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, qualification or filing under the securities laws of any such jurisdiction. NEW ISSUE–BOOK-ENTRYONLY † * Preliminary,subject tochange. Dated: ______, 2018 Dated: DateofDelivery to DTCinNewYork,York oritscustodialagentonabout______,2018. counsel, their by Underwriters the for upon passed Hawkins Delafieldbe & Wood LLP, Newark, New Jersey. It iswill expected that the Series 2018 Bonds will be available formatters delivery legal Certain HMH. to counsel Jersey, New Newark, LLP, English, & McCarter by legality of approval the to and notice, without offer the of modification or withdrawal to sale, an informedinvestmentdecision. this issue.InvestorsmustreadtheentireOfferingMemorandum toobtaininformationessentialthemakingof and Appendix B-2 attached hereto. See also “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2018 BONDS” herein. FINANCIAL INFORMATION – LONG TERM INDEBTEDNESS AND INTEREST RATE SWAP AGREEMENTS” and Appendix B-1 more SELECTED as – HEALTH MERIDIAN Note, HACKENSACK CONCERNING 2018 “INFORMATION – A Series Appendix See the herein. described securing fully Revenues Gross on lien a by secured including secured, or unsecured either be may which indebtedness, additional issue to permitted are Group Obligated the of Members the Moreover, Note. of 2018 Series issuance the the with simultaneously Indenture Master the to pursuant and under issued Obligations Debt other and/or notes with TheBankofNewYorkMellon,asmastertrustee(the“MasterTrustee”). the of herein) defined (as Indenture”), “Master (the Revenues 2017 1, April Gross of as dated of Indenture, Trust pledge Master a to a pursuant herein) defined by (as Group Combined secured Trustee, the to Note”) 2018 “Series (the note a issue will securities laws. CONSIDERATIONS” herein. for federal,stateorlocalincometaxpurposes.See“CERTAINUNITEDSTATESFEDERALINCOME TAX SERIES 2018BONDS–Redemption”herein. fully describedin“BOOK-ENTRYONLYSYSTEM”herein. more as Bonds, 2018 Series the of Owners Beneficial the to disbursement subsequent for herein) defined (as Participants DTC be payablebywiretransfertoDTC,whichinturnisrequiredremitsuchprincipalorRedemptionPriceandinterest tothe long astheSeries2018BondsareheldbyDTC,principalorRedemptionPriceofandintereston will the Series2018Bondspurchased. in interests ownership their representing Indenture) the in described circumstances certain under (except certificates physical form only,inprincipalamountsof$1,000andanyintegralmultiplethereof.PurchaserstheSeries2018Bondswillnot receive York (“DTC”). DTC will act as securities depository for the Series 2018 Bonds. Individual purchases will be made in book-entry New York, New Company, Trust Depository The of nominee as Co., & Cede of name the in registered be will issued, when and, of theSeries2018Bonds. finance the general corporate purposes of HMH and other System Affiliates (as defined herein); and (iii) pay the costs of issuance Financing Authority’sStateContractBonds(HospitalAssetTransformationProgram)Series2009A;(ii)providemoneysto 2018 BondswillbeusedbyHMHto(i)refund,redeem,andlegallydefeasetheoutstandingNewJerseyHealthCareFacilities Jersey nonprofit corporation (“HMH”), and The Bank of New York Mellon, as trustee (the “Trustee”). The proceeds of the Series terms ofaTrustIndenture,datedasApril1,2018(the“Indenture”),byandbetweenHackensackMeridianHealth,Inc.,New Seethe CUSIP footnoteon pageix,“SUMMARY OFTHEOFFERING”. The Series2018Bondsareofferedwhen,asandifissued byHMHandacceptedtheUnderwriters,subjecttoprior This coverpagecontainscertaininformationforquick referenceonly.Itisnotintendedtobeasummaryof There arecertainrisksassociatedwiththepurchaseof Series2018Bonds.See“BONDHOLDERS’RISKS”herein. promissory by secured become will that indebtedness including outstanding, indebtedness other has Group Obligated The Group”), “Obligated (the Group Obligated the of Member sole as HMH, Indenture, the under obligations HMH’s secure To state any or amended, as 1933, of Act Securities the under registered been not have Bonds 2018 Series The fromgrossincome excludable arenot Bonds 2018 Series the of sale the on any, if profit, and on Interest The Series2018Bondsaresubjecttooptionalredemptionpriormaturityasdescribedherein.See“THE Interest ontheSeries2018BondswillbepayableJanuary1andJulyofeachyear,commencing1,2019. So The Series 2018 Bonds will be issued in fully registered form in denominations of $1,000 and any integralmultiple thereof The Hackensack Meridian Health Taxable Bonds, Series 2018 (the “Series 2018 Bonds”) will be issued pursuant to the PRELIMINARY OFFERING MEMORANDUM DATED APRIL 12, 2018 J.P. Morgan
HACKENSACK MERIDIAN HEALTH Price: ____%
_____% TaxableBonds,Series2018 $300,000,000*
CUSIP No.[______] (See “DESCRIPTIONOFRATINGS”herein) Goldman Sachs&Co. LLC †
Due: July1,2048 RATINGS: Fitch: ___ S&P: AA-
TABLE OF CONTENTS Page
GENERAL INFORMATION ...... ii SUMMARY OF THE OFFERING ...... ix INTRODUCTION ...... 1 THE SYSTEM ...... 4 THE SERIES 2018 BONDS ...... 5 CLEARING SYSTEMS ...... 7 BOOK-ENTRY ONLY SYSTEM ...... 8 EUROCLEAR AND CLEARSTREAM ...... 10 SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2018 BONDS ...... 12 CERTAIN FINANCIAL COVENANTS ...... 15 PLAN OF FINANCE ...... 17 ESTIMATED SOURCES AND USES OF FUNDS ...... 17 DEBT SERVICE REQUIREMENTS ...... 18 BONDHOLDERS’ RISKS ...... 19 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS ...... 47 ERISA CONSIDERATIONS ...... 49 VERIFICATION OF MATHEMATICAL COMPUTATIONS ...... 49 UNDERWRITING ...... 50 FINANCIAL ADVISOR ...... 50 CERTAIN RELATIONSHIPS ...... 50 CONTINUING DISCLOSURE ...... 51 APPROVAL OF LEGALITY ...... 51 INDEPENDENT ACCOUNTANTS ...... 51 DESCRIPTION OF RATINGS ...... 51 LITIGATION ...... 52 MISCELLANEOUS ...... 52
APPENDIX A – Information Concerning Hackensack Meridian Health...... A-1 APPENDIX B-1 – Hackensack Meridian Health, Inc. Consolidated Financial Statements, December 31, 2017 ...... B-1-1 APPENDIX B-2 – JFK Health System, Inc. Consolidated Financial Statements, December 31, 2017 ...... B-2-1 APPENDIX C – Forms of the Trust Indenture and the Master Indenture ...... C - 1 APPENDIX D – Approving Opinion of Institution Counsel ...... D-1
i.
GENERAL INFORMATION
This Offering Memorandum does not constitute an offer to sell the Series 2018 Bonds in any jurisdiction in which or to any person to whom it is unlawful to make such an offer. No dealer, salesperson or other person has been authorized by the Underwriters or the Combined Group to give any information or to make any representations, other than those contained herein, in connection with the offering of the Series 2018 Bonds and, if given or made, such information or representations must not be relied upon.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMBINED GROUP AND THE TERMS OF THIS OFFERING MEMORANDUM, INCLUDING THE MERITS AND RISKS INVOLVED. NONE OF THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION, OR ANY OTHER FEDERAL OR STATE REGULATORY AUTHORITY HAS RECOMMENDED OR APPROVED OR DISAPPROVED OF THE SERIES 2018 BONDS, OR DETERMINED THAT THIS OFFERING MEMORANDUM IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Series 2018 Bonds have not been and will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), and are being issued in reliance on an exemption under Section 3(a)(4) of the Securities Act. The Series 2018 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 Series 2018 Bonds’ exemption from registration. In addition, the Indenture has not been qualified under the Trust Indenture Act of 1939, as amended, in reliance upon exemptions in such Act.
The distribution of this Offering Memorandum and the offer or sale of Series 2018 Bonds may be restricted by law in certain jurisdictions. None of the Members of the Combined Group or the Underwriters represent that this Offering Memorandum may be lawfully distributed, or that any Series 2018 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 Combined Group or the Underwriters which would permit a public offering of any of the Series 2018 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 distributions or any secondary sales that may occur. Accordingly, none of the Series 2018 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.
All information set forth herein has been obtained from the Combined Group, The Depository Trust Company and other sources which are believed to be reliable, but are not guaranteed as to accuracy or completeness, and is not to be construed as a representation of the Underwriters. Estimates and opinions are included and should not be interpreted as statements of fact. Summaries of documents do not purport to be complete statements of their provisions. 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 will, under any circumstances, create any implication that there has been no change in the affairs of the Members of the Combined Group 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 (the “Exchange Act”), 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 Appendix A – “INFORMATION CONCERNING HACKENSACK MERIDIAN HEALTH” and Appendix B-1 and Appendix B-2. A number of important factors, including factors affecting the financial condition of the Members of the Combined Group and factors which are otherwise unrelated thereto, could cause actual results to differ materially from those stated in such forward-looking statements. THE COMBINED GROUP DOES NOT PLAN TO ISSUE ANY UPDATES OR
ii.
REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN ITS EXPECTATIONS CHANGE, OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED OCCUR.
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.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2018 BONDS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The order and placement of materials in this Offering Memorandum, including the Appendices, are not to be deemed to be a determination of relevance, materiality or importance, and this Offering Memorandum, including the Appendices, must be considered in its entirety.
iii.
INFORMATION CONCERNING OFFERING RESTRICTIONS IN CERTAIN JURISDICTIONS OUTSIDE THE UNITED STATES
REFERENCES TO “BONDS” OR “SECURITIES” MEAN THE SERIES 2018 BONDS OFFERED HEREBY. NEITHER HMH NOR THE UNDERWRITERS ASSUME ANY RESPONSIBILITY FOR THIS SECTION.
MINIMUM UNIT SALES
THE SERIES 2018 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 PROSPECTIVE INVESTORS IN THE EUROPEAN ECONOMIC AREA
THE SERIES 2018 BONDS ARE NOT INTENDED TO BE OFFERED, SOLD OR OTHERWISE MADE AVAILABLE TO AND SHOULD NOT BE OFFERED, SOLD OR OTHERWISE MADE AVAILABLE TO ANY RETAIL INVESTOR IN THE EUROPEAN ECONOMIC AREA (“EEA”). FOR THESE PURPOSES, A RETAIL INVESTOR MEANS A PERSON WHO IS ONE (OR MORE) OF: (I) A RETAIL CLIENT AS DEFINED IN POINT (11) OF ARTICLE 4(1) OF DIRECTIVE 2014/65/EU (AS AMENDED,“MIFID II”); OR (II) A CUSTOMER WITHIN THE MEANING OF DIRECTIVE 2002/92/EC (AS AMENDED, THE “INSURANCE MEDIATION DIRECTIVE”), WHERE THAT CUSTOMER WOULD NOT QUALIFY AS A PROFESSIONAL CLIENT AS DEFINED IN POINT (10) OF ARTICLE 4(1) OF MIFID II; OR (III) NOT A QUALIFIED INVESTOR AS DEFINED IN DIRECTIVE 2003/71/EC (AS AMENDED, THE “PROSPECTUS DIRECTIVE”). CONSEQUENTLY, NO KEY INFORMATION DOCUMENT REQUIRED BY REGULATION (EU) NO 1286/2014 (AS AMENDED, THE “PRIIPS REGULATION”) FOR OFFERING OR SELLING THE SERIES 2018 BONDS OR OTHERWISE MAKING THEM AVAILABLE TO RETAIL INVESTORS IN THE EEA HAS BEEN PREPARED AND THEREFORE OFFERING OR SELLING THE SERIES 2018 BONDS OR OTHERWISE MAKING THEM AVAILABLE TO ANY RETAIL INVESTOR IN THE EEA MAY BE UNLAWFUL UNDER THE PRIIPS REGULATION.
THIS OFFERING MEMORANDUM HAS BEEN PREPARED ON THE BASIS THAT ALL OFFERS OF THE SERIES 2018 BONDS TO ANY PERSON THAT IS LOCATED WITHIN A MEMBER STATE OF THE EEA WILL BE MADE PURSUANT TO AN EXEMPTION UNDER ARTICLE 3 OF THE PROSPECTUS DIRECTIVE, AS IMPLEMENTED IN MEMBER STATES OF THE EEA, FROM THE REQUIREMENT TO PRODUCE A PROSPECTUS FOR OFFERS OF THE SECURITIES. ACCORDINGLY, ANY PERSON MAKING OR INTENDING TO MAKE ANY OFFER IN THE EEA OF THE SERIES 2018 BONDS SHOULD ONLY DO SO IN CIRCUMSTANCES IN WHICH NO OBLIGATION ARISES FOR HMH OR ANY OF THE UNDERWRITERS TO PRODUCE A PROSPECTUS FOR SUCH OFFER. NEITHER HMH NOR THE UNDERWRITERS HAVE AUTHORIZED, NOR DO THEY AUTHORIZE, THE MAKING OF ANY OFFER OF BONDS THROUGH ANY FINANCIAL INTERMEDIARY, OTHER THAN OFFERS MADE BY THE UNDERWRITERS, WHICH CONSTITUTE THE FINAL PLACEMENT OF THE SERIES 2018 BONDS CONTEMPLATED IN THIS OFFERING MEMORANDUM.
IN RELATION TO EACH MEMBER STATE OF THE EEA THAT HAS IMPLEMENTED THE PROSPECTUS DIRECTIVE (EACH, A “RELEVANT MEMBER STATE”), WITH EFFECT FROM AND INCLUDING THE DATE ON WHICH THE PROSPECTUS DIRECTIVE IS IMPLEMENTED IN THAT RELEVANT MEMBER STATE, THE OFFER OF ANY BONDS WHICH IS THE SUBJECT OF THE OFFERING CONTEMPLATED BY THIS OFFERING MEMORANDUM IS NOT BEING MADE AND WILL NOT BE MADE TO THE PUBLIC IN THAT RELEVANT MEMBER STATE, OTHER THAN: (A) TO ANY LEGAL ENTITY WHICH IS A “QUALIFIED INVESTOR” AS SUCH TERM IS DEFINED IN THE PROSPECTUS DIRECTIVE; (B) TO FEWER THAN 150 NATURAL OR LEGAL PERSONS (OTHER THAN “QUALIFIED INVESTORS” AS SUCH TERM IS DEFINED IN THE PROSPECTUS DIRECTIVE), SUBJECT TO OBTAINING THE PRIOR CONSENT OF THE RELEVANT INITIAL PURCHASER OR HMH FOR ANY SUCH OFFER OR (C) IN ANY OTHER CIRCUMSTANCES FALLING WITHIN ARTICLE 3(2) OF THE
iv.
PROSPECTUS DIRECTIVE; PROVIDED THAT NO SUCH OFFER OF THE SERIES 2018 BONDS SHALL REQUIRE HMH OR THE INITIAL PURCHASERS TO PUBLISH A PROSPECTUS PURSUANT TO ARTICLE 3 OF THE PROSPECTUS DIRECTIVE OR A SUPPLEMENT TO A PROSPECTUS PURSUANT TO ARTICLE 16 OF THE PROSPECTUS DIRECTIVE.
FOR THE PURPOSES OF THIS PROVISION, THE EXPRESSION AN “OFFER OF SECURITIES TO THE PUBLIC” IN RELATION TO THE SERIES 2018 BONDS IN ANY RELEVANT MEMBER STATE MEANS THE COMMUNICATION IN ANY FORM AND BY ANY MEANS OF SUFFICIENT INFORMATION ON THE TERMS OF THE OFFER AND THE SERIES 2018 BONDS TO BE OFFERED SO AS TO ENABLE AN INVESTOR TO DECIDE TO PURCHASE THE SERIES 2018 BONDS, AS THE SAME MAY BE VARIED IN THAT RELEVANT MEMBER STATE BY ANY MEASURE IMPLEMENTING THE PROSPECTUS DIRECTIVE IN THAT RELEVANT MEMBER STATE.
EACH SUBSCRIBER FOR OR PURCHASER OF THE SECURITIES IN THE OFFERING LOCATED WITHIN A RELEVANT MEMBER STATE 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. HMH AND EACH INITIAL PURCHASER AND OTHERS WILL RELY ON THE TRUTH AND ACCURACY OF THE FOREGOING REPRESENTATION, ACKNOWLEDGEMENT AND AGREEMENT.
NOTICE TO PROSPECTIVE INVESTORS 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 IN 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, (III) ARE OUTSIDE THE UNITED KINGDOM, OR (IV) ARE PERSONS TO WHOM AN INVITATION OR INDUCEMENT TO ENGAGE IN INVESTMENT ACTIVITY (WITHIN THE MEANING OF SECTION 21 OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (THE “FSMA”)) IN CONNECTION WITH THE ISSUE OR SALE OF ANY BONDS MAY OTHERWISE BE LAWFULLY COMMUNICATED OR CAUSED TO BE 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. 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 ACT OR RELY ON THIS OFFERING MEMORANDUM OR ANY OF ITS CONTENTS. THIS OFFERING MEMORANDUM HAS NOT BEEN APPROVED FOR THE PURPOSES OF SECTION 21 OF THE FSMA AND DOES NOT CONSTITUTE AN OFFER TO THE PUBLIC IN ACCORDANCE WITH THE PROVISIONS OF SECTION 85 OF THE FSMA.
NOTICE TO PROSPECTIVE INVESTORS IN SWITZERLAND
THIS OFFERING MEMORANDUM IS NOT INTENDED TO CONSTITUTE AN OFFER OR A SOLICITATION TO PURCHASE OR INVEST IN THE SERIES 2018 BONDS. THE SERIES 2018 BONDS MAY NOT BE PUBLICLY OFFERED, SOLD OR ADVERTISED, DIRECTLY OR INDIRECTLY, IN, INTO OR FROM SWITZERLAND AND WILL NOT BE LISTED ON THE SIX SWISS EXCHANGE OR ON ANY OTHER EXCHANGE OR REGULATED TRADING FACILITY IN SWITZERLAND. NEITHER THIS OFFERING MEMORANDUM NOR ANY OTHER OFFERING OR MARKETING MATERIAL RELATING TO THE SERIES 2018 BONDS CONSTITUTES A PROSPECTUS AS SUCH TERM IS UNDERSTOOD PURSUANT TO ART. 652A OR ART. 1156 OF THE SWISS CODE OF OBLIGATIONS OR A LISTING PROSPECTUS WITHIN THE MEANING OF THE LISTING RULES OF THE SIX SWISS EXCHANGE OR ANY OTHER REGULATED TRADING FACILITY IN SWITZERLAND, AND NEITHER THIS OFFERING MEMORANDUM NOR ANY OTHER OFFERING OR MARKETING MATERIAL RELATING TO THE SERIES 2018 BONDS MAY BE PUBLICLY DISTRIBUTED OR OTHERWISE MADE PUBLICLY AVAILABLE IN SWITZERLAND. NEITHER THIS OFFERING MEMORANDUM NOR ANY OTHER
v.
OFFERING OR MARKETING MATERIAL RELATING TO THE OFFERING, NOR HMH, NOR THE SERIES 2018 BONDS HAVE BEEN OR WILL BE FILED WITH OR APPROVED BY ANY SWISS REGULATORY AUTHORITY. THE SERIES 2018 BONDS ARE NOT SUBJECT TO SUPERVISION BY ANY SWISS REGULATORY AUTHORITY, E.G., THE SWISS FINANCIAL MARKET SUPERVISORY AUTHORITY FINMA, AND INVESTORS IN THE SERIES 2018 BONDS WILL NOT BENEFIT FROM PROTECTION OR SUPERVISION BY SUCH AUTHORITY.
SELLING RESTRICTIONS FOR OFFER OF SECURITIES IN SINGAPORE
THIS OFFERING MEMORANDUM HAS NOT BEEN AND WILL NOT BE 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 SERIES 2018 BONDS MAY NOT BE CIRCULATED OR DISTRIBUTED, NOR MAY THE SERIES 2018 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 UNDER SECTION 274 OF THE SECURITIES AND FUTURES ACT, CHAPTER 289 OF SINGAPORE (THE “SFA”), (II) TO A RELEVANT PERSON PURSUANT TO SECTION 275(1), OR ANY PERSON PURSUANT TO SECTION 275(1A), 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.
WHERE THE SERIES 2018 BONDS ARE SUBSCRIBED OR PURCHASED UNDER SECTION 275 OF THE SFA BY A RELEVANT PERSON WHICH IS:
(A) 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; OR
(B) A TRUST (WHERE THE TRUSTEE IS NOT AN ACCREDITED INVESTOR) WHOSE SOLE PURPOSE IS TO HOLD INVESTMENTS AND EACH BENEFICIARY OF THE TRUST IS AN INDIVIDUAL WHO IS AN ACCREDITED INVESTOR.
SECURITIES (AS DEFINED IN SECTION 239(1) OF THE SFA) OF THAT CORPORATION OR THE BENEFICIARIES' RIGHTS AND INTEREST (HOWSOEVER DESCRIBED) IN THAT TRUST SHALL NOT BE TRANSFERRED WITHIN SIX MONTHS AFTER THAT CORPORATION OR THAT TRUST HAS ACQUIRED SUCH BONDS PURSUANT TO AN OFFER MADE UNDER SECTION 275 OF THE SFA, EXCEPT:
(1) TO AN INSTITUTIONAL INVESTOR (AS DEFINED IN SECTION 4A OF THE SFA) OR TO A RELEVANT PERSON (AS DEFINED IN SECTION 275(2) OF THE SFA), OR TO ANY PERSON ARISING FROM AN OFFER REFERRED TO IN SECTION 275(1A) OR SECTION 276(4)(I)(B) OF THE SFA;
(2) WHERE NO CONSIDERATION IS OR WILL BE GIVEN FOR THE TRANSFER;
(3) WHERE THE TRANSFER IS BY OPERATION OF LAW;
(4) AS SPECIFIED IN SECTION 276(7) OF THE SFA; OR
(5) AS SPECIFIED IN REGULATION 32 OF THE SECURITIES AND FUTURES (OFFERS OF INVESTMENTS) (SHARES AND DEBENTURES) REGULATIONS 2005 OF SINGAPORE.
vi.
NOTICE TO PROSPECTIVE INVESTORS OF HONG KONG
THE CONTENTS OF THIS OFFERING MEMORANDUM HAVE NOT BEEN REVIEWED BY ANY REGULATORY AUTHORITY IN HONG KONG. YOU ARE ADVISED TO EXERCISE CAUTION IN RELATION TO THE OFFER OF THE SERIES 2018 BONDS. IF YOU ARE IN ANY DOUBT ABOUT ANY OF THE CONTENTS OF THIS OFFERING MEMORANDUM, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL ADVICE.
THIS OFFERING MEMORANDUM HAS NOT BEEN, AND WILL NOT BE, REGISTERED AS A PROSPECTUS (AS DEFINED IN THE COMPANIES (WINDING UP AND MISCELLANEOUS PROVISIONS) ORDINANCE (CHAPTER 32 OF THE LAWS OF HONG KONG)) IN HONG KONG NOR HAS IT BEEN APPROVED BY THE SECURITIES AND FUTURES COMMISSION OF HONG KONG PURSUANT TO THE SECURITIES AND FUTURES ORDINANCE (CHAPTER 571 OF THE LAWS OF HONG KONG) (“SFO”). ACCORDINGLY, THE SERIES 2018 BONDS MAY NOT BE OFFERED OR SOLD IN HONG KONG BY MEANS OF THIS OFFERING MEMORANDUM OR ANY OTHER DOCUMENT, AND THIS OFFERING MEMORANDUM MUST NOT BE ISSUED, CIRCULATED OR DISTRIBUTED IN HONG KONG, OTHER THAN TO 'PROFESSIONAL INVESTORS' AS DEFINED IN THE SFO AND ANY RULES MADE UNDER THE SFO. IN ADDITION, NO PERSON MAY ISSUE OR HAVE IN ITS POSSESSION FOR THE PURPOSES OF ISSUE, WHETHER IN HONG KONG OR ELSEWHERE, ANY ADVERTISEMENT, INVITATION OR DOCUMENT RELATING TO THE SERIES 2018 BONDS, WHICH IS DIRECTED AT, OR THE CONTENTS OF WHICH ARE LIKELY TO BE ACCESSED OR READ BY, THE PUBLIC OF 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 (A) TO PERSONS OUTSIDE HONG KONG, (B) TO ‘PROFESSIONAL INVESTORS’ AS DEFINED IN THE SFO AND ANY RULES MADE UNDER THE SFO.
NOTICE TO PROSPECTIVE INVESTORS OF TAIWAN
THE OFFER OF THE SERIES 2018 BONDS HAS NOT BEEN AND WILL NOT BE REGISTERED OR FILED WITH, OR APPROVED BY, THE FINANCIAL SUPERVISORY COMMISSION OF TAIWAN AND/OR OTHER REGULATORY AUTHORITY OF TAIWAN PURSUANT TO RELEVANT SECURITIES LAWS AND REGULATIONS, AND THE SERIES 2018 BONDS MAY NOT BE OFFERED, ISSUED OR SOLD IN TAIWAN THROUGH A PUBLIC OFFERING OR IN CIRCUMSTANCES WHICH CONSTITUTE AN OFFER WITHIN THE MEANING OF THE SECURITIES AND EXCHANGE ACT OF TAIWAN THAT REQUIRES THE REGISTRATION OR FILING WITH OR APPROVAL OF THE FINANCIAL SUPERVISORY COMMISSION OF TAIWAN. THE SERIES 2018 BONDS MAY BE MADE AVAILABLE OUTSIDE TAIWAN FOR PURCHASE BY INVESTORS RESIDING IN TAIWAN (EITHER DIRECTLY OR THROUGH PROPERLY LICENSED TAIWAN INTERMEDIARIES), BUT MAY NOT BE OFFERED OR SOLD IN TAIWAN EXCEPT TO QUALIFIED INVESTORS VIA A TAIWAN LICENSED INTERMEDIARY. ANY SUBSCRIPTIONS OF BONDS SHALL ONLY BECOME EFFECTIVE UPON ACCEPTANCE BY HMH OR THE RELEVANT DEALER OUTSIDE TAIWAN AND SHALL BE DEEMED A CONTRACT ENTERED INTO IN THE JURISDICTION OF INCORPORATION OF HMH OR RELEVANT DEALER, AS THE CASE MAY BE, UNLESS OTHERWISE SPECIFIED IN THE SUBSCRIPTION DOCUMENTS RELATING TO THE SERIES 2018 BONDS SIGNED BY THE INVESTORS.
NOTICE TO PROSPECTIVE INVESTORS OF 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 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 SERIES 2018 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
vii.
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.
viii.
SUMMARY OF THE OFFERING
Issuer Hackensack Meridian Health, Inc.
Securities Offered $300,000,000* _____% Taxable Bonds, Series 2018, due July 1, 2048
Issue Price ______%
CUSIP Number ______†
Interest Accrual Dates Interest will accrue from ______, 2018
Interest Payment Dates January 1 and July 1 of each year, commencing January 1, 2019
Redemption* The Series 2018 Bonds are subject to optional redemption by HMH, in whole or in part at any time, (i) prior to January 1, 2048, at the Make-Whole Redemption Price, and (ii) on or after January 1, 2048, at par, in either case plus accrued interest thereon to the date set for redemption as described more fully herein. See “THE SERIES 2018 BONDS –Redemption” herein.
Settlement Date ______, 2018
Authorized Denominations $1,000 and any integral multiple thereof.
Form and Depository The Series 2018 Bonds will be delivered solely in book-entry form through the facilities of DTC.
Use of Proceeds HMH will use the proceeds of the Series 2018 Bonds to: (i) refund, redeem, and legally defease the outstanding Refunded Bonds; (ii) provide moneys to finance the general corporate purposes of HMH and other System Affiliates; and (iii) pay the costs of issuance of the Series 2018 Bonds. See “PLAN OF FINANCE” herein.
Ratings S&P: “AA-” (stable outlook) Fitch: “___” (_____ outlook)
Bond Trustee The Bank of New York Mellon
* Preliminary, subject to change. † Copyright 2018, American Bankers Association. The CUSIP (Committee on Uniform Securities Identification Procedures) number in this Offering Memorandum has been assigned by an organization not affiliated with HMH, the Underwriters or the Trustee, and such parties are not responsible for the selection or use of the CUSIP number. The CUSIP number is included solely for the convenience of Bondholders and no representation is made as to the correctness of the CUSIP number herein. CUSIP numbers assigned to securities may be changed during the term of such securities based on a number of factors including but not limited to the refunding or defeasance of such issue or the use of secondary market financial products. None of HMH, the Underwriters or the Trustee has agreed to, nor is there any duty or obligation to, update this Offering Memorandum to reflect any change or correction in the CUSIP number herein.
ix.
OFFERING MEMORANDUM
Relating to
$300,000,000* HACKENSACK MERIDIAN HEALTH TAXABLE BONDS, SERIES 2018
INTRODUCTION
The purpose of this Offering Memorandum, which includes the cover page, the General Information and Summary of the Offering on pages ii. through ix. and the appendices hereto, is to provide certain information concerning Hackensack Meridian Health, Inc., including information concerning the other Members of the Combined Group (as defined below) and other affiliates of HMH and the sale and delivery by HMH of $300,000,000* aggregate principal amount of its Taxable Bonds, Series 2018 (the “Series 2018 Bonds”). This Introduction contains only a brief summary of certain of the terms of the Series 2018 Bonds being offered and a brief description of the Offering Memorandum. All statements contained in this Introduction are qualified in their entirety by reference to the entire Offering Memorandum. The definitions of certain terms used and not otherwise defined herein are contained in Appendix C – “FORMS OF THE TRUST INDENTURE AND THE MASTER INDENTURE.”
Hackensack Meridian Health, Inc.
Hackensack University Health Network, Inc., a New Jersey nonprofit corporation (“HUHN”) and Meridian Health System, Inc., a New Jersey nonprofit corporation (“Meridian”) completed a transaction effective July 1, 2016, whereby Hackensack Meridian Health, Inc., also a New Jersey nonprofit corporation (referred to herein as “HMH”, the “System” or the “Combined Group Agent”), became the surviving corporation of both HUHN and Meridian. HMH consists of a group of affiliated health care organizations (each, a “System Affiliate”). The sole member or stockholder of each System Affiliate is either HMH or another System Affiliate controlled by HMH. The System forms an integrated Network of health care providers throughout the State of New Jersey.
Effective as of January 1, 2018, JFK Health System, Inc. (“JFK”) became a subsidiary of HMH. JFK, based in Edison, New Jersey, is comprised of The Community Hospital Group, Inc., T/A JFK Medical Center (“JFKMC”), a 499 bed community hospital, along with ambulatory surgery centers, senior assisted living and rehabilitation centers and a school of nursing.
Also effective as of January 1, 2018, HMH caused the consolidation of its hospital operations into HMH Hospitals Corporation (“HMH Hospitals”), a New Jersey nonprofit corporation whose sole member is HMH. HMH Hospitals is the successor entity to Hackensack University Medical Center (“HUMC”), Meridian Hospitals Corporation (“MHC”), Palisades Medical Center, Inc. (“PMC”), and Raritan Bay Medical Center (“RBMC”).
The System offers a complete range of medical services, research and life-enhancing care. HMH comprises 14 acute care hospitals, including three academic medical centers, two children's hospitals, nine community hospitals and two rehabilitation hospitals, more than 400 physician practices, ambulatory care centers, surgery centers, home health services, long-term care and assisted living communities, ambulance services, air medical transportation, fitness and wellness centers, rehabilitation centers, and urgent care and after-hours centers. The System has approximately 32,000 team members (employees) and more than 7,000 credentialed physicians.
For a more detailed discussion of HMH and the System Affiliates, see Appendix A hereto.
* Preliminary, subject to change.
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Purpose of the Series 2018 Bonds and the Plan of Finance
HMH will use the proceeds of the Series 2018 Bonds to: (i) refund, redeem, and legally defease the outstanding New Jersey Health Care Facilities Financing Authority (the “Authority”) State Contract Bonds (Hospital Asset Transformation Program) Series 2009A (the “Refunded Bonds”), (ii) provide moneys to finance the general corporate purposes of HMH and other System Affiliates; and (iii) pay the costs of issuance of the Series 2018 Bonds. See “PLAN OF FINANCE” and “ESTIMATED SOURCES AND USES OF FUNDS” herein and Appendix A hereto.
The Combined Group
HMH is the sole Member of the Obligated Group. Pursuant to the Master Indenture (defined herein), HMH has designated HMH Hospitals (as successor to HUMC, MHC, PMC and RBMC), and, upon issuance of the Series 2018 Bonds, JFK and JFKMC as Designated Affiliates. For a further description of the hospitals operated by HMH, see “FACILITIES OVERVIEW” in Appendix A to this Offering Memorandum. The Master Indenture provides that HMH, as the Combined Group Agent, shall cause each Designated Affiliate, and use reasonable efforts to cause each other System Affiliates (subject to contractual and organizational limitations), to pay, loan or otherwise transfer to the Combined Group Agent such amounts as are necessary to duly and punctually make payments due under any Obligation under the Master Indenture. Members of the Obligated Group and the Designated Affiliates are referred to collectively herein as the “Combined Group.” See “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2018 BONDS – The Master Indenture.”
In the future, other entities may become Members of the Obligated Group in accordance with the provisions of the Master Indenture as supplemented from time to time, and members of the Obligated Group may withdraw from the Obligated Group and be released from their respective obligations under the Master Indenture upon compliance with the conditions prescribed therein. See “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2018 BONDS – The Master Indenture.
See “THE SYSTEM” herein and Appendix A hereto for certain information regarding the Members of the Combined Group. For a form of the Master Indenture, see “FORMS OF THE TRUST INDENTURE AND THE MASTER INDENTURE – FORM OF THE MASTER INDENTURE” in Appendix C hereto.
The Series 2018 Bonds
The Series 2018 Bonds are being issued pursuant to a Trust Indenture, dated as of April 1, 2017 (the “Indenture”), by and between HMH and The Bank of New York Mellon, as bond trustee (the “Trustee”). The Series 2018 Bonds will mature on the date, and bear interest at the rate, set forth on the cover page hereof. See “THE SERIES 2018 BONDS” herein.
The Master Indenture
The obligation of HMH to make payments under the Indenture are evidenced by a promissory note of HMH, on behalf of itself and any future Members of the Obligated Group, dated as of the date of Closing (the “Series 2018 Note”), in an aggregate principal amount equal to the principal amount of the Series 2018 Bonds and will contain payment provisions corresponding to those of the Series 2018 Bonds. The Series 2018 Note will be issued under and pursuant to the Master Trust Indenture (the “Master Trust Indenture”) by and between HMH, on behalf of itself and any future Members of the Obligated Group, and The Bank of New York Mellon, as Master Trustee (the “Master Trustee”), dated as of April 1, 2017, as amended and supplemented, including by a Third Supplemental Indenture by and between HMH, on behalf of itself and any future Members of the Obligated Group, and the Master Trustee, dated as of April 1, 2018 (the “Third Supplemental Indenture” and, together with the Master Trust Indenture, are collectively referred to herein as the “Master Indenture”).
The Series 2018 Note will be secured under the Master Indenture equally and ratably with other Debt Obligations, Hedging Obligations or Ancillary Obligations outstanding thereunder upon the issuance of the Series
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2018 Bonds or thereafter pursuant to the Master Indenture, including without limitation, the Debt Obligations to be issued currently with the Series 2018 Note described herein.
To secure its payment obligations under the Series 2018 Note, each Member of the Combined Group has granted, or in the case of JFK and JFKMC will grant, upon the issuance of the Series 2018 Bonds, to the Master Trustee for the equal and ratable benefit of the holders of all Obligations issued and Outstanding under the Master Indenture a first lien on and security interest in the Gross Revenues (as hereinafter defined) of such Member of the Combined Group subject to the provisions of the Master Indenture. See “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2018 BONDS” herein.
It should be noted that the Master Indenture contains provisions permitting amendments thereto under certain conditions. See “FORMS OF THE TRUST INDENTURE AND THE MASTER INDENTURE – FORM OF THE MASTER INDENTURE – Section 701. Supplemental Indentures Not Requiring Consent of Obligation Holders,” “ – Section 702. Supplemental Indentures Requiring Consent of Obligation Holders” and “ – Section 703. Note and Document Substitution” in Appendix C hereto.
Security and Sources of Payment for the Series 2018 Bonds
The Series 2018 Bonds constitute general obligations of HMH. As security for the Series 2018 Bonds, the Obligated Group will cause to be delivered to the Trustee the Series 2018 Note issued pursuant to the Master Indenture. The Series 2018 Note shall be secured by a lien on Gross Revenues of the Combined Group as set forth in the Master Indenture and as described herein. The Series 2018 Note will constitute a joint and several obligation of HMH and any other entities which may hereafter become Members of the Obligated Group.
The Series 2018 Bonds will be secured by the Series 2018 Note, which Series 2018 Note is to be secured on a parity basis, including with respect to the pledge of Gross Revenues, with all outstanding Notes and obligations issued and to be issued the Master Indenture. See “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2018 BONDS” herein.
Redemption*
The Series 2018 Bonds are subject to optional redemption by HMH prior to maturity, in whole or in part at any time, (i) prior to January 1, 2048, at the Make-Whole Redemption Price, as described herein, and (ii) on or after January 1, 2048, at par, in either case plus accrued interest thereon to the date set for redemption as more fully described herein. See “THE SERIES 2018 BONDS –Redemption” herein. The Series 2018 Bonds are not subject to mandatory sinking fund redemption.
Book-Entry Only System
When delivered, the Series 2018 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 Series 2018 Bonds. Purchases of the Series 2018 Bonds may be made in book-entry form only, through brokers and dealers who are, or who act through, DTC Participants. Beneficial Owners of the Series 2018 Bonds will not receive physical delivery of certificated securities (except under certain circumstances described in the Indenture). Payment of the principal or Redemption Price of and interest on the Series 2018 Bonds are payable by the Trustee to DTC, which will in turn remit such payments to the DTC Participants, which will in turn remit such payments to the Beneficial Owners of the Series 2018 Bonds. In addition, so long as Cede & Co. is the registered owner of the Series 2018 Bonds, the right of any Beneficial Owner to receive payment for any Series 2018 Bond will be based only upon and subject to the procedures and limitations of the DTC book-entry system. See “BOOK-ENTRY ONLY SYSTEM” herein.
* Preliminary, subject to change.
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Continuing Disclosure
The Combined Group will agree to provide, or cause to be provided, certain annual and quarterly financial information and operating data with respect to HMH, pursuant to the Indenture. See “CONTINUING DISCLOSURE” herein.
Certain Information Related to this Offering Memorandum
The descriptions herein of the Indenture, the Master Indenture, the Third Supplemental Indenture, the Series 2018 Note and other documents relating to the Series 2018 Bonds do not purport to be complete and are qualified in their entirety by reference to such documents, and the description herein of the Series 2018 Bonds is qualified in its entirety by the form thereof and the information with respect thereto included in such documents. See Appendix C – “FORMS OF THE TRUST INDENTURE AND THE MASTER INDENTURE – FORM OF THE TRUST INDENTURE” attached hereto for certain excerpts from the Indenture, including provisions relating to certain duties of the Trustee, rights and remedies of the Trustee and the Bondowners upon an Event of Default, and amendments of the Indenture and procedures for defeasance of the Series 2018 Bonds. See Appendix C – “FORMS OF THE TRUST INDENTURE AND THE MASTER INDENTURE – FORM OF THE MASTER INDENTURE” attached hereto for certain excerpts from the Master Indenture.
All capitalized terms used in this Offering Memorandum and not otherwise defined herein have the same meanings as in the Indenture. See Appendix C attached hereto for definitions of certain words and terms used but not otherwise defined herein.
The information and expressions of opinion herein speak only as of their date and are subject to change without notice. Neither delivery of this Offering Memorandum nor any sale made hereunder nor any future use of this Offering Memorandum will, under any circumstances, create any implication that there has been no change in the affairs of the Members of the Combined Group.
THE SYSTEM
The System consists of a group of affiliated health care organizations. The sole member or stockholder of each System Affiliate is either HMH or another System Affiliate controlled by HMH. The System forms an integrated Network of health care providers throughout the State of New Jersey.
The System offers a complete range of medical services, research and life-enhancing care. The System comprises 14 acute care hospitals, including three academic medical centers, two children's hospitals, nine community hospitals and two rehabilitation hospitals, more than 400 physician practices, ambulatory care centers, surgery centers, home health services, long-term care and assisted living communities, ambulance services, air medical transportation, fitness and wellness centers, rehabilitation centers, and urgent care and after-hours centers. The System has approximately 32,000 team members (employees) and more than 7,000 credentialed physicians.
For a more detailed description of the System, see Appendix A hereto. For the financial statements of the various System Affiliates for the year ended December 31, 2017, see Appendix B-1. Such financial statements contain consolidated financial statements of Members of the Combined Group and other System Affiliates that are not Members of the Combined Group. For financial statements of JFK for the year ended December 31, 2017, see Appendix B-2 hereto. As of December 31, 2017, management calculates that Members of the Combined Group accounted for approximately 87% of total operating revenue and approximately 84% of unrestricted net assets of the System, assuming JFK was a member of the System in 2017. The financial information included in Appendix A hereto is presented on a consolidated basis; however, certain calculations of the select financial indicators included in Appendix A are calculated, where indicated therein, in accordance with the relevant requirements of the Master Indenture.
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THE SERIES 2018 BONDS
Description of the Series 2018 Bonds
The Series 2018 Bonds will be dated, will bear interest at the rate and will mature on the date (subject to prior redemption) as set forth on the cover page to this Offering Memorandum. Interest on the Series 2018 Bonds will be calculated on the basis of a 360-day year consisting of twelve 30-day months.
The Series 2018 Bonds will be delivered in the form of fully registered Series 2018 Bonds in denominations of $1,000 and any integral multiple thereof. The Series 2018 Bonds will be registered initially in the name of “Cede & Co.,” as nominee of DTC and will be evidenced by one Series 2018 Bond in the aggregate principal amount of the Series 2018 Bonds. Registered ownership of the Series 2018 Bonds, or any portions thereof, may not thereafter be transferred except as set forth in the Indenture. See Appendix C – “Forms of the Trust INDENTURE and the Master Indenture – FORM OF THE TRUST INDENTURE” attached hereto.
The principal or Redemption Price of the Series 2018 Bonds will be payable by check or by wire transfer of immediately available funds in lawful money of the United States of America at the Corporate Trust Office (as defined in the Indenture) of the Trustee.
Interest on the Series 2018 Bonds will be payable from the later of (i) the dated date of the Series 2018 Bonds and (ii) the most recent Interest Payment Date to which interest has been paid or duly provided for. An “Interest Payment Date” for the Series 2018 Bonds will occur on January 1 and July 1 of each year commencing on January 1, 2019. Payment of the interest on the Series 2018 Bonds shall be made to the person appearing on the registration books of HMH kept by the Trustee provided for herein as the Bondowner thereof on the Record Date, by wire or by check or draft mailed by the Trustee to the Bondowner at the address of such Bondowner as shown on such registration books of HMH, unless an alternate method of payment is agreed to by the Trustee and the Bondowner, subject to the approval of HMH. Notwithstanding the foregoing, as long as Cede & Co. is the Holder of all or part of the Series 2018 Bonds in Book-Entry Form, said principal or Redemption Price and interest payments will be made to Cede & Co. by check mailed to DTC or by wire transfer.
Redemption*
Optional Redemption. The Series 2018 Bonds are subject to optional redemption by HMH prior to maturity in whole or in part, at any time (i) prior to January 1, 2048, at the Make-Whole Redemption Price, and (ii) on and after January 1, 2048, at a Redemption Price equal to the principal amount of the Series 2018 Bonds to be redeemed, in either case plus accrued interest thereon to the date set for redemption. For purposes of this paragraph, the following definitions shall apply:
“Business Day” means any day, other than a Saturday or Sunday, and other than a day on which the Trustee or a Paying Agent (other than the Trustee), as applicable, is required, or authorized or not prohibited, by law (including without limitation, executive orders) to close and is closed.
“Comparable Treasury Issue” means the United States Treasury security or securities selected by a Designated Investment Banker as having an actual maturity comparable to the remaining term of the Series 2018 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 after excluding the highest and lowest of such Reference Treasury Dealer Quotations or, if the Designated Investment Banker obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such Reference Treasury Dealer Quotations.
* Preliminary, subject to change.
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“Designated Investment Banker” means one of the Reference Treasury Dealers appointed by HMH.
“Make-Whole Redemption Price” is the greater of (i) 100% of the principal amount of the Series 2018 Bonds to be redeemed; and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on any Series 2018 Bonds being redeemed (exclusive of interest accrued and unpaid to the date of redemption) discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus ___ basis points.
“Reference Treasury Dealer” means each of four firms, as designated by HMH, and their respective successors; provided, however, that if any of them ceases to be a primary U.S. Government securities dealer in the City of New York (a “Primary Treasury Dealer”), HMH will substitute another Primary 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.
“Treasury Rate” means, with respect to any redemption date, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue with respect thereto, computed as of the second Business Day immediately preceding that redemption date, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price with respect thereto for that redemption date.
HMH may provide prior written direction to the Trustee, together with available funds, to purchase, or cause to be purchased, Series 2018 Bonds at prices which have been identified by HMH not exceeding the Redemption Price for such Series 2018 Bonds, plus accrued interest to the date of purchase. Upon purchase thereof, such Series 2018 Bonds shall be canceled and no longer considered to be Outstanding.
Notice of Redemption. If the Series 2018 Bonds (or portions thereof) are to be redeemed, the Trustee shall give or cause to be given notice of the redemption of the Series 2018 Bonds (or portions thereof) in the name of HMH which notice shall specify: (i) that the Series 2018 Bonds are to be redeemed, in whole or in part, as applicable; (ii) the redemption date and the Redemption Price; (iii) the numbers and other distinguishing marks, if any, of the Series 2018 Bonds to be redeemed (except in the event that all of the Outstanding Series 2018 Bonds are to be redeemed); (iv) that such Series 2018 Bonds will be redeemed at the Corporate Trust Office of the Trustee; and (v) any conditions applicable to such redemption. Such notice shall further state that on such date there shall become due and payable upon the Series 2018 Bonds (or portions thereof to be redeemed) the Redemption Price thereof, together with interest accrued to the redemption date, and that, from and after such date, interest thereon shall cease to accrue. Such notice shall be given, not more than 45 nor less than 30 days prior to the redemption date, by the Trustee by mail, postage prepaid, or by Electronic Means to the Bondowners of the Series 2018 Bonds which are to be redeemed, at their addresses appearing on the registration books maintained by the Trustee. Any notice of optional redemption shall state that it is conditional and that the redemption of such Series 2018 Bonds is subject to there being on deposit with the Trustee on the redemption date funds sufficient to pay the Redemption Price of such Series 2018 Bonds. Notice having been given in accordance with the foregoing, failure to receive any such notice by any of such Bondowners or any defect therein, shall not affect the redemption or the validity of the proceedings for the redemption of the Series 2018 Bonds. Upon mailing such notice to Bondowners the Trustee shall submit a copy of the notice of such redemption to any securities depository in the event that the Series 2018 Bonds are registered in the name of a securities depository or its nominee. The Trustee shall also indicate on such notices, the contact person or persons and telephone number of the person or persons handling the redemption.
Effect of Redemption. Notice having been given in the manner provided in the Indenture, and the conditions for such redemption having been met, the Series 2018 Bonds (or portions thereof called for redemption) shall become due and payable on the redemption date so designated at the Redemption Price, plus accrued interest to the redemption date, and upon presentation and surrender thereof at the office specified in such notice, the Series 2018 Bonds (or portions thereof so called for redemption) shall be paid at the Redemption Price, plus accrued interest to the redemption date. If, on the redemption date, moneys for the redemption of all the Series 2018 Bonds
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(or portions thereof so called for redemption), together with interest to the redemption date, shall be held by the Trustee so as to be available therefor on such date, and after notice of redemption shall have been given as aforesaid, then, from and after the redemption date, the Series 2018 Bonds (or portions thereof so called for redemption) shall cease to bear interest and the Series 2018 Bonds (or such portions) shall no longer be considered as Outstanding under the Indenture. If such moneys shall not be so available on the redemption date, the Series 2018 Bonds (or portions thereof) shall continue to bear interest until paid at the same rate as they would have borne had they not been called for redemption, and in the case of optional redemption, the Series 2018 Bonds shall continue to be due on their original maturity dates as if the Series 2018 Bonds had not been called for redemption.
Selection of a Portion of the Series 2018 Bonds. If the Series 2018 Bonds are registered in book-entry only form and so long as Cede & Co (or such other DTC nominee) is the sole registered owner of the Series 2018 Bonds, if less than all of the Series 2018 Bonds are called for prior redemption, the portions thereof to be redeemed shall be allocated on a pro rata pass-through distribution of principal basis in accordance with DTC procedures, provided that, so long as the Series 2018 Bonds are held in book-entry form, the selection for redemption of such portions of the Series 2018 Bonds shall be made in accordance with the operational arrangements of DTC then in effect, and, if such operational arrangements do not allow for redemption on a pro rata pass-through distribution of principal basis, the portions of the Series 2018 Bonds will be selected for redemption, in accordance with DTC procedures, by lot.
HMH intends that redemption allocations made by DTC be made on a pro rata pass-through distribution of principal basis as described above. However, neither HMH nor the Underwriters can provide any assurance that DTC, DTC’s direct and indirect participants or any other intermediary will allocate the redemption of the Series 2018 Bonds on such basis.
For purposes of calculation of the pro rata pass-through distribution of principal, “pro rata,” means, for any amount of principal to be paid, the application of a fraction to the Series 2018 Bonds where (a) the numerator is equal to the amount due to the respective Bondowners on a payment date, and (b) the denominator is equal to the total original par amount of the Series 2018 Bonds.
