum of $5,000 per instance of improper disposal.

International Classification of Diseases, 10th Revision Coding System – In 2009, CMS published the final rule adopting the International Classification of Disease, 10th Revision coding system (“ICD-10”). ICD-10 provides a common approach to the classification of diseases and other health problems, allowing the United States to align with other nations to better share medical information, diagnosis, and treatment codes. In order to implement the ICD-10, staff will need to be retrained, processes redesigned, and computer applications modified as the current available codes and digit size will dramatically increase. Additionally, there is a potential for temporary coding and payment backlog, as well as potential increases in claims errors. Products and services will be developed by outside software vendors, clearinghouses and third-party billing companies to support and enable timely, complete and successful implementation of ICD-10. Health care organizations were required to implement ICD-10 no later than October 1, 2015. The Hospital has met the October 1, 2015 deadline for ICD-10 implementation.

Exclusions from Medicare or Medicaid Participation – The government may exclude a hospital from Medicare/Medicaid program participation if it is 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, 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. The government also may exclude individuals or entities under certain other circumstances, such as an unrelated conviction of fraud, 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 from the Medicare/Medicaid program means that a hospital would be decertified and no program payments could be made. Any hospital exclusion could be a materially adverse event. In addition, exclusion of hospital employees may be another source of potential liability for hospitals or health systems.

Enforcement Affecting Academic Research – In addition to increasing enforcement of laws governing payment and reimbursement, the federal government has also stepped up enforcement of laws and regulations governing the conduct of clinical trials at hospitals. DHHS elevated and strengthened its Office of Human Research Protection, one of the agencies with responsibility for monitoring federally funded research. In addition, NIH significantly increased the number of facility inspections that these agencies perform. The

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FDA also has authority over the conduct of clinical trials performed in hospitals when these trials are conducted on behalf of sponsors seeking FDA approval to market the drug or device that is the subject of the research. Moreover, the OIG has included several enforcement initiatives related to reimbursement for experimental drugs and devices (including kickback concerns) and has issued compliance program guidance directed at recipients of extramural research awards from the NIH and other agencies of the U.S. Public Health Service. These agencies’ enforcement powers range from substantial fines and penalties to exclusion of researchers and suspension or termination of entire research programs, and errors in billing of the Medicare program for care provided to patients enrolled in clinical trials that is not eligible for Medicare reimbursement can subject hospitals to sanctions as well as repayment obligations.

Administrative Enforcement – Administrative regulations may require less proof of a violation than do criminal laws, and, thus, health care providers may have a higher risk of imposition of monetary penalties as a result of administrative enforcement actions.

Compliance with Conditions of Participation – CMS, in its role of monitoring participating providers’ compliance with conditions of participation in the Medicare program, may determine that a provider is not in compliance with its conditions of participation. In that event, a notice of termination of participation may be issued or other sanctions potentially could be imposed.

EMTALA – The Emergency Medical Treatment and Active Labor Act (“EMTALA”) is a federal civil statute that requires hospitals to treat or conduct a medical screening for emergency conditions and to stabilize a patient’s emergency medical condition before releasing, discharging or transferring the patient. A hospital that violates EMTALA is subject to civil penalties of up to $50,000 per offense and exclusion from the Medicare and Medicaid programs. In addition, the hospital may be liable for any claim by an individual who has suffered harm as a result of a violation.

Licensing, Surveys, Investigations and Audits – Health facilities are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. These include, but are not limited to, requirements of state licensing agencies and The Joint Commission. Renewal and continuation of certain of these licenses, certifications and accreditations are based on inspections or other reviews generally conducted in the normal course of business of health facilities. Loss of, or limitations imposed on, hospital licenses or accreditations could reduce hospital utilization or revenues, or a hospital’s ability to operate all or a portion of its facilities.

Environmental Laws and Regulations – Health facilities are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. These include, but are not limited to: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at the hospital; and requirements for training employees in the proper handling and management of hazardous materials and wastes.

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Health facilities may be subject to requirements related to investigating and remedying hazardous substances located on their property, including substances that may have migrated off the property. Typical hospital operations include 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 the environmental laws and regulations. Such risks may result in damage to individuals, property or the environment; may interrupt operations and increase their cost; may result in legal liability, damages, injunctions or fines; and may result in investigations, administrative proceedings, civil litigation, criminal prosecution, penalties or other governmental agency actions; and may not be covered by insurance.

Enforcement Activity – Enforcement activity against health care providers has increased, and enforcement authorities have adopted aggressive approaches. In the current regulatory climate, it is anticipated that many hospitals and physician groups will be subject to an audit, investigation, or other enforcement action regarding the health care fraud laws mentioned above.

Enforcement authorities are often in a position to compel settlements by providers charged with or being investigated for false claims violations by withholding or threatening to withhold Medicare, Medicaid and similar payments or to recover higher damages, assessments or penalties by instituting criminal action. In addition, the cost of defending such an action, the time and management attention consumed, and the facts of a case may dictate settlement. Therefore, regardless of the merits of a particular case, a hospital could experience materially adverse settlement costs, as well as materially adverse costs associated with implementation of any settlement agreement. Prolonged and publicized investigations could be damaging to the reputation and business of a hospital, regardless of outcome.

Certain acts or transactions may result in violation or alleged violation of a number of the federal health care fraud laws described above, and corresponding penalties or settlement amounts often are compounded. Generally these risks are not covered by insurance. Enforcement actions may involve multiple hospitals or other facilities in a health system, as the government often extends enforcement actions regarding health care fraud to other entities in the same organization. As a result, Medicare fraud related risks identified as being materially adverse to a hospital could have materially adverse consequences to a health system taken as a whole.

Determination of Need Requirements

The Massachusetts DoN Program, requires an acute care hospital to obtain the approval of DPH before (i) undertaking a “substantial capital expenditure” in excess of a specified dollar threshold, (ii) making a substantial change in services defined, in part, as offering, expanding, or converting to certain innovative services or new technologies designated by DPH, including, but not limited to, cardiac catheterization, open heart surgery, magnetic resonance imaging, free standing ambulatory surgery, and positron emission tomography (PET), or (iii) adding, expanding, or converting to services which may be provided by a facility that is not an acute care hospital. The capital expenditure threshold is adjusted

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annually. From October 1, 2016 through September 30, 2017, the capital expenditure threshold is $18,065,167. If a provider fails to obtain required approvals, such provider will be subject to sanctions that may include, without limitation, civil fines and injunctions to restrain or prevent violations of the DoN law. As a result of these sanctions, Medicare and Medicaid certification could be affected. The DoN Program may limit or delay a provider’s ability to respond to competitive initiatives or implement a provider’s strategic plan.

Management of the Hospital is aware of no proceeding or investigation in which a violation of the DoN law of Massachusetts by the Hospital is alleged or suspected by any governmental agency.

Business Relationships and Other Business Matters

Affiliation, Merger, Acquisition and Divestiture – As part of its ongoing planning and property management functions, the Hospital and the Medical Center review the use, compatibility and financial viability of many of their operations, and from time to time, may pursue changes in the use, or disposition, of their facilities. Likewise, the Hospital and the Medical Center may receive offers from, or conduct discussions with, third parties about the potential acquisition of operations or properties that may become part of the Hospital or the Medical Center in the future, or about the potential sale of some of the operations and properties of the Hospital or the Medical Center. Discussions with respect to affiliation, merger, acquisition, disposition, or change of use, including those that may affect the Hospital or the Medical Center, are held on an intermittent, and usually confidential, basis. As a result, it is possible that the assets currently owned by the Hospital and the Medical Center may change from time to time, subject to the provisions in the financing documents that apply to merger, sale, disposition or purchase of assets. The Hospital and the Medical Center evaluate affiliation opportunities as they arise. Any affiliation or other similar transaction would be completed in compliance with the covenants in the Master Trust Indenture.

Integrated Delivery Systems – Health facilities and health care systems often own, control or have affiliations with physician groups and independent practice associations. Generally, the sponsoring health care facility or health care system is the primary capital and funding source for the alliances and may have an ongoing financial commitment to provide growth capital and support operating deficits. As separate operating units, integrated physician practices and medical foundations sometimes operate at a loss and require subsidy from the related hospital or health system.

These types of alliances are likely to become increasingly important to the success of hospitals in the future as a result of changes to the health care delivery and reimbursement systems that are intended to restrain the rate of increases of health care costs, encourage coordinated care, promote collective provider accountability and improve clinical outcomes. The ACA authorizes several alternative payment programs for Medicare that promotes, reward or necessitate integration among hospitals, physicians and other providers.

Whether these programs will achieve their objectives and be expanded or mandated as conditions of Medicare participation cannot be predicted. However, Congress and CMS have

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clearly emphasized continuing the trend away from the fee-for-service reimbursement model, which began in the 1980s with the introduction of the prospective payment system for inpatient care, and toward an episode-based payment model that rewards use of evidence- based protocols, quality and satisfaction in patient outcomes, efficiency in using resources, and the ability to measure and report clinical performance. This shift is likely to favor integrated delivery systems, which may be better able than stand-alone providers to realize efficiencies, coordinate services across the continuum of patient care, track performance and monitor and control patient outcomes. Changes to the reimbursement methods and payment requirements of Medicare, which is the dominant purchaser of medical services, are likely to prompt equivalent changes in the commercial sector, because commercial payors frequently follow Medicare’s lead in adopting payment policies.

While payment trends may stimulate the growth of integrated delivery systems, these systems carry with them the potential for legal or regulatory risks. Many of the risks discussed in “—Regulatory Environment” above, may be heightened in an integrated delivery system. The foregoing laws were not designed to accommodate coordinated action among hospitals, physicians and other health care providers to set standards, reduce costs and share savings, among other things. Although CMS and the agencies that enforce these laws are expected to institute new regulatory exceptions, safe harbors or waivers that will enable providers to participate in payment reform programs, there can be no assurance that the regulations will be forthcoming or that any regulations or guidance issued will sufficiently clarify the scope of permissible activity. State law prohibitions, such as the bar on the corporate practice of medicine, or state law requirements, such as insurance laws regarding licensure and minimum financial reserve holdings of risk-bearing organizations, may also introduce complexity, risk and additional costs in organizing and operating integrated delivery systems. Tax-exempt hospitals also face the risk in affiliating with for-profit entities that the IRS will determine that compensation practices or business arrangements result in private benefit or private use or generate unrelated business income for the hospitals.

In addition, integrated delivery systems present business challenges and risks. Inability to attract or retain participating physicians may negatively affect managed care, contracting and utilization. The technological and administrative infrastructure necessary both to develop and operate integrated delivery systems and to implement new payment arrangements in response to changes in Medicare and other payor reimbursement is costly. Hospitals may not achieve savings sufficient to offset the substantial costs of creating and maintaining this infrastructure.

Physician Medical Staff – 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 or revoked often file legal actions against hospitals and medical staffs. 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.

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Physician Supply – Sufficient community-based physician supply is important to hospitals. CMS annually reviews overall physician reimbursement formulas for Medicare and Medicaid. Changes to physician compensation under these programs could lead to physicians ceasing to accept Medicare or Medicaid patients. Regional differences in reimbursement by commercial and governmental payors, along with variations in the costs of living, may cause physicians to avoid locating their practices in communities with low reimbursement or high living costs. Hospitals may be required to invest additional resources in recruiting and retaining physicians, or may be compelled to affiliate with, and provide support to, physicians in order to continue serving the growing population base and maintain market share.

Competition Among Health Care Providers – Increased competition from a wide variety of sources, including specialty hospitals, other hospitals and health care systems, HMOs, inpatient and outpatient health care facilities, long-term care and skilled nursing services facilities, clinics, physicians and others, may adversely affect the utilization and revenues of hospitals. Existing and potential competitors may not be subject to various restrictions applicable to hospitals, and competition, in the future, may arise from new sources not currently anticipated or prevalent.

Specialty facilities or ventures that attract an important segment of an existing hospital’s admitting specialists and services that generate significant revenue may be particularly damaging. For example, some large hospitals may have significant dependence on heart surgery or orthopedic programs producing revenue streams that cover significant fixed overhead costs. If a significant component of such a hospital’s heart surgeons or orthopedists develop their own specialty hospital or surgery center (alone or in conjunction with a growing number of specialty hospital operators and promoters), taking with them their patient base, the hospital could experience a rapid and dramatic decline in net revenues that is not proportionate to the number of patient admissions or patient days lost. It is also possible that the competing specialty entity, as a for-profit venture, would not accept indigent patients or other payors and government programs, leaving low-pay patient populations in the full- service hospital. In certain cases, such an event could be materially adverse to the hospital. A variety of proposals has been advanced recently to permanently prohibit such investments. Nonetheless, specialty hospitals continue to represent a significant competitive challenge for full-service hospitals.

Freestanding ambulatory surgery centers may attract away significant commercial outpatient services traditionally performed at hospitals. Commercial outpatient services, currently among the most profitable for hospitals, may be lost to competitors who can provide these services in an alternative, less costly setting. Full-service hospitals rely upon the revenues generated from commercial outpatient services to fund other less profitable services, and the decline of such business may result in a decline in operating income. Competing ambulatory surgery centers, more likely a for-profit business, may not accept indigent patients or low paying programs and would leave these populations to receive services in the full-service hospital setting. Consequently, hospitals are vulnerable to competition from ambulatory surgery centers.

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Additionally, scientific and technological advances, new procedures, drugs and appliances, preventive medicine and outpatient health care delivery may reduce utilization and revenues of hospitals in the future or otherwise lead to new avenues of competition. In some cases, hospital investment in facilities and equipment for capital-intensive services may be lost as a result of rapid changes in diagnosis, treatment or clinical practice brought about by new technology or new pharmacology.

Action by Purchasers of Hospital Services and Consumers – Major purchasers of hospital services could take action to restrain hospital charges or charge increases. As a result of increased public scrutiny, it is also possible that the pricing strategies of hospitals may be perceived negatively by consumers, and hospitals may be forced to reduce fees for their services. Decreased utilization could result, and hospitals’ revenues may be negatively affected. In addition, consumers and groups on behalf of consumers are increasing pressure on hospitals and health care providers to be transparent and provide information about cost and quality of services that may affect future consumer choices about where to receive health care services.

Ballot Initiatives and Legislation: Nursing and Other Workforce Shortages; Operating Margins; Health Insurance Payments – Periodically, organizations or interest groups involved in or focused on the delivery of healthcare in the Commonwealth seek to address issues of concern through public ballot initiatives. In recent years, ballot initiatives have been introduced by organizations including the MNA and SEIU.

In 2014, the MNA initiated a statewide ballot initiative requiring minimum nurse to patient staffing ratios. Although the statewide ballot question did not reach the November 2014 ballot, in June 2014, the Massachusetts legislature passed and the Governor signed into law legislation that dictates nurse staffing levels in intensive care units in all Massachusetts hospitals. The law mandated that, effective on September 28, 2014, in all intensive care units the patient assignment for the registered nurse shall be 1:1 or 1:2 depending on the stability of the patient. The HPC has promulgated regulations governing the implementation and operation of this staffing ratio including the formulation of an acuity tool and a method of reporting to the public on staffing compliance in hospital intensive care units, as well as in neonatal and pediatric intensive care units, burn units and coronary care units. The costs of implementation of the HPC’s regulations cannot yet be fully ascertained.

There can be no assurance that the MNA, the SEIU or other organizations will not continue to initiate ballot initiatives or engage in other legislative activities that may adversely affect hospital operations, patient and physician satisfaction, financial condition, results of operations and future growth.

Labor Relations and Collective Bargaining – Hospitals are large employers with a wide diversity of employees. Increasingly, employees of hospitals are becoming unionized, and many hospitals have collective bargaining agreements with one or more labor organizations. Employees who are subject to collective bargaining agreements may include essential nursing and technical personnel, as well as food service, maintenance and other trade personnel. Renegotiation of such agreements upon expiration may result in significant cost increases to hospitals. Employee strikes or other adverse labor actions may have an adverse

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impact on operations, revenue and hospital reputation. For information concerning collective bargaining activities among the Hospital’s employees, see “EMPLOYEES.”

Wage and Hour Class Actions and Litigation – Federal law and many states impose standards related to worker classification, eligibility and payment for overtime, liability for providing rest periods and similar requirements. Large employers with complex workforces, such as hospitals, are susceptible to actual and alleged violations of these standards. In recent years there has been a proliferation of lawsuits over these “wage and hour” issues, often in the form of large, sometimes multi-state, class actions. For large employers, such as hospitals, such class actions can involve multi-million dollar claims, judgments and settlements. A major class action decided or settled adversely to the Hospital could have a material adverse impact on its financial condition and results of operations.

Other Class Actions – Nonprofit hospitals and health systems have long been subject to a wide variety of litigation risks, including liability for care outcomes, employer liability, property and premises liability, and peer review litigation with physicians, among others. In recent years, consumer class action litigation has emerged as a potentially significant source of litigation liability for nonprofit hospitals and health systems. These class action suits have most recently focused on hospital billing and collections practices, and they may be used for a variety of currently unanticipated causes of action. Since the subject matter of class action suits may involve uninsured risks, and since such actions often involve alleged large classes of plaintiffs, they may have material adverse consequences on nonprofit hospitals and health systems in the future.

Health Care Worker Classification – Health care providers, like all businesses, are required to withhold income taxes from amounts paid to employees. If the employer fails to withhold the tax, the employer becomes liable for payment of the tax imposed on the employee. On the other hand, businesses are not required to withhold federal taxes from amounts paid to a worker classified as an independent contractor. The IRS has established criteria for determining whether a worker is an employee or an independent contractor for tax purposes. If the IRS were to reclassify a significant number of hospital independent contractors (e.g., physician medical directors) as employees, back taxes and penalties could be material.

Staffing – From time to time, the health care industry suffers from a scarcity of nursing personnel, respiratory therapists, pharmacists and other trained health care technicians. In addition, aging medical staffs and difficulties in recruiting individuals to the medical profession are predicted to result in physician shortages. A significant factor underlying this trend includes a decrease in the number of persons entering those professions. This is expected to intensify in the future, aggravating the general shortage and increasing the likelihood of hospital-specific shortages. Competition for physicians and other health care professionals, coupled with increased recruiting and retention costs may increase hospital operating costs, possibly significantly. This trend could have a material adverse impact on the financial conditions and results of operations of hospitals. This scarcity may further be intensified if utilization of health care services increases as a consequence of the ACA’s expansion of the number of insured consumers.

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Professional Liability Claims and General Liability Insurance – In recent years, the number of professional and general liability suits and the dollar amounts of damage recoveries have increased in health care nationwide, resulting in substantial increases in malpractice insurance premiums, higher deductibles and generally less coverage. Professional liability and other actions alleging wrongful conduct and seeking punitive damages are often filed against health care providers. Insurance does not provide coverage for judgments for punitive damages.

Beginning in 2008, CMS refused to reimburse hospitals for medical costs arising from certain “never events,” which include specific preventable medical errors. Certain private insurers and HMOs followed suit. The occurrence of “never events” is more likely to be publicized and may negatively affect a hospital’s reputation, reducing future utilization and potentially increasing the possibility of liability claims.

Litigation also arises from the corporate and business activities of hospitals, from a hospital’s status as an employer or as a result of medical staff or provider network peer review or the denial of medical staff or provider network privileges. As with professional liability, many of these risks are covered by insurance, but some are not. For example, some antitrust claims or business disputes are not covered by insurance or other sources and may, in whole or in part, be a liability of the Hospital if determined or settled adversely.

Information Technology – The ability to adequately price and bill health care services and to accurately report financial results depends on the integrity of the data stored within information systems, as well as the operability of such systems. An ongoing commitment of significant resources is required to maintain, protect and enhance existing information systems and to develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards. There can be no assurance that efforts to upgrade and expand information systems capabilities, protect and enhance these systems, and develop new systems to keep pace with continuing changes in information processing technology will be successful or that additional systems issues will not arise in the future.

Electronic media are also increasingly being used in clinical operations, including the conversion from paper to EHR, computerization of order entry functions and the implementation of clinical decision-support software. The reliance on IT for these purposes imposes new expectations on physicians and other workforce members to be adept in using and managing electronic systems. It also introduces risks related to patient safety, and to the privacy, accessibility and preservation of health information. See “—Regulatory Environment—HIPAA” above. Technology malfunctions or failure to understand and use information systems properly could result in the dissemination of or reliance on inaccurate information, as well as in disputes with patients, physicians and other health care professionals. Health information systems may also be subject to different or higher standards or greater regulation than other IT or the paper-based systems previously used by health care providers, which may increase the cost, complexity and risks of operations. All of these risks may have adverse consequences on hospitals and health care providers.

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Cybersecurity Risks – Despite the implementation of network security measures by the Hospital, its IT systems may be vulnerable to breaches, hacker attacks, computer viruses, physical or electronic break-ins and other similar events or issues. Such events or issues could lead to the inadvertent disclosure of protected health information or other confidential information or could have an adverse effect on the ability of the Hospital to provide health care services.

Tax-Exempt Status and Other Tax Matters

Maintenance of the Tax-Exempt Status of Benefiting Affiliates – The maintenance of the Hospital’s status as an organization described in Section 501(c)(3) of the Code is contingent on compliance with general rules promulgated in the Code and related regulations regarding the organization and operation of tax-exempt entities, including their operation for charitable and other permissible purposes and their avoidance of transactions that may cause their earnings or assets to inure to the benefit of private individuals. As these general principles were developed primarily for public charities that do not conduct large-scale technical operations and business activities, they often do not adequately address the myriad operations and transactions entered into by a modern health care organization. Although traditional activities of health care providers, such as medical office building leases, have been the subject of interpretations by the IRS in the form of Private Letter Rulings, many activities or categories of activities have not been fully addressed in any official opinion, interpretation or policy of the IRS.

The ACA also contains certain requirements for tax-exempt hospitals. Under the ACA, each tax-exempt hospital facility is required to (i) conduct a community health needs assessment at least every three years and adopt an implementation strategy to meet the identified community needs, (ii) adopt, implement and widely publicize a written financial assistance policy and a policy to provide emergency medical treatment without discrimination, (iii) limit charges to individuals who qualify for financial assistance under the tax-exempt hospital’s financial assistance policy to no more than the amounts generally billed to individuals who have insurance covering that care and refrain from using “gross charges” when billing those individuals, and (iv) refrain from taking extraordinary collection actions without first making reasonable efforts to determine whether the individual is eligible for assistance under the tax-exempt hospital’s financial assistance policy. In addition, the Treasury Department is required to review information about each tax-exempt hospital’s community benefit activities at least once every three years, as well as to submit an annual report to Congress with information regarding the levels of charity care, bad debt expenses, unreimbursed costs of government programs, and costs incurred by tax-exempt hospitals for community benefit activities. The periodic reviews and reports to Congress regarding the community benefits provided by 501(c)(3) hospitals may increase the likelihood that Congress will require hospitals to provide a minimum level of charity care in order to retain tax-exempt status and may increase IRS scrutiny of particular 501(c)(3) hospital organizations.

The Hospital participates in a variety of transactions with physicians either directly or indirectly. Management believes that the transactions to which the Hospital is a party are

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consistent with the requirements of the Code as to tax-exempt status, but, as noted above, there is uncertainty as to the state of the law.

If the IRS were to find that the Hospital has participated in activities in violation of certain regulations or rulings, the tax-exempt status of the Hospital could be jeopardized. Although the IRS has not frequently revoked the 501(c)(3) tax-exempt status of nonprofit health care corporations, it could do so in the future. Loss of tax-exempt status by the Hospital potentially could result in loss of tax exemption of tax-exempt debt issued for the benefit of the Hospital and defaults in covenants regarding the Bonds and other obligations likely would be triggered. Loss of tax-exempt status also could result in substantial tax liabilities on the Hospital’s income. For these reasons, loss of tax-exempt status of the Hospital could have a material adverse effect on the financial condition of the Hospital.

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

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

Real Property Tax Exemption – State, county and local taxing authorities undertake audits and reviews of the operations of tax-exempt health care providers with respect to their real property tax exemptions. In some cases, particularly where authorities are dissatisfied with the level of charitable activity provided by a nonprofit organization, the real property tax- exempt status of the health care providers has been questioned. The majority of the Hospital’s real property is currently treated as exempt from real property taxation. Although the Hospital’s real property tax exemptions with respect to its core hospital facilities have not, to the knowledge of Management, been under challenge or investigation, an audit could lead to a challenge that could adversely affect the Hospital’s real property tax exemptions.

It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to taxation of nonprofit corporations. There can be no assurance that future changes in the laws and regulations of state or local governments will not materially adversely affect the financial condition of the Hospital by requiring payment of income, local property or other taxes. See also “—Nonprofit Health Care Environment—IRS Community Benefit Initiative” and “—Challenges to Real Property Tax Exemption” above.

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Limitations on Contractual and Other Arrangements Imposed by the Internal Revenue Code – As a tax-exempt organization, the Hospital is limited with respect to its use of practice income guarantees, reduced rent on medical office space, low interest loans, joint venture programs and other means of recruiting and retaining physicians. Uncertainty in this area has been reduced somewhat by the issuance by the IRS of guidelines on permissible physician recruitment practices. The IRS scrutinizes a broad variety of contractual relationships commonly entered into by hospitals and has issued a detailed audit guide suggesting that field agents scrutinize numerous activities of the hospitals in an effort to determine whether any action should be taken with respect to limitations on or revocation of their tax-exempt status or assessment of additional tax. Any suspension, limitation, or revocation of the Hospital’s tax-exempt status or assessment of significant tax liability would have a materially adverse effect on the Hospital.

Interest Rate Swap Agreements

The Hospital has entered into a series of “floating-to-fixed” interest rate swap agreements in notional amounts corresponding to the Hospital’s outstanding debt. Such interest rate swap agreements may be subject to periodic “mark-to market” valuations and may have a negative value to the Hospital. The counter-parties to such agreements may be able to terminate such agreements upon certain events of default under such agreements. In addition, in the event the Hospital’s credit ratings were downgraded below a specified level, the counter-parties could elect to terminate the swap (which could require the Hospital to make a material termination payment to the counter-party) or negotiate collateral terms with the Hospital.

The interest rate on the Hospital’s indebtedness that corresponds to the notional amounts of the existing interest rate swap agreements was generally intended to track the SIFMA index, whereas the interest rates under the existing interest rate swap agreements is based upon a percentage of LIBOR. The percentage of LIBOR was determined in recognition of the historical trading relationship between the two indices. If the relationship between these two indices changes, the Hospital may be exposed to basis risk and the amounts received from the counter-parties under the existing interest rate swap agreements may be less than the Hospital’s total interest cost on the Hospital’s indebtedness that corresponded to the notional amounts of the existing interest rate swap agreements.

Other Risk Factors

Investments – The Hospital has significant holdings in a broad range of investments. Market fluctuations may affect the value of those investments and those fluctuations may be and historically have been at times material.

Other Future Risks – In the future, the following factors, among others, may adversely affect the operations of health care providers, including the Hospital, or the market value of health care revenue bonds, including the Bonds, to an extent that cannot be determined at this time:

• Adoption of legislation or implementation of regulations that would modify national or state health programs or that would establish national, statewide or otherwise regulated rates applicable to hospitals and other health care providers;

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• Reduced demand for the services of the Hospital that might result from decreases in population or loss of market share to competitors;

• Bankruptcy of an indemnity/commercial insurer, managed care plan or other payor;

• Efforts by insurers and governmental agencies to limit the cost of hospital services, to reduce the number of hospital beds and to reduce the utilization of hospital facilities by such means such as improved occupational health and safety and outpatient care, or comparable regulations or attempts by third-party payors to control or restrict the operations of certain health care facilities;

• Cost and availability of any insurance, such as professional liability, fire, automobile and general comprehensive liability coverages, which health care facilities of a similar size and type generally carry;

• The occurrence of a natural or man-made disaster, a pandemic or an epidemic that could damage the Hospital’s facilities, interrupt utility service to such facilities, result in an abnormally high demand for health care services or otherwise impair the Hospital’s operations and the generation of revenues from such facilities. The Hospital’s facilities are covered by general property insurance in an amount that Management considers generally sufficient to provide for the replacement of such facilities in the event of most natural disasters; and

• Limitations on the availability of, and increased compensation necessary to secure and retain, nursing, technical and other professional personnel.

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APPENDIX B

A UDITED C ONSOLIDATED F INANCIAL S TATEMENTS AND S UPPLEMENTARY I NFORMATION

Boston Children’s Hospital and Subsidiaries Years Ended September 30, 2016 and 2015 With Reports of Independent Auditors

Ernst & Young LLP

Boston Children’s Hospital and Subsidiaries

Audited Consolidated Financial Statements and Supplementary Information

Years Ended September 30, 2016 and 2015

Contents

Report of Independent Auditors...... 1

Audited Consolidated Financial Statements

Consolidated Balance Sheets ...... 3 Consolidated Statements of Operations and Changes in Net Assets ...... 5 Consolidated Statements of Cash Flows ...... 7 Notes to Consolidated Financial Statements...... 8

Supplementary Information

Report of Independent Auditors on Supplementary Information ...... 58 Consolidating Balance Sheet at September 30, 2016 ...... 59 Consolidating Statement of Operations for the Year Ended September 30, 2016 ...... 61 Consolidating Balance Sheet at September 30, 2015 ...... 62 Consolidating Statement of Operations for the Year Ended September 30, 2015 ...... 64

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Ernst & Young LLP Tel: +1 617 266 2000 200 Clarendon Street Fax: +1 617 266 5843 Boston, MA 02116 ey.com

Report of Independent Auditors

The Board of Trustees Boston Children’s Hospital

We have audited the accompanying consolidated financial statements of Children’s Medical Center and Subsidiaries (d/b/a Boston Children’s Hospital and Subsidiaries), which comprise the consolidated balance sheets as of September 30, 2016 and 2015, and the related consolidated statements of operations and changes in net assets and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of 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 did not audit the financial statements of the Physician’s Organization at Children’s Hospital, Inc. (the P.O.) and the Physician Foundations (the Foundations), controlled affiliates, which statements reflect total assets of $1,171 million and $1,085 million and total revenues of $675 million and $638 million as of and for the years ended September 30, 2016 and 2015, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the P.O. and the Foundations, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of 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.

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A member firm of Ernst & Young Global Limited

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.

Opinion

In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Children’s Medical Center and Subsidiaries at September 30, 2016 and 2015, and the consolidated results of their operations and changes in net assets and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. January 13, 2017

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A member firm of Ernst & Young Global Limited

Boston Children’s Hospital and Subsidiaries

Consolidated Balance Sheets (In Thousands)

September 30 2016 2015 Assets Current assets: Cash and cash equivalents $ 154,236 $ 140,603 Patient accounts receivable, net of allowance for uncollectible accounts of $50,747 and $40,170 in 2016 and 2015, respectively 270,107 264,567 Other receivables 50,305 41,234 Grants receivable 39,311 41,279 Current portion of pledges receivable, net 40,130 33,916 Other current assets 42,223 31,650 Total current assets 596,312 553,249

Investments: Unrestricted as to use 1,838,046 1,626,012 Limited by Board designation 2,228,760 2,217,850 Restricted by donor-imposed restriction 572,351 544,094 4,639,157 4,387,956

Other assets whose use is limited: By externally administered trusts 47,881 47,276 For deferred compensation and other benefit obligations 150,815 145,387 By long-term debt agreements 2,517 36,837 Other 3,735 4,421 204,948 233,921

Property, plant, and equipment, net 1,174,051 1,075,738 Goodwill and other intangible assets 41,776 20,682 Pledges receivable, net 88,169 79,647 Other assets 69,027 61,151 Total assets $ 6,813,440 $ 6,412,344

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Consolidated Balance Sheets (continued) (In Thousands)

September 30 2016 2015 Liabilities and net assets Current liabilities: Accounts payable and accrued expenses $ 173,965 $ 181,587 Accrued salaries and wages 117,204 100,488 Current portion of estimated third-party settlement liabilities 3,248 2,731 Current portion of long-term debt 1,100 271 Current portion of notes payable 814 1,470 Deferred revenue 55,737 46,663 Other current liabilities 1,376 603 Total current liabilities 353,444 333,813

Long-term liabilities: Long-term debt 868,717 862,342 Mortgage notes payable 64,421 64,531 Estimated third-party settlement liabilities 10,350 9,631 Net pension liability 171,783 93,213 Funds held for others 45,889 44,838 Interest rate swap liability 177,094 146,314 Deferred compensation and other benefit obligations 132,743 127,770 Other liabilities 138,365 104,532 Total long-term liabilities 1,609,362 1,453,171

Net assets: Unrestricted 4,102,103 3,918,267 Temporarily restricted 507,194 486,112 Permanently restricted 241,337 220,981 Total net assets 4,850,634 4,625,360 Total liabilities and net assets $ 6,813,440 $ 6,412,344

See accompanying notes.