If the Series 2018 Bonds are no longer registered in book-entry-only form, each owner will receive an amount of Series 2018 Bonds equal to the original face amount then beneficially held by that owner, registered in such investor’s name. Thereafter, any redemption of less than all of the Series 2018 Bonds will continue to be paid to the registered owners of the Series 2018 Bonds on a pro rata basis, based on the portion of the original face amount of the Series 2018 Bonds to be redeemed.
CLEARING SYSTEMS
This section describes how ownership of the Series 2018 Bonds is to be transferred and how the principal of and interest on the Series 2018 Bonds are to be paid to and credited by DTC while the Series 2018 Bonds are registered in its nominee's name.
The information in this section concerning DTC, Euroclear Bank SA/NV as operator of the Euroclear System (“Euroclear”) and Clearstream Banking S.A., Luxembourg (“Clearstream Banking”) (DTC, Euroclear and Clearstream Banking together, the “Clearing Systems”), and DTC’s book-entry-only system has been provided by DTC, Euroclear and Clearstream Banking for use in disclosure documents such as this Offering Memorandum.
DTC will act as the initial securities depository for the Series 2018 Bonds. Euroclear and Clearstream Banking are participants of DTC and facilitate the clearance and settlement of securities transactions by electronic book-entry transfer between their respective account holders.
The information set forth below is subject to any change in or reinterpretation of the rules, regulations and procedures of the Clearing Systems currently in effect and the Members of the Combined Group, the Trustee and the Underwriters expressly disclaim any responsibility to update this Offering Memorandum to reflect any such changes. The information herein concerning the Clearing Systems has been obtained from
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sources that the Combined Group, the Trustee and the Underwriters believe to be reliable, but none of the Members of the Combined Group, the Trustee or the Underwriters make any representation as to the accuracy or completeness of the information set forth herein. 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. HMH 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 Series 2018 Bonds held through the facilities of any Clearing System or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.
BOOK-ENTRY ONLY SYSTEM
The Depository Trust Company, New York, New York, will act as securities depository for the Series 2018 Bonds. The Series 2018 Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered Bond certificate will be issued for the Series 2018 Bonds, and will be deposited with DTC.
The information set forth in this section under the subheading “General” has been obtained from sources that the Combined Group, the Trustee and the Underwriters believe to be reliable, but none of the Members of the Combined Group, the Trustee or the Underwriters make any representation as to the completeness or accuracy of such information or as to the absence of material adverse changes in such information subsequent to the date hereof.
SO LONG AS CEDE & CO. IS THE REGISTERED OWNER OF THE SERIES 2018 BONDS, AS NOMINEE OF DTC, REFERENCES HEREIN TO THE BONDOWNERS OR REGISTERED OWNERS OF THE SERIES 2018 BONDS SHALL MEAN CEDE & CO. AND SHALL NOT MEAN THE BENEFICIAL OWNERS OF THE SERIES 2018 BONDS.
General
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, thereby eliminating the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants,” and together with Direct Participants, “DTC Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to DTC Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.
Purchases of the Series 2018 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2018 Bonds on DTC’s records. The ownership interest of each actual purchaser of each Series 2018 Bond (“Beneficial Owner”) is in turn to be recorded on the Direct Participants’ and the 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 Participant or the Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2018
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Bonds are to be accomplished by entries made on the books of Direct Participants and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Series 2018 Bonds, except in the event that use of the book-entry system for such Series 2018 Bonds is discontinued.
To facilitate subsequent transfers, all Series 2018 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 Series 2018 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 Series 2018 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Series 2018 Bonds are credited, which may or may not be the Beneficial Owners. The Direct Participants and the Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
Redemption notices shall be sent to DTC. If less than all of the Series 2018 Bonds of an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant to be redeemed.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Series 2018 Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to HMH as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Series 2018 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).
Principal and interest payments on the Series 2018 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 Trustee on the payable date in accordance with their respective holdings shown on DTC’s records. Payments by DTC 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 DTC Participant and not of DTC, the Underwriters, the Trustee or the Combined Group subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct Participants and Indirect Participants.
DTC may discontinue providing its services as securities depository with respect to the Series 2018 Bonds at any time by giving reasonable notice to HMH and the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, the Series 2018 Bond certificates are required to be printed and delivered. See “Certificated Bonds” below.
HMH may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, the Series 2018 Bond certificates will be printed and delivered to DTC.
Each person for whom a DTC Participant acquires an interest in the Series 2018 Bonds, as nominee, may desire to make arrangements with such DTC Participant to receive a credit balance in the records of such DTC Participant, and may desire to make arrangements with such DTC Participant to have all notices of redemption or other communications to DTC, which may affect such persons, to be forwarded in writing by such DTC Participant and to have notification made of all interest payments. NONE OF THE MEMBERS OF THE COMBINED GROUP, THE TRUSTEE OR THE UNDERWRITERS WILL HAVE ANY RESPONSIBILITY OR
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OBLIGATION TO SUCH DTC PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH RESPECT TO THE SERIES 2018 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 Trustee to DTC only.
For every transfer and exchange of the Series 2018 Bonds, the Beneficial Owner may be charged a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto.
NONE OF THE MEMBERS OF THE COMBINED GROUP, THE TRUSTEE OR THE UNDERWRITERS WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DIRECT PARTICIPANTS, TO INDIRECT PARTICIPANTS, OR TO ANY BENEFICIAL OWNER WITH RESPECT TO (I) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, ANY DIRECT PARTICIPANT, OR ANY INDIRECT PARTICIPANT; (II) ANY NOTICE THAT IS PERMITTED OR REQUIRED TO BE GIVEN TO THE OWNERS OF THE SERIES 2018 BONDS UNDER THE INDENTURE; (III) THE SELECTION BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT OF ANY PERSON TO RECEIVE PAYMENT IN THE EVENT OF A PARTIAL REDEMPTION OF THE SERIES 2018 BONDS; (IV) THE PAYMENT BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT OF ANY AMOUNT WITH RESPECT TO THE PRINCIPAL OR REDEMPTION PRICE, IF ANY, OR INTEREST DUE WITH RESPECT TO THE SERIES 2018 BONDS; (V) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS THE OWNER OF THE SERIES 2018 BONDS; OR (VI) ANY OTHER MATTER.
Certificated Bonds
DTC may discontinue providing its services as securities depository with respect to the Series 2018 Bonds at any time if it is unwilling or unable to continue as depository by giving reasonable notice to HMH and the Trustee. In addition, HMH may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). If for either reason the Book-Entry Only system is discontinued, Series 2018 Bond certificates will be delivered as described in the Indenture and the Beneficial Owner, upon registration of certificates held in the Beneficial Owner’s name, will become the Bondowner. Thereafter, the Series 2018 Bonds may be exchanged for an equal aggregate principal amount of the Series 2018 Bonds in other authorized denominations and of the same maturity, upon surrender thereof at the principal Corporate Trust Office of the Trustee. The transfer of any Series 2018 Bond may be registered on the books maintained by the Trustee for such purpose only upon assignment in form satisfactory to the Trustee. For every such exchange or transfer of Series 2018 Bonds, whether temporary or definitive, HMH or the Trustee may make a charge sufficient to reimburse it for any tax, fee or other governmental charge required to be paid with respect to such exchange or transfer, which sum or sums shall be paid by the person requesting such exchange or transfer as a condition precedent to the exercise of the privilege of making such exchange or transfer. Except for Series 2018 Bonds for which a notice of optional or mandatory tender has been given, the Trustee shall not be obliged to make any such exchange or transfer of Series 2018 Bonds, during the period from each Record Date to the following Interest Payment Date or, in the case of a proposed redemption of Series 2018 Bonds if such Series 2018 Bonds are eligible to be selected or have been selected for redemption, during the 45 days next preceding the date fixed for such redemption.
EUROCLEAR AND CLEARSTREAM
Euroclear and Clearstream have advised HMH as follows:
Euroclear and Clearstream 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 provide various services including safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Euroclear and Clearstream also deal with domestic securities markets in several countries through established depositary and custodial relationships. Euroclear and Clearstream have established an electronic bridge between their two systems across which their respective participants may settle trades with each other.
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Euroclear and Clearstream customers are worldwide financial institutions, including underwriters, securities brokers and dealers, banks, trust companies and clearing corporations. Indirect access to Euroclear and Clearstream 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 Series 2018 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 Series 2018 Bonds, the record holder will be DTC’s nominee. Clearstream and Euroclear will hold omnibus positions on behalf of their participants through customers’ securities accounts in Clearstream’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 or Euroclear participant as a result of a transaction with a participant, other than a depository holding on behalf of Clearstream or Euroclear, will be credited during the securities settlement processing day, which must be a business day for Clearstream 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 participant on that business day. Cash received in Clearstream or Euroclear as a result of sales of securities by or through a Clearstream participant or Euroclear participant to a DTC Participant, other than the depository for Clearstream or Euroclear, will be received with value on the DTC settlement date but will be available in the relevant Clearstream 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 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 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 participants or Euroclear participants may not deliver instructions directly to the depositories.
HMH will not impose any fees in respect of holding the Series 2018 Bonds; however, holders of book-entry interests in the Series 2018 Bonds may incur fees normally payable in respect of the maintenance and operation of accounts in the clearing systems.
Initial Settlement. Interests in the Series 2018 Bonds will be in uncertified book-entry form. Purchasers electing to hold book-entry interests in the Series 2018 Bonds through Euroclear and Clearstream accounts will follow the settlement procedures applicable to conventional EuroSeries 2018 Bonds. Book-entry interests in the Series 2018 Bonds will be credited to Euroclear and Clearstream participants’ securities clearance accounts on the business day following the date of delivery of the Series 2018 Bonds against payment (value as on the date of delivery of the Series 2018 Bonds). DTC participants acting on behalf of purchasers electing to hold book-entry interests in the Series 2018 Bonds through DTC will follow the delivery practices applicable to securities eligible for DTC’s Same Day Funds Settlement system. DTC participants’ securities accounts will be credited with book-entry interests in the Series 2018 Bonds following confirmation of receipt of payment to the Bond Trustee on behalf of the Issuer on the date of delivery of the Series 2018 Bonds.
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Secondary Market Trading. Secondary market trades in the Series 2018 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 or DTC, as the case may be, in accordance with their respective procedures. Book-entry interests in the Series 2018 Bonds may be transferred within Euroclear and within Clearstream and between Euroclear and Clearstream in accordance with procedures established for these purposes by Euroclear and Clearstream. Book-entry interests in the Series 2018 Bonds may be transferred within DTC in accordance with procedures established for this purpose by DTC. Transfer of book-entry interests in the Series 2018 Bonds between Euroclear or Clearstream Banking and DTC may be effected in accordance with procedures established for this purpose by Euroclear, Clearstream and DTC.
SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2018 BONDS
General
Pursuant to the Indenture, HMH will be obligated to pay or cause to be paid, the principal or Redemption Price of and interest on the Series 2018 Bonds on the dates and at the places and in the manner provided therein. In addition, the Indenture provides that HMH shall pay amounts sufficient to provide Revenues (as hereinafter defined) sufficient at all times: (i) to pay the principal of and interest on the Series 2018 Bonds as the same respectively become due and payable by redemption or otherwise, and (ii) to pay the expenditures of the Trustee incurred in relation to the Indenture.
Pledge under the Indenture
Under the Indenture, HMH pledges and assigns to the Trustee all of HMH’s interest in the Series 2018 Note and the Revenues payable to the Trustee for the account of HMH and any and all other property conveyed, pledged, assigned or transferred as additional security for the Series 2018 Bonds. “Revenues” are defined in the Indenture to include all amounts paid or payable to the Trustee for the account of HMH (excluding fees and expenses payable to the Trustee and the rights to indemnification of the Trustee) under and pursuant to the Indenture and the Series 2018 Note. HMH also pledges all moneys and securities deposited and held from time to time by the Trustee in the funds and accounts established under the Indenture.
The Master Indenture
HMH will execute and upon authentication thereof by the Master Trustee, deliver to the Trustee the Series 2018 Note, to evidence and secure the payment obligations of HMH under the Indenture. The Series 2018 Note will be issued in a principal amount equal to the aggregate principal amount of the Series 2018 Bonds. Under the terms of the Master Indenture, the Series 2018 Note will be a joint and several general obligation of HMH and any future Members of the Obligated Group. Payments under the Series 2018 Note are scheduled to be made at the times and in the amounts required to pay debt service on the Series 2018 Bonds and will be credited against the loan payment requirements of HMH under the Indenture. Payment of the Series 2018 Note is required to be in an amount sufficient to enable HMH to meet all of its obligations under the Series 2018 Bonds and the Indenture and certain costs and expenses described in the Indenture.
Pursuant to the Master Indenture, HMH, as Combined Group Agent, has designated HMH Hospitals (as successor to HUMC, MHC, PMC and RBMC) as Designated Affiliates. Pursuant to the Master Indenture, HMH, as the Combined Group Agent, shall cause each Designated Affiliate, and use reasonable efforts to cause each other System Affiliates (subject to contractual and organizational limitations), to pay, loan or otherwise transfer to the Combined Group Agent or other Member of the Obligated Group such amounts as necessary to duly and punctually pay the principal of, premium, if any, and interest on all Outstanding Obligations and any other payments due under any Obligation, on the dates, at the times and at the places and in the manner provided in such Obligations and the Master Indenture, when and as the same become payable, whether at maturity, upon call for redemption, by acceleration of maturity or otherwise.
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Effective upon the date of issuance of the Series 2018 Bonds, JFK and JFKMC will become Designated Affiliates under the Master Indenture by entering into a contractual agreement in accordance with Section 401(B) of the Master Indenture. Pursuant to the terms of such contractual agreement, each of JFK and JFKMC agree to, among other things, (i) pay, loan or otherwise transfer, and to use reasonable efforts to cause each of its affiliates (subject to contractual and organizational limitations) to pay, loan or otherwise transfer, in each case, to HMH, as Combined Group Agent, such amounts as are necessary to duly and punctually pay the principal of, premium, if any, and interest on all outstanding Obligations issued, and any other payments due, under the Master Indenture, and (ii) pledge and assign to the Master Trustee all of its Gross Revenues.
The Combined Group Agent (or its designee Controlling Member, as such term is defined in the Master Indenture) is required with respect to each Designated Affiliate, to either (a) maintain, directly or indirectly, control of each Designated Affiliate, including the power to direct the management, policies, disposition of assets and actions of such Designated Affiliate to the extent required to cause such Designated Affiliate to comply with the terms and conditions of the Master Indenture, whether through the ownership of voting securities, by contract, partnership interests, membership, reserved powers, or the power to appoint members, trustees or directors or otherwise, or (b) execute and have in effect such contracts or other agreements that the Combined Group Agent or Controlling Member, in its sole judgment, deems sufficient for it to cause such Designated Affiliate to comply with the terms and conditions of the Master Indenture. Any Person will cease to be a Designated Affiliate upon the declaration of the Combined Group Agent in an Officer's Certificate delivered to the Master Trustee, and upon such declaration, such Person shall no longer be subject to any of the covenants applicable to a Designated Affiliate thereunder. Notwithstanding anything to the contrary in the Master Indenture, no Person shall cease to be a Designated Affiliate or a System Affiliate if any Outstanding Related Bonds have been issued for the benefit of such Person until there is delivered to the Master Trustee an opinion of nationally recognized bond counsel to the effect that, under then existing law, the cessation by such Person of its status as a Designated Affiliate or System Affiliate will not adversely affect the validity of any Related Bond or any exemption from federal or state income taxation of interest payable thereon to which such Related Bond would otherwise be entitled. In addition, no Designated Affiliate which generated at least 25% of the combined total revenues of the Combined Group and the System Affiliates as set forth on the combined financial statements for the most recently completed Fiscal Year of the System shall be declared to no longer be a Designated Affiliate by the Combined Group Agent unless the Combined Group Agent shall have delivered an Officer's Certificate to the Master Trustee demonstrating that the Transaction Test will be met, assuming the incurrence of $1.00 of additional Long-Term Indebtedness, after giving effect to such proposed declaration by the Combined Group Agent.
In addition, the Master Indenture requires the Combined Group Agent to cause each Designated Affiliate to comply with the terms and conditions of the Master Indenture which are applicable to such Designated Affiliate.
Under the Master Indenture, each member of the Combined Group (as defined in the Master Indenture) has granted to the Master Trustee for the equal and ratable benefit of the holders of all Obligations issued under the Master Indenture (including the Series 2018 Note) a first lien on and security interest in its Gross Revenues subject to the provisions of the Master Indenture. Inasmuch as payments on Obligations issued under the Master Indenture may (unless certain Events of Default exist under the Master Indenture) be made directly to the holders of such Obligations, there may not be any amounts deposited in the Gross Revenues Account under the Master Indenture. Gross Revenues is defined in the Master Indenture as all revenues, rents, profits, receipts, benefits, royalties, and income of any Member of the Combined Group arising from goods or services provided by Members of the Combined Group or arising in any manner with respect to, incident to or on account of the Members of the Combined Group’s operations, including, without limitation, (i) the Members of the Combined Group’s rights under agreements with insurance companies, Medicare, Medicaid, governmental units and prepaid health organizations, including health care insurance receivables and rights to Medicare and Medicaid loss recapture under applicable regulations to the extent not prohibited by applicable law, rules or regulations; (ii) gifts, grants, bequests, donations, contributions and pledges to any Member of the Combined Group; (iii) insurance proceeds of any kind, and any award, or payment in lieu of an award, resulting from condemnation proceedings; (iv) all proceeds from the sale or other transfer of any goods, inventory and other tangible and intangible property, and all rights to receive the foregoing, whether now owned or hereafter acquired by any Member of the Combined Group and regardless of whether generated in the form of Accounts, accounts receivable, Contract Rights, Chattel Paper, Documents, General Intangibles, Instruments, Investment Property, and proceeds of insurance; and (v) all proceeds of the foregoing; excluding, however, gifts, grants, bequests, donations, contributions and pledges to any Member of the
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Combined Group heretofore or hereafter made, and the income and gains derived therefrom, which are specifically restricted by the donor or grantor to a particular purpose which is inconsistent with its use for payments required under the Master Indenture or on any Obligations or Indebtedness.
The Members of the Obligated Group have covenanted in the Master Indenture (a) not to withdraw from or permit other entities to join the Obligated Group, except as permitted under the Master Indenture, (b) not merge into, or consolidate with, one or more corporations or other legal entities, allow one or more of such corporations or other legal entities to merge into it, or sell or convey all or substantially all of its Property, unless certain conditions of the Master Indenture are met, and (c) not to sell, lease, remove, release from the Lien of the Master Indenture, transfer, assign, convey or otherwise dispose of any Property of the Material Combined Group Members unless certain conditions of the Master Indenture are met. HMH may not withdraw from the Obligated Group so long as any Obligations are Outstanding under the Master Indenture.
See “FORMS OF THE TRUST INDENTURE AND THE MASTER INDENTURE – FORM OF THE MASTER INDENTURE – Section 403. Entrance into the Obligated Group,” “– Section 404. Cessation of Status as a Member of the Obligated Group,” “ – Section 408. Permitted Reorganizations,” and “– Section 411. Permitted Dispositions” in Appendix C hereto.
Limitation on Liens under Master Indenture
The Series 2018 Note is not secured by a mortgage or other lien on physical assets of the Members of the Combined Group. Other than the Lien on Gross Revenues created pursuant to the Master Indenture, the Members of the Combined Group covenant in the Master Indenture that they will not create or incur or permit to be created or incurred or to exist any Lien, whether superior or inferior to the Lien of the Master Indenture, on the Gross Revenues of such Member of the Combined Group except as provided therein. Additionally, no Material Combined Group Member may create or incur or permit to be created or incurred or to exist any Lien on any other Property of such Member, except for Permitted Encumbrances. A Material Combined Group Member under the Master Indenture is any Member of the Combined Group whose total revenues as set forth on its financial statements for the most recently completed Fiscal Year for such Member of the Combined Group exceed 15% of the combined total revenues of the Combined Group and the System Affiliates as set forth on the combined financial statements for the most recently completed Fiscal Year of the System. See “FORMS OF THE TRUST INDENTURE AND THE MASTER INDENTURE – FORM OF THE MASTER INDENTURE – Section 412. No Lien on Gross Revenues; Permitted Encumbrances” and the related definitions in Appendix C hereto
Other Indebtedness of the Combined Group
The Members of the Combined Group may incur additional indebtedness secured by purchase money security interests or by liens, on a parity with, or subordinate to, the Obligations, upon compliance with the applicable provisions of the Master Indenture. The additional indebtedness may be issued as Obligations issued under the Master Indenture, for the payment of which the Members of the Combined Group together with any future Members of the Combined Group will be jointly and severally liable. See “FORMS OF TRUST INDENTURE AND THE MASTER INDENTURE – FORM OF THE MASTER INDENTURE – Section 410. Permitted Indebtedness” in Appendix C hereto for which limitations apply to Members of the Obligated Group and Material Combined Group Members.
Additional Bonds on a parity with the Series 2018 Bonds may be issued under the Indenture, which Additional Bonds may be consolidated with the Series 2018 Bonds upon satisfaction with the terms set forth in the Indenture. Additional Bonds consolidated with the Series 2018 Bonds will bear interest at the same rate, have the same maturity date and shall be subject to redemption on the same terms as the Series 2018 Bonds and shall otherwise be treated as a single series of Bonds for all purposes of the Indenture.
In addition, the New Jersey Economic Development Authority (“NJEDA”) Revenue Bonds (Hillcrest Health Service System Project) Series 1997 (Capital Appreciation Bonds) (“1997 Bonds”), which were issued for the benefit of a predecessor company of HMH (f/k/a Hillcrest Health Service System, Inc.), are outstanding obligations of HMH. The 1997 Bonds mature in each year through January 1, 2022 at their respective accreted values and as of December 31, 2017 the aggregate accreted value of the 1997 Bonds is $41,239,000. The related
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loan from NJEDA is a general obligation of HMH. The 1997 Bonds are secured by (i) a debt service reserve fund and surplus fund established under the related trust indenture, (ii) a mortgage and assignment of leases on a four- story office building and a parking garage located on HMH Hospitals’ campus in Hackensack, New Jersey, and (iii) an assignment of collateral and security agreement related to certain equipment leased to HMH Hospitals. The payment obligations related to the 1997 Bonds are also secured by a municipal bond insurance policy issued by Ambac Assurance Corporation. HMH’s obligations related to the 1997 Bonds will not be secured by the Master Indenture but a failure to make timely payments, as a general obligation of HMH, could result in the exercise of remedies including on the specific collateral described above securing the payment obligations related to the 1997 Bonds. The bond documents related to the 1997 Bonds do not include financial maintenance covenants to be satisfied by HMH, do not conflict with the terms of the Master Indenture, and permit HMH to assign its obligations in connection with the 1997 Bonds to a tax-exempt affiliate of HMH, without any third-party consent, although HMH has no current plans to do so.
See also “LONG TERM INDEBTEDNESS AND INTEREST RATE SWAP AGREEMENTS” in Appendix A hereto for a description of the currently outstanding indebtedness of HMH that will become secured by promissory notes and/or other Debt Obligations issued under and pursuant to the Master Indenture simultaneously with the issuance and delivery of the Series 2018 Note. The Series 2018 Note and all such other Debt Obligations will be on parity with each other and will be equally and ratable secured under the Master Indenture.
CERTAIN FINANCIAL COVENANTS
Pursuant to the Master Indenture, the Obligated Group has agreed to certain financial covenants, including but not limited to the rate covenant described below.
Historic Annual Debt Service Coverage Ratio
HMH, as the Combined Group Agent, shall calculate the Income Available for Debt Service of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of the Master Indenture), for each Fiscal Year as of the end of such Fiscal Year and the Historic Annual Debt Service Coverage Ratio of the Combined Group or the System, as the case may be, for such Fiscal Year as of the end of such Fiscal Year.
If in any Fiscal Year the Historic Annual Debt Service Coverage Ratio of the Combined Group or the System, as the case may be, is less than 1.10 to 1, the Combined Group Agent shall at the expense of the Combined Group retain a Consultant, in a timely manner but in no event later than ninety (90) days after the date on which the Combined Group Agent determines that such Historic Annual Debt Service Coverage Ratio is less than 1.10 to 1, to prepare a report and make recommendations with respect to the rates, fees and charges of the Combined Group or the System, as the case may be, and the methods of operation of the Combined Group or the System, as the case may be, and other factors affecting their financial condition in order to increase such Historic Annual Debt Service Coverage Ratio to at least 1.10 to 1. Any Consultant so retained shall be required to submit such report and recommendations within sixty (60) days after being retained. So long as the Combined Group has retained a Consultant and has followed the report and recommendations of the Consultant to the extent permitted by applicable laws, the Combined Group shall not be deemed to have violated this covenant.
A copy of the Consultant’s report and recommendations, if any, shall be filed with the Combined Group Agent and the Master Trustee. Each Member of the Obligated Group shall follow and each Controlling Member shall cause each Designated Affiliate to follow each recommendation of the Consultant applicable to it to the extent feasible (as determined in the reasonable judgment of the Governing Body of such Member of the Obligated Group) and permitted by law, applicable regulations and the legal obligations binding upon such Member of the Obligated Group. The Members of the Obligated Group shall take such steps as they consider feasible to cause System Affiliates that are not Members of the Obligated Group or Designated Affiliates to follow each recommendation of the Consultant applicable to such System Affiliate.
The foregoing provisions notwithstanding, if in any Fiscal Year the Historic Annual Debt Service Coverage Ratio of the Combined Group or the System, as the case may be, is less than 1.10 to 1, the Combined Group Agent
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shall not be required to retain a Consultant to make such recommendations if: (a) there is filed with the Master Trustee a written report of a Consultant which contains an opinion of such Consultant to the effect that applicable laws or regulations have prevented the Combined Group or the System, as the case may be, from generating Income Available for Debt Service during such Fiscal Year in an amount sufficient to produce a Historic Annual Debt Service Coverage Ratio of the Combined Group or the System, as the case may be, of 1.10 to 1 or higher; (b) the report of such Consultant indicates that the fees and rates charged by the System Affiliates or the Members of the Combined Group, as the case may be, are such that, in the opinion of the Consultant, the System Affiliates or the Members of the Combined Group, as the case may be, have generated the maximum amount of Revenues reasonably practicable given such laws or regulations or other legal obligations; and (c) the Historic Annual Debt Service Coverage Ratio of the Combined Group or the System, as the case may be, was at least 1.00 to 1 for such Fiscal Year. The Combined Group Agent shall not be required to cause the Consultant’s report referred to in the preceding sentence to be prepared more frequently than once every two Fiscal Years if at the end of the first of such two Fiscal Years the Combined Group Agent provides to the Master Trustee an Officer’s Certificate or an opinion of Counsel to the effect that the applicable laws and regulations underlying the Consultant’s report delivered in respect of the previous Fiscal Year have not changed in any material way.
Notwithstanding anything else in the Master Indenture to the contrary, it shall be an Event of Default under Section 501(c) of the Master Indenture if as of the end of any two consecutive Fiscal Years the Historic Annual Debt Service Coverage Ratio of the Combined Group is less than 1.00 to 1. See “FORMS OF THE TRUST INDENTURE AND THE MASTER INDENTURE – FORM OF THE MASTER INDENTURE – Section 407. Annual Debt Service Coverage Ratio” in Appendix C hereto.
Potential for Additional Covenants For Existing Institutional Debt
Certain outstanding bonds or taxable loans (the “Institutional Debt”), which have been issued on behalf of certain System Affiliates, are held by several institutional holders or secured by letter of credit banks (the “Institutional Holders”). Certain Institution Debt is outstanding and will remain outstanding after the issuance of the Series 2018 Bonds. In connection with such Institutional Debt, the relevant Institutional Holders have received promissory notes or other Debt Obligations of HMH issued under the Master Indenture and have also required that HMH covenant to maintain certain additional requirements, solely for the benefit of the respective Institutional Holder. The material additional requirements related to such Institutional Debt are as follows:
(i) It shall be an event of default if as of the end of any fiscal year the Historic Debt Service Coverage Ratio (as defined in the Master Indenture with certain modifications in each agreement related to such Institutional Debt) is (A) greater than 1.0 to 1 but less than 1.10 to 1 for two (2) consecutive years or (B) less than 1.00 to 1 at the end of any fiscal year.
(ii) HMH and the other System Affiliates party thereto are required to maintain a maximum Debt to Capitalization Ratio (as defined in the Master Indenture with certain modifications in each agreement related to such Institutional Debt) of 0.70, which shall be tested annually as of the end of each fiscal year, with an event of default resulting if the Debt to Capitalization Ratio is greater than 0.70 for two consecutive fiscal years.
(iii) For purposes of satisfying the Transaction Test (as defined in the Master Indenture), in addition to the requirements of the Master Indenture, HMH must demonstrate that (A) the Maximum Annual Debt Service Coverage Ratio (as defined in the Master Indenture with certain modifications in each agreement related to such Institutional Debt) for the most recent fiscal year, assuming the proposed transaction had occurred at the beginning of such period, is not less than 1.15, and (B) immediately after the completion of the proposed transaction, the Debt to Capitalization Ratio (as defined in the Master Indenture with certain modifications in each agreement related to such Institutional Debt) is not in excess of 0.65 for the immediately preceding fiscal year, assuming the proposed transaction occurred at the beginning of such period.
Certain other Institutional Debt of various JFK System Affiliates, in an aggregate amount not exceeding $12 million, may be either maintained, refunded or refinanced upon the issuance of the Series 2018 Bonds. If such Institutional Debt remains outstanding, the relevant Institutional Holders may receive a promissory note or other
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Debt Obligation of HMH issued under the Master Indenture and may also require that HMH covenant to maintain certain additional requirements, solely for the benefit of the respective Institutional Holder, which such additional requirements are expected to be identical or substantially similar to the material additional requirements described above.
Any of these covenants may be waived, modified or amended by the applicable Institutional Holder in its sole discretion and without notice to or consent by the Trustee, the Master Trustee, the holders of the Series 2018 Bonds, the holders of any other Obligations outstanding under the Master Indenture or any other person. Violation of any such covenant may result in an event of default under the Institutional Holder’s agreement with HMH and, by virtue of cross default provisions under the Master Indenture, an Event of Default under the Master Indenture. In such instance, an Institutional Holder may seek remedies under its agreement, which remedies may include an acceleration of its promissory note or other Debt Obligation.
It should be noted that the total outstanding principal amount of the Institutional Debt is approximately $563.1 million as of December 31, 2017, which represents approximately 35.1% of the amount of the outstanding Obligations of the System. For the provisions governing an Institutional Holder’s right to enforce remedies under the Master Indenture, see “FORMS OF THE TRUST INDENTURE AND THE MASTER INDENTURE – FORM OF THE MASTER INDENTURE – Section 503. Remedies; Rights of Obligation Holders” in Appendix C hereto.
PLAN OF FINANCE
HMH will use the proceeds of the Series 2018 Bonds to: (i) refund, redeem, and legally defease the outstanding the Authority’s State Contract Bonds (Hospital Asset Transformation Program) Series 2009A (the “Refunded Bonds”); (ii) provide moneys to finance the general corporate purposes of HMH and other System Affiliates; and (iii) pay the costs of issuance of the Series 2018 Bonds. See “ESTIMATED SOURCES AND USES OF FUNDS” herein.
ESTIMATED SOURCES AND USES OF FUNDS
The proceeds of the Series 2018 Bonds, together with other available funds as described below, are expected to be used as follows:
Sources of Funds Par Amount $300,000,000* Net Original Issue Premium (Discount) ______Funds Released Upon Redemption of the Refunded Bonds ______Total Sources of Funds $______
Uses of Funds General Corporate Purposes $______Redemption and Escrow Deposit for Refunded Bonds ______Costs of Issuance(1) ______Total Uses of Funds $______
______* Preliminary, subject to change. (1) Includes amounts for Underwriters’ discount, legal, financial advisor, accounting and printing fees, and associated bond issuance costs related to the Series 2018 Bonds.
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DEBT SERVICE REQUIREMENTS
The following table sets forth, for each ensuing fiscal year, the gross amounts required to be made available for the payment of debt service on the existing Obligations and the Series 2018 Bonds. The principal amounts of the Series 2018 Bonds will be payable on July 1, and interest will be payable thereon on January 1 and July 1, commencing on January 1, 2019. Columns may not add to total due to rounding:
Year Ending Series 2018 Existing Debt Total Debt December 31 Bonds Service(1)(2) Service Principal Interest 2018 $ 144,661,963 2019 135,182,537 2020 127,554,537 2021 116,352,747 2022 114,457,344 2023 104,877,277 2024 105,107,990 2025 106,723,562 2026 105,576,269 2027 105,266,602 2028 89,223,280 2029 88,854,128 2030 88,292,203 2031 88,327,678 2032 88,356,928 2033 88,390,385 2034 88,661,681 2035 88,699,911 2036 88,730,864 2037 88,753,476 2038 88,749,413 2039 88,749,526 2040 88,747,329 2041 26,690,802 2042 25,529,144 2043 25,034,478 2044 23,673,744 2045 23,678,100 2046 23,674,025 2047 23,673,225 2048 23,678,025 2049 23,675,125 2050 23,674,925 2051 23,676,775 2052 23,675,025 2053 23,674,225 2054 23,677,475 2055 23,674,650 2056 23,674,988 2057 323,677,200 TOTAL $3,027,009,559
(1) Debt Service after issuance of the Series 2018 Bonds and provision for the payment of the Refunded Bonds. Debt Service includes capital leases and remaining JFK debt. (2) With respect to variable rate issues and balloon maturities, assumes an interest rate of 20-year average SIFMA through April 6, 2018 (currently 1.54%) and smooth out provisions consistent with the Master Indenture, with the exception of the Series 2017 Taxable Bonds which mature on July 1, 2057.
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BONDHOLDERS’ RISKS
The discussion herein of risks to the registered owners of the Series 2018 Bonds is not intended as dispositive, comprehensive or definitive, but rather is to summarize certain matters which could affect payment on the Series 2018 Bonds. Other sections of this Offering Memorandum, as cited herein, should be referred to for a more detailed description of risks described in this section, which descriptions are qualified by reference to any documents discussed therein. Copies of all such documents are available for inspection at the principal office of the Trustee.
Risk of Redemption or Acceleration
The Series 2018 Bonds are subject to redemption or acceleration prior to maturity in certain circumstances, including but not limited to the failure of HMH to make timely payments under the Indenture. Bondholders may not realize their anticipated yield on investment to maturity because the Series 2018 Bonds may be redeemed or accelerated prior to maturity at par or at a redemption price that results in the realization of less than anticipated yield to maturity.
Adequacy of Revenues
Except to the extent otherwise noted herein, the Series 2018 Bonds are payable solely from the payments required to be made by HMH under the Indenture, as evidenced by the Series 2018 Note. The Series 2018 Note is an Obligation issued under the Master Indenture and is therefore an Obligation of the Combined Group. To the extent the Combined Group makes payments on the Series 2018 Note, there will be a credit given for HMH’s obligation to make loan payments under the Indenture. Therefore, Holders of the Series 2018 Bonds are dependent upon the creditworthiness of the Members of the Combined Group. No representation or assurance can be made that revenues will be realized by the Combined Group in amounts sufficient to pay maturing principal of, redemption premium, if any, and interest on the Series 2018 Bonds. The ability of HMH to make payments under the Indenture and on the Series 2018 Bonds under the Indenture depends, among other things, upon the capabilities of management of the Members of the Combined Group and the ability of the Members of the Combined Group to maximize revenues under various third party reimbursement programs and to minimize costs and to obtain sufficient revenues from their operations to meet such obligations. Revenues and costs are affected by and subject to conditions which may change in the future to an extent and with effects that cannot be determined at this time. The risk factors discussed below should be considered in evaluating the ability of (i) HMH to make payments in amounts sufficient to meet its obligations under the Indenture, and (ii) the ability of the Members of the Combined Group to make payments in amounts sufficient to meet their obligations under the Master Indenture and the Series 2018 Note. This discussion is not, and is not intended to be, exhaustive.
The ability of the Members of the Combined Group, if any, to make required payments on the Series 2018 Note is subject to, among other things, the capabilities of the management of the Members of the Combined Group and future economic and other conditions, which are unpredictable and which may affect revenues and costs and, in turn, the payment of principal of, premium, if any, and interest on the Series 2018 Note and the Series 2018 Bonds. Future revenues and expenses of the Combined Group will be affected by events and conditions relating generally to, among other things, demand for the Combined Group’s services, its ability to provide the services required by patients, physicians’ relationships with the Combined Group, management capabilities, the design and success of the Combined Group’s strategic plans, economic developments in the service area, the Combined Group’s ability to control expenses, maintenance by the Members of the Combined Group of relationships with HMOs and PPOs (as defined herein) and other third-party payor programs, competition, rates, costs, third-party reimbursement, the Combined Group’s ability to transition from a fee-for-service to value-based payment models, the Combined Group’s investment in information technology infrastructure and human resources to meet federal quality data reporting requirements, future federal and State funding of health care reimbursement programs and potential future modifications of said programs, legislation, governmental regulation, general economic conditions and other conditions which are impossible to predict. Federal and state funding statutes and regulations are the subject of intense legislative debate and are likely to change, and unanticipated events and circumstances may occur which cause variations from the Combined Group’s expectations, and the variations may be material. THERE CAN BE NO ASSURANCE THAT THE REVENUES OF THE MEMBERS OF THE COMBINED GROUP OR
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UTILIZATION OF THEIR FACILITIES WILL BE SUFFICIENT TO ENABLE THE MEMBERS OF THE COMBINED GROUP TO MAKE SUCH PAYMENTS.
No representation or assurance can be given that HMH will generate revenues sufficient to allow payment of debt service on the Series 2018 Bonds when due.
None of the provisions, covenants, terms and conditions of the Indenture, the Master Indenture and the Series 2018 Note issued pursuant thereto will afford any assurance that the principal and interest owing under the Indenture and the Series 2018 Note (which, except for money held under the Indenture, constitute the sole source of funds for the payment of the Series 2018 Bonds) will be paid as and when due, if the financial condition of the Combined Group deteriorates to a point where the Members of the Combined Group are unable to pay their debts as they come due, or otherwise become insolvent.
Health Care Industry Factors Affecting the Combined Group
The health care industry is highly dependent on a number of factors that may limit the ability of HMH to meet its obligations under the Indenture and the Members of the Combined Group to meet their obligations under the Master Indenture, many of which are beyond their control. Among other things, participants in the health care industry are subject to significant regulatory requirements of federal, state and local governmental agencies and independent professional organizations and accrediting bodies, technological advances and changes in treatment modes, various competitive factors and changes in third-party reimbursement programs. Discussed below are certain of these factors which could have a significant impact on the future operations and financial condition of the Members of the Combined Group
The Combined Group’s ability to pay their obligations under the Indenture or the Master Indenture, as the case may be, could be adversely affected by legislation, regulatory actions, economic conditions, increased competition from other health care providers, changes in the demand for health care services, government and third- party payor reimbursement changes, demographic changes, and malpractice claims and other litigation. Neither of the Underwriters has made any independent investigation of the extent to which any such factors may have an adverse impact on the financial condition of the Members of the Combined Group.
Federal Legislative and Regulatory Initiatives
The discussion herein describes risks related to certain existing federal and state laws, regulations, rules and governmental administrative policies and determinations to which the Combined Group and the healthcare industry are subject. Several of the federal statutes and regulations described herein may be substantially modified or repealed in whole or in part. See “Affordable Care Act and Health Reform Initiatives.”
Nonprofit Healthcare Environment
As nonprofit tax-exempt organizations, Members of the Combined Group are subject to federal, State and local laws, regulations, rulings and court decisions relating to their organization and operation, including their operation for charitable purposes. At the same time, the Combined Group conducts large-scale complex business transactions and is a major employer in its geographic area. 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.
Recently, an increasing number of the operations or practices of health care providers have been challenged or questioned to determine if they are consistent with the regulatory requirements for 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 have included pricing practices, billing and collection practices, charitable care, methods of providing and reporting
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community benefit, executive compensation, exemption of property from real property taxation, private use of facilities financed with tax-exempt bonds and others. These challenges and questions have come from a variety of sources, including state attorneys general, the Internal Revenue Service (the “IRS”), labor unions, Congress, state legislatures and patients, and in a variety of forums, including hearings, audits, and litigation.
Major purchasers of hospital services also could take action to restrain hospital charges or charge increases. Additionally and 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 impacted. In addition, consumers and groups on behalf of consumers are increasing pressure for hospitals and other 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.
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 other business practices of these organizations and may indicate an increasingly more difficult operating environment for health care organizations, including the Combined Group. The challenges and examinations, and any resulting legislation, regulations, judgments, or penalties, could have a material adverse effect on hospitals.
Patient Service Revenue
The Medicare Program. Medicare is a federal program that provides certain health care benefits to beneficiaries who are 65 years of age or older, disabled or qualify for the End Stage Renal Disease program. Medicare Part A covers inpatient services and certain other services, and Medicare Part B covers certain physicians services, medical supplies and durable medical equipment. The Medicare Advantage Program, also known as Medicare Part C, enables Medicare beneficiaries who are entitled to Part A and are enrolled in Part B to choose to obtain their benefits through a variety of risk-based plans. Medicare Part D is the prescription drug benefit.
Medicare is administered by CMS, an agency of the U.S. Department of Health and Human Services, which delegates to the states the process for certifying those organizations to which CMS will make payment. The rule-making authority of DHHS is substantial and the rules are extensive and complex. Substantial deference is generally given by courts to rules promulgated by DHHS.
Medicare claims are processed by non-government organizations or agencies that contract to serve as the fiscal agent between providers and the federal government to locally process Medicare’s institutional and provider claims. The contractors apply the Medicare coverage rules to determine the appropriateness of claims. CMS selects organizations (generally insurance companies) to act as contractors in various states or regions and enters into a “prime contract” with each. Most Medicare services are paid for on a fee-for-service basis under the reimbursement methods described below. Some Medicare recipients, however, enroll in Medicare Advantage managed care plans which may reimburse providers on a fee for service or capitated basis.
To achieve and maintain Medicare certification, hospitals must meet CMS’s “Conditions of Participation” on an ongoing basis. Compliance is determined by the state and/or an appropriate accrediting organization. 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 to address such changing requirements. 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. Any adverse development or change in Medicare reimbursement could have a material adverse effect on the financial condition and results of operations of the Combined Group.
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Federal Budget Cuts. The Budget Control Act of 2011 (the “BCA”) mandates significant reductions and spending caps on the federal budget for federal fiscal years 2012 through 2021. Without further action by Congress, the spending cuts are scheduled to continue through federal fiscal year 2025. However, because Congress may make changes to the federal budget in the future, it is impossible to predict the impact any spending cuts that are approved may have upon Members of the Combined Group. Similarly, it is impossible to predict whether any automatic reductions to Medicare may be triggered in lieu of other spending cuts that may be proposed by Congress. These reductions could be implemented disproportionately for hospitals and could have an adverse effect on the financial condition of the Combined Group.
Medicare Reimbursement for Hospital Inpatient and Outpatient Services. Medicare payments to hospitals for the delivery of certain inpatient and outpatient hospital services to program beneficiaries are based on prospective payment systems (“PPSs”) that essentially pays hospitals a fixed amount for each Medicare inpatient discharge or outpatient encounter. Under these PPSs, a hospital with costs exceeding the applicable payment rate would incur losses on such services provided to Medicare beneficiaries. There can be no assurance that PPS payments will be sufficient to cover all of the actual costs of providing hospital services to Medicare patients.
CMS periodically promulgates regulations, such as its annual inpatient PPS rules, to adjust the rates paid to hospitals based on its continuing experience with hospital operating and capital costs, and to implement various quality improvement, patient safety and fraud and abuse programs. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (the “Affordable Care Act” or the “ACA”) expanded programs to improve the quality of care by establishing programs that adjust reimbursements for performance against value metrics, excessive readmissions, medical errors and preventable conditions such as hospital acquired infections. Depending on the mix of future services delivered, the overall effect of these programs to the inpatient PPS reimbursement rules may be to reduce Medicare reimbursement to the Members of the Combined Group. Payments for both inpatient and outpatient services also are inflated each year by market basket adjustments, which often are reduced by productivity adjustments. The amount of these adjustments in a given year may substantially affect both inpatient and outpatient payments to the Members of the Combined Group. Additionally, Congress from time-to-time adjusts these inflationary and productivity adjustments, and those changes could substantially affect both inpatient and outpatient payments to the Members of the Combined Group. Congress also frequently enacts legislation affecting Medicare payment amounts or regulatory obligations under the program. Administrative and legislative changes, such as these, could have a material impact on the operations, financial condition and financial performance, even in the absence of statutory changes, of the Members of the Combined Group.
Section 603 of the Bipartisan Budget Act of 2015 (“Section 603”) included a revision to the payment system to be used to reimburse hospitals for outpatient services rendered at certain off-campus provider-based departments (“PBDs”). Effective January 1, 2017, most hospital off-campus PBDs that began furnishing services on or after November 2, 2015 are no longer eligible to be paid under PPS. How and how much they would be paid, and what other rules would apply to these entities and grandfathered facilities were left to CMS to determine. On November 1, 2016, CMS released the final rule implementing Section 603. Generally, CMS chose to pay affected hospitals a rate that is approximately 50 percent of the outpatient PPS rate, with some limited exceptions. On July 13, 2017, CMS published a proposed rule that proposed further revisions to be effective January 1, 2018. In that rule, CMS proposed to reduce the applicable payment amount to 25 percent of the applicable PPS rate. On November 13, 2017, CMS published a final rule that lowered the applicable payment amount to 40 percent of the applicable PPS rate. These changes could have a material impact on the Combined Group’s operations, financial condition and financial performance. Additionally, if CMS or Congress revisit this payment amount in the future, and further lower it below current levels, such change also could have a material impact on the Combined Group’s operations, financial condition and financial performance.
Medicare and Medicaid Audits and Withholdings. Hospitals participating in Medicare and Medicaid are subject to audits and retroactive audit adjustments with respect to reimbursement claimed under those
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programs, and the representations upon which such reimbursements are claimed. There can be no assurance any such future adjustments will not be material or that the reserves established for such purpose will be adequate to cover any such adjustments. Both Medicare and Medicaid regulations also provide for withholding payments in certain circumstances. Any such withholding with respect to the Members of the Combined Group could have a material adverse effect on the financial condition and results of operations of the Combined Group. In addition, contracts between hospitals and third-party payors often have contractual audit, setoff and withhold provisions that may cause substantial, retroactive adjustments. Such contractual adjustments also could have a material adverse effect on the financial condition and results of operations of the Combined Group. No assurance can be given that in the future a Medicare payment or other payment will not be withheld that would materially and adversely affect the financial condition or results of the Combined Group.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established the Medicare Recovery Audit Contract (“RAC”) program initially as a demonstration program to identify improper Medicare payments. RACs are paid on a contingency fee basis, receiving a percentage of the improper overpayments and underpayments they collect from providers. RACs can review the last four years of Medicare and Medicaid claims.
In light of the complexity of the regulations relating to the Medicare program, and the nature of ongoing audits and compliance activities as described above, there can be no assurance that Members of the Combined Group will not be the subject of any such activities.
Health Plans and Managed Care. Most private health insurance coverage is provided by various types of “managed care” plans, including health maintenance organizations (“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. To control costs, managed care plans typically contract with hospitals and other providers for discounted prices, review medical services for medical necessity, require members to pay copayments and deductibles, and channel patients to contracted providers 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.
Managed care plans are replacing indemnity insurance as the prime source of nongovernmental 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 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.
Often, managed care 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. Hospitals from time to time have disputes with managed care payors concerning payment and contract interpretation issues.
Failure to maintain contracts could have the effect of reducing the Combined Group’s market share and net patient service revenue. Conversely, participation may result in lower net income if participating hospitals are unable to adequately contain their costs. Thus, managed care poses one of the most significant business risks (and opportunities) the hospitals face.
The Medicaid Program. Medicaid is a program for 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
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standards. Pursuant to these broad federal guidelines, each state establishes its own eligibility standards; determines the type, amount, duration and scope of services; sets the payment rates for services; and administers its own programs. Payments made to health care providers under the Medicaid program are subject to change as a result of federal or state legislative and administrative actions, including changes in the methods for calculating payments, the amount of payments that will be made for covered services and the types of services that will be covered under the program. Such changes have occurred in the past and may be expected to occur in the future, particularly in response to federal and state budgetary constraints. Any future reduction in the level of Medicaid spending by the federal government is likely to have an adverse impact on the revenues of the Combined Group derived from the Medicaid program.
The ACA makes changes to Medicaid funding and substantially increases the potential number of Medicaid beneficiaries. In June 2012, the United States Supreme Court ruled that states could decline to expand Medicaid coverage without losing their existing federal funding for the program. Because increased Medicaid funding generally brings more patients to most hospital providers, certain outcomes, such as a state refusing to expand Medicaid coverage, while Medicaid payment cuts are implemented, could put hospital providers at greater risk. It is uncertain to what extent this risk may be mitigated if the increased Medicaid utilization population replaces previously uncompensated patients.
Many states, including New Jersey, continue to face severe financial challenges, including erosion of general fund tax revenues, which factors have resulted in a shortfall between revenue and spending demands. Such financial challenges may negatively affect hospitals in many ways, including, but not limited to, a greater number of individuals who qualify for Medicaid, further reductions in Medicaid reimbursement rates and further changes in Medicaid enrollment eligibility.
Medicaid operates as a vendor payment program. Subject to federally-imposed upper limits and specific restrictions, states may either pay providers directly or may pay for Medicaid services through various prepayment arrangements (see “Medicaid Managed Care” below). Providers participating in Medicaid must accept Medicaid payment rates as payment in full. States must make additional payments to qualified hospitals that provide services to a disproportionately large number of Medicaid, low income and/or uninsured patients. These payments are referred to as a DSH adjustment. Often DSH payments are insufficient to cover a hospital’s costs in providing care to such patients, and there can be no assurance that any future DSH payments will cover the Combined Group’s costs.
Under the ACA, there will be incremental decreases to the Medicare and Medicaid payments for disproportionate share hospitals totaling $36 billion over the period of fiscal years 2014 to 2024, based on an assumption that the law’s new coverage and access provisions will substantially reduce uncompensated care provided by hospitals. Under the ACA, annual Medicaid DSH payment reductions were scheduled to start in 2014, but the start date was delayed under MACRA until fiscal year 2018. Reductions are scheduled to occur through 2025.
States may impose nominal deductibles, coinsurance, or co-payments on some Medicaid recipients for certain services. Emergency services, family planning services, pregnancy-related services and preventative services for children are exempt from such co-payments. Certain Medicaid recipients must be excluded from this cost sharing including but not limited to: pregnant women (states may choose to exempt all services provided to pregnant women), children under age 18 (or 19, 20 or 21 at the state’s option), hospital or nursing home patients who are expected to contribute most of their income to institutional care, hospice patients and categorically needy HMO enrollees.
Medicaid Managed Care. In New Jersey, the Medicaid managed care program is administered by the State’s Department of Human Services (“DHS”). Under this program, DHS contracts with managed care companies to arrange for the provision of health care services to most of the Medicaid recipients in the State. The managed care companies are paid a fixed amount per enrollee per month by the State. These companies in
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turn negotiate rates for services with hospitals and other health care providers. There can be no assurance that the negotiated rates will cover expenses incurred in providing care to the Medicaid patients.
For Supplemental Security Income (“SSI”) recipients and other Medicaid-eligible groups not enrolled in a managed care program, hospitals are reimbursed for inpatient services using DRG rates. These rates are based on the average cost of hospital care for Medicaid patients at New Jersey hospitals. Because hospitals are reimbursed the median rate per case, there can be no assurance that Medicaid revenues will cover expenses for Medicaid patients. Further reduction in Medicaid payments and/or the conversion of Medicaid recipients to managed care Medicaid coverage would reduce the amount of reimbursement that the Members of the Combined Group receive for providing services to Medicaid beneficiaries. There can be no assurances that the Members of the Combined Group can reduce the costs associated with treating Medicaid patients to offset these potential reimbursement reductions.
CMS Regulations at 42 CFR 455.301 and 455.304(d) require states to verify Medicaid DSH payments. New Jersey’s Medicaid DSH verification is executed under an independent accountant’s report and includes an examination of the hospital’s payment and cost related to inpatient and outpatient Medicaid fee- for-service, Medicaid managed care, the uninsured and the underinsured. Federal law limits Federal Financial Participation (“FFP”) for DSH payments through the hospital-specific DSH limit. Under the hospital-specific DSH limit, FFP is not available for DSH payments that are more than the hospital's cost. It should be noted that significant costs, such as hospital-subsidized physician costs for treating Medicaid and uninsured patients are not recognized in the Medicaid DSH cost, as well as the treatment of reducing Medicaid DSH costs by certain grants, results in the cost of treating this population to be understated.
Changes in qualification criteria, covered benefits, and reimbursement amounts could have a material effect on the Combined Group’s net revenue and operating margin. With increased benefit limitations and more restrictive payments for services, reductions in reimbursement could be materially greater than current estimates and could result in more uninsured patients. Accordingly, there can be no assurance that Medicaid payments are or will continue to be adequate.
Affordable Care Act and Health Care Reform Initiatives
The Affordable Care Act was enacted in 2010. The Affordable Care Act was intended to address disparities in access, cost, quality and delivery of health care to United States residents.
The changes to various aspects of the health care system in the ACA are far-reaching and include substantial adjustments to Medicare reimbursement, establishment of individual and employer mandates for health insurance coverage, extension of Medicaid coverage to certain populations, provision of incentives for employer-provided health care insurance, restrictions on physician-owned hospitals, and increased efficiency and oversight provisions. The provisions of the ACA were structured to take effect over time, ranging from immediately upon passage to ten years from passage. Most of the significant health insurance coverage reforms began in 2014. The ACA also requires the promulgation of substantial regulations with significant effects on the health care industry.
The ACA changes the sources and methods by which consumers will pay for health care. The ACA also imposed new requirements for employers’ provision of health insurance to their employees and dependents. One of the primary goals of the ACA was to provide or make available, or subsidize the premium costs of, health care insurance for otherwise uninsured (or underinsured) consumers who fall below certain income levels. The ACA was intended to accomplish that objective by a number of means, including creating state organized insurance markets in which individuals and small employers can purchase health care insurance; providing income-based subsidies for premium costs to individuals and families; mandating that individual consumers obtain and certain employers provide a minimum level of health care insurance; establishing insurance reforms, such as prohibiting denials of coverage for pre-existing conditions; and expanding existing public programs, such as Medicaid.
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Some of the specific provisions of the ACA that may affect hospital operations, financial performance or financial conditions are described below. This listing is not exhaustive. The ACA is complex and comprehensive, and includes a myriad of new programs and initiatives and changes to existing programs, policies, practices and laws. Further, as discussed below, the current position of the Administration in Washington, D.C., is to roll back implementation of key elements of the ACA, or to repeal it entirely.
• Annual inflation adjustments to Medicare payments have been reduced.
• Many state Medicaid programs have expanded to a broader population.
• Medicare has begun reducing payments to hospitals found to have an excess readmissions ratio for certain conditions.
• To reduce waste, fraud, and abuse in public programs, the ACA provides for provider enrollment screening, enhanced oversight periods for new providers and suppliers, enrollment moratoria in areas identified as being at elevated risk of fraud in all public programs, increased penalties for fraud and abuse violations, and increased funding for anti-fraud activities.
• Medicare payments to certain hospitals to cover conditions acquired during hospitalization have been reduced and federal payments to states for Medicaid services related to hospital-acquired conditions are prohibited.
• A value-based purchasing program has been established under the Medicare program. Under this program, hospital payments will increase or decrease depending on a hospital’s performance vis-à-vis established quality measures.
• Medicaid Disproportionate Share Hospital (DSH) allotments to each state have also been reduced, based on state-wide reduction in uninsured and uncompensated care.
In general, the provisions of the ACA that encourage or mandate health care coverage for individuals can be expected to increase demand for health care and reduce the amount of uncompensated care of health care providers. However, the reimbursement paid by the payers of the newly insured may be inadequate to cover costs. Revisions to the Medicare reimbursement program will also likely reduce Medicare reimbursement levels. The practical consequences of the ACA, as well as of other future federal and state actions affecting the health care delivery system cannot be foreseen. In particular, any legal, legislative or executive action that delays the implementation of new employer mandates, reduces federal health care program spending, increases the number of individuals without health insurance, reduces the number of people seeking health care, or otherwise significantly alters the health care delivery system or insurance markets could have a material adverse effect on the Combined Group’s business or financial condition.
Challenges to the Affordable Care Act
The ACA has been subject to significant opposition in the political and judicial arenas. Multiple lawsuits challenging the constitutionality of the ACA have been filed by private and state parties in federal courts. In 2012, the U.S. Supreme Court largely upheld the ACA as constitutional. However, in the same decision it limited the scope of the ACA by restricting the federal government’s ability to condition Medicaid funding on states’ participation in the ACA’s anticipated Medicaid expansion. As a result, states effectively have the option but not the obligation to extend Medicaid coverage to the indigent adult population specified in
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the ACA. In 2015, the Supreme Court rejected an effort to limit federal subsidies only to exchanges that were established directly by the states and not through the federal government.
During the November 2016 elections, several successful candidates for election to the United States Congress, as well as President Trump, campaigned on promises to modify, repeal or replace the ACA. Throughout the first half of 2017, President Trump and Congressional Republicans sought to enact legislation repealing or substantially rewriting major portions of the ACA and reforming the Internal Revenue Code of 1986, as amended (the “Code”), including a proposal to eliminate portions of ACA through tax reform. The Tax Act (as defined below under “Tax Reform”) effectively repealed the individual mandate by reducing the penalty to zero beginning in 2019 for individuals who fail to have minimum health insurance coverage. This effective repeal could result in a material increase in the number of uninsured patients. Although it is uncertain whether or when additional legislation affecting such key areas will be introduced or passed, such legislation could have a material impact on the operations, financial condition and financial performance of the Combined Group.
Additional efforts towards repeal of the ACA could result in additional pressure on Medicaid and Medicare funding and could have the effect of reducing the availability of health insurance to individuals who were previously insured, resulting in greater numbers of uninsured individuals. Even if such legislation is not enacted, the fact that such objectives are being discussed and are considered possible creates substantial uncertainty in the health industry, and affects the operations, financial condition and financial performance of the Combined Group.
Management cannot predict the effect of these executive branch actions on its business or financial condition, though such effects could be material.
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 providers. The ACA shifts payments from paying for volume to paying for value, based on various health outcome measures. Published rankings such as “score cards,” “pay for performance” and other financial and non-financial incentive programs may 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 Members of the Combined Group. Currently prevalent are measures of quality based on clinical outcomes of patient care, reduction in costs, patient satisfaction, and investment in health information technology. Measures of performance set by others that characterize a hospital or provider negatively may adversely affect its reputation and financial condition.
Government Regulation of Relationships between Hospitals, Physicians and Other Providers and Suppliers
The health care industry is heavily regulated by federal and state governments and is dependent on governmental sources for a substantial portion of revenues. In the past, there have been periodic and often significant changes in the methods and standards used by government agencies to reimburse and regulate the operation of healthcare providers. The ACA implemented additional changes and there is reason to believe that further substantial changes will occur in the future. See “Affordable Care Act and Health Care Reform Initiatives,” above.
From time to time Members of the Combined Group receive subpoenas, civil investigatory demands, audit requests and other formal inquiries from state and federal legislative committees, governmental agencies or investigators. It is often impossible to determine the specific nature of the investigation or whether such
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investigations could result in potential liability under a cause of action that might subsequently be asserted by the government. Management considers these investigations a routine part of operations in the current health care climate, and expects them to continue in the future.
Federal and State “Fraud and Abuse” Laws and Regulations. “Fraud” in government funded health care programs is a significant concern of DHHS and many states and is one of the federal government’s prime law enforcement priorities. Federal and state governments impose a wide variety of complex and technical requirements intended to prevent over-utilization based on economic inducements, misallocation of expenses, overcharging and other forms of fraud in state and federally-funded health care programs, including the Medicare and Medicaid programs. Fraud regulation affects a broad spectrum of hospital activity, including billing, accounting, recordkeeping, medical staff oversight, physician contracting and recruiting, cost allocation, clinical trials, discounts and other functions and transactions. Violations carry significant civil, criminal and administrative sanctions and may result in temporary or permanent exclusion from participation in Medicare, Medicaid and other federally-funded health care programs. Health care providers may reduce their financial exposure for fraud and abuse law violations through prompt repayment of sums received as a result of violations of applicable laws, prompt voluntary reporting to the government of illegal arrangements and implementation of effective corporate compliance programs. This financial exposure is generally uninsured. Much of this risk cannot be assessed accurately due to the broadly worded prohibitions, limited case law and the lack of material guidance by CMS and the Office of the Inspector General (OIG).
Anti-Kickback Law. The federal anti-kickback statute (AKS) makes it a criminal offense to knowingly and willfully offer, pay, solicit or receive remuneration in return for or to induce referrals for any item or service that may be paid for, in whole or in part, under a federal health care program including, but not limited to, the Medicare or Medicaid programs. Activities subject to the AKS include almost any arrangement between a hospital and a person or entity in a position to generate business for the hospital or benefit from business from the hospital. In recent years, the government has aggressively enforced the AKS, and the ACA amended the AKS to make it easier for the government to prove “intent” to violate the law.
Violation of the AKS can result in a felony conviction, fines, imprisonment, civil monetary penalties, and exclusion from the Medicare and Medicaid programs. “Safe harbor” regulations, published by the OIG, provide protections from prosecution or administrative enforcement action for a limited scope of arrangements. The safe harbors are narrow and a wide range of business arrangements common to most hospitals, physicians and other health care providers are not protected thereunder. However, failure to satisfy the conditions of a safe harbor does not necessarily indicate a violation of the applicable AKS provision.
False Claims Acts. The federal False Claims Acts are criminal and civil statutes that prohibit a person from “knowingly” presenting or causing to be presented a false or fraudulent claim for payment or approval to the federal government and from “knowingly” making, using or causing to be made a false record or statement to get a false or fraudulent claim paid or approved by the federal government. These prohibitions extend to claims submitted to federal health care programs including, but not limited to, Medicare and Medicaid. The terms “knowing” and “knowingly” are broadly defined and do not require proof of a specific intent to defraud in order to prove that the law has been violated. The ACA amended the False Claims Acts to expressly state that claims for items or services resulting from violations of the AKS are false or fraudulent for purposes of the False Claims Acts. Additionally, providers may be liable for the submission of false claims when they are not in full compliance with applicable legal and regulatory standards. Both the Fraud Enforcement and Recovery Act of 2009 and the ACA significantly expanded the scope of the False Claims Acts to include (a) conspiracy to commit any substantive violation of the False Claims Acts, (b) knowingly retaining an overpayment from a federal health care program, and (c) payments made by, through or in connection with a health insurance exchange.
Violations of the criminal False Claims Act can result in imprisonment and/or fines, while violations of the civil False Claims Act may result in substantial monetary penalties. Private individuals may also bring suit under the qui tam provisions of the civil False Claims Act and may be eligible for incentive payments for
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providing information that leads to recoveries or sanctions that arise in a variety of contexts in which hospitals and health care providers operate. The ACA also eased the requirements for private individuals to bring suit under the civil False Claims Act.
Stark Law. The federal statute commonly known as the Stark Law prohibits a physician (or an immediate family member of such physician) from referring a Medicare or Medicaid patient for certain “designated health services” to an entity with which the referring person has a financial relationship. It also prohibits such entity from billing the Medicare or Medicaid program for services furnished pursuant to a prohibited referral. Unlike the AKS, neither knowledge nor intent are required to find a violation of the Stark Law. The “designated health services” include clinical laboratory services, physical and occupational therapy services, radiology services, radiation therapy services and supplies, durable medical equipment, parenteral and enteral nutrients (including equipment and supplies), orthotic and prosthetic devices, speech language pathology, home health services, outpatient prescription drugs and inpatient and outpatient hospital services. The Stark Law defines a financial relationship as either an ownership or investment interest in the entity that provides designated health services or a compensation arrangement with such entity.
Many ordinary business practices and arrangements with physicians would trigger the prohibition on referrals and billing under the Stark Law. There are certain statutory and regulatory exceptions to the prohibition, but these exceptions are narrow and exacting to meet. Violations of the Stark Law can result in denial of payment, or a refund of amounts paid for the designated health services, substantial civil monetary penalties and exclusion from the Medicare and Medicaid programs. In certain circumstances, knowing violations may also create liability under the False Claims Acts.
CMS has established a voluntary self-disclosure program under which hospitals and other entities may report Stark Law violations in an effort to reduce potential refund obligations. The program is relatively new, so it is uncertain whether it will provide significant monetary relief to hospitals that discover and self-disclose inadvertent Stark Law violations.
Civil Monetary Penalty Act. The federal Civil Monetary Penalty Act (CMPA) 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 CMPA 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 (known as “gainsharing”) under which a physician is paid to limit or reduce needed services to Medicare fee-for-service beneficiaries would be subject to CMPA penalties. The ACA added new exceptions to the CMPA 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.
Health care providers may be found liable under the CMPA even when they did not have actual knowledge of the impropriety of their action. The imposition of civil money penalties on a health care provider could have a material adverse impact on the provider’s financial condition.
OIG Compliance Guidance. The OIG has encouraged all health care providers to adopt and implement programs to promote compliance with federal and state laws, including the False Claims Acts, the AKS and the Stark Law. The OIG’s Compliance Program Guidance (CPG) and Supplemental Compliance Program Guidance provide recommendations to hospitals for adopting and implementing effective compliance programs. The CPG also identifies significant risk areas for hospitals. The ACA requires the establishment of a compliance program as a condition of enrollment under the Medicare and Medicaid programs. The OIG is expected to implement further regulations regarding industry-specific compliance plan requirements. The OIG will consider the existence of an effective compliance program that pre-dated any governmental investigation when addressing the appropriateness of administrative penalties. However, the presence of a compliance
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program is not an assurance that a health care provider will not be investigated by one or more federal or state agencies that enforce health care fraud and abuse laws or that it will not be required to make repayments to various health care insurers (including the Medicare and/or Medicaid programs). Hospitals are also required to create a Medicaid Compliance Plan and to educate staff, agents and contractors about state and federal anti- fraud and abuse laws.
Enforcement Activity. Federal and state governments are intensifying their efforts to investigate and prosecute waste, fraud and abuse in both government and private health care programs, and pursuant to the ACA and other legislation significant additional federal monies have been made available for these enforcement efforts. Enforcement activity against health care providers, such as investigations, audits or inquiries, has increased, and enforcement authorities are adopting more aggressive approaches. Enforcement authorities are sometimes in a position to compel settlements by providers charged with, or being investigated for, violations of the various federal and state fraud and abuse or false claims laws and regulations by threatened penalties, including withholding Medicare, Medicaid or similar payments or the possibility of a criminal action. The cost, time and management attention of defending or responding to an investigation or alleged violation and the facts of a particular case may dictate settlement, resulting in additional costs. Prolonged and publicized investigations could damage the reputation, business and credit of a provider, regardless of the outcome. Settlements, fines, prospective restrictions or other results of settlement agreements and negative publicity may have a materially adverse impact on a hospital’s operations, financial condition and reputation.
The government may exclude a hospital from Medicare/Medicaid program participation that 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 terminated from participation and no program payments can 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.
Increased Enforcement Affecting 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, the National Institutes of Health significantly increased the number of facility inspections that these agencies perform. The Food and Drug Administration (“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 Office of Inspector General of DHHS, in its “Work Plans,” has included several enforcement initiatives related to reimbursement for experimental drugs and devices (including kickback concerns). The United States Department of Justice may also become involved in enforcement actions relating to the use of federal funds or submission of information to federal agencies. There have been a number of recent government investigations and settlements involving hospital use of federal grant funding in connection with clinical trials and also a settlement involving the submission of claims to Medicare for services provided in a clinical trial. 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 or Medicaid programs for care provided to patients enrolled in clinical trials that is not eligible for Medicare reimbursement can subject certain Members of the Combined Group to sanctions as well as repayment obligations.
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Federal and State Laws Relating to the Privacy and Security of Personal Health Information; Cyber Security. Under the Health Insurance Portability and Accountability Act (“HIPAA”), DHHS has issued regulations to standardize and facilitate the electronic transfer of health care information for purposes that include the processing of health care payments, privacy regulations that protect patient medical records and other protected health information maintained by health care providers, health plans and health care clearinghouses, and security regulations that require health care providers to implement safeguards to protect the confidentiality, integrity and availability of the electronic health information that they receive or create. HIPAA also requires that health care providers enter into business associate agreements to assure that entities doing business on their behalf protect the privacy and security of patient information.
The HIPAA privacy and security regulations were strengthened under the Health Information Technology for Economic and Clinical Health Act (“HITECH”). HITECH expanded certain provisions and created new avenues of enforcement, including the ability of state attorneys general to bring actions. HITECH also made business associates directly liable for HIPAA security compliance and established breach notification obligations for providers in the event of a breach that creates a risk of harm to individuals. Violations of the privacy and security standards can result in civil monetary penalties up to $1.5 million per year and criminal penalties including fines and imprisonment. The Members of the Combined Group believe their operations and information systems comply with the HIPAA standardized electronic transfer, privacy and security regulations, although there can be no assurance that they will not be found to have violated these regulations in a particular instance.
Under HITECH’s new breach notification requirements, Covered Entities (which term includes most hospitals) must report breaches as soon as is reasonably practicable, but no later than 60 days following discovery of the breach. Reports must be made to affected individuals and to appropriate officials. In some cases, breaches must also be reported through local and national media, depending on the size of the breach.
Covered Entities are subject to audit under DHHS’ HITECH-mandated audit program and may also be audited in connection with a privacy complaint. Covered Entities are subject to prosecution and/or administrative enforcement and increased civil and criminal penalties for non-compliance, including a new, four-tiered system of monetary penalties adopted under HITECH. To avoid penalties under the HITECH breach notification provisions, Covered Entities must ensure that breaches of PHI are promptly detected and reported within the organization, so that the Covered Entity can make all required notifications on a timely basis. However, even if such reports are timely made, Covered Entities may still be subject to penalties for the underlying breach.
Information technology systems may be vulnerable to breaches, hacker attacks, computer viruses, physical or electronic break-ins and other similar events or issues. The Federal Bureau of Investigation has expressed concern that health care systems are a prime target for such cyber-attacks due to a higher financial payout for medical records in the black market, and health care systems have recently been subject to such attacks. Such events or issues could lead to the inadvertent disclosure of protected health information or other confidential information, which could materially impact the operations, financial position and cash flows of the Combined Group.
Portions of an Combined Group Member’s IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration, maintenance or migration work that takes place from time to time. Such Combined Group Member may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact the ability to provide services and interrupt other processes. Increased costs, damaged reputation, reduction in revenue or lost patients and business resulting from these disruptions could materially impact the operations, financial position or revenues and expenses of the Combined Group.
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Regulation of Patient Transfer. The Emergency Medical Treatment and Active Labor Act (EMTALA) requires hospitals that have emergency rooms to provide medical screening and stabilizing treatment before transferring a patient who is medically unstable or in labor to another facility, unless the patient asks to be transferred or a physician certifies that the benefits of the transfer outweigh the risks. The law further prohibits hospitals from delaying such screening or treatment in order to inquire about an individual’s method of payment. Failure to comply with EMTALA can result in exclusion from the Medicare and/or Medicaid programs as well as civil and criminal penalties. In addition, hospitals may be liable for claims brought by any individual who has suffered harm as a result of such violation. Accordingly, failure of acute care hospitals to meet their responsibilities under EMTALA could adversely affect their financial condition.
State Regulatory Issues.
Health care providers are subject to a variety of New Jersey State law issues as described below:
False Claims. The New Jersey Insurance Fraud Prevention Act (“FPA”) prohibits a person’s or entity’s submission of false or misleading claims for payment or approval by an insurance company, and allows the State to recover substantial damages from persons or entities that knowingly present or cause to be presented a false or misleading claim for payment or approval by an insurance company. Any person or entity that violates the FPA may be liable for, among other things, a penalty of $5,000 for the first violation, $10,000 for the second violation, and $15,000 for each subsequent violation. In addition to or as an alternative to the civil sanctions provided in the FPA, the Attorney General of the State may bring a criminal action under applicable statutes.
Health Care Claims Fraud. N.J.S.A. 2C:21 4.3 and N.J.S.A. 2C:51 5 complement the FPA and prohibit a practitioner (a physician or health care professional as defined by the statute) from submitting of bills or claims for payment reimbursement of health care services that contain false, fictitious, fraudulent and misleading statements of material fact, or omissions of material fact. In addition to other criminal penalties allowed by other applicable laws, under this body of law, a practitioner may be guilty of the crime of health care claims fraud. Practitioners can be guilty of a crime in the second or third degree depending upon the severity of the claims fraud, may be subject to a fine of up to five times the pecuniary benefit obtained or sought to be obtained, and may be subject to imprisonment, if convicted. A practitioner may, in some cases, also have his or her license revoked or suspended.
State False Claims Act. Effective March 13, 2008, the New Jersey False Claims Act authorizes a person to bring an action against any other person who knowingly causes the State to pay a false claim. A person who violates this law is subject to civil penalties in the amounts set forth in the federal False Claims Act and be liable for treble damages. The Act contains “whistleblower” provisions similar to the federal Civil False Claims Act. (See “Civil Money Penalties Law” above). The New Jersey False Claims Act also amends the existing Medicaid fraud statute so that civil penalties for Medicaid fraud committed under that statute are consistent with, and supplement, those under the New Jersey False Claims Act.
As noted above under “Federal False Claims Act” and “Civil Money Penalties Law”, the potential imposition of large monetary penalties, criminal sanctions, and the significant costs of mounting a defense, create serious pressures to settle on providers who are targets of false claims actions or investigations. Therefore, an action under the FPA or the New Jersey False Claims Act could have a material adverse financial impact on the Combined Group, regardless of the merits of the case.
State Anti-Kickback Law. The New Jersey Board of Medical Examiners’ regulations contain provisions which prohibit Board licensees from, directly or indirectly, giving or receiving from any licensed or unlicensed source a gift of more than nominal (negligible) value, or any fee, commission, rebate, bonus or other compensation however denominated, which a reasonable person would recognize as having been given or received in appreciation for or to promote certain conduct by a licensee, including making or receiving a referral to or from another for professional services. Provisions of State law make it a criminal offense to offer, solicit or receive any kickback, rebate or bribe in order to induce business for which reimbursement is provided under the Medicaid or other State health care programs. Violation of the State Anti-Kickback Law may lead to civil and criminal penalties, as well as exclusion from the Medicaid program. Each Member of the Combined Group attempts to comply with the
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provisions of these regulations. However, at the present time, there can be no assurance that a Member of the Combined Group or the physicians with which it has relationships with will not be found to have violated these State Anti-kickback prohibitions. The mere allegation of such a violation, or if such violation were found to have occurred, or any sanctions imposed, could have a material adverse effect upon the operations and financial condition of the Combined Group.
State Anti-Referral Law. The New Jersey law governing referrals by physicians, which is commonly referred to as the “Codey Law”, and regulations promulgated thereunder by the New Jersey Board of Medical Examiners (the “BME”), prohibit the referral of a patient for “health care services” provider by practitioners who have, or whose immediate family members have, a “significant beneficial interest” in an entity providing such services. A “health care services” provider includes an entity that provides on an inpatient or outpatient basis testing or diagnosis, or treatment of human disease or dysfunction or dispensing of drugs or medical devices for the treatment of human disease or dysfunction, and also includes the following businesses: bioanalytical laboratory; pharmacy; home health care agency; home infusion therapy company; rehabilitation facility; nursing home; hospital; or facility which provides radiological or other diagnostic imaging services; physical therapy services; ambulatory surgery; or ophthalmic services. A “significant beneficial interest” means any “financial interest”, including an equity or ownership interest in a practice or a commercial entity holding itself out as offering health care services. A “financial interest”, in turn, means any monetary interest held by a Board licensee personally or through immediate family in a health care service to which the Board licensee’s patients are referred, other than the ownership of space leased to the entity under prevailing rates or any interest held in publicly traded securities. There are various exceptions to these prohibitions and some of the defined terms. Violations of the Codey Law could result in civil and criminal penalties and could also result in a physician’s loss of his or her license to practice medicine in New Jersey. Violations of the Codey Law could be a basis for a claim under the New Jersey False Claims Act or the FPA by a third party payor based upon the implied false certification theory.
Health Claims Authorization Processing and Payment Act. Carriers and health care providers must comply with New Jersey’s Health Claims Authorization, Processing and Payment Act (“HCAPPA”) which contains provisions relating to handling of claims, claims payment appeals, prior authorization processes, utilization management (“UM”) appeals rights and obligations, and information about clinical guidelines and claims submissions procedures. Carriers and health care providers have an obligation to meet certain requirements of the HCAPPA with respect to both claims payment and the establishment of an independent claims arbitration program to be administered through the New Jersey Department of Banking and Insurance. No assurance can be given at this time as to the impact, if any, of the provisions of the HCAPPA to the operations and financial condition of the Combined Group.
Future Federal Legislation
Future legislation, regulation, or other actions by the federal government are expected to continue the trend toward more restrictive limitations on reimbursement for health care services. Legislation has been introduced in Congress, and is now pending, which would dramatically change the way in which healthcare services are insured and paid for throughout the United States. If enacted, such legislation would very likely result in limitations on health care revenues, reimbursement and costs or charges. At present, no determination can be made concerning whether, or in what form, such legislation will be enacted into law. Similarly, the impact of future cost control programs and future regulations upon the Combined Group’s forecasted financial performance cannot be determined at this time.
Any future changes to the Medicare and Medicaid programs could result in substantial reductions in the amounts of Medicare and Medicaid payments to health care providers in the future which could substantially reduce the revenues available to the Members of the Combined Group, and any reduction in the levels of payment in these government payment programs could substantially adversely affect the Combined Group’s financial condition and ability to fulfill its obligations securing the Series 2018 Bonds.
From time to time, Congress considers the issue of organizations whose income is exempt from federal income taxation, such as the Members of the Combined Group. Such studies may result in additional requirements which the Members of the Combined Group must meet in order to maintain their tax-exempt status. One proposal which has been made concerns reporting requirements to the Internal Revenue Service (“IRS”) by tax-exempt
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hospitals about their provision of charity care. Congress can at any time impose additional requirements on tax- exempt organizations. Should Congress impose any new requirements on tax-exempt organizations, such as the Members of the Combined Group, including any requirements relating to charity care, it is not certain that (i) the Member of the Combined Group would be able to meet such requirements, or (ii) if it should meet such requirements, it would not suffer adverse economic consequences in so doing.
Certificate of Need
State law requires a health care facility, under certain circumstances, to obtain a Certificate of Need from the New Jersey Department of the Health prior to the initiation of certain new health care services, bed additions, bed reductions, or conversions, and certain transfers of ownership. The existence of Certificate of Need requirements may limit the ability of the Members of the Combined Group to initiate certain types of projects or services which might enhance their competitive position or revenue sources. Over the past several years, relaxation of Certificate of Need rules have allowed health care providers to expand certain activities without adhering to the more rigorous requirements previously imposed. One of the purposes of these changes is to increase opportunities for competition in the health care market. Although these changes may increase opportunities of the Combined Group to provide additional services, they also may increase its exposure to competition from other health care providers.
Health Care Facility Approvals/Licensure Risks
Health care facilities are subject to extensive regulation/oversight and may require approvals from State agencies, such as the Department of Health, in order to provide health care services. Such approvals include, but are not limited to, construction plan approval and amendments to health care facilities licenses.
State Children’s Health Insurance Program
The State Children’s Health Insurance Program (“SCHIP”) provides federal matching funds to states that cover a portion of the costs of health care coverage, primarily for low-income children. CMS administers SCHIP, but each state creates its own program based on minimum federal guidelines, or the state may apply for a waiver, which allows the state to create its own program using the federal funds, but often with different criteria for eligibility.
New Jersey’s SCHIP program, NJ FamilyCare, covers children in households with income levels up to 355% of FPL. Under New Jersey’s waiver program, NJ FamilyCare also covers parents and guardians with income levels up to 138% of FPL. Because of the state budget shortfall in New Jersey, eligibility requirements are subject to change. DHS submitted a comprehensive Medicaid waiver to the federal government, which was approved on July 27, 2017, and makes several eligibility, payment, and delivery reforms to NJ Family Care that may have an adverse effect upon the revenues of the Combined Group. The waiver lasts for five years, but may be extended.
While generally considered to be beneficial for both patients and providers because it reduces the number of uninsured children, it is difficult to assess the fiscal impact of SCHIP payments on the Members of the Combined Group. Moreover, each state must periodically submit its SCHIP plan to CMS for review to determine if it meets the federal requirements. If a state does not meet the federal requirements, it may lose its federal funding for its program. From time to time Congress and/or the President seek to expand or contract SCHIP. Most recently, on January 22, 2018, Congress passed a six-year extension of SCHIP, which continues the SCHIP federal matching rate of 23% established by the ACA for 2018 and 2019, but decreases the matching rate to 11.5% in 2020, and returns to the regular SCHIP matching rate for 2021 through 2023. The loss of federal approval for a state’s program or a reduction in the amounts available under SCHIP could have an adverse impact on the financial condition of the Combined Group.
Out-of-Network Legislation
Legislation is pending in New Jersey that places certain responsibilities on health care facilities to disclose to patients in writing or through website postings whether such health care facility is in-network or out-of-network
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and to advise patients to consult with arranging physicians as to whether such physician is in-network or out-of- network. Further, such legislation imposes limitations on the ability of health care facilities to bill at out-of-network rates and requires certain billing disputes to be resolved through a specified binding arbitration process. It cannot be determined at this time what final form any such legislation would take, whether it will become law, or what its impact would be on the Combined Group.
Other State Legislation
In 2008, the New Jersey State Legislature enacted several pieces of legislation adopting reforms that were aimed at improving the financial condition of New Jersey hospitals and preserving access to care for residents of New Jersey. The reforms included the creation of stabilization grants for hospitals in danger of reducing services or closing, mandating training of hospital board members on the delivery of health care services, requiring annual public meetings of hospital boards, limiting the amount that hospitals may charge low-income uninsured patients, and authorizing the New Jersey Department of Health to monitor the financial performance of hospitals and to intervene in the management of financially distressed hospitals. In February 2013, New Jersey elected a fully federally run exchange under the ACA. In 2013, New Jersey expanded coverage of its Medicaid program under the ACA. The federal government will fully fund the expansion for the first three years and after that New Jersey will become responsible for covering a percentage of the cost of the expansion, increasing each year until 2020 when it becomes responsible for covering 10% of the expanded coverage. However, future legislative action is required in order to make the Medicaid expansion permanent.
Future State Legislation
From time to time, the New Jersey State Legislature considers certain reforms aimed at containing health care costs and increasing coverage. Such reforms often include provisions to (i) provide more affordable coverage through expanded government health care programs, (ii) subsidize low-income residents to enable them to purchase health care coverage and (iii) study and implement payment system reforms. At this time, it is impossible to measure the overall financial impact that current and future legislation (if enacted) will have on the Combined Group.
Environmental Laws and Regulations
Health care systems are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. Among the types of regulatory requirements faced by health care systems and hospitals are air and water quality control requirements applicable to asbestos, polychlorinated biphenyls, and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at a health care facility; and requirements for training employees in the proper handling and management of hazardous materials and wastes.
In their role as owners and/or operators of properties or facilities, hospitals may be subject to liability for investigating and remedying any hazardous substances located on the property, including any such substances that migrate off the property. Typical health care system operations include, without limitation, the handling, use, storage, transportation, disposal and/or discharge of medical and/or other hazardous materials, wastes, pollutants or contaminants. As a result, health care system operations are particularly susceptible to the risks associated with compliance with such laws and regulations. Failure to comply may result in damage to individuals, property or the environment; may interrupt operations and/or increase their cost; may result in legal liability, damages, injunctions or fines; and may result in investigations, administrative proceedings, penalties or other government agency actions. At the present time, HMH is not aware of any pending or threatened environmental claim, investigation or enforcement action which, if determined adversely, would have material adverse consequences on the Members of the Combined Group.
Insurance Coverage Limits
The Indenture and the Master Indenture require HMH to maintain prescribed levels of professional liability and property hazard insurance and HMH is currently complying with such requirements. HMH believes that its
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present insurance coverage limits are sufficient to cover any reasonably anticipated malpractice or property hazard exposures. No assurance can be given, however, that HMH will always be able to procure or maintain such levels of insurance in the future.
The Members of the Combined Group are occasionally named as a defendant in malpractice actions and there remains a risk that individual or aggregate judgments or settlements will exceed coverage limits of the Members of the Obligated, or that some allegations or damages will not be covered by existing insurance coverages of the Members of the Combined Group. To the extent that the professional liability insurance coverage maintained by the Members of the Combined Group is inadequate to cover settlements or judgments against it, claims may have to be discharged by payments from current funds and such payments could have a material adverse impact on the Combined Group.
Medical Professional Liability Insurance Market
Underwriting results are generating substantial premium increases and coverage reductions in the medical professional liability insurance marketplace. A rise in claim severity is driving the deterioration. As a result of the market deterioration, health care providers have experienced substantial premium increases, reductions in coverage and coverage availability, more stringently enforced policy terms, and increases in required deductibles or self- insured retentions. Several regional medical professional liability insurance carriers have taken substantial charges to their surplus capital, have had their financial ratings reduced, and/or have been subject to state insurance department takeover for rehabilitation or liquidation. The effect of these developments has been to significantly increase the operating costs of hospitals. In addition, the dramatic increase in the cost of professional liability insurance in the State may have the effect of causing established physicians to leave the market and of preventing new physicians from establishing their practices in the area. There can be no assurance that the reduction in coverage availability and the rising cost of professional liability coverage will not adversely affect the operations or financial condition of the Combined Group.
Physician and Registered Nurse Recruitment
Hospitals and health systems are experiencing significant challenges to the recruitment and retention of qualified health care providers, particularly primary care providers.
The health care industry is facing a nationwide shortage of nursing professionals, including registered nurses. At the same time, enrollment in nursing programs has declined, and the skill level of those who are enrolling in nursing programs is declining as more individuals opt to enroll in non-baccalaureate programs. Additionally, the average age of the existing workforce has risen substantially over the last two decades. As a result of these factors, the health care industry is facing a severe nursing shortage. A shortage of nursing staff could result in escalating labor costs, delays in providing care, and patient care management issues, among other adverse effects. Although legislation has been introduced at both the state and federal level to mitigate the impact of the existing and projected nursing shortages, there can be no assurance that a nursing shortage will not adversely affect the operations or financial condition of the Combined Group.
Likewise, the ability of the Members of the Combined Group to generate revenues could be adversely affected should it be unable to attract and retain a sufficient number of qualified physicians, for specialties or sub- specialties needed to deliver desired services or other health care professionals.
Licensing, Surveys, Accreditations and Audits
On a regular basis, health care facilities, including those of the Members of the Combined Group, are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. Those requirements include, but are not limited to, requirements relating to Medicare and Medicaid participation and payment, state licensing agencies, private payors, The Joint Commission (a private nonprofit corporation that accredits health care programs and providers in the United States), the National Labor Relations Board and other federal, state and local government agencies. Renewal and continuance of certain of these licenses, certifications and accreditations is based on inspections, surveys, audits, investigations or other reviews, some of
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which may require or include affirmative action or response by the Members of the Combined Group. These activities are generally conducted in the normal course of business of health care facilities. Nevertheless, an adverse result could be the cause of loss or reduction in a facility’s scope of licensure, certification or accreditation, third party payor contracts or reduction in payments received. HMH currently expects no difficulty in renewing or maintaining currently held licenses, certifications or accreditations that are material to its operations. There can be no assurance that the requirements of present or future laws, regulations, certifications, licenses or third party payor contracts will not materially and adversely affect the future operations of the Combined Group.
The IRS and State, county and local taxing authorities audit and investigate hospital operations to confirm that such organizations are in compliance with applicable tax rules and regulations. These audits may result in disputes about issues ranging from sales tax collections to qualifications of a hospital’s exemption from property or income taxation. The IRS undertakes audits and reviews of the operations of tax-exempt hospitals with respect to such matters as their generation of unrelated business taxable income or relating to inurement of or under private benefit to non-501(c)(3) entities, proper classification of workers as employees, and joint ventures. In some cases, the tax-exempt status of hospitals has been questioned as a result of activities deemed to violate the tax laws or other statutes. In addition, the OIG also undertakes audits and reviews of Medicare billing practices and other regulatory matters. In some cases, hospitals have incurred substantial liabilities including interest and penalties as a result of the findings or settlement of such audits.
Maintenance of 501(c)(3) Status
HMH has been determined to be a tax-exempt organization described in Section 501(c)(3) of the Code. Maintaining that status is contingent upon compliance with general rules promulgated in the Code and related regulations regarding the organization and operation of tax-exempt entities, including their operation for charitable and educational purposes and their avoidance of transactions that would cause their assets to inure to the benefit of private persons. The IRS has indicated that it intends to issue “compliance checks” relating to post-issuance compliance of tax-exempt bonds issued for exempt organizations.
As a tax-exempt organization, HMH is limited in its use of practice income, guarantees, reduced rent on medical office space, below-market rate interest loans, joint venture programs and other means of recruiting and maintaining physicians. The IRS scrutinizes a broad variety of contractual relationships commonly entered into by hospitals and affiliated entities and has issued detailed hospital audit guidelines suggesting that field agents scrutinize numerous activities of hospitals in an effort to determine whether any action should be taken with respect to limitations on, or revocation of, their tax-exempt status or assessment of additional tax. HMH conducts diverse operations involving private parties and has entered into arrangements, directly or through affiliates, that are of the kind that the IRS has indicated that it will examine in connection with audits of tax-exempt hospitals. Therefore, there can be no assurances that certain of its transactions would not be challenged by the IRS.
The IRS has issued limited guidance that addresses joint ventures and other common arrangements between exempt health care organizations and non-exempt individuals or entities. HMH believes that its arrangements with private persons and entities are generally consistent with guidance by the IRS, but there can be no assurance concerning the outcome of an audit or other investigation given the limited authority interpreting the range of activities undertaken by HMH.
The IRS has taken the position that hospitals that are in violation of the Anti-Kickback Law may also be subject to revocation of their federal tax-exempt status. As a result, tax-exempt entities such as HMH that have, and will continue to have, extensive transactions with physicians are subject to an increased degree of scrutiny and perhaps enforcement by the IRS.
Although HMH has covenanted to maintain its status as a tax-exempt organization, loss of tax-exempt status would likely have a significant adverse effect on any such organization and its operations. Any suspension, limitation or revocation of the tax-exempt status of HMH or assessment of significant tax liability could have a material adverse effect on HMH.
It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to taxation of exempt organizations. Since such actions and proposals have been made, they have been vigorously
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challenged and contested. There can be, however, no assurance that future changes in the laws and regulations of the federal, state or local governments will not materially and adversely affect the operations and revenues of HMH by requiring it to pay income or real estate taxes.
There have also been numerous Congressional hearings in the past several years held by the House Ways and Means Committee, the Senate Finance Committee and other committees investigating various activities and practices of tax-exempt and other health care organizations, including hospital pricing systems, hospital billing and collection practices, unaudited business income and prices charged to uninsured patients. It cannot be determined at this time whether any legislation will be enacted in response to congressional hearings and investigations and, if so, what form any such legislation would take and what its impact would be on HMH.
Other legislative changes or judicial actions with respect to matters relating to the tax-exempt status of nonprofit corporations, including the provision of free care to the indigent and the exemption from property taxes of such corporations, could be enacted. There can be no assurance that the future changes in federal, state or local laws, rules, regulations and policies governing tax-exempt entities will not have adverse effects on the future operations of HMH.
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 or services that generate a significant source of revenue may be particularly damaging. For example, some large hospitals may have significant dependence on heart surgery or orthopedic programs, as revenue streams from those programs may cover significant fixed overhead costs. If a significant number of such a hospital's heart surgeons or orthopedists were to 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 hospital, 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 have a material adverse effect on the operations, results of operations and financial condition of the hospital.
Freestanding ambulatory surgery centers may attract significant commercial outpatient services traditionally performed at hospitals. Commercial outpatient services, currently among the most profitable for hospitals, may be lost to competitors that 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 that business may result in reduced income. Competing ambulatory surgery centers, which are often for-profit businesses, may not accept indigent patients or low paying programs and would leave these populations to receive services in the full-service, nonprofit hospital setting. Consequently, hospitals are vulnerable to competition from ambulatory surgery centers.
Additionally, scientific and technological advances, new procedures, drugs and applications, preventive medicine and outpatient health care delivery may reduce utilization and revenues of hospitals in the future or otherwise lead the way 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. The growth of e-commerce also may result in a shift in the way that health care is delivered, i.e. from remote locations. For example, physicians will be able to provide certain services over the internet and pharmaceuticals and other health services may now be purchased online. Additionally, other service providers in competition with the Members of the Combined Group may compete through these same electronic mediums by advertising their services and providing easy registration for competing services over the internet.
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Real Estate Tax Exemptions for Nonprofit Corporations
The real property tax exemptions afforded to certain nonprofit health care providers by various state and local taxing authorities have been challenged on the theory that the health care providers were not sufficiently engaged in charitable activities. These challenges have been based on a variety of grounds, including allegations of aggressive billing and collection practices and excessive financial margins.
Until recently, states have not been as active as the IRS in scrutinizing the income tax exemption of health care organizations. Legislation that would result in further regulation and supervision of nonprofit corporations generally is introduced from time to time in state legislatures. The loss by certain Members of the Combined Group of federal tax exemption could very well trigger a challenge to its state or local tax exemption. Depending on the circumstances, such a challenge, if successful, could be material and adverse.
State 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 amount of services provided to the indigent, or where space is used by private individuals or for-profit entities, the real property tax-exempt status of the health care providers has been questioned. The majority of the real property of the Members of the Combined Group is currently treated as exempt from state and local real property taxation.
In June 2015 the Tax Court of New Jersey ruled in favor of the Town of Morristown in a lawsuit filed against the Town by Atlantic Health System Hospital Corp., the parent of Morristown Medical Center, in upholding the Town’s denial of property tax exemptions for Morristown Medical Center for the years 2006 through 2008 on the basis that Morristown Medical Center had conducted and operated its for-profit and not-for-profit activities in such an integrated and entangled manner such that its overall operations were essentially that of a for-profit corporation. The Tax Court’s ruling was limited solely to the exemption from property taxes under State law. The amount of property tax to be paid by Morristown Medical Center following the ruling of the Tax Court was not determined and the case was settled by the parties. Since the issuance of the Tax Court’s decision in the Morristown case, several New Jersey municipalities have filed suit against tax-exempt hospitals located within their borders seeking to impose real estate taxes on the hospitals. In the wake of the ruling, municipal tax authorities throughout the State have served non-profit hospitals with property tax assessments, including several of HMH’s affiliated hospitals. In January of 2016, the New Jersey Legislature approved legislation which would have amended the tax exemption statute and would have required all hospitals in New Jersey to make community service contributions to their host municipality. The law was pocket vetoed by New Jersey Governor Christie, who has suggested a two- year freeze on property tax collections by municipalities from hospitals while the issue undergoes further study. This proposal is currently being evaluated by the New Jersey legislation.
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 the State or local government will not materially adversely affect the consolidated financial condition of the Combined Group by requiring payment of income, property or other taxes. See Appendix A – “INFORMATION CONCERNING HACKENSACK MERIDIAN HEALTH – MISCELLANEOUS - Litigation” for further discussion.
Community Benefit Initiatives
The IRS has also undertaken a community benefit initiative directed at hospitals. The IRS Hospital Compliance Project Final Report issued in 2009 determined that the reporting of community benefit by nonprofit hospitals varied widely, both as to types of programs and expenditures classified as community benefit and the measurement of community benefits. As a result, the IRS issued revised Form 990 that includes Schedule H, effective for tax years beginning after March 23, 2010, which is designed to provide uniformity regarding types of programs and expenditures reported as community benefits by nonprofit hospitals. As the IRS collects and reviews information from hospitals about the levels and types of community benefit provided, the IRS may issue a more stringent interpretation of community benefit. Findings from Schedule H reports may also revive proposals in Congressional committees which, from time to time, have been made 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. Additionally, the ACA contains new requirements for nonprofit hospitals in order to maintain
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their tax-exempt status, which includes a requirement to conduct a periodic community health needs assessment (“CHNA”), among other requirements.
Intermediate Sanctions
The Code Section 4958 (“Intermediate Sanctions”) imposes penalty excise taxes in cases where an exempt organization is found to have engaged in an “excess benefit transaction” with a “disqualified person.” Such penalty excise taxes may be imposed in lieu of revocation of exemption or in addition to such revocation in cases where the magnitude or nature of the excess benefit calls into question whether the organization has continued to function as a charity. The tax is imposed on the disqualified person receiving the excess benefit. An additional tax may be imposed on any officer, director, trustee or other person having similar powers or responsibilities who knowingly participated in the transaction willfully or without reasonable cause.
“Excess benefit transactions” include transactions in which a disqualified person receives unreasonable compensation for services or receives other economic benefit from the organization that exceeds fair market value. “Disqualified persons” include “insiders” such as board members and officers, senior management, and members of the medical staff, who in each case are in a position to substantially influence the affairs of the organization; their family members; and entities which are more than 35% controlled by a disqualified person. The legislative history sets forth Congress’ intent that compensation of disqualified persons shall be presumed to be reasonable if it is: (1) approved by disinterested members of the organization’s board or compensation committee; (2) based upon data regarding comparable compensation arrangements paid by similarly situated organizations; and (3) adequately documented by the board or committee as to the basis for its determination. A presumption of reasonableness will also arise with respect to transfers of property between the exempt organization and disqualified persons if a similar procedure with approval by an independent board is followed.
Intermediate Sanction penalties can also be assessed in situations where the exempt organization, or an entity controlled by the organization, provides an economic benefit to a disqualified person without maintaining contemporaneous written substantiation of the organization’s intent to treat the benefit as compensation. If the written contemporaneous substantiation requirements are not satisfied and unless the organization can establish that it provided the economic benefit in exchange for consideration other than the performance of services (i.e., a bona fide loan), the IRS shall deem such transactions as an “automatic” excess benefit transaction without regard to whether: (1) the economic benefit is reasonable; (2) any other compensation the disqualified person may have received is reasonable; or (3) the aggregate of the economic benefit and any other compensation the disqualified person may have received is reasonable. There is no defense to the assessment of automatic excess benefit penalties.
The imposition of a penalty excise tax in lieu of revocation based upon a finding that an exempt organization engaged in an excess benefit transaction is likely to result in negative publicity and other consequences that could have a material adverse effect on the operations, property, or assets of the organization.
Bond Audits
IRS officials have recently indicated that more resources will be invested in audits of tax-exempt bonds in the charitable organization sector, with specific review of private use. In addition, the IRS has sent several hundred post-issuance compliance questionnaires to nonprofit corporations that have borrowed on a tax-exempt basis regarding their post-issuance compliance with various requirements for maintaining the federal tax exemption of interest on their bonds. The questionnaire includes questions relating to the borrower’s (i) record retention, which the IRS has particularly emphasized, (ii) qualified use of bond-financed property, (iii) arbitrage yield restriction and rebate requirements, (iv) debt management policies and (v) voluntary compliance and education. IRS representatives indicate that after analyzing responses from the first wave of questionnaires, thousands more will be sent.
The IRS has also added a new schedule (Schedule K) to IRS Form 990. This schedule requests detailed information related to all outstanding bond issues of nonprofit borrowers, including information regarding operating, management and research contracts as well as private use compliance.
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Secondary Market
There can be no assurance that there will be a secondary market for the purchase or sale of the Series 2018 Bonds. From time to time there may be no market for the Series 2018 Bonds depending upon prevailing market conditions, including the financial condition or market position of firms that may make the secondary market, the evaluation of the capabilities of the Members of the Combined Group, and the financial condition and results of operations of the Members of the Combined Group.