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Consolidated Statements of Operations and Changes in Net Assets (In Thousands)

Year Ended September 30 2016 2015 Revenues: Patient services revenue, net of contractual allowances and discounts $ 1,886,425 $ 1,663,435 Provision for uncollectible accounts (65,264) (44,535) Net patient services revenue 1,821,161 1,618,900

Research grants and contracts 185,706 177,310 Recovery of indirect costs on grants and contracts 71,322 63,166 Other operating revenue 110,829 87,252 Unrestricted contributions, net of fundraising expenses of $8,721 and $7,947 in 2016 and 2015, respectively 12,724 8,939 Net assets released from restrictions used for operations 65,487 46,740 Total revenues 2,267,229 2,002,307

Expenses: Salaries and benefits 1,345,889 1,133,483 Supplies and other expenses 537,310 467,232 Direct research expenses of grants 185,706 177,310 Health Safety Net assessment 10,101 8,570 Depreciation and amortization 125,435 114,046 Interest and net interest rate swap cash flows 34,200 34,234 Total expenses 2,238,641 1,934,875

Gain from operations 28,588 67,432

Non-operating gains (losses): Income from investments 37,073 58,204 Net realized gain on investments 47,605 90,246 Unrealized gain (loss) on investments classified as trading securities 10,011 (26,408) Increase (decrease) in value of alternative investments 97,959 (1,890) Recognition of unrealized losses on other than trading investments (27,188) (96,227) Fundraising expenses on restricted contributions (20,349) (18,542) Adjustment of interest rate swaps to fair value (30,780) (33,579) Other non-operating losses (4,475) (7,788) Total non-operating gains (losses) 109,856 (35,984) Excess of revenues over expenses 138,444 31,448

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Consolidated Statements of Operations and Changes in Net Assets (continued) (In Thousands)

Year Ended September 30 2016 2015 Changes in unrestricted net assets: Excess of revenues over expenses $ 138,444 $ 31,448 Net assets released from restrictions for capital asset acquisitions 947 3,239 Net unrealized gain (loss) on other than trading investments 122,866 (113,679) Net asset transfer (402) (1,079) Depreciation on endowment funds (1,035) (3,200) Pension adjustment (76,984) (84,835) Increase (decrease) in unrestricted net assets 183,836 (168,106)

Changes in temporarily restricted net assets: Contributions 63,165 52,933 Income and net realized gain on investments 6,077 16,694 Recognition of unrealized losses on investments (5,535) (16,928) Increase in value of alternative investments 16,486 1,478 Net unrealized gain (loss) on investments 6,353 (9,945) Net asset transfer (65) 166 Appreciation on endowment funds 1,035 3,200 Net assets released from restrictions (66,434) (49,979) Increase (decrease) in temporarily restricted net assets 21,082 (2,381)

Changes in permanently restricted net assets: Contributions 19,889 11,194 Net asset transfer 467 913 Increase in permanently restricted net assets 20,356 12,107

Increase (decrease) in net assets 225,274 (158,380) Net assets at beginning of year 4,625,360 4,783,740 Net assets at end of year $ 4,850,634 $ 4,625,360

See accompanying notes.

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Consolidated Statements of Cash Flows (In Thousands)

Year Ended September 30 2016 2015 Operating activities Change in net assets $ 225,274 $ (158,380) Non-cash and non-operating activities included in change in net assets: Depreciation and amortization 125,435 114,046 Restricted contributions (83,054) (64,127) Net realized and unrealized (gain) loss on investments (294,300) 98,455 Net unrealized (gains) losses on investments classified as trading securities (10,011) 26,408 Changes in operating assets and liabilities: Investments classified as trading securities 7,396 34,333 Patient accounts receivable (5,540) (33,024) Other accounts receivable (7,103) (3,782) Other assets (19,550) (10,855) Accounts payable and accrued expenses 9,368 36,669 Estimated third-party liabilities 1,236 (9,675) Other liabilities 137,051 138,870 Net cash provided by operating activities 86,202 168,938

Financing activities Payments of note payable (766) (719) Capital lease payments (271) (265) (Decrease) increase in pledges receivable (14,736) 12,696 Restricted contributions 83,054 64,127 Net cash provided by financing activities 67,281 75,839

Investing activities Cash paid for acquisition, net of cash acquired – (21,491) Purchases of investments (746,637) (1,033,581) Proceeds from sales of investments 792,351 963,832 Additions to fixed assets, net of retirements (212,020) (156,515) Decrease (increase) in other assets whose use is limited 26,456 (2,237) Net cash used in investing activities (139,850) (249,992)

Net increase (decrease) in cash and cash equivalents 13,633 (5,215) Cash and cash equivalents at beginning of year 140,603 145,818 Cash and cash equivalents at end of year $ 154,236 $ 140,603

See accompanying notes.

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Notes to Consolidated Financial Statements

September 30, 2016

1. Summary of Significant Accounting Policies

Basis of Consolidation

The accompanying consolidated financial statements include the accounts of Children’s Medical Center Corporation (d/b/a Boston Children’s Hospital) and its subsidiaries (collectively, the Medical Center) including (a) Children’s Hospital (the Hospital), which engages in pediatric patient care, research, training, and community service; (b) 15 tax-exempt foundations (the Foundations), which are organized for charitable, scientific, and educational purposes, and operate for the benefit of the Hospital and Harvard Medical School (Harvard) by providing medical and health care services primarily to patients at the Hospital and of other health care providers at satellite locations; (c) the Physicians’ Organization at Children’s Hospital, Inc. (the P.O.), which provides coordination and general oversight of the clinical and medicine practices and related health care services of the Foundations; (d) CHB Properties, Inc., which owns and operates real property and distributes the net income of such property to the Medical Center; (e) Longwood Research Institute, Inc., which holds real property for the benefit of the Hospital in the furtherance of its research mission; (f) Fenmore Realty Corporation, which owns and operates real property and distributes the net income of such property to the Medical Center; (g) Longwood Corporation, which owns and operates real property and distributes the net income of such property to the Medical Center; (h) Boston Children’s Health Physicians; and (i) Blood Research Institute, Inc. (BRI) (see below).

Certain Foundations have fiscal year-ends that differ from the Medical Center’s fiscal year-end date of September 30. The Medical Center has consolidated the financial statements of these Foundations based on their most recent audited financial statements as of September 30, 2016, which in no case is more than three months prior to September 30, 2016. All material intervening transactions or events, if any, have been recorded or disclosed in the consolidated financial statements.

All material intercompany balances and transactions are eliminated in consolidation.

Acquisition

Effective July 1, 2015, the Medical Center acquired a controlling interest in Boston Children’s Health Physicians (BCHP), formerly known as Children’s & Women’s Physicians of Westchester, LLP, a fully integrated health care community that provides pediatric physician

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Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued) inpatient and outpatient care to patients throughout the New York Metropolitan Area, the Hudson Valley, Connecticut, and New Jersey. The Medical Center provided approximately $29,659,000 in total consideration, including $21,713,000 of cash consideration, to complete the BCHP acquisition.

The BCHP acquisition has been accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification (ASC) Topic 958-805, Business Combinations – Not-for-Profit Entities. The purchase consideration has been allocated to the assets and liabilities acquired based on estimated fair values, and any excess of the purchase price over the fair value of such identifiable net assets has been allocated to goodwill. Determining the fair value of the assets acquired and liabilities assumed requires judgment and involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows and discount rates, among others. The fair values of assets acquired and liabilities assumed at the date of the BCHP acquisition were as follows (amounts in thousands):

Cash $ 222 Patient accounts receivable 12,634 Other current assets 948 Property and equipment 6,669 Other long-term assets 289 Goodwill and identifiable intangible assets 20,682 Total assets acquired 41,444

Accounts payable and accrued expenses 10,184 Accrued salaries and wages 1,601 Total liabilities assumed 11,785 Net assets acquired $ 29,659

The Medical Center recognized goodwill of approximately $18,582,000 in connection with the BCHP acquisition. The Medical Center believes the factors contributing to the goodwill that resulted from the BCHP acquisition include, but are not limited to, the access to long-term patient, employee, and physician relationships.

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Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

Blood Research Institute, Inc.

BRI, a not-for-profit organization, was incorporated for the purpose of owning and leasing real estate and other property, primarily in connection with and for the benefit of The Immune Disease Institute, Inc. (IDI). On December 28, 2008, the Board of Trustees of IDI and the Board of Trustees of Boston Children’s Hospital (BCH), entered into a five-year affiliation agreement to make IDI BCH’s sixth multidisciplinary research program, the Program in Cellular and Molecular Medicine. On October 1, 2012, IDI was merged into BCH.

On April 5, 2016, BRI amended its Articles of Incorporation and amended and restated its bylaws to name the Hospital, a subsidiary of BCH, as its sole corporate member. As a result, BRI’s assets and liabilities have been reflected within the Medical Center’s consolidated financial statements as of and for the year ending September 30, 2016. BRI’s financial position and results of operations are not material to the Medical Center’s consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates.

Cash and Cash Equivalents

Cash equivalents include money market instruments with average maturities of less than 90 days, excluding amounts included in investments and other assets whose use is limited. Cash balances maintained with financial institutions may exceed federal depository insurance limits; however, management believes the credit risk related to these financial institutions is minimal. The Medical Center has not experienced any losses in such accounts, and it believes it is not exposed to any significant risk at September 30, 2016.

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Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

The Medical Center’s cash management system provides for daily investment of available balances and the funding of outstanding checks when presented for payment. Outstanding, but unpresented, checks totaling $28,105,000 and $21,158,000 at September 30, 2016 and 2015, respectively, have been included in accounts payable on the consolidated balance sheets. Upon presentation for payment, these checks are funded through available cash balances.

Investments and Other Assets Whose Use Is Limited

Investments and other assets whose use is limited include the following: Board-designated assets for plant replacement and expansion and mission-related activities; donor-restricted assets and funds held for others (all of which participate in the investment pool); externally managed trusts associated with deferred giving arrangements; assets limited by long-term debt agreements; and deferred compensation (which are invested primarily in mutual funds and government obligations, and are reported at fair value).

Medical Center

The Medical Center follows the practice of pooling resources of unrestricted and restricted assets for long-term investment purposes. The investment pool is operated on the market value method, whereby each participating fund is assigned a number of units based on the percentage of the pool it owns at the time of entry. Income, gains, and losses of the pool are allocated to the funds based on their respective participation in the pool.

Investments in marketable debt and equity securities are stated at fair value determined principally from quoted market prices. Realized gains and losses on investment transactions are computed on an average-cost basis. Net realized gains or losses on unrestricted investments and impairments in investment values that are determined to be other than temporary are reported as non-operating gains (losses). Net unrealized gains or losses on unrestricted assets are recorded as an increase or decrease in unrestricted net assets. Net realized and unrealized gains or losses on restricted assets are recorded as an increase or decrease to the restricted net asset balance. Unrestricted investment income is reported in non-operating gains. Investment income on endowment funds appropriated by the Board of Trustees (the Board) for expenditure is reported as non-operating gains. Restricted investment income is recorded as an increase to the restricted net asset balance.

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Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

Real estate purchased and held for investment is accounted for at cost less accumulated depreciation. Alternative investments (non-traditional, not readily marketable holdings) include hedge funds and private equity funds. Alternative investment interests generally are structured such that the Medical Center holds a limited partnership interest. The Medical Center’s ownership structure does not provide for control over the related investees and the associated financial risk is limited to the carrying amount reported for each investee, in addition to any unfunded capital commitment. Future funding commitments for alternative investments aggregated approximately $212,042,000 and $158,528,000 at September 30, 2016 and 2015, respectively.

Alternative investments are reported on the accompanying consolidated balance sheets based upon net asset values derived from the application of the equity method of accounting. Financial information used by the Medical Center to evaluate its alternative investments is provided by the investment manager or general partner and includes fair value valuations (quoted market prices and values determined through other means) of underlying securities and other financial instruments held by the investee, and estimates that require varying degrees of judgment. The financial statements of the investee companies are audited annually by independent auditors, although the timing for reporting the results of such audits does not coincide with the Medical Center’s annual financial statement reporting.

There is uncertainty in the valuation for alternative investments arising from factors, such as lack of active markets (primary and secondary), lack of transparency into underlying holdings, and time lags associated with reporting by investee companies. As a result, there is at least a reasonable possibility that estimates will change in the near term by a material amount.

Foundations

The Foundations classify their investments as trading securities with investment income (including realized and unrealized gains and losses on investments, interest, and dividends) included in the excess of revenues over expenses unless the income is restricted by donor or law. Investments in marketable equity and debt securities and mutual funds are carried at quoted market values (fair value) of the investments at the balance sheet date. The Foundations also invest in alternative investments and report their investments on the same basis as the Medical Center, as described above.

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Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

Inventories

Inventories are valued at the lower of cost (first-in, first-out method) or market and are recorded in other current assets on the accompanying consolidated balance sheets.

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost. Interest costs incurred during the construction period of major projects are capitalized as a component of the cost of these assets, and are depreciated over the estimated useful lives of the assets. The costs of repairs and maintenance are charged to expense as incurred.

Depreciation and amortization are computed on the straight-line method based on the estimated useful lives of the assets. The estimated useful lives conform to the guidelines established by the American Hospital Association. The half-year convention is used for calculating depreciation in the year of acquisition. The Medical Center’s policy is to fund depreciation expense in amounts not exceeding cumulative allowable depreciation expense. Amortization expense related to assets recorded under capital leases is included with depreciation expense.

Goodwill and Other Intangible Assets

Goodwill recorded in connection with the acquisition of BCHP represents the excess of purchase price over the fair value of net assets purchased. The carrying amount of goodwill was $18,582,000 as of September 30, 2016. No impairment losses were recognized during 2016.

Other intangible assets consist of amortizable intangible assets recorded in connection with the acquisition of BCHP. Amortizable intangible assets include non-compete agreements and are amortized over seven years. The carrying amount of amortizable intangible assets was $1,725,000 as of September 30, 2016. Amortizable intangible assets are reviewed for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable.

In addition, other intangible assets include licensed software acquired in a ten-year software licensing arrangement, effective April 28, 2016. The asset for the software license is recognized and measured at cost, which includes the present value of the license obligation. The carrying amount of the related amortizable intangible asset was $21,469,000 as of September 30, 2016.

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Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

Original Issue Discount and Premium and Debt Issuance Costs

Unamortized original issue discount and premium and the costs associated with the issuance of debt are amortized using the interest method over the life of the bond issue and are presented on the accompanying consolidated balance sheets as a direct deduction from or addition to the carrying amount of debt.

Pledges

Unconditional pledges, less an allowance for uncollectible amounts, are recorded as a receivable in the year made. Pledges receivable over a period greater than one year are stated at net present value.

Net Assets

The accompanying consolidated balance sheets classify net assets into three categories: unrestricted, temporarily restricted, and permanently restricted. Net assets that bear no external restriction as to use or purpose are classified as unrestricted. Also included in unrestricted net assets are assets whose use is limited under debt or trust agreements and Board-designated funds for plant replacement and expansion and mission-related activities.

Net assets, which are restricted by donors or grantors as to use or purpose, are classified as either temporarily restricted or permanently restricted:

Temporarily restricted net assets are restricted by the donor or grantor, principally for the support of research; patient care; departmental support; medical education; community health services; and the acquisition of property, plant, and equipment. When a restriction expires, that is, when a stipulated time restriction ends or the purpose of the restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported on the consolidated statements of operations and changes in net assets as net assets released from restrictions.

Permanently restricted net assets represent contributions to the Medical Center, the principal of which may not be expended. Income from permanently restricted net assets may be unrestricted or restricted in accordance with the donor’s request. In accordance with the laws of the commonwealth of Massachusetts, gains on permanently restricted net assets are recorded as temporarily restricted net assets until appropriated for expenditure by the Board of Trustees.

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Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

Net Patient Services Revenue

Revenues are recorded during the period the health care services are provided, based upon the estimated net realizable amounts due from patients and third-party payors. Third-party payors include federal and state agencies (under Medicare, Medicaid, and other programs), managed care health plans, commercial insurance companies, and employers. Estimates of contractual allowances related to third-party payors are based upon the payment terms specified in the related contractual agreements. Contractual allowances are accrued on an estimated basis in the period in which the related services are rendered. If estimated allowances are adjusted in future periods, the adjustments are recorded as changes in estimates of prior year third-party settlements. Revenues related to uninsured patients and copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts).

The Medical Center and its subsidiaries also record a provision for uncollectible accounts related primarily to uninsured accounts to record the net self-pay accounts receivable at the estimated amounts expected to be collected. The provision for uncollectible accounts is based upon management’s assessment of expected net collections considering economic conditions, historical experience, trends in health care coverage, and other collection indicators. Accounts receivable are reduced by an allowance for uncollectible accounts. Periodically throughout the year, management assesses the adequacy of the allowance for uncollectible accounts based upon historical write-off experience by payor category, including those amounts not covered by insurance. After satisfaction of amounts due from insurance and reasonable efforts to collect from the patient have been exhausted, the Medical Center follows established guidelines for placing certain past-due patient balances with collection agencies, subject to the terms of certain restrictions on collection efforts as determined by the Medical Center. Accounts receivable are written off after collection efforts have been followed in accordance with the Medical Center’s policies.

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Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

Incentive Payments for Using Electronic Health Records

The American Recovery and Reinvestment Act of 2009 included provisions for implementing health information technology under the Health Information Technology for Economic and Clinical Health Act (HITECH). The provisions were designed to increase the use of electronic health record (EHR) technology and establish the requirements for a Medicaid incentive payment program beginning in 2011 for eligible providers that adopt and meaningfully use certified EHR technology. Medicaid incentive payments are available to providers that adopt, implement, or upgrade certified EHR technology. Providers must demonstrate meaningful use of such technology to qualify for Medicaid incentive payments.

The Medical Center accounts for HITECH incentive payments under a grant accounting model. Income from Medicaid incentive payments is recognized as revenue after the Medical Center has demonstrated that it complied with the meaningful use criteria over the entire applicable compliance period and the 12-month cost report period that will be used to determine the final incentive payment has ended. Medicaid EHR incentive payments recognized as revenue for the years ended September 30, 2016 and 2015, totaled $1,330,000 and $4,837,000, respectively, and are reported in other operating revenues. Income from incentive payments is subject to retrospective adjustment upon final settlement of the applicable cost report from which payments were calculated. Additionally, the Medical Center’s attestation of compliance with the meaningful use criteria is subject to audit by the federal government.

Research Grants and Contracts

The Medical Center, through the Hospital, engages in research activities funded by grants and contracts with federal and state governments, and various private sources. Revenues associated with grants and contracts are recognized as the related costs are incurred. Research funds received in advance are reported as deferred revenue, and are recognized as earned revenue as the related research expenditures are incurred.

Recoveries of indirect costs relating to certain government grants and contracts are reimbursed at predetermined rates negotiated with government agencies. Recoveries of indirect costs relating to non-government grants are reimbursed at varying rates, depending upon sponsor policies.

1611-2110000 16 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

Contributions

Unrestricted contributions are recorded as operating revenue; restricted contributions are recorded as additions to restricted net asset balances. Donated securities and property are recorded at fair value as of the date of donation.

Excess of Revenues Over Expenses

The consolidated statements of operations and changes in net assets include the excess of revenues over expenses as the performance indicator. Changes in unrestricted net assets which are excluded from the excess of revenues over expenses primarily include changes in net assets related to the pension adjustment, net assets released from restrictions for capital, and net unrealized gains or losses on other than trading investments.

Income Taxes

The Medical Center; the Hospital; the Foundations; the P.O.; CHB Properties, Inc.; BRI; and Longwood Research Institute, Inc. are Section 501(c)(3) organizations exempt from income taxes on related business income pursuant to Internal Revenue Code (the Code) Section 501(a)). Longwood Corporation and Fenmore Realty Corporation are Section 501(c)(2) organizations exempt from income taxes on related business income pursuant to Code Section 501(a). BCHP is a limited liability partnership disregarded for tax purposes.

1611-2110000 17 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of ASU 2014-09 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 those goods or services. The guidance in ASU 2014-09 supersedes the FASB’s current revenue recognition requirements in ASC 605, Revenue Recognition, and most industry-specific guidance. The provisions of ASU 2014-09 are effective for the Medical Center for the fiscal year ending September 30, 2019. Early application is permitted for the fiscal year ending September 30, 2018. The Medical Center is in the process of evaluating the impact of ASU 2014-09 on its consolidated financial statements and has not yet determined if it will early adopt the provisions of ASU 2014-09.

In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs be presented on the balance sheet as a deduction from the carrying amount of the related liability, rather than as a deferred charge. The updated guidance is effective retroactively for financial statements covering fiscal years beginning October 1, 2016, and interim periods within those fiscal years. Early application is permitted. The Medical Center adopted ASU 2015-03 for the year ending September 30, 2016, and, accordingly, has classified debt issuance costs of $6,009,000 and $6,224,000 as of September 30, 2016 and 2015, respectively as a reduction to the carrying amount of debt.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The core principle of ASU 2016-02 is that lessees will recognize assets and liabilities for most leases as either finance or operating leases. The guidance in ASU 2016-02 supersedes the FASB’s current lease guidance in ASC 840, Leases, and most industry-specific guidance. The provisions of ASU 2016-02 are effective for the Medical Center for the fiscal year ending September 30, 2020. Early application is permitted for all entities. The Medical Center in the process of evaluating the impact of ASU 2016-02 on its consolidated financial statements.

1611-2110000 18 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies (continued)

In August 2016, the FASB issued ASU No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. ASU 2016-14 will change certain financial statement requirements for not-for-profit (NFP) entities in an effort to make the information more meaningful to users and make reporting less complex for NFPs. The provisions of ASU 2016-14 are effective for the Medical Center for the fiscal year ending September 30, 2019. Early application is permitted for all entities. The Medical Center is in the process of evaluating the impact of ASU 2016-14 on its consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, that will require management of public and non-public companies to evaluate and disclose where there is substantial doubt about an entity’s ability to continue as a going concern. The standard is effective for the fiscal year ending September 30, 2017. The Medical Center does not currently expect the adoption of this standard will have a material effect on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This ASU is intended to assist in the evaluation of the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software. The guidance is effective for annual periods beginning after December 15, 2015. Early adoption is permitted for all entities and the Medical Center early adopted this ASU on October 1, 2015. The adoption of this ASU did not have a material effect on the Medical Center’s consolidated financial statements.

1611-2110000 19 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

2. Investments and Other Assets Whose Use Is Limited

Investments and other assets whose use is limited consist of the following, at fair value:

September 30 2016 2015 (In Thousands) Pooled investments: Cash and cash equivalents $ 19,712 $ 49,434 Equity securities 1,213,560 1,045,132 Fixed income securities 464,348 461,918 Alternative investments 1,602,762 1,504,102 Total pooled investments 3,300,382 3,060,586

Non-pooled investments: Cash equivalents 239,855 258,656 Mutual funds 192,186 174,629 Equity securities 359,832 331,031 Fixed income securities 404,491 406,880 Real estate 234,543 241,298 Other 53,802 54,888 Total non-pooled investments 1,484,709 1,467,382 Long-term debt agreements (money market funds) 2,517 36,837 Externally administered trusts (marketable debt and equity securities) 47,881 47,276 Other 8,616 9,796 Total investments and other assets whose use is limited $ 4,844,105 $ 4,621,877

Individual investment holdings within the alternative investments include non-marketable and market-traded debt, equity and real asset securities, and interests in other alternative investments.

The Medical Center may be exposed indirectly to securities lending; short sales of securities; and trading in futures and forward contracts, options, and other derivative products. Alternative investments often have liquidity restrictions under which the Medical Center’s capital may be divested only at specified times. The Medical Center’s liquidity restrictions may be up to seven years or longer for certain private equity investments. Liquidity restrictions may apply to all or portions of a particular invested amount.

1611-2110000 20 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

2. Investments and Other Assets Whose Use Is Limited (continued)

Investments and other assets whose use is limited are presented on the accompanying consolidated balance sheets as follows:

September 30 2016 2015 (In Thousands)

Investments, unrestricted as to use $ 1,838,046 $ 1,626,012

Investments and other assets whose use is limited: By Board designation for plant replacement and expansion and mission-related activities 2,228,760 2,217,850 By donor-imposed restriction 572,351 544,094 By long-term debt agreements 2,517 36,837 For deferred compensation and other benefit obligations 150,815 145,387 By externally administered trusts 47,881 47,276

Other: As funds held for others 1,162 1,015 Other 2,573 3,406 3,735 4,421 Total investments and other assets whose use is limited $ 4,844,105 $ 4,621,877

1611-2110000 21 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

2. Investments and Other Assets Whose Use Is Limited (continued)

Investment earnings were reported as follows:

Temporarily Unrestricted Restricted Total (In Thousands) Year ended September 30, 2016 Interest and dividend income: Operating revenue $ 5,225 $ – $ 5,225 Non-operating revenue 37,073 37,073 Increase in temporarily restricted net assets – 779 779 Increase in value of alternative investments 97,959 16,486 114,445 Net realized gain 47,605 5,298 52,903 Recognition of unrealized losses (27,188) (5,535) (32,723) Net unrealized gains on other than trading securities 122,866 6,353 129,219 Net unrealized gains on trading securities 10,011 – 10,011 Total net gains on investments $ 293,551 $ 23,381 $ 316,932

Investment income is reported net of fees of $8,326,000 for the year ended September 30, 2016.

1611-2110000 22 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

2. Investments and Other Assets Whose Use Is Limited (continued)

Investment earnings were reported as follows:

Temporarily Unrestricted Restricted Total (In Thousands) Year ended September 30, 2015 Interest and dividend income: Operating revenue $ 1,688 $ – $ 1,688 Non-operating revenue 58,204 – 58,204 Increase in temporarily restricted net assets – 3,510 3,510 (Decrease) increase in value of alternative investments (1,890) 1,478 (412) Net realized gain 90,246 13,184 103,430 Recognition of unrealized losses (96,227) (16,928) (113,155) Net unrealized losses on other than trading securities (113,679) (9,945) (123,624) Net unrealized losses on trading securities (26,408) – (26,408) Total net loss on investments $ (88,066) $ (8,701) $ (96,767)

Investment income is reported net of fees of $9,154,000 for the year ended September 30, 2015.

The Medical Center retains professional investment managers for the management of all pooled investments. These managers invest in temporary cash investments, fixed income securities, and equities. In addition, as part of their investment strategy, certain managers may engage in short- selling and futures and options trading. Management believes that the risk of accounting loss associated with short-selling and futures and options-trading strategies is no greater than that associated with other investment strategies, which do not involve off-balance sheet risk.

Management continually reviews its investment portfolio where the fair value is below cost, and in cases where the decline is considered to be other than temporary, an adjustment is recorded to realize the loss. The Medical Center recorded a realized loss for other-than-temporary declines in the fair value of investments of approximately $32,723,000 and $113,155,000 for the years ended September 30, 2016 and 2015, respectively, of which $27,188,000 and $96,227,000 is included in unrestricted investment income, and $5,535,000 and $16,928,000 is included in changes in temporarily restricted net assets. There were no investments that had aggregate gross unrealized losses at September 30, 2016 or 2015.

1611-2110000 23 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

3. Contributions

Contributions received and pledged to the Medical Center were as follows:

Year Ended September 30 2016 2015 (In Thousands)

Gross contributions $ 107,821 $ 81,382 Provision for uncollectible pledges (2,392) (59) Amortization of discount (930) (310) Net contributions $ 104,499 $ 81,013

These contributions are reported in the accompanying consolidated financial statements in accordance with donors’ restrictions as follows:

Year Ended September 30 2016 2015 (In Thousands)

Unrestricted contributions $ 21,445 $ 16,886 Temporarily restricted 63,165 52,933 Permanently restricted 19,889 11,194 Net contributions $ 104,499 $ 81,013

In addition to the $107,821,000 in gross contributions raised for the year ended September 30, 2016, the Medical Center raised $29,405,000 in non-governmental grant awards, to bring the total funds raised to $137,226,000. In addition to the $81,382,000 in gross contributions raised for the year ended September 30, 2015, the Medical Center raised $16,579,000 in non- governmental grant awards, to bring the total funds raised to $97,961,000.

1611-2110000 24 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

3. Contributions (continued)

Contributions pledged to the Medical Center are due as follows:

September 30 2016 2015 (In Thousands)

Due in less than one year $ 40,130 $ 36,202 Due in one to five years 84,279 72,151 Due in more than five years 22,148 22,100 146,557 130,453 Less discount to present value (10,677) (9,615) Less allowance for uncollectible pledges (7,581) (7,275) Total pledges receivable, net 128,299 113,563 Less current portion of pledges receivable, net (40,130) (33,916) Non-current portion of pledges receivable, net $ 88,169 $ 79,647

4. Free Care, Health Safety Net Trust, and Community Services

The Medical Center’s commitment to community service is evidenced by services provided to the poor and benefits provided to the broader community. Services provided to the poor include services provided to persons who are uninsured or underinsured without expectation of payment or at amounts less than its established rates.

The Medical Center provides quality medical care regardless of race, creed, sex, sexual orientation, national origin, handicap, age, or ability to pay. Although reimbursement for services rendered is critical to the operations and stability of the Medical Center, it is recognized that not all individuals possess the ability to pay for essential medical services and that the Medical Center’s mission is to serve the community with respect to health care and health care education.

In keeping with the Medical Center’s commitment to serve members of the community, the Medical Center provides the following: charity care to the indigent, care to persons covered by governmental programs at below cost, and health care activities and programs to support the community. These activities include wellness programs, community education programs, health screenings, and a broad variety of community support services.

1611-2110000 25 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

4. Free Care, Health Safety Net Trust, and Community Services (continued)

The Medical Center also provides resources to support numerous initiatives aimed at contributing to the physical and psychological well-being of children, youth, and families living in the Medical Center’s community. These initiatives include programs at the Medical Center, and in collaboration with community-based organizations, provide comprehensive services to adolescent mothers and children, HIV outreach services, services to reduce infant mortality, assistance to the homeless, and training and other related services to individuals with developmental disabilities. The Medical Center also provides medical services to the community through its emergency room, which operates 24 hours a day, and is available to all regardless of ability to pay.

The Medical Center makes available free care programs for qualifying patients under its charity care and financial aid policy. The Medical Center obtains additional financial information for uninsured or underinsured patients who do not qualify or have not supplied requisite information to qualify for charity care. The additional information is used by the Medical Center in determining whether to qualify patients for charity care and/or financial aid. For patients who were determined by the Medical Center to have the ability to pay but did not, the uncollected amounts are reported as a component of provision for uncollectible accounts. The costs of uncompensated care (other than uncollectible accounts) and community benefit activities are derived from various Medical Center records. Amounts for activities as reported below are based on estimated and actual data, subject to changes in estimates upon the finalization of the Medical Center’s cost report, and other government filings. The amounts reported below are calculated in accordance with guidelines prescribed by the Internal Revenue Service. The net cost of charity includes the direct and indirect cost of providing charity care services, and is estimated by utilizing a ratio of cost to gross charges applied to the gross uncompensated charges associated with providing charity care.

As the Hospital and the Foundations do not pursue collection of amounts determined to qualify as free care, they are not reported as net patient services revenue. The Hospital also supports the delivery of health care services to the indigent through payments to the Health Safety Net Trust (HST), which is administered by the commonwealth of Massachusetts.

1611-2110000 26 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

4. Free Care, Health Safety Net Trust, and Community Services (continued)

The amounts of HST assessment and receipts, provision for uncollectible accounts, and free care were as follows:

Year Ended September 30 2016 2015 (In Thousands)

HST assessment $ 10,101 $ 8,570 HST receipts (net patient service revenue) (3,850) (3,850) Net disbursements to HST 6,251 4,720 Provision for uncollectible accounts 65,264 44,535 Free care (at cost) 7,301 8,430 Total HST, provision, and free care $ 78,816 $ 57,685

5. Property, Plant, and Equipment

Property, plant, and equipment consist of the following:

September 30 2016 2015 (In Thousands)

Land and improvements $ 17,139 $ 17,124 Buildings, leasehold, and related improvements 1,816,911 1,710,660 Equipment 810,183 750,774 Construction-in-progress 128,663 65,061 2,772,896 2,543,619 Less accumulated depreciation and amortization (1,598,845) (1,467,881) $ 1,174,051 $ 1,075,738

At September 30, 2016 and 2015, the Medical Center had commitments of approximately $115,675,000 and $76,077,000, respectively, to complete projects relating to capital construction and software development.

1611-2110000 27 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

6. Asset Retirement Obligations

Conditional asset retirement obligations amounted to $13,018,000 and $13,598,000 as of September 30, 2016 and 2015, respectively. These obligations are recorded in other liabilities on the accompanying consolidated balance sheets. There are no assets that are legally restricted for purposes of settling asset retirement obligations.

During 2016 and 2015, retirement obligations incurred and settled amounted to $621,000 and $1,592,000, respectively. Accretion expenses of $41,000 and $132,000 were recorded during the years ended September 30, 2016 and 2015, respectively.

7. Other Assets and Other Liabilities

Other assets consist of the following:

September 30 2016 2015 (In Thousands) Expected insurance recoveries for professional liability claims (Note 14) $ 52,864 $ 46,114 Employee loans receivable 11,855 12,048 Other 4,308 2,989 $ 69,027 $ 61,151

Other liabilities consist of the following:

September 30 2016 2015 (In Thousands) Estimated insured professional liability losses (Note 14) $ 52,864 $ 46,114 Software license obligation 22,545 – Accrued lease escalations 17,858 14,350 Non-current portion of liability for claims incurred but not reported 13,216 14,674 Asset retirement obligation reserve (Note 6) 13,018 13,598 Promissory notes 11,475 12,425 Non-current portion of lease incentive obligation 7,389 3,371 $ 138,365 $ 104,532

1611-2110000 28 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

8. Leases

The Medical Center and its subsidiaries lease clinical and office space under operating leases, some of which include fixed escalation clauses. The obligations under non-cancelable leases as of September 30, 2016, are as follows (in thousands):

2017 $ 42,723 2018 42,623 2019 43,340 2020 43,552 2021 43,776 Thereafter 76,885 Total operating leases $ 292,899

Rent expense was approximately $64,514,000 and $47,476,000 for the years ended September 30, 2016 and 2015, respectively.

The Medical Center records rent expense on a straight-line basis over the life of the lease and records accrued rent as the difference between rent expense and actual payments made. As of September 30, 2016 and 2015, the accumulated difference between rent expense and amounts paid amounted to $17,858,000 and $14,349,000, respectively, which is included in other liabilities on the accompanying consolidated balance sheets.

1611-2110000 29 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

9. Long-Term Debt and Mortgage Notes

Long-term debt consists of the following:

September 30 2016 2015 (In Thousands)

Series M $ 124,785 $ 124,719 Series N 216,590 216,590 Series O 200,640 200,640 Series P 150,467 151,012 Series Q 50,255 50,255 Series R 125,350 125,350 Series A (BRI) 7,739 – Capital leases – 271 875,826 868,837 Less: Unamortized debt issuance costs 6,009 6,224 Current portion of long-term debt 1,100 271 $ 868,717 $ 862,342

Interest paid was $17,392,000 and $17,133,000 for the years ended September 30, 2016 and 2015, respectively. Interest capitalized in connection with ongoing construction projects approximated $903,000 and $262,000 in 2016 and 2015, respectively.

Series M Bonds

On November 18, 2009, the Hospital issued Series M MHEFA Revenue Bonds in the aggregate principal amount of $126,110,000. The bond proceeds were used to reimburse and fund certain capital additions, renovations, and equipment expenditures. The bonds, with a final maturity in December 2039, were issued at a net discount in the amount of $1,780,000 to bear interest at yields, which increase from 5.30% to 5.40% as maturities lengthen. Interest payments are due semiannually. The first annual principal payment is due in 2033.

1611-2110000 30 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

9. Long-Term Debt and Mortgage Notes (continued)

Series N Bonds

On May 13, 2010, the Hospital issued Series N MHEFA Revenue Bonds in the amount of $341,590,000. The bond proceeds redeemed MHEFA’s Revenue Bonds, Children’s Hospital Issue, Periodic Auction Reset Securities Series G, H, I, J, and K. The Series N Bonds were issued as Variable Rate Demand Revenue Bonds. In July 2014, $125,000,000 was refunded by the proceeds of the Series R Bonds.

The remaining outstanding Series N Bonds have a final maturity in October 2049 and are secured by bank letters of credit. These bank letters of credit will expire on December 2, 2017 and November 30, 2018. Interest payments are due monthly. Interest on the bonds is variable based on weekly (Series N-3) and daily (Series N-4) auctions and was .82%, and .83% for Series N-3 and N-4, respectively, on September 30, 2016. The first annual principal payment is due in 2029.

Series O Bonds

On December 11, 2013, the Hospital entered into two direct purchase loan agreements with banks for the Series O Massachusetts Development Finance Agency (MDFA) Revenue Bonds in the amount of $200,640,000. The bond proceeds redeemed a $200,000,000 bank term loan, which was entered into on August 28, 2008. The terms of the loan agreements are $100,640,000 for a 10-year period and $100,000,000 for a 15-year period. Interest on the loans is variable based on a tax-exempt rate and was 1.02% and .98%, respectively, on September 30, 2016. Interest payments are due monthly. Principal on the loans is due at maturity in 2023 and in 2028.

Series P Bonds

On May 21, 2014, the Hospital issued Series P MDFA Revenue Bonds in the amount of $136,685,000. The bond proceeds were used to reimburse and fund certain capital additions, renovations, and equipment expenditures. The bonds, with a final maturity in October 2046, were issued at a premium in the amount of $15,068,000 to bear interest at yields which increase from 3.85% to 4.41% as maturities lengthen. The first annual principal payment is due in 2031.

1611-2110000 31 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

9. Long-Term Debt and Mortgage Notes (continued)

Series Q Bonds

On July 11, 2014, the Hospital entered into a direct purchase loan agreement with a bank for the Series Q MDFA Revenue Bonds in the amount of $50,255,000. The bond proceeds were used to reimburse and fund certain capital additions and renovations. The term of the loan agreement is for a ten-year period. Interest on the loan is variable based on a tax-exempt rate and was .87% on September 30, 2016. Interest payments are due monthly. Principal on the loan is due at maturity in 2024.

Series R Bonds

On July 29, 2014, the Hospital entered into a direct purchase loan agreement with a bank for the Series R MDFA Revenue Bonds in the amount of $125,350,000. The bond proceeds redeemed $125,000,000 of the Series N-1 and N-2 MHEFA Variable Rate Demand Revenue Bonds. The term of the loan agreement is for a 15-year period. Interest on the loan is variable based on a tax- exempt rate and was .95% on September 30, 2016. Interest payments are due monthly. The first annual principal payment is due in 2022 with a final payment on the loan due at maturity in 2029.

Series A Bonds

On September 1, 1992, BRI entered into a Mortgage and Trust Agreement with Massachusetts Health and Education Facilities Authorities (MHEFA) for $21,300,000 MHEFA Revenue Bonds, BRI Issue, Series A. These bonds have a fixed interest rate of 6.5%, and are due serially through February 1, 2022. The proceeds of the issue were used to finance an initial lease payment pursuant to a capital lease with Harvard College and purchased equipment. The bonds are collateralized by substantially all of BRI’s assets and are guaranteed by Harvard College (the lessor), the owner of the leased property.

The bonds require semiannual interest payments on February 1 and August 1 and are redeemable prior to maturity beginning on February 1, 2003, at the option of MHEFA, and with the consent of BRI or by direction of BRI at redemption prices ranging from 100% to 102%, depending on the date they are redeemed, plus accrued interest. The bonds are also subject to redemption from required sinking fund installments.

1611-2110000 32 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

9. Long-Term Debt and Mortgage Notes (continued)

Capital Lease

During 2011, the Hospital obtained MHEFA financing of $1,300,000 for equipment to be purchased under capital leases. Principal and interest were paid semiannually through 2016 at an annual interest rate of 2.15%. The capital lease matured in May 2016.

Mortgage Notes

On August 1, 2008, Fenmore Realty Corporation entered into a mortgage note in the amount of $43,250,000. The note is secured by certain real estate investments. The note bears interest at a fixed rate of 6.53%, and matures in annual amounts through 2018. The annual principal and interest payments are $3,291,000 each year through 2018, with a final principal payment of $36,967,000 due at maturity on August 1, 2018.

On November 9, 2009, CHB Properties, Inc. acquired the remaining property interest in a medical office building and assumed the balance of the mortgage note in the amount of $27,837,000. The note matured in 2014.

On October 1, 2013, CHB Properties, Inc. entered into a term loan with a bank in the amount of $27,000,000 to pay off the remaining balance of the mortgage note. The bank loan bears interest at a variable rate of .98% at September 30, 2016, and is scheduled to mature on November 30, 2019. Interest payments are due monthly.

As of September 30, 2016, the Medical Center was in compliance with its debt covenants.

1611-2110000 33 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

9. Long-Term Debt and Mortgage Notes (continued)

Future Maturities

Future maturities of long-term debt and mortgage notes as of September 30, 2016, are as follows:

Series A Series M Series N Series O Series P Series Q Series R Mortgage Bonds Bonds Bonds Bonds Bonds Bonds Bonds Notes Total Years ending September 30: 2017 $ 1,100 $ – $ – $ – $ – $ – $ – $ 814 $ 1,914 2018 1,200 – – – – – – 37,421 38,621 2019 1,300 – – – – – – – 1,300 2020 1,400 – – – – – – 27,000 28,400 2021 1,500 – – – – – – – 1,500 Thereafter 1,500 126,110 216,590 200,640 136,685 50,255 125,350 – 857,130 Principal payments 8,000 126,110 216,590 200,640 136,685 50,255 125,350 65,235 928,865 Premium (discount) (261) (1,325) – – 13,782 – – – 12,196 Total $ 7,739 $ 124,785 $ 216,590 $ 200,640 $ 150,467 $ 50,255 $ 125,350 $ 65,235 $ 941,061 Less: Unamortized debt issuance costs (6,009) $ 935,052

Interest Rate Swap Agreements

The Medical Center was a party to the following interest rate swap agreements as of September 30, 2016:

Notional Fixed Effective Date Amount Interest Rate Maturity Date

December 2007 $ 120,000,000 3.42% October 2042 May 2006 119,875,000 3.57 October 2040 August 2004 70,000,000 4.00* October 2028 November 2003 50,000,000 3.13 October 2040 July 2002 35,000,000 4.72 October 2022 July 2002 35,000,000 4.72 October 2027 May 2001 105,250,000 4.58 October 2035

* Fixed at 4.0% through October 1, 2028, if the variable rate tax-exempt index reaches 4.5%.

1611-2110000 34 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

9. Long-Term Debt and Mortgage Notes (continued)

The Medical Center uses interest rate swap agreements in order to manage its interest rate risk associated with its outstanding debt. These swaps effectively convert interest rates on variable rate bonds to fixed rates. The interest rate swap agreements meet the definition of derivative instruments. Consequently, the aggregate fair value of the swaps (a liability of $177,094,000 and $146,314,000 at September 30, 2016 and 2015, respectively) is reported in long-term liabilities on the accompanying consolidated balance sheets, and the change in fair value of $(30,780,000) and $(33,579,000) for the years ended September 30, 2016 and 2015, respectively, is reported as a non-operating loss on the accompanying consolidated statements of operations and changes in net assets. The swaps, while serving as an economic hedge, do not qualify as an accounting hedge.

Cash flows under the swaps netted to payments of approximately $17,069,000 and $17,897,000 in 2016 and 2015, respectively, and are reported with interest expense on the accompanying consolidated statements of operations and changes in net assets.

Three of the interest rate swaps are cancelable at the option of the counterparty at any time if the variable interest rate is greater than or equal to 7%. The aggregate fair value of these swaps as of September 30, 2016 and 2015 is a liability of approximately $37,033,000 and $32,760,000, respectively.

Guaranteed Debt

As security to the Hospital’s direct purchase loan agreements with banks and Series M, N, and P bondholders, the Medical Center has executed unconditional and irrevocable guaranties of full and punctual payment of all obligations of the Hospital under the terms of the related loan agreements.

1611-2110000 35 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

10. Restricted Net Assets

Temporarily restricted net assets are composed of the following:

September 30 2016 2015 (In Thousands)

Mission-related activities $ 286,918 $ 252,469 Accumulated gains on permanently restricted net assets 220,276 233,643 $ 507,194 $ 486,112

Permanently restricted net assets are restricted as follows:

September 30 2016 2015 (In Thousands) Investments to be held in perpetuity, the income from which is: Unrestricted as to use $ 31,939 $ 28,251 Restricted for patient care-related activities 118,897 139,609 Restricted for research 68,848 34,586 Restricted for medical education 21,653 18,535 $ 241,337 $ 220,981

The Medical Center follows the requirements of the Massachusetts Uniform Prudent Management of Institutional Funds Act (UPMIFA) as they relate to its permanently restricted endowments. The Medical Center’s endowments consist of numerous individual funds established for a variety of purposes and include both donor-restricted endowment funds and unrestricted Board-designated funds held as endowments. Net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions.

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Notes to Consolidated Financial Statements (continued)

10. Restricted Net Assets (continued)

Management of the Medical Center has interpreted UPMIFA as requiring the preservation of the fair value of the original gift as of the date of the gift absent explicit donor stipulation to the contrary. Permanently restricted net assets are classified as (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment funds that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure. The Medical Center considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) the duration and preservation of the fund, (2) the purpose of the Medical Center and the donor-restricted endowment fund, (3) general economic conditions, (4) the possible effect of inflation and deflation, (5) the expected total return from income and the appreciation of investments, and (6) the investment policies of the Medical Center.

The components of endowment-related activities include the following:

Board- Temporarily Permanently Total Designated Restricted Restricted Endowment Funds Funds Funds Funds (In Thousands) Year ended September 30, 2016 Endowment net assets at beginning of year $ 837,683 $ 234,818 $ 179,516 $ 1,252,017 Investment return: Investment income 4,997 2,485 – 7,482 Net appreciation 68,245 33,306 – 101,551 Total investment gain 73,242 35,791 – 109,033

Contributions 18,208 – 12,706 30,914 Net asset reclassifications – – 2,994 2,994 Amounts appropriated for expenditure (63,807) (50,264) – (114,071) Endowment net assets at end of year $ 865,326 $ 220,345 $ 195,216 $ 1,280,887

*Excluded from the above table, but included in total permanently restricted net assets for the year ended September 30, 2016, are permanently restricted pledges of $11,257 and externally administered trusts of $34,864.

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Notes to Consolidated Financial Statements (continued)

10. Restricted Net Assets (continued)

Board- Temporarily Permanently Total Designated Restricted Restricted Endowment Funds Funds Funds Funds (In Thousands) Year ended September 30, 2015 Endowment net assets at beginning of year $ 881,013 $ 261,365 $ 169,242 $ 1,311,620 Investment return: Investment income 5,167 2,462 – 7,629 Net depreciation (25,178) (12,330) – (37,508) Total investment loss (20,011) (9,868) – (29,879)

Contributions 15,714 – 10,274 25,988 Net asset reclassifications 755 – – 755 Amounts appropriated for expenditure (39,788) (16,679) – (56,467) Endowment net assets at end of year $ 837,683 $ 234,818 $ 179,516 $ 1,252,017

*Excluded from the above table, but included in total permanently restricted net assets for the year ended September 30, 2015, are permanently restricted pledges of $7,954 and externally administered trusts of $33,511.

The Medical Center’s investment and spending policies for endowment assets are intended to provide a predictable stream of funding to programs supported by its endowment, while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the Medical Center must hold in perpetuity and the unexpended appreciation on those funds and unrestricted funds, which the Board has designated to function as endowments in support of mission-related activities. Under this policy, as approved by the Board of Trustees, the endowment assets are invested with the expectation they will generate a long-term rate of return of approximately 7% per annum. Actual returns in any given year may vary from this amount.

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Notes to Consolidated Financial Statements (continued)

10. Restricted Net Assets (continued)

To satisfy its long-term rate-of-return objectives, the Medical Center relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized), and current yield (interest and dividends). The Medical Center targets a diversified asset allocation that consists of equities, fixed income securities, and alternative investments.

The Medical Center has a policy of appropriating for distribution each year, no more than 5% of its endowment funds’ three-year trailing average market value. In establishing this policy, the Medical Center considered the long-term expected return on its endowments.

From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor requires the Medical Center to retain as a fund of perpetual duration. Deficiencies of this nature that are reported in unrestricted net assets are $1,033,864 as of September 30, 2016. The deficiency reported as of September 30, 2015, was $3,200,000. These deficiencies resulted from unfavorable market fluctuations.

The Hospital’s donor match program matches certain permanently restricted gifts from donors under a predefined ratio. This program has resulted in several major gifts to the Hospital in support of certain strategic purposes.

Net assets were released from donor or grantor restrictions by incurring expenses satisfying the following restricted purposes:

Year Ended September 30 2016 2015 (In Thousands)

Mission-related activities $ 65,487 $ 46,740 Property, plant, and equipment 947 3,239 $ 66,434 $ 49,979

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Notes to Consolidated Financial Statements (continued)

11. Net Patient Services Revenue

The Hospital and the Foundations have agreements with numerous third-party payors that provide for payments at amounts different from their established charges. Contracts with commercial providers provide for payments based on a variety of methodologies, including discounted charges, per-case or per-diem arrangements, and fee schedules for certain outpatient and professional services. Medicaid payments are based on a contract with the Massachusetts Executive Office of Health and Human Services, and hospital services are reimbursed on a standardized payment-per-encounter basis for outpatients, a standardized per-adjusted-discharge basis for inpatients, and a fee schedule for professional services. Medicare reimbursements are based upon Medicare’s proportionate share of reasonable costs for hospital services and a fee schedule for professional services.

Laws and regulations governing the Medicare and Medicaid programs are 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. Revenues from Medicare and Medicaid, including Medicaid out-of-state programs, accounted for approximately 1.0% and 16.4%, respectively, of the Medical Center’s net patient services revenue for 2016. Revenues from Medicare and Medicaid, including Medicaid out-of-state programs, accounted for approximately 1.0% and 19.1%, respectively, of the Medical Center’s net patient services revenue for 2015.

During 2016 and 2015, in connection with special legislative appropriations, the Medical Center received $20,411,000 and $17,387,000, respectively, from the Federal Children’s Hospital’s Graduate Medical Education program for reimbursement of graduate medical education expense. There is no guarantee that similar appropriations will occur in the future, or at what level.

Differences between estimated and final settlements are recorded as contractual adjustments in the year determined. The Medical Center decreased contractual adjustments by approximately $9,344,000 and $15,302,000 in 2016 and 2015, respectively, as a result of final settlements and other adjustments to prior year estimates.

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Notes to Consolidated Financial Statements (continued)

11. Net Patient Services Revenue (continued)

The Medical Center’s allowances for uncollectible accounts increased from 13% of accounts receivable at September 30, 2015, to 16% of accounts receivable at September 30, 2016, due to deterioration in the accounts receivable aging. The Hospital’s and Foundations’ self-pay and third-party payor write-offs were $78,306,000 and $57,235,000 for fiscal years 2016 and 2015, respectively. Write-offs as a percentage of net patient service revenue were 4% and 4% for fiscal years 2016 and 2015, respectively. The Hospital and Foundations have not changed their charity care or uninsured discount policies during fiscal year 2016. The Hospital and the Foundations grant credit without collateral to their patients. The concentration of credit risk by payor, as measured by patient accounts receivable, net of contractual adjustments, was as follows:

Year Ended September 30 2016 2015

Commercial/other managed care 31.9% 29.6% Blue Cross 20.9 21.6 Medicaid 17.0 15.9 International 22.5 25.3 Patients 5.1 5.3 Other governmental 2.6 2.3 Total 100.0% 100.0%

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Notes to Consolidated Financial Statements (continued)

11. Net Patient Services Revenue (continued)

Revenues from third-party payors, the uninsured, and other revenues are summarized in the following tables:

Amount Percentage (In Thousands) Year ended September 30, 2016 Commercial/other managed care $ 742,104 39.4% Blue Cross 573,866 30.4 Medicaid 298,826 15.9 International 153,523 8.1 Patients 49,711 2.6 Other governmental 47,984 2.5 Other 20,411 1.1 Revenues before provision for uncollectible accounts 1,886,425 100.0 Provision for uncollectible accounts (65,264) (3.5) Net patient services revenue $ 1,821,161 96.5%

Year ended September 30, 2015 Commercial/other managed care $ 609,520 36.7% Blue Cross 529,214 31.8 Medicaid 307,838 18.5 International 118,519 7.1 Patients 37,032 2.2 Other governmental 43,925 2.6 Other 17,387 1.1 Revenues before provision for uncollectible accounts 1,663,435 100.0 Provision for uncollectible accounts (44,535) (2.8) Net patient services revenue $ 1,618,900 97.2%

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Notes to Consolidated Financial Statements (continued)

12. Employees’ Retirement Plans

The Hospital sponsors two non-contributory, defined benefit retirement plans (the Regular Employees’ Pension Plan and the Maintenance Employees’ Pension Plan), which cover substantially all employees of the Hospital. The Regular Employees’ Pension Plan and the Maintenance Employees’ Pension Plan are cash balance plans under which benefits are based on the annuitized value of a participant’s account, which consists of basic credits (determined on age, years of vesting service, and compensation), plus interest credits thereon. The measurement date of these plans is September 30. The Hospital does not provide postretirement benefits other than pension to its retirees.

The Foundations maintain eight defined benefit pension plans for eligible employees at retirement based upon years of service, age, and compensation rates near retirement. These plans call for benefits to be paid to eligible employees at retirement based upon years of service and compensation earned as set forth in each plan. Contributions to these plans reflect benefits attributed to employees’ services to date, as well as services expected to be earned in the future, and are based upon actuarially determined requirements. Annual measurement dates for these respective plans are June 30 or September 30, based on their fiscal year-ends.

One of the Foundations also maintains a postretirement medical plan, which provides eligible participants and their dependents with postretirement health benefits. The plan is intended to qualify as a medical reimbursement plan under Internal Revenue Code Section 105(b). Participants must meet age and years of service requirements. A fixed amount is credited to a participant’s accounts based on years of service, with a cost of living adjustment credited annually. The measurement date is June 30 for the postretirement medical plan.

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Notes to Consolidated Financial Statements (continued)

12. Employees’ Retirement Plans (continued)

Reconciliation of Funded Status

A reconciliation of the changes in the defined benefit pension plans’ aggregate projected benefit obligation, fair value of assets, and the accumulated benefit obligation of the plans is as follows:

Year Ended September 30 2016 2015 (In Thousands) Change in benefit obligation Benefit obligation at beginning of year $ 809,003 $ 744,648 Service cost 46,462 45,267 Interest cost 34,344 30,961 Actuarial loss 78,436 7,546 Plan amendments 1,300 – Plan established 2,689 – Settlements (8,406) – Benefits paid (19,994) (19,419) Benefit obligations at end of year 943,834 809,003

Change in plan assets Fair value of plan assets at beginning of year 715,790 732,149 Actual return on plan assets 43,968 (27,277) Employer contributions 40,346 30,337 Settlements (8,059) – Benefits paid (19,994) (19,419) Fair value of plan assets at end of year 772,051 715,790

Funded status Net pension liability at end of year $ (171,783) $ (93,213)

Accumulated benefit obligation $ 832,556 $ 725,248

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Notes to Consolidated Financial Statements (continued)

12. Employees’ Retirement Plans (continued)

As of September 30 2016 2015 Amounts not yet recognized in net periodic benefit cost and included in unrestricted net assets Actuarial net loss $ 221,765 $ 146,403 Transition obligation cost – – Prior service credit (10,509) (12,130) $ 211,256 $ 134,273

The aggregate projected benefit obligation and fair value of plan assets for defined benefit plans with benefit obligations in excess of plan assets was $927,082,000 and $751,808,000 as of September 30, 2016, and $789,270,000 and $689,096,000 as of September 30, 2015. The aggregate projected benefit obligation and fair value of plan assets for defined benefit plans with fair value of plan assets in excess of benefit obligations was $16,752,000 and $20,242,000 as of September 30, 2016, and $19,733,000 and $26,694,000 as of September 30, 2015.

Year Ended September 30 2016 2015 (In Thousands) Components of net periodic benefit cost Service cost $ 46,462 $ 45,267 Interest cost 34,344 30,961 Expected return on plan assets (49,409) (50,854) Effect of settlement 2,697 – Plan established 2,689 – Amortization of unrecognized net loss 5,472 473 Amortization of net transition obligation – 612 Amortization of prior service credit (321) (399) Net periodic benefit cost $ 41,934 $ 26,060

Prior service credit of $321,000 and unrecognized actuarial losses of $10,208,000 are expected to be recognized in net periodic pension cost during the fiscal year ending September 30, 2017.

1611-2110000 45 Boston Children’s Hospital and Subsidiaries

Notes to Consolidated Financial Statements (continued)

12. Employees’ Retirement Plans (continued)

The weighted average assumptions used to develop pension expense are as follows:

Year Ended September 30 2016 2015

Discount rates 4.35%–4.40% 4.20%–4.50% Expected return on plan assets 7.00% 7.00% Rates of compensation increase 2.00%–4.00% 2.00%–4.00%

The weighted average assumptions used to develop the projected benefit obligation are as follows:

Year Ended September 30 2016 2015

Discount rates 3.60%–3.70% 4.35%–4.40% Rates of compensation increase 2.00%–4.00% 2.00%–4.00%

Plan Assets

To develop the expected long-term rate of return on plan assets assumption, the Medical Center considered the historical return and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolios.

The plans’ investment objectives are to achieve long-term growth in excess of long-term inflation, and to provide a rate of return that meets or exceeds the actuarial expected long-term rate of return on plan assets over a long-term time horizon. In order to minimize risk, the plans intend to minimize the variability in yearly returns. The plans also intend to diversify their holdings among asset classes, investment managers, sectors, industries, and companies. The Hospital’s and Foundations’ target asset policy guidelines include total equities between 45% and 75%, total fixed income between 10% and 40%, and other strategies between 5% and 25%.

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Notes to Consolidated Financial Statements (continued)

12. Employees’ Retirement Plans (continued)

The Hospital’s and Foundations’ pension plans’ weighted average asset allocations, by asset category, are as follows:

September 30 2016 2015

Cash and cash equivalents 4.1% 5.0% U.S. equities 15.9 16.7 Mutual funds 7.1 2.4 Global equities 19.1 15.8 Fixed income 12.6 17.1 Alternative investments 41.2 43.0 Total 100.0% 100.0%

Contributions

The Hospital and Foundations expect to contribute an aggregate of approximately $33,019,000 to their pension plans in 2017.

Estimated Future Benefit Payments

Benefit payments, which reflect expected future service, are expected to be paid as follows (in thousands):

Pension Benefits

2017 $ 59,824 2018 48,034 2019 50,076 2020 57,641 2021 63,062 Years 2022–2027 354,483

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Notes to Consolidated Financial Statements (continued)

12. Employees’ Retirement Plans (continued)

Certain physicians, by virtue of their joint appointments at the Hospital and Harvard University, are eligible for participation in the Harvard Retirement Plan for Teaching Faculty (the Harvard Plan), a defined contribution plan, and do not participate in the Hospital’s plans. The Hospital’s pension expense related to the Harvard Plan was approximately $4,133,000 and $3,646,000 for the years ended September 30, 2016 and 2015, respectively.

The Hospital has a 403(b) Tax-Deferred Annuity Plan under which contributions can be made by employees. The Hospital makes contributions to the plan based on a percentage of annual eligible earnings. Hospital contributions under the plan amounted to $5,559,000 and $5,555,000 for the years ended September 30, 2016 and 2015, respectively.

The Foundations have established 18 defined contribution plans to provide their long-term physician employees with fair and adequate retirement benefits. These include traditional 403(b) plans, money purchase plans, and profit-sharing plans. The basis for determining contributions range from 7.8% to 25% based on compensation of eligible employees. Total expense recognized by the Foundations under the defined contribution plans for the years ended September 30, 2016 and 2015, amounted to $28,549,000 and $27,222,000, respectively.

13. Deferred Compensation and Other Benefit Obligations

The Medical Center and Foundations maintain a program of integrated retirement plans such as 457(b), 457(f), and supplemental executive retirement plans to provide supplemental retirement benefits to certain employees. Plans provide either immediate vesting of benefits or may be determined by years of service and annual base compensation depending on the provisions set for the respective plans.

The Foundations have also established other profit-sharing, severance benefit, education or tuition, and long-term service plans to provide their physician employees with fair and adequate benefits. The benefits under these plans are administered based on the provisions set forth in the respective plan documents.

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Notes to Consolidated Financial Statements (continued)

13. Deferred Compensation and Other Benefit Obligations (continued)

The following table outlines the assets designated, accrued liabilities, and expenses recorded for the respective deferred compensation and other benefit plans as of and for the years ended September 30:

Assets Liabilities Expense (In Thousands) 2016 Supplemental retirement benefit plans $ 77,667 $ 91,365 $ 14,549 Other benefit plan obligations 73,148 41,378 11,912 $ 150,815 $ 132,743 $ 26,461

2015 Supplemental retirement benefit plans $ 72,171 $ 82,861 $ 9,943 Other benefit plan obligations 73,216 44,909 7,503 $ 145,387 $ 127,770 $ 17,446

14. Professional Liability

The Hospital’s and the Foundations’ primary professional and general liability insurance coverages are provided by Controlled Risk Insurance Company, Ltd. (CRICO), a corporation formed and wholly owned by the Harvard-affiliated medical institutions. The Hospital owns approximately 10% of CRICO’s stock and accounts for this investment on the cost basis. The premiums paid to CRICO are actuarially determined based on asserted claims and incurred but unasserted, claims. CRICO obtains excess coverage from other insurers.

The Hospital’s and the Foundations’ professional liability insurance policy is a retrospectively rated policy and is on a claims-made basis. The Hospital and the Foundations accrue a liability for claims incurred but not reported, which at September 30, 2016, was $13,272,000 and at September 30, 2015, was $14,727,000. Additionally, the Hospital and Foundations recorded a liability of $52,864,000 and $46,114,000 at September 30, 2016 and 2015, respectively, related to estimated insured professional liability losses and a corresponding receivable of $52,864,000 and $46,114,000 at September 30, 2016 and 2015, respectively, related to estimated recoveries under insurance coverage for recoveries of the potential losses.

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Notes to Consolidated Financial Statements (continued)

14. Professional Liability (continued)

Professional liability insurance expenses, net of recoveries, are as follows:

Year Ended September 30 2016 2015 (In Thousands) Professional liability insurance premiums, net of recoveries $ 13,791 $ 10,984 Decrease in reserve for incurred but not reported professional liability claims (1,455) (245) Total $ 12,336 $ 10,739

15. Fair Value of Financial Instruments

The Medical Center uses the methods for calculating fair value as defined in ASC 820, Fair Value Measurement, to value its financial assets and liabilities, where applicable. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value. Fair value measurements are applied based on the unit of account from the reporting entity’s perspective.

The unit of account determines what is being measured by reference to the level at which the asset or liability is aggregated (or disaggregated) for purposes of applying other accounting pronouncements.

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Notes to Consolidated Financial Statements (continued)

15. Fair Value of Financial Instruments (continued)

ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable inputs that are based on inputs not quoted in active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. In determining fair value, the Medical Center uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and considers non-performance risk in its assessment of fair value.

These financial instruments exclude real estate and investments accounted for under the equity method of approximately $1,891,107,000 and $1,800,290,000 at September 30, 2016 and 2015, respectively.

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Notes to Consolidated Financial Statements (continued)

15. Fair Value of Financial Instruments (continued)

Financial instruments carried at fair value are classified in the table below in one of the three categories described above:

September 30, 2016 Level 1 Level 2 Level 3 Total (In Thousands) Assets Cash and cash equivalents $ 251,127 $ 136,902 $ – $ 388,029 U.S. equities 684,434 125,648 – 810,082 Global equities 143,148 378,294 133,428 654,870 Investment-grade fixed income 40,679 639,440 – 680,119 Mutual funds 169,098 30,969 – 200,067 High-yield fixed income – 56,704 – 56,704 Global bonds fixed income – 47,534 – 47,534 Real asset funds 58,856 56,737 – 115,593 $ 1,347,342 $ 1,472,228 $ 133,428 $ 2,952,998 Liabilities Interest rate swap agreements $ – $ 177,094 $ – $ 177,094

September 30, 2015 Level 1 Level 2 Level 3 Total (In Thousands) Assets Cash and cash equivalents $ 315,742 $ 150,277 $ – $ 466,019 U.S. equities 686,900 82,338 – 769,238 Global equities 131,347 321,332 62,510 515,189 Investment-grade fixed income 68,724 619,094 – 687,818 Mutual funds 161,993 26,984 – 188,977 High-yield fixed income – 53,825 – 53,825 Global bonds fixed income – 45,472 – 45,472 Real asset funds 44,918 50,131 – 95,049 $ 1,409,624 $ 1,349,453 $ 62,510 $ 2,821,587 Liabilities Interest rate swap agreements $ – $ 146,314 $ – $ 146,314

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Notes to Consolidated Financial Statements (continued)

15. Fair Value of Financial Instruments (continued)

The following table sets forth a summary of changes in the fair value of the Level 3 assets:

Year Ended September 30 2016 2015 (In Thousands)

Balance, beginning of year $ 62,510 $ 14,813 Net realized loss (2,049) (281) Unrealized gains relating to investments still held at the reporting date 5,967 835 Purchases 67,000 48,000 Sales – (857) Balance, end of year $ 133,428 $ 62,510

Financial assets invested in the Medical Center’s defined benefit pension plans are classified in the table below in one of the three categories described above:

September 30, 2016 Level 1 Level 2 Level 3 Total (In Thousands) Assets Cash and cash equivalents $ 5,226 $ 26,797 $ – $ 32,023 U.S. equities 77,126 41,149 4,288 122,563 Mutual funds 47,169 7,336 – 54,505 Global equities 44,929 67,709 34,643 147,281 Investment-grade fixed income 10,020 59,028 2,949 71,997 High-yield fixed income 1,925 12,236 – 14,161 Global bonds fixed income – 10,539 950 11,489 Real asset funds 10,182 16,280 – 26,462 Domestic equity hedge funds – – 100,259 100,259 Distressed debt hedge funds – – 62,928 62,928 Multistrategy hedge funds – – 33,342 33,342 Global equity hedge funds – – 14,394 14,394 Private equity partnerships – – 80,647 80,647 $ 196,577 $ 241,074 $ 334,400 $ 772,051

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Notes to Consolidated Financial Statements (continued)

15. Fair Value of Financial Instruments (continued)

September 30, 2015 Level 1 Level 2 Level 3 Total (In Thousands) Assets Cash and cash equivalents $ 4,736 $ 30,959 $ – $ 35,695 U.S. equities 83,733 32,199 3,332 119,264 Mutual funds 8,934 7,854 539 17,327 Global equities 37,931 54,112 21,395 113,438 Investment-grade fixed income 46,491 50,331 – 96,822 High-yield fixed income 5,379 11,697 – 17,076 Global bonds fixed income – 8,321 – 8,321 Real asset funds 7,796 14,512 644 22,952 Domestic equity hedge funds – – 107,014 107,014 Distressed debt hedge funds – – 59,793 59,793 Multistrategy hedge funds – – 39,011 39,011 Global equity hedge funds – – 58,761 58,761 Private equity partnerships – – 20,316 20,316 $ 195,000 $ 209,985 $ 310,805 $ 715,790

The following table sets forth a summary of changes in the fair value of the Level 3 assets:

Year Ended September 30 2016 2015 (In Thousands)

Balance, beginning of year $ 310,805 $ 293,968 Net realized gain (loss) 5,410 (5,790) Unrealized gains relating to investments still held at the reporting date 6,370 39,898 Purchases 41,162 29,361 Sales (29,347) (46,632) Balance, end of year $ 334,400 $ 310,805

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Notes to Consolidated Financial Statements (continued)

15. Fair Value of Financial Instruments (continued)

The following table presents liquidity information for the financial instruments carried at net asset value:

September 30 Liquidity Restriction 2016 2015 Range (Including Net Asset Net Asset Notice Period) for Investment Type Value Value Redemption* (In Thousands)

U.S. equities $ 52,080 $ 34,937 0 to 60 days Global equities 101,278 72,165 30 to over 365 days Cash and cash equivalents 26,803 30,960 0 to 30 days Investment-grade fixed income 61,380 62,187 0 to 30 days High-yield fixed income 12,236 10,100 0 to 30 days Global bonds fixed income 10,327 8,118 0 to 30 days Real asset funds 16,895 14,860 0 to 60 days Domestic equity hedge funds 98,491 105,116 90 to over 365 days Distressed debt hedge funds 62,104 59,018 90 to over 365 days Multistrategy hedge funds 33,342 39,011 90 to over 365 days Global equity hedge funds 14,393 20,315 90 to over 365 days Private equity partnerships 80,647 58,761 Up to 7 years $ 569,976 $ 515,548

* Notices for redemption can be anywhere from a few days before a redemption date to more than 90 days, assuming the fund has met its lockup period.

Assets classified as Level 1 are valued using unadjusted quoted market prices for identical assets in active markets. Level 2 assets include U.S. and global equities, fixed income securities, and real asset funds. Fair value for Level 2 assets is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Inputs are obtained from various sources, including market participants, dealers, and brokers. Fair value for Level 3 assets is determined using net asset values as a practical expedient, as permitted by generally accepted accounting principles, rather than using another valuation method to independently estimate fair value. There were no transfers between Level 1 and Level 2 during 2015.