Affiliation, Merger, Acquisition and Divestiture
HMH evaluates and pursues potential acquisition, merger and affiliation candidates as part of the overall strategic planning and development process. As part of its ongoing planning and property management functions, HMH reviews the use, compatibility and business viability of many of the operations of its system, and from time to may pursue changes in the use of, or disposition of, the facilities. Likewise, HMH occasionally receives offers from, or conducts discussions with, third parties about the potential acquisition of operations or properties which may become subsidiaries or affiliates of HMH in the future, or about the potential sale of some of the operations and properties which are currently conducted or owned by the members of the system. Discussions with respect to affiliation, merger, acquisition, disposition, or change of use of facilities are held from time to time with other parties. These may be conducted with acute care hospital facilities and may relate to potential affiliation. As a result, it is possible that the current organization and assets of the Combined Group may change from time to time.
Mergers, such as the integration of JFK, carry certain inherent risks, including, but not limited to, risk that all merged entities will not perform in accordance with management’s expectations, risk of potential difficulties arising in connection with the integration of operations and risk of human resource challenges potentially jeopardizing key staff retention. There can be no assurance that the Members of the Combined Group will be successful in their ability to minimize and effectively manage such risks.
General Economic Factors
Credit Facilities. The Combined Group has and will continue to carry variable rate indebtedness in the future which may be secured by liquidity and/or credit facilities. Future credit conditions may impact the ability of the Combined Group to extend or replace the liquidity and credit facilities securing such variable rate indebtedness.
Investments. The Combined Group has significant holdings in a broad range of investments. Market fluctuations may affect the value of those investments and those fluctuations historically have been at times material.
Pension Funding Impact. Changes in market interest rates and debt and equity market fluctuations also potentially could have an impact on the Combined Group’s pension fund liabilities and its requirements for funding its related pension. Like any other entity with pension fund liabilities, the Combined Group finds that increases or decreases in interest rates have an impact on the assumed earnings rates on pension assets needed to match pension fund liabilities, which accordingly affects the levels of actuarial pension investment assets required to meet future pension obligations. Consequently, any substantial and sustained decline in long-term interest rates could have the effect of increasing the current pension funding requirements of the Members of the Combined Group. In addition, the Pension Protection Act of 2006 (the “PPA”) has accelerated the minimum funding requirements for many defined benefit pension plans. This change, together with new rules for measuring pension plan assets and liabilities, including new actuarial assumptions and asset valuation rules included in the PPA, has generally increased employers’ required minimum funding contributions to pension plans.
Potential Effects of Bankruptcy
If a Member of the Combined Group were to file a petition for relief under the federal Bankruptcy Code, the filing would act as an automatic stay against the commencement or continuation of judicial or other proceedings against the petitioner and its property.
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Any petitioner for relief may file a plan for the adjustment of its debts in a proceeding under the federal Bankruptcy Code which could include provisions modifying or altering the rights of creditors generally, or any class of them, secured or unsecured. The plan, when confirmed by the court, would bind all creditors who had notice or knowledge of the plan and discharge all claims against the petitioner provided for in the plan. No plan may be confirmed unless certain conditions are met, including that the plan is in the best interests of creditors, is feasible and has been accepted by each class of claims impaired thereunder. Each class of claims will be deemed to have accepted the plan if at least two-thirds in dollar amount and more than one-half in number of the allowed claims of the class that are voted with respect to the plan are cast in its favor. Even if the plan is not so accepted, it may be confirmed if the court finds that the plan is fair and equitable with respect to each class of non-accepting creditors impaired thereunder and does not discriminate unfairly.
Enforceability of Obligations Under the United States Bankruptcy Code and Under Fraudulent Conveyance Laws
The rights and remedies of Bondholders are subject to various provisions of the Federal Bankruptcy Code. A filing under the United States Bankruptcy Code would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against the Combined Group or any future member of the Combined Group, and its property, and as an automatic stay of any act or proceeding to enforce a lien upon its property.
The Combined Group may file a plan for the adjustment of its debts in any such proceeding which could include provisions modifying or altering the rights of creditors generally, or any class of them, secured or unsecured. The plan, when confirmed by the court, binds all creditors who had notice or knowledge of the plan and discharges all claims against the debtor provided for in the plan. No plan may be confirmed unless certain conditions are met, among which are that the plan is in the best interests of creditors, is feasible and has been accepted by each class of claims impaired thereunder. Each class of claims has accepted the plan if at least two-thirds in dollar amount and more than one-half in number of the allowed claims of the class that are voted with respect to the plan are cast in its favor. Even if the plan is not so accepted, it may be confirmed if the court finds that the plan is fair and equitable with respect to each class of non-accepting creditors impaired thereunder and does not discriminate unfairly.
The Combined Group is liable for all obligations issued pursuant to the Master Indenture. The enforcement of such liability may be limited to the extent that any payment or transfer by the Members of the Combined Group would render them insolvent or would conflict with, not be permitted by, or be subject to recovery for the benefit of other creditors, under applicable state or federal laws.
Certain Matters Relating to the Enforceability of the Master Indenture
The accounts of the Members of the Combined Group and any future Members of the Combined Group will be combined for financial reporting purposes and will be used in determining whether various covenants and tests contained in the Master Indenture (including tests relating to the issuance of additional Indebtedness) are met. This is the case notwithstanding uncertainties as to the enforceability of the joint and several obligations of the Members of the Obligated Group to make payments on the obligations issued under the Master Indenture, including, without limitation, the Series 2018 Note issued to evidence and secure the obligations of HMH pursuant to the Indenture, which uncertainties bear on the availability of the assets of the Members of the Obligated Group for such payments.
Counsel to HMH will give an opinion or opinions concurrently with the delivery of the Series 2018 Bonds that the Indenture and the obligations of HMH thereunder are enforceable against HMH in accordance with its terms, and that the Master Indenture and the Obligations issued thereunder, including the Series 2018 Note, are enforceable against HMH in accordance with their terms. Such opinion will be qualified as to the enforceability of the provisions of the Indenture, the Master Indenture and the Obligations by limitations imposed by state and federal laws, rulings and decisions relating to equitable remedies regardless of whether enforceability is sought in a proceeding at law or in equity, fraudulent conveyances and fraudulent transfers, the ability of one charitable corporation to pledge its assets to secure the debt of another, and bankruptcy, reorganization, insolvency, receivership or other similar laws affecting the rights of creditors generally from time to time in effect or by equitable principles, or as otherwise limited by state and federal laws prohibiting, limiting or restricting any liens on Gross Revenues derived from the Medicare or Medicaid programs or other federal healthcare programs, the ability
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of a charitable corporation to pledge its assets to secure the debt of another, the use or pledge of any assets subject to a direct, express or charitable trust or any restrictions under state and federal privacy laws.
A Member of the Obligated Group may not be required to make a payment or use its assets to make a payment in order to provide for the payment under the Indenture or the Series 2018 Note, or a portion thereof, the proceeds of which were not lent or otherwise disbursed to such member, to the extent that such payment or use would render the Member insolvent or which would conflict with, not be permitted by or which is subject to recovery for the benefit of other creditors of such Member under applicable law. There is no clear precedent in the law as to whether such payments or use of assets by a Member of the Obligated Group may be voided by a trustee in bankruptcy in the event of a bankruptcy of such member or by third party creditors in an action brought pursuant to state fraudulent conveyances statutes. Under the United States Bankruptcy Code, a trustee in bankruptcy and, under state fraudulent conveyances statutes, a creditor of a related guarantor, may avoid any obligation incurred by a related guarantor if, among other bases therefor, (i) the guarantor has not received fair consideration or reasonably equivalent value in exchange for the guaranty and (ii) the guaranty renders the guarantor insolvent, as defined in the United States Bankruptcy Code or state fraudulent conveyances statutes, or the guarantor is undercapitalized.
Application by courts of the tests of “insolvency,” “reasonably equivalent value” and “fair consideration” has resulted in a conflicting body of case law. It is possible that, in an action to force a Member of the Obligated Group to make a payment under the Indenture or on the Series 2018 Note for which it was not a direct beneficiary, a court might not enforce such a payment in the event it is determined that the Member of the Obligated Group against which payment is sought is analogous to a guarantor of the debt of the Member of the Obligated Group who benefited from the borrowing and that sufficient consideration for the Member’s obligation was not received or that the incurrence of such obligation has rendered or will render the Member insolvent.
In addition, there exists common law authority and authority under state statutes for the ability of the state courts to terminate the existence of a nonprofit corporation or undertake supervision of its affairs on various grounds, including a finding that such corporation has insufficient assets to carry out its stated charitable purposes or has taken some action which renders it unable to carry out such purposes. Such court action may arise on the court’s own motion or pursuant to a petition of the state attorney general or such other persons who have interests different from those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to see to the application of their funds to their intended charitable uses.
Enforceability of Lien on Gross Revenues
The Series 2018 Note provides that HMH shall make payments sufficient to pay the principal of the Series 2018 Bonds and the interest thereon as the same become due. The obligation of HMH to make such payments is secured in part by a lien granted by the Combined Group on Gross Revenues as provided in the Master Indenture. Such lien is on a parity with the lien on Gross Revenues securing all other Obligations that may be issued in the future, as well as other Obligations that may be issued pursuant to the Master Indenture, including Guarantees.
Gross Revenues is defined to include all revenues, rents, profits, receipts, benefits, royalties, and income of any Member of the Combined Group arising from goods or services provided by Members of the Combined Group or arising in any manner with respect to, incident to or on account of the Members of the Combined Group’s operations, including, without limitation, (i) the Members of the Combined Group’s rights under agreements with insurance companies, Medicare, Medicaid, governmental units and prepaid health organizations, including health care insurance receivables and rights to Medicare and Medicaid loss recapture under applicable regulations to the extent not prohibited by applicable law, rules or regulations; (ii) gifts, grants, bequests, donations, contributions and pledges to any Member of the Combined Group; (iii) insurance proceeds of any kind, and any award, or payment in lieu of an award, resulting from condemnation proceedings; (iv) all proceeds from the sale or other transfer of any goods, inventory and other tangible and intangible property, and all rights to receive the foregoing, whether now owned or hereafter acquired by any Member of the Combined Group and regardless of whether generated in the form of Accounts, accounts receivable, Contract Rights, Chattel Paper, Documents, General Intangibles, Instruments, Investment Property, and proceeds of insurance; and (v) all proceeds of the foregoing; excluding, however, gifts, grants, bequests, donations, contributions and pledges to any Member of the Combined Group heretofore or hereafter made, and the income and gains derived therefrom, which are specifically restricted by the
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donor or grantor to a particular purpose which is inconsistent with its use for payments required under the Master Indenture or on any Obligations or Indebtedness.
To the extent that Gross Revenues are derived from payments by the federal government under the Medicare or Medicaid program, any right to receive such payments directly may be unenforceable. The Social Security Act and state regulations prohibit anyone other than the individual receiving care of the Combined Group member providing service from collecting Medicare and Medicaid payments directly from the federal or state government. In addition, Medicare and Medicaid receivables may be subject to provisions of the Assignment of Claims Act of 1940 which restricts the ability of a secured party to collect accounts directly from government agencies. With respect to receivables and revenues not subject to the lien, or where such lien was unenforceable, the Master Trustee would occupy the position of an unsecured creditor. Counsel to the Combined Group has not provided an opinion with regard to the enforceability of the lien on Gross Revenues of the Combined Group, where such Gross Revenues are derived from the Medicare and Medicaid programs.
In the event of bankruptcy of a Member of the Combined Group, transfers of property made by such Member at a time that it was insolvent in payment of or to secure an antecedent debt, including the payment of debt or the transfer of any collateral, including receivables and Gross Revenues on or after the date which is 90 days (or, in some circumstances, one year) prior to the commencement of the case under the Bankruptcy Code, may be subject to avoidance as preferential transfers. Under certain circumstances a court may have the power to direct the use of Gross Revenues to meet expenses of such member before paying debt service on the Series 2018 Note that secures the Series 2018 Bonds.
The value of the security interest in the Gross Revenues could be diluted by the incurrence pursuant to the Master Indenture of Additional Indebtedness secured equally and ratably with (or in certain cases senior or subordinate to) the Series 2018 Note that secures the Series 2018 Bonds as to the security interest in the Gross Revenues. See Appendix C – “FORMS OF THE TRUST INDENTURE AND THE MASTER INDENTURE – FORM OF THE MASTER INDENTURE.
Matters Relating to Security
The remedies available to the Trustee or the registered owners of the Series 2018 Bonds upon an event of default under the Indenture are in many respects dependent upon judicial actions which are often subject to discretion and delay. Under existing constitutional and statutory law and judicial decisions, including, specifically, the United States Bankruptcy Code, the remedies provided in the Indenture may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the Series 2018 Bonds and the delivery of the Indenture will be qualified as to the enforceability of the various legal instruments by limitations imposed by general principles of equity and by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally. The enforceability of the Indenture and the Series 2018 Bonds is subject to bankruptcy, insolvency, fraudulent conveyance, moratorium, reorganization and other state and federal laws affecting the enforcement of creditors’ rights and to general principles of equity. A claim for payment of the principal of or interest on the Series 2018 Bonds could be made subject to any statutes that may be constitutionally enacted by the United States Congress or the state legislatures affecting the time and manner of payment of debt or imposing other constraints upon enforcement of debt obligations.
Certain amendments to the Indenture may be made with the consent of the owners of a majority of the aggregate principal amount of the Series 2018 Bonds then Outstanding. Such amendments may adversely affect the security of the Bondholders, and such majorities of owners may be composed wholly or partially of the owners of Additional Bonds. In addition, upon compliance with certain conditions set forth in the Master Indenture, amendments to certain of the operational, procedural or financial covenants set forth in the Master Indenture may be effected without consent of the holders of Obligations, including the Bondholders. Such amendments may adversely affect the security for the Series 2018 Note that secures the Series 2018 Bonds.
The enforceability of the obligations of the members of the Combined Group to make payments on the Series 2018 Note is subject to certain limitations including (i) state and federal bankruptcy laws relating to fraudulent conveyances if, among other things, a member of the Combined Group is determined not to have received fair consideration or reasonably equivalent value for its obligation to make such payment and is rendered insolvent
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as a result of such obligation; (ii) restrictions on the use of assets subject to a direct, express or charitable trust; (iii) corporate or related purposes of the Member of the Combined Group which are inconsistent with the corporate or related purposes for the issuance of the Series 2018 Note; (iv) requests for payments from a Member of the Combined Group which would result in the cessation or discontinuance of any material portion of the health care or related services previously provided; and (v) applicable usury laws.
Derivative Products
The Members of the Combined Group use, and may continue to use, interest rate hedging arrangements in connection with certain Obligations (as defined in the Master Indenture). Such arrangements may be used to manage exposure to interest rate volatility, but may expose the Members of the Combined Group to additional risks, including the risk that a counterparty may fail to honor its obligation.
Swap agreements are subject to periodic “mark-to-market” valuations. A swap agreement may, at any time, have a positive or negative value to the Members of the Combined Group, such value, if negative could result in the Combined Group posting collateral related to such mark-to-market valuations. If the Members of the Combined Group were to choose to terminate a swap agreement or if a swap agreement were terminated pursuant to an event of default or a termination event as described in the swap agreement, the Members of the Combined Group could be required to pay a termination payment to the swap provider, and such payment could adversely affect the Members of the Combined Group’s financial condition.
Risks Related to Variable Rate or Private Placement Indebtedness
HMH, like many tax-exempt health care entities, has historically incurred variable rate indebtedness. Generally, the interest cost of variable rate indebtedness is lower than for fixed rate debt of a comparable maturity. In order for variable rate indebtedness to have the desired result of lower borrowing costs, the variable rate indebtedness commonly requires credit enhancement such as bond insurance or a bank letter of credit. Any such indebtedness therefore will bear interest at rates that are directly related to the ratings accorded to, and to investor perceptions of, the financial strength of the applicable provider of credit enhancement. In addition, HMH, like many tax-exempt health care entities, have incurred indebtedness purchased by private placement purchasers in non-public transactions. Such indebtedness generally bears interest at an initial rate and is subject to mandatory tender at the end of the initial holder’s purchase period. Similar to the failure to extend or replace a credit facility, the failure to remarket private placement bonds could result in such obligations bearing interest at a penalty rate or default rate, increasing the debt service obligation of HMH.
The applicable providers of credit enhancement and the purchasers of private placement bonds often are the beneficiaries of covenants in addition to those set forth in the Master Indenture. Bondholders may not be informed of the terms of such covenants and these additional covenants could restrict the ability of the Members of the Combined Group to enter into certain transactions and the violation of such covenants could result in an event of default under the applicable additional agreement which may result in a default under the Master Indenture.
General Factors Affecting the Combined Group’s Revenues
The following factors, among others, may unfavorably affect the operations of health care facilities, including those of the Combined Group, to an extent and in a manner that cannot be determined at this time:
1. Employee strikes and other adverse actions that could result in a substantial reduction in revenues with corresponding decreases in costs. Hospitals and their employees fall within the scope of, and are subject to, the National Labor Relations Act. Accordingly, labor relationships with hospital and nursing home employees are regulated by the federal government. Employees may organize, bargain collectively and strike.
2. Reduced need for hospitalization or other services arising from future medical and scientific advances.
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3. Reduced demand for the services that might result from decreases in population of the service area of the Combined Group.
4. Increased unemployment or other adverse economic conditions in the service area of the Combined Group which could increase the proportion of patients who are unable to pay fully for the cost of their care. In addition, increased unemployment caused by a general downturn in the economy of the Combined Group’s service area or the State of New Jersey or by the closing of one or more major employers in such service area may result in a loss of health insurance benefits for a portion of the Combined Group’s patients.
5. Cost, availability and sufficiency of any insurance such as medical professional liability, directors’ and officers’ liability, property, automobile liability, and commercial general liability coverages that health care facilities of a similar size and type generally carry.
6. Adoption of legislation that would establish a national healthcare program.
7. Adoption of legislation limiting the ability of hospitals and other healthcare providers from charging out-of-network rates for healthcare services.
8. Cost and availability of energy.
9. Potential depletion of the Medicare trust fund.
10. The occurrence of terrorist activities or natural disasters, including floods and earthquakes, may damage the facilities of the Combined Group, interrupt utility service to the facilities, or otherwise impair the operation of the Combined Group and the generation of revenues from its facilities. The facilities of the Members of the Combined Group are covered by general property insurance in an amount which management considers to be sufficient to provide for the replacement of such facilities in the event of a natural disaster.
11. Any increase in the quantity of indigent care provided which is mandated by law or required due to increased need of the community in order to maintain the charitable status of the Members of the Combined Group.
12. Factors such as: (i) the cost and availability of insurance, such as workers’ compensation, fire and general comprehensive liability; (ii) uninsured acts of God; and (iii) increased costs and possible liability exposure arising out of potential environmental hazards.
13. Technological advances in recent years have accelerated the trend toward the use of sophisticated diagnostic and treatment equipment in hospitals. The availability of certain equipment may be a significant factor in hospital utilization, but purchase of such equipment may be subject to health planning agency approval and to the ability of the Combined Group to finance such purchases.
14. Imposition of wage and price controls for the health care industry or an increase in the minimum wage.
15. Developments adversely affecting the federal or state tax-exemption of municipal bonds.
16. Acts of terrorism.
17. Changes in accounting rules which could result in the reclassification of assets and transactions which are subject to the terms of the Master Indenture.
18. Changes in the governmental requirements concerning how patients are treated. These regulations are embodied in patients’ bills of rights and similar programs being promulgated with greater frequency, and changes in licensure requirements. All of these programs can increase the cost of doing business and consequently adversely affect the financial condition of the Combined Group.
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Additional Members of the Obligated Group or Combined Group
In the future, additional entities may become members of the Obligated Group pursuant to the terms and provisions of the Master Indenture. Thereupon, the Bondholders’ risks discussed above may be relevant to such new members of the Obligated Group, if any. In addition, HMH or Combined Group Agent may appoint additional Designated Affiliates under the Master Indenture. Any such entities would be members of the Combined Group and would be subject to the risks described herein.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
Interest on the Series 2018 Bonds (i) is included in gross income for Federal income tax purposes under the Code and (ii) is not excluded from New Jersey taxable income.
The following discussion is a brief summary of the principal United States Federal income tax consequences of the acquisition, ownership and disposition of Series 2018 Bonds by original purchasers of the Series 2018 Bonds who are “U.S. Holders,” as defined herein. This summary (i) is based on the Code, United States Treasury regulations, revenue rulings and court decisions, all as presently in effect and all subject to change at any time, possibly with retroactive effect; (ii) assumes that the Series 2018 Bonds will be held as “capital assets” under the Code, and (iii) does not discuss all of the United States Federal income tax consequences that may be relevant to a holder of the Series 2018 Bonds of the in light of its particular circumstances or to holders of the Series 2018 Bonds subject to special rules, such as insurance companies, financial institutions, tax-exempt organizations, dealers in securities or foreign currencies, persons holding the Series 2018 Bonds as a position in a “hedge” or “straddle,” holders whose functional currency (as defined in Section 985 of the Code) is not the United States dollar, holders who acquire Series 2018 Bonds in the secondary market, or individuals, estates and trusts subject to the tax on unearned income imposed by Section 1411 of the Code. Each prospective purchaser of Series 2018 Bonds should consult with their own tax advisors concerning the United States Federal income tax and other tax consequences with respect to the acquisition, ownership and disposition of the Series 2018 Bonds as well as any tax consequences that may arise under the laws of any state, local or foreign tax jurisdiction.
As used herein, the term “U.S. Holder” means a beneficial owner of a Bond that is for United States Federal income tax purposes (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, (iii) an estate the income of which is subject to United States Federal income taxation regardless of its source or (iv) a trust whose administration is subject to the primary jurisdiction of a United States court and which has one or more United States fiduciaries who have the authority to control all substantial decisions of the trust.
Original Issue Discount
In general, if Original Issue Discount (“OID”) is greater than a statutorily defined de minimis amount, a Holder of a Series 2018 Bond must include in Federal gross income (for each day of the taxable year, or portion of the taxable year, in which such Holder holds such Series 2018 Bond) the daily portion of OID, as it accrues (generally on a constant yield method) and regardless of the Holder’s method of accounting. “OID” is the excess of (i) the “stated redemption price at maturity” over (ii) the “issue price.” For purposes of the foregoing: “issue price” means the first price at which a substantial amount of the Series 2018 Bond is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriter, placement agents or wholesalers); “stated redemption price at maturity” means the sum of all payments, other than “qualified stated interest,” provided by such Series 2018 Bond; “qualified stated interest” is stated interest that is unconditionally payable in cash or property (other than debt instruments of the Issuer) at least annually at a single fixed rate; and “de minimis amount” is an amount equal to 0.25 percent of the Series 2018 Bond’s stated redemption price at maturity multiplied by the number of complete years to its maturity. A Holder may irrevocably elect to include in gross income all interest that accrues on a Series 2018 Bond using the constant yield method, subject to certain modifications.
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Recognition of Income
Under the recently enacted Federal tax law that is effective for tax years beginning after December 31, 2017 (or, in the case of original issue discount, for tax years beginning after December 31, 2018), certain taxpayers that are required to prepare certified financial statements or file financial statements with certain regulatory or governmental agencies may be required to recognize income, gain and loss with respect to the Series 2018 Bonds at the time that such income, gain or loss is recognized on such financial statements instead of under the rules described in other portions of in this Offering Memorandum. Prospective purchasers of the 2018 Series Bonds should consult their own tax advisors regarding the potential applicability of this rule and its impact on the timing of recognition of income related to the 2018 Series Bond under the Code.
Disposition and Defeasance
Generally, upon the sale, exchange, redemption, or other disposition (which would include a legal defeasance) of a Series 2018 Bond, a Holder generally will recognize taxable gain or loss in an amount equal to the difference between the amount realized (other than amounts attributable to accrued interest not previously includable in income) and such Holder’s adjusted tax basis in the Series 2018 Bond. A U.S. Holder’s adjusted tax basis in a Series 2018 Bond generally will equal such U.S. Holder’s initial investment in the Series 2018 Bond, decreased by the amount of any payments, other than qualified stated interest payments, received. Such gain or loss generally will be long-term capital gain or loss if the Series 2018 Bonds were held for more than one year.
The Obligated Group may cause the deposit of moneys or securities in escrow in such amount and manner as to cause the Series 2018 Bonds to be deemed to be no longer outstanding under the Indenture (a “defeasance”). See Appendix C – “FORMS OF THE TRUST INDENTURE AND THE MASTER INDENTURE – FORM OF THE TRUST INDENTURE.” For Federal income tax purposes, such defeasance could result in a deemed exchange under Section 1001 of the Code and a recognition by such owner of taxable income or loss, without any corresponding receipt of moneys. In addition, the character and timing of receipt of payments on the Series 2018 Bonds subsequent to any such defeasance could also be affected.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to non-corporate U.S. Holders with respect to payments of principal, payments of interest, and the accrual of OID on a Series 2018 Bond and the proceeds of the sale of a Series 2018 Bond before maturity within the United States. Backup withholding at a rate equal to the fourth lowest rate of tax under Section 1(c) of the Code will apply to such payments unless the U.S. Holder (i) is a corporation or other exempt recipient and, when required, demonstrates that fact, or (ii) provides a correct taxpayer identification number, certifies under penalties of perjury, when required, that such U.S. Holder is not subject to backup withholding and has not been notified by the Internal Revenue Service that it has failed to report all interest and dividends required to be shown on its United States Federal income tax returns.
Unearned Income Tax Affecting U.S. Holders
A U.S. Holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a tax on the lesser of (1) the U.S. Holder’s “net investment income” for the taxable year and (2) the excess of the U.S. Holder’s modified adjusted gross income for the taxable year over a certain threshold (the “Unearned Income Tax”). A U.S. Holder’s net investment income will generally include its interest income and its net gains from the disposition of the Series 2018 Bond, unless such interest income or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). A U.S. Holder that is an individual, estate, or trust, should consult its own tax advisor regarding the applicability of the Unearned Income Tax.
Non-U.S. Holders
Under the Code, interest and OID on any Series 2018 Bond whose beneficial owner is not a U.S. Holder (a “non-U.S. Holder”) is generally not subject to United States income tax or withholding tax (including backup
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withholding) if the non-U.S. Holder provides the payor of interest on the Series 2018 Bonds with an appropriate statement as to its status as a non-U.S. Holder. This statement can be made on IRS Form W-8BEN or a successor form. If, however, the non-U.S. Holder conducts a trade or business in the United States and the interest or OID on the Series 2018 Bonds held by the non-U.S. Holder is effectively connected with such trade or business, that interest or OID will be subject to United States income tax but will generally not be subject to United States withholding tax (including backup withholding). Non-U.S. Holders should also consult their tax advisors regarding the tax consequences of an investment in the Series 2018 Bonds.
Miscellaneous
Future tax legislation, administrative actions taken by tax authorities, or court decisions, whether at the Federal or state level, may adversely affect the market price or marketability of the Series 2018 Bonds.
ERISA CONSIDERATIONS
Persons who are fiduciaries (each a “Plan Fiduciary”) of employee benefit plans under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) or tax qualified retirement plans and individual retirement accounts under the Code (collectively, “Plans”) should give appropriate consideration to the facts and circumstances that are relevant to an investment in Series 2018 Bonds, including the role that such an investment in Series 2018 Bonds would play in a Plan’s overall investment portfolio. Each Plan Fiduciary, before deciding to invest in Series 2018 Bonds, should consider whether such an investment in Series 2018 Bonds is a prudent investment for the Plan, including whether such an investment would reasonably further the Plan’s investment purposes, whether the Series 2018 Bonds have appropriate risk and return characteristics, whether the investments of the Plan, with such an investment in Series 2018 Bonds, would be sufficiently diversified so as to minimize the risk of large losses, whether the Series 2018 Bonds are sufficiently liquid to meet the Plan’s current cash needs, whether the rate of interest on the Series 2018 Bonds is consistent with the Plan’s funding objectives, and whether an investment in the Series 2018 Bonds complies with the documents of the Plan and related trust, to the extent such documents are consistent with ERISA.
ERISA and the Code generally prohibit certain transactions between a Plan and persons who, with respect to the Plan, are Plan Fiduciaries or other “parties in interest” within the meaning of ERISA or “disqualified persons” within the meaning of the Code. Such prohibited transactions include the use of plan assets for the benefit of a Plan Fiduciary or other party in interest or disqualified person, for example, by causing the Plan to make an investment from which such a Plan Fiduciary or other party in interest or disqualified person would receive a fee or other consideration. A Plan Fiduciary considering an investment in Series 2018 Bonds should determine whether it or any other person affiliated with the Plan may currently have a relationship with HMH, the other Members of the Combined Group, the Trustee or the Underwriters, or with any person affiliated with any of them, that would cause the Plan’s investment in Series 2018 Bonds to be a prohibited transaction.
All Plan Fiduciaries, in consultation with their advisors, should carefully consider the impact of ERISA and the Code on an investment in any Series 2018 Bond including the applicability of the fiduciary responsibility and prohibited transaction provisions of ERISA and the Code or other similar laws to such in investment.
VERIFICATION OF MATHEMATICAL COMPUTATIONS
Causey Demgen & Moore, P.C., Denver, Colorado, a firm of independent public accountants, will deliver to the Authority and HMH, on or before the settlement date for the Series 2018 Bonds, its verification report indicating that it has verified, in accordance with attestation standards established by the American Institute of Certified Public Accountants, the mathematical accuracy of the mathematical computations of the adequacy of the cash and the maturing principal of and interest on the defeasance securities deposited with the trustee for the Refunded Bonds, to pay, when due, the principal or redemption price, if applicable, and interest due and to become due on the Refunded Bonds on and prior to the redemption date or maturity date thereof, as the case may be.
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The verifications performed by Causey Demgen & Moore will be solely based upon data, information and documents provided to Causey Demgen & Moore by HMH and its representatives. Causey Demgen & Moore has restricted its procedures to recalculating the computations provided by HMH and its representatives and has not evaluated or examined the assumptions or information used in the computations.
UNDERWRITING
HMH has entered into a Contract of Purchase with J.P. Morgan Securities LLC and Goldman Sachs & Co. LLC (collectively, the “Underwriters”), pursuant to which the Underwriters have agreed to purchase the Series 2018 Bonds from HMH at an aggregate purchase price of $______(consisting of the principal amount of the Series 2018 Bonds of $______, less an original issue discount in the amount of $______and less an underwriting discount in the amount of $______).
The Contract of Purchase pursuant to which the Series 2018 Bonds are being sold provides that the Underwriters will purchase not less than all of the Series 2018 Bonds and that HMH will indemnify the Underwriters against losses, claims, damages, and liabilities arising out of any incorrect statements of information, including the omission of material facts, contained in this Offering Memorandum pertaining to the Combined Group. The Underwriters’ obligations to make such purchase is subject to certain terms and conditions set forth in the purchase contract, the approval of certain legal matters by counsel and certain other conditions.
The Underwriters may offer and sell the Series 2018 Bonds to certain dealers and others at a price lower than the initial offering price. The offering price of Series 2018 Bonds may be changed from time to time by the Underwriters.
J.P. Morgan Securities LLC (“JPMS”), one of the Underwriters of the Series 2018 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, including the Series 2018 Bonds, at the original issue prices. Pursuant to each Dealer Agreement, each of CS&Co. and LPL may purchase Series 2018 Bonds from JPMS at the original issue price less a negotiated portion of the selling concession applicable to any Series 2018 Bonds that such firm sells.
FINANCIAL ADVISOR
The System has retained Raymond James & Associates, Inc. (the "Financial Advisor") New York, New York, as financial advisor in connection with the issuance of the Series 2018 Bonds. Although the Financial Advisor has assisted in the preparation of this Offering Memorandum, the Financial Advisor was not and is not obligated to undertake, and has not undertaken to make, an independent verification and assumes no responsibility for the accuracy, completeness or fairness of the information contained in this Offering Memorandum.
CERTAIN RELATIONSHIPS
The Underwriters and their respective 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. Certain of the Underwriters and their respective affiliates have provided, and may in the future provide, a variety of these services to the Members of the Combined Group and to persons and entities with relationships with the Members of the Combined Group, for which they received or will receive customary fees and expenses.
In the ordinary course of their various business activities, the Underwriters and their respective 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 Members of the Combined Group (directly, as collateral securing
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other obligations or otherwise) and/or persons and entities with relationships with the Members of the Combined Group. 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.
CONTINUING DISCLOSURE
The Members of the Combined Group have entered into continuing disclosure undertakings in connection with tax-exempt revenue bonds issued for the benefit of the Members of the Combined Group (collectively, “Continuing Disclosure Undertakings”). Holders and prospective purchasers of the Series 2018 Bonds may obtain copies of the information provided by HMH and the other Members of the Combined Group under those Continuing Disclosure Undertakings on the MSRB’s EMMA System. While each Continuing Disclosure Undertaking terminates when the related bonds are paid or deemed paid in full, HMH covenants in the Indenture that unless otherwise available on EMMA or any successor thereto or to the functions thereof pursuant to the Continuing Disclosure Undertakings, copies of HMH’s and its affiliates’ unaudited quarterly consolidated financial statements, and consolidated annual audited financial statements, will either be posted on HMH’s website, posted on EMMA, or filed with the Trustee.
In connection with the filing requirement under the aforementioned existing undertakings, the interim information for the quarter ended December 31, 2017 (unaudited financial statements and operating data) was filed late as a result of an administrative oversight.
APPROVAL OF LEGALITY
Legal matters incident to validity of the Series 2018 Bonds and certain other matters are subject to the approving opinion of McCarter & English, LLP, Newark, New Jersey, counsel to HMH. Certain other legal matters will be passed upon for the Underwriters by their counsel, Hawkins Delafield & Wood LLP, Newark, New Jersey.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of Hackensack Meridian Health, Inc., as of and for the year ended December 31, 2017, set forth in Appendix B-1 to the Preliminary Offering Memorandum and to the Offering Memorandum have been audited by PricewaterhouseCoopers LLP, independent accountants, as stated in their report appearing therein.
The financial statements of JFK Health System as of and for the year ended December 31, 2017 set forth in Appendix B-2 to the Preliminary Offering Memorandum and to the Offering Memorandum have been audited by Baker Tilly Virchow Krause, LLP, independent accountants, as stated in their report appearing thereon.
DESCRIPTION OF RATINGS
S&P Global Ratings, a business of Standard & Poor’s Financial Services, LLC (“S&P”) and Fitch Ratings (“Fitch”) have assigned their long-term ratings of “AA-” with a stable outlook and “_____” with a ______outlook, respectively, to the Series 2018 Bonds.
Explanations of the significance of each rating may be obtained from S&P at 55 Water Street, 38th Floor, New York, New York and from Fitch at 33 Whitehall Street, New York, New York 10004. Each such rating reflects only the views of the respective rating agency, and an explanation of the significance of the ratings may be obtained from the rating agency. Generally, rating agencies base their ratings on information and material furnished by the Combined Group and on investigations, studies and assumptions made by the rating agencies. 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 one or more of the rating agencies, if in the judgment of any such rating agency,
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circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Series 2018 Bonds. The Underwriters have not agreed to take any action with respect to any proposed rating change or to bring such rating change, if any, to the attention of the owners of the Series 2018 Bonds. A securities rating is not a recommendation to buy, sell or hold securities.
LITIGATION
There is not now pending any litigation contesting the plan of financing, the undertaking or completing of the refunding of the Refunded Bonds, or the ability of HMH to enter into the Indenture, the Master Indenture or any other documents it is required to sign in connection with the issuance of the Series 2018 Bonds or the ability of the Members of the Combined Group to perform their respective duties and obligations under the Master Indenture. No litigation or proceedings are pending or, to the knowledge of the Members of the Combined Group, threatened, against them except (a) litigation and proceedings involving claims for hospital professional liability in which the probable recoveries and estimated costs and expenses of defense, in the opinion of counsel to the Combined Group, will be entirely within the Combined Group’s applicable insurance policy limits (subject to applicable deductibles which the Members of the Combined Group believe will be within their resources to pay) and (b) litigation and proceedings other than those described in (a), which if adversely determined would not, in the opinion of such counsel, materially adversely affect the financial condition or results of operations of the Members of the Combined Group, the transactions contemplated by this Offering Memorandum or the validity of the Indenture or the Master Indenture and the issuance of the Series 2018 Note if any Member of the Combined Group were found liable under such proceedings. For additional information on litigation with respect to the Members of the Combined Group, see Appendix A – “INFORMATION CONCERNING HACKENSACK MERIDIAN HEALTH– MISCELLANEOUS - Litigation.”
MISCELLANEOUS
All quotations from and summaries and explanations of the Indenture, the Master Indenture, the Third Supplemental Indenture, the Series 2018 Note and the Series 2018 Bonds, and of other statutes and documents contained herein do not purport to be complete, and reference is made to said documents and statutes for full and complete statements of their provisions. Copies in reasonable quantity of the Indenture, the Master Indenture and the Third Supplemental Indenture may be obtained upon request directed to the Underwriters or HMH.
Any statements in this Offering Memorandum involving matters of opinion are intended as such and not as representations of fact. This Offering Memorandum is not to be construed as a contract or agreement between HMH and the Holders of any of the Series 2018 Bonds.
Attached hereto as Appendix A is certain information relating to HMH and the Combined Group. The Financial Statements included in Appendix B-1 contain the consolidated financial statements of the System and include financial information for non-obligated System Affiliates. The Financial Statements included in Appendix B-2 contain the consolidated financial statements of JFK Health System. Appendices A and B have been provided by HMH.
Appendix C – “FORMS OF THE TRUST INDENTURE AND THE MASTER INDENTURE” has been prepared and provided by Counsel to the HMH.
All Appendices are incorporated as an integral part of this Offering Memorandum.
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The execution and delivery of this Offering Memorandum has been duly authorized by HMH.
HACKENSACK MERIDIAN HEALTH, INC.
By: President, Financial Services Division and Chief Financial Officer
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APPENDIX A
INFORMATION CONCERNING HACKENSACK MERIDIAN HEALTH
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TABLE OF CONTENTS
OVERVIEW OF HACKENSACK MERIDIAN HEALTH ...... 1 NETWORK LOCATIONS ...... 2 MISSION AND VISION ...... 3 STRATEGIC PRIORITIES ...... 3 JFK AFFILIATION ...... 4 CONTINUUM OF CARE ...... 5 CORPORATE STRUCTURE ...... 6 GOVERNANCE ...... 7 MANAGEMENT ...... 10 OPERATING DIVISIONS OF HMH ...... 14 FACILITIES OVERVIEW ...... 15 DIVERSIFIED HEALTH VENTURES ...... 16 EDUCATIONAL AFFILIATIONS ...... 16 STRATEGIC JOINT VENTURES, PARTNERSHIPS AND OTHER AFFILIATIONS ...... 20 AWARDS AND RECOGNITION ...... 22 PHYSICIAN ALIGNMENT AND STRATEGY ...... 24 TEAM MEMBERS / EMPLOYEES ...... 25 SERVICE AREA AND COMPETITION ...... 26 POPULATION HEALTH INITIATIVES ...... 29 MANAGED CARE ...... 30 UTILIZATION ...... 31 FINANCIAL PERFORMANCE ...... 31 MANAGEMENT’S DISCUSSION OF FINANCIAL PERFORMANCE ...... 34 FINANCIAL RATIOS...... 35 SOURCES OF PATIENT REVENUE ...... 37 PENSION BENEFITS ...... 37 INVESTMENTS ...... 40 LONG TERM INDEBTEDNESS AND INTEREST RATE SWAP AGREEMENTS ...... 41 OVERVIEW OF JFK AFFILIATION AND COMBINATION WITH HMH ...... 42 MISCELLANEOUS ...... 47
CERTAIN STATEMENTS IN THIS OFFERING DOCUMENT THAT RELATE TO HACKENSACK MERIDIAN HEALTH, INC., INCLUDING, BUT NOT LIMITED TO, STATEMENTS IN THIS APPENDIX A – “INFORMATION CONCERNING HACKENSACK MERIDIAN HEALTH”, ARE FORWARD-LOOKING STATEMENTS THAT ARE BASED ON THE BELIEFS OF, AND ASSUMPTIONS MADE BY, THE MANAGEMENT OF HACKENSACK MERIDIAN HEALTH. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS OR PERFORMANCE OF HACKENSACK MERIDIAN HEALTH TO BE MATERIALLY DIFFERENT FROM ANY EXPECTED FUTURE RESULTS OR PERFORMANCE. SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED TO, ITEMS DESCRIBED UNDER THE HEADING “BONDHOLDERS' RISKS” IN THE FOREPART OF THIS OFFERING DOCUMENT.
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OVERVIEW OF HACKENSACK MERIDIAN HEALTH
Hackensack Meridian Health, Inc. (“HMH” or the “Network”) is a nonprofit health care organization that is a comprehensive and integrated health care network in New Jersey (the “State”), offering a full range of medical services, research and life-enhancing care. HMH was established on July 1, 2016, through the merger of Hackensack University Health Network, Inc. (“HUHN”) and Meridian Health System, Inc. (“Meridian”), uniting two significant health care networks in the State. Effective as of January 1, 2018, JFK Health System, Inc. (“JFK”) joined the Network. JFK, based in Edison, New Jersey, is comprised of The Community Hospital Group, Inc., T/A JFK Medical Center (“JFKMC”) along with ambulatory surgery centers, senior living and rehabilitation centers and a school of nursing. For additional information, see “JFK AFFILIATION” herein. HMH combines academic medical centers with community-based care and services.
HMH comprises 14 acute care hospitals, including three academic medical centers, two children's hospitals and nine community hospitals as well as two rehabilitation hospitals, surgery centers, home health services, long-term care and assisted living communities, inpatient and outpatient behavioral health facilities, ambulance services, air medical transportation, fitness and wellness centers, rehabilitation centers, ambulatory care centers, urgent care and after-hours centers, and physician practices. HMH has approximately 32,000 team members (employees), more than 7,000 credentialed physicians, generates over $5.5 billion in revenue annually (including joint ventures) and is a leader in health care philanthropy. HMH is also a member of AllSpire Health Partners, an interstate consortium of leading health systems, organized to focus on sharing best practices in clinical care and achieving operating efficiencies. HMH is one of the largest employers in the State and has the leading market share in its three core markets for inpatient admissions.
As of February 2018, the hospitals of HMH include: (i) academic medical centers – Hackensack University Medical Center (“HUMC”) in Hackensack, Jersey Shore University Medical Center (“JSUMC”) in Neptune, and JFKMC in Edison; (ii) children's hospitals – Joseph M. Sanzari Children's Hospital (“JMSCH”) in Hackensack and K. Hovnanian Children's Hospital (“KHOV”) in Neptune; (iii) community hospitals – Ocean Medical Center (“OMC”) in Brick, Riverview Medical Center (“RMC”) in Red Bank, Palisades Medical Center (“PMC”) in North Bergen, Raritan Bay Medical Center in Perth Amboy (“RBMC Perth Amboy”), Southern Ocean Medical Center (“SOMC”) in Manahawkin, Bayshore Medical Center (“BMC”) in Holmdel, and Raritan Bay Medical Center in Old Bridge (“RBMC Old Bridge”); and (iv) joint-ventured hospitals – Mountainside Medical Center (“MMC”) in Montclair and Pascack Valley Medical Center (“PVMC”) in Westwood.
Effective as of January 1, 2018, HMH has consolidated its hospital operations into HMH Hospitals Corporation (“HMH Hospitals”), a New Jersey nonprofit corporation whose sole corporate member is HMH. HMH Hospitals is the successor entity to the following former Designated Affiliates under the Master Indenture: HUMC, Meridian Hospitals Corporation (“MHC”), PMC, RBMC Perth Amboy and RBMC Old Bridge. HMH Hospitals currently owns, controls and operates HUMC, JMSCH, JSUMC, KHOV, OMC, RMC, PMC, RBMC Perth Amboy, SOMC, BMC, and RBMC Old Bridge. JFKMC is not, at present, part of HMH Hospitals, but its consolidation into HMH Hospitals is contemplated by operation of the transaction
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documents. JFK and JFKMC will both be Designated Affiliates upon issuance of the Series 2018 Bonds.
HMH, through its various affiliated corporations, is licensed to operate 4,323 inpatient acute care beds (including joint ventures), which includes 150 adult acute psychiatric beds, 366 adult ICU/CCU beds, 21 pediatric ICU beds, 15 inpatient alcohol beds, 202 comprehensive long- term care and rehabilitation beds, 40 intensive care neonatal bassinets, 71 intermediate neonatal bassinets, 143 pediatric hospital beds, 259 OB/GYN beds, and 3,056 medical/surgical beds. In addition, the Network has 1,494 skilled nursing beds, 44 ventilator beds, and 397 assisted living beds.
NETWORK LOCATIONS
As set forth in the preceding map, HMH facilities and locations are concentrated in an eight county region (the “8-County Region”) along New Jersey’s seaboard. These eight counties from north to south are Bergen, Passaic, Hudson, Essex, Union, Middlesex, Monmouth and Ocean. The 8-County Region comprises approximately two-thirds of the State’s population. See “SERVICE AREA AND COMPETITION” herein.
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MISSION AND VISION
The stated mission of HMH is “to transform health care and be recognized as the leader of positive change.”
The stated vision of HMH is “innovation is in our DNA, compelling us to create a world where: the highest quality care is human-centered, accessible and affordable; we deliver outcomes that matter most; and excellence is the standard.”
STRATEGIC PRIORITIES
The Network, like many other health systems nationwide, continues to face pressures affecting top line revenue growth and overall profitability. The Network is developing strategies to be a leader in the implementation of value-based care in response to the ACA (and any potential repeal or refinement) and new technologies that improve patient outcomes, while navigating increased competition from non-traditional sources, growing consumer price sensitivity and State budgetary constraints. The Network’s strategic priorities are summarized below.
• Transform HMH to create the future care delivery enterprise (Quality, High Reliability Organization, Human Experience) • Embed a culture that aligns with the HMH Mission, Vision, and Values • Develop and grow all HMH marketplaces to provide superior value with accessible, comprehensive, integrated programs, services and facilities • Establish the School of Medicine (“SOM”) for the future, which will be in the forefront of innovation and patient-centered academics of providers • Establish Hackensack Meridian Health Partners, HMH’s clinically integrated network (“CIN”), as an indispensable population health network to consumers, insurers, and employers • Fund and develop nationally recognized innovation center • Achieve financial performance necessary to support Strategic Priorities and needed investments
Given the ever-changing healthcare environment, there can be no assurances that the aforementioned strategies and priorities will not change.
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JFK AFFILIATION
On January 1, 2018, HMH and JFK completed a transaction pursuant to a “definitive agreement” dated May 2, 2017 whereby, among other things, HMH became the sole corporate member of JFK (the “JFK Affiliation”). In early 2019, JFK is expected to merge with and into HMH, with HMH as the surviving entity (the “System Merger”). The definitive agreement also contemplates that no sooner than the fifth anniversary of the effective date of the JFK Affiliation and subject to certain conditions precedent thereto, JFKMC, whose sole corporate member at that time will be HMH, will merge with and into HMH Hospitals, which currently comprises the other hospital operations of HMH.
As contemplated by the definitive agreement, HMH is undertaking a capital formation plan for JFK, which includes the issuance of the Series 2018 Bonds, to, among other things, refinance or restructure the existing debt of JFKMC and its affiliates to permit JFKMC and its affiliates to benefit from more favorable credit terms resulting from the JFK Affiliation. In connection with such capital formation plan and effective upon the date of issuance of the Series 2018 Bonds, JFK and JFKMC will become Designated Affiliates (and will therefore be in the Combined Group) under the Master Indenture by entering into a contractual agreement pursuant to the terms of Section 401(B) of the Master Indenture. Pursuant to the terms of such contractual agreement, each of JFK and JFKMC agree to, among other things, (a) pay, loan or otherwise transfer, and to use reasonable efforts to cause each of its affiliates (subject to contractual and organizational limitations) to pay, loan or otherwise transfer, in each case, to HMH, as Combined Group Agent, such amounts as are necessary to duly and punctually pay the principal of, premium, if any, and interest on all outstanding Obligations issued, and any other payments due, under the Master Indenture, and (b) pledge and assign to the Master Trustee all of its Gross Revenues. Such contractual agreement will be effective through the date of the System Merger, at which time the bylaws of JFKMC will be amended to include reserved powers of HMH consistent with the reserved powers HMH has with respect to its other Designated Affiliates.
HMH and JFK expect to achieve several objectives from the JFK Affiliation, including: (a) clinical excellence demonstrated by comprehensive and consistent quality across an integrated delivery system, (b) enhanced patient access to a broader continuum of services, (c) various operating efficiencies, (d) a more robust physician and advanced practitioner network, (e) integration and unification of information technology systems and platforms, (f) enhancement and expansion of research and innovation to advance clinical outcomes and develop new care delivery and treatment; and (g) support of, and participation in, medical education for physicians and allied health personnel, which will address, among other issues, shortages of clinicians. Further, pursuant to the terms of the definitive agreement, HMH agrees to make certain capital investments in JFK and/or JFKMC pursuant to an agreed upon capital allocation plan in an amount equal to $257.0 million over a period of eight years following the effective date of the JFK Affiliation.
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CONTINUUM OF CARE
The depiction below illustrates the continuum of care of services provided by the Network and its affiliated entities. By providing a full continuum of care, HMH is able to guide and track a patient over time through a comprehensive array of health services spanning various levels and intensities of care. The Network has more than 440 physician practice and patient care locations ranging from home care and prevention to academic medical centers and post-acute facilities. As depicted in the graphic below, the Network provides services from prevention and outpatient services, to hospital-based care, rehabilitation, and post acute. Management believes that this combination of services and care expertise positions HMH well to be a leader in population health management and value-based care.
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CORPORATE STRUCTURE
HMH is a New Jersey nonprofit corporation and an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, formed on July 1, 2016 (the “Merger Closing Date”) as the result of the statutory merger of Meridian and HUHN. HMH is the sole corporate member or currently controls the organizations that comprise HMH.
Set forth below is an organizational chart for HMH and its affiliates. The Members of the Obligated Group and the Designated Affiliates, as defined in the Master Indenture, are shaded in accordance with the legend below.