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Notes to Consolidated Financial Statements (continued)

15. Fair Value of Financial Instruments (continued)

The Level 2 liabilities are interest rate swap agreements. The fair value of interest rate swap agreements is primarily determined using techniques consistent with the market approach. Significant observable inputs to valuation models include interest rates, Treasury yields, and credit spreads.

The following methods and assumptions were used in estimating the fair value of financial instruments:

Accounts payable and accrued expenses: The carrying amount reported on the consolidated balance sheets for accounts payable and accrued expenses approximates its fair value.

Estimated third-party payor settlements: The carrying amount reported on the consolidated balance sheets for estimated third-party payor settlements approximates its fair value.

The Medical Center’s long-term debt obligations and mortgage notes are reported on the accompanying consolidated balance sheets at principal value, less unamortized discount or premium and debt issuance costs, which totaled approximately $869,817,000 and $65,235,000, respectively, at September 30, 2016. The fair value of the long-term obligations and mortgage notes was $898,193,000 and $67,062,000, respectively at September 30, 2016. The Medical Center’s long-term debt obligations and mortgage notes are reported on the accompanying consolidated balance sheets at principal value, less unamortized discount or premium and debt issuance costs, which totaled approximately $862,613,000 and $66,001,000 respectively, at September 30, 2015. The fair value of the long-term obligations and mortgage notes was $888,598,000 and $68,507,000, respectively at September 30, 2015.

Such fair value was determined assuming that the carrying value of the variable rate debt approximated fair value. The fair value of fixed rate debt was determined using discounted cash flows at current interest rates. These methodologies are consistent with the classification of Level 2 in the fair value hierarchy.

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

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Notes to Consolidated Financial Statements (continued)

16. Functional Expenses

The Medical Center is a multifaceted pediatric patient care provider dedicated to the improvement of the quality of life for children and their families. In its leadership role in pediatric medicine, the Medical Center focuses its efforts in three major areas: patient care, research, and medical education. Expenses related to providing these services are estimated as follows:

Year Ended September 30 2016 2015 (In Thousands)

Patient care $ 1,822,772 $ 1,537,261 Research 371,984 354,027 Medical education 43,885 43,587 Total expenses $ 2,238,641 $ 1,934,875

17. Subsequent Events

Subsequent events have been evaluated for potential recognition in the consolidated financial statements through January 13, 2017, which is the date the accompanying consolidated financial statements were issued. No subsequent events have occurred that require disclosure in or adjustment to the consolidated financial statements.

1611-2110000 57 Supplementary Information

1611-2110000

Ernst & Young LLP Tel: +1 617 266 2000 200 Clarendon Street Fax: +1 617 266 5843 Boston, MA 02116 ey.com

Report of Independent Auditors on Supplementary Information

The Board of Trustees Boston Children’s Hospital

We have audited the consolidated financial statements of Boston Children’s Hospital and Subsidiaries as of and for the years ended September 30, 2016 and 2015, and have issued our report thereon dated January 13, 2017, which contained an unmodified opinion on those financial statements. Our audits were performed for the purpose of forming an opinion on the consolidated financial statements as a whole. We did not audit the financial statements of the Physician’s Organization at Children’s Hospital, Inc. (the P.O.) and the Physician Foundations (the Foundations), controlled affiliates, which statements reflect total assets of $1,171 million and $1,085 million and total revenues of $675 million and $638 million as of and for the years ended September 30, 2016 and 2015, respectively, of the related consolidated totals. The accompanying consolidating balance sheets and consolidating statements of operations as of and for the years ended September 30, 2016 and 2015, are presented for the purposes of additional analysis and are not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, based on our audits and the report of the other auditors, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. January 13, 2017

1611-2110000 58

A member firm of Ernst & Young Global Limited Boston Children’s Hospital and Subsidiaries

Consolidating Balance Sheet

September 30, 2016 (In Thousands)

Physician Organization at Children’s Children’s Children’s Obligated to Hospital, Inc. Medical Children’s Medical the Payment and Other Center Hospital Center of the Bonds Foundations Subsidiaries Eliminations Consolidated Assets Current assets: Cash and cash equivalents $ 482 $ 32,601 $ 33,083 $ 137,725 $ 4,122 $ (20,694) $ 154,236 Patient accounts receivable, net of allowance for uncollectible accounts 186,400 – 186,400 68,308 15,399 – 270,107 Other receivables 55,850 19,903 75,753 10,997 1,418 (37,863) 50,305 Grants receivable 39,311 – 39,311 – – – 39,311 Due from Children’s Hospital – – – 16,975 – (16,975) – Due from Parent 2,112,428 (1,974,766) 137,662 – (137,662) – – Current portion of pledges receivable, net 41,730 – 41,730 – – (1,600) 40,130 Other current assets 36,900 170 37,070 4,771 2,675 (2,293) 42,223 Total current assets 2,473,101 (1,922,092) 551,009 238,776 (114,048) (79,425) 596,312 Investments: Unrestricted as to use 8,302 875,722 884,024 637,470 225,925 90,627 1,838,046 Limited by Board designation 82,710 1,562,447 1,645,157 67,714 – 515,889 2,228,760 Restricted by donor-imposed restriction 1,019,454 162,373 1,181,827 26,691 – (636,167) 572,351 1,110,466 2,600,542 3,711,008 731,875 225,925 (29,651) 4,639,157 Other assets whose use is limited: By externally administered trusts 47,881 – 47,881 – – – 47,881 For deferred compensation and other benefit obligations 2,557 – 2,557 148,258 – – 150,815 By long-term debt agreements – – – – 2,517 – 2,517 Other 6,059 – 6,059 – – (2,324) 3,735 56,497 – 56,497 148,258 2,517 (2,324) 204,948 Property, plant, and equipment, net 1,016,800 6,683 1,023,483 12,345 138,223 – 1,174,051 Goodwill and identifiable intangible assets 21,469 – 21,469 – 20,307 – 41,776 Pledges receivable, net 90,139 – 90,139 – – (1,970) 88,169 Other assets 29,199 – 29,199 39,524 12,804 (12,500) 69,027 Total assets $ 4,797,671 $ 685,133 $ 5,482,804 $ 1,170,778 $ 285,728 $ (125,870) $ 6,813,440

59 1611-2110000 Boston Children’s Hospital and Subsidiaries

Consolidating Balance Sheet (continued)

September 30, 2016 (In Thousands)

Physician Organization at Children’s Children’s Children’s Obligated to Hospital, Inc. Medical Children’s Medical the Payment and Other Center Hospital Center of the Bonds Foundations Subsidiaries Eliminations Consolidated Liabilities and net assets Current liabilities: Accounts payable and accrued expenses $ 126,332 $ 1,798 $ 128,130 $ 28,084 $ 9,497 $ 8,254 $ 173,965 Accrued salaries and wages 83,932 845 84,777 22,562 11,135 (1,270) 117,204 Current portion of estimated third-party liabilities 5,221 – 5,221 – – (1,973) 3,248 Due to Children’s Hospital – – – 43,689 – (43,689) – Promises to give – – – 3,435 – (3,435) – Current portion of long-term debt – – – – 1,100 – 1,100 Current portion of notes payable – – – – 814 – 814 Deferred revenue 98,463 – 98,463 2,824 – (45,550) 55,737 Other current liabilities 1,339 – 1,339 – 37 – 1,376 Total current liabilities 315,287 2,643 317,930 100,594 22,583 (87,663) 353,444

Long-term liabilities: Long-term debt 862,158 – 862,158 – 6,559 – 868,717 Mortgage notes payable – – – – 64,421 – 64,421 Long-term portion of estimated third-party liabilities 10,350 – 10,350 – – – 10,350 Net pension liability 124,207 – 124,207 – – 47,576 171,783 Funds held for others 38,918 9,036 47,954 – – (2,065) 45,889 Interest rate swap liability 177,094 – 177,094 – – – 177,094 Accrued defined benefit plan obligations, net – – – 47,577 – (47,577) – Deferred compensation and other benefit obligations 13,713 979 14,692 118,051 – – 132,743 Promises to give – – – 3,810 – (3,810) – Other liabilities 97,245 7,946 105,191 32,302 13,372 (12,500) 138,365 Total long-term liabilities 1,323,685 17,961 1,341,646 201,740 84,352 (18,376) 1,609,362

Net assets: Unrestricted 1,797,122 664,529 2,461,651 841,269 178,793 620,390 4,102,103 Temporarily restricted 630,895 – 630,895 27,175 – (150,876) 507,194 Permanently restricted 730,682 – 730,682 – – (489,345) 241,337 Total net assets 3,158,699 664,529 3,823,228 868,444 178,793 (19,831) 4,850,634 Total liabilities and net assets $ 4,797,671 $ 685,133 $ 5,482,804 $ 1,170,778 $ 285,728 $ (125,870) $ 6,813,440

See accompanying independent auditors’ report on other financial information.

60 1611-2110000 Boston Children’s Hospital and Subsidiaries

Consolidating Statement of Operations

Year Ended September 30, 2016 (In Thousands)

Physician Organization at Children’s Children’s Children’s Obligated to Hospital, Inc. Medical Children’s Medical the Payment and Other Center Hospital Center of the Bonds Foundations Subsidiaries Eliminations Consolidated Revenues: Patient services revenue, net of contractual allowances and discounts $ 1,179,426 $ – $ 1,179,426 $ 593,138 $ 121,966 $ (8,105) $ 1,886,425 Provision for uncollectible accounts (41,234) – (41,234) (24,030) – – (65,264) Net patient services revenue 1,138,192 – 1,138,192 569,108 121,966 (8,105) 1,821,161

Research grants and contracts 195,721 – 195,721 – – (10,015) 185,706 Recovery of indirect costs on grants and contracts 74,213 – 74,213 – – (2,891) 71,322 Other operating revenue 49,831 4,906 54,737 – 36,586 19,506 110,829 Unrestricted contributions, net of fundraising expenses 12,805 – 12,805 – – (81) 12,724 Research revenue – – – 41,387 – (41,387) – Clinical and other revenue – – – 44,888 – (44,888) – Teaching, administration and supervision revenue – – – 10,764 – (10,764) – Net assets released from restriction used for operations 75,362 – 75,362 8,583 – (18,458) 65,487 Total revenues 1,546,124 4,906 1,551,030 674,730 158,552 (117,083) 2,267,229

Expenses: Salaries and benefits 687,756 6 687,762 545,601 108,366 4,160 1,345,889 Supplies and other expenses 464,245 411 464,656 41,274 64,480 (33,100) 537,310 Direct research expenses of grants 195,721 – 195,721 – – (10,015) 185,706 Health Safety Net assessment 10,101 – 10,101 – – – 10,101 Medical service expenses – – – 35,166 – (35,166) – Research expenses – – – 17,116 – (17,116) – Contributions – – – 26,452 – (26,452) – Depreciation and amortization 114,516 559 115,075 2,261 8,099 – 125,435 Interest and net interest rate swap cash flows 33,975 – 33,975 – 225 – 34,200 Total expenses 1,506,314 976 1,507,290 667,870 181,170 (117,689) 2,238,641

Gain (loss) from operations 39,810 3,930 43,740 6,860 (22,618) 606 28,588

Non-operating gains (losses): Income from investments 7,379 6,217 13,596 12,777 (749) 11,449 37,073 Net realized gain on investments 1,444 30,913 32,357 15,283 (35) – 47,605 Unrealized gain on investments classified as trading securities – – – 10,011 – – 10,011 Increase in value of alternative investments 2,952 62,479 65,431 16,981 – 15,547 97,959 Recognition of unrealized losses on investments ( 786) (23,553) (24,339) – – (2,849) (27,188) Gain on sale of real estate – – – – – – – Fundraising expenses on restricted contributions (20,349) – (20,349) – – – (20,349) Adjustment of interest rate swaps to fair value (30,780) – (30,780) – – – (30,780) Other non-operating losses – (8,200) (8,200) 4,069 (413) 69 (4,475) Total non-operating (losses) gains (40,140) 67,856 27,716 59,121 (1,197) 24,216 109,856 (Deficiency) excess of revenues over expenses $ (330) $ 71,786 $ 71,456 $ 65,981 $ (23,815) $ 24,822 $ 138,444

See accompanying independent auditors’ report on other financial information.

61 1611-2110000 Boston Children’s Hospital and Subsidiaries

Consolidating Balance Sheet

September 30, 2015 (In Thousands)

Physician Organization at Children’s Children’s Children’s Obligated to Hospital, Inc. Medical Children’s Medical the Payment and Other Center Hospital Center of the Bonds Foundations Subsidiaries Eliminations Consolidated Assets Current assets: Cash and cash equivalents $ 506 $ 31,435 $ 31,941 $ 107,597 $ 1,910 $ (845) $ 140,603 Patient accounts receivable, net of allowance for uncollectible accounts 183,476 – 183,476 68,637 12,454 – 264,567 Other receivables 47,768 17,400 65,168 10,855 101 (34,890) 41,234 Grants receivable 41,279 – 41,279 – – – 41,279 Due from Children’s Hospital – – – 18,580 – (18,580) – Due from Parent 2,075,902 (2,002,149) 73,753 – (73,753) – – Current portion of pledges receivable, net 34,837 – 34,837 – – (921) 33,916 Other current assets 29,716 – 29,716 5,040 1,287 (4,393) 31,650 Total current assets 2,413,484 (1,953,314) 460,170 210,709 (58,001) (59,629) 553,249 Investments: Unrestricted as to use 10,240 777,838 788,078 597,367 230,769 9,798 1,626,012 Limited by Board designation 79,197 1,541,143 1,620,340 63,388 – 534,122 2,217,850 Restricted by donor-imposed restriction 951,114 139,837 1,090,951 26,714 – (573,571) 544,094 1,040,551 2,458,818 3,499,369 687,469 230,769 (29,651) 4,387,956 Other assets whose use is limited: By externally administered trusts 47,276 – 47,276 – – – 47,276 For deferred compensation and other benefit obligations 3,236 – 3,236 142,151 – – 145,387 By long-term debt agreements 36,837 – 36,837 – – – 36,837 Other 6,560 – 6,560 – – (2,139) 4,421 93,909 – 93,909 142,151 – (2,139) 233,921 Property, plant, and equipment, net 966,942 3,482 970,424 8,728 96,586 – 1,075,738 Goodwill and identifiable intangible assets – – – – 20,682 – 20,682 Pledges receivable, net 81,807 – 81,807 – – (2,160) 79,647 Other assets 24,790 – 24,790 36,047 314 – 61,151 Total assets $ 4,621,483 $ 508,986 $ 5,130,469 $ 1,085,104 $ 290,350 $ (93,579) $ 6,412,344

62 1611-2110000 Boston Children’s Hospital and Subsidiaries

Consolidating Balance Sheet (continued)

September 30, 2015 (In Thousands)

Physician Organization at Children’s Children’s Children’s Obligated to Hospital, Inc. Medical Children’s Medical the Payment and Other Center Hospital Center of the Bonds Foundations Subsidiaries Eliminations Consolidated Liabilities and net assets Current liabilities: Accounts payable and accrued expenses $ 137,056 $ 2,233 $ 139,289 $ 26,765 $ 8,179 $ 7,354 $ 181,587 Accrued salaries and wages 73,325 463 73,788 18,534 8,395 (229) 100,488 Current portion of estimated third-party liabilities 5,993 – 5,993 – – (3,262) 2,731 Due to Children’s Hospital – – – 29,946 – (29,946) – Promises to give – – – 2,756 – (2,756) – Current portion of long-term debt 271 – 271 – – – 271 Current portion of notes payable – – – – 1,470 – 1,470 Deferred revenue 83,162 – 83,162 2,684 – (39,183) 46,663 Other current liabilities 603 603 603 Total current liabilities 300,410 2,696 303,106 80,685 18,044 (68,022) 333,813

Long-term liabilities: Long-term debt 862,342 – 862,342 – – – 862,342 Mortgage notes payable – – – – 64,531 – 64,531 Long-term portion of estimated third-party liabilities 9,631 – 9,631 – – – 9,631 Net pension liability 66,640 – 66,640 – – 26,573 93,213 Funds held for others 38,858 8,726 47,584 – – (2,746) 44,838 Interest rate swap liability 146,314 – 146,314 – – – 146,314 Accrued defined benefit plan obligations, net – – – 26,573 – (26,573) – Deferred compensation and other benefit obligations 13,924 525 14,449 113,321 – – 127,770 Promises to give – – – 2,840 – (2,840) – Other liabilities 64,861 7,946 72,807 31,557 168 – 104,532 Total long-term liabilities 1,202,570 17,197 1,219,767 174,291 64,699 (5,586) 1,453,171

Net assets: Unrestricted 1,852,300 489,093 2,341,393 802,910 207,607 566,357 3,918,267 Temporarily restricted 565,670 – 565,670 27,218 – (106,776) 486,112 Permanently restricted 700,533 – 700,533 – – (479,552) 220,981 Total net assets 3,118,503 489,093 3,607,596 830,128 207,607 (19,971) 4,625,360 Total liabilities and net assets $ 4,621,483 $ 508,986 $ 5,130,469 $ 1,085,104 $ 290,350 $ (93,579) $ 6,412,344

See accompanying independent auditors’ report on other financial information.

63 1611-2110000 Boston Children’s Hospital and Subsidiaries

Consolidating Statement of Operations

Year Ended September 30, 2015 (In Thousands)

Physician Organization at Children’s Children’s Children’s Obligated to Hospital, Inc. Medical Children’s Medical the Payment and Other Center Hospital Center of the Bonds Foundations Subsidiaries Eliminations Consolidated Revenues: Patient services revenue, net of contractual allowances and discounts $ 1,088,733 $ – $ 1,088,733 $ 552,743 $ 29,244 $ (7,285) $ 1,663,435 Provision for uncollectible accounts (26,989) – (26,989) (17,546) – – (44,535) Net patient services revenue 1,061,744 – 1,061,744 535,197 29,244 (7,285) 1,618,900

Research grants and contracts 187,023 – 187,023 – – (9,713) 177,310 Recovery of indirect costs on grants and contracts 65,864 – 65,864 – – (2,698) 63,166 Other operating revenue 49,356 4,129 53,485 – 16,283 17,484 87,252 Unrestricted contributions, net of fundraising expenses 9,009 – 9,009 – – (70) 8,939 Research revenue – – – 40,582 – (40,582) – Clinical and other revenue – – – 38,841 – (38,841) – Teaching, administration and supervision revenue – – – 9,180 – (9,180) – Net assets released from restriction used for operations 47,875 – 47,875 14,475 – (15,610) 46,740 Total revenues 1,420,871 4,129 1,425,000 638,275 45,527 (106,495) 2,002,307

Expenses: Salaries and benefits 618,948 (67) 618,881 483,588 26,712 4,302 1,133,483 Supplies and other expenses 427,598 383 427,981 41,484 17,138 (19,371) 467,232 Direct research expenses of grants 187,023 – 187,023 – – (9,713) 177,310 Health Safety Net assessment 8,570 – 8,570 – – – 8,570 Medical service expenses – – – 23,672 – (23,672) – Research expenses – – – 33,317 – (33,317) – Contributions – – – 19,994 – (19,994) – Depreciation and amortization 106,853 689 107,542 1,064 5,440 – 114,046 Interest and net interest rate swap cash flows 34,228 – 34,228 – 6 – 34,234 Total expenses 1,383,220 1,005 1,384,225 603,119 49,296 (101,765) 1,934,875

Gain (loss) from operations 37,651 3,124 40,775 35,156 (3,769) (4,730) 67,432

Non-operating gains (losses): Income from investments 8,910 13,194 22,104 13,083 1,031 21,986 58,204 Net realized gain on investments 3,003 74,659 77,662 12,622 (38) – 90,246 Unrealized gain on investments classified as trading securities – – – (26,408) – – (26,408) Increase in value of alternative investments 16 6,498 6,514 (10,289) – 1,885 (1,890) Recognition of unrealized losses on investments (2,835) (78,867) (81,702) – – (14,525) (96,227) Fundraising expenses on restricted contributions (18,542) – (18,542) – – – (18,542) Adjustment of interest rate swaps to fair value (33,579) – (33,579) – – – (33,579) Other non-operating losses (89) (7,653) (7,742) (46) – – (7,788) Total non-operating (losses) gains (43,116) 7,831 (35,285) (11,038) 993 9,346 (35,984) (Deficiency) excess of revenues over expenses $ (5,465) $ 10,955 $ 5,490 $ 24,118 $ (2,776) $ 4,616 $ 31,448

See accompanying independent auditors’ report on other financial information.

64 1611-2110000 EY | Assurance | Tax | Transactions | Advisory

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DEFINITIONS OF CERTAIN TERMS

In addition to the terms defined elsewhere in this Offering Memorandum, unless the context otherwise requires, the following terms shall have the following meanings in this Offering Memorandum, including the appendices hereto:

“Additional Indebtedness” means any Indebtedness (including all Indenture Indebtedness) incurred by any Member, subsequent to its becoming a Member.

“Adjusted Annual Operating Revenues” means, as to any Fiscal Year, the aggregate of operating revenues, not including uncollectible accounts, of all Members for such year, less contractual allowances and free care, determined in accordance with generally accepted accounting principles and in such a manner that no portion of the operating revenues, contractual allowances or free care of any Member is included more than once.

“Affiliate” means a corporation, partnership, joint venture, association, business trust or similar entity organized under the laws of the United States of America or any state thereof: (a) which Controls or which is Controlled, directly or indirectly, by the Institution, the Medical Center or any Affiliate; or (b) a majority of the members of any Governing Body of which are members of the Governing Body of the Institution.

“Aggregate Debt Service Requirement” means, as to any period, the aggregate of the Debt Service Requirements of all Members for such period, determined in such a manner that no portion of the Debt Service Requirement of any Member is included more than once.

“Aggregate Income Available for Debt Service” means, as to any period, the aggregate of Income Available for Debt Service of all Members for such period, determined in such a manner that no portion of Income Available for Debt Service of any such Member is included more than once.

“Authorized Denominations” means $1,000 and any integral multiple thereof.

“Balloon Indebtedness” means (i) Long-Term Indebtedness which is secured by a refinancing arrangement meeting the requirements of the Master Indenture or which is part of an issue of Indebtedness 40% or more of which has its Date of Maturity in the same 12 month period or (ii) any portion of an issue of Long-Term Indebtedness which is so designated by the Representative with the consent of the Master Trustee pursuant to an Officer’s Certificate stating that such portion shall be deemed to constitute a separate issue of Balloon Indebtedness.

“Bond Indenture” means the bond indenture dated as of February 1, 2017 between The Children’s Hospital Corporation and U.S. Bank National Association, as Bond Trustee, providing for the issuance of the Bonds.

“Bondholder” or “Holders” means the registered owners of any Bond, including DTC or its nominee as the sole registered owner of book-entry Bonds.

“Bonds” means the Initial Bonds and any Additional Bonds.

“Bond Trustee” means U.S. Bank National Association.

“Book Value,” when used in connection with Property of any Member of the Obligated Group, shall mean the cost of such property, net of accumulated depreciation, as shown on the most recent audited financial statements of the owner thereof, or, in the case of real property only, the value shown on an MAI appraisal dated not earlier than one year before the proposed transaction, and when used in connection with Property of the Obligated Group, means the aggregate of the values so determined with respect to such Property of all Members of the Obligated Group

C-1 determined in such a manner that no portion of such value of property of any Member is included more than once. Notwithstanding the above, investment securities shall be valued at market value.

“Business Day” means any day of the week other than Saturday, Sunday or a day which shall be in the State of New York, in The Commonwealth of Massachusetts or in the state in which the Bond Trustee’s principal corporate trust offices are located a legal holiday or a day on which banking corporations are authorized or obligated by law or executive order to close.

“Code” means the Internal Revenue Code of 1986, as amended, or any successor code or law, and any regulations in effect or promulgated thereunder.

“Completion Indebtedness” means any Long-Term Indebtedness incurred by any Member for the purpose of financing the completion of constructing or equipping facilities for the construction or equipping of which Long-Term Indebtedness has theretofore been incurred in accordance with the provisions of the Master Indenture, to the extent necessary to provide a completed and equipped facility of the type and scope contemplated at the time such prior Long-Term Indebtedness was originally incurred and for the purpose of financing a related debt service reserve fund, if any.

“Consultant” means an independent firm which is a certified public accountant or professional management consultant, selected by the Institution or other Member, as the case may be, reasonably acceptable to the Master Trustee and having the skill and experience necessary to render the particular report required by the provision of the Master Indenture in which such requirement appears.

“Corporate Trust Office” means the office of the Bond Trustee at which its principal corporate trust business is conducted.

“Controlled” or “Controls” means with respect to: (a) a corporation having stock, the ownership, directly or indirectly, of more than 50% of the securities (as defined in Section 2(1) of the Securities Act of 1933, as amended) of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of such corporation’s directors (or persons performing similar functions); (b) a not for profit corporation not having stock, having the power to elect or appoint, directly or indirectly, a majority of the Governing Body of such corporation; (c) a partnership, any Member is the sole general partner or Controls the sole general partner; or (d) any other entity, the power to direct the management of such entity through the ownership of at least a majority of its voting securities or the right to designate or elect at least a majority of the members of its Governing Body, by contract or otherwise.

“Coverage Ratio” means, with respect to the Guarantor, the ratio of the Guarantor’s Unconsolidated Income Available for Debt Services to its Direct Debt Service Requirement.

“Credit Facility” means a financial guaranty insurance policy, line of credit, letter of credit, standby bond purchase agreement or similar credit enhancement or liquidity facility established in connection with the issuance of Indebtedness to provide credit or liquidity support for such Indebtedness.

“Date of Maturity” means as to any Indebtedness, as of any date of determination, the first date thereafter on which such Indebtedness is payable, whether at maturity, by mandatory (including sinking fund) redemption (or purchase) or by redemption (or purchase) at the option of the holders; provided that if portions of any Indebtedness are payable on different dates, the Date of Maturity shall be separately determined for each such portion. If there is a refinancing arrangement for any Indebtedness meeting certain requirements of the Master Indenture, in determining Dates of Maturity, such Indebtedness shall be deemed to be payable in accordance with the terms of the refinancing arrangement.

“Debt Service Requirement” shall mean, with respect to each Member of the Obligated Group, as to any period of time, the aggregate of the amounts required to be paid to amortize principal of Outstanding Long-Term Indebtedness and to pay interest (other than capitalized interest) on Outstanding Long-Term Indebtedness of such Member during such period, taking into account in determining the Debt Service Requirement (A) for any future

C-2 period that (i) Indebtedness described in the Master Indenture shall be deemed payable on the dates and in the amounts contemplated in the Master Indenture, (ii) except as otherwise expressly permitted in the Master Indenture, principal on all Indebtedness shall be deemed to be payable on the Date of Maturity thereof, and (iii) with respect to variable rate indebtedness, the interest rate to be taken into account for each future period in which such Indebtedness will be outstanding shall be calculated, at the option of the Representative, either at the average interest rate for the preceding twelve months (or if such Indebtedness has not been outstanding for the preceding twelve months, at the average interest rate for similar obligations with comparable ratings, as set forth in an Officer’s Certificate) or the interest rate on similar obligations with comparable ratings and maturities as set forth in a certificate of an investment banking firm acceptable to the Master Trustee; provided, however, that the Representative may make other assumptions with respect to such Indebtedness as it deems reasonable and as are reasonably acceptable to the Master Trustee, and (B) for any period with respect to Indebtedness that has been refunded or refinanced, the amounts of principal and interest taken into account during such period shall exclude amounts payable from proceeds of the refunding Indebtedness.

“Direct Debt” means, with respect to the Guarantor, its Long-Term Indebtedness, excluding any Guaranty.

“Direct Debt Service Requirement” means, with respect to the Guarantor, the Debt Service Requirement of the Guarantor, excluding from the determination thereof payments with respect to indebtedness guaranteed by the Guarantor except to the extent actually made by the Guarantor.

“Discount Indebtedness” means an issue of Indebtedness which is originally sold by the issuer at a price (excluding accrued interest but without deduction of any underwriter’s discount) of less than the principal amount of such Indebtedness.

“DTC” means The Depository Trust Company, a limited purpose trust company organized under the laws of the State of New York, and its successors and assigns, or any other depository which agrees to follow the procedures required to be followed by such depository in connection with the Bonds.

“Electronic Means” means the following communications methods: SWIFT, e‐mail, facsimile transmission, secure electronic transmission containing applicable authorization codes, passwords and/or authentication keys issued by the Bond Trustee, or another method or system specified by the Bond Trustee as available for use in connection with its services hereunder.

“Event of Default” means any one or more of those events set forth in the Master Indenture or the Bond Indenture or the Guaranty.

“Fitch” means Fitch Ratings Inc., its successors and assigns.

“Fiscal Year” means the fiscal year of the Institution or the fiscal year of any other Member as the context may require.

“Governing Body” means, when used with respect to the Institution or any other Member, its board of directors, board of trustees, or other board or group of individuals, or the individual, in which the powers of the Institution or the Member are vested.

“Government or Equivalent Obligations” means, in the context of the Master Indenture, (i) obligations issued or guaranteed by the United States; (ii) certificates evidencing ownership of the right to the payment of the principal of and interest on obligations described in clause (i), provided that such obligations are held in the custody of a bank or trust company satisfactory to the Master Trustee in a special account separate from the general assets of such custodian and (iii) bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state (A) which are not callable at the option of the obligor or otherwise prior to maturity or as to which irrevocable notice has been given by the obligor to call such bonds or obligations on the date specified in the notice, (B) which are fully secured as to principal and interest and redemption premium, if any, by a fund consisting only of cash or bonds or other obligations of the character described in clause (i) or (ii) which fund may be applied only to the payment when due of interest, principal of and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or

C-3 dates pursuant to such irrevocable instructions, as appropriate, and (C) as to which the principal of and interest on the bonds and obligations of the character described in clause (i) or (ii), as the case may be, which have been deposited in such fund on deposit in such fund is sufficient to pay interest when due, principal of and redemption premium, if any, on the bonds or other obligations described in this clause (iii) on the maturity date or dates thereof or on the redemption date or dates specified in the irrevocable instructions referred to in subclause (A) of this clause (iii), as appropriate.

“Government or Equivalent Obligations” means, in the context of the Bond Indenture, (i) obligations issued or fully and unconditionally guaranteed by the United States; (ii) certificates evidencing ownership of the right to the payment of the principal of and interest on obligations described in clause (i), provided that such obligations are held in the custody of a bank or trust company satisfactory to the Bond Trustee in a special account separate from the general assets of such custodian; and (iii) bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state (A) which are not callable at the option of the obligor or otherwise prior to maturity or as to which irrevocable notice has been given by the obligor to call such bonds or obligations on the date specified in the notice, (B) which are fully secured as to principal and interest and redemption premium, if any, by a fund consisting only of cash or bonds or other obligations of the character described in clause (i) or (ii) which fund may be applied only to the payment when due of interest, principal of and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, and (C) as to which the principal of and interest on the bonds and obligations of the character described in clause (i) or (ii), as the case may be, which have been deposited in such fund is sufficient to pay interest when due, principal of and redemption premium, if any, on the bonds or other obligations described in this clause (iii) on the maturity date or dates thereof or on the redemption date or dates specified in the irrevocable instructions referred to in subclause (A) of this clause (iii), as appropriate.

“Governmental Issuer” means any federal, state or municipal corporation or political subdivision thereof or any instrumentality of any of the foregoing empowered to issue obligations on behalf thereof.

“Gross Receipts” shall mean all accounts receivable, contract rights and the proceeds thereof, including all revenues and receipts of each Member of the Obligated Group from all sources including, without limitation, insurance proceeds (other than gifts, grants or bequests which by their terms may not lawfully be used to fulfill such Member’s obligations under the Master Indenture and insurance proceeds attributable to assets that are the subject of a capital lease or purchase money security interest).

“Guaranteed Debt” means the total outstanding amount of indebtedness guaranteed by the Guarantor.

“Guarantor” means The Children’s Medical Center Corporation.

“Guaranty” means the Guaranty of Obligation No. 34 dated February 1, 2017 by The Children’s Medical Center Corporation in favor of the Master Trustee.

“Historical Debt Service Coverage Ratio” means, for any period of time, the ratio determined by dividing Aggregate Income Available for Debt Service for that period by the Aggregate Debt Service Requirement for such period.

“Income Available for Debt Service” shall mean, with respect to each Member of the Obligated Group, as to any period of time, the excess of revenues over expenses (excluding from revenues and expenses extraordinary items, infrequently occurring items or unusual items and the cumulative effect of changes in accounting principles, excluding income from Irrevocable Deposits and excluding from expenses depreciation, interest on Long-Term Indebtedness and amortization of bond discount and financing expenses), as determined in accordance with generally accepted accounting principles, provided that no determination thereof shall take into account any revenue or expense of an Affiliate which is not a Member of the Obligated Group except as provided in the following two sentences and provided further that there shall be excluded from revenues or expenses, as the case may be, any gain or loss resulting from the valuation of investment securities or any Interest Rate Agreements at market value and any other gain or loss that does not require or result in the receipt or expenditure of cash. In determining the Historical Debt Service Coverage Ratio or historical coverage of pro forma Indebtedness, (i) amounts actually transferred from the Medical Center to any Member may be treated as revenues of such Member provided such amounts were not restricted to purposes inconsistent with the payment of any Indebtedness of such Member and (ii) if a Member has audited financial

C-4 statements for the period in question, its Income Available for Debt Service shall be determined to the extent possible from such statements. In determining the Projected Debt Service Coverage Ratio for any period, projected transfers from the Medical Center to any Member may be treated as revenues of such Member to the extent the amounts projected to be transferred do not exceed in aggregate the projected income of the Medical Center during such period excluding any income which is restricted for other purposes, encumbered or customarily transferred to Persons which are not Members, plus any amount of unrestricted net assets of the Medical Center authorized to be transferred to the Institution pursuant to a vote of the Governing Body of the Medical Center then in effect as of the date of the projection.

“Indebtedness” shall mean all obligations for borrowed money, or installment sale and capitalized lease obligations, incurred or assumed by any Member of the Obligated Group, including Guaranties (other than any Guaranty by any Member of the Obligated Group of Indebtedness of any other Member of the Obligated Group), Long-Term Indebtedness, Short-Term Indebtedness, subordinated Indebtedness or any other obligation of a Member for payments of principal and interest with respect to money borrowed; provided that Indebtedness shall not include obligations of a Member of the Obligated Group to another Member of the Obligated Group or Interest Rate Agreements.

“Indenture Indebtedness” means any Indebtedness evidenced by or the repayment of which is secured by an Obligation or Obligations issued and delivered under the Master Indenture and authenticated by the Master Trustee pursuant to the Master Indenture.

“Institution” means The Children’s Hospital Corporation.

“Insurance Consultant” means an independent Person or firm which is selected by the Institution or other Member, as the case may be, and acceptable to the Master Trustee and qualified to survey risks and to recommend insurance coverage for hospitals, health related facilities and services and organizations engaged in such operations.

“Interest Payment Date” means each date on which interest is to be paid.

“Interest Rate Agreement” means an interest rate exchange, hedge or similar agreement, expressly identified in an Officer’s Certificate of the Institution delivered to the Master Trustee as having been entered into in order to hedge the interest payable on all or a portion of any Indebtedness, which agreement may include, without limitation, an interest rate swap or a forward or futures contract (e.g., a call, put, cap, floor or collar).

“Irrevocable Deposit” shall mean the irrevocable deposit in trust of cash in an amount (or Government or Equivalent Obligations the principal of and interest on which will be in an amount) and under terms sufficient to pay all or a portion of the principal of and interest on, as the same shall become due, any Indebtedness which immediately prior to the time of such deposit is Outstanding. The trustee of such deposit may be the Master Trustee, a Related Bond Trustee or any other trustee authorized to act in such capacity.

“Lien” means any mortgage or pledge of, security interest in or lien or encumbrance on any Property of any Member which secures any Indebtedness or any other obligation of any Member, or which secures any obligation of any Person other than an obligation to any Member, excluding liens applicable to Property in which the Member has only a leasehold interest unless the lien secures Indebtedness of any Member.

“Long-Term Indebtedness” means any Indebtedness which is not Short-Term Indebtedness.

“Marketable Securities” means, with respect to the Guaranty, all cash and securities of the Guarantor that may be converted to cash by the Guarantor within 120 days.

“Master Trust Indenture” or “Master Indenture” means the Amended and Restated Master Trust Indenture dated as of April 10, 2001, between the Institution and the Master Trustee, as amended and supplemented from time to time.

C-5 “Master Trustee” means U.S. Bank National Association (as successor to State Street Bank and Trust Company, as successor to BayBank Middlesex), and its successors as Master Trustee under the Master Indenture.

“Maximum Annual Debt Service” means the highest Aggregate Debt Service Requirement for the then current or any succeeding Fiscal Year.

“Medical Center” or “Guarantor” means The Children’s Medical Center Corporation, and its successors, so long as it, or its successor, Controls or is under common Control with the Institution.

“Member of the Obligated Group” or “Member” shall mean (i) the Institution and (ii) any Affiliate or any other Person which at any time after the delivery of the Master Indenture has become a Member of the Obligated Group in accordance with the Master Indenture and has not withdrawn from the Obligated Group pursuant to the terms of the Master Indenture.

“Moody’s” means Moody’s Investors Service Inc., its successors and assigns.

“Note” or “Obligation No. 34” means The Children’s Hospital Corporation Obligation No. 34, issued under the Master Indenture with respect to the Bonds.

“Obligated Group” means the Institution and each other Member of the Obligated Group, if any.

“Obligation” shall mean an instrument evidencing or securing the repayment of particular Indenture Indebtedness or evidencing any repayment obligation under an Interest Rate Agreement, provided such instrument has been issued in accordance with the Master Indenture and executed and authenticated as provided in the Master Indenture.

“Obligation Holder” or “Holder” shall mean the registered owner of any Obligation.

“Officer’s Certificate” shall mean a certificate meeting the requirements of the Master Indenture, an original of which shall be received by the Master Trustee, signed by the chief financial officer or such other person designated in writing by the chief financial officer or by resolution of the board of trustees of the Institution or other Member as the case may be.

“Opinion of Bond Counsel” means an opinion in writing signed by an attorney or firm of attorneys acceptable to the Master Trustee and experienced in the field of municipal bonds whose opinions are generally accepted by purchasers of municipal bonds to the effect that the matter or action in question will not have an adverse impact on the tax-exempt status of the Bonds for federal income tax purposes.

“Opinion of Counsel” means an opinion in writing signed by an attorney or firm of attorneys, acceptable to the Master Trustee, who may be counsel for any Member of the Obligated Group, or other counsel.

“Outstanding,” when used with reference to the Bonds, means, as of any date of determination, all Bonds theretofore authenticated and delivered except: (i) Bonds theretofore cancelled by the Bond Trustee or delivered to the Bond Trustee for cancellation; (ii) Bonds the principal of which, Redemption Price, if any, and interest on have been paid in full or are deemed to have been paid in full as provided in this Bond Indenture; (iii) Bonds in lieu of which other Bonds have been issued pursuant to the provisions of this Bond Indenture relating to Bonds destroyed, stolen or lost, unless evidence satisfactory to the Bond Trustee has been received that any such Bond is held by a bona fide purchaser; and (iv) for purposes of any consent or other action to be taken under this Bond Indenture by the Holders of a specified percentage of principal amount of Bonds, Bonds held by or for the account of the Borrower, or any Person controlling, controlled by, or under common control with, the Borrower (for purposes of this clause (iv), the Bond Trustee shall be permitted to rely on a certificate of the Borrower).

“Outstanding” when used with reference to Indebtedness, shall mean, as of any date of determination, all Indebtedness theretofore issued or incurred and not paid and discharged other than (i) Obligations theretofore cancelled by the Master Trustee or delivered to the Master Trustee for cancellation, (ii) Indebtedness deemed paid and

C-6 no longer Outstanding as provided in the Master Indenture or for which the requirements of the Master Indenture have been satisfied from proceeds of Long-Term Indebtedness or from any other funds, and (iii) Obligations and any coupons appurtenant thereto in lieu of which other Obligations have been authenticated and delivered or have been paid pursuant to the provisions of the Related Supplement regarding mutilated, destroyed, lost or stolen Obligations unless proof satisfactory to the Master Trustee has been received that any such Obligation is held by a bona fide purchaser; provided however that for purposes of exercising any rights under the Master Indenture, other than receiving payment under the Master Indenture, the principal amount of any Obligation that secures Related Bonds deemed Outstanding shall be reduced by the amount of Related Bonds that are secured by a Credit Facility, when such Credit Facility is also secured by a separate Obligation under the Master Indenture. Any Interest Rate Agreement which is authenticated as an Obligation under the Master Indenture shall be deemed outstanding under the Master Indenture solely for the purpose of receiving payment under the Master Indenture and shall not be entitled to exercise any rights under the Master Indenture as set forth in the Master Indenture.

“Person” means any natural person, corporation, limited liability company, partnership, trust, joint venture, association, company, estate, unincorporated organization or any other entity or organization, including a government or any agency or political subdivision or instrumentality thereof.

“Projected Debt Service Coverage Ratio” means, for any future forecast period of time, the ratio determined by dividing projected or forecasted Aggregate Income Available for Debt Service during such period by Maximum Annual Debt Service during such period.

“Projection” means a forecast or determination of the Projected Debt Service Coverage Ratio or a determination of historical coverage of pro forma Indebtedness.

“Property” means with respect to each Member any and all of its rights, titles and interests in and to any and all property, except as otherwise provided in this definition, whether real or personal, tangible or intangible and wherever situated including, without limitation, accounts, accounts receivable, contract rights and general intangibles, and all proceeds of all of the foregoing, whether cash or non-cash but the Property of the Institution shall not include the Property listed in Exhibit A attached to the Master Indenture or the revenues derived therefrom.

“Property, Plant and Equipment” means all Property of the Members which is property, plant and equipment under generally accepted accounting principles.

“Purchase Contract” means the Bond Purchase Contract dated January __, 2017 among the Underwriter, the Institution, and the Guarantor.

“Rating Agency” means any of Moody’s, S&P or Fitch, which is then providing a rating on the Bonds.

“Related Bond Indenture” means any indenture, bond resolution or other comparable instrument pursuant to which a series of Related Bonds is issued, together with any mortgage, note, loan agreement or similar instrument securing such series of Related Bonds.

“Related Bond Issuer” means the Governmental Issuer of any issue of Related Bonds.

“Related Bonds” means the revenue bonds, notes, other evidences of indebtedness or any other obligations issued by a Governmental Issuer, pursuant to a single Related Bond Indenture, the proceeds of which are loaned or otherwise made available to or for the benefit of a Member, directly or indirectly, in consideration, in whole or in part, of the execution, authentication and delivery of an Obligation or series of Obligations to or for the order of such Governmental Issuer or Related Bond Trustee.

“Related Bond Trustee” means the trustee and its successors in the trust created under any Related Bond Indenture, and if there is no such trustee, shall mean the Related Bond Issuer.

C-7 “Related Supplement” means an indenture supplemental to, and authorized and executed pursuant to the terms of, the Master Indenture for the purpose of authorizing obligations to evidence or secure Indenture Indebtedness issued under the Master Indenture.

“Representative” shall mean the Institution or such other Member of the Obligated Group as may be designated from time to time pursuant to written notice to the Master Trustee executed by each Member of the Obligated Group.

“Research Affiliate” means The Children’s National Research Institute, Inc. and its successors, provided that substantially all of the activities thereof consist of research or related activities.

“S&P” means S&P Global Ratings, its successors and assigns.

“Short-Term Indebtedness” means any issue of Indebtedness no portion of which has a Date of Maturity more than one year from the date of original issuance thereof.

“Supplemental Master Indenture for Obligation No. 34” means the Supplemental Master Indenture for Obligation No. 34 dated as of February 1, 2017 by and between the Institution and the Master Trustee.

“UCC” means the Massachusetts Uniform Commercial Code.

“Unconsolidated Income Available for Debt Service” means, with respect to the Guarantor, as to any period of time, the excess of revenues over expenses (excluding from revenues and expenses extraordinary items, infrequently occurring or unusual items and the cumulative effect of changes in accounting principles, excluding income from Irrevocable Deposits and excluding from expenses depreciation, interest on Long-Term Indebtedness and amortization of bond discount and financing expenses), as determined in accordance with generally accepted accounting principles, provided that no determination thereof shall take into account any revenue or expense of any Affiliate.

“Underwriter” means, in the case of the Initial Bonds, Goldman, Sachs & Co., as representative of the underwriters identified in the Bond Purchase Contract.

“Unrestricted Assets” means, with respect to the Guarantor, unconsolidated total cash and unrestricted and unencumbered investments.

Words importing persons include firms, associations and corporations, and the singular and plural form of words shall be deemed interchangeable wherever appropriate.

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APPENDIX D

SUMMARY OF CERTAIN PROVISIONS OF THE LEGAL DOCUMENTS

SUMMARY OF THE MASTER TRUST INDENTURE

The following is a brief summary of certain provisions of the Amended and Restated Master Trust Indenture dated as of April 10, 2001 between the Institution and the Master Trustee (as supplemented and amended, the “Master Indenture”). This summary does not purport to be complete, and reference is made to the Master Indenture for full and complete statements of such and all provisions.

Amount of Indenture Indebtedness and Interest Rate Agreements

The number of Obligations evidencing or securing Indenture Indebtedness and Interest Rate Agreements that may be created under the Master Indenture is not limited. The aggregate principal amount of Indenture Indebtedness, the aggregate notional amount of Interest Rate Agreements and the principal amount of each Obligation that may be issued, authenticated and delivered under the Master Indenture is not limited except as limited by the provisions of the Master Indenture or of the Related Supplements. (Section 2.01)

Designation of Indenture Indebtedness

Obligations shall be issued in such forms as may from time to time be determined by Related Supplements. Each Obligation or series of Obligations shall be created by a different Related Supplement and each Obligation shall be designated in such a manner as will differentiate such Obligation from any other Obligation. (Section 2.02)

Supplement Creating Obligations

The Representative and the Master Trustee may from time to time enter into a Related Supplement to create Obligations to be issued under the Master Indenture. (Section 2.04)

Conditions for Membership

A Person which is an Affiliate may become a Member of the Obligated Group upon satisfying the conditions set forth in the Master Indenture which include:

Unless such Person is the Medical Center or the Research Affiliate, the Master Trustee shall have received an Officer’s Certificate of the Representative’s chief financial officer to the effect that (A) the Projected Debt Service Coverage Ratio for the first Fiscal Year succeeding the date of admission of such Person, is greater than the Projected Debt Service Coverage Ratio for such Fiscal Year of the Obligated Group without such Person or (B) subject to the provisions of the Master Indenture the Obligated Group could issue $1 of additional Long-Term Indebtedness pursuant to the Master Indenture or, if the Indebtedness of such Person would qualify as additional Long-Term Indebtedness under the Master Indenture. The Officer’s Certificate shall include combined pro forma balance sheets, statements of operations and changes in net assets and statements of cash flows for such period, together with a statement of the relevant assumptions upon which such pro forma statements are based.

Unless the Officer’s Certificate delivered pursuant to the Master Indenture was to the effect specified in the paragraph above, the Master Trustee shall have received an Officer’s Certificate of the Representative to the effect that, immediately after the admission of such Person to the Obligated Group, the Obligated Group will not be in default in the performance or observance of any covenant or condition to be performed or observed under the Master Indenture. (Section 3.01)

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Power to Incur Indebtedness On Behalf of Other Members of the Obligated Group

Each Member of the Obligated Group, respectively, by becoming a Member acknowledges that the Representative has the power to issue Obligations under the Master Indenture, subject to the requirements of the Master Indenture or of any Related Supplement, on which all Members of the Obligated Group will be jointly and severally obligated. (Section 4.01)

Each Member of the Obligated Group jointly and severally covenants promptly to pay or cause to be paid the principal of and premium, if any, and interest on Obligations issued under the Master Indenture at the place, on the dates and in the manner provided therein, in the Related Supplements, and in said Obligations and any coupons appertaining thereto according to the terms thereof whether at maturity, upon proceedings for redemption, by acceleration or otherwise. (Section 5.01)

Each Member agrees that, with respect to Indenture Indebtedness incurred by it or for its direct benefit and evidenced or secured by an Obligation, it will be primarily liable to make full and timely payment on such Obligation and Indenture Indebtedness. (Section 4.02)

Withdrawal From the Obligated Group

No Member of the Obligated Group may withdraw from the Obligated Group unless the Representative consents to such withdrawal; such Member is not a party to a Related Bond Indenture with respect to Related Bonds then Outstanding and is not primarily liable pursuant to the Master Indenture for the payment of any Outstanding Obligation or Indenture Indebtedness or the remaining Members of the Obligated Group expressly agree in writing to pay the related Bonds; and the Master Trustee shall have received an Officer’s Certificate of the Representative’s chief financial officer to the effect that the Projected Debt Service Coverage Ratio for the first Fiscal Year succeeding the date of withdrawal of such Member and assuming the withdrawal of such Member (A) is greater than the Projected Debt Service Coverage Ratio for such Fiscal Year of the Obligated Group including such Member or (B) the Obligated Group could issue $1 of additional Long-Term Indebtedness pursuant to the Master Indenture or if the indebtedness of such Person would qualify as Additional Long-Term Indebtedness under the Master Indenture. The Officer’s Certificate shall include combined pro forma balance sheets, statements of income or of revenue and expenses and statements of changes in financial position for such period, together with a statement of the relevant assumptions upon which such pro forma statements are based. (Section 4.03)

Covenants as to Corporate Existence, Maintenance of Properties, Etc.

Each Member of the Obligated Group, respectively, covenants:

Except as otherwise expressly provided, to preserve its corporate or other separate legal existence and all its rights and licenses to the extent necessary or desirable in the operation of its business and affairs and to be qualified to do business and conduct its affairs in each jurisdiction where its ownership of Property or the conduct of its business or affairs requires such qualifications, unless any of its rights or licenses is no longer used or useful in the conduct of its business or affairs.

At all times to cause its Properties to be maintained, preserved and kept in good repair, working order and condition and all needful and proper repairs, renewals and replacements thereof to be made; provided, however, that the covenant does not (i) prevent it from ceasing to operate any portion of its Properties if in its judgment (evidenced, in the case of such a cessation other than in the ordinary course of business, by a determination by its Governing Body) it is advisable not to operate the same, or if it intends to sell or otherwise dispose of the same and within a reasonable time endeavors to effect such sale or other disposition, or (ii) obligate it to retain, preserve, repair, renew or replace any Property, leases, rights, privileges or licenses no longer used or, in the judgment of its Governing Body, useful in the conduct of its business or affairs.

To do all things reasonably necessary to conduct its affairs and carry on its business and operations in such manner as to comply in all material respects with any and all applicable laws of the United States and the several states thereof and with all valid orders, regulations or requirements of any governmental authority relative to the conduct of D-2

its business and the ownership of its Properties, unless the validity of such laws, orders, regulations or requirements or the applicability thereof to it shall be contested in good faith.

Promptly to pay all lawful taxes, governmental charges and assessments at any time levied or assessed upon or against it or its Properties; provided, however, that it shall have the right to contest in good faith any such taxes, charges or assessments or the collection of any such sums and pending such contest may delay or defer payment thereof. (Section 5.02)

Insurance

(a) Each Member of the Obligated Group shall (i) keep its plant, equipment and furnishings included in its Property insured against fire, lightning and extended coverage perils and against such other risks as are customarily insured against by similar institutions in the area; (ii) to the extent required by law, carry worker’s compensation insurance, (which may be through the so-called Massachusetts Self – Insurance Group) disability insurance and other insurance covering injury, sickness, disability or death of employees; (iii) maintain insurance against liability of the Member imposed by law or assumed by contract for injuries to persons (excluding liability covered by clauses (iv) and (v)), and for death of persons from such injuries; (iv) maintain motor vehicle liability insurance covering owned, nonowned and hired motor vehicles, protecting the Member against liability for property damage; and (v) if it provides health care services, maintain insurance against liability of the Member for professional malpractice.

(b) In lieu of obtaining third-party coverage for the risks described in Subsection (a), the Institution or any other Member may self-insure any of the required coverages or a portion thereof (or may participate in captive insurance programs sponsored by the Medical Center, any Affiliate, Harvard University, or any association or organization exposed to comparable risks); provided such Member delivers to the Master Trustee a report of an Insurance Consultant stating that the self-insurance of such risks (or such participation) is consistent with reasonable management and insurance practices.

(c) As long as any Member maintains any self-insurance (or participates in any captive insurance program) pursuant to Subsection (b), it will provide the Master Trustee bi-annually with a report of an Insurance Consultant concerning the adequacy of funding and the funding determination processes employed in connection therewith. The insurance maintained by any Member pursuant to Subsection (a) shall also be subject to the review of an Insurance Consultant who shall every five years prepare and file with the Master Trustee a report on the adequacy of such insurance. Each Member of the Obligated Group, respectively, agrees that it will follow any reasonable recommendations of the Insurance Consultant to the extent permitted by law. (Section 5.03)

Limitations on Creation of Liens

Each Member of the Obligated Group, respectively, agrees that it will not create or suffer to be created or exist any Lien upon any Property consisting solely of real property now owned or hereafter acquired by it or upon Gross Receipts other than Permitted Liens.

Permitted Liens consist of the following:

(i) Any judgment lien or notice of pending action against any Member of the Obligated Group so long as such judgment or pending action is being contested and execution thereon is stayed or while the period for responsive pleading has not lapsed;

(ii) (A) Rights reserved to or vested in any municipality or public authority by the terms of any right, power, franchise, grant, license, permit or provision of law, affecting any Property, to (1) terminate such right, power, franchise, grant, license or permit, provided that the exercise of such right would not materially impair the use of the Member’s Property or materially and adversely affect the value thereof, or (2) purchase, condemn, appropriate or recapture, or designate a purchaser of, such Property; (B) any liens on any Property for taxes, assessments, levies, fees, water and sewer rents, and other governmental and similar charges and any liens of mechanics, materialmen, laborers, suppliers or vendors for work or services performed or materials furnished in connection with such Property, D-3

which are not due and payable or which are not delinquent or which, or the amount or validity of which, are being contested and execution thereon is stayed or, with respect to liens of mechanics, materialmen, and laborers, have been due for less than 60 days; (C) easements, rights-of-way, servitudes, restrictions and other minor defects, encumbrances, and irregularities in the title to any Property which do not materially impair the use of such Property or materially and adversely affect the value thereof; and (D) rights reserved to or vested in any municipality or public authority to control or regulate any Property or to use such Property in any manner, which rights do not materially impair the use of such Property or materially and adversely affect the value thereof;

(iii) Any Lien described in Exhibit B to the Master Indenture which is existing on the date of authentication and delivery of Obligation No. 8 provided that no such Lien (or the amount of Indebtedness secured thereby) may be increased, extended, renewed or modified to apply to any Property of any Member of the Obligated Group not subject to such Lien on such date, unless such Lien as so increased, extended, renewed or modified otherwise qualifies as a Permitted Lien under the Master Indenture;

(iv) Purchase money security interests and security interests existing on any Property prior to the time of its acquisition through purchase, merger, consolidation or otherwise, or placed upon Property to secure a portion of the purchase price thereof, or lessor’s interests in leases required to be capitalized in accordance with generally accepted accounting principles; provided that the aggregate principal amounts secured by any such interests shall not exceed at the time of incurrence or assumption the fair market value of such Property;

(v) Any Lien in favor of the Master Trustee securing all Indenture Indebtedness on a parity basis;

(vi) Liens arising by reason of good faith deposits in connection with leases of real estate, bids or contracts (other than contracts for the payment of money), deposits to secure public or statutory obligations, or to secure, or in lieu of, surety, stay or appeal bonds, and deposits as security for the payment of taxes or assessments or other similar charges;

(vii) Any Lien arising by reason of deposits with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulation for any purpose at any time as required by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege or license, or to enable any Member of the Obligated Group to maintain self-insurance or to participate in any funds established to cover any insurance risks or in connection with workers’ compensation, unemployment insurance, pension or profit-sharing plans or other similar arrangements, or to share in the privileges or benefits required for companies participating in such arrangements and any Lien in the nature of a banker’s lien or right of setoff with respect to deposits that any Member is required to maintain with the bank in question;

(viii) Any Lien arising by reason of an Irrevocable Deposit;

(ix) Any Lien in favor of a trustee on the proceeds of Indebtedness prior to the application of such proceeds or while held in a debt service reserve fund;

(x) Liens on moneys deposited by patients or others with any Member as security for or as prepayment for the cost of patient care;

(xi) Liens on Property received by any Member through gifts, grants or bequests, such Liens being due to restrictions on such gifts, grants or bequests of Property or the income thereon, up to the fair market value of such Property;

(xii) Statutory rights of the United States of America by reason of federal funds made available under 42 U.S.C. §291 et seq. and similar rights under other federal and state statutes;

(xiii) Liens for taxes or special assessments not then delinquent or which are being contested in accordance with the Master Indenture;

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(xiv) Liens on Property due to rights of third-party payers for setoff or recoupment of amounts paid to any Member;

(xv) Liens securing Long-Term Indebtedness, provided that the aggregate amount of Indebtedness of the Members of the Obligated Group (other than capitalized leases) which is secured pursuant to this Paragraph (xv) shall not at any time exceed 10% of the total Book Value of the Property of the Obligated Group;

(xvi) Any Lien created or permitted by the Master Indenture;

(xvii) Any Lien upon Property the loss of which Property would not have any material adverse effect upon (1) the security for the Outstanding Obligations, (2) the operations of the Property of the Obligated Group or (3) the Aggregate Income Available for Debt Service;

(xviii) Liens arising from leases that relate to Property of a Member, as lessor, that is of a type that is customarily the subject of such leases, such as office space of physicians, health care and educational institutions, food service facilities, gift shops and radiology or other hospital-specialty services, pharmacy and similar departments; leases, licenses or similar rights existing as of the date of issuance of Obligation No. 6 to use Property owned on such date by any Person who was a Member on such date, and any renewal extensions thereof; and any leases, licenses or similar rights to use Property whereunder a Member is a lessee, licensee or the equivalent thereof; and

(xix) Liens securing non-recourse Indebtedness, provided, however, that the Property subject to such Lien is the Property being financed by such Indebtedness;

(xx) Liens resulting from a Person’s becoming an Obligated Group Member pursuant to the Master Indenture or from a consolidation, merger or acquisition of assets pursuant to the Master Indenture;

(xxi) Any Lien on accounts receivable of the Obligated Group and on amounts due the Obligated Group from Medicare, Medicaid and other third party payors, in each case which may be senior to or on a parity with any Lien on gross receipts hereafter granted under the Master Indenture, securing Short-Term Indebtedness (including Guaranties) in an amount not to exceed 50% of the aggregate amount of such accounts, accounts receivable and amounts due from Medicare, Medicaid and other third party payors, net of bad debt, as shown as patients accounts receivable, less allowances for uncollectible accounts, on the most recent year-end audited combined or consolidated financial statements of the Obligated Group at the time such Short-Term Indebtedness (or Guaranty) is incurred;

(xxii) Any Lien on accounts receivable of the Obligated Group and on amounts due the Obligated Group from Medicare, Medicaid and other third party payors, which are junior to any Lien on gross receipts hereafter granted under the Master Indenture;

(xxiii) Liens granted by a member of the Obligated Group to any other Member to secure any Indebtedness of a Member of the Obligated Group to any other Member, and

(xxiv) Any Lien on Property that, at the time of the creation of such Lien, could have otherwise been disposed of in accordance with the Master Indenture.

A determination by the Master Trustee that a Lien is a Permitted Lien pursuant to Paragraph (xvii) shall be binding upon the Obligation Holders, but such a determination shall not be required. (Section 5.04)

Limitations on Incurrence of Additional Indebtedness

Each Member of the Obligated Group, respectively, agrees that it will not incur any Additional Indebtedness except as follows:

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(a) Long-Term Indebtedness, including Indenture Indebtedness, if prior to incurrence of the Long-Term Indebtedness, there is delivered to the Master Trustee an Officer’s Certificate of the Representative’s chief financial officer, certifying that:

(i) the ratio determined by dividing Aggregate Income Available for Debt Service for the most recent Fiscal Year for which the combined financial statements of the Obligated Group have been reported upon by independent certified public accountants, by Maximum Annual Debt Service including the Additional Indebtedness, is not less than 1.25; or

(ii) Subject to the provisions of Subsection (f) below, (A) the Historical Debt Service Coverage Ratio for the period mentioned in Paragraph (a)(i) of this Section, not including the proposed Additional Indebtedness, is not less than 1.10, and (B) the Projected Debt Service Coverage Ratio, taking the proposed Additional Indebtedness into account, for (1) in the case of Additional Indebtedness to finance capital improvements, each of the two Fiscal Years succeeding the date on which such capital improvements are expected to be placed in operation, or (2) in the case of Long-Term Indebtedness refinancing other Indebtedness for completed capital projects or Long-Term Indebtedness not financing capital improvements, each of the two Fiscal Years succeeding the date on which the Indebtedness is incurred, is not less than 1.25, as shown by combined pro forma balance sheets, statements of operations and changes in net assets and statements of cash flows for each such period, accompanied by a statement of the relevant assumptions upon which such pro forma statements are based, delivered to the Master Trustee along with the Officer’s Certificate; or

(iii) the aggregate principal amount of Long-Term Indebtedness incurred and Outstanding pursuant to this Paragraph (a)(iii), including the proposed Additional Indebtedness, does not exceed 20% of Adjusted Annual Operating Revenues for the most recent Fiscal Year for which the combined financial statements of the Obligated Group have been reported upon by independent certified public accountants. Any Outstanding Indebtedness incurred under this Paragraph (iii) shall be deemed to have been incurred under another provision of this Section upon the satisfaction of such other provision as if such Outstanding Indebtedness were then being incurred.

(b) Completion Indebtedness in an amount not greater than twenty-five percent (25%) of the Indebtedness originally incurred to finance the facilities being completed.

(c) Long-Term Indebtedness incurred for the purpose of refunding any Long-Term Indebtedness if the conditions described in Subsection (a) of this Section are met with respect to such proposed Long- Term Indebtedness or if upon the incurrence thereof an Officer’s Certificate is delivered to the Master Trustee stating that, taking the proposed Long-Term Indebtedness and the refunding of the existing Long-Term Indebtedness into account, Maximum Annual Debt Service will not be increased by more than 10%.

(d) Short-Term Indebtedness if:

(A) immediately after the incurrence of such Short-Term Indebtedness, the principal amount of all Outstanding Short-Term Indebtedness does not exceed the greater of (1) 15% of the Adjusted Annual Operating Revenues or (2) 75% of the aggregate net accounts receivable of the Obligated Group as of the end of the most recent Fiscal Year for which the combined financial statements of the Obligated Group have been reported upon by independent certified public accountants, and (B) during the 12 months immediately preceding the incurrence of such Short- Term Indebtedness there shall have been a period of at least 30 consecutive days in which the Obligated Group had Outstanding Short-Term Indebtedness of no more than five percent 5% of Adjusted Annual Operating Revenues, provided that the Master Trustee shall waive the requirement of this clause (B) if (i) there is delivered to the Master Trustee a Consultant’s report confirming that there is a temporary interruption in the flow of reimbursement revenues from third parties, or (ii) if and to the extent that such Short-Term Indebtedness could be incurred under Subparagraph (i) or (ii) of Subsection (a) above if it were Long-Term Indebtedness.

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(e) Indebtedness the payment of which is subordinated in a manner satisfactory to the Master Trustee to the payment of all Indenture Indebtedness.

(f) Agreements relating to letters or lines of credit or similar credit facilities used to secure Additional Indebtedness incurred in accordance with the provisions of this Section.

(g) If the Obligated Group is unable to satisfy certain requirements of the Master Indenture regarding maintenance of Projected Debt Service Coverage Ratios as specified in the Master Indenture as a condition to Membership in the Obligated Group, consolidation, merger or disposition of assets, or incurrence of Additional Indebtedness, such otherwise unmet requirements shall be deemed satisfied if there shall be filed with the Master Trustee a report by a Consultant containing the following opinions:

(1) That applicable laws or regulations, and contracts generally applicable to all similar health care providers have prevented or will prevent generation of the required level of Aggregate Income Available for Debt Service, and, if requested by the Master Trustee, an accompanying Opinion of Counsel acceptable to the Master Trustee setting forth any conclusions of law relevant to such opinion;

(2) That, with regard to such a failure, the Obligated Group has generated the maximum amount of Aggregate Income Available for Debt Service which could reasonably be generated given such governing laws and regulations during the applicable period and that the Historical Debt Service Coverage Ratio for the period was at least 1.00; and

(3) That, with regard to such a failure based upon forecasts and estimates contained in the report, the Obligated Group will generate the maximum amount of Aggregate Income Available for Debt Service which can reasonably be generated given such governing laws and regulations during the applicable period and that the Projected Debt Service Coverage Ratio for the applicable period is not less than 1.00. (Section 5.05)

Debt Service on Guaranties

In determining the Debt Service Requirement of any Member, whether historical or projected, computations of debt service on Long-Term Indebtedness shall include an amount equal to twenty-five percent (25%) of the debt service on Guaranties for the period during which such Debt Service Requirement is computed; provided, however, that debt service on Guaranties with respect to which a payment has been made during the preceding twenty-four (24) months or with respect to which the primary obligor is in default by reason of bankruptcy or insolvency shall be included at one hundred percent (100%) of such debt service. (Section 5.06)

Debt Service on Balloon Indebtedness

At the election of any Member, for the purpose of any computation of the Debt Service Requirement, whether historical or projected, the principal and interest deemed to be payable on Balloon Indebtedness of such Member outstanding for the period during which such Debt Service Requirement is computed, shall be as set forth below:

(a) If the Member has obtained a binding commitment of a responsible financial institution satisfactory to the Master Trustee to refinance such Balloon Indebtedness (or a portion thereof), including without limitation, a letter of credit or a line of credit, which commitment is subject only to such conditions as are reasonably acceptable to the Master Trustee, the Balloon Indebtedness (or portion thereof) may be deemed to be payable in accordance with the terms of the refinancing arrangement; or

(b) (A) the Date of Maturity of any portion of such Balloon Indebtedness is more than 18 months after the date of any transaction for which a Projection is made or (B) the condition of paragraph (a), above is satisfied with respect to such portion by a financing arrangement having a term not less than three years, such portion of such Balloon Indebtedness may be deemed to be Indebtedness payable over a 25-year term, at the interest rate certified below, in equal annual installments of principal and interest, provided that the Representative has delivered D-7

to the Master Trustee a certificate of an investment banker or a financial advisor satisfactory to the Master Trustee stating that it is reasonable to assume that such Indebtedness of the Member could be sold and stating the interest rate then applicable to 25-year obligations of comparable quality and type. (Section 5.07)

Debt Service on Discount Indebtedness; Interest Rate Agreements

At the election of any Member, for the purpose of any Projection the principal and interest payable on Discount Indebtedness of such Member shall be deemed to be payable as set forth below:

(a) If the Member has obtained a binding commitment of a responsible financial institution satisfactory to the Master Trustee to refinance such Discount Indebtedness (or a portion thereof), including without limitation, a letter of credit or a line of credit, which commitment is subject only to such conditions as are reasonably acceptable to the Master Trustee, the Discount Indebtedness (or portion thereof) may be deemed to be payable in accordance with the terms of the refinancing arrangement; or

(b) If the Member has entered into a binding agreement satisfactory to the Master Trustee providing for the deposit by such Member with a responsible financial institution in trust of amounts equal in aggregate to the principal amount of such Discount Indebtedness (or a portion thereof) and for the payment of such principal amount when due from the sums so deposited, the principal amount of the Discount Indebtedness (or portion thereof) may be deemed to be payable in accordance with the terms of such agreement.