Hackensack Meridian Health Combined Group = Obligated Group Member Not-for-Profit = Designated Affiliate
HMH Hackensack JFK Health HMH Hospitals HMH 8 Local Residential Meridian Health System, Inc. Corporation(1) Physician Foundations Services, Inc. Care, Inc. (2) Ventures, Inc. Not-for-Profit Not-for-Profit Not-for-Profits Not-for-Profit Not-for-Profit For-Profit
The Hackensack John F. 20 Prospect Community University Health Hackensack Kennedy Avenue Raritan Palisades iMPak Hospital Medical Innovations Meridian Medical Center Holdings, Insurance, Child Care Health, LLC Group, Inc. Center Unlimited, Quality Care, Foundation, Inc. Ltd. Center, Inc. (d/b/a JFK LLC Inc. LLC and various Casualty Limited Liability Medical Company Limited Liability Company For-Profit Limited Liability For-Profit other subsidiary Not-for-Profit Center) Company Bermuda Limited Company Not-for-Profit corporations Liability Company
Hackensack Hackensack Meridian Hackensack Coastal Bergen Hackensack Meridian Physician- Accountable Meridian Medical Health Meridian Ambulatory Hospital Care Health Insurance Management Health Realty Ventures, Inc. Alliance Organization, Partners, Limited System, Inc. Corporation ACO, LLC LLC LLC Limited Liability Limited Liability Limited Liability Bermuda Limited Not-for-Profit Not-for-Profit Not-for-Profit Company Company Company Liability Company
(1) Effective as of January 1, 2018, HMH consolidated its hospital operations into HMH Hospitals Corporation, consisting of Hackensack University Medical Center, which has two Joint Ventures with Ardent Health Services: Pascack Valley Medical Center and Mountainside Medical Center, as well as Palisades Medical Center, RBMC Perth Amboy, RBMC Old Bridge, and Meridian Hospitals Corporation Divisions: Jersey Shore University Medical Center, Bayshore Medical Center, Ocean Medical Center, Riverview Medical Center, and Southern Ocean Medical Center. (2) HMH Residential Care, Inc. includes Nursing Home Divisions: Bayshore Healthcare Center, Brick, The Harborage, Ocean Grove, Shrewsbury, and Wall. Also included within HMH Residential Care, Inc. are the following Home Care Divisions: Bergen County, Middlesex County, Monmouth County, Ocean County, and Passaic County. HMH is the sole Member of the Obligated Group. Pursuant to the Master Indenture, HMH has designated HMH Hospitals (as successor to HUMC, MHC, PMC, RBMC Perth Amboy and RBMC Old Bridge) and, upon issuance of the Series 2018 Bonds, JFK and JFKMC as Designated Affiliates. The Master Indenture provides that HMH, as the Combined Group Agent, shall cause each Designated Affiliate, and use reasonable efforts to cause each other System Affiliates (subject to contractual and organizational limitations), to pay, loan or otherwise transfer to the Combined Group Agent such amounts as are necessary to duly and punctually make payments due under any Obligation under the Master Indenture. Members of the Obligated Group and the Designated Affiliates are referred to collectively herein as the “Combined Group.”
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GOVERNANCE
Board of Trustees
HMH is governed by a Board of Trustees (the “Network Board” or “HMH Board”) consisting of not less than eleven (11) members, the precise number of which shall be determined as set forth in the Bylaws of the Network. Commencing as of the date of the formation of HMH, the Network Board was composed of 24 trustees which were designated as follows: 11 independent trustees designated by the Board of Trustees of HUHN, the President and CEO of HUHN (ex- officio with a vote), 11 independent trustees designated by the Board of Trustees of Meridian, and the President and CEO of Meridian (ex-officio with a vote). By virtue of the merger agreement between Meridian and HUHN, the HMH Board will be self-perpetuating as of January 1, 2023 and shall consist of an odd-number of trustees whose election will not be based on a nomination by legacy HUHN or Meridian trustees. Effective as of November 9, 2016, and during the term of the School of Medicine Agreement by and between Seton Hall University and HMH (as successor to HUHN), the President of Seton Hall University, or a senior executive designated by the President of Seton Hall University, will have a trustee position on the Network Board, serving ex-officio without vote. Additionally, as a result of the JFK Affiliation, the HMH Board membership was increased by two trustees appointed by the JFK Board prior to closing. The JFK Board representation continues through the end of 2023.
The Network Board’s bylaws provide that, except for ex-officio trustees and officers, a member of the Network Board may not serve more than three consecutive terms and may only become qualified for re-election after a one-year absence from serving on the Network Board. HMH’s principal purpose is to operate for the benefit of, perform the functions of, and promote, support and coordinate the activities of HMH and its affiliates. To effectuate the coordination of the activities of its affiliates, HMH has various reserved powers over certain actions of its affiliates.
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The current members of the Network Board, the year their respective terms expire and their respective occupations are as follows:
Name Term (July 1, ) Occupation Gregg Azcuy 2018 Owner, CEO, Storage Engine, Inc. Keith Banks 2019 President, US Trust, Bank of America Private Wealth Management James Bollerman 2020 President, Bollerman Companies Stephen T. Boswell, PhD 2020 CEO, Boswell Engineering J. Fletcher Creamer, Jr. 2018 Owner, Fletcher Creamer & Son Theresa de Leon, J.D. 2018 SVP and Managing Director, PNC Wealth Management Frank DeCongelio 2019 Retired, Former Managing Director, Credit Suisse Investment Bank Domenic DiPiero 2019 President, Newport Capital Group Thomas J. Dolan 2020 Management Consultant Kathleen T. Ellis 2020 Retired, former SVP, New Jersey Resources Frank L. Fekete, CPA, Treasurer 2019 Managing Partner, Mandel, Fekete & Bloom, CPAs James Galeota 2020 President, G&W Laboratories Robert C. Garrett, Co-CEO Ex-Officio Co-CEO, Hackensack Meridian Health Peter C. Gerhard 2018 CEO and CIO, G Capital Management Lawrence Inserra 2020 CEO, Inserra Supermarkets, Inc. Michael Kleiman, DMD 2020 Oral and Maxillofacial Surgeon Thomas J. Kononowitz 2019 Retired, Former SVP, New Jersey Natural Gas Company William A. Kozy 2020 Retired, Former EVP and COO, Becton Dickinson and Company Gordon N. Litwin, Esq., Co-Chairperson 2019 Partner, Litwin & Provence, LLC John K. Lloyd, Co-CEO Ex-Officio Co-CEO, Hackensack Meridian Health Mary Meehan, PhD Ex-officio Interim President of Seton Hall University Peter S. Reinhart, Esq., Vice Chairperson 2019 Director, Kislak Real Estate Institute at Monmouth University Alfred Schiavetti, Jr. 2018 Managing Member, Rumson Capital Partners, LLC Joseph Simunovich, Co-Chairperson 2019 Member, Board of Directors, Suez North America Peter H. Wegener, Esq., Secretary 2018 Senior Partner, Bathgate Wegener & Wolf, PC
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Committees
Standing committees of the Network Board include:
• Academics Committee • Finance Committee • Audit and Compliance Committee • Human Resources Committee • Governance and Board Development Committee • Investment Committee • Data Governance and Technology Committee • Care Transformation Committee • Executive Committee • Strategic Planning Committee • Executive and Physician Compensation Committee
Conflicts of Interest
The trustees that serve on the Network and affiliate boards are subject to the HMH Network Wide Policy on Conflicts, Dualities of Interest and Independence (the “Conflict of Interest Policy”), the purpose of which is to assure that the Network and its affiliate boards’ decisions are made solely with the intent to promote the best interests of HMH without regard to favor, preference or benefit that such decision might confer (directly or indirectly) upon any individual involved in the decision-making progress. The policy requires annual disclosure by trustees, officers, committee members and senior management of any transaction or relationship with HMH or an affiliate of HMH that may give rise to a conflict of interest. In addition, each such person is required to affirm on an annual basis that he or she has received the Conflict of Interest Policy. Further, such persons are advised how to bring a transaction or relationship to the attention of the applicable board for its review.
Potential conflicts of interest are considered by the applicable board or committee outside the presence of the affected person. Failure to disclose a potential conflict of interest can result in disciplinary or corrective action.
Corporate Compliance
Continuing the long standing commitment to a corporate compliance program by HUHN and Meridian, HMH adopted a corporate compliance program at the time of its formation in July 2016. This commitment to good corporate citizenship has been continued by the Network Board through its endorsement of an enterprise-wide compliance program to support, monitor and enhance HMH's commitment to business ethics, legal and regulatory compliance. The Compliance Program applies to all medical, business, and legal activities performed by trustees, officers, team members, medical staff members, residents, volunteers, and contractors.
The Compliance Program is monitored by the Audit and Compliance Committee of the Network Board. Day-to-day coordination of the Compliance Program is carried out by the Vice President, Chief Compliance Officer. The Audit and Compliance Committee’s charter states, in part, that its purpose is to assist the Network Board in fulfilling its oversight responsibilities for financial reporting, adequacy of internal control systems, and monitoring compliance with applicable laws and regulations and the HMH Code of Conduct.
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MANAGEMENT
Brief biographical information for members of HMH’s senior management team is set forth below:
ROBERT C. GARRETT, FACHE Co-Chief Executive Officer
Robert C. Garrett, 60, began his time with HUMC in 1981 as an administrative resident, and served as president and chief executive officer of HUHN from 2009 through 2016, at which time he assumed his current position as co-CEO of HMH.
Mr. Garrett was ranked #1 on the NJBIZ 2017 “Power 50 Health Care” list. He has also ranked on the NJBIZ “Power 100: The most powerful people in New Jersey business” list for six consecutive years. He was selected as a member of The Wall Street Journal CEO Council, an invite-only council representing some of the most well-respected business leaders in America. He was also listed as one of the 2016 “130 Nonprofit Hospital and Health System CEOs to Know.”
Mr. Garrett received his Master of Health Administration from Washington University in Saint Louis, and his bachelor’s degree from Binghamton University in New York.
JOHN K. LLOYD, FACHE Co-Chief Executive Officer
John K. Lloyd, 71, began his time at Meridian Health in 1982 and previously served as president and chief executive officer before becoming co-CEO of HMH.
Mr. Lloyd has served as chairman of New Jersey Hospital Association (“NJHA”) and has held local, state and national board positions at organizations such as the New Jersey Council of Teaching Hospitals, American Hospital Association and American College of Healthcare Executives. In 2009, he was recognized by the NJHA as its Healthcare Professional of the Year. He is currently ranked among the most powerful health care leaders by NJBIZ. He was also listed as one of the 2016 “130 Nonprofit Hospital and Health System CEOs to Know.”
Mr. Lloyd received his undergraduate degree from Princeton University, and proudly served his country in the United States Marine Corps, before earning a Master of Business Administration in Health Administration at Temple University.
ROBERT L. GLENNING, MBA President of the Financial Services Division and Chief Financial Officer
Robert L. Glenning, 57, serves as president of the Financial Services Division and chief financial officer for HMH. He previously served as executive vice president and chief financial officer of HUHN having joined HUMC in 2007. In this role, Mr. Glenning led strategic financial planning and management for all aspects of the network as well as information technology planning and management for HUMC.
Mr. Glenning previously served as executive vice president and chief financial officer, and, prior to that role, as vice president of Finance, for Kaleida Health in Buffalo, New York. Mr.
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Glenning earned his Master of Business Administration from Clarkson University and his bachelor’s degree in Accounting from Siena College. He has been recognized by NJBIZ with the 2011 Healthcare CFO of the Year Award.
CATHERINE A. AINORA Interim President of the Hospital Services Division Executive Vice President, Chief Integration Officer, Health System
Catherine A. Ainora, 64, serves as interim president, Hospital Services Division and executive vice president and chief integration officer for the Network and is responsible for managing the integration process.
Ms. Ainora previously served as acting chief strategy officer at HUHN having joined the organization in 2015. In this role she was responsible for regional strategic network growth through mergers, acquisitions and creative partnerships with health care providers. Prior to this role she was a retired executive from Barnabas Health, where she served for seventeen years as the senior vice president for System Development / Planning, part of the executive team building one of the largest health care systems in New Jersey.
Ms. Ainora received an MBA in Health Care Administration from Bernard Baruch College-Mt. Sinai School of Medicine and a bachelor's degree in business from Fairleigh Dickinson University.
JOSEPH M. LEMAIRE President of Health Ventures
Joseph Lemaire, 64, is president of the Health Ventures Division for HMH. In this role, he has oversight of HMH’s non-acute services, including its sub-acute facilities, home care and outpatient ambulatory facilities. In support of HMH’s population health strategy, Mr. Lemaire and his team are focused on providing additional access points of care for more people through more convenient options and locations.
Mr. Lemaire joined Meridian in 2014 and served as executive vice president and chief financial officer for Meridian, which involved oversight of Meridian’s financial planning and reporting, as well as its partner companies. Prior to joining Meridian, he served as executive vice president and chief financial officer for Holy Name Medical Center. He was a partner with Big 4 accounting firm Ernst & Young, auditing a diverse range of health care providers. In addition, he spent eight years as a consultant to global life sciences companies while he was a partner at Accenture.
Mr. Lemaire holds a Bachelor of Science degree in Accounting from Farleigh Dickenson University. He is a certified public accountant in New York and New Jersey. His additional board service includes: chairman of the Finance Committee of QualCare, chairman of the Finance Committee at St. Anne’s Nursing Home, and chairman of the Management Committee of Catholic Charities of the Archdiocese of Newark. He has been recognized by NJBIZ with the 2015 Healthcare CFO of the Year Award.
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PATRICK R. YOUNG President of Population Health
Patrick Young, 52, is president of the Population Health Division for HMH. In this role, he is responsible for accelerating the development of strategic priorities related to health care reform, population health management, HMH’s Accountable Care Organizations, Hackensack Meridian Health Partners, HMH’s clinically integrated network, and health insurance partnerships, as well as overseeing managed care contracting.
Prior to joining HMH, Mr. Young served as chairman and chief executive officer for Noble Health Alliance, a coordinated care partnership between four Pennsylvania health systems. While at Noble, he led the Alliance’s physician network, created clinical and claims data analysis capabilities, and developed innovative relationships with regional health care providers, insurers, and employers to help improve the quality and efficiency of health care.
Mr. Young began his career in health care in the 1980s with US Healthcare, which was later acquired by Aetna. He served in a series of increasingly responsible positions within Aetna, including president of business segments in the mid-Atlantic and Northeastern regions of the United States. In 2006, Mr. Young was named president of Aetna’s Pennsylvania, Delaware, and West Virginia markets. In this role, he had overall responsibility for sales, network contracting, product development, and relationships with business leaders and elected officials.
Mr. Young holds a Bachelor of Arts in Public Management from the University of Maine, and is a member of the Pennsylvania Association of Health Underwriters. He serves on an advisory board for PatientPing, a health care technology company.
ANDREW PECORA, M.D., FACP, CPE Chief Innovation Officer and President of the Physician Services Division
Dr. Pecora, 60, serves as chief innovation officer and president of the Physician Services Division. He previously served as vice president of Cancer Services and chief innovations officer at HUMC. In this role, he was responsible for the research, treatment and innovation of cancer services being provided to patients at the network. In 2004, Dr. Pecora was promoted to Professor of Medicine, UMDNJ-New Jersey Medical School and in 2013 to Professor of Oncology and Medicine at Georgetown University.
A Diplomate of the American Board of Internal Medicine, subspecialty of Hematology and subspecialty of Oncology, Dr. Pecora has received numerous awards and honors. He has been involved in numerous research projects in an effort to improve the outcomes of patients with cancer.
Dr. Pecora holds 50 national and international patents covering the composition and use of bone marrow derived cells for treating cardiovascular disease and relating to informatics technology. He has led several national trials in the field of transplantation and has published numerous peer-reviewed articles and abstracts and has presented the results of his research at many national and international scientific meetings. Dr. Pecora has helped found several successful companies and serves as chairman of various private and public companies.
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Dr. Pecora graduated with honors from Seton Hall University, earning a Bachelor of Science degree in Biology. He earned his M.D. from the University of Medicine and Dentistry of New Jersey and completed his training at NewYork-Presbyterian Hospital and Memorial Sloan Kettering Cancer Center.
ANN B. GAVZY, ESQ. Executive Vice President, General Counsel, Health System
Ann B. Gavzy, Esq., 59, serves HMH as executive vice president and general counsel of the Network. She was most recently senior vice president of Legal Affairs and general counsel at Meridian, where she was responsible for initiating, overseeing and coordinating all legal services for the health system since joining the organization in 1997, and guided the health system through the evolving health care landscape.
Prior to Meridian, Ms. Gavzy was a partner at Kalison & McBride, P.A. in Liberty Corner, New Jersey, and a partner at Norris, McLaughlin and Marcus in Somerville, New Jersey.
Ms. Gavzy is the recipient of both the 2015 NJBIZ “50 Best Women in Business” award and the 2015 NJBIZ “General Counsel of the Year” award. She was recently named a 2016 First Chair Award Recipient. This annual award recognizes America’s most innovative and accomplished in-house counsel for their achievements and significant contributions to the legal community.
Ms. Gavzy earned her J.D. degree from American University’s Washington College of Law and her bachelor’s degree from Clark University. She is a member of the American Bar Association, the New Jersey State Bar Association (Health and Hospital Law Section), the American Health Lawyers Association, and the Health Care Roundtable, a limited membership group of chief legal officers from around the country.
AUDREY C. MURPHY, ESQ. Executive Vice President, General Counsel, Hospital Enterprise
Audrey Murphy, Esq., RN, 58, serves HMH as executive vice president, general counsel, Hospital Enterprise. She previously served as the executive vice president/chief legal officer at HUMC and HUHN having joined the organization in 1992. As chief legal officer, Ms. Murphy was responsible for the overall functioning of the Legal/Regulatory Department. In this role, she oversaw the daily in-house corporate advising as well as the medical/legal advising, the medical center’s various insurance programs and for managing and directing all litigation.
Ms. Murphy is a member of numerous professional societies including: Sigma Theta Tau, American Corporate Counsel Association, American Health Lawyers Association, American College of Healthcare Executives and the Bergen County Bar Association as well as the New York and New Jersey State Bar Associations. She sits on the boards of the Bergen County Bar Foundation, Commerce & Industry of New Jersey and the Pace President’s Committee.
Ms. Murphy was the recipient of the Innovator Award from Pace University, which pays tribute to individuals or groups whose work exemplifies positive change and self-empowerment. She was also the recipient of the Best 50 Women in Business Award presented by NJBIZ in March
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of 2015, the Early Career Healthcare Executive Regent’s Award presented by the American College of Healthcare Executives, and was honored with a TWIN Award - Tribute to Women and Industry, which is given to professional women who have excelled in their field and made contributions to industry in executive, managerial and/or professional roles.
Ms. Murphy earned her J.D. degree from Pace University School of Law and BSN and MSN degrees from Pace University.
OPERATING DIVISIONS OF HMH
The Network is operated pursuant to five major operating divisions, the Hospital Services Division, the Health Ventures Division, the Physician Services Division, the Population Health Division and the Academic Enterprise and School of Medicine Division.
The Hospital Services Division is described in more detail under the caption “FACILITIES OVERVIEW” and consists primarily of three academic medical centers, two children’s hospitals and nine community hospitals, including the Network’s hospital joint ventures.
The Health Ventures Division manages the Network’s non-acute health care delivery facilities and services including ambulatory care centers, surgery centers, home health services, long-term care and assisted living communities, inpatient and outpatient behavioral health facilities, ambulance services, air medical transportation, fitness and wellness centers, rehabilitation centers, and urgent care and after-hours centers.
The Physician Services Division manages all physician related activities of the Network including independent physicians, employed physicians, the clinically integrated network physicians and the Network’s medical services organization (“MSO”). See “PHYSICIAN ALIGNMENT AND STRATEGY” herein.
The Population Health Division is designed to position the Network for success in the changing healthcare environment and expand the Network’s footprint and coordination of care. See “POPULATION HEALTH INITIATIVES” herein.
A component of the strategic mission of HMH is to enhance its academic vision through its newly formed Seton Hall-Hackensack Meridian School of Medicine, with a focus on educational excellence; cutting-edge research; highest-quality clinical care; meaningful integration; and the advancement of New Jersey medical and health sciences educational imperatives. HMH has further demonstrated its educational commitment through affiliations with Georgetown University School of Medicine, Stevens Institute of Technology, St. George’s University School of Medicine and Rutgers New Jersey Medical School. See “EDUCATIONAL AFFILIATIONS” herein.
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FACILITIES OVERVIEW
HMH’s Hospital Services Division consists of 14 acute care hospitals, including three academic medical centers, two children's hospitals and nine community hospitals. HMH employs a regional strategy across the Hospital Services Division, with each region anchored by one of its three academic medical centers: HUMC, JSUMC, and JFKMC.
Founded in 1888 as Bergen County’s first hospital, HUMC is the largest provider of inpatient and outpatient services in the State and ranks among the best hospitals in the nation according to several national organizations. See “AWARDS AND RECOGNTION” herein. HUMC has created an entire campus of award-winning care, including: the John Theurer Cancer Center (“JTCC”); the Heart & Vascular Hospital; and the Sarkis and Siran Gabrellian Women’s and Children’s Pavilion, which houses the Joseph M. Sanzari Children’s Hospital and Donna A. Sanzari Women’s Hospital.
JSUMC is a nonprofit teaching hospital and the only Level II Trauma Center in Monmouth and Ocean Counties. It is home to K. Hovnanian Children’s Hospital – the first children’s hospital in Monmouth and Ocean Counties. The team’s commitment to excellence has earned JSUMC numerous accolades. See “AWARDS AND RECOGNTIONS” herein. Through the hospital’s clinical research program, and its affiliation with Rutgers Robert Wood Johnson Medical School, JSUMC serves as an academic center dedicated to advancing medical knowledge, training future physicians, and providing the community with access to promising medical breakthroughs. JSUMC is nearing completion of the HOPE Tower Project – a $265 million 10-story medical office building which includes advanced imaging services, a clinical academic center, innovative stimulation laboratory, state-of-the-art amphitheater, specialty physician offices, a nine-level parking garage, and a 58,000 square foot cancer facility.
For additional information on JFKMC, see “OVERVIEW OF JFK AFFILIATION AND COMBINATION WITH HMH” herein.
Within their respective regions, each of the three academic medical centers coordinates strategy with the other inpatient and outpatient facilities within their market to ensure continuity and integration of care, coordination of health services and effective population health management as well as the elimination of duplicative health services or management functions. The academic medical centers are supported by seven community hospitals, all of which are wholly-owned by HMH Hospitals, the Hospitals Division of HMH, and include PMC, RBMC Perth Amboy, RBMC Old Bridge, BMC, OMC, RMC, and SOMC. Additionally, two community hospitals, PVMC and MMC, are joint ventures with Ardent Health Services and also support the Network of Hospitals. See “STRATEGIC JOINT VENTURES, PARTNERSHIPS AND OTHER AFFILIATIONS” herein.
HMH provides pediatric services through its two pediatric hospitals, KHOV and JMSCH, located on the campuses of JSUMC and HUMC, respectively. The two pediatric hospitals work collaboratively to provide high-quality pediatric services across the Network. KHOV is supported by over 130 pediatric sub-specialists and includes a 24-hour pediatric emergency department, an intensive care unit with 10 private rooms, an acute care unit with 31 private rooms, and a Level III neonatal intensive care unit. KHOV provides access to more than 25 different specialty areas. JMSCH provides comprehensive medical and surgical pediatric care in more than 30 sub-
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specialties, all integrated within a state-of–the-art child and family-focused facility. JMSCH is one of a select group designated a full institutional member of the Children’s Hospital Association. JMSCH includes the Children’s Cancer Institute and Pediatric Emergency Department.
Effective as of January 1, 2018, HMH consolidated all of its hospital operations into HMH Hospitals. HMH Hospitals had total revenue in 2017 of over $3.82 billion, excluding JFKMC. Below is an overview of the acute care hospital facilities of HMH.
Hospital County Beds(1) Hackensack University Medical Center Bergen 781 Joseph M. Sanzari Children’s Hospital** Bergen - Jersey Shore University Medical Center Monmouth 614 K. Hovnanian Children’s Hospital** Monmouth - JFK Medical Center Middlesex 499 Riverview Medical Center Monmouth 468 Raritan Bay Medical Center – Perth Amboy Middlesex 395 Mountainside Medical Center* Essex 375 Ocean Medical Center Ocean 357 Bayshore Medical Center Monmouth 211 Palisades Medical Center Hudson 206 Southern Ocean Medical Center Ocean 176 Pascack Valley Medical Center* Bergen 128 Raritan Bay Medical Center – Old Bridge Middlesex 113
* Joint venture with Ardent Health Services, the successor to LHP Hospital Group **Included in HUMC and JSUMC bed count (1) Represents licensed acute care beds; does not include regulated bassinets and does not include licensed beds for long term care & assisted living facilities
DIVERSIFIED HEALTH VENTURES
The Network’s non-acute health care delivery facilities and services include more than 120 ambulatory care centers, surgery centers, home health services, long-term care and assisted living communities, inpatient and outpatient behavioral health facilities, ambulance services, air medical transportation, fitness and wellness centers, rehabilitation centers, and urgent care and after-hours centers. The Network’s Meridian Health Village boasts a comprehensive collection of health care and wellness services, including medical services, diagnostic services and other medical and wellness needs, all in one location. The Network is also partnered with the largest regional ambulance company in New Jersey, Alert Ambulance Service, to facilitate transports. These non- acute facilities serve as an ancillary source of revenue to support the Network’s strategic initiative to provide a fully integrated continuum of care.
EDUCATIONAL AFFILIATIONS
On January 15, 2015, HMH (as successor to HUHN) signed a Memorandum of Understanding with Seton Hall University to establish the new, four-year SOM, which submitted an application for accreditation from The Liaison Committee on Medical Education (“LCME”) in March 2017. Both organizations believe that their academic reputations, combined with clinical expertise, will create an opportunity to form New Jersey’s only private school of medicine. This new school will be located on the campus of the former Hoffmann-La Roche Inc. in Nutley and
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Clifton, New Jersey. A 25-year lease on the campus commenced in October 2016. Construction and the accreditation process are on track for the first class of students to enter in July 2018.
The School of Medicine is dedicated to achieving the following goals: educational excellence; cutting-edge research; highest-quality clinical care; meaningful integration; and the advancement of New Jersey medical and health sciences educational imperatives. Seton Hall University plans on moving its College of Nursing and School of Health and Medical Sciences to the campus. This includes its programs or degrees in Physician Assistant, Athletic Training, Occupational Therapy, Physical Therapy, Speech and Language Pathology, Masters in Health Administration and a Ph.D. in Health Sciences (Research). This effort is intended to integrate the education and training of these multiple disciplines into a single classroom setting, an innovative approach that is designed to mirror how health care is increasingly delivered. Students will be trained within New Jersey on HMH campuses, and retention programs are to be developed to embed the physicians within the Network.
On March 19, 2018, the Network entered into a letter agreement with Seton Hall University which provides for the SOM to seek its own independent accreditation from its various accrediting and licensing bodies. Should the SOM receive such accreditation, the Network would assume full governance over the SOM. The letter agreement stipulates that the Network has full responsibility for the financial obligations of the SOM inclusive of the long term lease for the two buildings on the campus. As part of the letter agreement, Seton Hall University agreed to assume responsibility for a sublease of those buildings related to their School of Nursing and School of Allied Health programs that they are relocating to the campus, which in the aggregate constitute approximately 40% of the campus.
On March 20, 2018, the SOM began accepting applications for its first class of students, which is expected to total 55 students, to begin July 9, 2018. On March 26, 2018, the SOM announced that it had launched a $100 million endowment fund to provide student scholarships, which HMH will be responsible for funding at its discretion along with any donor contributions.
HMH has further demonstrated its educational commitment through HUMC’s affiliations with Georgetown University School of Medicine, Stevens Institute of Technology (“Stevens”), St. George’s University School of Medicine and Rutgers New Jersey Medical School. The academic students participate in the following specialties: OB/GYN, psychiatry, pediatrics, internal medicine, surgery and emergency medicine, while the Network’s medical residents participate in specialties such as: OB/GYN, psychiatry, pediatrics, internal medicine, surgery, emergency medicine, neurosurgery, ENT, orthopedics, podiatry, urology and pathology. The Network educates medical, nursing, and pharmacology students, residents (including emergency medicine, dental, and podiatry), and fellows. These students rotate monthly from Georgetown University School of Medicine, PMC, Rutgers New Jersey Medical School, St. Barnabas Medical Center, St. George’s University School of Medicine, St. Michael’s Medical Center, St. Joseph’s Regional Medical Center, and Stevens.
In 2013, HUMC formed an academic affiliation with the Georgetown University School of Medicine to establish the HUMC Emergency Medicine Residency Program in Hackensack, New Jersey. The Program was approved for 36 total residents in 2013, and graduated its first class in 2016. HUMC and Georgetown University formed a clinical nursing agreement that includes the following online graduate nursing programs: Family Nurse Practitioner Program, Nurse Education
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Program, and Adult Gerontology Acute Care Nurse Practitioner/Clinical Nurse Specialist. Full- and part-time HUMC staff members, as well as non-employees residing in the tri-state area, who are enrolled in the program, will be targeted for clinical placements at HUMC.
In 2012, Stevens in Hoboken, New Jersey, and HUMC partnered to introduce joint biomedical educational programs that provide undergraduate and graduate students with advanced clinical education experience. This partnership is a continuation of a Research Collaboration Agreement with Stevens, which has formed various research initiatives since 2009.
In August 2010, HUMC formed an academic partnership with St. George’s University School of Medicine in Grenada. Annually, 48 third-year students from St. George’s University School of Medicine serve their five core rotations from September through mid-August; and 20 to 25 fourth-year medical students complete electives on a monthly basis.
HUMC has been affiliated with Rutgers New Jersey Medical School (formerly UMDNJ) for more than 40 years. There are 40 medical students monthly from Rutgers New Jersey Medical School completing their third-year core rotations, and 10 to 15 fourth-year medical students completing electives on a monthly basis.
In early 2016, HUMC became the only health care Charter Member of the New Jersey Innovation Institute (“NJII”), and a partner in its Healthcare Delivery Systems Innovation Lab (“iLab”s). NJII is a New Jersey Institute of Technology (“NJIT”) corporation that applies intellectual and technological resources to challenges identified by industry partners. Through its iLabs, NJII brings NJIT expertise to key economic sectors, including health care delivery systems, bio-pharmaceutical production, civil infrastructure, defense and homeland security, and financial services (recently, the Network Board approved a $25 million capital fund to be applied toward innovation). NJII aims to become an ideation center to help streamline funding for ideas and an innovation center to help kick-start companies. Incubator space will be available at the SOM campus.
JSUMC also serves as a key academic affiliate for HMH dedicated to advancing medical knowledge, training future physicians, and providing the community with access to the benefits of medical innovations, especially through the hospital’s clinical research program, and its affiliation with Rutgers Robert Wood Johnson Medical School. JSUMC sponsors ACGME-accredited residency training in Pediatrics, Obstetrics & Gynecology, General Surgery and Internal Medicine. In addition, JSUMC offers a Pediatric Hospital Medicine Fellowship through the Department of Pediatrics, and sponsors graduate training programs in General Dentistry, Clinical Pharmacy and Podiatry.
JSUMC hosts a summer program for medical, nursing and allied health students to teach interdisciplinary care in geriatrics. This program, Geriatric Interdisciplinary Fellowship Training or “GIFT”, provides students the opportunity to practice selected professional skills and procedures and participate in evidenced based initiatives and quality improvement activities under the guidance of board certified geriatricians, geriatric pharmacists and geriatric advance practice and clinical scholar nurses.
Since the mid-2000s, JSUMC has served as a rotation site for several residency and fellowship programs from Rutgers Robert Wood Johnson Medical School. Beginning in 2016,
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JSUMC started an initiative to bring these programs “in house” with approval of its own General Surgery Residency Program and Cardiology Fellowship. Only six other hospitals in New Jersey are approved to provide advanced training in cardiovascular disease.
In 2015, JSUMC established an academic partnership in the Department of Medicine with the NYU School of Medicine Center for Healthful Behavioral Change for residents to participate in an intensive research elective experience. Several peer-reviewed papers have already resulted from the partnership. Pediatrics residents participate in specialty rotations at Robert Wood Johnson University Hospital in New Brunswick, and residents in Obstetrics and Gynecology routinely partner with leading hospitals and medical centers to provide state-of-the-art training to HMH’s residents. In the past year, residents participated in electives at Baylor College of Medicine, Loyola and Boston Medical Center.
JSUMC is a member of the Alliance for Independent Academic Medical Centers. For the last four years, JSUMC has participated in initiatives focused on performance improvement and cultural diversity. Residents participate as team members with hospital leadership on these initiatives.
The Florence M. Cook School of Medical Laboratory Science was founded in 1947 at JSUMC. The curriculum consists of an 11-month training program with didactic sessions as well as clinical rotations throughout JSUMC's laboratory departments.
OMC is affiliated with the Rowan University School of Osteopathic Medicine (“Rowan- SOM”). Rowan-SOM students spend time at OMC on clinical rotations and for elective experiences.
Launched in fall 2008, the Georgian Court-Meridian Health School of Nursing BSN program strives to address the escalating nursing shortage in New Jersey and nationally, and build upon the Network’s mission to improve the health of the communities it serves through excellence in nursing education.
The Field Placements at Behavioral Health Services provides experiential training to students pursuing a career in the mental health field, offering unpaid field placements to students enrolled in affiliated colleges and universities who are pursuing their undergraduate and graduate degrees in social work, psychology or counseling. Field Placements are offered through both JSUMC and RMC. RMC offers two sites: one in Red Bank and the other at the Booker Behavioral Health Center in Shrewsbury.
JFKMC also now serves as the Network’s third academic medical center, providing an array of graduate medical and allied teaching programs and extensive participation in clinical, translational and basic science research. JFKMC has provided residency/fellowship programs in physical medicine and rehabilitation, neurology and family medicine, each for over 20 years. JFKMC also operates a Commission on Dental Accreditation (“CODA”) accredited dental residency and beginning July 1, 2018 will provide an American Society of Health-System Pharmacists (“ASHP”) accredited pharmacy residency program.
JFK’s Robert Wood Johnson, Jr. Rehabilitation Institute ("JFK Johnson") serves as the primary teaching site for the Department of Physical Medicine and Rehabilitation (“PM&R”) of
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the Rutgers New Jersey Medical School. JFK Johnson’s Medical Director serves as the Chair of PM&R. JFK Johnson’s Medical Director also serves (effective February 2018) as Chair of PM&R of the SOM.
JFKMC has been a primary teaching affiliate of the St. George’s University School of Medicine, providing a rotation site for students in family medicine and neurology. JFK Johnson also serves as a primary teaching site for Rutgers New Jersey Medical School medical students in physical medicine and rehabilitation, neurology, and more recently OB/GYN and pediatrics.
Established in 1894, JFKMC’s Dorothy and Harold Snyder School of Nursing (“DHSSN”) provides a comprehensive program to prepare students for a career in nursing. Since 1984, DHSSN has offered a nationally accredited Diploma Program in Nursing. DHSSN has an enrollment of over 330 students and graduates an average of 106 students annually.
STRATEGIC JOINT VENTURES, PARTNERSHIPS AND OTHER AFFILIATIONS
Memorial Sloan Kettering Cancer Center. In December 2016, HMH announced a 10- year strategic partnership with Memorial Sloan Kettering Cancer Center (“MSKCC”). The objective of the partnership is to deliver and improve comprehensive cancer care through the development and/or sharing of care standards, protocols, tumor boards and other care delivery tools, the provision of advice on the deployment of teaching and training resources and the creation of sharing of knowledge and experience about how to treat and prevent cancer. The partnership intends to establish seamless clinical interfaces and service arrangements to facilitate non- oncologic care of MSKCC cancer patients and inpatient hospitalization closer to their New Jersey homes through use of the HMH Network providers and expand services to cancer patients through a new entity which will design, build, jointly own and operate new cancer facilities and programs in New Jersey. Through the partnership, HMH and MSKCC expect to treat an estimated one in five New Jersey residents who are diagnosed with cancer.
Ardent Health Services. The Network has two separate joint ventures with Ardent Health Services (“Ardent”), which were entered into with LHP Hospital Group by HUMC during 2012. On October 5, 2016, it was announced that Ardent, a privately owned, for-profit hospital system, would acquire LHP Hospital Group. Ardent completed its acquisition of LHP Hospital Group on March 13, 2017. Under the first joint venture arrangement, entered into on March 23, 2012, the Network contributed the existing property and equipment of the former Pascack Valley Hospital campus for a 35% interest in the joint venture, now known as Pascack Valley Medical Center. Under the second joint venture, entered into on July 1, 2012, the Network purchased a 20% ownership interest in Mountainside Hospital, now Mountainside Medical Center.
Opened in June 2013, Pascack Valley Medical Center is a full-service, acute-care community hospital. The hospital features all-private patient rooms, a state-of-the-art obstetrical unit, an intensive/critical care unit, five operating rooms, one special procedure room, and a cardiac catheterization laboratory. In 2016, Pascack Valley Medical Center completed a new, state-of-the- art Emergency Department. The $14 million expansion doubled the space and provides 26 all- private exam rooms.
Mountainside Medical Center is a community hospital that delivers care while also serving as a learning center via its nursing school and residency programs in family medicine, internal
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medicine and dentistry. The hospital has served Montclair, Glen Ridge and surrounding communities for more than 120 years.
Under both Ardent joint ventures, Ardent is the managing agent for the respective operations and HMH Hospitals (as successor to HUMC) has equal Board or voting rights as well as other privileges or powers.
The Network has the ability to purchase additional equity interests in both joint ventures with Ardent, which it may periodically consider.
United Surgical Partners International. The two principal legacy health systems, HUHN and Meridian, had previously entered into joint venture partnerships with United Surgical Partners International (“USPI”) relating to the acquisition and operation of ambulatory surgery centers. As a result of these relationships and expansion since the formation of HMH, the Network owns and operates a network of outpatient ambulatory surgery centers in Bergen, Hudson, Middlesex, Monmouth and Ocean Counties.
Englewood Hospital and Medical Center. In April 2015, HMH (as successor to HUHN) and Englewood Hospital and Medical Center (“EHMC”) received board approval to enter into a new clinical and academic affiliation, announcing five major initiatives to benefit New Jersey communities in Bergen, Essex, Hudson and Passaic Counties, as well as Rockland County, New York. Under the agreement, HMH and EHMC intend to remain independent health care providers and will continue to be responsible for individual finances and operations, including boards, administration, physicians and employees. The new collaboration is designed to enable both HUHN and EHMC to enhance access to a variety of patient care services and to develop population health management programs for the benefit of the communities they serve. The partnership is expected to create regional models of care with an emphasis on difficult-to-access services targeting multicultural communities, preventive medicine and early intervention. EHMC plans to also serve as a major teaching site for the SOM and its graduate medical education programs.
MedStar Georgetown University Hospital. In early 2013, HUHN announced an innovative partnership with MedStar Georgetown University Hospital, Georgetown University School of Medicine and Georgetown Lombardi Comprehensive Cancer Center. This partnership includes an oncology affiliation agreement between the Georgetown Lombardi Comprehensive Cancer Center and the JTCC to foster collaboration among clinicians and researchers from both institutions. As part of the oncology affiliation, the Georgetown Lombardi Cancer Center and JTCC formed the Regional Immunotherapy Discovery Program to accelerate discovery and implementation of a new immunotherapy approach. The partnership has also announced a joint cancer research agenda designed to significantly expand the ability of both institutions to conduct research intended to lead to innovative clinical trials and improvements in cancer care. This partnership anticipates applying for National Cancer Institute (“NCI”) designation for JTCC in 2018 with expected decision regarding designation for early 2019.
This partnership has resulted in several other initiatives, including a clinical collaboration to establish a Blood and Marrow Stem Cell Transplantation Program at MedStar Georgetown University Hospital and a clinical nursing agreement with Georgetown University.
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Carrier Clinic. In March 2018, HMH and Carrier Clinic signed a non-binding of letter of intent to explore a strategic affiliation, with a focus on enhancing behavioral health care in the region. Carrier Clinic’s 100-acre campus in Belle Meade, New Jersey includes a licensed 281-bed capacity hospital; the Blake Recovery Center, a licensed 40-bed inpatient and outpatient detox and recovery facility; East Mountain Youth Lodge, which can house up to 91 residents ages 13-18; and East Mountain School, a fully-accredited school for 120 7th-12th graders affected by behavioral and psychiatric disorders. As of December 31, 2017, Carrier Clinic had annual revenues of approximately $75 million. No assurance is given that any transaction with Carrier Clinic will occur, as the transaction remains subject to due diligence, various regulatory approvals and other contingencies.
Other Notable Partnerships. HMH has a joint venture partnership with Fresenius Kidney Care which started in April 2016. The partnership includes nine kidney care/dialysis locations throughout Monmouth and Ocean Counties in Brick, Lakewood, Manahawkin, Matawan, Neptune, Red Bank, Toms River (2), and Whiting and anticipates the opening of a Forked River and East Brunswick location in the latter part of 2018. Fresenius is a global leader in kidney care with locations in over 45 countries, and is a large provider of kidney care services in the North America with over 178,000 patients and 26 million hemodialysis treatments provided annually.
The Network has numerous other partnerships with organizations such as those listed below. The Network intends to continue to grow through value-added, accretive partnerships and affiliations. CityMD Panasonic ConvenientCare Now Uber New York Giants NYU Langone Medical Center CVS Caremark’s Minute Clinic Minute Care RediClinic St. Joseph’s HealthCare American Well Teladoc Alert Ambulance
AWARDS AND RECOGNITION
U.S. News & World Report: Best Hospitals Rankings:
Hackensack University Medical Center: • Ranked as the number one hospital in New Jersey – maintaining its place atop the rankings since the rating system was introduced. • Listed as one of the top four New York Metro Area hospitals. • Ranked as high performing in diabetes and endocrinology, geriatrics, nephrology, pulmonology, and cancer care. • Received national rankings in neurology and neurosurgery, orthopedics, and urology. • Ranked as a high-performing hospital in eight of the nine common adult procedures and conditions: heart bypass surgery, heart failure, chronic obstructive pulmonary disease, hip replacement, knee replacement, lung cancer surgery, colon cancer surgery, and abdominal aortic aneurysm repair. • The Joseph M. Sanzari Children’s Hospital ranked nationally in pediatric neurology and neurosurgery.
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• Ranked in the 2015-16 “U.S. News & World Report: Most Connected Hospitals.”
Jersey Shore University Medical Center • Ranked fourth in New Jersey and 11th in the New York Metropolitan Area. • Ranked as high-performing across eight common adult procedures and conditions: heart bypass surgery, heart failure, chronic obstructive pulmonary disease, hip replacement, knee replacement, aortic valve surgery, colon cancer surgery, and abdominal aortic aneurysm repair.
Ocean Medical Center • Tied for eighth in New Jersey and 17th in the New York Metropolitan Area. • Ranked as high-performing in four common adult procedures and conditions: heart bypass surgery, chronic obstructive pulmonary disease, knee replacement, and colon cancer surgery.
Riverview Medical Center • Tied for eighth in New Jersey and 17th in the New York Metropolitan Area. • Ranked as high-performing in four common adult procedures and conditions: heart failure, chronic obstructive pulmonary disease, hip replacement, and knee replacement.
Several HMH hospitals have been Magnet-designated for more than two decades.
• Hackensack University Medical Center, Jersey Shore University Medical Center, Riverview Medical Center and Ocean Medical Center received the designation five times; Raritan Bay Medical Center has received the Magnet designation three times and Bayshore Medical Center and Southern Ocean Medical Center were designated in 2017 for the first time. • Meridian Health was the first health system in the nation to receive Magnet designation. • Hackensack University Medical Center was the first hospital in New Jersey and the second in the country to receive this designation.
Healthgrades: Hackensack University Medical Center was one of only five major academic medical centers in the nation to receive Healthgrades America’s 50 Best Hospitals Award for five or more years in a row.
Becker’s Hospital Review: • Becker’s Hospital Review recognized Robert C. Garrett and John K. Lloyd as two of the 2017 “188 Nonprofit Hospital and Healthcare System CEOs to Know.” • Robert C. Garrett and John K. Lloyd, co-CEOs of HMH, were the only New Jersey CEOs named to the 2016 “135 Nonprofit Hospital and Health System CEOs to Know” list. • 150 Great Places to Work in Healthcare 2017 – seventh consecutive year and every year since its inception (HMH). • 100 Great Hospitals in America 2017 – six consecutive years – every year since its inception (Hackensack University Medical Center). • 100 Hospitals and Health Systems with Great Oncology Programs 2017.
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Practice Greenhealth Environmental Excellence Award: • Hackensack University Medical Center is the only hospital in New York and New Jersey to win the award three years in a row.
National Research Corporation Consumer Choice Award 2016/17: • Hackensack University Medical Center: only hospital in Bergen County, and has won 21 consecutive times – every year since the award’s inception. Also the co-winner in the Jersey City market for the sixth consecutive year. • Jersey Shore University Medical Center is the only hospital in the Monmouth-Ocean market, and has received the award nine times.
Joint Commission Gold Seals of Approval Awarded: • Hackensack University Medical Center (23) • Jersey Shore University Medical Center (5) • JFK Medical Center (1) • Riverview Medical Center (5) • Palisades Medical Center (2) • Mountainside Medical Center (7) • Ocean Medical Center (5) • Bayshore Medical Center (1) • Pascack Valley Medical Center (3)
Hospitals & Health Network Magazine: Top 100 Most Wired and Top 25 Most Wireless Health Systems in New Jersey (Hackensack University Medical Center & Meridian Health).
PHYSICIAN ALIGNMENT AND STRATEGY
Strengthening and growing the physician enterprise is a strategic priority for the Network. The Network is creating unified and aligned strategies that both embrace voluntary faculty and employed physicians as well as develop clinical strengths and integration through physician networking and recruitment. The Network has initiated a recruitment plan for the CIN, a medical staff development plan for the Network, and conducted a physician gap analysis across Middlesex, Bergen and Hudson Counties. To further these integration strategies, HMH Hospitals’ medical staff recently adopted a uniform set of bylaws. JFK has not yet adopted the new bylaws.
Using a pluralistic model, the Network aligns physicians through its Physician Services Division, the CIN, and numerous partnerships and affiliations and provides practice management through its MSO.
The Physician Services Division, which includes the Network’s employed physicians, has seen significant year-over-year growth as physician employment models have been key to the Network-wide integration efforts. In total, the Physician Services Division consists of 831 employed physicians and physician extenders (i.e. mid-levels), excluding JFK’s employed physicians.
Hackensack Meridian Health Partners is the Network’s CIN that includes over 3,100 physicians. See “POPULATION HEALTH INITIATIVES” herein.
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The Network’s MSO provides comprehensive practice management services and contracted consulting services for some affiliated physicians, including the Meridian Practice Institute, which combined provide approximately a half-million annual office visits.
As of December 31, 2017, the Network has a total active medical staff of over 7,000 credentialed physicians, of which 81.3% are board certified. The average age of the medical staff is 50.7.
TEAM MEMBERS / EMPLOYEES
As of December 31, 2017, the Network employed approximately 32,000 team members. At present, the Network, including JFK facilities, has 14 collective bargaining agreements that represent approximately 3,300 team members. Several collective bargaining agreements are in the process of being renegotiated and renewed. One such collective bargaining agreement for a subacute facility that is not owned by a member of the Combined Group expired in January 2018 and is currently being renegotiated.
HMH aspires to create a “culture of excellence” that:
• Aligns to the mission, vision and values of the organization and instills a sense of purpose to all team members.
• Inspires trust and well-being so that team members, leaders and physicians can enhance the human experience and deliver on the brand promise to provide patients with the best health care experience.
• Acknowledges and honors the fundamental value and dignity of all individuals by creating and maintaining an environment that respects diverse traditions, heritages and experiences.
• Supports an innovative culture of learning and continuous improvement resulting in national recognition as an employer of choice.
• Provides a total rewards philosophy, inclusive of compensation, productivity, work-life balance, health and wellness benefits, reward and recognition, performance and talent development.
HMH provides team members with competitive benefits programs, retirement programs, wellness solutions, work-life balance solutions, competitive base and variable pay programs, personal and leadership development programs, and reward and recognition programs. Communication is critical to fostering a culture of excellence. As a result, HMH incorporates electronic newsletters, team huddles, social media, team member forums and plasma television units for consistent messaging.
Management credits the “total rewards” approach with creating a relatively low turnover and high team member engagement as reported by Great Place to Work®. HMH was recently certified as a Great Place to Work based on its strong culture and nurturing work environment.
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SERVICE AREA AND COMPETITION
Service Area
HMH defines its Network-wide service area as an 8-County Region including Bergen, Passaic, Essex, Hudson, Union, Middlesex, Monmouth, and Ocean Counties creating a contiguous Network service area. HMH serves approximately 5,600,000 people or 62% of New Jersey’s total population of 8,999,197. The map below provides an overview of the 8-County Region highlighting the Network’s Primary Service Area (“PSA”) in green and its Secondary Service Area (“SSA”) in blue.
8-COUNTY REGION
Pa ssa i c
Bergen Esse x
Hudson Union
Middlesex
Monmouth
Ocean
Academic Medical Center (2) Children’s Hospital (2) Community Hospital (9) JFK Medical Center (1)
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In 2016, approximately 95.7% of HMH’s 173,313 grand total inpatient discharges came from the 8-County Region. The table below shows the Network’s patient origin for inpatients in 2016. The Network’s PSA (Monmouth, Ocean, Middlesex and Bergen Counties) comprises 71.9% of the Network’s total 2016 inpatient discharges.
PATIENT ORIGIN – INPATIENT (2016) Patient Origin County/State 2016 % of Patient Origin Monmouth 37,516 21.7% Ocean 29,797 17.2%
Bergen 28,907 16.7% HMH 8-COUNTY Middlesex 28,247 16.3% REGION Hudson 15,448 8.9% Essex 11,931 6.9% Passaic 7,713 4.5% Union 6,233 3.6% Subtotal: HMH 8-County 165,792 95.7% Region Other NJ Counties 3,228 1.9% OTHER AREAS New York and Pennsylvania 3,194 1.8% Other States 1,099 0.6% Subtotal: Other Areas 7,521 4.3% Grand Total 173,313 100.0%
Source: NJ, NY and PA UB Claims Data Note: Includes Acute Rehabilitation and JFK
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Competitive Overview / Market Share
Management considers HMH’s principal competitors for routine services to be other large healthcare systems operating in the 8-County Region. Of the 71 acute care hospitals in New Jersey, HMH, including JFKMC, operates 12 facilities totaling 4,078 licensed general acute care hospital beds. HMH’s closest competitor, RWJBarnabas Health, operates 11 hospitals comprising 4,811 licensed general acute care beds. The other main competitor in New Jersey is Atlantic Health System, which consists of 5 acute care hospitals and 1,672 licensed general acute care beds. Additionally, HMH’s competitors for highly specialized care include major medical centers in New York City.
In 2016, the hospitals that now comprise HMH had 165,792 discharges representing 26.8% of total discharges in the 8-County Region. HMH measures its market share based on total inpatient discharges of all New Jersey residents hospitalized in any hospital in New Jersey, New York or Pennsylvania. The following table sets forth HMH’s market share from 2014 to 2016 (the most recent years of data available) and the market share change between 2015 and 2016 for residents of the 8-County Region who were discharged from New Jersey, New York or Pennsylvania hospitals. From 2015 to 2016, HMH inpatient discharges increased +0.1% and market share increased +0.2% as the 8-County Region experienced a -0.7% decrease in inpatient discharges.
INPATIENT DISCHARGE AND MARKET SHARE SUMMARY FOR 8-COUNTY SERVICE AREA
2014 2015 2016 Market % M.S. Health System % Change(2) Discharges Discharges Discharges Share Change(2)
Hackensack Meridian Health(1) 164,451 165,639 165,792 0.1% 26.8% 0.2%
RWJBarnabas Health 174,189 169,386 168,028 (0.8)% 27.2% 0.0%
Atlantic Health 35,588 35,860 35,009 (2.4)% 5.7% (0.1)%
All Other NJ Hospitals 254,541 251,971 249,521 (1.0)% 40.3% (0.1)%
GRAND TOTAL 628,769 622,856 618,350 (0.7)% 100.0%
(1) All years include pro forma inpatient discharges and market share for HMH and JFK. (2) 2015-2016 Source: NJ, NY and PA UB Claims Data Note: Includes Acute Rehabilitation
In HMH’s core markets of Bergen, Monmouth-Ocean and Middlesex Counties, the Network is the leading provider. In Bergen County, the Network's market share was 32.4% for 2016, the most recent year of available data. The closest competitor, Valley Health System, had a market share of 18.0%. In Monmouth and Ocean Counties, the Network’s market share was 43.8%. The closest competitor, RWJBarnabas, had a market share of 35.9%. In Middlesex County, the Network’s market share was 33.4% in 2016, where the closest competitor is RWJBarnabas with a 30.7% market share.
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POPULATION HEALTH INITIATIVES
From successfully managing its Medicare population to growing Hackensack Meridian Health Partners, the Network’s CIN, the Network’s population health strategy is to position HMH for success in this evolving health care marketplace while increasing its footprint and expanding coordination of care across the Network.
Hackensack Meridian Health Partners
Hackensack Meridian Health Partners is HMH’s clinically integrated network of health care providers who share the common goals of improving health outcomes, reducing health care costs, and enhancing the patient experience. This physician-led network is mainly comprised of independent physicians and enables physicians to coordinate care, shape and influence clinical practice, and prepare for new, value-based compensation programs. HMH established Hackensack Meridian Health Partners as a way to partner with its affiliated physicians in order to improve hospital and ambulatory quality and ultimately generate better quality at lower cost for patients, their families and employers. Hackensack Meridian Health Partners is the primary vehicle utilized for value-based and other strategic contracting initiatives with managed care payors.
In 2017, Hackensack Meridian Health Partners underwent significant growth, increasing membership by 20 percent. As of January 1 2018, the CIN is comprised of the 14 hospitals and over 3,100 physicians including employed, faculty, and independent health providers. In 2018, Hackensack Meridian Health Partners expanded to include physicians affiliated with JFKMC. This move broadened Hackensack Meridian Health Partners' presence which now spans eastern New Jersey from Bergen County to Ocean County.
Accountable Care Organizations
The Network has three accountable care organizations that have agreements with CMS. Meridian Accountable Care Organization, LLC (“Meridian ACO”) launched on January 1, 2013 and is traditionally one of the largest accountable care organizations in New Jersey by assigned Medicare beneficiaries with over 41,000 as of December 31, 2017. In 2016, Meridian ACO’s Quality Score as computed by CMS based on over 30 metrics including patient satisfaction and readmission rate, was 87.3%. Hackensack Physician – Hospital Alliance Accountable Care Organization (“Hackensack ACO”) launched on April 1, 2012, and, as of December 31, 2017, had over 35,000 assigned beneficiaries. It placed third in the nation for total savings in 2016 with over $50 million and a CMS Quality Score of 92.26%. Launched on January 1, 2014, JFK Population Health (“JFK ACO”) had over 14,000 assigned beneficiaries as of December 31, 2017. In 2016, JFK ACO’s CMS Quality Rating was 91.7%.
Population Health Strategies and Priorities
To properly address changes in the health care marketplace, HMH is dedicating resources to several strategic priorities including:
• Care Management Redesign: The Network moved all of its case management team to the triad model, enabling inpatient and outpatient care management teams to operate in the same manner with standardized roles and responsibilities for the first time. This
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transition finished ahead of schedule, taking just 10 months instead of the anticipated 18.
• Million Hearts Program: HMH is participating in this national initiative to prevent one million heart attacks and strokes in five years. In its first performance report, HMH exceeded CMS’ expectations, screening 97% of eligible Medicare patients for cardiovascular risk who visited participating physicians. This percentage surpassed CMS’ requirement of 90%.
• PatientPing: HMH is the first health system in New Jersey to partner with this health technology company. PatientPing’s technology enables HMH to increase its care coordination by enabling its care managers to see where and when its attributed patients are admitted, discharged or transferred to/from a HMH Hospital.
• Information Technology: After operationalizing its enterprise data warehouse in 2016, the Network continues to invest in information technology and data analytics. In 2017, the Population Health Division added additional team members to assist in data gathering and analysis, helping increase Population Health’s insight while helping management and growth:
• Value-Based Contracts: These additional resources intend to help fulfill existing value- based contracts including Horizon, Aetna, United and AmeriHealth.
• Medical Record Management: HMH has adopted EPIC, an industry leading electronic medical record system, intended to streamline and standardize care across the Network.
MANAGED CARE
The Network has maintained long-standing business relationships with the managed care payors set forth below. HMH has successfully renegotiated its top managed care contracts for 2018 including Horizon Blue Cross Blue Shield of New Jersey (“Horizon”), which is the largest commercial managed care contract for the Network. HMH also represents and coordinates all of the Network’s entities (hospitals, employed physicians and partner companies) in negotiations with payors and ensures appropriate reimbursement and participation in all various insurance products. This strategy of contracting for the entire Network is key especially for HMH’s value- based agreements with payors (Horizon, Aetna, AmeriHealth, United) which promotes coordinated care and efficiency.
The following managed care organizations have contracts for a variety of products with the Network: Aetna; AmeriChoice of New Jersey; AmeriGroup New Jersey; AmeriHealth HMO; Cigna HealthCare of New Jersey; Empire BCBS of New York; Horizon; Qualcare; and United (including Oxford Health Plan of New Jersey).
In 2018, Hackensack Meridian Health Partners expanded its attribution value-based model with Horizon, Aetna and AmeriHealth and launched a new product initiative with Brighton Health. Hackensack Meridian Health Partners also engaged in a co-branded, commercial, product-based accountable care organization agreement with Aetna to offer employers in Monmouth and Ocean
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Counties a health care model designed to improve quality, efficiency and the patient experience. This commercial health care plan, known as Aetna Whole HealthSM – (Meridian Health), gives Aetna members access to highly coordinated care through the physicians of Hackensack Meridian Health Partners in Monmouth and Ocean Counties. Health care savings vary by employer group.
UTILIZATION
The statistical information provided below was prepared by the records maintained by the Network. The following table sets forth selected inpatient and outpatient utilization data for the three years ended December 31, 2017 (see notes regarding entities included in each year).
2015 2016 2017 Licensed Beds 2,404 3,113 3,225 Maintained Beds 2,022 2,499 2,591 Adult and Pediatric Inpatient Admissions(1) 102,642 124,207 125,057 Inpatient Days(1) 538,756 635,439 633,011 Occupancy (%)(2) 73% 69% 67% Newborn and Neonatal ICU Admissions(3) 12,758 15,691 13,799 Outpatient Visits (4) 1,161,051 1,468,476 1,467,054 Emergency Room Visits (5) 323,870 428,905 423,142 Radiation Oncology Registrations 30,220 69,526 70,378 Same-Day Surgery Cases 35,391 46,371 46,027 Observation Cases 29,422 38,552 39,078 Full Time Equivalent (FTEs) 20,480 24,824 24,092
Source: Network records Note: Does not include PMC or RBMC for 2015. Does not include JFK, PVMC or MMC. Please refer to “OVERVIEW OF JFK AFFILIATION AND COMBINATION WITH HMH” for JFK’s utilization statistics. (1) Excludes Newborn, Neonatal ICU, Same Day Surgery, Same Day Medical, and Rehabilitation. (2) Based on maintained beds excluding Newborn, Neonatal ICU, and Rehabilitation. (3) Includes routine births and births admitted to Neonatal ICU. (4) Outpatient Visits is inclusive of the balances listed in the table for Emergency Room, Radiation Oncology, Same Day Surgery, and Observation Cases, in addition to all other outpatient areas not listed in the table. (5) Excludes admissions deriving from the Emergency Room.
FINANCIAL PERFORMANCE
The following tables set forth the statements of operations for the Network for the fiscal years ended December 31, 2015, December 31, 2016, and December 31, 2017 and the balance sheets as of December 31, 2016 and December 31, 2017 (see notes regarding entities included in each year). As of December 31, 2017, Management calculates that members of the Combined Group accounted for approximately 87% of total operating revenue and 84% of unrestricted net assets of the Network, excluding JFK.
This summary should be read in conjunction with the audited consolidated financial statements for Hackensack Meridian Health, Inc. and related notes to the consolidated financial statements included in Appendix B to this Offering Document.
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SUMMARY BALANCE SHEET INFORMATION (In 000’s)
December 31, (1) (2) 2016 2017 Assets Current Assets Cash and cash equivalents $ 634,207 $ 713,235 Patient accounts receivable, less allowance for uncollectible accounts 386,588 431,819 Pledges receivable, net of allowance 33,851 37,723 Other current assets 171,765 167,665 Assets limited as to use and investments, current portion 847,403 814,933 Total current assets 2,073,814 2,165,375
Assets limited as to use and investments, noncurrent portion 1,109,700 1,656,976 Investment in joint ventures 120,135 139,214 Property and equipment, net 1,873,060 2,029,877 Other assets 129,966 124,003 Total assets $ 5,306,675 $ 6,115,445
Liabilities and Net Assets Current liabilities Current maturities of long-term debt and capital lease obligations $ 147,624 $ 61,363 Accounts payable and accrued expenses 503,308 597,329 Other current liabilities 196,494 157,018 Total current liabilities 847,426 815,710
Long-term debt and capital lease obligations, less current maturities 1,267,392 1,675,532 Accrued pension liability 390,282 387,241 Other liabilities 372,527 434,373 Total liabilities 2,877,627 3,312,856
Net Assets Unrestricted 2,263,515 2,604,041 Non-controlling interests in subsidiaries 29,115 31,474 Total unrestricted net assets 2,292,630 2,635,515 Temporarily restricted 94,391 121,777 Permanently restricted 42,027 45,297 Total net assets 2,429,048 2,802,589
Total liabilities and net assets $ 5,306,675 $ 6,115,445
Source: The Network's records. (1) Does not include JFK. Certain amounts in the 2016 summary balance sheet have been reclassified to conform to the 2017 presentation. (2) Derived from the audited consolidated financial statements of HMH set forth in Appendix B hereto. Does not include JFK. Please refer to “OVERVIEW OF JFK AFFILIATION AND COMBINATION WITH HMH” for additional information.
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SUMMARY STATEMENTS OF OPERATIONS (In 000’s)
Fiscal Year Ended December 31, (1) (2) (3) 2015 2016 2017 Revenue Net patient service revenue, less provision for bad debts $ 3,341,920 $ 3,975,380 $ 4,168,371 Other revenue and gains 156,025 192,664 230,888 Total revenues 3,497,945 4,168,044 4,399,259
Expenses Salaries and benefits 1,725,812 2,125,397 2,312,800 Supplies and miscellaneous expenses 1,330,466 1,556,211 1,614,644 Depreciation and amortization 132,684 156,058 169,252 Interest 58,298 63,447 66,473 Total expenses 3,247,260 3,901,113 4,163,169
Excess of revenues over expenses before other adjustments 250,685 266,931 236,090
Other operating adjustments Investment income (loss) (972) 79,396 169,378 Contribution income - acquisitions - 57,599 - Unrealized gain on derivative investments 3,523 8,150 5,125 Loss on extinguishment of debt - (7,050) (30,961) Other gains (losses) 5,733 (1,792) 1,747
Excess of revenues over expenses 258,969 403,234 381,379
Other adjustments in unrestricted net assets: Net assets released from restrictions - capital acquisitions 16,112 6,746 11,260 Pension-related adjustments (27,984) (25,802) (42,081) Other changes in net assets 32 1,713 (150) Distributions to noncontrolling interests (6,725) (7,786) (7,523)
Increase in unrestricted net assets $ 240,404 $ 378,105 $ 342,885
Source: The Network’s records. (1) Derived from the aggregation of audited financial statements of HUHN and MHS. Does not include PMC, RBMC or JFK. Certain amounts in the 2015 summary statement of operations have been reclassified to conform to the 2017 presentation. (2) Derived from the internal records of HMH, which only includes 10 months of PMC. Does not include JFK. Certain amounts in the 2016 summary statement of operations have been reclassified to conform to the 2017 presentation. (3) Derived from the audited consolidated financial statements of HMH set forth in Appendix B hereto. Does not include JFK. Please refer to “OVERVIEW OF JFK AFFILIATION AND COMBINATION WITH HMH” for additional information.
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MANAGEMENT’S DISCUSSION OF FINANCIAL PERFORMANCE
Results of Operations - Fiscal Year 2015 to Fiscal Year 2017
The summary statements of operations above include RBMC’s two sites for the full year of 2016 and 2017, and PMC from March 1, 2016 (date of acquisition) to December 31, 2016 and full year of 2017. At $406.8 million of combined total revenue and $417.2 million of combined expenses these two divisions represent approximately 10% of the Network’s revenue and expenses in 2017, while having minimal impact on the year-over-year operating margin from 2015 to 2017 for the Network as a whole.
In 2017, the Network had a 5.4% operating margin, which is consistent with the prior two years.
The 2017 total revenue for the Network was $4.40 billion, an increase of $901.3 million or 26% growth from 2015. As noted above, RBMC and PMC accounted for $406.8 million or 9% of the increase. The Hospital Division accounts for 86% of the remaining $494.5 million. The primary driver of the Hospital Division growth is attributable to governmental and managed care rate increases with modest volume increases in oncology, surgical services and emergency room visits. The rate increases are driven from (a) increases in the acuity of the patients the hospitals have cared for over the two-year period, coupled with reduced length of stay as Management has developed improved patient clinical pathways through its extensive continuum of care; and (b) routine annual rate increases. In addition, the Hospital Division has also experienced a favorable payer mix shift due to the ACA, which expanded Medicaid coverage resulting in a significant number of uninsured/charity patients qualifying for traditional Medicaid and/or Managed Care Medicaid. Specific areas of growth within the Health Ventures Division included expansion of services at homecare, significant positive results from the Network’s two ACO’s from their participation in the Medicare shared savings programs, and the Physician Services Division has seen year-over-year growth in revenue through its physician practice acquisition and development of its CIN initiatives.
The total 2017 expenses for the Network were $4.16 billion, an increase of $915.9 million or 28% growth from 2015. As noted above, RBMC and PMC accounted for $417.2 million or 10% of the increase. The remaining increase in expenses was primarily attributable to Salaries and Benefits increasing $317.3 million and Supplies and Miscellaneous Expenses increasing $153.7 million. Salaries and Benefits increases were attributable to: (a) annual merit increases for Team Members; (b) investment in new clinical and administrative positions which can be associated with both volume growth noted above and initiatives such as population health; (c) and the continued investment in nursing to improve patient experience and outcomes across the Network. Supplies and Miscellaneous Expenses increased due to: (w) the rising cost and increased utilization of pharmaceuticals, specifically in oncology where volume has grown year-over-year; (x) increased surgical volume resulting in increased use of high-cost implantables; (y) one-time costs associated with merger/acquisition activity; and (z) increased volume as noted above.
During the two-year period, Management completed various refinancings which reduced the cost of capital through the reduction of interest expense for the Network.
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Balance Sheet
The Network’s revenue growth and cost containment strategies have resulted in a strong balance sheet position as of December 31, 2017. The balance sheet above includes RBMC and PMC as of December 31, 2016 and December 31, 2017. RBMC and PMC represent approximately 5% of total Network assets and 2% of total Network unrestricted net assets as of December 31, 2017. In 2017, the Network increased its Cash and Investments balance by $593.8 million. Approximately $395 million of this increase consisted of proceeds from bond issuances in 2017, which funds investments in the Network’s infrastructure such as the Second Street Pavilion at HUMC. The remaining $198.8 million resulted from operations and investment performance. Property and Equipment increased by $156.8 million as the Network continues to invest in the development of its infrastructure including several new projects such as the Hope Tower at JSUMC, as well as continued investment in information technology (e.g. Epic). Additionally, Unrestricted Net Assets increased by $342.9 million for fiscal year 2017.
Management believes its steady and improving margin performance is attributable to a disciplined focus on bottom line results.
FINANCIAL RATIOS
For the years ended December 31, 2016 and 2017, the following table sets forth the Network’s (a) unrestricted cash and investments, (b) average daily operating expenses, (c) Days Cash on Hand, (d) Income Available for Debt Service, (e) Annual Debt Service Coverage, and (f) Debt-to-Capitalization Ratio (see notes regarding entities included in each year). Capitalized terms not otherwise defined in this section have the meanings ascribed to such terms in the Master Indenture.
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FINANCIAL RATIOS (000s)
December 31, (1) (2) 2016 2017 Days Cash on Hand(3) Unrestricted cash and investments $ 2,444,276 $ 3,066,388
Total operating expenses 3,901,113 4,163,169 Depreciation and amortization 156,058 169,252 Provision for bad debt 13,775 7,159 Cash operating expenses $ 3,731,280 $ 3,986,758
Average daily operating expenses 10,195 10,923
Days Cash on Hand(3) 240 days 281 days
Historic Annual Debt Service Coverage Ratio Excess of revenues over expenses $ 403,234 $ 381,379 Depreciation and amortization 156,058 169,252 Interest 63,447 66,473 Contribution income (57,599) - Unrealized (gain)/loss on investments (43,568) (89,439) Loss on extinguishment of debt 7,050 30,961 Unrealized (gain)/loss on derivatives (8,150) (5,125) Income Available for Debt Service $ 520,472 $ 553,501
Historic Debt Service Requirements $ 138,100 $ 139,101
Historic Annual Debt Service Coverage Ratio 3.77x 3.98x
Debt-to-Capitalization Ratio(3) Total Long-Term Indebtedness $ 1,267,392 $ 1,675,532 Accumulated changes in other comprehensive income resulting from minimum pension liabilities 459,063 498,294 Unrestricted Net Assets 2,292,630 2,635,515
Debt-to-Capitalization Ratio(3) 0.32x 0.35x
Source: Network records. (1) Derived from the internal financial records of HMH, which include 10 months of PMC for 2016. Does not reflect the issuance of the Series 2018 Bonds. Does not include JFK. (2) Derived from the audited consolidated financial statements of HMH set forth in Appendix B hereto. Does not include JFK. Please refer to “OVERVIEW OF JFK AFFILIATION AND COMBINATION WITH HMH” for additional information. (3) The Master Indenture does not require the Combined Group to maintain a minimum Days Cash on Hand or a maximum Debt- to-Capitalization Ratio and no obligation for the Network to maintain such should be implied or inferred. For additional information on other financial covenants in HMH’s bank documents for its other Institutional Debt, see “CERTAIN FINANCIAL COVENANTS – Potential for Additional Covenants for Existing Institutional Debt.”
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SOURCES OF PATIENT REVENUE
The following table displays the distribution of net patient service revenue of the Network, excluding JFK, by payer source for the year ended December 31, 2017.
NET PATIENT SERVICE REVENUE (%) Medicare, incl. Managed Medicare 35% Medicaid, incl. Managed Medicaid 10% New Jersey Blue Cross 22% Other Commercial & Managed Care 32% Self Pay 1% 100%
Source: HMH audited financial statements as of December 31, 2017.
PENSION BENEFITS
The Network has multiple noncontributory defined benefit retirement plans covering most employees. The Network’s funding policy is to contribute annually an amount no less than the minimum amount required by the Employee Retirement Income Security Act of 1974, plus additional amounts, which may be approved by the Network from time to time. The following describes the various noncontributory defined benefit retirement plans:
HUMC Defined Benefit Pension Plan
HUMC has a noncontributory defined benefit retirement plan covering most employees. In 2010, HUMC announced to all employees a change in its qualified defined benefit pension plan. Beginning January 1, 2011, most of its employees automatically earned retirement benefits under two new retirement plans, a defined contribution plan and a retirement savings plan. Any employee whose age and years of vesting service total at least 65 remains in the defined benefit plan and earns benefits under a new pension formula. The new pension formula continues to use an employee’s compensation and years of service, but benefits are expected to grow more evenly and slower over the remaining course of an employee’s career.
MHC Defined Benefit Cash Balance Pension Plan
The defined benefit cash balance plan for MHC (the “MHC Plan”) was created on January 1, 1998 through the conversion and merger of predecessor defined benefit plans. Benefits calculated based upon the predecessor plans were frozen as of December 31, 1997. Beginning January 1, 1998 benefits are based upon contributions to participants’ accounts at a percentage of the employee’s salary. On December 31, 2009, the MHC Plan was effectively frozen. Any employee eligible to participate in MHC Plan on December 31, 2009 will continue to accrue benefits under this plan until retirement. All new employees joining MHC after this date will be eligible to participate in a new 403(b) savings plan.
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BMC Defined Benefit Pension Plan
BMC was the sponsor of a noncontributory defined benefit pension plan (the “BMC Plan”) covering substantially all of BMC’s employees. Benefits are based on salary and years of service. In 1999, BMC froze the BMC Plan to new participants and no benefits will accrue for future services.
RBMC Pension Plan
The Employees’ Retirement Plan of Raritan Bay Health Services Corporation (the “RB Plan”) is a noncontributory defined benefit retirement plan. The RB Plan was frozen on December 31, 2004. Prior to December 31, 2004, the RB Plan covered all employees who had completed one year of service.
PMC Pension Plan
PMC is the sponsor of a noncontributory defined benefit pension plan (the “PMC Plan”) covering certain of its employees. The benefits are based on years of service and the employees’ last ten years of average earnings. During 2006, PMC amended the PMC Plan such that employees hired after June 1, 2006, do not participate in the PMC Plan. A defined contribution plan was established for such employees as described herein. Certain other changes were made which became effective January 1, 2007, and relate to employees subject to a collective bargaining agreement and the manner that future benefits will accrue for such employees. Certain amendments to the retirement benefits formula were adopted in 2009, effective January 1, 2010. The amendments include revisions to the percentage of compensation used for the determination of certain benefits and to the definition of compensation used in the computation.
The table below displays a summary of the financial position of the Network’s defined benefit pension plans for December 31, 2016 and 2017, respectively:
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SUMMARY OF PENSION BENEFITS ($ 000's)
December 31, (1) (1) 2016 2017
Total annual expense(2) $29,216 $25,632
Fair Value of Plan assets 1,241,239 1,339,333
Benefit Obligation 1,637,278 1,732,271
Funded Status (396,039) (392,938)
Accumulated Benefit Obligation 1,588,224 1,662,410
Discount rate 4.34 - 4.77% 3.67 – 4.54% Expected long term rate of return 7.00 - 7.52% 7.00 – 7.63%
Source: Network records. (1) Excludes JFK. (2) Only includes 10 months of PMC for 2016.
The Network also provides benefits through various defined contribution plans and post- retirement/post-employment benefits plans. The Network’s total expense related to the defined contribution plans was $39.5 million for the fiscal year ended December 31, 2017.
Additional information related to these plans and the assumptions for calculating benefit obligations and determining net periodic pension costs are set forth in the Consolidated Financial Statements included in Appendix B-1.
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INVESTMENTS
The Network’s cash and investments, excluding JFK, are managed pursuant to policies established by the Investment Committee of the Network Board. The Investment Committee meets quarterly, determines the allocation of investments according to asset class, selects managers for each asset class, and reviews manager performance based on a benchmark rate of return established for that manager. Currently the Network utilizes various investment advisors to manage its investments. The Network invests in certain alternative investments with varying restrictions on liquidity. The following table sets forth the cash and investments for the Network, the defined benefit plans, and defined contribution plans at market value by asset class and the percentage which each asset class represents of the total as of December 31, 2016 and 2017, respectively:
SUMMARY OF INVESTMENTS ($ 000's)
2016 2017 % of Asset Class Investment % of total Investment total Cash and Cash Equivalents $911,566 18% $ 985,279 16% Marketable Equity Securities 657,859 13 572,168 9 Mutual Funds 2,134,032 43 2,735,769 45 Corporate Bonds 327,466 7 702,559 12 Government Securities 605,522 12 511,261 8 Alternative and Other Investments 341,660 7 590,271 10 Total $4,978,105 100% $ 6,097,307 100% Note: Excludes JFK.
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LONG TERM INDEBTEDNESS AND INTEREST RATE SWAP AGREEMENTS
The table below represents the Network’s and JFK’s total outstanding debt on December 31, 2017. The pro-forma principal outstanding is the expected total outstanding debt balance after the issuance of the Series 2018 Bonds and the other transactions related thereto.
Pro-Forma Legacy Principal Principal Interest Bond Issue Org. (000s) (000s) Mode Type Series 2018 Taxable HMH $ - $ 300,000* Fixed Public Bond Series 2017A HMH 588,790 588,790 Fixed Public Bond Series 2017 Taxable HMH 300,000 300,000 Fixed Public Bond Series 2016A HMH 127,865 127,865 Synthetic Direct Placement 2016 Taxable Bank Loan HMH 19,526 19,526 Fixed Direct Placement Series 2015A HMH 120,972 120,972 Fixed Direct Placement Series 2015A HMH 78,047 78,047 Fixed Direct Placement 2015 Taxable Bank Loan HMH 33,758 33,758 Fixed Direct Placement 2013A Taxable Bank Loan HMH 26,166 26,166 Fixed Direct Placement 2013B Taxable Bank Loan HMH 34,783 34,783 Fixed Direct Placement Series 2013A HMH 23,585 23,585 Fixed Public Bond Series 2011 HMH 127,800 127,800 Fixed Public Bond Series 2009A-1 JFK 130,015 - Fixed Public Bond Series 2006 HMH 15,010 15,010 Synthetic Public Bond Series 2006-A3 HMH 3,500 3,500 Variable Public Bond Series 2006-A4 HMH 13,570 13,570 Variable Public Bond Series 2006-A5 HMH 10,915 10,915 Variable Public Bond Series 2004-A3 HMH 10,305 10,305 Variable Public Bond Series 2003A HMH 60,000 60,000 Synthetic Public Bond Series 2001 JFK 6,511 6,511 Fixed Direct Placement Series 1998A HMH 8,645 8,645 Variable Public Bond Series 1997 CABS(1) HMH 13,003 13,003 CABS Public Bond Accreted Interest 28,236 28,236 - Commercial Mortgages(1) HMH 39,216 39,216 Fixed & Var. Mortgage Whispering Knoll Mortgage JFK 2,258 2,258 Fixed Direct Placement Hartwyck Mortgage JFK 2,408 2,408 Fixed Direct Placement Capital Leases(1) All 15,701 15,701 Fixed Lease Total $ 1,840,585 $ 2,010,570
*Preliminary, subject to change. (1) Listed indebtedness is not secured by the Master Indenture.
The Network’s balance sheet as of December 31, 2017, which excludes JFK’s outstanding debt of approximately $151 million, includes the current portion of accreted interest included in accrued interest payable of $6.3 million, an original issue unamortized bond premium of $63.5 million, and deferred financing costs of $9.9 million resulting in total long-term debt of $1.7 billion, inclusive of short-term debt.
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The Network has utilized interest rate swap agreements to secure low-cost debt financing and lock in interest costs on certain variable rate debt instruments. The Network has established a formal debt and interest rate hedging policy that provides guidelines for the issuance of debt and the use of derivative instruments. This policy requires a financial feasibility analysis for all new debt issuances and establishes targets for the relationship of fixed to variable debt. In addition, the policy requires an independent analysis of all derivative contracts, ongoing analyses of counterparties in swap agreements and other measures designed to mitigate the risks associated with interest rate derivative agreements. The Network’s policies prohibit speculative swap arrangements. As of December 31, 2017, the fair value of swaps was in a liability position of $56.8 million. The Network is not obligated to post collateral at any time under any of its outstanding swap agreements. The following table summarizes the interest rate swap agreements as of December 31, 2017.
Swap Series Effective Date Current Notional Amount Pay Receive 1994 (1) 10/1/2006 $ 14,015,000 3.88% 67% of LIBOR 1999 7/1/2009 136,025,000 3.56% 67% of LIBOR 2003 11/1/2007 100,000,000 3.65% 67% of LIBOR 2006 6/1/2006 6,004,000 3.81% 68% of LIBOR 2007 1/2/2008 91,200,000 3.33% 68% of LIBOR
(1) 1994 Swap was terminated effective February 20, 2018
OVERVIEW OF JFK AFFILIATION AND COMBINATION WITH HMH
Based in Edison, New Jersey, JFK is comprised of JFKMC along with ambulatory surgery centers, senior living and rehabilitation centers and a school of nursing. JFKMC is a private, non- profit New Jersey corporation which owns and operates two separately licensed health care facilities, the Anthony M. Yelencsics Community Hospital (the “JFK Hospital”) and JFK Johnson. Both the JFK Hospital and JFK Johnson are located on a joint, 37-acre campus in the Township of Edison, in Middlesex County, New Jersey. JFK also operates four long-term care facilities.
JFK Hospital
The JFK Hospital is a nonprofit, academic, general acute-care hospital with 405 beds, including 6 neonatal intensive care unit beds. Established in 1967, JFK Hospital now has more than 1,000 affiliated physicians and offers a spectrum of services including general and specialized surgery, general medicine, maternity and pediatrics, cardiac care, oncology, imaging, breast center, sleep center, wound care, robotic surgery and emergency medicine. The Emergency Department consists of 50 adult private beds, a separate Pediatric Emergency Department with 14 private beds and a Patient Arrival Center.
The JFK Hospital is the home of the Neuroscience Institute – one of New Jersey’s most comprehensive programs for the diagnosis and treatment of brain, spine and nervous system disorders.
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The Robert Wood Johnson, Jr. Rehabilitation Institute
Open since 1974, the 94 bed (with 92 maintained) JFK Johnson Rehabilitation Institute is one the most comprehensive rehabilitation hospitals in New Jersey. JFK Johnson is staffed by the Physical Medicine and Rehabilitation Department of Seton Hall University School of Allied Health and the Rutgers Robert Wood Johnson Medical School.
As a nationally recognized rehabilitation hospital, JFK Johnson has programs in specialties such as brain injury (as part of the Center for Brain Injuries), stroke rehabilitation, orthopedics musculoskeletal/sports injuries, fitness, women’s health and pediatrics. Subspecialty services include spasticity, Parkinson’s, pain management, cardiac rehabilitation, audiology, prosthetics and orthotics, cognitive and vocational rehabilitation, fitness and wellness. Research capabilities continues to expand to ensure that patients receive the best in innovations that translate to improvements in clinical care.
In addition to providing inpatient adult rehabilitation services, thousands of children and adults are treated each year on an outpatient and short-term basis. Outpatient rehabilitation programs are provided in Edison and at facilities in Metuchen, Monroe and Piscataway. Affiliated with JFK Johnson is the Shore Rehabilitation Institute, a 40-bed inpatient and outpatient comprehensive rehabilitation hospital located in Brick, NJ. JFK Johnson also provides a variety of consulting, treatment, education, and advocacy for local companies, professionals and schools.
Honors & Awards
• Healthgrades Five Star rated for Peripheral Vascular Bypass, Bariatric Surgery, and C- Section Delivery for Labor & Delivery. • Healthgrades ranked in the top 10% nationally for Labor & Delivery. • Accredited by the Commission on Accreditation of Rehabilitation Facilities (CARF) in top 3% nationally. • Joint Commission Advanced Comprehensive Stroke Center.
Combined Financial and Utilization Information
The following tables set forth the combined utilization statistics, statements of operations, and balance sheets as of December 31, 2017 for JFK and HMH, without any adjustments. The tables are presented in summary format, have been prepared by Management, and have not been reviewed by independent auditors.
This summary should be read in conjunction with the audited financial statements for Hackensack Meridian Health, Inc., JFK Health System, Inc. and related notes to the financial statements included in Appendix B to this Offering Document. The audited financial statements are being provided as additional information, and the sum of the individual audits is not intended to equal the financial performance presented in Appendix A.
As of December 31, 2017, Management calculates that members of the Combined Group, including JFK, accounted for approximately 87% of total operating revenue and 84% of unrestricted net assets of the Network, assuming JFK was a member of the Network in 2017. In
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March 2018, HMH expects to record a gain of approximately $200 million relating to the acquisition of JFK.
JFKMC Utilization Statistics and Combination with HMH
JFKMC 2017 HMH 2017 Combined 2017 Licensed Beds 399 3,225 3,624 Maintained Beds 354 2,591 2,945 Adult and Pediatric Inpatient Admissions(1) 17,900 125,057 142,957 Inpatient Days(1) 89,895 633,011 722,906 Occupancy (%)(2) 70% 67% 67% Newborn and Neonatal ICU Admissions(3) 2,255 13,799 16,054 Outpatient Visits (4) 271,177 1,467,054 1,738,231 Emergency Room Visits (5) 76,925 423,142 500,067 Radiation Oncology Registrations 7,803 70,378 78,181 Same-Day Surgery Cases 6,718 46,027 52,745 Observation Cases 4,546 39,078 43,624 Full Time Equivalent (FTEs) 2,794 24,092 26,886
Source: Network and JFK records (1) Excludes Newborn, Neonatal ICU, Same Day Surgery, Same Day Medical, and Rehabilitation. (2) Based on maintained beds excluding Newborn, Neonatal ICU, and Rehabilitation. (3) Includes routine births and births admitted to Neonatal ICU. (4) Outpatient Visits is inclusive of the balances listed in the table for Emergency Room, Radiation Oncology, Same Day Surgery, and Observation Cases, in addition to all other outpatient areas not listed in the table. (5) Excludes admissions deriving from the Emergency Room.
JFK Balance Sheet and Combination with HMH (In 000’s)
December 31, Combined (1) (1) (2) JFK 2017 HMH 2017 2017 Assets Unrestricted Cash and Investments $ 110,343 $ 3,066,388 $ 3,176,731 Property, plant and equipment, net 146,168 2,029,877 2,176,045 Other assets 123,141 1,019,180 1,142,321 Total assets $ 379,652 $ 6,115,445 $ 6,495,097
Liabilities and Net Assets Current liabilities(3) $ 111,043 $ 754,347 $ 865,390 Total debt(3) 148,761 1,736,895 1,885,656 Other liabilities 67,805 821,614 889,419 Total liabilities 327,609 3,312,856 3,640,465
Total net assets 52,043 2,802,589 2,854,632
Total liabilities and net assets $ 379,652 $ 6,115,445 $ 6,495,097
Source: The Network's and JFK’s records. (1) Derived from the audited consolidated financial statements set forth in Appendix B hereto. (2) Management combination of JFK and HMH results. (3) Current portion of long-term debt is included within Total debt and excluded from Current liabilities.
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JFK Summary Statement of Operations and Combination with HMH (In 000’s)
Fiscal Year Ended December 31, HMH Combined (1) (1) (2) JFK 2017 2017 2017 Revenue Net patient service revenue, less provision for bad debts $ 629,165 $ 4,168,371 $ 4,797,536 Other revenue and gains 20,477 230,888 251,365 Total operating revenue 649,642 4,399,259 5,048,901
Expenses Salaries and benefits 347,516 2,312,800 2,660,316 Supplies and miscellaneous expenses(3) 299,231 1,614,644 1,913,875 Depreciation and amortization 14,286 169,252 183,538 Interest 8,667 66,473 75,140 Total expenses 669,700 4,163,169 4,832,869
Excess of revenues over expenses before other adjustments (20,058) 236,090 216,032
Other operating adjustments (1,549) 145,289 143,740
Excess of revenues over expenses $ (21,607) $ 381,379 $ 359,772
Source: The Network's and JFK’s records. (1) Derived from the audited consolidated financial statements set forth in Appendix B hereto. (2) Management combination of JFK and HMH results. (3) JFK includes one-time write downs for Loss on abandonment of construction in progress and Special events – unrestricted, which totaled $28,027. See Appendix B for additional details.
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JFK Financial Ratios and Combination with HMH (000s)
December 31, Combined (1) (1) (2) JFK 2017 HMH 2017 2017 Days Cash on Hand(3) Unrestricted cash and investments $ 110,343 $ 3,066,388 $ 3,176,731
Total operating expenses 669,700 4,163,169 4,832,869 Depreciation and amortization 14,286 169,252 183,538 Provision for bad debt - 7,159 7,159 Loss on abandonment of construction in progress 27,883 - 27,883 Other Loss & Special Events - Unrestricted 144 - 144 Cash operating expenses $ 627,387 $ 3,986,758 $ 4,614,145
Average daily operating expenses 1,719 10,923 12,641
Days Cash on Hand(3) 64 days 281 days 251 days
Historic Annual Debt Service Coverage Ratio Excess of revenues over expenses $ (21,607) $ 381,379 $ 359,772 Depreciation and amortization 14,286 169,252 183,538 Interest 8,667 66,473 75,140 Unrealized (gain)/loss on investments - (89,439) (89,439) Unrealized (gain)/loss on trading securities 439 - 439 Loss on extinguishment of debt - 30,961 30,961 Loss on abandonment of construction in progress 27,883 - 27,883 Other Loss & Special Events - Unrestricted 144 - 144 Pension Settlement 2,792 - 2,792 Unrealized (gain)/loss on derivatives - (5,125) (5,125) Income Available for Debt Service $ 32,601 $ 553,501 $ 586,104
Historic Debt Service Requirements $ 20,117 $ 139,101 $ 159,218
Historic Annual Debt Service Coverage Ratio 1.62x 3.98x 3.68x
Debt-to-Capitalization Ratio(3) Total Long-Term Indebtedness $ 137,022 $ 1,675,532 $ 1,812,554 Accumulated changes in other comprehensive income resulting from minimum pension liabilities 58,161 498,294 556,455 Unrestricted Net Assets 32,163 2,635,515 2,667,678
Debt-to-Capitalization Ratio(3) 0.60x 0.35x 0.36x
Source: The Network's and JFK’s records. (1) Derived from the audited consolidated financial statements set forth in Appendix B hereto. (2) Management combination of JFK and HMH financial results. (3) HMH’s Master Indenture does not require the Combined Group to maintain a minimum Days Cash on Hand or a maximum Debt-to- Capitalization Ratio and no obligation for the Network to maintain such should be implied or inferred. For additional information on other financial covenants in HMH’s bank documents for its other Institutional Debt, see “CERTAIN FINANCIAL COVENANTS – Potential for Additional Covenants for Existing Institutional Debt.”
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MISCELLANEOUS
Future Capital Plan
Over the next three years, HMH is planning to make $1.7 billion in capital investments, including routine capital needs at existing facilities. Of the $1.7 billion, approximately $1.0 billion is earmarked for strategic capital investments, including development of the Second Street Pavilion for HUMC, expanding EPIC Financials and Clinical components of the Network’s information system to all hospitals and physician practices within the Network, development of the SOM, and expansion of other various facilities among other projects.
Accreditation
The Network’s hospitals are fully accredited by The Joint Commission as follows:
Hospital Accredited Through Hackensack University Medical Center 11/20 Jersey Shore University Medical Center 1/19 Riverview Medical Center 1/19 Raritan Bay Medical Center – Perth Amboy 10/20 Mountainside Medical Center 11/19 Ocean Medical Center 1/19 Bayshore Medical Center 5/18 Palisades Medical Center 10/20 Southern Ocean Medical Center 7/19 Pascack Valley Medical Center 5/19 Raritan Bay Medical Center – Old Bridge 10/20 JFK Medical Center 7/20
The Network’s hospitals are also licensed by the New Jersey Department of Health as General Acute Care Hospitals.
Fundraising
Since the merger of HMH, the organization has maintained the three legacy foundations – Meridian Health Foundation, Hackensack University Medical Center Foundation, and Palisades Medical Center Foundation (collectively, the “Foundations”). In order to maintain a local fundraising presence and continued community support, Meridian Health Foundation continues to operate six separate foundations for each of its divisions. The Meridian Health Foundation includes Jersey Shore University Medical Center Foundation, Ocean Medical Center Foundation, Riverview Medical Center Foundation, Southern Ocean Medical Center Foundation, Bayshore Medical Center Foundation and Raritan Bay Medical Center Foundation. During 2017, the Foundations contributed $11.3 million for routine capital expenditures and program support. During 2017, the Foundations raised $92.4 million for future needs. As of December 31, 2017, the Foundations had an aggregate total net asset balance of approximately $205.0 million, excluding JFK. While the Network will likely maintain local foundations geared to local communities, the
A-47
Network intends to continually coordinate all fundraising activities to maximize funds raised and to ensure coordination, with no overlapping efforts.
Insurance
HMH maintains alternative risk finance programs for its facilities via wholly-owned Bermuda domiciled captive insurance companies, which HMH may look to consolidate in its pursuit of further integration. Additionally, certain risks are covered through third party insurance policies.
Captive Insurance Companies. Coastal Medical Insurance Limited (“Coastal”) (established in 1998) and Hackensack University Medical Center Casualty Company (“HUMCCO”) (established in 2003) provide various coverages to legacy Meridian facilities and legacy HUHN facilities, respectively. Both captives provide funding for indemnification for respective Hospital Professional Liability and General Liability exposures. Additionally, Coastal also provides funding for indemnification for exposures related to Employed Physician Professional Liability; Excess Hospital Professional Liability; and Workers’ Compensation. Funding for each of these programs is determined on an annual basis by consulting actuarial firms.
As of December 31, 2017, Coastal provides funding for Hospital Professional Liability exposures of $1 million per medical incident subject to an annual aggregate of $3 million and funding for General Liability exposures of $1 million per occurrence subject to an annual aggregate of $1 million. Coastal provides funding for Employed Physician Professional Liability exposures of $1 million per medical incident subject to an annual aggregate of $3 million per physician. Coastal also provides funding of $3 million per medical incident excess of funding for Primary Hospital Professional Liability exposures. Coastal’s Hospital Professional Liability and Employed Physician Professional Liability components respond to claims and suits on a claims-made basis. Coastal’s General Liability component responds to claims and suits on an occurrence basis.
As of December 31, 2017, Coastal provides funding for the deductible portion of legacy Meridian workers compensation claims per occurrence exposures of $750,000 on an occurrence basis.
As of December 31, 2017, HUMCCO provides funding for Hospital Professional Liability and General Liability exposures of $6 million per medical incident subject to an annual aggregate of $13 million. The Hospital Professional Liability and General Liability components of the HUMCCO program respond to claims and suits on a claims-made basis.
As both Coastal and HUMCCO captives provide Hospital Professional Liability coverage on a claims-made basis and HUMCCO provides General Liability coverage on a claims-made basis, MHC and HUMC have recorded estimated liabilities for claims incurred but not yet reported as of December 31, 2017 within other liabilities on the consolidated balance sheet.
Reinsurance Coverage. For the period ended December 31, 2017, Coastal purchased annual reinsurance policies in the amount of $75 million per claim subject to an annual aggregate of $75 million in excess of Coastal’s primary and first excess layer.
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For the period ended December 31, 2017, HUMCCO purchased reinsurance policies in the amount of $5 million with a $250,000 corridor deductible in excess of the HUMCCO primary retained layer of $1 million. In addition, HUMC purchased additional layers of insurance totaling $75 million.
Third Party Insurance – Workers Compensation. HUMC had an occurrence based policy for workers compensation claims with a third party insurance company through June 30, 2016. Effective July 1, 2016, HUMC created its own self-insured workers compensation plan, and has recorded an estimated liability for claims incurred but not yet reported within the self-insurance period on the consolidated balance sheet as of December 31, 2017.
JFK maintains professional and general liability insurance coverage for all subsidiaries and their employees. JFK’s insurance coverages are provided under the provisions of two insurance arrangements, as follows:
Primary coverage. Primary coverage is provided by Atlantic Insurance Exchange, Ltd. (“AIE”) established in 1987. Professional liability is under the terms of a claims-made insurance policy. General liability is under the terms of an occurrence based policy. Both policies have an individual claim limit of $1 million and an annual aggregate limit of $3 million.
Excess coverage: JFK has excess liability insurance coverage which insures against losses in excess of the above primary coverage reported during the period of policy coverage. Those commercial excess liability insurance policies have an individual occurrence limit of $30 million and an annual aggregate limit of $30 million. AIE was incorporated under the laws of Bermuda on June 24, 1987 and insures the risks of JFK and controlled entities.
Litigation
Various suits and claims arising in the normal course of operations are pending or are in progress against the Network and its affiliates. Such suits and claims are either specifically covered by insurance, provided for through estimated self-insurance liabilities, or are not material. While the outcome of these other suits cannot be determined at this time, Management, based on advice from legal counsel, believes that any loss which may arise from these actions will not have a material adverse effect on the consolidated financial position or results of operations of the Network.
Several municipalities in New Jersey have challenged the tax-exempt status with respect to real estate taxes on properties owned by the Network and its affiliates. The applicable Network affiliates continue to take steps to defend their tax-exempt status against such challenges.
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[THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX B-1
Hackensack Meridian Health, Inc. Consolidated Financial Statements, December 31, 2017
[THIS PAGE INTENTIONALLY LEFT BLANK] Appendix B-1
Hackensack Meridian Health, Inc. Consolidated Financial Statements and Consolidating Supplemental Schedules December 31, 2017
Hackensack Meridian Health, Inc. Index December 31, 2017
Page(s)
Report of Independent Auditors ...... 1–2
Consolidated Financial Statements
Consolidated Balance Sheet ...... 3
Consolidated Statement of Operations ...... 4
Consolidated Statement of Changes in Net Assets ...... 5
Consolidated Statement of Cash Flows ...... 6
Notes to Consolidated Financial Statements ...... 7–34
Consolidating Supplemental Schedules
Consolidating Balance Sheet ...... 35
Consolidating Statement of Operations ...... 36
Note to Consolidating Supplemental Schedules ...... 37
Report of Independent Auditors
To the Board of Trustees Hackensack Meridian Health, Inc.
We have audited the accompanying consolidated financial statements of Hackensack Meridian Health, Inc. and its subsidiaries, which comprise the consolidated balance sheet as of December 31, 2017, and the related consolidated statements of operations, of changes in net assets and of cash flows for the year then ended.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hackensack Meridian Health, Inc. and its subsidiaries as of December 31, 2017, and the results of their operations, changes in their net assets, and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
PricewaterhouseCoopers LLP, 300 Madison Avenue, New York, New York 10017 T: (973) 236 4000, F: (973) 236 5000, www.pwc.com/us
Other Matter
Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating balance sheet as of December 31, 2017 and the consolidating statement of operations for the year then ended (the “consolidating information”) is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves and other additional procedures, in accordance with auditing standards generally accepted in the United States of America. In our opinion, the consolidating information is fairly stated, in all material respects, in relation to the consolidated financial statements taken as a whole. The consolidating information is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations, changes in net assets and cash flows of the individual companies and is not a required part of the consolidated financial statements. Accordingly, we do not express an opinion on the financial position, results of operations, changes in net assets and cash flows of the individual companies.
New York, New York April 5, 2018
2 Hackensack Meridian Health, Inc. Consolidated Balance Sheet December 31, 2017
(in thousands)
Assets Current assets Cash and cash equivalents $ 713,235 Patient accounts receivable, less allowance for uncollectible accounts of $149,849 431,819 Pledges receivable, less allowance for uncollectible pledges of $2,267 37,723 Other current assets 167,665 Assets limited as to use and short-term investments, current portion 814,933 Total current assets 2,165,375 Assets limited as to use and investments, noncurrent portion 1,656,976 Investment in joint ventures 139,214 Property and equipment, net 2,029,877 Other assets 124,003 Total assets $ 6,115,445 Liabilities and Net Assets Current liabilities Current maturities of long-term debt and capital lease obligations $ 61,363 Accounts payable and accrued expenses 597,329 Other current liabilities 157,018 Total current liabilities 815,710 Long-term debt and capital lease obligations, less current maturities 1,675,532 Accrued pension benefits 387,241 Other liabilities 434,373 Total liabilities 3,312,856 Net Assets Unrestricted 2,604,041 Noncontrolling interest in subsidiaries 31,474 Total unrestricted net assets 2,635,515 Temporarily restricted 121,777 Permanently restricted 45,297 Total net assets 2,802,589 Total liabilities and net assets $ 6,115,445
The accompanying notes are an integral part of these consolidated financial statements.
3 Hackensack Meridian Health, Inc. Consolidated Statement of Operations Year Ended December 31, 2017
(in thousands)
Unrestricted revenues and other support Patient service revenue, net of contractual allowances and discounts $ 4,343,150 Provision for bad debts (174,779) Net patient service revenue, less provision for bad debts 4,168,371 Other revenue 199,253 Net gain on equity investments 21,230 Net assets released from restriction used for operating activities 10,405 Total unrestricted revenues and other support 4,399,259 Expenses Salaries and contracted labor 1,594,684 Physician salaries and fees 320,849 Employee benefits 397,267 Supplies and other expenses 1,607,485 Depreciation and amortization 169,252 Interest 66,473 Provision for bad debts 7,159 Total expenses 4,163,169 Excess of revenues over expenses before other adjustments 236,090 Other operating adjustments Investment income 169,378 Unrealized gain on derivative investments 5,125 Loss on extinguishment of debt (30,961) Other gains, net 5,026 Provision for income taxes (3,279) Excess of revenues over expenses 381,379
Other adjustments in unrestricted net assets Net assets released from restriction for capital acquisition 11,260 Pension-related adjustments (42,081) Other changes in unrestricted net assets (150) Distributions to noncontrolling interests (7,523)
Increase in unrestricted net assets $ 342,885
The accompanying notes are an integral part of these consolidated financial statements.