(c) Notwithstanding anything in any Interest Rate Agreement to the contrary, any so-called mark to market charge or credit attributable to any Interest Rate Agreement under Financial Accounting Standard 133 or otherwise shall be excluded from calculation of the revenues and expenses, in each case, of each Member of the Obligated Group and all related definitions and financial covenants in the Master Indenture for all purposes of the Master Indenture. Furthermore, notwithstanding anything else in the Master Indenture to the contrary, any portion of any Indebtedness of any Member for which an Interest Rate Agreement has been obtained by such Member shall be deemed to bear interest for the period of time that such Interest Rate Agreement is in effect at a net rate which takes into account the interest payments made by such Member on such Indebtedness and the payments made or 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 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). In addition, so long as any Indebtedness is deemed to bear interest at such net rate taking into account an Interest Rate Agreement, any payments made by a Member on such Interest Rate Agreement shall be excluded from expenses and any payments received by a Member on Such Interest Rate Agreement shall be excluded from revenues, in each case, for all purposes of the Master Indenture. (Section 5.08)

Debt Service Coverage Ratios

The Obligated Group agrees to charge and collect rates and charges which shall, together with other available moneys, including without limitation amounts transferred from the Medical Center and available to make payments under the Master Indenture, provide moneys sufficient at all times to make any payments required under the Master Indenture and to comply with the Master Indenture in all other respects, and to satisfy all other obligations of the Obligated Group in a timely fashion. Without limiting the generality of the foregoing, the Obligated Group shall charge and collect rates and charges which together with other available moneys, in each fiscal year will produce revenues at least sufficient to meet expenses. In determining compliance with the preceding sentence, amounts actually transferred from the Medical Center to any Member may be treated as revenues of such Member provided such amounts were not restricted to purposes inconsistent with the payment of any Indebtedness of such Member. Within one hundred twenty (120) days after the end of each Fiscal Year, the Obligated Group shall furnish to the Master Trustee an Officer’s Certificate confirming that the requirement of the foregoing sentence was met during the Fiscal Year.

The Obligated Group agrees to use its best efforts to maintain the Historical Debt Service Coverage Ratio at least equal to 1.10 in each Fiscal Year. If the Historical Debt Service Coverage Ratio, as calculated at the end of any Fiscal Year, is less than 1.10, the Obligated Group covenants to retain a Consultant to make recommendations to D-8

increase such ratio for subsequent Fiscal Years to the levels required or, if in the opinion of the Consultant the attainment of such level is impracticable, to the highest practicable level. Each Member of the Obligated Group, respectively, agrees that it will, to the extent permitted by law, follow the recommendations of the Consultant. So long as the Obligated Group shall retain a Consultant and each Member of the Obligated Group shall follow such Consultant’s recommendations to the extent permitted by law, this Section shall be deemed to have been complied with even if such ratio for any subsequent Fiscal Year is less than 1.10. If in any Fiscal Year the Historical Debt Service Coverage Ratio is less than 1.10, the Obligated Group will not be required to retain a Consultant to make such recommendations if a written report of a Consultant is filed with the Master Trustee which contains an opinion of such Consultant that (i) applicable laws or regulations have prevented the maintenance of the 1.10 ratio, (ii) the Members of the Obligated Group have generated the maximum amount of Income Available for Debt Service which in the opinion of such Consultant could reasonably have been generated given such laws and regulations during the period affected thereby and (iii) the ratio actually achieved was at least 1.00. Notwithstanding any other provision under the Master Indenture to the contrary, if at any time the Historical Debt Service Coverage Ratio is less than 1.00, then an Event of Default shall be deemed to have occurred. (Section 5.09)

Sale, Lease or Other Disposition of Property

Each Member of the Obligated Group, respectively, agrees that it will not in any Fiscal Year sell, lease or otherwise dispose of any Property, the disposition of which would cause the aggregate Book Value of Property so transferred by Members of the Obligated Group in such year to exceed 20% of the Book Value of the Property of the Obligated Group, or $1,000,000, whichever is greater, except in the ordinary course of business and except for transfers of Property:

(a) To any Person if such property has become, or within the next succeeding 24 calendar months is reasonably expected to become, inadequate, obsolete, worn out, unsuitable, unprofitable, undesirable or unnecessary and the sale, lease, removal or other disposition thereof will not impair the structural soundness, efficiency or economic value of the remaining Property;

(b) To another Member of the Obligated Group or to the Medical Center;

(c) To any Person provided that prior to the sale, lease or other disposition there is delivered to the Master Trustee an Officer’s Certificate of the Institution’s chief financial officer, or, if requested by the Master Trustee, a Consultant’s report, to the effect that (A) the Obligated Group could issue $1 of additional Long-Term Indebtedness pursuant to the Master Indenture, or (B) the Projected Debt Service Coverage Ratio for such Fiscal Year immediately following such transfer is no less than 90% of what it would be for such fiscal year if such transfer were not to occur;

(d) As part of a merger, consolidation, sale or conveyance permitted under the Master Indenture;

(e) To any Person if in exchange therefor such Member receives the fair market value of the Property so transferred;

(f) In the case of cash or cash equivalents, as a loan to any Person provided that such loan is in writing, bears interest at a reasonable interest rate, and there is a reasonable expectation that such loan will be repaid in accordance with its terms;

(g) To any person in connection with a “sale and lease back” transaction that would constitute and be treated as a true sale and lease back under the Code. (Section 5.10)

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Consolidation, Merger, Sale or Conveyance

(a) Each Member of the Obligated Group, respectively, covenants that it will not merge or consolidate with any other corporation not a Member of the Obligated Group or sell or convey all or substantially all of its assets to any Person not a Member of the Obligated Group unless:

(i) Either it will be the surviving corporation, or the successor corporation (if other than a Member of the Obligated Group) shall be a corporation organized and existing under the laws of the United States of America or a state thereof and such corporation shall expressly assume the due and punctual payment of the principal of and premium, if any, and interest on all Outstanding Obligations issued under the Master Indenture, and the due and punctual performance and observance of all of the covenants and conditions of the Master Indenture by a supplement satisfactory to the Master Trustee, executed and delivered to the Master Trustee by such corporation; and

(ii) Except in the case of a merger or consolidation with or a sale or conveyance to the Medical Center, the Master Trustee shall have received an Officer’s Certificate of the Representative’s chief financial officer or, if requested by the Master Trustee a report of a Consultant to the effect that, subject to the provisions of the Master Indenture, (A) the Obligated Group could issue $1 of additional Long-Term Indebtedness pursuant to the Master Indenture, or (B) the Projected Debt Service Coverage Ratio for the next Fiscal Year is no less than it would be for such Fiscal Year if such consolidation, merger, sale or conveyance were not to occur.

(b) In case of any such consolidation, merger, sale or conveyance and upon any such assumption by the successor corporation, such successor corporation shall succeed to and be substituted for its predecessor, with the same effect as if it had been named in the Master Indenture as the Institution or other Member of the Obligated Group, as the case may be.

(c) The Master Trustee shall receive an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale or conveyance, and any such assumption, complies with the provisions of the Master Indenture. (Section 5.11)

Insurance and Condemnation Proceeds

Any Member of the Obligated Group may make agreements and covenants with the holder of secured Indebtedness which is incurred in compliance with the provisions of the Master Indenture and which is secured by a Permitted Lien with respect to the application or use to be made of insurance proceeds or condemnation awards which may be received in connection with Property which is subject to such Permitted Lien.

Amounts received by any Member of the Obligated Group as insurance proceeds with respect to any casualty loss or as condemnation awards which do not exceed 20% of the aggregate Book Value of the Property, Plant and Equipment of the Obligated Group, shall be paid to such Member and applied to the repair of the Property with respect to which such proceeds were received; provided that the Member receiving such proceeds may use such proceeds for any lawful corporate purpose if there is filed with the Master Trustee an Officer’s Certificate stating that such application of proceeds will not adversely affect such Member’s Income Available for Debt Service or the Aggregate Income Available for Debt Service. If the amount of proceeds received by any Member with respect to any one casualty or condemnation exceeds such limit such amount shall be paid to the Master Trustee and, as specified in an Officer’s Certificate, applied to either (i) capital expenditures of the Member, or (ii) to the prepayment of the Outstanding Obligations equally and ratably, either directly or indirectly by paying underlying Indenture Indebtedness. (Section 5.13)

Events of Default

Event of Default shall mean any of the following events:

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(a) Any payment of the principal of, the premium, if any, and interest on any Obligation issued and Outstanding under the Master Indenture is not made after same shall become due and payable, and after any applicable grace period, whether at maturity, by proceedings for redemption, by acceleration or otherwise, in accordance with the terms thereof, of the Master Indenture and the Related Supplement;

(b) Any Member of the Obligated Group shall fail duly to observe or perform any covenant or agreement on its part under the Master Indenture for a period of 60 days (or such longer period as permitted in writing by the Master Trustee) after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Members of the Obligated Group by the Master Trustee, or to the Members of the Obligated Group and the Master Trustee by the Holders of at least 25% in aggregate principal amount of Obligations then Outstanding;

(c) A breach shall occur (and continue beyond any applicable grace period) with respect to a payment by any Member of Indebtedness for borrowed money with respect to outstanding Indebtedness, or with respect to the performance of any agreement securing such other Indebtedness or pursuant to which the same was issued or incurred, or an event shall occur with respect to provisions of any such agreement relating to matters of the character referred to in this Section, and as a result of such breach or occurrence a holder or holders of such Indebtedness or a trustee or trustees under any such agreement accelerates any such Indebtedness in an amount exceeding the greater of $10,000,000 and 1% of Adjusted Annual Operating Revenues; but an Event of Default shall not be deemed to be in existence or to be continuing under this clause (c) if (i) the Member is in good faith contesting the existence of such breach or event and if such acceleration is being stayed by judicial proceedings, or (ii) such breach or event is remedied and the acceleration is wholly annulled. Each Member shall notify the Master Trustee of any such breach or event immediately upon becoming aware of its occurrence and shall from time to time furnish such information as the Master Trustee may reasonably request for the purpose of determining whether a breach or event described in this paragraph has occurred and whether the acceleration continues to be in effect;

(d) The entry of a decree or order by a court having jurisdiction in the premises adjudging any Member of the Obligated Group a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of such Member under the Federal Bankruptcy Code or any other applicable federal or state law, or appointing a receiver, liquidator, assignee, or sequestrator (or other similar official) of such Member or of any substantial part of its Property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days or the consent of such Member to such decree or order;

(e) The institution by any Member of the Obligated Group of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under the Federal Bankruptcy Code or any other similar applicable federal or state law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of such Member or of any substantial part of its Property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due; or

(f) An event of default shall occur (and continue beyond any applicable grace period) with respect to (i) the performance by the Medical Center under any agreement guaranteeing or securing a guaranty by the Medical Center of any Obligation or (ii) the payment by the Medical Center under any agreement guaranteeing Indenture Indebtedness or any other Indebtedness of a Member for borrowed moneys with respect to outstanding Indebtedness exceeding the greater of $10,000,000 and I% of Adjusted Annual Operating Revenues of the Medical Center. (Section 6.01)

Remedies Upon Default: Acceleration; Annulment of Acceleration

(a) Upon the occurrence and during the continuation of an Event of Default, the Master Trustee may, and upon the written request of the Holders of not less than 50% in aggregate principal amount of the Obligations Outstanding, shall, by notice to the Members of the Obligated Group, declare all Obligations Outstanding immediately due and payable, whereupon such Obligations shall become and be immediately due and payable without any further D-11

action or notice. There shall then be due and payable on the Obligations an amount equal to the total principal amount of all such Obligations, plus all interest accrued thereon and, to the extent permitted by applicable law, which accrues to the date of payment.

(b) At any time after the principal of the Outstanding Obligations shall have been so declared to be due and payable and before the entry of final judgment or decree on any suit, action or proceeding instituted on account of such default, if (i) the Obligated Group has paid or caused to be paid or deposited with the Master Trustee moneys sufficient to pay all matured installments of interest, and interest on installments of principal and interest, and principal or redemption prices then due (other than the principal then due only because of such declaration) of all Obligations Outstanding, (ii) the Obligated Group has paid or caused to be paid or deposited with the Master Trustee moneys sufficient to pay the charges, compensation, expenses, disbursements, advances and liabilities of the Master Trustee and any paying agents incurred as a result of such Event of Default, (iii) all other amounts then payable by the Obligated Group under the Master Indenture shall have been deposited with the Master Trustee, and (iv) every Event of Default (other than a default in the payment of the principal of such Obligations then due only because of such declaration) shall have been remedied, then, unless otherwise directed in writing by Holders of not less than 50% in aggregate principal amount of the Obligations then Outstanding, the Master Trustee shall annul such declaration and its consequences with respect to any Obligations or portions thereof not then due by its terms. No such annulment shall extend to or affect any subsequent Event of Default or impair any right consequent thereon. (Section 6.02)

Additional Remedies and Enforcement of Remedies

(a) Upon the occurrence and continuance of any Event of Default, the Master Trustee may, and upon the written request of the Holders of not less than 25% in aggregate principal amount of the Obligations Outstanding, together with indemnification of the Master Trustee to its satisfaction therefor, shall, proceed forthwith to protect and enforce its rights and the rights of the Obligation Holders under the Master Indenture by such suits, actions or proceedings as the Master Trustee, being advised by counsel, shall deem expedient.

Regardless of the occurrence of an Event of Default, the Master Trustee, if requested in writing by the Holders of not less than 25% in aggregate principal amount of Obligations then Outstanding, shall, upon being indemnified to its satisfaction therefor, institute and maintain such suits and proceedings as it may be advised shall be necessary or expedient (i) to prevent any impairment of the security under the Master Indenture by any acts which may be unlawful or in violation of the Master Indenture, or (ii) to preserve or protect the interests of the Holders, provided that such request and the action to be taken by the Master Trustee are not in conflict with any applicable law or the provisions of the Master Indenture and, in the sole judgment of the Master Trustee, is not unduly prejudicial to the interest of the Obligation Holders not making such request. (Section 6.03)

Application of Revenues and Other Moneys After Default

During the continuance of an Event of Default, the Master Trustee may by written notice to the Representative require that all payments of Outstanding Obligations be made to the Master Trustee when due in immediately available funds. During the continuance of an Event of Default all moneys received by the Master Trustee pursuant to any right given or action taken under the provisions of the Master Indenture, after payment of the costs and expenses of the proceedings resulting in the collection of such moneys and of the expenses and advances, including expenses of the Master Trustee as set forth in the Master Indenture, incurred or made by the Master Trustee with respect thereto shall be applied as follows:

First: To the payment to the Persons entitled thereto of all installments of interest then due on Obligations in the order of the maturity of such installments, and, if the amount available shall not be sufficient to pay in full any installment or installments maturing on the same date, then to the payment thereof ratably, according to the amounts due thereon to the Persons entitled thereto, without any discrimination or preference; and

Second: To the payment to the Persons entitled thereto of the unpaid principal installments of any Obligations which shall have become due, whether at maturity or by call for redemption, in the order of their due dates, and if the amounts available shall not be sufficient to pay in full all Obligations due on any D-12

date, then to the payment thereof ratably, according to the amount of principal installments due on such date, to the Persons entitled thereto, without any discrimination or preference. (Section 6.04)

Obligation Holders’ Control of Proceedings

If an Event of Default shall have occurred and be continuing, notwithstanding anything in the Master Indenture to the contrary, the Holders of at least a majority in aggregate principal amount of Obligations then Outstanding shall have the right, at any time, by an instrument in writing executed and delivered to the Master Trustee, to direct the method and place of conducting any proceeding to be taken in connection with the enforcement of the terms and conditions of the Master Indenture or for the appointment of a receiver or any other proceedings of the Master Indenture, provided that such direction is not in conflict with any applicable law or the provisions of the Master Indenture (including indemnity to the Master Trustee as provided therein) and, in the sole judgment of the Master Trustee, is not unduly prejudicial to the interest of Obligation Holders not joining in such direction and provided further that nothing in this Section shall impair the right of the Master Trustee in its discretion to take any other action under the Master Indenture, which it may deem proper and which is not inconsistent with such direction by Obligation Holders.

It is recognized that certain Obligation Holders may exercise rights against the Institution and other Members of the Obligated Group in connection with Related Bonds and otherwise which are independent of the Master Indenture. The Master Trustee shall not be required to take notice of the exercise of such rights, and the Master Trustee shall have no duty to other Obligation Holders where the exercise of such rights by a particular Obligation Holder is or may be prejudicial to such other Obligation Holders. (Section 6.07)

Waiver of Event of Default

The Master Trustee may waive any Event of Default which in its opinion shall have been remedied before the entry of final judgment or decree in any suit, action or proceeding instituted by it under the provisions of the Master Indenture, or before the completion of the enforcement of any other remedy.

Notwithstanding anything contained in the Master Indenture to the contrary, the Master Trustee, upon the written request of the Holders of at least a majority of the aggregate principal amount of Indenture Indebtedness then Outstanding, shall waive any Event of Default under the Master Indenture and its consequences; provided, however, that a default in the payment of the principal of, premium, if any, or interest on any Obligation, when the same shall become due and payable by the terms thereof or upon call for redemption, may not be waived without the written consent of the Holders of all the Obligations at the time Outstanding unless (i) the conditions set forth in the Master Indenture regarding compensation of the Master Trustee and any paying agents of any expenses incurred as a result of such Event of Default, payment of all sums then payable and remedy of each Event of Default are satisfied and (ii) if the principal of the Obligations has been declared due and payable, such declaration has been annulled. (Section 6.09)

Notice of Default

The Master Trustee shall, within 10 days after an officer of the Master Trustee in its corporate trust department has knowledge of the occurrence of an Event of Default, mail to all Obligation Holders as the name and addresses of such Holders appear upon the books of the Master Trustee, notice of such Event of Default so known to the Master Trustee, unless such Event of Default shall have been cured before the giving of such notice not including certain periods of grace provided for in the Master Indenture and irrespective of the giving of written notice specified in the Master Indenture and provided that, except in the case of default on the payment of the principal of or premium, if any, or interest on any of the Obligations and the Events of Default specified in the Master Indenture regarding Bankruptcy or insolvency, the Master Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors or responsible officers of the Master Trustee in good faith determine that the withholding of such notice is in the interests of the Obligation Holders. (Section 6.12)

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Limitations on Obligation Holders’ Remedies

The Master Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Obligations relating to the time, method and place of conducting any proceeding for any remedy available to the Master Trustee, or exercising any trust or power conferred upon the Master Trustee, under the Master Indenture. (Section 7.01)

The duties and responsibilities of the Master Trustee are qualified as provided in the Master Indenture including:

(a) The Master Trustee shall be under no obligation to exercise any of the rights or powers vested in it by the Master Indenture at the request or direction of any of the Obligation Holders pursuant to the Master Indenture, unless such Obligation Holders shall have offered to the Master Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction.

(b) Except as specifically provided in the Master Indenture, the Master Trustee shall not be required to monitor the financial condition of the Institution or any other Member of the Obligated Group or the physical condition of the Property and shall not have any responsibility with respect to reports, notices, certificates or other documents filed or to be filed with it under the Master Indenture. The Master Trustee shall not be required to take notice of any breach or default under the Master Indenture by the Institution or any Member of the Obligated Group, except for (i) those of which it receives written notice by an Obligation Holder, and (ii) the failure of the Master Trustee to receive certificates, reports, or opinions specifically required to be furnished to the Master Trustee by the Master Indenture. The Master Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note or other paper or document, but the Master Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Master Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of any Member of the Obligated Group, personally or by agent or attorney. (Section 7.02)

Removal and Resignation of the Master Trustee

The Master Trustee may resign at any time or be removed at any time by an instrument or instruments in writing signed by the Holders of not less than 50% of the principal amount of the Obligations Outstanding. Any such resignation or removal shall not become effective for 60 days after notice of such resignation or removal shall have been given as provided in the Master Indenture nor unless and until a successor Master Trustee has been appointed and has assumed the trusts created under the Master Indenture. Written notice of such resignation or removal shall be given to the Members of the Obligated Group and to each Holder of Obligations then Outstanding at the address then reflected on the books of the Master Trustee and such resignation or removal shall take effect upon the appointment and qualification of a successor Master Trustee. A successor Master Trustee may be appointed at the direction of the Holders of not less than 50% in aggregate principal amount of the Obligations Outstanding. In the event a successor Master Trustee has not been appointed and qualified within 60 days of the date notice of resignation is given, the Master Trustee, any Member of the Obligated Group or any Obligation Holder may apply to any court of competent jurisdiction for the appointment of a successor Master Trustee to act until such time as a successor is appointed. (Section 7.04)

Supplements Not Requiring Consent of Obligation Holders

The Representative and the Master Trustee may, without the consent of or notice to any of the Holders, enter into one or more supplements for one or more of the following purposes:

(a) To cure any ambiguity or formal defect or omission in the Master Indenture.

(b) To correct or supplement any provision in the Master Indenture which may be inconsistent with any other provision in the Master Indenture, or to make any other provisions with respect to matters or questions arising under the Master Indenture and which shall not materially and adversely affect the interests of the Holders. D-14

(c) To grant or confer ratably upon all of the Holders any additional rights, remedies, powers or authority that may lawfully be granted or conferred upon them subject to the provisions of the Master Indenture.

(d) To qualify the Master Indenture under the Trust Indenture Act of 1939, as amended, or corresponding provisions of federal laws from time to time in effect.

(e) To create and provide for the issuance of Obligations as permitted under the Master Indenture.

(f) To obligate a successor to the Institution or other Member of the Obligated Group as provided in the Master Indenture.

(g) To add additional security for the benefit of the Holders.

(h) If there are Outstanding Related Bonds issued by any Governmental Issuer, then with the consent of such Governmental Issuer, to make any changes (1) relating to the application of GAAP or the definition or determination of Adjusted Annual Operating Revenues, Book Value, Indebtedness (which for the avoidance of doubt includes all definitions incorporating the definition of Indebtedness, including, without limitation, Long-Term Indebtedness, Aggregate Income Available for Debt Service, Debt Service Requirement, Aggregate Debt Service Requirement, Maximum Annual Debt Service and Projected Debt Service Requirement), or Income Available for Debt Service, or (2) to the provisions of Article V to the Master Indenture, in each case, that are necessary to address a change in GAAP that solely in and of itself would cause any Member of the Obligated Group to be in default of any of the covenants set forth in Article V of the Master Indenture. (Section 8.01)

Supplements Requiring Consent of Obligation Holders

Other than supplements referred to above and subject to the terms and provisions and limitations contained in the Master Indenture and not otherwise, the Holders of not less than a majority in aggregate principal amount of Obligations then Outstanding shall have the right, from time to time, anything contained in the Master Indenture to the contrary notwithstanding, to consent to and approve the execution, by each Member of the Obligated Group and the Master Trustee, of such supplements as shall be deemed necessary and desirable for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in the Master Indenture; provided, however, nothing in this Section shall permit or be construed as permitting a supplement which would:

(i) Extend the stated maturity of or time for paying interest on any Obligations or reduce the principal amount of or the redemption premium, if any, or rate of interest payable on any Obligations;

(ii) Make any Obligation redeemable other than in accordance with its terms;

(iii) Create a preference or priority of one Obligation over any other Obligation; or

(iv) Reduce the aggregate principal amount of Obligations the consent of the Holders of which is required to authorize any such supplement without the unanimous written consent of the affected Holders of Obligations then Outstanding. (Section 8.02)

Satisfaction and Discharge of Master Indenture

If (A) (i) all Members of the Obligated Group shall deliver to the Master Trustee for cancellation all Obligations theretofore authenticated (other than any Obligations which shall have been mutilated, destroyed, lost or stolen and which shall have been replaced or paid as provided in the Related Supplement) and not theretofore cancelled, or (ii) all Obligations not theretofore cancelled or delivered to the Master Trustee for cancellation shall have become due and payable and shall have been paid, or (iii) the Members of the Obligated Group shall deposit with the Master Trustee (or with a bank or trust company acceptable to the Master Trustee pursuant to an agreement between the Representative and such bank or trust company in form acceptable to the Master Trustee) as trust funds D-15

Government of Equivalent Obligations bearing interest at such rates and with such maturities as will provide sufficient funds to pay or redeem in full all Obligations not theretofore cancelled or delivered to the Master Trustee for cancellation, including principal and interest due or to become due to such date of maturity or redemption date, as the case may be, and (B) the Members of the Obligated Group shall also pay or cause to be paid all other sums payable under the Master Indenture by the Members of the Obligated Group or any thereof, then the Master Indenture shall cease to be of further effect, and the Master Trustee, on demand of the Members of the Obligated Group or any thereof, and at the cost and expense of the Members of the Obligated Group or any thereof, shall execute proper instruments acknowledging satisfaction of and discharging the Master Indenture. If any Obligation is to be redeemed prior to Maturity thereof, the Master Indenture shall not cease to be in effect until all action necessary to redeem such Obligation shall have been taken or irrevocable provision satisfactory to the Master Trustee has been made for the taking of such action. (Section 9.01)

Guaranties by the Medical Center

If tendered to the Master Trustee by the Medical Center (substantially in the form attached to the Master Indenture as Exhibit C, and as summarized in Appendix C-5 to this Official Statement with such changes as are reasonably acceptable to the Master Trustee), the Master Trustee shall accept the written guaranty by the Medical Center of full and punctual payment of any particular Obligation. Notwithstanding any other provision of the Master Indenture, moneys received by the Master Trustee from the Medical Center pursuant to any such guaranty of an Obligation shall be applied by the Master Trustee solely to the payment when due of such Obligation. The Master Trustee may agree to amendments of any such guaranty with the consent of the Holder of the Obligation guaranteed thereby. (Section 11.01)

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SUMMARY OF THE SUPPLEMENTAL MASTER INDENTURE FOR OBLIGATION NO. 34

The following is a summary of the Supplemental Master Indenture for Obligation No. 34 dated as of February 1, 2017, between the Institution and the Master Trustee (the “Supplemental Master Indenture”). This summary does not purport to be complete, and reference is made to the Supplemental Master Indenture for full and complete statements of such and all provisions.

Issuance of Obligation No. 34

The Supplemental Master Indenture creates and authorizes the issuance of one Obligation under the Master Indenture in the aggregate principal amount of $______. (Section 2)

Payments on Obligation No. 34; Credits

Principal of, premium, if any, and interest on Obligation No. 34 are payable in lawful money of the United States of America. Principal and interest on Obligation No. 34 shall be payable on such dates and in such amounts as are required under the Bond Indenture to provide for payment of the principal, premium, if any, and interest on the Bonds when due, whether at maturity, upon redemption or acceleration or otherwise.

Obligation No. 34 shall be prepayable in the same manner, with the same effect and in the same principal amounts as the Bonds.

The Institution shall receive credit as provided in the Supplemental Master Indenture for payments of principal of or interest on Obligation No. 34 in an amount equal to the payments of principal of or interest on the Bonds, except to the extent such amounts have previously been credited against payments on Obligation No. 34 and except for payments of principal of or interest on the Bonds or purchases made from the proceeds of payments made on Obligation No. 34.

On the date of any payment of interest or premium on the Bonds, the Institution shall receive credit for payment on such date of a like amount of interest or premium on Obligation No. 34. On the date of any payment of principal of the Bonds, whether at maturity or upon acceleration or redemption, the Institution shall receive credit as provided below for the payment of a like principal amount of Obligation No. 34. If a Bond is purchased and delivered to the Bond Trustee for cancellation, the Institution shall receive credit for payment of a like principal amount of Obligation No. 34. Such credit for a payment of principal of the Bonds or a delivery for cancellation of a purchased Bond shall be applied to reduce the payments which would otherwise be required to provide for the payment of the principal of and interest on the Bond so paid. Principal of or interest or premium on Obligation No. 34 as to which a credit is made as provided in this paragraph shall be deemed pro tanto to be paid for all purposes of the Master Indenture and thereafter no interest shall accrue on such principal.

When all Outstanding Bonds are deemed to have been paid in full when due or prepaid in whole and all other conditions imposed by the Bond Indenture are satisfied, Obligation No. 34 shall be deemed to have been paid and to be no longer Outstanding under the Master Indenture. (Sections 3 and 6)

Registration, Number, Negotiability and Transfer of Obligation No. 34

Except as otherwise provided, so long as any Bonds remain Outstanding, Obligation No. 34 shall consist of a single Obligation without coupons registered in the name of the Bond Trustee and no transfer of Obligation No. 34 shall be registered under the Master Indenture except for transfers to a successor Bond Trustee. Upon the principal of all Indenture Indebtedness Outstanding being declared immediately due and payable upon and during the continuance of an Event of Default, Obligation No. 34 may be transferred, if and to the extent the Bond Trustee requests that the above restrictions on transfers be terminated. (Section 4)

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Default

Upon the occurrence of certain “Events of Default” (as defined in the Master Indenture), the principal of all Outstanding Obligations may be declared, and thereupon shall become, due and payable as provided in the Master Indenture.

The Holder(s) of Obligation No. 34 shall have no right to enforce the provisions of the Master Indenture, institute any action to enforce the covenants of the Master Indenture, take any action with respect to any default under the Master Indenture, institute, appear in or defend any suit or other proceeding with respect to any default under the Master Indenture, or institute, appear in or defend any other suit or proceeding with respect to the Master Indenture, except as provided in the Master Indenture. (Section 6)

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SUMMARY OF THE GUARANTY OF OBLIGATION NO. 34

The following is a summary of the Guaranty of Obligation No. 34 dated as of February 1, 2017, by the Guarantor in favor of the Master Trustee (the “Guaranty”). This summary does not purport to be complete, and reference is made to the Guaranty for full and complete statements of such and all provisions.

Definitions

In addition to terms defined elsewhere in this Official Statement, the following terms shall have the following meanings in the Guaranty of Obligation No. 34 (the “Guaranty”):

“Direct Debt” shall mean with respect to the Guarantor its Long-Term Indebtedness, excluding any Guaranty.

“Direct Debt Service Requirement” shall mean with respect to the Guarantor, the Debt Service Requirement of the Guarantor, excluding from the determination thereof payments with respect to indebtedness guaranteed by the Guarantor except to the extent actually made by the Guarantor.

“Marketable Securities” shall mean all cash and securities of the Guarantor that may be converted to cash by the Guarantor within 120 days.

“Unconsolidated Income Available for Debt Service” shall mean, with respect to the Guarantor, as to any period of time, the excess of revenues over expenses (excluding from revenues and expenses extraordinary items, infrequently occurring or unusual items and the cumulative effect of changes in accounting principles, excluding income from Irrevocable Deposits and excluding from expenses depreciation, interest on Long-Term Indebtedness and amortization of bond discount and financing expenses), as determined in accordance with generally accepted accounting principles, provided that no determination thereof shall take into account any revenue or expense of any Affiliate. (Section 14)

Guaranty of Payment

The Guarantor unconditionally guarantees to the Master Trustee for the benefit of the holder(s) of Obligation No. 34 (the “Obligation Holder(s)”), the full and punctual payment of all amounts payable pursuant to such Obligation No. 34, including, without limitation, principal, prepayment premium, if any, and interest, when due whether at maturity, upon tender, by proceedings for prepayment, upon acceleration or otherwise. The Guaranty is an absolute and unlimited guaranty of the full and punctual payment of Obligation No. 34 without regard to the regularity, validity or enforceability thereof against the Institution. The obligation of the Guarantor is not a guarantee of collectability only and is in no way conditioned upon any requirement that the Master Trustee first attempt to collect from the Institution or resort to any security or other means of obtaining payment of Obligation No. 34 that the Master Trustee now has or may acquire after the date of the Guaranty, or upon any other contingency whatsoever.