4 Hackensack Meridian Health, Inc. Consolidated Statement of Changes in Net Assets Year Ended December 31, 2017
(in thousands)
Temporarily Permanently Total Unrestricted Restricted Restricted Net Assets
Balances at December 31, 2016 $ 2,292,630 $ 94,391 $ 42,027 $ 2,429,048 Excess of revenues over expenses 381,379 - - 381,379 Investment income - 3,181 - 3,181 Contributions - 45,909 2,891 48,800 Net assets released from restriction for capital acquisition 11,260 (11,260) - - Net assets released from restriction used for operating activities - (10,405) - (10,405) Other changes (150) (39) 379 190 Pension-related adjustments (42,081) - - (42,081) Distributions to noncontrolling interests (7,523) - - (7,523) Increase in net assets 342,885 27,386 3,270 373,541 Balances at December 31, 2017 $ 2,635,515 $ 121,777 $ 45,297 $ 2,802,589
The accompanying notes are an integral part of these consolidated financial statements.
5 Hackensack Meridian Health, Inc. Consolidated Statement of Cash Flows Year Ended December 31, 2017
(in thousands)
Cash flows from operating activities Change in net assets $ 373,541 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 169,252 Provision for bad debts 181,938 Amortization of deferred financing costs 655 Premium on issuance of new debt 58,984 Amortization of bond premium (7,206) Unrealized gain on derivative investments (5,125) Net gain on equity investments (21,230) Realized and unrealized gains on investments (133,960) Restricted contributions for capital acquisitions (5,554) Pension-related adjustments 42,081 Changes in assets and liabilities: Increase in patient accounts receivable and pledges receivable (231,041) Decrease in other assets 15,538 Increase in accounts payable and accrued expenses 109,796 Decrease in accrued pension benefits (45,122) Increase in other liabilities 33,918 Net cash provided by operating activities 536,465 Cash flows from investing activities Purchases of property and equipment (339,322) Proceeds from joint ventures 2,151 Sale of investment securities 518,692 Purchases of investment securities (899,538) Net cash used in investing activities (718,017) Cash flows from financing activities Repayment on long-term debt and capital lease obligations (619,356) Proceeds from borrowings 888,790 Distributions to noncontrolling interests (7,523) Restricted contributions for capital acquisitions 5,554 Payment of deferred financing costs (6,885) Net cash provided by financing activities 260,580 Change in cash and cash equivalents 79,028 Cash and cash equivalents Beginning of period 634,207 End of period $ 713,235 Supplemental information Cash paid for interest expense $ 53,631 Change in non-cash acquisitions of property and equipment (15,301)
The accompanying notes are an integral part of these consolidated financial statements.
6 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
1. Organization and Summary of Significant Accounting Policies
Organization Hackensack Meridian Health, Inc. and its subsidiaries and controlled entities (the “Network”) comprise an integrated health care delivery system. The Network is incorporated as a New Jersey non-profit, non-stock corporation established to promote and carry out charitable, scientific, academic and research activities and was created as a result of the merger of Hackensack University Health Network, Inc. (“HUHN”) and Meridian Health System, Inc. The surviving parent entity was renamed Hackensack Meridian Health on July 1, 2016. The Network is the sole corporate member of the following entities: Meridian Hospitals Corporation (“MHC”) and its wholly owned subsidiary, Raritan Bay Medical Center (“RBMC”); Hackensack University Medical Center (“HUMC”) and its wholly owned subsidiaries, Hackensack University Medical Center Casualty Company (“HUMCCO”) and 20 Prospect Holdings, LLC; HackensackUMC Palisades (“PMC”); Hackensack University Medical Center Foundation (“HUMCF”); Meridian Health Foundation, Inc. and its six foundation subsidiaries (“MHF”); Palisades Medical Center Foundation (“PMCF”); Hackensack Meridian Nursing and Rehabilitation, Inc. (“HMNR”); Palisades General Care Inc. (“PGC”); Hackensack Meridian Health Realty Corporation and five subsidiaries (“Realty”); Hackensack Meridian Health Physician Services, Inc. (“HMPS”); Hackensack Meridian Ambulatory Ventures, Inc. (“HMAV”); Hackensack Meridian Home Care Services, Inc. and its subsidiary (“HMHCS”); and Bergen Health Management System, Inc. (“BHMS”).
The Network is also the sole shareholder of Coastal Medical Insurance Limited (“Coastal”), Meridian Health Ventures, Inc. and its subsidiary (“HMHV”), Raritan Management Corporation and is the sole member of Meridian Accountable Care Organization, LLC (“MACO”), and Hackensack Physician-Hospital Alliance ACO, LLC (“ACO”).
The accompanying consolidated financial statements also include the accounts of the following Network-controlled tax-exempt and taxable professional corporations: Hackensack University Medical Group, P.C. (“HUMG”), HUMC Cardiovascular Partners, P.C. (“HUMCCP”), HUMC Primary Care Associates, P.C. (“HUMCPCA”), New Amsterdam Medical Associates, P.C. (“NAMA”), Hackensack Specialty Care Associates, P.C. (“HCSA”), Hackensack Medical Observation, P.A. (“HMO”), Hackensack Occupational Medicine Associates, P.C. (“HOM”), Palisades Medical Associates, P.C. (“PMA”) and The Auxiliary of Hackensack University Medical Center. HMPS serves as the management organization for the Physician division which encapsulates the fifteen professional corporations consolidated with the Network and provides other physician practice development strategies. Consolidated with HMPS are nine not-for-profit professional corporations that encapsulate Meridian Medical Group (“MMG”). MMG includes the faculty practice as well as the specialty and primary care group practices operating in Monmouth and Ocean Counties.
The Network operates an extensive acute care hospital system which consists of two academic medical centers (which include two children’s hospitals and a cancer center), and seven community hospitals as follows:
HUMC, located in Hackensack, New Jersey, is an academic medical center and the largest stand-alone medical center in the state with 781 beds. HUMC includes the Joseph M. Sanzari Children’s Hospital, the Donna A. Sanzari Women’s Hospital, the John Theurer Cancer Center, and the Heart and Vascular Hospital;
7 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
Jersey Shore University Medical Center (“JSUMC”), located in Neptune, New Jersey, is a major academic medical center and regional trauma center with 614 beds that includes the K. Hovnanian Children’s Hospital(1); Riverview Medical Center (“RMC”), is a 468-bed community hospital located in Red Bank, New Jersey(1); RBMC at Perth Amboy, is a 395-bed community hospital located in Perth Amboy, New Jersey; Ocean Medical Center (“OMC”), is a 357-bed community hospital located in Brick, New Jersey(1); Bayshore Medical Center (“BMC”), is a 211-bed community hospital located in Holmdel, New Jersey(1); PMC, located in North Bergen, New Jersey, is a 206-bed community hospital, that includes a 247-bed nursing home known as the Harborage; Southern Ocean Medical Center (“SOMC”), New Jersey, is a 176-bed community hospital located in Manahawkin(1); and RBMC at Old Bridge, located in Old Bridge, New Jersey, is a 113-bed community hospital.
(1) These hospitals are divisions of MHC.
On January 1, 2018, HUMC, MHC, RBMC and PMC were merged into one entity, HMH Hospitals Corporation. On January 1, 2018, HMNR, PGC and HMHCS were merged into one entity, HMH Residential Care, Inc. On January 1, 2018, Raritan Management Corporation, HMHV, and its subsidiary were merged into one entity with HMHV surviving.
On January 1, 2018, the Network merged with JFK Health System, Inc. (“JFK Health”). JFK Health is the parent company of the Community Hospital Group, Inc. d/b/a JFK Medical Center; Muhlenberg Regional Medical Center, Inc.; John F. Kennedy Medical Center Foundation, Inc.; Muhlenberg Foundation, Inc.; Lifestyle Institute, Inc.; JFK Healthshare, Inc. (“Healthshare”); Hartwyck at JFK, Inc.; Hartwyck West Nursing Home, Inc. and affiliates (“Hartwyck West”); Hartwyck at Oak Tree, Inc.; JFK Medical Group, P.C.; and Atlantic Insurance Exchange, Ltd., a wholly-owned insurance company. Hartwyck West operates Hartwyck at Cedar Brook, JFK Assisted Living, Inc. d/b/a Whispering Knoll, and JFK Hartwyck Management and Consulting, Inc. The Network transferred no consideration and acquired all of the assets and liabilities of JFK Health. This business combination will be accounted for as an acquisition. As of the date of issuance of the consolidated financial statements, the acquisition accounting of JFK Health has not been finalized.
During 2012, HUMC entered into two separate joint ventures with an unrelated entity. Under the first joint venture arrangement, entered into on March 23, 2012, HUMC contributed the existing property and equipment of the former Pascack Valley Hospital campus for a 35% interest in the joint venture which was valued at $51,100. The investment in the Pascack Valley joint venture recorded on the consolidated balance sheet was $36,242 as of December 31, 2017.
Under the second joint venture, entered into on July 1, 2012, HUMC purchased a 20% ownership interest in Mountainside Hospital. For its ownership interest, HUMC contributed $10,644 in cash and entered into a nonrecourse loan agreement with its joint venture partner. The interest rate on the loan is 8.875% per annum, with principal and interest payments to be made on a non-recourse
8 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
basis from the distribution of profits of HUMC’s share in the joint venture. In July 2016, HUMC entered into a bank loan and used the proceeds to payoff the remaining outstanding balance on the nonrecourse loan and its accrued interest (See Note 5). The investment in the Mountainside joint venture recorded on the consolidated balance sheet was $29,771 as of December 31, 2017.
Joint ventures in which the Network exerts significant influence in the operations of the unconsolidated entities, primarily through shared representation on the governing bodies of the investee and equal voting rights, and has an equity interest of more than 20% but less than 50%, are accounted for under the equity method of accounting.
During 2012, HUMC and a separate unrelated entity formed a joint venture limited liability company which purchased a 51% interest in two ambulatory surgical centers (the “Centers”) located in Bergen County, New Jersey, with HUMC receiving 50.1% voting rights in the joint venture entity. As a result, HUMC consolidated the Centers in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 958-810, Not-for-Profit Entities – Consolidation, and reflected a non-controlling interest for the equity related to the previous owners and the unrelated party in accordance with ASC 810. The net assets acquired of the Centers were $34,950 (including goodwill of $34,250). Effective December 31, 2016, HUMC has transferred its interest in the Centers to HMAV.
The following schedule of changes in consolidated net assets attributable to the parent and the non-controlling interest reconciles beginning and ending balances of the parent’s controlling interest and non-controlling interest for the year ended December 31, 2017:
The Network (Controlling Noncontrolling Total Interest) Interests
Balances at December 31, 2016 $ 2,292,630 $ 2,263,515 $ 29,115 Excess revenues over expenses 381,379 371,497 9,882 Distributions to non-controlling interests (7,523) - (7,523) Other changes (30,971) (30,971) - Change in unrestricted net assets 342,885 340,526 2,359 Balances at December 31, 2017 $ 2,635,515 $ 2,604,041 $ 31,474
In June 2015, the former HUHN, now replaced by the Network, and Seton Hall University (“SHU”) signed a definitive agreement to form a new four-year school of medicine. The partnership will establish the only private school of medicine in the State of New Jersey. In conjunction with the formation of the new school of medicine, the Network and SHU entered into a long-term lease for two buildings in the town of Nutley and city of Clifton, New Jersey. During 2016, the Network made an initial contribution of $15,000 to the school of medicine which has been included as an investment in joint ventures on the consolidated balance sheet as of December 31, 2017.
9 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
Summary of Significant Accounting Policies The following is a summary of the Network’s significant accounting policies:
Basis of Presentation The Network’s policy is to consolidate all entities affiliated with the Network that meet the requirements for consolidation under ASC 810. All significant intercompany transactions and balances have been eliminated.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the reserves on accounts receivable such as allowance for doubtful accounts and contractual allowances, valuation of alternative investments, estimated amounts due to and from third-party payors, professional liability costs and accrued pension benefit liabilities. Actual results could differ from those estimates.
Income Taxes All of the not-for-profit entities included in the consolidated financial statements are corporations as described in Section 501(c)(3) of the Internal Revenue Code (“Code”) and are exempt from federal income taxes on related income pursuant to Section 501(a) of the Code. These entities, except for the physician practices, are also exempt from state income taxes. Per the requirement to assess for tax uncertainty, management has determined that it does not have any significant uncertain tax positions required to be accrued or reported.
The for-profit corporations are subject to federal and state income taxes.
Cash and Cash Equivalents Cash and cash equivalents include investments in highly-liquid instruments with original maturity of three months or less. Cash and cash equivalents are also held in its investments and assets limited as to use portfolio. At December 31, 2017, the Network had cash balances in a financial institution that exceeded federal depository insurance limits. Management believes that the credit risk related to these deposits is minimal.
Assets limited as to use and Investments Investments and assets limited as to use are recorded at fair values, which are based on the assumptions and methods described in the “Fair Value Measurements” section of this note.
Assets limited as to use include cash and investments set aside by the Network Board of Trustees (the “Board”) for future capital improvements over which the Board retains control and may, at its discretion, subsequently use for other purposes, assets held by trustees under indenture agreements, assets held in connection with the captive insurance program, assets held for deferred employee benefit plans, and donor-restricted assets. Amounts required to meet current liabilities of the Network are classified as current assets.
A majority of the Network’s investments in equity securities with readily determinable fair values and investments in debt securities are reported as trading securities based on the Network’s investment strategy and investment philosophies. Trustee-held assets under bond indenture,
10 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
which are primarily comprised of cash and short-term investments, as well as alternative investments, are classified as other than trading.
Investment income or losses (including realized gains and losses on investments, interest, dividends, holding gains and losses on trading securities, declines in fair value that are determined by management to be other-than-temporary, and changes in the value of investments accounted for on the equity basis of accounting) are included in the accompanying consolidated statement of operations as other operating adjustments, unless the income or loss is restricted by donor or law. Gains and losses on sales of investment assets are determined using the first-in, first-out method. Investments classified as current assets are available to support current operations.
Investments, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. As such, it is reasonably possible that changes in the values of investments will occur in the near term and that such changes could materially affect the amounts reported in the consolidated financial statements.
Financial Instruments The Network has entered into interest rate swap agreements to manage its exposure to fluctuations in interest rates (interest rate risk) and lower cost of capital. These swap agreements involve the exchange of fixed and variable rate interest payments between the Network and counterparties based on common notional principal amounts and maturity dates that correspond to the Network’s outstanding long-term debt.
The Network recognizes all derivatives (interest rate swap agreements) at fair value within other liabilities on the consolidated balance sheet. Changes in fair value of these instruments are reported in the consolidated statement of operations as discussed in Note 6.
Fair Value Measurements FASB ASC Topic 820, Fair Value Measurements and Disclosures, establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from sources independent of the reporting entity and unobservable inputs reflect the entities own assumptions about how market participants would value an asset or liability based on the best information available. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by the Network for financial instruments measured at fair value on a recurring basis. The three levels of inputs are as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, or quoted prices in markets that are not active.
11 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and liabilities measured at fair value are based on one or more of three valuation techniques. The three valuation techniques are as follows:
Market Approach (M) – Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities;
Cost Approach (C) – Amount that would be required to replace the service capacity of an asset (i.e. replacement cost); and
Income Approach (I) – Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing models, and lattice models).
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. Inputs are used in applying the various valuation techniques and broadly refer to the assumptions the market participants use to make valuation decisions. Inputs may include price information, credit data, liquidity statistics and other factors. The Network utilized the best available information in measuring fair value.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments held by the Network:
Cash and Cash Equivalents – Estimated fair values of cash equivalents are based on daily values (closing price on primary market) that are validated with a sufficient level of observable activity (i.e., purchases and sales).
Mutual Funds – Estimated fair values of mutual funds are based on daily values (closing price on primary market) that are validated with a sufficient level of observable activity (i.e. purchases and sales).
Corporate Equity Securities – Securities listed on national stock exchanges are valued at the last published sales price on the last business day of the year; over–the-counter securities for which no sale was reported on the last business day of the year are valued at the latest reported bid price from a published source.
U.S. Government, Municipal, and Corporate Debt Securities – Valued on the basis of the quoted market prices at year-end. If quoted market prices are not available for the investments, these investments are valued based on yields currently available on comparable securities or issuers with similar credit ratings.
Derivative Instruments – Consist of interest rate swap agreements. Value is determined using a market-based interest rate yield curve adjusted specifically to take into account the Network’s risk of nonperformance.
Alternative Investments and common/collective trusts - Fair value of alternative investments are measured based on unobservable inputs that cannot be corroborated by observable
12 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
market data. The Network accounts for these investments within its assets limited as to use and investments portfolios using the equity method of accounting and as such, these investments are excluded from the fair value hierarchy.
The Network’s alternative investments include holdings in common/collective trusts, limited partnerships or hedge funds which engage in a variety of investment strategies and are managed by money managers. Certain pension plan asset investments in alternative investments are valued by management utilizing the NAV provided by the respective fund manager of the underlying investment companies unless management determines some other valuation is more appropriate. Such fair value estimates do not reflect early redemption penalties as the Network does not intend to sell such investments before the expiration of the early redemption periods. The fair values of the securities held by limited partnerships that do not have readily determinable fair values are determined by the general partner and are based on historical cost, appraisals, or other estimates that require varying degrees of judgment. If no public market exists for the investment securities, the fair value is determined by the general partner taking into consideration, among other things, the cost of securities, prices of recent significant placements of securities of the same issuer, and subsequent developments concerning the companies to which the securities relate.
Changes in the value of these alternative investments are included in investment income - net, in the consolidated statement of operations. Generally, alternative investments upon which redemptions may be made annually with written notice of 100 days are recorded as current assets. Limited partnerships which do not provide for voluntary withdrawal and are long term in nature are classified as noncurrent assets.
Inventories Inventories are stated at lower of cost (determined on an average cost basis) or market and are included in other current assets on the consolidated balance sheet.
Property and Equipment Property and equipment are recorded at cost. The Network determines depreciation using the straight-line method, over the estimated useful life of each class of depreciable asset. Estimated lives range from 3 to 20 years for equipment and up to 40 years for buildings.
Capitalized leases are recorded at their present value at the inception of the lease. Equipment under capital leases is amortized on the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the consolidated statement of operations. Gains and losses resulting from the retirement of property and equipment are included in the results of current operations.
Gifts of long-lived assets such as property and equipment are determined at their fair value at the date of the gift and reported as an increase to unrestricted net assets unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service.
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(in thousands)
Impairment of Long-Lived Assets Long-lived assets to be held and used are reviewed for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are deemed to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value, less cost to sell. There were no impairments of long-lived assets at December 31, 2017.
Deferred Financing Costs Deferred financing costs include legal, financing, and placement fees associated with the issuance of long-term debt, and are presented net of the related long-term debt issuances, in accordance with FASB Accounting Standards Update (ASU) 2015-03. These costs are amortized using the interest method over the period the related obligations are outstanding.
Professional, General and Workers Compensation Liabilities The Network’s policy is to accrue an estimate of the ultimate cost of malpractice and workers compensation claims covered through either its wholly owned captive insurance companies or insurance policies with third party insurers. These accrued liabilities are included in other liabilities in the accompanying consolidated balance sheet. The Network also records an estimate for insurance recoveries associated with these claims, which is recorded in other assets on the consolidated balance sheet.
Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those funds whose use has been limited by donors to a specified time period and/or purpose. Temporarily restricted net assets are available for the funding of healthcare services and capital acquisitions. Permanently restricted net assets have been restricted by donors to be held in perpetuity and the income from permanently restricted net assets is expendable to support various health care services. Resources arising from the results of operations or assets set aside by the Board of Trustees are not considered to be donor restricted. Included in unrestricted net assets are board designated endowment funds of $73,579 at December 31, 2017.
Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received, which is then treated as the cost basis. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statement of operations as net assets released from restrictions. Net assets released from restrictions for capital acquisitions are excluded from excess of revenues over expenses within the consolidated statement of operations. Net assets released from restrictions for noncapital purposes are included within operating income. Donor-restricted contributions whose restrictions are met within the same year as received are reflected as unrestricted net assets.
The Boards of HUMCF, PMCF, and MHF, collectively (the “Foundations”), consistent with regulatory requirements, require the preservation of the fair value of the donor-restricted endowment funds, absent explicit donor stipulations to the contrary. As a result, the Foundations classify permanently restricted net assets 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)
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(in thousands)
accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure in accordance with donor intent and in a manner consistent with the standard of prudence prescribed by state laws.
Net Patient Service Revenue and Patient Accounts Receivable Net patient service revenue is accounted for on the accrual basis in the period in which the service is provided. These amounts are net of appropriate allowances to give recognition to differences between the Network’s charges and reimbursement rates from third party payors. The Network is reimbursed from third party payors under various methodologies based on the level of care provided. Certain net revenues received are subject to audit and retroactive adjustment for which amounts are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined.
The process for estimating the ultimate collection of receivables involves significant assumptions and judgments. Account balances are written off against the allowance when management feels it is probable the receivable will not be recovered. The use of historical collection and payor reimbursement experience is an integral part of the estimation process related to reserves for doubtful accounts. Revisions in reserve for doubtful accounts estimates are recorded as an adjustment to bad debt expense.
A summary of the payment arrangements with major third party payers is as follows:
Medicare - inpatient acute care services and most outpatient services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic and other factors. Certain outpatient services and medical education costs related to Medicare beneficiaries are paid based on a cost reimbursement methodology, the Network is reimbursed for cost reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports and audits thereof by the Medicare fiscal intermediary. The classification of patients under the Medicare program and the appropriateness of their admission are subject to an independent review by a peer review organization under contract with the Network. The Network’s Medicare cost report audit status is as follows: HUMC, OMC, RMC, BMC, JSUMC and PMC have been audited and finalized by the Medicare intermediary through December 31, 2014, except for 2010 for HUMC, 2011 for OMC and 2010 and 2011 for RMC. SOMC has been audited and finalized through December 31, 2013. RBMC has been audited and finalized through December 31, 2015, except for 2010 and 2014. SOMC for 2014 has not been audited.
Medicaid - inpatient acute care services rendered to Medicaid program beneficiaries are reimbursed under a prospective methodology in accordance with N.J.A.C. 10:52 sub-chapter 14. Outpatient services are paid based upon a cost reimbursement methodology and certain services are paid based on a Medicaid fee schedule. The Network’s Medicaid cost reports have been audited and finalized by the Medicaid fiscal intermediary for HUMC, JSUMC, OMC, RMC, BMC, SOMC, PMC and RBMC through December 31, 2014, except for 2007 through 2009 for HUMC. JSUMC, OMC, RMC, BMC, SOMC and RBMC have been audited through December 31, 2015, but not finalized by the fiscal intermediary.
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(in thousands)
The Network has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment under these agreements includes prospectively determined rates per patient day or procedure and discounts from established charges.
The Network records gross patient service revenue on an accrual basis at established rates, with contractual and other allowances added to or deducted from such amounts to determine net patient service revenue. The Network maintains policies and records to identify and monitor these contractual allowances and the level of charity care. These records include the amount of deductions from gross revenue due to qualified services provided under the State’s charity care guidelines. The components of net patient service revenue for the year ended December 31, 2017 are as follows:
Gross charges $ 16,885,949 Contractual and other allowances (12,585,836) Provision for bad debts (174,779) Change in estimate of prior year's net patient service revenue 23,064 Charity care subsidy 13,209 Hospital relief subsidy 6,764 $ 4,168,371
The mix of patient service revenue, net of contractual allowances from patients and third party payors for the year ended December 31, 2017 is as follows:
Medicare, included managed Medicare 35% Medicaid, including managed Medicaid 10% NJ Blue Cross 22% Other Payors 32% Self Pay 1% 100%
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation for which action for noncompliance includes fines, penalties and exclusion from the Medicare and Medicaid programs. The Network believes that they are currently in compliance with all applicable laws and regulations. The Network has established a Corporate Compliance Program to monitor compliance with various regulations.
Performance Indicator The consolidated statement of operations includes excess of revenues over expenses as the performance indicator. Changes in unrestricted net assets which are excluded from excess of revenues over expenses, consistent with industry practice, include distributions to noncontrolling interests, pension-related adjustments, net assets released from restriction - capital acquisitions and other changes in unrestricted net assets.
The Network differentiates its core operating activities through the use of excess of revenues over expenses before other operating adjustments as an intermediate measure of operations. For the purposes of display, investment income, loss on extinguishment of debt and certain other
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(in thousands)
transactions, which management does not consider being components of the Network’s core operating activities, are reported as other operating adjustments in the consolidated statement of operations.
New Authoritative Pronouncements In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This standard implements a single framework for recognition of all revenue earned from customers. This framework ensures that entities appropriately reflect the consideration to which they expect to be entitled in exchange for goods and services by allocating transaction price to identified performance obligations and recognizing revenue as performance obligations are satisfied. Qualitative and quantitative disclosures are required to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The standard is effective for fiscal years beginning after December 15, 2017. The Network is currently assessing the impact the adoption of this standard will have on their consolidated financial statements.
In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement and Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent). This guidance requires entities to present investments that use NAV as a practical expedient for valuation purposes separately from other investments categorized in the fair value hierarchy. If the NAV per share of an investment is determined and published, the NAV is considered the basis for fair value for a transaction and the investment is presented within the fair value hierarchy. In other instances, where NAV is communicated to an investor but not made publicly available, such investments are considered to be valued using NAV as a practical expedient and are presented separately from the fair value hierarchy. The standard is effective for fiscal years beginning after December 15, 2016. The Network adopted the provisions of this standard in fiscal year 2017 and presents investments valued using NAV separately from the fair value hierarchy.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of leases with a term of twelve months or less) at the commencement date: (a) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The guidance requires a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expire before the earliest comparative period presented. A full retrospective transition approach is not permitted. This guidance will be effective for the Network beginning in fiscal year 2019. Early application is permitted. The Network is currently assessing the impact the adoption of this standard will have on their consolidated financial statements.
In August 2016, the FASB issued ASU 2016-14, Presentation of Financial Statements for Not-for- Profit Entities. This standard marks the completion of the first phase of a larger project aimed at improving not-for-profit financial reporting. Under the new guidance, the existing three categories of net assets will be replaced with a simplified model that combines temporarily restricted and permanently restricted net assets into a single category called “net assets with donor restrictions” and renames unrestricted net assets as “net assets without donor restrictions.” There will be new reporting requirements for expenses and additional disclosures to describe an organization’s liquidity. The standard is effective for fiscal years beginning after December 15, 2017. The
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(in thousands)
Network is currently assessing the impact this standard will have on their 2018 consolidated financial statements.
In August 2016 and November 2016, respectively, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, and ASU 2016-18, Restricted Cash. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 includes guidance on eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. ASU 2016-18 addresses the presentation, disclosure, and cash flow classification of restricted cash and requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities would also be required to reconcile these amounts on the balance sheet to the statement of cash flows and disclose the nature of the restrictions. The guidance is effective for financial statements issued for fiscal years beginning after December 31, 2018. Early adoption is permitted for ASU 2016-15 provided that all of the amendments are adopted in the same period. Both ASUs require application using a retrospective transition method. The Network is currently assessing the impact the adoption of these standards will have on the consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Cost. The ASU requires that in instances where an operating measure is included in the consolidated statements of operations, the service cost component of the net periodic cost be included as a component of the operating measure and other components of net periodic costs be presented separately in the nonoperating section of the consolidated statements of operations. The ASU is effective for fiscal years beginning after December 15, 2017 with early adoption permitted. Retrospective application of the standard for the presentation of the service cost component and the other components of net benefit cost in the consolidated statements of operations is required. The Network is currently assessing the impact the adoption of this standard will have on the consolidated financial statements.
2. Charity and Uncompensated Care
The Network provides care to patients who meet certain criteria defined by the New Jersey Department of Health and Senior Services without charge or at amounts less than its established rates. The Network maintains records to identify and monitor the level of charity care it provides. These records include the amount of charges foregone for services and supplies furnished. The Network receives partial reimbursement for the uncompensated care provided. Of the Network’s total consolidated operating expenses reported, estimated costs of $88,051 for the year ended December 31, 2017 are attributable to providing services to charity patients. The estimated costs of providing charity services are based on a calculation which applies a ratio of cost to charges to the gross uncompensated charges associated with providing care to charity patients. The ratio of cost to charges is calculated based on the Network’s total operating expenses, excluding bad debt expense, divided by gross patient service revenue.
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(in thousands)
3. Assets Limited as to Use and Investments
The following tables provide a summary of the Network’s assets limited as to use and investments that are measured at fair value on a recurring basis at December 31, 2017:
Quoted Prices In Active Significant Markets Other for Identical Observable Assets Inputs December 31, (Level 1) (Level 2) 2017 Under Board of Trustees designation Cash and cash equivalents $ 68,575 $ 2,087 $ 70,662 Mutual funds 565,192 95,353 660,545 Corporate equity securities 206,241 - 206,241 Corporate debt securities - 621,571 621,571 U.S. government obligations 322,077 158,355 480,432 1,162,085 877,366 2,039,451 Accrued interest 6,741 Common/collective trusts 208,248 Alternative investments 98,713 Total under Board of Trustees designation 2,353,153 Under donor designation Cash and cash equivalents 5,297 - 5,297 Mutual funds 30,159 12,705 42,864 Corporate equity securities 6,985 - 6,985 Corporate debt securities - 7,761 7,761 U.S. government obligations - 7,525 7,525 42,441 27,991 70,432 Accrued interest 190 Guaranteed interest contract 2,862 Total under donor designation 73,484
Under bond indenture agreements held by trustee Cash and cash equivalents 45,248 - 45,248 Total under bond indenture agreements held by trustee 45,248 - 45,248 Restricted cash 24
Total assets whose use is limited and investments $ 2,471,909
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(in thousands)
Assets limited as to use and investments are reported on the consolidated balance sheet at December 31, 2017 as follows:
Assets limited as to use and investments, current portion $ 814,933 Assets limited as to use and investments, noncurrent portion 1,656,976 $ 2,471,909
There were no transfers between Levels 1 and 2 during the year ended December 31, 2017.
At December 31, 2017, the Network’s remaining outstanding funding commitments to alternative investments approximated $7,014.
Assets under bond indenture agreements held by trustees are maintained in the following accounts at December 31, 2017:
Debt service fund, principal $ 16,569 Debt service fund, interest 23,038 Debt service reserve fund 5,237 Cost of issuance fund 374 Construction fund 30 Total assets under bond indenture agreements $ 45,248
Investment income consists of the following for the year ended December 31, 2017:
Interest and dividend income $ 37,311 Realized gains and losses and net change in unrealized gains and losses 133,960 Investment management fees (3,098) Other gains and losses 1,205
$ 169,378
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(in thousands)
4. Property and Equipment
Property and equipment, including assets held under capital lease obligations, consist of the following at December 31, 2017:
Land $ 107,634 Land improvements 20,673 Buildings and fixed equipment 2,268,447 Major movable equipment 983,364 3,380,118 Accumulated depreciation and amortization (1,617,173) Construction-in-progress 266,932
Property and equipment, net $ 2,029,877
Depreciation expense for the year ended December 31, 2017 was $167,204.
5. Long-Term Debt and Capital Lease Obligations
The Network has various bond issues outstanding, primarily issued through the New Jersey Health Care Facilities Financing Authority (the “Authority”), as well as various bank loans, mortgages and capital lease obligations. During 2017, the Network established one legally obligated group for certain borrowings with the Authority and other lenders. This obligated group is represented by Hackensack Meridian Health, HUMC, MHC, RBMC and PMC (“Obligated Group”). The Obligated Group is subject to the covenants of the Master Trust Indenture (“MTI”) with the Authority.
Long-term debt and capital lease obligations consist of the following at December 31, 2017:
Long-term debt Revenue bonds, Series 2017, which mature on July 1, 2057 and bear interest at 4.5% payable semiannually. $300,000
Refunding bonds, Series 2017A, which mature annually from July 1, 2020 through July 1, 2040, and bear interest at rates ranging from 2.5% to 5.0% payable semiannually. 489,870
Refunding bonds, Series 2017A, which mature from July 1, 2043 through July 1, 2057 and bear interest at rates ranging from 4.0% to 5.25% payable semiannually. 98,920
Bank loan, Series 2016, which has an annual interest rate of 2.59%, a term of 120 months with a 25- year amortization, and a fixed monthly payment of $92; commencing July 28, 2016 and ending July 28, 2041. 19,526
Revenue bonds, Series 2016A, principal and interest payments made monthly, maturing on July 1, 2038 and has interest rate of 1.51% at December 31, 2017. 127,865
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(in thousands)
Revenue bonds, Series 2015A, principal and interest payments payable monthly, maturing November 1, 2045 with annual rate of 2.5%. 120,972
Bank loan (tax -exempt), Series 2015A, which has an annual interest rate of 2.38%, a term of 120 months with a 25-year amortization, and a fixed monthly payment of $372; commencing August 12, 2015 and ending July 12, 2040. 78,047
Bank loan, Series 2015B, which has an annual interest rate of 3.31%, a term of 120 months with a 25- year amortization, and a fixed monthly payment of $177; commencing August 12, 2015 and ending July 12, 2040. 33,758
Refunding bonds, Series 2013A , in varying maturities through July 1, 2032 at annual interest rates varying between 2.0% and 5.0% payable semiannually. 23,585
Bank loan, Series 2013A, which has an annual interest rate of 1.93% and a term of 84 months with a fixed monthly payment of $957, commencing May 1, 2013 and ending April 1, 2020. 26,166 Bank loan, Series 2013B, which has an annual interest rate of 1.80% and a term of 84 months with a fixed monthly payment of $1,270, commencing May 1, 2013 and ending April 1, 2020. 34,783
Refunding bonds, Series 2011, in varying maturities through July 1, 2027 at annual interest rates varying between 2.0% and 5.0% payable semiannually. 127,800
Revenue bonds, Series 2006, maturing on July 1, 2036, principal paid annually, interest is payable monthly and determined weekly based upon market rates with a 12% per annum maximum, interest rate was 1.75% at December 31, 2017. 15,010
Variable rate composite revenue bonds, Series 2006 A-3 maturing on July 1, 2031,interest is payable monthly and the interest rate is determined weekly based on market rates with a 12% per annum maximum, interest rate was 1.31% at December 31, 2017. 3,500
Revenue bonds Series 2006 A-4 (issued through the Authority by Realty) maturing on July 1, 2027, interest is payable monthly and the interest rate is determined weekly based on market rates with a 12% per annum maximum interest rate was 1.75 % at December 31, 2017. 13,570
Revenue bonds Series 2006 A-5 (issued through the Authority by Realty) maturing on July 1, 2036, interest is payable monthly and the interest rate is determined weekly based on market rates with a 12% per annum maximum interest rate was 1.75% at December 31, 2017. 10,915
Variable rate composite revenue bonds, Series 2004 A-3 maturing on July 1, 2035, interest is payable monthly and the interest rate is determined weekly based on market rates with a 12% per annum maximum, interest rate was 1.27% at December 31, 2017. 10,305
Revenue bonds, Series 2003, maturing on July 1, 2033, interest is payable monthly and is determined weekly based on market rates with a 12% per annum maximum, interest rate was 1.63% at December 31, 2017. 60,000
Variable rate revenue bonds, Series 1998A, varying maturities through July 2028, interest payable monthly and is determined weekly based on market rates with a 12% per annum maximum, principal is payable semiannually, interest rate was 1.28% at December 31, 2017. 8,645
New Jersey Economic Development Authority Series 1997 Revenue Bonds which mature annually from January 1, 1998 through January 1, 2022, and bear interest at stated rates ranging from 4.1% to 5.7%. 13,003
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(in thousands)
Accreted bond interest payable on the capital appreciation portion of the Series 1997 bonds due between January 1, 2012 and January 1, 2022. 28,236
Various commercial mortgages with fixed interest rates ranging from 3.625% to 4.25% and variable interest rates equal to the LIBOR rate for each period plus 0.85% to 1.0%. Each note is collateralized by a mortgage. Principal and interest are paid monthly. 39,216
Total long-term debt 1,683,692
Capital lease obligations Capital lease obligations and other obligations with interest rates ranging from 1.74% to 12.3% collateralized by equipment financed through the leases. 5,853 Total capital lease obligations 5,853 Total long-term debt and capital lease obligations 1,689,545
Current portion of accreted interest, included in accrued interest payable (6,299) Original issue premium (discount), net 63,508 Deferred financing costs, net of accumulated amortization (9,859) Current portion (61,363) Long-term debt and capital lease obligations, net of current portion $ 1,675,532
In April 2017, the Obligated Group issued new bonds in the amount of $888,790. These funds were used to defease MHC Series 2007, HUMC Series 2008, Series 2010, Series 2010B and PMC Series 2013 bond issues; reimburse MHC for construction costs related to certain expansion projects; reimburse HUMC for a 2016 bank loan; and for future renovation and expansion projects.
Management is not aware of any noncompliance with any of the required covenants related to its outstanding debt at December 31, 2017. The Obligated Group’s most restrictive covenants are meeting minimum requirements for debt service coverage ratio, debt-to-capitalization ratio and cushion ratio. At December 31, 2017, the Obligated Group was in compliance with all financial ratio covenants.
The future principal payments on long-term debt and payments on capital lease obligations are as follows: Capital Long-Term Lease Debt Obligations Total
2018 $ 59,068 $ 2,295 $ 61,363 2019 112,972 1,897 114,869 2020 124,961 1,024 125,985 2021 50,058 466 50,524 2022 69,993 397 70,390 Thereafter 1,266,640 - 1,266,640 1,683,692 6,079 1,689,771 Amounts representing interest on capital lease obligations - (226) (226) Total long-term debt and capital lease obligations$ 1,683,692 $ 5,853 $ 1,689,545
23 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
6. Interest Rate Swap Agreements
The Network currently has five forward starting pay fixed interest swap agreements which were entered into to mitigate variable rate exposure and take advantage of low interest rates. Under the terms of these agreements, the Network is paying fixed interest rates ranging from 3.33% to 3.88% in exchange for variable rate payments equal to either 67% or 68% of the one month LIBOR rate. The notional amounts on these swap agreements are also tied to the outstanding principal on the underlying bond series.
At December 31, 2017, the fair value of the Network’s derivative instruments was in a liability position of $56,849 and included in other liabilities in the consolidated balance sheet. The fair values of the Network’s derivative instruments are classified as Level 2 financial instruments and reflect a risk of nonperformance adjustment of approximately $3,600. The total gain recognized on these derivatives for the year ended December 31, 2017 was $5,125, which was included within other operating adjustments in the consolidated statement of operations. In February 2018, the Network terminated one of these swap agreements due to more favorable market conditions for $1,100.
7. Pension Plans, Postretirement Health Care and Postemployment
The Network has multiple noncontributory defined benefit retirement plans covering most employees. The Network’s fund policy is to contribute annually an amount no less than the minimum amount required by the Employee Retirement Income Security Act of 1974, plus additional amounts, which may be approved by the Corporation from time to time. The following describes the various noncontributory defined benefit retirement plans:
HUMC Defined Benefit Pension Plan and Other Benefit Plan HUMC has a noncontributory defined benefit retirement plan (the “HUMC Plan”) covering most employees. In 2010, HUMC announced to all employees a change in its qualified defined benefit pension plan. Beginning January 1, 2011, most of its employees automatically earned retirement benefits under two new retirement plans, a defined contribution plan and a retirement savings plan. Any employee whose age and years of vesting service total at least 65 remains in the defined benefit plan and earns benefits under a new pension formula. The new pension formula continues to use an employee’s compensation and years of service, but benefits grow more evenly and slower over the remaining course of an employee’s career.
Additionally, HUMC had a defined benefit plan for Postretirement Life Insurance benefits for eligible employees who retired after age 55 with at least 10 years of service. Retirees were insured for a percentage of their final salary at retirement based on their age at retirement. These benefits were eliminated for anyone retiring after July 1, 2009.
MHC Defined Benefit Cash Balance Pension Plan The defined benefit cash balance plan (the “MHC Plan”) was created on January 1, 1998 through the conversion and merger of predecessor defined benefit plans. Benefits calculated based upon the predecessor plans were frozen as of December 31, 1997. Beginning January 1, 1998 benefits are based upon contributions to participants’ accounts at a percentage of the employee’s salary. On December 31, 2009, the MHC Plan was effectively frozen. Any employee eligible to participate in the MHC Plan on December 31, 2009 will continue to accrue benefits under this plan until
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(in thousands)
retirement. All new employees joining MHC after this date will be eligible to participate in a new 403(b) savings plan.
BCH Defined Benefit Pension Plan Bayshore Community Hospital (BCH) was the sponsor of a noncontributory defined benefit pension plan (the “BCH Plan”) covering substantially all of BCH’s employees. Benefits are based on salary and years of service. In 1999, BCH froze the BCH Plan to new participants and no benefits will accrue for future services.
RBMC Pension Plan The Employees’ Retirement Plan of Raritan Bay Health Services Corporation (the “RB Plan”) is a noncontributory defined benefit retirement plan. The RB Plan was frozen on December 31, 2004. Prior to December 31, 2004, the RB Plan covered all employees who had completed one year of service.
PMC Pension Plan PMC is the sponsor of a noncontributory defined benefit pension plan (the “PMC Plan”) covering certain of its employees. The benefits are based on years of service and the employees’ last ten years of average earnings. During 2006, Palisades amended the pension plan such that employees hired after June 1, 2006, do not participate in the plan. A defined contribution plan was established for such employees as described herein. Certain other changes were made which became effective January 1, 2007, and relate to employees subject to a collective bargaining agreement and the manner that future benefits will accrue for such employees. Certain amendments to the retirement benefits formula were adopted in 2009, effective January 1, 2010. The amendments include revisions to the percentage of compensation used for the determination of certain benefits and to the definition of compensation used in the computation.
During November 2017, the Network completed a small benefit retiree annuity program, whereby a select group of retirees from each of the plans above were transferred to an annuity plan held by a third party insurance company. In total, 2,200 retirees were transferred, accounting for a total of $94,109 of current obligation and corresponding assets from the plans being transferred to the insurance company.
25 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
The following table sets forth the funded status of the combined defined benefit pension plans for the year ended December 31, 2017:
Pension Benefits Change in benefit obligation Benefit obligation at beginning of year $ 1,637,279 Service cost 32,945 Interest cost 69,460 Actuarial loss 142,206 Benefits paid (55,510) Settlements (94,109) Net benefit obligation at end of year 1,732,271 Change in plan assets Fair value of plan assets at beginning of year 1,241,241 Actual return on plan assets 176,898 Employer contributions 70,813 Benefits paid (55,510) Settlements (94,109) Fair value of plan assets at end of year 1,339,333 Funded status at end of year $ 392,938
Accumulated benefit obligation, end of year $ 1,662,410
Amounts recognized in the consolidated balance sheet consist of Current liability (included in accounts payable and accrued expenses) $ 5,697 Accrued pension benefits 387,241 Total accrued pension liability $ 392,938
Amounts recognized in unrestricted net assets not yet captured within net periodic benefit costs consist of Net loss $ 526,161 Prior service credit (27,867) $ 498,294 Amounts in unrestricted net assets expected to be recognized in 2018 net periodic benefit cost Net loss $ 11,806 Prior service credit (4,153)
$ 7,653
26 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
At December 31, 2017, the respective plans utilized discount rates within the ranges as described below for the determination of the benefit obligations at December 31, 2017 and the net periodic pension cost for the period ended December 31, 2017:
Weighted-average assumptions used to determine benefit obligations Discount rate 3.14 - 3.77% Rate of compensation increase 3.00 - 3.50% Weighted average assumptions used to determine net periodic benefit cost Discount rate 3.67 - 4.54% Expected return on plan assets 7.00 - 7.63% Rate of compensation increase 3.00 - 3.50%
The net periodic pension cost and other changes in benefits and plan assets included the following components for the year ended December 31, 2017:
2017 Pension Benefits Net periodic benefit cost Service cost $ 32,945 Interest cost 69,460 Expected return on assets (89,154) Settlement loss 1,864 Amortization of prior service credit (4,153) Amortization of actuarial loss 14,670 Net periodic benefit cost $ 25,632
2017 Pension Benefits Other changes in benefits and plan assets (unrestricted net assets) Current year actuarial loss $ 52,598 Amortization of actuarial loss (14,670) Amortization of prior service credit 4,153 Total other changes in benefits and plan assets $ 42,081 Total net periodic benefit cost and other changes in benefits and plan assets $ 67,713
27 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
Investment Policy Upon completion of the merger on July 1, 2016, the Board of Trustees of the Network established an Investment Committee whose responsibilities include oversight and management of each of the pension plan investment portfolios. As such, the investment policy and strategy with respect to all defined benefit plan portfolios is to provide for growth of capital with a moderate level of volatility by investing in assets based on the respective plans’ target allocations. The expected long-term rate of return assumptions are based on forward-looking return forecasts for the modeled asset classes provided by the Network’s investment management consultants. The long-term forecasts are based on their analysis of long-cycle historical data as well as their longer-term global views. The target allocations have been set to achieve a long-term rate of return of 7.0% for all of the plans.
The target asset allocations of the pension plan assets are as follows:
Target Asset Allocation Investment categories HUMC Plan MHC Plan BCH Plan RB Plan PMC Plan
Equities (domestic and foreign) 40% 53% 57% 60% 55% Fixed Income 30% 40% 40% 38% 35% Alternative Investment 30% 7% 3% - 10% Cash equivalents - - - 2% - 100% 100% 100% 100% 100%
Fair Value Measurements The following table sets forth by level, within the fair value hierarchy, the Plans’ investments at fair value as of December 31, 2017:
Quoted Prices in Active Significant Markets Other for Identical Observable Balances at Assets Inputs December 31, (Level 1) (Level 2) 2017
Cash and cash equivalents $ 14,705 $ 7,529 $ 22,234 Corporate equity securities 217,625 6,194 223,819 Corporate bonds - 59,156 59,156 Government securities - 23,304 23,304 Asset backed securities - 3,431 3,431 Mortgage backed securities - 10,641 10,641 Master limited partnership 19,463 - 19,463 Mutual funds-equity 352,128 16,509 368,637 Mutual funds-fixed income 30,651 513 31,164 Total assets at fair value $ 634,572 $ 127,277 $ 761,849
Common/collective trusts 412,828 Alternative investments 164,138 Accrued interest 518 $ 1,339,333
28 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
Common/collective trusts and alternative investments are excluded from the fair value hierarchy table as they are valued using NAV as a practical expedient.
There were no transfers between Level 1 and Level 2 during 2017.
At December 31, 2017, the Network’s remaining outstanding funding commitments to alternative investments were $4,907.
Contributions The Network expects to contribute $40,000 to its pension plans in 2018.
Estimated Future Benefit Payments The following benefit payments which reflect future service as appropriate are expected to be paid:
Pension Benefits
2018 $ 70,675 2019 69,704 2020 75,955 2021 80,459 2022 88,175 2023–2027 502,622
Defined Contribution Plans HUMC’s defined contribution plan and the retirement savings plan both provide for employer contributions. The retirement savings plan is a noncontributory plan whereby the employer contribution is specific to employees who do not accrue benefits under the old defined benefit plan and equals two percent of the participant’s eligible compensation. The defined contribution plan provides for employee and employer matching contributions. The matching employer contribution is equal to 50 percent of the employee’s elective contribution up to a maximum employer contribution ranging from 1.5% to 3% of eligible compensation, based on years of service beginning in 2011. For the year ended December 31, 2017, the contribution expense related to the plans was $19,537 and is included in employee benefits within the consolidated statement of operations.
HUMC also sponsors a nonqualified, unfunded supplementary employee retirement plan for certain other employees. Similar to the changes under the qualified pension plan, HUMC froze benefits under the nonqualified deferred compensation plan as of December 31, 2010. Beginning January 1, 2011, certain management employees earn benefits under a newly designed supplemental employee retirement plan. This plan is intended to remain as an unfunded nonqualified deferred compensation plan which provides for an annual contribution in the form of a percentage of base payroll.
MHC sponsors two 403(b) savings plans. The Meridian 403(b) Savings Plan for Cash Balance Participants was adopted January 1, 1998. An employee is eligible for participation in this plan if the employee was hired prior to January 1, 2010, after attaining the age of 21 and completion of one year of eligible service. Matching contributions are received after 15 months of eligible service.
29 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
The second 403(b) plan is the Meridian 403(b) Savings Plan. An employee is eligible to participate in this plan if the employee was hired on or after January 1, 2010. All employees who are scheduled to work 20 hours or more per week are eligible to make elective deferrals beginning on the date of hire. Employer matching contributions will begin after attaining the age of 21 and completion of one year of service. Employees are eligible to receive employer non-elective contributions equal to 3% of compensation immediately. Total employer contributions for the year ended December 31, 2017 for both plans were $16,691.
HMNR sponsors several 401(k) plans (“401(k)”) and a money purchase plan. Once an employee has worked 1,000 hours in a calendar year, HMNR matches 100 percent up to 3 percent and 50 percent up to 2 percent of a team member’s contribution for Brick, Shrewsbury (nonunion); and Ocean Grove; and matches 100 percent up to 6 percent of pay at Wall. The Shrewsbury Union plan is 100 percent employee funded with no matching contribution. The Shrewsbury Union Money Purchase Plan is an employer funded plan and the employee receives $0.48 per hour worked. Total contributions to the plans for the year ended December 31, 2017 were $1,382.