Subject to Section 16 of the Guaranty, the Guaranty shall be fully effective in all circumstances notwithstanding any modification of Obligation No. 34, the Master Indenture, or the Agreement, or any waiver, extension, release or security or other indulgence granted to the Guarantor or the Institution and notwithstanding any bankruptcy, merger, change in membership or control of the Guarantor or the Institution, or other change of circumstances of any of the foregoing. (Section 1)

Warranties by the Guarantor

(1) Corporate Organization, Authorization and Powers. The Guarantor represents and warrants that it is a corporation duly organized, validly existing and in good standing under the laws of The Commonwealth of Massachusetts, with the power to enter into and perform the Guaranty and that by proper corporate action it has duly authorized the execution and delivery of the Guaranty. The Guarantor further represents and warrants that the execution and delivery of the Guaranty and the consummation of the transactions contemplated therein will not conflict with or constitute a breach of or default under any bond, indenture, note or other evidence of indebtedness of the Guarantor, or any contract, lease or other instrument to which the Guarantor is a party or by which it is bound or D-19

cause the Guarantor to be in violation of any applicable statute or rule or regulation of any governmental authority. (Section 2)

(2) Tax Status. The Guarantor represents and warrants that it is an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986 (the “Code”) (or corresponding provisions of prior law) and it is not a “private foundation” as defined in Section 509 of the Code. To the extent consistent with its status as a nonprofit corporation, the Guarantor will not take any action or omit to take any action if such action or omission would cause any revocation or adverse modification of such federal income tax status of the Guarantor; provided, however, that the Guarantor may change its status if there is delivered to the Bond Trustee an opinion of nationally recognized bond counsel acceptable to the Bond Trustee to the effect that such change would not adversely affect the validity of the Bonds. (Section 3)

(3) Securities Law Status. The Guarantor represents and warrants that it is an organization organized and operated exclusively for charitable purposes and not for pecuniary profit; and that no part of its earnings inures to the benefit of any person, private stockholder or individual, all within the meaning of the Securities Act of 1933, as amended. The Guarantor shall not take any action or omit to take any action if such action or omission would change its status as set forth in this Section; provided, however, that the Guarantor may change its status if there is delivered to the Bond Trustee an opinion of nationally recognized bond counsel acceptable to the Bond Trustee to the effect that such change would not subject the Bonds to the registration provisions of the Securities Act of 1933, as amended, or that the Bonds have been so registered if registration is required. (Section 4)

Covenants of the Guarantor

(1) Maintenance of Corporate Existence. The Guarantor shall maintain its existence as a nonprofit corporation qualified to do business in Massachusetts, subject to the Guarantor’s right to alter its status under the Securities Act of 1933 upon compliance with the requirements set forth in the Guaranty and shall not dissolve or dispose of all or substantially all of its assets, or consolidate with or merge into another entity or entities, or permit one or more other entities to consolidate with or merge into it, except that it may consolidate with or merge into one or more other entities, or permit one or more other entities to consolidate with or merge into it, or transfer all or substantially all of its assets to one or more other entities (and thereafter dissolve or not dissolve as it may elect), if (a) the surviving, resulting or transferee entity or entities each is a corporation meeting certain requirements set forth in the Guaranty as to its corporate, nonprofit, tax-exempt status, (b) the transaction does not result in a conflict, breach or default referred to in Section 2 or result in a default referred to in Section 13 of the Guaranty, (c) the surviving, resulting or transferee entity or entities, if not the Guarantor, each assumes by written agreement with the Master Trustee, in form reasonably satisfactory to the Master Trustee, all the obligations of the Guarantor, and (d) the surviving, resulting or transferee entity or entities each has or have in aggregate unrestricted net assets (“UNA”) equal at least to ninety percent (90%) of the Guarantor’s UNA before the transaction as reflected on the respective most recent audited financial statements of such entity or entities. (Section 6)

(2) Debt Service Coverage Ratio. The Guarantor agrees to use its best efforts to maintain the ratio (the “Coverage Ratio”) of its Unconsolidated Income Available for Debt Service to its Direct Debt Service Requirement at least equal to 1.10 in each Fiscal Year. If such ratio, as calculated at the end of any Fiscal Year, is below 1.10, the Guarantor covenants to retain a Consultant to make recommendations to increase such ratio for subsequent Fiscal Years to the levels required or, if in the opinion of the Consultant the attainment of such level is impracticable, to the highest practicable level. So long as the Guarantor shall retain a Consultant and shall follow such Consultant’s recommendations to the extent permitted by law, this requirement shall be deemed to have been complied with even if such ratio for any subsequent Fiscal Year is below 1.10. (Section 7)

(3) Additional Indebtedness. Prior to incurrence of additional Direct Debt, the Guarantor shall deliver to the Master Trustee an Officer’s Certificate of the Guarantor’s chief financial officer projecting the Coverage Ratio of the Guarantor (taking account of such additional Indebtedness) for the period described below. If the projected Coverage Ratio as shown in the Officer’s Certificate is less than 1.25, the Guarantor shall not incur such additional Direct Debt. The period referred to in the first sentence of this Section shall be (1) in the case of Indebtedness to finance capital improvements, the Fiscal Year succeeding the date on which such improvements are expected to be placed in operation or (2) in the case of Indebtedness refinancing other Indebtedness for capital improvements or D-20

Indebtedness not financing capital improvements, the Fiscal Year succeeding the date on which the Indebtedness is incurred. (Section 8)

(4) Maintenance of Unrestricted Assets. As of the end of each Fiscal Year, the Guarantor shall have unconsolidated total cash and unrestricted and unencumbered investments (“Unrestricted Assets”), valued at market, equal to at least one-third of the total outstanding amount of indebtedness guaranteed by the Guarantor (“Guaranteed Debt”). If in any Fiscal Year the ratio of the Institution’s Income Available for Debt Service to its Debt Service Requirement is less than 1.75, within six months from the date such ratio is determined the Guarantor shall submit an Officer’s Certificate together with such additional evidence as the Master Trustee may require demonstrating that the Guarantor has Unrestricted Assets at least equal to the amount of any Indebtedness of the Institution that is guaranteed by the Guarantor. Unrestricted Assets in such amount will be required to be maintained until the next Fiscal Year in which such ratio is at least 1.75. For the purposes of the Guaranty, the amount of indebtedness guaranteed by the Guarantor shall be deemed to include all obligations of the Guarantor guaranteeing in any manner whether directly or indirectly any obligation of any other Person (including the Institution) which constitutes or would, if such other Person were a Member of the Obligated Group, constitute Indebtedness under the Master Indenture. To avoid double- counting of Guaranteed Debt, the Master Trustee may consent to the exclusion from Guaranteed Debt of (i) any letters or lines of credit or similar credit facilities guaranteed by the Guarantor used to secure Indebtedness separately guaranteed by the Guarantor, (ii) Indebtedness secured by funds or Marketable Securities in such principal amounts, bearing interest at such rates and with such maturities as will provide sufficient funds to pay such Indebtedness and interest thereon (assuming no acceleration thereof) to some future date, and (iii) the amount of any Indebtedness to the extent secured by Marketable Securities. Not later than five (5) months after the end of each Fiscal Year, the Guarantor shall deliver to the Master Trustee a certificate stating the ratio of its Unrestricted Assets to its Guaranteed Debt. (Section 9)

(5) Maintenance of Marketable Securities. The Guarantor will, as of the last day of each December and June, maintain unrestricted and unencumbered Marketable Securities having a market value at least equal to the highest Debt Service Requirement of the Guarantor for the then current or any succeeding Fiscal Year (determined as if the Guarantor were a Member and as if the amounts payable for such Fiscal Year on all Guaranties by the Guarantor or any Member equal the amounts payable for such Fiscal Year on the indebtedness being guaranteed). The unrestricted and unencumbered Marketable Securities required by this Section to be maintained by the Guarantor shall be reduced by the market value of cash or other investments actually held in a trusteed debt service reserve fund established in connection with any Indebtedness of the Guarantor (including any indebtedness being guaranteed). The Guarantor shall deliver to the Master Trustee on or prior to the last day of each January and July, an Officer’s Certificate or, if requested by the Master Trustee, a certificate of a commercial bank, investment banker, registered broker-dealer or independent certified public accountant confirming that the market value of the Guarantor’s Marketable Securities as of the last day of the previous month equals or exceeds the amount required by this Section. (Section 10)

Default

Event of Default, as used in the Guaranty, shall mean any of the following events:

(1) Default under Obligation No. 34. Any payment of the principal of, or premium, if any, or interest on Obligation No. 34 is not made when same shall become due and payable, whether at maturity, by proceedings for redemption, by acceleration or otherwise;

(2) Breach of Covenants. The Guarantor shall fail duly to observe or perform any covenant or agreement on its part under the Guaranty for a period of sixty (60) days (or such longer period as permitted in writing by the Master Trustee) after written notice of such failure, requiring the same to be remedied, shall have been given to the Guarantor by the Master Trustee or to the Guarantor and the Master Trustee by the Obligation Holder(s).

(3) Breach of other Agreements. A breach shall occur (and continue beyond any applicable grace period) with respect to the payment of other indebtedness of the Guarantor for borrowed money with respect to loans exceeding the greater of $10,000,000 or 1% of Adjusted Annual Operating Revenues, or with respect to the performance of any agreement securing the same or pursuant to which the same was incurred, or an event shall occur D-21

with respect to provisions of any such agreement so that a holder or holders of such indebtedness or a trustee or trustees under any such agreement accelerates any such indebtedness; unless (i) the Guarantor is in good faith contesting the existence of such breach or event and if such acceleration is being stayed by judicial proceedings or (ii) such breach or event is remedied and the acceleration is wholly annulled.

(4) Decree of Bankruptcy. The entry of a decree or order by a court having jurisdiction in the premises adjudging the Guarantor a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Guarantor under the Federal Bankruptcy Code or any other applicable federal or state law, or appointing a receiver, liquidator, assignee, or sequestrator (or other similar official) of the Guarantor or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of sixty (60) consecutive days; or

(5) Insolvency Proceedings. The institution by the Guarantor of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under the Federal Bankruptcy Code or any other similar applicable federal or state law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of the Guarantor or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due. (Section 13.1)

Remedies and Enforcement of Remedies

Upon the occurrence and continuance of any Event of Default, the Master Trustee may, and upon written request of the Obligation Holder(s), together with indemnification of the Master Trustee to its satisfaction, the Master Trustee shall, proceed forthwith to protect and enforce its rights and the rights of the Obligation Holder(s) under the Guaranty by such suits, actions or proceedings as the Master Trustee, being advised by its counsel, shall deem expedient.

Regardless of the occurrence of an Event of Default, the Master Trustee, if requested in writing by the Obligation Holder(s), upon being indemnified to its satisfaction therefor, shall institute and maintain such suits and proceedings as it may be advised shall be necessary or expedient (i) to prevent any impairment of the security under the Guaranty by any acts which may be unlawful or in violation of the Guaranty, or (ii) to preserve or protect the interests of the Obligation Holder(s). (Section 13.2)

The Master Trustee may waive any Event of Default which in its opinion shall have been remedied before the entry of final judgment or decree in any suit, action or proceeding instituted by it under the Guaranty, or before the completion of the enforcement of any other remedy under the Guaranty. Upon written request of the Obligation Holder(s), the Master Trustee shall waive any Event of Default. (Section 13.4)

Amendment

The Guaranty may be amended by a written instrument signed by the Master Trustee and the Guarantor (a) without the consent of or notice to any of the Holders under the Master Indenture to cure any ambiguity, formal defect, or omission, or to take any other action with respect to the Guaranty that would be permitted under Section 8.01 of the Master Indenture with respect to the Master Indenture, or (b) either (i) with the consent of the Bond Trustee acting upon the consent of the Holders of not less than a majority of the Bonds Outstanding under the Bond Indenture or (ii) with the consent of the Holders of not less than a majority in aggregate principal amount of Obligations then Outstanding under the Master Indenture, so long as all other guarantees of Obligations issued under the Master Indenture (the “Related Guarantees”) are also amended in the same manner to the extent such Related Guarantees contain comparable provisions to those being amended, in each case to take any action with respect to the Guaranty that would be permitted under Section 8.02 of the Master Indenture with respect to the Master Indenture. The Guaranty may further be amended without the consent of or notice to any of the Holders under the Master Indenture to provide for the guaranty of payment by the Guarantor of all payment obligations on any amended Obligation No. 34 in connection with the issuance of Additional Bonds (as defined in the Bond Indenture). (Section 15) D-22

Termination Upon Entrance of Guarantor into the Obligated Group

Notwithstanding anything in the Guaranty to the contrary, in the event that the Guarantor becomes a Member of the Obligated Group or merges with or consolidates with any Member of the Obligated Group in accordance with the provisions of the Master Indenture, the Guaranty shall automatically terminate and shall be void and of no effect as of the date of such joinder, merger, or consolidation; provided, however, that the Guarantor covenants not to withdraw from the Obligated Group so long as the Bonds remain Outstanding. (Section 16)

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SUMMARY OF THE BOND INDENTURE

The following is a summary of the Bond Indenture dated as of February 1, 2017, between the Institution and the Bond Trustee (the “Bond Indenture”). This summary does not purport to be complete, and reference is made to the Bond Indenture for full and complete statements of such and all provisions.

All Bonds Equally and Ratably Secured; Bonds Are General Obligations of the Institution

All Bonds issued under the Bond Indenture and at any time Outstanding shall in all respects be equally and ratably secured thereby, without preference, priority, or distinction on account of the date or dates or the actual time or times of the issuance or maturity of the Bonds, so that all Bonds at any time issued and Outstanding thereunder shall have the same right, lien, and preference under the Bond Indenture, and shall all be equally and ratably secured thereby. The Bonds shall constitute general obligations of the Institution. In addition, the Bonds are secured by Obligation No. 34 issued by the Members of the Obligated Group to the Bond Trustee pursuant to the Master Indenture, including the Supplemental Master Indenture for Obligation No. 34. Pursuant to the Guaranty, The Children’s Hospital Medical Center Corporation has guaranteed to the Master Trustee the full and punctual payment of Obligation No. 34. (Section 1.03)

Payments of Principal, Redemption Price and Interest

The Institution covenants that it will duly and punctually pay the principal of and interest and any Redemption Price on the Bonds on the dates and in the places and manner mentioned therein and in the Bond Indenture. Notwithstanding any schedule of payments to be made on the Bonds set forth therein or in the Bond Indenture, the Institution agrees to make payments upon the Bonds and be liable therefor at the times and in the amounts equal to the amounts to be paid as principal or Redemption Price of or interest on the Bonds from time to time Outstanding under the Bond Indenture as the same shall become due whether at maturity, upon redemption, by declaration of acceleration or otherwise. All amounts payable with respect to the Bonds or under the Bond Indenture by the Institution, except as otherwise expressly provided in the Bond Indenture, shall be paid to the Bond Trustee so long as any Bonds remain Outstanding. The Institution agrees and represents that it has received fair consideration in return for the obligations undertaken and to be undertaken by the Institution resulting from each Bond issued or to be issued by the Institution under the Bond Indenture. (Section 1.04)

Obligations Unconditional

The Bond Indenture is a general obligation of the Institution and the obligations of the Institution to make payments pursuant to the Bond Indenture and pursuant to the Bonds and to perform and observe all agreements on its part contained in the Bond Indenture shall be absolute and unconditional, shall be binding and enforceable in all circumstances whatsoever, shall not be subject to set off, recoupment or counterclaim and shall be a general obligation of the Institution to which the full faith and credit of the Institution are pledged. Until the Bond Indenture is terminated or payment in full of all Bonds is made or is provided for in accordance with the Bond Indenture, the Institution (i) will not suspend or discontinue any payments thereunder or neglect to perform any of its duties required thereunder; (ii) will perform and observe all of its obligations set forth in the Bond Indenture; and (iii) except as provided in the Bond Indenture, will not terminate the Bond Indenture for any cause including, without limiting the generality of the foregoing, any acts or circumstances that may constitute failure of consideration; commercial frustration of purpose; any change in the tax or other laws or administrative rulings of, or administrative actions by or under authority of, the United States of America or of The Commonwealth of Massachusetts. (Section 1.05)

Power to Issue Bonds and Make Pledge and Assignment

The Institution is duly authorized to issue the Bonds and to enter into the Bond Indenture and to pledge and assign the funds and accounts purported to be pledged and assigned under the Bond Indenture in the manner and to the extent provided in the Bond Indenture. The Bonds are and will be legal, valid and binding obligations of the Institution in accordance with their terms, and the Institution and the Bond Trustee shall at all times, to the extent permitted by law, defend, preserve and protect said pledge and assignment of funds and accounts and all the rights of

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the Bondholders under the Bond Indenture against all claims and demands of all Persons whomsoever, subject to the limitations set forth in the Bond Indenture relating to the Bond Trustee. (Section 1.07)

Additional Bonds

(a) Additional Bonds shall be authorized by a Supplemental Bond Indenture. The Additional Bonds so authorized shall be issued from time to time and in such amounts as directed by the Institution, shall be authenticated by the Bond Trustee and, upon written request from the Institution, shall be delivered by the Bond Trustee to or upon the order of the Institution upon receipt of the consideration therefor. All such Additional Bonds shall mature on one or more of the maturity dates for the Initial Bonds and shall bear interest at the same rate per annum as the applicable maturity of the Initial Bonds. Each Supplemental Bond Indenture authorizing the issuance of Additional Bonds shall specify the following:

(i) the authorized principal amount of Additional Bonds of each maturity to be issued;

(ii) the first interest payment date for the Additional Bonds;

(iii) directions for the applications of the proceeds of the Additional Bonds; and

(iv) such other provisions as the Institution deems advisable and as are not materially adverse to the Holders of the Outstanding Bonds issued prior to such Additional Bonds.

(b) Additional Bonds shall:

(i) be identical in all respects to the Initial Bonds except for their date of issuance and initial interest payment date;

(ii) without limiting the foregoing, be subject to redemption at the same times and at the same Redemption Price as the Initial Bonds of the applicable maturity;

(iii) following the initial interest payment date for the applicable Additional Bonds, or upon issuance, if such Additional Bonds are issued on an interest payment date, and if such Additional Bonds are fungible with the Initial Bonds for U.S. federal income tax purposes, bear the same CUSIP identifier as the Initial Bonds of the same maturity.

(c) As a condition to the issuance of such Additional Bonds, there shall be delivered to the Bond Trustee an amended Obligation No. 34 or an additional obligation under the Master Indenture providing for the payment when due of the aggregate Outstanding principal amount of and interest on the Bonds Outstanding after the issuance of such Additional Bonds, as well as an amendment of the Guaranty providing for the guaranty of payment by the Guarantor of all payment obligations on any such amended Obligation No. 34 or additional obligation. (Section 2.11)

Creation of Funds and Accounts

Upon the issuance of the Bonds, there shall be created the following fund and accounts to be held by the Bond Trustee: The Bond Fund, which shall contain the following accounts:

(i) The Interest Account;

(ii) The Principal Account; and

(iii) The Redemption Account. (Section 5.01)

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Payments by Institution

(a) So long as any Bonds are Outstanding, the Institution shall make payments (which shall be made by the Institution by wire transfer of immediately available funds) to the Bond Trustee not later than the last Business Day of each month in an amount equal to the sum of (i) one-sixth (1/6) of the interest coming due on the Bonds on the next July 1 or January 1, as the case may be, for deposit in the Interest Account of the Bond Fund, plus (ii) one- twelfth (1/12) of the principal coming due on the Bonds on the next January 1 for deposit in the Principal Account of the Bond Fund. In addition, on or prior to the date any amount of principal is due under the Bond Indenture, the Institution shall make such payment by wire transfer of immediately available funds to the Bond Trustee. Upon receipt, the Bond Trustee shall deposit such amounts in the applicable account of the Bond Fund.

(b) The payments to be made under the foregoing subsection shall be appropriately adjusted to reflect the date of issue of the Bonds, any earnings on amounts in the Bond Fund, and any purchase or redemption of Bonds, so that there will be available on each Bond Payment Date in the Bond Fund the amount necessary to pay the interest and principal due or coming due on the Bonds.

(c) At any time when any principal of the Bonds is overdue, the Institution shall also have a continuing obligation to pay to the Bond Trustee for deposit in the Interest Account of the Bond Fund an amount equal to interest on the overdue principal.

(d) The Institution may at any time purchase Bonds and deliver such Bonds to the Bond Trustee for cancellation. The principal amount of Bonds of each maturity so purchased and cancelled shall be credited against the unsatisfied balance of the applicable maturity of Bonds.

(e) If the Institution makes an optional prepayment of any principal due on the Bonds, the amount so paid or transferred shall be credited to the Redemption Account and applied promptly by the Bond Trustee, first, to cause the amounts credited to the Interest Account and the Principal Account of the Bond Fund, in that order, to be not less than the amounts then required to be credited thereto, and then to retire Bonds by purchase, redemption or both purchase and redemption in accordance with the Institution’s directions. Any such redemption shall be of Bonds then subject to optional redemption at the Redemption Price then applicable for the optional redemption of such Bonds.

Any balance remaining in the Redemption Account after the purchase or redemption of Bonds in accordance with the Institution’s directions, or in any event on the day following the Bond Payment Date next succeeding the prepayment by the Institution, shall be transferred to the Interest Account. (Section 5.03)

Investment of Moneys Held by the Bond Trustee

(a) Pending their use under the Bond Indenture, moneys in the Bond Fund may be invested by the Bond Trustee in Permitted Investments (as defined below) maturing or redeemable at the option of the holder at or before the time when such moneys are expected to be needed and shall be so invested pursuant to written direction of the Institution; provided, in the case of Permitted Investments described in clauses (iii), (iv) and (v) of Subsection (c)(1) below which mature in more than thirty-one (31) days, that are fully secured by a security interest in obligations described in clause (i) maturing or redeemable at the option of the holder within two (2) years or, if later, at or before the time the invested moneys are expected to be needed. Any investments pursuant to the provisions described under this heading shall be held by the Bond Trustee as a part of the Bond Fund and shall be sold or redeemed to the extent necessary to make payments or transfers or anticipated payments or transfers from such Fund, subject to the notice provisions of Section 9-611 of the Uniform Commercial Code to the extent applicable. The Bond Trustee shall incur no liability for losses or penalties resulting from the sale or redemption of securities prior to maturity if the investment in such security and the sale or redemption is made pursuant to this Subsection (a). The Bond Trustee shall be under no obligation to invest any moneys under the Bond Indenture except pursuant to written instructions of the Institution, as described in the Bond Indenture.

(b) Any interest realized on investments in any Account and any profit realized upon the sale or other disposition thereof shall be credited to the Account with respect to which they were earned and any loss shall be charged thereto. D-26

(c) (1) The term “Permitted Investments” means (i) Government or Equivalent Obligations, (ii) obligations described in the Code §103(a) which are not items of preference under the Code §57(a)(5), or any successor thereto, rated at least “AA” or “Aa” by Fitch, Moody’s and/or S&P or shares of a so called money market or mutual fund that do not constitute “investment property” within the meaning of the Code §148(b)(2), provided either that the fund has all of its assets invested in obligations of such rating quality or, if such obligations are not so rated, that the fund has comparable creditworthiness through insurance or otherwise and which fund is rated AAm or Aam G if rated by S&P, (iii) certificates of deposit of, banker’s acceptances drawn on and accepted by, and interest bearing deposit accounts of, a bank or trust company which has a capital and surplus of not less than $50,000,000, provided that such certificates of deposit, banker’s acceptances and interest bearing deposit accounts are within the limits of applicable deposit insurance provided by the FDIC or are with a bank whose debt obligations or those of whose parent holding company have a rating from Fitch, Moody’s and/or S&P at least as high as the then current rating on the Bonds, if any, or equal to or greater than the second highest rating category, if the Bonds are not then rated, (iv) Repurchase Agreements (as defined below), (v) investment agreements with banks, insurance companies or other financial institutions the long term, unsecured senior obligations, (or claims paying ability if applicable), of which are rated in one of the three highest rating categories by Fitch, Moody’s and/or S&P, (vi) money market funds rated at least “Aam” or “Mm-G” (or their equivalent) by Fitch, Moody’s and/or S&P, (vii) commercial paper which is rated at the time of purchase at least “A-1” or “P-1” or their equivalent by Fitch, Moody’s and/or S&P and which matures not more than 270 days after the date of purchase, (viii) obligations of state or local government municipal bond issuers that are rated by Moody’s and S&P in one of the two highest rating categories (without regard to any numerical or other gradations or refinements such as “plus” or “minus”) and (ix) senior debt obligations issued, or guaranteed on a senior basis, by the Federal National Mortgage Association, Government National Mortgage Association, Federal Financing Bank, Federal Intermediate Credit Banks, Federal Farm Credit Bank, Banks for Cooperatives, Federal Land Banks, Federal Farm Credit Banks Funding Corporation, Farm Credit System Financial Assistance Corporation, Federal Home Loan Banks, Farmers Home Administration, Export-Import Bank of the United States, Resolution Funding Corporation, Student Loan Marketing Association, United States Postal Service, Tennessee Valley Authority, Federal Home Loan Mortgage Corporation or any other agency or corporation which has been or may hereafter be created pursuant to an act of Congress as an agency or instrumentality of the United States of America. The term “Repurchase Agreement” shall mean a written agreement under which a bank or trust company which has a capital and surplus of not less than $50,000,000, is regulated by the FDIC and, in the case of a bank, has or whose parent holding company has long term debt obligations rated A or better by Fitch, Moody’s and/or S&P or a government bond dealer reporting to, trading with, and recognized as a primary dealer by the Federal Reserve Bank of New York or Boston and which is a member of the Securities Investor Protection Association, sells to, and agrees to repurchase from the Bond Trustee obligations issued or guaranteed by the United States; provided that the market value of such obligations is at the time of entering into the agreement at least one hundred and three percent (103%) of the repurchase price specified in the agreement and that such obligations are segregated from the unencumbered assets of such bank or trust company or government bond dealer; and provided further that unless the agreement is with a bank or trust company, such agreement shall require the repurchase to occur on demand or on a date certain which is not later than one (1) year after such agreement is entered into and shall expressly authorize the Bond Trustee to liquidate the purchased obligations in the event of the insolvency of the party required to repurchase such obligations or the commencement against such party of a case under the Bankruptcy Code or the appointment of or taking possession by a trustee or custodian in a case against such party under the Bankruptcy Code. Any such investments may be purchased from or through the Bond Trustee. Any investment agreement shall provide for the collateralization of the provider’s obligations thereunder in the manner set forth above with respect to Repurchase Agreements in the event that the rating of the long term, unsecured senior obligations (or claims paying ability if applicable) of the provider falls below the levels required under clause (c)(1)(v) above.

(d) A security interest shall be perfected in such manner as may be provided by law. In the case of a Repurchase Agreement, if under applicable law, including the Bankruptcy Code, the agreement is recognized as transferring ownership in the underlying securities to the investing party with a right to liquidate the securities and apply the proceeds against the repurchase obligation, all free and clear of the claims of creditors and transferees of the other party, the interest of the investing party shall be regarded as the equivalent of a perfected security interest for the purposes of this Subsection. In any case, however, if the underlying securities or the securities subject to the security interest are certificated securities (as opposed to uncertificated or book entry securities), they shall be delivered to the Bond Trustee or to a depository satisfactory to the Bond Trustee, as the case may be, either as agent for the Bond Trustee or as bailee with appropriate instructions and acknowledgment, at the time of or prior to the D-27

investment, or, if the security interest is perfected without delivery, delivery shall be made within three (3) Business Days. (Section 5.04)

Indemnity

(a) The Institution will indemnify, defend and hold harmless the Bond Trustee (including its officers, directors and employees) from and against all claims, liabilities, losses, damages, costs, expenses (including reasonable attorneys’ fees and expenses), suits and judgments arising out of or in connection with the acceptance or administration of this trust including but not limited to (i) injury to or death of any Person or damage to property in or upon any property of the Institution financed or refinanced, directly or indirectly, out of Bond proceeds or the occupation, use, possession or condition of such property or any part thereof or related to the foregoing, (ii) any violation of any law, ordinance or regulation affecting such property or any part thereof or the ownership, occupation, use, possession or condition thereof, (iii) the issuance and sale of the Bonds or any portion thereof, (iv) the execution and delivery thereof or of the Bond Indenture or of any document required by the Bond Indenture or in furtherance of the transactions contemplated by the Bond Indenture, or (v) the performance of any act required of any indemnitee under this Section or otherwise hereunder; provided, however that this indemnification shall not cover any claims, liabilities, losses, damages, costs, expenses (including reasonable attorneys’ fees and expenses), suits or judgments that are solely or primarily the result of negligence or willful misconduct of the Bond Trustee (including its officers, directors and employees).

(b) The Bond Trustee shall promptly, upon receipt of notice of the existence of a claim or the commencement of a proceeding regarding which indemnity described under this Section may be sought, notify the Institution in writing thereof. If such a proceeding is commenced against the Bond Trustee, the Institution may assume the defense thereof and shall be responsible for the reasonable fees, costs and expenses of the Bond Trustee in conducting such defense with counsel reasonably satisfactory to the Bond Trustee. Alternatively, the Institution may elect to participate in any such proceedings or allow the Bond Trustee to assume its own defense. In such case, the Institution shall be responsible for the reasonable fees, costs and expenses of the Bond Trustee in conducting its defense. If the Institution fails to assume the defense of such proceeding or to employ such counsel for that purpose within a reasonable time after notice of commencement of the proceeding, the Institution shall not be entitled to assume the defense of the proceeding on behalf of the Bond Trustee, but shall be responsible for the reasonable fees, costs and expenses of the Bond Trustee in conducting its defense. Any settlement which affects the Bond Trustee may not be entered into without the written consent of the Bond Trustee, unless the Bond Trustee is given a full and unconditional release from liability with respect to the claims covered thereby and such settlement does not include a statement or admission of fault, culpability or failure to act by or on behalf of the Bond Trustee. (Section 6.05)

General Covenants of the Institution

Principal and Interest. The Institution covenants that it will promptly pay or cause to be paid the principal of, Redemption Price, if any, and interest on each Bond issued under the Bond Indenture at the place, on the dates and in the manner provided in the Bond Indenture and in said Bonds according to the terms thereof. (Section 6.01)

Performance of Covenants. The Institution covenants that it will faithfully perform at all times any and all covenants, undertakings and provisions on its part to be performed as provided in the Bond Indenture and in each and every Bond executed, authenticated and delivered under the Bond Indenture. (Section 6.02)

Instruments of Further Assurance. The Institution covenants that it will do, execute, acknowledge and deliver or cause to be done, executed, acknowledged and delivered, such instruments supplemental to the Bond Indenture and such further acts, instruments and transfers as the Bond Trustee may reasonably require for the better assuring, transferring, conveying, pledging, assigning and confirming unto the Bond Trustee all interests, revenues and receipts pledged by the Bond Indenture to the payment of the principal of, Redemption Price, if any, and interest on the Bonds in the manner and to the extent contemplated in the Bond Indenture. (Section 6.03)

Protection of Lien. The Institution agrees not to make or create or suffer to be made or created any assignment or lien under the Bond Indenture except as otherwise specifically provided in the Bond Indenture. (Section 6.04)

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Securities Law Status. The Institution represents and warrants that it is an organization organized and operated exclusively for charitable purposes and not for pecuniary profit; and that no part of its earnings inures to the benefit of any person, private stockholder or individual, all within the meaning of the Securities Act of 1933, as amended. (Section 6.06)

Reports. The Institution shall furnish to any agencies rating the Bonds such information as they may reasonably require for current reports to their subscribers. The Institution shall furnish to the Bond Trustee, within one hundred and eighty (180) days after the close of each fiscal year, a certificate signed by its chief financial officer or an authorized officer stating that the Institution has caused its operations for the year to be reviewed and that in the course of that review, no Event of Default under the Bond Indenture has come to its attention or, if such an Event of Default has occurred, a description of the Event of Default. Within one hundred eighty (180) days after the close of each of its fiscal years, unless available on EMMA or any successor thereto or to functions thereof, the Institution shall furnish copies of its audited financial statements to the Bond Trustee and to beneficial owners of the Bonds requesting the same in writing from the Institution and the Bond Trustee. Within seventy-five (75) days after the end of each of the first, second and third fiscal quarters (i.e., the fiscal quarters ending December 31, March 31 and June 30), unless available on EMMA or any successor thereto or to functions thereof, the Institution shall furnish copies of its quarterly financial statements described above to the Bond Trustee and to beneficial owners of the Bonds requesting the same in writing from the Institution and the Bond Trustee. The Institution hereby directs the Bond Trustee, at the expense of the Institution, to maintain a list of beneficial owners of the Bonds containing only those beneficial owners who have requested in writing to the Institution and the Bond Trustee to receive the above-referenced financial statements. For this purpose, the Bond Trustee may from time to time accept written certifications of beneficial ownership setting forth the address for delivery of copies of financial statements. The Bond Trustee may, but is under no obligation to, request evidence of ownership of the Bonds from a requesting beneficial owner. The Bond Trustee has no duty to review such financial statements, is not considered to have notice of the content of such financial statements or a default based on such content and does not have a duty to verify the accuracy of such statements. The Bond Trustee has no duty to verify or to update the list of beneficial owners and shall have no liability to the Institution or any Bondholder for maintaining such list or for delivering or facilitating the delivery of such financial statements to any Person or entity included on the list. (Section 6.07)

Maintenance of Corporate Existence. The Institution shall maintain its existence as a nonprofit corporation qualified to do business in The Commonwealth of Massachusetts and shall not dissolve or dispose of all or substantially all of its assets, or spin off a substantial amount of its assets, or consolidate with or merge into another entity or entities, or permit one or more other entities to consolidate with or merge into it, except as permitted by the Master Indenture. (Section 6.08)

Compliance with Master Indenture. Nothing contained in the Bond Indenture shall be construed as relieving the Institution of any of its obligations under the Master Indenture. Without limiting the generality of the foregoing, the Institution covenants and agrees that (a) it shall comply with all applicable provisions of the Master Indenture, as if contained in the Bond Indenture, (b) it shall not take or cause to permit to be taken any action except as permitted by the Master Indenture, whether or not specifically permitted under the Bond Indenture and (c) at the request of the Bond Trustee, it shall furnish to the Bond Trustee copies of such documents, certificates and reports as it may be required under the terms of the Master Indenture to deliver to the Master Trustee from time to time, whether or not specifically required under the Bond Indenture. (Section 6.09)

Continuing Disclosure. The Institution has entered into continuing disclosure undertakings (the “Continuing Disclosure Undertakings”) in connection with tax-exempt revenue bonds issued for the benefit of the Institution (the “Tax-Exempt Bonds”). Holders and prospective purchasers of the Bonds may obtain copies of the information provided by the Institution under those Continuing Disclosure Undertakings on EMMA. The Continuing Disclosure Undertakings will terminate when the Tax-Exempt Bonds are paid or deemed paid in full. (Section 6.10)

Deemed Representations of the Bondholders. By acquiring the Bonds, each Holder will be deemed to represent either (i) it is not acquiring Bonds with assets of an ERISA Plan or other plan subject to the prohibited transaction restrictions of ERISA, the Code or similar law or (ii) the acquisition and holding of the Bonds will not give rise to a non-exempt prohibited transaction. (Section 6.11)

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Events of Default

Each of the following is declared an “Event of Default” under the Bond Indenture:

(a) If payment by the Institution in respect of any installment of interest on any Bond shall not be made in full when the same becomes due and payable;

(b) If payment by the Institution in respect of the principal of or Redemption Price, if any, on any Bond shall not be made in full when the same becomes due and payable, whether at maturity or by proceedings for redemption or by declaration of acceleration or otherwise;

(c) The Institution shall fail to make any other required payment to the Bond Trustee, and such failure is not remedied within seven (7) days after written notice thereof is given by the Bond Trustee to the Institution; or the Institution shall fail to observe or perform any of its other agreements, covenants or obligations under the Bond Indenture and such failure is not remedied within sixty (60) days after written notice thereof is given by the Bond Trustee to the Institution.

(d) There shall be a material breach of warranty made in the Bond Indenture by the Institution as of the date it was intended to be effective and the breach is not cured within sixty (60) days after written notice thereof is given by the Bond Trustee to the Institution.

(e) The occurrence and continuance of an Event of Default (as defined in the Master Indenture) under the Master Indenture or under the Guaranty (as defined in the Guaranty). (Section 7.01)

Acceleration; Annulment of Acceleration

(a) Upon the occurrence of an Event of Default, the Bond Trustee may, and upon the written request of the Holders of not less than a majority in aggregate principal amount of the Bonds Outstanding shall, without any further action, declare all Bonds Outstanding to be immediately due and payable. The Bond Trustee shall declare such acceleration without regard to receipt of prior indemnification under the Bond Indenture. In such event, there shall be due and payable on the Bonds an amount equal to the total principal amount of all such Bonds, plus all interest accrued thereon and which accrues to the date of payment. For the avoidance of doubt, the Make-Whole Redemption Price is not payable upon the acceleration of the Bonds. The Bond Trustee shall give written notice of such acceleration to the Institution and the Bondholders.

(b) If at any time after the principal of the Bonds shall have been so declared to be due and payable as a result of an Event of Default, and before the entry of final judgment or decree in any suit, action or proceeding instituted on account of such default, or before the completion of the enforcement of any other remedy under the Bond Indenture, moneys shall have accumulated in the appropriate Funds and Accounts created under the Bond Indenture sufficient to pay the principal of all matured Bonds and all arrears of interest, if any, upon all Bonds then Outstanding (except the principal of any Bonds not then due and payable other than as a result of such declaration and the interest accrued on such Bonds since the last Bond Payment Date), and the charges, compensation, expenses, disbursements, advances and liabilities of the Bond Trustee and all other amounts then payable by the Institution under the Bond Indenture shall have been paid or a sum sufficient to pay the same shall have been deposited with the Bond Trustee, and every other Event of Default known to the Bond Trustee in the observance or performance of any covenant, condition, agreement or provision contained in the Bonds or in the Bond Indenture (other than a default in the payment of the principal of such Bonds then due and payable only because of the declaration under the provisions described under this heading) shall have been remedied to the satisfaction of the Bond Trustee, then and in every such case the Bond Trustee may, by written notice to the Institution, rescind and annul such declaration and its consequences, and the Bond Trustee shall promptly give notice of such annulment in the same manner as provided in subsection (a) of the provisions described under this heading for giving notice of acceleration. No such annulment shall extend to or affect any subsequent Event of Default or impair any right consequent thereon. If the Bond Trustee determines that a default other than a default in the payment of principal or Redemption Price of, premium, if any, or interest on the Bonds has been cured before the entry of any final judgment or decree with respect to it, the Bond Trustee shall waive

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the default and its consequences, including any acceleration, upon written instruction of the owners of at least twenty- five percent (25%) in principal amount of the Outstanding Bonds. (Section 7.02)

Additional Remedies and Enforcement of Remedies; Actions as Holder of Obligation No. 34

(a) Upon the occurrence and continuance of any Event of Default, the Bond Trustee may or upon the written request of the Holders of not less than a majority of the aggregate principal amount of the Bonds Outstanding, together with indemnification of the Bond Trustee to its satisfaction therefor, shall proceed forthwith to protect and enforce its rights and the rights of the Bondholders under the Bond Indenture and the Bonds by such suits, actions or proceedings as the Bond Trustee, being advised by counsel, shall deem expedient, including but not limited to:

(i) Civil action to recover money or damages due and owing;

(ii) Civil action to enjoin any acts or things which may be in violation of the rights of the Holders of Bonds; and

(iii) Enforcement of any and all other rights and remedies of a secured party under the Uniform Commercial Code with respect to Obligation No. 34 issued under the Master Indenture and with respect to securities in the Bond Fund, including the right to sell or redeem such securities and the right to retain the securities in satisfaction of the obligations of the Institution under the Bond Indenture;

(iv) Enforcement of any and all other rights and remedies under the Master Indenture as the holder of Obligation No. 34, including but not limited to granting consents and waivers, directing the Master Trustee as to the exercise of its remedies and the conduct of proceedings under the Guaranty or otherwise, the acceleration of the Obligations (as defined under the Master Indenture), the annulment of any such acceleration and the waiver of Events of Default (as defined in the Master Indenture). If the Obligations are declared to be due and payable under the Master Indenture based on any event or occurrence which does not arise from or cause (otherwise than by such declaration) an Event of Default under clause (a) or (b) described under the heading “Events of Default” and if such Event of Default under the Master Indenture is cured and the applicable conditions of the Master Indenture are satisfied, the Bond Trustee shall refrain from directing the Master Trustee not to annul such declaration and its consequences and may direct the Master Trustee to annul such declaration and its consequences; and

(v) Enforcement of any and all other rights and remedies under the Guaranty.

(b) Regardless of the happening of an Event of Default, the Bond Trustee, if requested in writing by the Holders of not less than a majority of the aggregate principal amount of the Bonds then Outstanding, shall upon being indemnified or provided with security to its satisfaction therefor, institute and maintain such suits and proceedings as it may be advised shall be necessary or expedient (i) to prevent any impairment of the security under the Bond Indenture by any acts which may be unlawful or in violation of the Bond Indenture, or (ii) to preserve or protect the interests of the Holders, provided that such request is in accordance with law and the provisions of the Bond Indenture and, in the sole judgment of the Bond Trustee, is not unduly prejudicial to the interest of the Holders of Bonds not making such request (it being understood that the Bond Trustee does not have an affirmative duty to ascertain whether or not any actions or forbearances by a Bondholder are unduly prejudicial to other Bondholders) or would involve the Bond Trustee in personal liability.

(c) Regardless of the happening of an Event of Default, the Bond Trustee may, and if requested in writing by the Holders of not less than a majority of the aggregate principal amount of the Bonds then Outstanding, shall, take any action that is permitted to be taken by the holder of an Obligation under the Master Indenture or the Guaranty, including but not limited to granting consents and waivers. (Section 7.03)

Application of Revenues and Other Moneys after Default

During the continuance of an Event of Default all moneys received by the Bond Trustee pursuant to any right given or action taken under the provisions described under this heading shall, after payment of the reasonable costs and expenses of the proceedings which result in the collection of such moneys and of the reasonable fees, expenses D-31

and advances incurred or made by the Bond Trustee with respect thereto, and the payments of any amounts due as compensation to the Bond Trustee under the Bond Indenture be deposited in the Bond Fund, and all amounts held by the Bond Trustee under the Bond Indenture shall be applied as follows:

(a) Unless the principal of all Outstanding Bonds shall have become or have been declared due and payable:

First: To the payment to the Persons entitled thereto of all installments of interest then due on the Bonds in the order of maturity of such installments, and, if the amount available shall not be sufficient to pay in full any installment or installments maturing on the same date, then to the payment thereof ratably, according to the amounts due thereon to the Persons entitled thereto, without any discrimination or preference; and

Second: To the payment to the Persons entitled thereto of the unpaid principal amounts or Redemption Price of any Bonds which shall have become due (other than Bonds previously called for redemption for the payment of which moneys are held pursuant to the provisions of the Bond Indenture), whether at maturity or by call for redemption, in the order of their due dates, and if the amounts available shall not be sufficient to pay in full all the Bonds due on any date, then to the payment thereof ratably, according to the principal amounts or Redemption Price due on such date, to the Persons entitled thereto, without any discrimination or preference.

(b) If the principal amounts of all Outstanding Bonds shall have become or have been declared due and payable, to the payment of the principal amounts and interest then due and unpaid upon the Bonds without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, ratably, according to the amounts due respectively for principal amounts and interest, to the Persons entitled thereto without any discrimination or preference.

(c) If the principal amounts of all Outstanding Bonds shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled under the provisions described under this heading, then, subject to the provisions of paragraph (b) of this Section in the event that the principal amounts of all Outstanding Bonds shall later become due or be declared due and payable, the moneys shall be applied in accordance with the provisions of paragraph (a) of this Section.

Whenever moneys are to be applied by the Bond Trustee pursuant to the provisions of this Section, such moneys shall be applied by it at such times, and from time to time, as the Bond Trustee shall determine, having due regard for the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Bond Trustee shall apply such moneys, it shall fix the date (which shall be a Bond 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 principal amounts to be paid on such dates shall cease to accrue. The Bond 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 Bond until such Bond shall be presented to the Bond Trustee for appropriate endorsement of any partial payment or for cancellation if fully paid.

Whenever all Bonds and interest thereon have been paid under the provisions of this Section, and all reasonable fees, expenses and charges of the Bond Trustee have been paid, any balance remaining shall be paid to the Person entitled to receive the same; if no other Person shall be entitled thereto, then the balance shall be paid to the Institution or as a court of competent jurisdiction may direct. (Section 7.04)

Remedies Not Exclusive

No remedy by the terms of the Bond Indenture conferred upon or reserved to the Bond Trustee or the Bondholders is intended to be exclusive of any other remedy but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under the Bond Indenture or existing at law or in equity on or after the date of the Bond Indenture. (Section 7.05)

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Remedies Vested in the Bond Trustee

All rights of action (including the right to file proof of claims) under the Bond Indenture or under any of the Bonds may be enforced by the Bond Trustee without the possession of any of the Bonds or the production thereof in any trial or other proceedings relating thereto. Any such suit or proceeding instituted by the Bond Trustee may be brought in its name as the Bond Trustee without the necessity of joining as plaintiffs or defendants any Holders of the Bonds. Subject to the provisions described under the heading “Application of Revenues and Other Moneys after Default” above, any recovery or judgment shall be for the equal benefit of the Holders of the Outstanding Bonds. (Section 7.06)

Bondholders’ Control of Proceedings

If an Event of Default shall have occurred and be continuing, notwithstanding anything in the Bond Indenture to the contrary, the Holders of a majority in aggregate principal amount of Bonds then Outstanding shall have the right, at any time, by any instrument in writing executed and delivered to the Bond Trustee to direct the method and place of conducting any proceeding to be taken in connection with the enforcement of the terms and conditions of the Bond Indenture, provided that such direction is in accordance with law and the provisions of the Bond Indenture (including indemnity or security to the Bond Trustee as provided in the Bond Indenture) and, in the sole judgment of the Bond Trustee, is not unduly prejudicial to the interest of Bondholders not joining in such direction (it being understood that the Bond Trustee does not have an affirmative duty to ascertain whether or not any actions or forbearances by a Bondholder are unduly prejudicial to other Bondholders) or would involve the Bond Trustee in personal liability and provided further that nothing in this Section shall impair the right of the Bond Trustee in its discretion to take any other action under the Bond Indenture which it may deem proper and which is not inconsistent with such direction by Bondholders. (Section 7.07)

Individual Bondholder Action Restricted

(a) No Holder of any Bond shall have any right to institute any suit, action or proceeding in equity or at law for the enforcement of the Bond Indenture or for the execution of any trust under the Bond Indenture or for any remedy under the Bond Indenture unless:

(i) an Event of Default has occurred (A) under subsection (a) or (b) described under the heading “Events of Default” above, or (B) under subsection (c), (d) or (e) described under the heading “Events of Default” above as to which the Bond Trustee has actual knowledge or as to which the Bond Trustee has been notified in writing;

(ii) the Holders of a majority in aggregate principal amount of Bonds Outstanding shall have made written request to the Bond Trustee to proceed to exercise the powers granted in the Bond Indenture or to institute such action, suit or proceeding in its own name;

(iii) such Bondholders shall have offered the Bond Trustee indemnity as provided in the Bond Indenture;

(iv) the Bond Trustee shall have failed or refused to exercise the powers in the Bond Indenture granted or to institute such action, suit or proceedings in its own name for a period of sixty (60) days after receipt by it of such request and offer of indemnity; and

(v) during such sixty (60) day period no direction inconsistent with such written request has been delivered to the Bond Trustee by the Holders of a majority in aggregate principal amount of Bonds then Outstanding in accordance with the provisions described under the heading “Bondholders’ Control of Proceedings” above.

(b) No one or more Holders of Bonds shall have any right in any manner whatsoever 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 for the equal benefit of the Holders of all Bonds Outstanding. D-33

(c) Nothing contained in the Bond Indenture shall affect or impair, or be construed to affect or impair, the right of the Holder of any Bond (i) to receive payment of the principal of or interest on such Bond on or after the due date thereof or (ii) to institute suit for the enforcement of any such payment on or after such due date. (Section 7.08)

Termination of Proceedings

In case any proceeding taken by the Bond Trustee on account of an Event of Default shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Bond Trustee or to the Bondholders, then the Institution, the Bond Trustee and the Bondholders shall be restored to their former positions and rights under the Bond Indenture, and all rights, remedies and powers of the Bond Trustee and the Bondholders shall continue as if no such proceeding had been taken. (Section 7.09)

Waiver of Event of Default

(a) No delay or omission of the Bond Trustee or of any Holder of the Bonds to exercise any right or power accruing upon any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein. Every power and remedy given by the provisions described under this heading to the Bond Trustee and the Holders of the Bonds, respectively, may be exercised from time to time and as often as may be deemed expedient by them.

(b) The Bond Trustee may waive any Event of Default which in its opinion shall have been remedied before the entry of final judgment or decree in any suit, action or proceeding instituted by it under the provisions of the Bond Indenture, or before the completion of the enforcement of any other remedy under the Bond Indenture.

(c) Notwithstanding anything contained in the Bond Indenture to the contrary, the Bond Trustee, upon the written request of the Holders of at least a majority of the aggregate principal amount of Bonds then Outstanding, shall waive any Event of Default under the Bond Indenture and its consequences; provided, however, that, except under the circumstances set forth in subsection (b) under the heading “Acceleration; Annulment of Acceleration” above, a default in the payment of the principal amount of, Redemption Price, if any, or interest on any Bond, when the same shall become due and payable by the terms thereof or upon call for redemption, may not be waived without the written consent of all of the affected Holders of the Bonds at the time Outstanding.

(d) In case of any waiver by the Bond Trustee of an Event of Default under the Bond Indenture, the Institution, the Bond Trustee and the Bondholders shall be restored to their former positions and rights under the Bond Indenture, respectively, but no such waiver shall extend to any subsequent or other Event of Default or impair any right consequent thereon. The Bond Trustee shall not be responsible to any person for waiving or refraining from waiving any Event of Default in accordance with this Section. (Section 7.10)

Notice of Default

Promptly, but in any event within thirty (30) days after (i) the occurrence of an Event of Default under clauses (a) or (b) under the heading “Events of Default” above, or (ii) receipt, in writing or otherwise, by the Bond Trustee of actual knowledge or notice of an Event of Default under clauses (c), (d), or (e) under the heading “Events of Default” above, the Bond Trustee shall, unless such Event of Default shall have theretofore been cured, give written notice thereof by first class mail to each Holder of a Bond then Outstanding, provided that, except in the case of a default in the payment of principal amounts or the Redemption Price of or interest on any of the Bonds, the Bond Trustee may withhold such notice to such Holders if, in its sole judgment, it determines that the withholding of such notice is in the best interests of the Bondholders. (Section 7.11)

Limitations on Remedies

It is the purpose and intention of the Bond Indenture to provide rights and remedies to the Bond Trustee and Bondholders which may be lawfully granted, but should any right or remedy granted in the Bond Indenture be held to

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be unlawful, the Bond Trustee and the Bondholders shall be entitled as above set forth, to every other right and remedy provided in the Bond Indenture and by law. (Section 7.12)

Certain Provisions Relating to Bond Trustee

(A) The Institution may remove the Bond Trustee at any time unless an Event of Default shall have occurred and then be continuing, and shall remove the Bond Trustee if at any time requested to do so by an instrument or concurrent instruments in writing signed by the Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding (or their attorneys duly authorized in writing) or if at any time the Bond Trustee shall cease to be eligible in accordance with subsection (D) under this heading, or shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Bond Trustee or its respective property shall be appointed, or any public officer shall take control or charge of the Bond Trustee or of its respective property or affairs for the purpose of rehabilitation, conservation or liquidation, in each case by giving written notice of such removal to the Bond Trustee, as the case may be, and thereupon shall appoint a successor Bond Trustee by an instrument in writing.

(B) The Bond Trustee may at any time resign by giving thirty (30) days’ prior written notice of such resignation to the Institution, the Bondholders by mail at the addresses shown on the Bond registration books maintained by the Bond Trustee and each rating agency then rating the Bonds. Upon receiving such notice of resignation, the Institution shall promptly appoint a successor Bond Trustee by an instrument in writing.

(C) Any removal or resignation of the Bond Trustee and appointment of a successor thereto shall become effective upon acceptance of appointment by the successor Bond Trustee. If no successor Bond Trustee shall have been appointed and have accepted appointment within forty-five (45) days of giving notice of removal or notice of resignation as aforesaid, the resigning Bond Trustee or any Bondholder (on behalf of himself and all other Bondholders) may petition any court of competent jurisdiction for the appointment of a successor Bond Trustee, and such court may thereupon, after such notice (if any) as it may deem proper, appoint such successor Bond Trustee. Any successor Bond Trustee appointed under the Bond Indenture shall signify its acceptance of such appointment by executing and delivering to the Institution and to its predecessor Bond Trustee a written acceptance thereof, and thereupon such successor Bond Trustee, without any further act, deed or conveyance, shall become vested with all the moneys, estates, properties, rights, powers, trusts, duties and obligations of such predecessor Bond Trustee, with like effect as if originally named Bond Trustee in the Bond Indenture; but, nevertheless at the request of the Institution or the request of the successor Bond Trustee, such predecessor Bond Trustee shall execute and deliver any and all instruments of conveyance or further assurance and do such other things as may reasonably be required for more fully and certainly vesting in and confirming to such successor Bond Trustee all the right, title and interest of such predecessor Bond Trustee in and to any property held by it under the Bond Indenture and shall pay over, transfer, assign and deliver to the successor Bond Trustee any money or other property subject to the trusts and conditions set forth in the Bond Indenture. Upon request of the successor Bond Trustee, the Institution shall execute and deliver any and all instruments as may be reasonably required for more fully and certainly vesting in and confirming to such successor Bond Trustee all such moneys, estates, properties, rights, powers, trusts, duties and obligations. Upon acceptance of appointment by a successor Bond Trustee as provided in this subsection, such successor Bond Trustee shall mail a notice of the succession of such Bond Trustee to the trusts under the Bond Indenture to the Bondholders at the addresses shown on the bond registration books maintained by the Bond Trustee, to the Institution and to each rating agency then rating the Bonds.

(D) Any Bond Trustee appointed under the provisions of the Bond Indenture shall be a trust company, association, corporation or bank having trust powers, having the power under applicable law to perform all the duties of the Bond Trustee under the Bond Indenture, having a combined capital (exclusive of borrowed capital) and surplus (or the parent holding company of which has a combined capital and surplus) of at least $50,000,000 and subject to supervision or examination by state or federal banking authorities. In case at any time the Bond Trustee shall cease to be eligible in accordance with the provisions of this subsection (D), the Bond Trustee shall resign immediately in the manner and with the effect specified under this heading. (Section 8.01)

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Merger or Consolidation

Any company into which the Bond Trustee may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which it shall be a party or any company to which the Bond Trustee may sell or transfer all or substantially all of its corporate trust business, provided such company shall be eligible under subsection (D) described under the heading “Certain Provisions Relating to Bond Trustee” above, shall be the successor to such Bond Trustee without the execution or filing of any paper or any further act, anything in the Bond Indenture to the contrary notwithstanding. (Section 8.02)

Compensation of Bond Trustee

The Institution shall pay to the Bond Trustee from time to time reasonable compensation for all services rendered hereunder and all reasonable expenses, charges, legal and consulting fees and other disbursements and those of its attorneys and agents incurred in and about the performance of its powers and duties hereunder. The obligations of the Institution described under this Section and described under the heading “Indemnity” shall survive resignation or removal of the Bond Trustee under the Bond Indenture and payment of the Bonds and discharge of the Bond Indenture. To secure the Institution’s payment obligations described under this Section and under the heading “Indemnity,” during the continuance of and after an Event of Default, the Bond Trustee shall have a lien prior to the Bonds on all money or property held or collected by the Bond Trustee, except that held in trust to pay principal and interest on particular Bonds. Such lien shall survive the resignation and removal of the Bond Trustee and the satisfaction and discharge of the Bond Indenture. When the Bond Trustee incurs expenses or renders services after an Event of Default, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under the Bankruptcy Code. (Section 8.06)

The Bond Trustee Not Required to Take Action Unless Indemnified

Except as expressly required in the Bond Indenture, the Bond Trustee shall neither be required to institute any suit or action or other proceeding under the Bond Indenture or appear in any suit or action or other proceeding in which it may be a defendant, or to take any steps to enforce its rights and expose it to liability, nor shall the Bond Trustee be deemed liable for failure to take any such action, unless and until it shall have been indemnified, to its satisfaction, against any and all reasonable costs, expenses, outlays, counsel and other fees, other disbursements including its own reasonable fees and against all liability and damages (including but not limited to liability related to environmental laws and regulations). The Bond Trustee may, nevertheless, begin suit, or appear in and defend suit, or do anything else which in its judgment is proper to be done by it as the Bond Trustee, without prior assurance of indemnity or security, and in such case the Institution shall reimburse the Bond Trustee for all reasonable costs, expenses, outlays, counsel and other fees, and other reasonable disbursements including its own fees, and for all liability and damages (including but not limited to liability related to environmental laws and regulations) suffered by the Bond Trustee in connection therewith, except to the extent such costs, expenses, outlays, counsel or other fees, disbursements, liability or damages shall have been finally determined by a court of competent jurisdiction to have been caused by the Bond Trustee’s negligence or willful misconduct. If the Bond Trustee begins, appears in or defends such a suit, the Bond Trustee shall give reasonably prompt notice of such action to the Institution, and shall give such notice prior to taking such action if possible. If the Institution shall fail to make such reimbursement, the Bond Trustee may reimburse itself from any surplus money created by the Bond Indenture; provided, however, that if the Bond Trustee shall collect any amounts or obtain a judgment, decree or recovery, by exercising the remedies available to it under the Bond Indenture, the Bond Trustee shall have a first claim upon the amount recovered for payment of its reasonable costs, expenses and fees incurred. (Section 8.08)

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Consequential Damages

Anything in the Bond Indenture notwithstanding, in no event shall the Bond Trustee be liable for special, indirect, punitive or consequential loss or damage of any kind (including, but not limited to, loss of profit) irrespective of whether the Bond Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action. (Section 8.16)

Amendments Not Requiring Consent of Bondholders

The Institution and the Bond Trustee may, without the consent of or notice to any of the Holders, enter into one or more amendments or supplements to the Bond Indenture, which amendments or supplements thereafter shall form a part of the Bond Indenture, for one or more of the following purposes:

(a) To cure any ambiguity or formal defect or omission in the Bond Indenture;

(b) To correct or supplement any provision in the Bond Indenture which may be inconsistent with any other provision in the Bond Indenture, or to make any other provisions with respect to matters or questions arising under the Bond Indenture which shall not materially adversely affect the interests of the Holders;

(c) To grant or confer upon the Holders any additional rights, remedies, powers or authority that may lawfully be granted or conferred upon them;

(d) To qualify the Bond Indenture under the Trust Indenture Act of 1939, as amended, or corresponding provisions of federal laws from time to time in effect;

(e) To secure additional revenues or provide additional security or reserves for payment of the Bonds;

(f) To issue Additional Bonds in accordance with the provisions described under the heading “Additional Bonds” above; and

(g) To replace the Bond Trustee in accordance with the applicable provisions of the Bond Indenture.

Any amendments or supplements authorized by the provisions described under this heading may be executed by the Institution and the Bond Trustee without the consent of the Holders of any of the Bonds at the time Outstanding, notwithstanding any of the provisions described under the heading “Amendments Requiring Consent of Bondholders” below, but the Bond Trustee shall not be obligated to enter into any such amendments or supplements which affects the Bond Trustee’s own rights, duties or immunities under the Bond Indenture or otherwise. (Section 9.01)

Amendments Requiring Consent of Bondholders

(a) Other than amendments or supplements to the Bond Indenture referred to under the heading “Amendments Not Requiring Consent of Bondholders” and subject to the terms and provisions and limitations contained under this heading and not otherwise, the Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding shall have the right, from time to time, anything contained in the Bond Indenture to the contrary notwithstanding, to consent to and approve the execution by the Institution and the Bond Trustee of such amendments or supplements as shall be deemed necessary and desirable by the Institution for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in the Bond Indenture; provided, however, none of the provisions described under this heading shall permit or be construed as permitting any amendments or supplements without the consent of the Holders of all Bonds then Outstanding which would:

(i) extend the stated maturity of, or time for paying interest on any Bond, or reduce the principal amount of or the Redemption Price or rate of interest payable on any Bond without the consent of the Holder of such Bond;

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(ii) prefer or give a priority to any Bond over any other Bond without the consent of the Holder of each Bond then Outstanding not receiving such preference or priority; or

(iii) reduce the aggregate principal amount of Bonds then Outstanding the consent of the Holders of which is required to authorize such amendment or supplement.

(b) If at any time the Institution shall request the Bond Trustee to enter into an amendment or supplement pursuant to this Section, the Bond Trustee shall, upon being satisfactorily indemnified with respect to expenses, cause notice of the proposed execution of such amendment or supplement to be mailed by first class mail, postage prepaid, to all Holders of Bonds then Outstanding at their addresses as they appear on the registration books provided for in the Bond Indenture. The Bond Trustee shall not, however, be subject to any liability to any Bondholder by reason of its failure to mail, or the failure of such Bondholder to receive, the notice required by this Section, and any such failure shall not affect the validity of such amendment or supplement when consented to and approved as provided in this Section. Such notice shall briefly set forth the nature of the proposed amendment or supplement and shall state that copies thereof are on file at the office of the Bond Trustee for inspection by all Bondholders.

(c) If within such period as shall be prescribed by the Institution following the giving of such notice, the Bond Trustee shall receive an instrument or instruments purporting to be executed by the Holders of not less than the aggregate principal amount or number of Bonds specified in clause (a) for the amendment or supplement in question which instrument or instruments shall refer to the proposed amendment or supplement described in such notice and shall specifically consent to and approve the execution thereof in substantially the form of the copy thereof referred to in such notice as on file with the Bond Trustee, thereupon, but not otherwise, the Bond Trustee may execute such amendment or supplement in substantially such form, without liability or responsibility to any Holder of any Bond, whether or not such Holder shall have consented thereto.

(d) Any such consent shall be binding upon the Holder of the Bond giving such consent and upon any subsequent Holder of such Bond and of any Bond issued in exchange therefor (whether or not such subsequent Holder thereof has notice thereof), unless such consent is revoked in writing by the Holder of such Bond giving such consent or by a subsequent Holder thereof by filing with the Bond Trustee, prior to the execution by the Bond Trustee of such amendment or supplement, such revocation. At any time after the Holders of the required principal amount or number of Bonds shall have filed their consents to the amendment or supplement, the Bond Trustee shall make and file with the Institution a written statement to that effect. Such written statement shall be conclusive that such consents have been so filed.

(e) If the Holders of the required principal amount or number of the Bonds Outstanding shall have consented to and approved the execution of such amendment or supplement as provided in the Bond Indenture, no Holder of any Bond shall have any right to object to the execution thereof, or to object to any of the terms 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 Bond Trustee or the Institution from executing the same or from taking any action pursuant to the provisions thereof. (Section 9.02)

Execution and Effect of Amendments or Supplements

(a) In executing any amendment or supplement to the Bond Indenture permitted by the provisions described under this heading, the Bond Trustee shall be entitled to receive and to rely upon an Opinion of Counsel stating that the execution of such amendment or supplement is authorized or permitted by the Bond Indenture. The Bond Trustee may but shall not be obligated to enter into any such amendment or supplement which affects the Bond Trustee’s own rights, duties or immunities.

(b) Upon the execution and delivery of any amendment or supplement in accordance with the provisions described under this heading, the provisions of the Bond Indenture shall be modified in accordance therewith and such amendment or supplement shall form a part of the Bond Indenture for all purposes and every Holder of a Bond theretofore or thereafter authenticated and delivered under the Bond Indenture shall be bound thereby.

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(c) Any Bond authenticated and delivered after the execution and delivery of any amendment or supplement in accordance with the provisions described under this heading may, and if required by the Institution or the Bond Trustee shall, bear a notation in form approved by the Institution and the Bond Trustee as to any matter provided for in such amendment or supplement. If the Institution shall so determine, new Bonds so modified as to conform in the opinion of the Bond Trustee and the Institution to any such amendment or supplement may be prepared and executed by the Institution and authenticated and delivered by the Bond Trustee in exchange for and upon surrender of Bonds then Outstanding. (Section 9.03)

Amendments to the Guaranty

Notwithstanding anything in the Bond Indenture to the contrary, the Bond Trustee may consent to, and direct the Master Trustee to consent to, amendment of the Guaranty in accordance with the provisions thereof. (9.04)

Discharge

If payment of all principal of, Redemption Price, if any, and interest on the Bonds in accordance with their terms and as provided in the Bond Indenture is made, and if all other sums payable by the Institution under the Bond Indenture shall be paid or provided for, then the liens, estates and security interests granted by the Bond Indenture shall cease. Thereupon, upon the request of the Institution, the Bond Trustee shall execute and deliver proper instruments acknowledging such satisfaction and discharging the lien of the Bond Indenture and the Bond Trustee shall transfer all property held by it under the Bond Indenture, other than moneys or obligations held by the Bond Trustee for payment of amounts due or to become due on the Bonds, to the Institution or such other Person as may be entitled thereto as their respective interests may appear, as directed in writing by the Institution. Such satisfaction and discharge shall be without prejudice to the rights of the Bond Trustee thereafter to charge and be compensated or reimbursed for services rendered and expenditures incurred in connection with the Bond Indenture. The Institution may at any time surrender to the Bond Trustee for cancellation any Bond previously authenticated and delivered which the Institution may have acquired in any manner whatsoever and such Bond upon such surrender and cancellation shall be deemed to be paid and retired. (Section 10.01)

Providing for Payment of Bonds – Legal Defeasance and Discharge

The Institution shall, subject to the satisfaction of the applicable conditions described under the heading “Conditions to Legal Defeasance” below, be deemed to have paid all principal of, Redemption Price, if any, and interest on the Bonds on the date the conditions set forth below are satisfied (“Legal Defeasance”). (Section 10.02)

Conditions to Legal Defeasance

In order to exercise Legal Defeasance with respect to the Bonds:

(a) The Institution must irrevocably deposit with the Bond Trustee moneys or non-callable Government or Equivalent Obligations, or any combination thereof, which moneys, and the maturing principal and interest income on which non-callable Government or Equivalent Obligations, if any, shall be sufficient to pay when due the principal or Redemption Price of and interest on the Bonds. The moneys and non-callable Government or Equivalent Obligations shall be held by the Bond Trustee irrevocably in trust for the Holders of the Bonds solely for the purpose of paying the principal or Redemption Price of and interest on the Bonds as the same shall mature or become payable upon prior redemption, and, if such prior redemption is to occur by optional redemption, the Institution must provide irrevocable instructions to the Bond Trustee as to the dates upon which any such Bonds are to be redeemed prior to their respective maturities. In connection with any such deposit occurring more than ninety (90) days prior to the payment of all Bonds at maturity or prior redemption, there shall be delivered to the Bond Trustee a verification report of a certified public accountant, verification agent or similar expert to the effect that the amount deposited, together with investment earnings thereon, will be sufficient to pay when due the principal of and interest due and to become due on said Bonds on or prior to the maturity date thereof, and the Bond Trustee shall mail a notice prepared by the Institution within thirty (30) days after such deposit to each Holder of a Bond stating that Legal Defeasance of the Bonds has occurred.

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(b) The Institution shall have delivered to the Bond Trustee an Opinion of Counsel (which Opinion of Counsel may be subject to customary assumptions and exclusions) stating that all conditions precedent provided for or relating to the Legal Defeasance have been complied with. (Section 10.03)

Payment of Bonds after Discharge

Notwithstanding the discharge of the lien of the Bond Indenture as provided in the Bond Indenture, the Bond Trustee shall nevertheless retain such rights, powers and duties under the Bond Indenture as may be necessary and convenient for the payment of amounts due or to become due on the Bonds and the registration, transfer, exchange and replacement of Bonds as provided in the Bond Indenture. Notwithstanding any provision of the Bond Indenture, and subject to applicable escheat laws, any moneys held by the Bond Trustee in trust for the payment of the principal of or Redemption Price, if any, or interest on any Bonds and remaining unclaimed for one (1) year after the principal of all the Outstanding Bonds has become due and payable (whether at maturity or upon call for redemption or by declaration as provided in the Bond Indenture), if such moneys were so held at such date, or two (2) years after the date of deposit of such moneys if deposited after said date when all of the Bonds became due and payable, shall be repaid to the Institution free from the trusts created by the Bond Indenture, and all liability of the Bond Trustee with respect to such moneys shall thereupon cease; provided, however, that before the repayment of such moneys to the Institution as aforesaid, the Bond Trustee shall (upon the request of the Institution) first mail to the Holders of Bonds which have not yet been paid, at the addresses shown on the registration books maintained by the Bond Trustee, a notice, in such form as may be deemed appropriate by the Bond Trustee, with respect to the Bonds so payable and not presented and with respect to the provisions relating to the repayment to the Institution of the moneys held for the payment thereof. Any money held by the Bond Trustee pursuant to the provisions described under this heading shall be held uninvested and without any liability for interest. (Section 10.04)

Disqualified Bonds

In determining whether the Holders of the requisite aggregate principal amount of Bonds have concurred in any demand, request, direction, consent or waiver under the Bond Indenture, Bonds which are owned or held by or for the account of the Institution or by any Person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Institution shall be disregarded and deemed not to be Outstanding for the purpose of any such determination; provided, however, that the Bond Trustee shall not be deemed to have knowledge that any Bond is owned or held by or for the account of the Institution or by any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Institution unless the Institution is the registered owner of such Bond or the Bond Trustee has notice thereof. Bonds so owned which have been pledged in good faith may be regarded as Outstanding for the purposes of this Section if the pledgee shall certify to the Bond Trustee the pledgee’s right to vote such Bonds and that the pledgee is not a person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Institution. In case of a dispute as to such right, any decision by the Bond Trustee taken upon the advice of counsel shall be full protection to the Bond Trustee. Upon request, the Institution shall designate those Bonds disqualified pursuant to the terms of this Section. (Section 11.08)

Money Held for Particular Bonds

The money held by the Bond Trustee for the payment of the interest or principal or Redemption Price due on any date with respect to particular Bonds (or portions of Bonds in the case of Bonds redeemed in part only) shall, on and after such date and pending such payment, be set aside on its books and held in trust by it for the Holders of the Bonds entitled thereto, subject, however, to the provisions described under the heading “Payment of Bonds after Discharge” above. (Section 11.09)

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THE CHILDREN’S HOSPITAL CORPORATION • Taxable Bonds, Series 2017A