Effective January 1, 2005, RBMC adopted a defined contribution pension plan (the RB Retirement Plan). The RB Retirement Plan provides for employer and employee contributions. All employees scheduled to work at least 20 hours per week are eligible for RBMC’s 50% match on the first 4% of the employee contribution. Under the RB Retirement Plan, a base contribution was made on behalf of each eligible employee towards this program. The amount was based upon each employee’s accumulated points (age and years of service). Effective May 2, 2009 the base contribution was suspended, and effective August 22, 2010, the matching contribution was suspended until further notice. Effective July 7, 2013, the RB Retirement Plan was amended to provide a 50% match by RBMC on the first 2% of the employee’s contribution and employer matching contributions were reinstated. Total contributions to the plan for the year ended December 31, 2017 was $619.
Palisades sponsors several defined contribution plans covering certain employees as described in each respective plan document. Total contribution expense under these plans for the year ended December 31, 2017 was $1,293.
Other Benefit Plans HUMC also sponsors a defined benefit postretirement health care plan that covers both salaried and non-salaried employees, and is contributory to the level of the annual major medical deductible.
HUMC has recognized liabilities, in connection with a self-insured medical and dental plan for its employees of $4,962 at December 31, 2017. This liability is included in accounts payable and accrued expenses in the consolidated balance sheet.
In addition, MHC provides certain postretirement and postemployment benefits. The postretirement and postemployment benefit plans provide health care benefits and life insurance coverage to a limited group of employees. Current employees are not eligible for participation in these plans. As of December 31, 2017, liabilities totaling $1,285 were included in other liabilities related to estimated benefits payable under the postretirement and postemployment plans. Benefits under the postretirement and postemployment benefit plans are paid as incurred.
30 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
Certain employees of the Network participate in various deferred compensation plans established pursuant to Section 457 of the Code. In connection with these plans, the Network deposits amounts with trustees on behalf of the participating employees. Under the terms of the plans, the Network is not responsible for investment gains or losses incurred. The assets set aside under the plans are designated for payments under the plans, but may revert to the Network under certain specified circumstances. At December 31, 2017, amounts on deposit with the trustees (at fair value) were equal to the liability under the plans.
8. Operating Leases
The Network utilizes various types of equipment and space under operating leases. Rent expense under these leases was approximately $36,070 for the year ended December 31, 2017. The following is a schedule of the future minimum payments for the remaining years required under operating leases currently in effect:
2018 $ 27,632 2019 19,859 2020 15,097 2021 12,276 2022 10,520 Thereafter 52,151 $ 137,535
9. Functional Expenses
The Network provides general health care services and programs. Expenses related to providing these services consist of the following:
Health care services $ 3,320,819 General and administrative 842,350
$ 4,163,169
31 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
10. Commitments and Contingencies
Lines of Credit The Network had available lines of credit totaling $62,300 at December 31, 2017. The Network had $12,850 outstanding against these lines as collateral for certain insurance policies at MHC, leaving $49,450 available for cash demands. Additionally, the Network has a separate letter of credit totaling $1,100 outstanding as collateral for certain high deductible insurance policies at BMC.
Litigation Various suits, investigations and claims arising in the normal course of operations are pending or are on appeal against the Network. Such suits and claims are either specifically covered by insurance or are not material. While the outcome of these suits cannot be determined with certainty at this time, management believes that any loss which may arise from those suits and claims will not have a material adverse effect on the financial position or results of operations of the Network.
11. Professional and General Liability Insurance
The Network maintains alternative risk finance programs for its facilities via wholly owned Bermuda domiciled captive insurance companies. Additionally, certain risks are covered through third party insurance policies.
The Network’s consolidated balance sheet includes the following estimated liabilities for hospital professional liability (“HPL”), employed physician professional liability (“EPPL”) general liability (“GL”) and workers compensation (“WC”) at December 31, 2017:
Type of coverage Nature of claims HUMCCO insurance liabilities HPL and GL $ 13,425 Coastal insurance liabilities HPL, GL, EPPL and WC 64,404 Third party insured liabilities WC 22,517 Incurred but not reported HPL, GL and WC 39,093 $ 139,439
Additionally, the Network has recorded estimated insurance recoveries totaling $28,917 at December 31, 2017, which is included in other assets on the consolidated balance sheet. The total represents estimated recoveries from both the captive companies’ reinsurance policies as well as third party insurance policies.
Captive Insurance Companies Coastal (established in 1998) and HUMCCO (established in 2003) provide various coverages to legacy MHS facilities and legacy HUHN facilities, respectively. Both captives provide funding for indemnification for respective HPL and GL exposures. Additionally, Coastal also provides funding for indemnification for exposures related to EPPL; Excess HPL; and WC. Funding for each of these programs is determined on an annual basis by consulting actuarial firms.
32 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
As of December 31, 2017, Coastal provides funding for HPL exposures of $1,000 per medical incident subject to an annual aggregate of $3,000 and funding for GL exposures of $1,000 per occurrence subject to an annual aggregate of $1,000. Coastal provides funding for EPPL exposures of $1,000 per medical incident subject to an annual aggregate of $3,000 per physician. Coastal also provides funding of $3,000 per medical incident excess of funding for Primary HPL exposures. Coastal’s HPL and EPPL components respond to claims and suits on a claims-made basis. Coastal’s GL component responds to claims and suits on an occurrence basis.
As of December 31, 2017, Coastal provides funding for the deductible portion of legacy MHS workers compensation claims per occurrence exposures of $750 on an occurrence basis.
As of December 31, 2017, HUMCCO provides funding for HPL and GL exposures of $6,000 per medical incident subject to an annual aggregate of $13,000. The HPL and GL components of the HUMCCO program respond to claims and suits on a claims-made basis.
As both captives provide HPL coverage on a claims-made basis and HUMCCO provides GL coverage on a claims-made basis, MHC and HUMC have recorded estimated liabilities for claims incurred but not yet reported as of December 31, 2017 within other liabilities on the consolidated balance sheet.
Reinsurance Coverage For the period ending December 31, 2017, Coastal purchased annual reinsurance policies in the amount of $75,000 per claim subject to an annual aggregate of $75,000 in excess of Coastal’s primary and first excess layer.
For the period ending December 31, 2017, HUMCCO purchased reinsurance policies in the amount of $5,000 with a $250 corridor deductible in excess of the HUMCCO primary retained layer of $1,000. In addition, HUMC purchased additional layers of insurance totaling $75,000.
Third Party Insurance – Workers Compensation HUMC had an occurrence based policy for workers compensation claims with a third party insurance company through June 30, 2016. Effective July 1, 2016, HUMC created its own self- insured workers compensation plan, and has recorded an estimated liability for claims incurred but not yet reported within the self-insurance period on the consolidated balance sheet as of December 31, 2017.
12. Concentration of Credit Risk
The Network grants credit without collateral to its patients, most of whom are local residents and are insured under third party payor agreements. Concentrations of gross accounts receivable from patients and third party payors were as follows:
Medicare and Medicaid 32% Managed Care/HMO 44% Other third party payors 14% Self-pay patients 10%
100%
33 Hackensack Meridian Health, Inc. Notes to Consolidated Financial Statements December 31, 2017
(in thousands)
13. Subsequent Events
The Network performed an evaluation of subsequent events through April 5, 2018 which is the date the consolidated financial statements were issued.
On March 19, 2018 the Network entered into a letter agreement with Seton Hall University which provides for the School of Medicine (“SOM”) to seek its own independent accreditation from its various accrediting and licensing bodies. Should the SOM receive such accreditation, the Network would assume full governance over the SOM. The letter agreement stipulates that the Network has full responsibility for the finances of the SOM, inclusive of the long term lease for the two buildings on the campus. As part of the letter agreement, Seton Hall University agreed to assume responsibility for a larger sublease of those buildings related to their School of Nursing and School of Allied Health programs that they are relocating to the campus. The financial impact of this letter agreement has been evaluated by management and has been deemed immaterial.
34
Consolidating Supplemental Schedules
Hackensack Meridian Health, Inc. Consolidating Balance Sheet December 31, 2017
(in thousands)
HMH & Hackensack Hackensack Hackensack Hackensack Hackensack Hackensack Hackensack Hospitals Hackensack Meridian Meridian Meridian Meridian Meridian Meridian Meridian University Palisades Division Meridian Health Realty Health Health Health Ambulatory Total Health Hospitals Medical Medical (Obligated Health Corporation & Residential Physician Ventures, Inc. Ventures Other Before Inc. Corporation Center Center Group) Foundations Subsidiaries Care, Inc. Services, Inc. & Subsidiary Inc. Affiliates Eliminations Eliminations Total Assets Current assets Cash and cash equivalents $ 9,367 $ 237,024 $ 286,408 24,199$ $ 556,998 $ 26,295 $ 8,933 $ 57,419 $ 19,408 $ 30,158 $ 2,026 11,998$ $ 713,235 $ - $ 713,235 Patient accounts receivable, less allowance for uncollectible accounts of $149,849 - 197,316 162,245 25,798 385,359 - - 17,252 27,197 - - 2,013 431,821 (2) 431,819 Pledges receivable, less allowance for uncollectible pledges of $2,267 - - - - - 37,746 ------37,746 (23) 37,723 Due from affiliates - 36,720 228,654 - 265,374 43,512 - 3 - - 4,149 49 313,087 (313,087) - Other current assets 7 61,182 61,077 6,290 128,556 125 4,621 4,574 24,493 5,943 - 681 168,993 (1,328) 167,665 Assets limited as to use and short-term investments, current portion 648,686 42,094 9,200 - 699,980 4,913 - 7,578 - 2,235 - 100,227 814,933 - 814,933
Total current assets 658,060 574,336 747,584 56,287 2,036,267 112,591 13,554 86,826 71,098 38,336 6,175 114,968 2,479,815 (314,440) 2,165,375
Assets limited as to use and investments, noncurrent portion 1,035,700 365,662 78,945 19,011 1,499,318 75,672 - 60,305 - - - 21,826 1,657,121 (145) 1,656,976 Investment in joint ventures 2,074 3,122 81,013 - 86,209 - 869 9,419 270 25,615 16,829 3 139,214 - 139,214 Property and equipment, net 136 1,107,454 554,496 57,075 1,719,161 1,395 80,154 68,196 13,251 24,593 - 123,127 2,029,877 - 2,029,877 Other assets - 70,838 94,776 23,309 188,923 23,036 2,982 7,883 264 1,726 12,358 26,251 263,423 (139,420) 124,003 Due from affiliates - 100,512 1,246 - 101,758 - - - - 218 - - 101,976 (101,976) -
Total assets $ 1,695,970 $ 2,221,924 $ 1,558,060 155,682$ $ 5,631,636 $ 212,694 $ 97,559 $ 232,629 $ 84,883 $ 90,488 $ 35,362 $ 286,175 $ 6,671,426 $ (555,981) $ 6,115,445
Liabilities and Net Assets Current liabilities Current maturities of long-term debt and capital lease obligations $ 53,824 $ 1,581 $ 2,901 $ 212 $ 58,518 $ - $ 1,148 -$ -$ -$ -$ $ 1,781 61,447 $ (84) $ 61,363 Accounts payable and accrued expenses 2,642 228,289 247,278 23,620 501,829 2,197 2,215 21,787 51,973 8,810 - 13,340 602,151 (4,822) 597,329 Due to affiliates 10,474 83,633 - 25,103 119,210 - 2,876 1,832 28,543 4,612 - 160,342 317,415 (317,415) - Other current liabilities 1,792 117,228 23,906 3,383 146,309 1 - 5,763 2,389 3,823 - 399 158,684 (1,666) 157,018 Total current liabilities 68,732 430,731 274,085 52,318 825,866 2,198 6,239 29,382 82,905 17,245 - 175,862 1,139,697 (323,987) 815,710
Long-term debt and capital lease obligations, less current maturities 1,604,692 1,449 31,704 384 1,638,229 - 23,348 - - 7,959 - 8,471 1,678,007 (2,475) 1,675,532 Due to affiliates ------218 - 1,246 1,464 (1,464) - Accrued pension benefits - 10,064 326,201 50,976 387,241 ------387,241 - 387,241 Other liabilities 1,622 266,346 119,362 21,821 409,151 1,187 262 1,703 3,065 - - 80,028 495,396 (61,023) 434,373 Total liabilities 1,675,046 708,590 751,352 125,499 3,260,487 3,385 29,849 31,085 85,970 25,422 - 265,607 3,701,805 (388,949) 3,312,856
Net assets Unrestricted 20,924 1,421,556 730,596 30,089 2,203,165 42,199 66,692 201,544 (1,087) 61,101 35,362 (2,939) 2,606,037 (1,996) 2,604,041 Noncontrolling interest in subsidiaries ------1,018 - - 3,965 - 26,499 31,482 (8) 31,474 Total unrestricted net assets 20,924 1,421,556 730,596 30,089 2,203,165 42,199 67,710 201,544 (1,087) 65,066 35,362 23,560 2,637,519 (2,004) 2,635,515 Temporarily restricted - 67,620 55,155 - 122,775 123,986 - - - - - (2,992) 243,769 (121,992) 121,777 Permanently restricted - 24,158 20,957 94 45,209 43,124 ------88,333 (43,036) 45,297 Total net assets 20,924 1,513,334 806,708 30,183 2,371,149 209,309 67,710 201,544 (1,087) 65,066 35,362 20,568 2,969,621 (167,032) 2,802,589
Total liabilities and net assets $ 1,695,970 $ 2,221,924 $ 1,558,060 155,682$ $ 5,631,636 $ 212,694 $ 97,559 $ 232,629 $ 84,883 $ 90,488 $ 35,362 $ 286,175 $ 6,671,426 $ (555,981) $ 6,115,445
The accompanying note is an integral part of these consolidating financial statements.
35 Hackensack Meridian Health, Inc. Consolidating Statement of Operations Year Ended December 31, 2017
(in thousands)
HMH & Hackensack Hackensack Hackensack Hackensack Hackensack Hackensack Hackensack Hospitals Hackensack Meridian Meridian Meridian Meridian Meridian Meridian Meridian University Palisades Division Meridian Health Realty Health Health Health Ambulatory Total Health Hospitals Medical Medical (Obligated Health Corporation & Residential Physician Ventures, Inc. Ventures Other Before Inc. Corporation Center Center Group) Foundations Subsidiaries Care, Inc. Services, Inc. & Subsidiaries Inc. Affiliates Eliminations Eliminations Total Unrestricted revenues and other support Patient service revenue, net of contractual allowances and discounts $ - $ 2,038,854 $ 1,638,839 $ 178,802 $ 3,856,495 $ - $ - $ 200,808 $ 265,519 $ - -$ $ 22,531 $ 4,345,353 $ (2,203) $ 4,343,150 Provision for bad debts - (85,161) (59,143) (20,332) (164,636) - - - (10,143) - - - (174,779) - (174,779)
Net patient service revenue, less provision for bad debts - 1,953,693 1,579,696 158,470 3,691,859 - - 200,808 255,376 - - 22,531 4,170,574 (2,203) 4,168,371
Other revenue 102 45,941 63,671 6,408 116,122 11,334 9,644 14,415 216,325 10,268 408 48,226 426,742 (227,489) 199,253 Net gain on equity investments 4,034 - 6,314 - 10,348 - 135 166 - 3,587 9,998 (3,004) 21,230 - 21,230 Net assets released from restriction used for operating activities - 4,126 5,461 - 9,587 9,589 - - 783 - - (1) 19,958 (9,553) 10,405 Total unrestricted revenues and other support 4,136 2,003,760 1,655,142 164,878 3,827,916 20,923 9,779 215,389 472,484 13,855 10,406 67,752 4,638,504 (239,245) 4,399,259
Expenses Salaries and contracted labor - 750,967 553,244 89,474 1,393,685 7,147 594 107,813 77,008 5,444 - 7,324 1,599,015 (4,331) 1,594,684 Physician salaries and fees - 60,469 26,065 8,495 95,029 - - - 225,779 - - 41 320,849 - 320,849 Employee benefits - 180,466 123,037 18,713 322,216 1,596 105 27,418 44,639 1,532 - 533 398,039 (772) 397,267 Supplies and other expenses 14,373 774,646 725,482 51,143 1,565,644 19,810 4,318 68,046 120,620 2,781 189 63,493 1,844,901 (237,416) 1,607,485 Depreciation and amortization 7 74,861 71,999 7,265 154,132 144 2,369 4,316 3,750 631 - 3,910 169,252 - 169,252 Interest - 35,487 25,959 1,624 63,070 - 1,368 1,519 - 26 - 490 66,473 - 66,473 Provision for bad debts - - - - - 132 - 6,982 - 45 - - 7,159 - 7,159 Total expenses 14,380 1,876,896 1,525,786 176,714 3,593,776 28,829 8,754 216,094 471,796 10,459 189 75,791 4,405,688 (242,519) 4,163,169 Excess of revenues over expenses before other adjustments (10,244) 126,864 129,356 (11,836) 234,140 (7,906) 1,025 (705) 688 3,396 10,217 (8,039) 232,816 3,274 236,090
Other operating adjustments Investment income 27,004 66,894 54,270 892 149,060 5,409 23 5,246 - 1,088 - 8,552 169,378 - 169,378 Unrealized gain on derivative investments - 5,125 - - 5,125 ------5,125 - 5,125 Loss on extinguishment of debt - (7,534) (17,311) (4,999) (29,844) - - (1,117) - - - - (30,961) - (30,961) Other gains, net - 5,056 - 10 5,066 - - 15 - (55) - - 5,026 - 5,026 Provision for income taxes ------(283) (3,174) - 178 (3,279) - (3,279) Excess of revenues over expenses 16,760 196,405 166,315 (15,933) 363,547 (2,497) 1,048 3,439 405 1,255 10,217 691 378,105 3,274 381,379
Other adjustments in unrestricted net assets Net assets released from restriction for capital acquisition - 5,554 5,706 - 11,260 9,425 ------20,685 (9,425) 11,260 Transfers (to)/from affiliates (1,657) (72,922) (34,256) 22,000 (86,835) (266) 27,749 38,000 3,457 3,413 1,708 3,399 (9,375) 9,375 - Pension-related adjustments - 36,540 (74,962) (3,659) (42,081) ------(42,081) - (42,081) Other changes in unrestricted net assets - - 3,328 - 3,328 - (200) - - - - - 3,128 (3,278) (150) Distributions to noncontrolling interests - - - - - (641) (102) - - 1,989 - (8,769) (7,523) - (7,523) Increase in unrestricted net assets $ 15,103 $ 165,577 $ 66,131 $ 2,408 $ 249,219 $ 6,021 $ 28,495 $ 41,439 $ 3,862 $ 6,657 $ 11,925 $ (4,679) $ 342,939 $ (54) $ 342,885
The accompanying note is an integral part of these consolidating financial statements.
36 Hackensack Meridian Health, Inc. Note to Consolidating Supplemental Schedules Year Ended December 31, 2017
1. Basis of Presentation
The consolidating supplemental schedules (“consolidating schedules”) presented on pages 35-36 was derived from and relates directly to the underlying accounting and other records used to prepare the consolidating financial statements. The consolidating schedules are presented for purposes of additional analysis of the consolidating financial statements rather than to present the financial position, results of operations, changes in net assets and cash flows of the individual companies within the Network and are not a required part of the consolidated financial statements. The individual companies within the Network as presented within the consolidating schedules are disclosed within Note 1 to the consolidated financial statements.
37 APPENDIX B-2
JFK Health System, Inc. Consolidated Financial Statements, December 31, 2017
[THIS PAGE INTENTIONALLY LEFT BLANK] Appendix B-2
JFK Health System, Inc. and Controlled Entities
Consolidated Financial Statements and Supplementary Information
December 31, 2017 and 2016 JFK Health System, Inc. and Controlled Entities Table of Contents December 31, 2017 and 2016
Page
Independent Auditors’ Report 1
Consolidated Financial Statements
Balance Sheet 3
Statement of Operations 4
Statement of Changes in Net Assets 5
Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7
Supplementary Information
Consolidating Schedules for 2017
Consolidating Schedule, Balance Sheet 42
Consolidating Schedule, Statement of Operations 44
Consolidating Schedule, Changes in Net Assets (Deficit) 45
Consolidating Schedules for 2016
Consolidating Schedule, Balance Sheet 46
Consolidating Schedule, Statement of Operations 48
Consolidating Schedule, Changes in Net Assets (Deficit) 49 Independent Auditors’ Report
Board of Directors JFK Health System, Inc. and Controlled Entities
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of JFK Health System, Inc. and controlled entities (collectively, the "JFK Health System"), which comprise the consolidated balance sheet as of December 31, 2017 and 2016, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
1 Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of JFK Health System, Inc. and controlled entities as of December 31, 2017 and 2016, and the results of their operations, changes in net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Report on Supplementary Information
Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary information presented on pages 42 to 49 is presented for purposes of additional analysis rather than to present the financial position and results of operations of the individual companies and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole.
Iselin, New Jersey April 9, 2018
2 JFK Health System, Inc. and Controlled Entities Consolidated Balance Sheet December 31, 2017 and 2016
2017 2016 2017 2016
Assets Liabilities and Net Assets
Current Assets Current Liabilities Cash and cash equivalents $ 54,821,247 $ 64,382,675 Current maturities of long-term debt $ 7,743,701 $ 7,393,429 Funds held for residents 193,864 183,311 Current maturities of capital Investments 19,124,031 18,556,621 lease obligations 3,995,540 5,239,754 Assets whose use is limited 3,495,985 3,480,722 Funds held for residents 193,864 183,311 Accounts receivable, patients (net of estimated Accounts payable 45,241,403 39,069,212 allowance for doubtful collections of $15,484,436 Accrued expenses 55,747,963 46,628,736 in 2017 and $15,131,916 in 2016) 80,373,475 75,674,461 Estimated third-party payor settlements 5,624,693 4,098,620 Inventories of drugs and supplies 8,027,971 7,640,514 Accrued postretirement benefits 45,855 46,525 Prepaid expenses and other current assets 8,698,933 8,657,670 Other current liabilities 4,189,368 2,511,387
Total current assets 174,735,506 178,575,974 Total current liabilities 122,782,387 105,170,974
Investments 5,544,199 4,542,747 Long-Term Debt 131,169,136 138,606,759
Assets Whose Use is Limited 35,156,417 30,188,774 Capital Lease Obligations 5,852,956 13,326,031
Property and Equipment, Net 146,168,196 181,805,744 Estimated Third-Party Payor Settlements 19,865,872 32,124,199 Pledges Receivable, Net 316,358 252,082 Self-Insurance Reserves 18,093,513 19,572,452 Other Assets 12,296,469 11,728,655 Accrued Pension Cost 13,736,365 29,876,388 Beneficial Interest in Perpetual Trusts 5,435,111 5,034,715 Accrued Postretirement Benefits 311,579 347,399
Other Liabilities 15,797,169 17,531,632
Total liabilities 327,608,977 356,555,834
Net Assets Unrestricted 32,163,368 38,224,329 Temporarily restricted 10,843,980 9,236,066 Permanently restricted 9,035,931 8,112,462
Total net assets 52,043,279 55,572,857
Total $ 379,652,256 $ 412,128,691 Total $ 379,652,256 $ 412,128,691
See notes to consolidated financial statements 3 JFK Health System, Inc. and Controlled Entities Consolidated Statement of Operations Years Ended December 31, 2017 and 2016
2017 2016
Unrestricted Revenues, Gains, and Other Support Patient service revenues, net of contractual allowances and discounts $ 647,621,755 $ 613,342,520 Resident fees 7,736,063 7,564,110 Less provision for doubtful collections 26,193,184 21,254,574
Net patient and resident service revenues 629,164,634 599,652,056
Other revenues 19,583,245 19,091,839 Special events 260,800 250,718 Net assets released from restrictions used in operations 426,181 1,984,359 Contributions 207,133 191,467
Total unrestricted revenues, gains, and other support 649,641,993 621,170,439
Expenses Salaries and wages 291,732,631 275,064,881 Employee benefits 55,783,319 54,063,077 Supplies and expenses 271,204,066 241,133,013 Loss on abandonment of construction in progress 27,882,656 - Special events - unrestricted 144,120 98,985 Depreciation 14,286,036 15,198,476 Interest 8,666,965 8,749,293
Total expenses 669,699,793 594,307,725
Operating (loss) income (20,057,800) 26,862,714
Pension Settlement (2,791,738) (3,212,580)
Investment Income 1,226,197 1,135,295
Net Unrealized Gains (Losses) on Trading Securities 438,891 (4,342)
Other Loss (422,938) (1,445)
Revenues (less than) in excess of expenses (21,607,388) 24,779,642
Pension/Postretirement Liability Adjustment 14,498,606 8,580,342
Net Assets Released from Restrictions for Capital Purchases 1,048,399 265,287
Net Asset Transfer (880,331) -
Other Gains 63,700 -
(Decrease) increase in unrestricted net assets from continuing operations (6,877,014) 33,625,271
Gain from Discontinued Operations 816,053 85,686
(Decrease) increase in unrestricted net assets $ (6,060,961) $ 33,710,957
See notes to consolidated financial statements 4 JFK Health System, Inc. and Controlled Entities Consolidated Statement of Changes in Net Assets Years Ended December 31, 2017 and 2016
2017 2016
Unrestricted Net Assets Revenues (less than) in excess of expenses $ (21,607,388) $ 24,779,642 Pension/postretirement liability adjustment 14,498,606 8,580,342 Net assets released from restrictions for capital purchases 1,048,399 265,287 Net asset transfer (880,331) - Other gains 63,700 -
(Decrease) increase in unrestricted net assets from continuing operations (6,877,014) 33,625,271
Gain from discontinued operations 816,053 85,686
(Decrease) increase in unrestricted net assets (6,060,961) 33,710,957
Temporarily Restricted Net Assets Contributions 1,260,820 1,728,469 Investment income 323,703 126,734 Net asset transfer 880,331 - Change in unrealized gains on investments 624,610 195,457 Change in provision for uncollectible pledges (6,970) (65,366) Net assets released from restrictions used in operations (426,181) (1,984,359) Net assets released from restrictions for capital purchases (1,048,399) (265,287)
Increase (decrease) in temporarily restricted net assets 1,607,914 (264,352)
Permanently Restricted Net Assets Contributions 523,073 11,000 Write-off of uncollectible pledge - (2,000) Change in valuation of beneficial interest in perpetual trusts 400,396 11,022
Increase in permanently restricted net assets 923,469 20,022
(Decrease) Increase in Net Assets (3,529,578) 33,466,627
Net Assets Beginning of year 55,572,857 22,106,230
End of year $ 52,043,279 $ 55,572,857
See notes to consolidated financial statements 5 JFK Health System, Inc. and Controlled Entities Consolidated Statement of Cash Flows Years Ended December 31, 2017 and 2016
2017 2016
Cash Flows from Operating Activities (Decrease) increase in net assets $ (3,529,578) $ 33,466,627 Adjustments to reconcile (decrease) increase in net assets to net cash provided by operating activities: Depreciation 14,286,036 15,198,476 Amortization 327,966 330,850 Provision for doubtful collections 26,193,184 21,254,574 Loss on abandonment of construction in progress 27,882,656 - Net realized and unrealized gains on investments (1,337,959) (62,409) Change in valuation of beneficial interest in perpetual trusts (400,396) (11,022) Pension settlement 2,791,738 3,212,580 Pension/postretirement liability adjustment (14,498,606) (8,580,342) Temporarily restricted contributions and investment income (2,107,596) (1,866,203) Changes in assets and liabilities: Accounts receivable, patients (30,892,198) (22,139,066) Inventories of drugs and supplies (387,457) (357,299) Prepaid expenses and other assets (639,869) (873,522) Accounts payable 6,172,191 (5,020,719) Accrued expenses 4,119,227 2,780,874 Estimated third-party payor settlements (10,732,254) 8,122,540 Accrued pension cost (4,433,155) (3,683,471) Self-insurance reserves (1,478,939) (6,585,669) Accrued postretirement benefits (36,490) (4,661) Other current and long-term liabilities (56,482) 1,321,586
Net cash provided by operating activities 11,242,019 36,503,724
Cash Flows from Investing Activities Purchases of property and equipment (6,213,430) (13,646,057) (Purchase) sale of investments and assets whose use is limited (5,213,809) 3,536,159
Net cash used in investing activities (11,427,239) (10,109,898)
Cash Flows from Financing Activities Repayment of long-term debt (7,415,317) (7,036,638) Repayment of capital lease obligations (4,035,003) (4,918,677) Payment of financing costs - (73,163) Proceeds from restricted contributions and investment income 2,107,596 1,866,203 Decrease in pledges receivable (33,484) 166,668
Net cash used in financing activities (9,376,208) (9,995,607)
(Decrease) increase in cash and cash equivalents (9,561,428) 16,398,219
Cash and Cash Equivalents, Beginning 64,382,675 47,984,456
Cash and Cash Equivalents, Ending $ 54,821,247 $ 64,382,675
Supplemental Disclosure of Cash Flow Information, Interest paid $ 8,420,027 $ 8,504,750
Purchases of property and equipment through capital lease obligations $ 317,714 $ 7,341,973
Reduction of capital lease obligation due to refinance $ 5,000,000 $ -
See notes to consolidated financial statements 6 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
1. Organizational Structure and Nature of Operations
The JFK Health System, Inc. (the "JFK Health System") is the parent company of the Community Hospital Group, Inc. d/b/a JFK Medical Center ("JFK Medical Center"); Muhlenberg Regional Medical Center, Inc. ("MRMC"); John F. Kennedy Medical Center Foundation, Inc. ("JFK Foundation"); Muhlenberg Foundation, Inc. ("Muhlenberg Foundation"); Lifestyle Institute, Inc. ("Lifestyle"); JFK Healthshare, Inc. ("Healthshare"); Hartwyck at JFK, Inc.; Hartwyck West Nursing Home, Inc. and affiliates ("Hartwyck West"); Hartwyck at Oak Tree, Inc. ("Oak Tree"); JFK Population Health Company, LLC ("JFK Population Health"); JFK Medical Associates, P.A. ("JFK MA"); JFK Medical Group, P.C. ("JFK Medical Group"); and Atlantic Insurance Exchange, Ltd. ("AIE"), a wholly-owned insurance company.
Hartwyck West operates Hartwyck at Cedar Brook ("Cedar Brook"), and is the sole member of JFK Assisted Living, Inc. d/b/a Whispering Knoll ("Whispering Knoll"), and JFK Hartwyck Management and Consulting, Inc. ("Consulting"). Healthshare was the general partner in Mediplex Surgical Center Associates, Limited Partnership ("Mediplex"), which was dissolved August 1, 2017.
On February 21, 2008, the JFK Health System Board of Directors voted to immediately authorize the filing of a certificate of need ("CON") application to close MRMC. The CON application was approved on July 29, 2008 and MRMC was closed on August 13, 2008. The JFK Health System will provide the opportunity for MRMC to continue its remaining operations.
On December 31, 2010, MRMC formed a joint venture with Meridian Healthcare to establish the new organization, JFK Meridian Home Care Services LLC d/b/a JFK at Home. JFK at Home is a Home Health Care provider. MRMC has 50% ownership in the joint venture which is accounted for on the equity method of accounting. As of December 31, 2017 and 2016, the investment was $660,907 and $960,196, respectively, and included in other assets on the consolidated balance sheet.
The Centers for Medicare & Medicaid Services ("CMS") has established a Medicare Shared Savings Program ("Shared Savings Program") to facilitate coordination and cooperation among providers to improve the quality of care for Medicare Fee-For-Service beneficiaries and reduce unnecessary costs. In December 2013, JFK Population Health was approved by CMS as an Accountable Care Organization ("ACO") to participate in the Shared Savings Program. The Shared Savings Program will reward ACOs that lower their growth in health care costs while meeting performance standards on quality of care and putting patients first. JFK Population Health is an ACO created by JFK Medical Center.
On March 6, 2013, a Certificate of Incorporation was filed for JFK MA to establish an organization for the acquisition of physician practices. JFK Medical Group contracted to operate a physician practice in December 2016. JFK MA and JFK Medical Group are wholly-owned subsidiaries of JFK Health System.
On April 1, 2017, Lifestyle entered into a purchase agreement with Edison Imaging Associates, P.A. t/a Advanced Medical Imaging. The total purchase amount was $582,000 of which $194,000 was paid at closing and the remainder is to be paid under a 2 year interest bearing promissory note.
7 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
JFK Health System and its controlled entities provide health care services ranging from acute care hospital services to rehabilitation, skilled nursing, sub-acute, and long-term care services in New Jersey and the New York metropolitan area, in addition to other activities for the benefit and support of JFK Health System.
On December 27, 2017, effective January 1, 2018, amended and restated Certificates of Incorporation for JFK Health System, along with amended and restated certificates of incorporation of other JFK Health System controlled entities, were filed with the State of New Jersey. These filings were made in accordance with the terms and conditions of the Definitive Agreement, dated May 2, 2017, by and between Hackensack Meridian Health, Inc. and JFK Health System. Hackensack Meridian Health, Inc. became the sole corporate member of JFK Health System.
The JFK Health System and Oak Tree Boards of Directors have approved a request for proposal to be sent out for the potential sale of Hartwyck at Edison Estates, one of the facilities operated by Oak Tree. The Boards are in the process of considering the proposals received from potential buyers. The buyer selection and sale are expected be completed during 2019.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the JFK Health System, JFK Medical Center, MRMC, JFK Foundation, Muhlenberg Foundation, Lifestyle, Healthshare, Hartwyck at JFK, Inc., Hartwyck West, Oak Tree, JFK MA, JFK Medical Group, JFK Population Health and AIE. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include certain investments in highly liquid debt investments purchased with an original maturity of three months or less, excluding investments and assets whose use is limited.
Accounts Receivable, Patients
Accounts receivable, patients are reported at net realizable value. Accounts are written off when they are determined to be uncollectible based upon management’s assessment of individual accounts. The allowance for doubtful collections is estimated based upon a periodic review of the accounts receivable aging, payor classifications, and application of historical write-off percentages.
8 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
JFK Medical Center’s allowance for self-pay patients was 99% and 97% of self-pay accounts receivable at December 31, 2017 and December 31, 2016, respectively. In addition, JFK Medical Center’s self-pay account write-offs (net of recoveries) increased to $17,742,092 in 2017 from $17,543,599 in 2016. JFK Medical Center has not changed its financial assistance policy in 2017 or 2016.
Net Patient Service Revenues and Net Residents' Fees
The JFK Health System has agreements with third-party payors that provide for payments at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, per diem payments, and contracted amounts. JFK Health System recognizes patient service revenue associated with services provided to patients who have third-party payor coverage on the basis of these established rates for the services rendered. For uninsured patients that do not qualify for charity care, JFK Health System recognizes revenues on the basis of its standard rates, discounted in accordance with JFK Health System’s policy. On the basis of historical experience, a significant portion of JFK Health System’s uninsured patients will be unable or unwilling to pay for the services provided. Thus, JFK Health System records a significant provision of bad debts related to uninsured patients in the period the services are provided.
Residents’ fees are reported at the estimated net realizable amounts from residents, third- party payors and others for services rendered.
Patient service revenues and resident fees, net of contractual allowances and discounts (but before the provision for doubtful collections), recognized in 2017 and 2016 from these major payor sources, are as follows:
Patient Service Revenues and Resident Fees (Net of Contractual Allowances and Discounts) Third-Party Third-Party Government Commercial Payors Payors Self-Pay Total
December 31, 2017 $ 200,933,000 $ 430,449,000 $ 23,976,000 $ 655,358,000
December 31, 2016 $ 205,982,000 $ 394,114,000 $ 20,811,000 $ 620,907,000
Inventories of Drugs and Supplies
Inventories of drugs, medical and surgical supplies, and maintenance supplies are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis.
Investments and Investment Risk
Investments in debt and equity securities and mutual funds are measured at fair value in the consolidated balance sheet. Investment income or loss (including realized and unrealized gains and losses on trading securities, interest, dividends, and capital gains distributions) is included in the determination of revenues (less than) in excess of expenses unless the income or loss is restricted by donor or law. Donor restricted investment income is reported as an increase in temporarily restricted net assets.
9 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
The JFK Health System's investments are comprised of a variety of financial instruments and are managed by investment advisors. The fair values reported in the consolidated balance sheet are subject to various risks including changes in the equity markets, the interest rate environment, and general economic conditions. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the fair value of investment securities, it is reasonably possible that the amounts reported in the consolidated balance sheet could change materially in the near term.
Assets Whose Use is Limited
Assets whose use is limited include assets held by bond trustees under trust indentures; assets set aside under deferred compensation plans; assets set aside as required for self- insurance programs; and assets restricted by donors. Amounts available to meet current liabilities have been reclassified as current assets in the accompanying consolidated balance sheet.
Property and Equipment
Property and equipment acquisitions are recorded at cost. Donated property and equipment are recorded at fair market value at the date of receipt. Depreciation is computed using the straight-line method based on estimated useful lives ranging from 3 to 40 years.
Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service.
Impairment of Long-Lived Assets
The JFK Health System reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.
Beneficial Interest in Perpetual Trusts
Under perpetual trust agreements, MRMC and Muhlenberg Foundation have recorded the asset and have recognized permanently restricted contribution revenue at the fair market value of their beneficial interest in the trust assets. Income earned on the trust assets is recorded as investment income in the accompanying consolidated statement of operations, unless otherwise restricted by the donor. Subsequent changes in fair values are recorded as a change in valuation of beneficial interest in perpetual trusts in permanently restricted net assets.
10 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
Pursuant to the terms of the instruments creating such perpetual trusts, MRMC and Muhlenberg Foundation had no legal right to direct the application of the assets and even though these assets are reported in the accompanying balance sheet, they are subject to the jurisdiction of the court. Based on a court action in 2015, it was determined that MRMC will retain its interest in the perpetual trusts. Income earned will be restricted for original donor intent or repurposed for relocation of various services operated by MRMC affiliates to the MRMC campus and the renovation thereof (the "Project"), and to offset costs incurred by MRMC’s affiliates providing health care services in the MRMC service area.
Deferred Financing Costs
Deferred financing costs represent costs incurred in connection with the issuance of long-term debt. These costs are reported in the consolidated balance sheet as a reduction of long-term debt and amortized over the life of the debt using the effective interested method. Amortization expense amounted to $327,966 and $330,850 in 2017 and 2016, respectively, and is included in interest expense in the consolidated statement of operations. Accumulated amortization of deferred financing costs at December 31, 2017 and 2016 totaled $3,122,418 and $2,794,452, respectively.
Pledges Receivable
Pledges receivable are primarily unsecured and are receivable from individuals and businesses located in central New Jersey. Pledges receivable and revenue are recorded at fair value, which was estimated as the present value of estimated cash flows on the date the unconditional promise to give is made.
Revenues (Less Than) in Excess of Expenses
The consolidated statement of operations includes the determination of revenues (less than) in excess of expenses. Changes in unrestricted net assets which are excluded from the determination of revenues (less than) in excess of expenses, consistent with industry practice, include pension/postretirement liability adjustment, permanent transfers of assets to and from affiliates for other than goods and services, forgiveness of amounts due to and from affiliates, loss from discontinued operations, and contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets).
Advertising Costs
Advertising costs are expensed as incurred. Such costs amounted to approximately $2,230,000 in 2017 and $2,125,000 in 2016.
11 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
Donor-Restricted Gifts
Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statement of operations as net assets released from restrictions. Donor restricted contributions whose restrictions are met within the same year as received are reflected as unrestricted contributions in the accompanying consolidated financial statements.
Income Taxes
The JFK Health System, JFK Medical Center, MRMC, JFK Foundation, Muhlenberg Foundation, Lifestyle, Hartwyck at JFK, Hartwyck West Nursing Home, Inc., Whispering Knoll, JFK MA, JFK Medical Group and Oak Tree are not-for-profit corporations as described in Section 501(c)(3) of the Internal Revenue Code and are exempt from federal income taxes on their exempt income under Section 501(a) of the Internal Revenue Code. JFK Population Health is a limited liability company and is not a tax-paying entity for federal and state income tax purposes.
AIE has received an undertaking from the Bermuda government that, in the event of income or capital gains taxes being imposed, AIE will be exempted from such taxes until the year 2035.
Consulting, Healthshare and Mediplex are organizations subject to federal and state income taxes and are no longer subject to examination by the Internal Revenue Service for years before 2014.
The JFK Health System accounts for uncertainty in income taxes by prescribing a recognition threshold of more-likely-than-not to be sustained upon examination by the appropriate taxing authority. Measurement of the tax uncertainty occurs if the recognition threshold has been met. There were no tax uncertainties that met the recognition threshold in 2017 or 2016.
Estimated Malpractice Costs
The provision for estimated medical malpractice claims includes estimates of the ultimate costs for both reported claims and claims incurred but not reported, including costs associated with litigating or settling claims. Anticipated insurance recoveries associated with reported claims are reported separately in JFK Health System’s consolidated balance sheet at net realizable value.
Postretirement Benefits
The JFK Health System accounts for postretirement benefits on an accrual basis. Postretirement benefits include reimbursement to qualified retirees for a portion of their health and life insurance costs. Effective January 1, 2016, health insurance costs were no longer reimbursed under the postretirement benefits plan.
12 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets are those whose use by the JFK Health System have been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the JFK Health System in perpetuity. Transfers are made based upon the occurrence of certain events or the determination that a transfer is needed to reflect the donors’ intent for the contribution.
Reclassifications
Certain 2016 amounts were reclassified to conform to the 2017 presentation.
Subsequent Events
JFK Health System evaluated subsequent events for recognition or disclosure through April 9, 2018, the date the consolidated financial statements were issued.
Recent Accounting Pronouncements
Financial Statements - Not-for-Profit Entities
In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The new guidance is intended to improve and simplify the current net asset classification requirements and information presented in financial statements and notes that is useful in assessing a not-for-profit’s liquidity, financial performance and cash flows. ASU No. 2016-14 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. ASU No. 2016-14 is to be applied retroactively with transition provisions. JFK Health System has not yet determined the impact of this standard on its consolidated financial statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. Under the requirements of ASU No. 2014-09, the core principle is that entities should recognize revenue to depict the transfer of promised goods or services to customers (patients) in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. JFK Health System will be required to retrospectively adopt the guidance in ASU No. 2014-09 for years beginning after December 15, 2017; early application is permitted only for years beginning after December 15, 2016. JFK Health System has not yet determined the impact of ASU No. 2014-09 on its consolidated financial statements.
13 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016- 02 was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the provisions of ASU No. 2016-02, a lessee is required to recognize a right-to-use asset and lease liability, initially measured at the present value of the lease payments, in the balance sheet. In addition, lessees are required to provide qualitative and quantitative disclosures that enable users to understand more about the nature of JFK Health System’s leasing activities. JFK Health System will be required to retrospectively adopt the guidance in ASU No. 2016-02 for years beginning after December 15, 2018. JFK Health System has not yet determined the impact of adoption of ASU No. 2016-02 on its consolidated financial statements.
Statement of Cash Flow, Restricted Cash
During November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. ASU No. 2016-18 requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts showing on the statement of cash flows. ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. The ASU should be applied using the retrospective transition method to each period presented. JFK Health System is currently assessing the effect that ASU No. 2016-18 will have on its statement of cash flows.
3. Charity Care
The JFK Health System provides care to patients who meet the strict charity care criteria of the New Jersey State Department of Health (the "Department") without charge or at amounts less than its established rates. Because the JFK Health System does not pursue collection of amounts determined to qualify as charity care, they are not reported as patient service revenue.
In accordance with guidelines established by the Department, the JFK Health System maintains records to identify and monitor the level of charity care it provides. The estimated costs of providing charity care are based upon the direct and indirect costs identified with the specific charity care services provided. The level of charity care provided by the JFK Health System amounted to approximately $10,105,000 in 2017 and $14,059,000 in 2016.
JFK Health System receives subsidy payments from the State of New Jersey to partially fund charity care and certain other costs. Subsidy payments included in net patient service revenues for the years ended December 31, 2017 and 2016 were approximately $1,265,000 and $2,758,000, respectively.
14 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
4. Net Patient Service Revenues
The JFK Health System has agreements with third-party payors that provide for payments to the JFK Health System at amounts different from its established rates. A significant portion of the JFK Health System’s net patient service revenues are derived from these third-party payor programs. A summary of the principal payment arrangements with major third-party payors is as follows:
! Medicare: Inpatient acute care and rehabilitation services and outpatient services rendered to Medicare program beneficiaries are paid at prospectively determined rates. These rates vary according to patient classification systems that are based on clinical, diagnostic, and other factors. Skilled nursing services provided to Medicare Part A beneficiaries are paid at prospectively determined rates per day and services to Medicare Part B beneficiaries at the lesser of a published fee schedule or actual charges, subject to an annual limitation. Defined medical education costs related to Medicare beneficiaries are paid based on a cost reimbursement methodology subject to various limitations. Reimbursements for cost reimbursable items are received at tentative interim rates, with final settlement determined after submission of annual cost reports by the JFK Health System and audits thereof by the Medicare fiscal intermediary. The JFK Health System’s Medicare cost reports have been settled by the Medicare fiscal intermediary through December 31, 2014, with the exception of MRMC's Medicare cost report for December 31, 2005, which has been filed but not finalized.
! Medicaid: Inpatient acute care and skilled nursing services rendered to Medicaid program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Inpatient nonacute services are paid at prospectively determined per diem rates. Outpatient services are paid based on a published fee schedule with final settlement determined after submission of annual cost reports. The Medicaid cost reports have been settled through December 31, 2015.
Revenue received under third-party arrangements is subject to audit and retroactive adjustments. Net patient service revenues include favorable adjustments of approximately $8,994,000 in 2017. The adjustments were related to final settlements of prior year cost reports and approval of various physician practices as off-site provider-based components of JFK Medical Center by Medicare. There were no such adjustments in 2016.
The JFK Health System has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment to the JFK Health System under these agreements includes prospectively determined rates per discharge, discounts from established charges, prospectively determined daily rates, and various other prospectively determined rates.
15 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
5. Investments and Assets Whose Use is Limited
The composition of investments and assets whose use is limited at December 31, 2017 and 2016 is set forth in the following table:
2017 2016 Investments: Cash and cash equivalents $ 802,828 $ 1,395,636 Certificates of deposit 74,399 73,261 U.S. government obligations 4,632,348 4,534,712 U.S. agency obligations 3,550,300 3,475,327 Exchange traded funds 2,689,535 2,057,743 Mutual funds - equities 3,790,257 3,577,036 Mutual funds - fixed income 242,047 - Mutual funds - other 69,889 37,490 Alternative investment funds 177,626 165,637 Corporate bonds 3,509,991 3,053,234 Municipal bonds 721,328 713,145 Marketable equity securities 4,407,682 4,016,147
Total 24,668,230 23,099,368
Less current portion 19,124,031 18,556,621
Noncurrent portion $ 5,544,199 $ 4,542,747
16 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
2017 2016
Assets whose use is limited: Held by bond trustees under trust indentures, Cash and cash equivalents $ 3,495,985 $ 3,480,722
Self-insurance funds: Cash and cash equivalents 1,318,710 2,313,589 U.S. government obligations 19,501,887 16,664,999 Corporate bonds 5,334,958 - U.S. government mortgage-backed obligations 2,052,449 4,132,172
Total 28,208,004 23,110,760
Under deferred compensation plans: Cash and cash equivalents 29,012 29,125 Mutual funds - equities 2,616,063 3,366,036
Total 2,645,075 3,395,161
Donor restricted: Cash and cash equivalents 373,250 386,512 Exchange traded funds 1,505,779 1,077,074 Mutual funds - equities 647,834 545,859 Mutual funds - fixed income 227,212 - Mutual funds - other 23,199 11,121 U.S. government obligations 173,209 194,106 U.S. agency obligations 198,310 178,100 Alternative investment funds 147,378 138,951 Corporate bonds 237,777 202,909 Marketable equity securities 769,390 948,221
Total 4,303,338 3,682,853
Total assets whose use is limited 38,652,402 33,669,496
Less current portion 3,495,985 3,480,722
Noncurrent portion $ 35,156,417 $ 30,188,774
17 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
Investment income, gains and losses on investments, assets whose use is limited, and cash and cash equivalents are comprised of the following:
2017 2016 Temporarily Temporarily Unrestricted Restricted Unrestricted Restricted Investment income: Interest and dividend income $ 1,117,930 $ 157,512 $ 1,230,358 $ 160,377 Realized gains (losses), net 108,267 166,191 (95,063) (33,643)
Total $ 1,226,197 $ 323,703 $ 1,135,295 $ 126,734
Change in net unrealized gains and losses on trading securities $ 438,891 $ 624,610 $ (4,342) $ 195,457
6. Fair Value Measurements
JFK Health System measured its investments and assets whose use is limited on a recurring basis in accordance with accounting principles generally accepted in the United States of America.
Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The framework that the authoritative guidance establishes for measuring fair value includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.
The levels of the fair value hierarchy are as follows:
Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the JFK Health System for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.
Level 2 - Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs.
Level 3 - Fair value would be based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and other similar techniques.
18 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
Fair Value as of December 31, 2017 Carrying Value Fair Value Level 1 Level 2 Level 3
Reported at Fair Value Investments: Cash and cash equivalents $ 802,828 $ 802,828 $ 802,828 $ - $ - Certificates of deposit 74,399 74,399 - 74,399 - U.S. government obligations 4,632,348 4,632,348 4,632,348 - - U.S. agency obligations 3,550,300 3,550,300 3,550,300 - - Exchange traded funds 2,689,535 2,689,535 2,689,535 - - Mutual funds - equities 3,790,257 3,790,257 3,790,257 - - Mutual funds - fixed income 242,047 242,047 242,047 - - Mutual funds - other 69,889 69,889 69,889 - - Alternative investment funds 177,626 177,626 - 177,626 - Corporate bonds 3,509,991 3,509,991 - 3,509,991 - Municipal bonds 721,328 721,328 721,328 - - Marketable equity securities 4,407,682 4,407,682 4,407,682 - -
Assets whose use is limited: Cash and cash equivalents 5,216,957 5,216,957 5,216,957 - - U.S. government obligations 19,675,096 19,675,096 19,675,096 - - U.S. government mortgage-backed obligations 2,052,449 2,052,449 - 2,052,449 - Exchange traded funds 1,505,779 1,505,779 1,505,779 - - Mutual funds - equities 3,263,897 3,263,897 3,263,897 - - Mutual funds - fixed income 227,212 227,212 227,212 - - Mutual funds - other 23,199 23,199 23,199 - - U.S. agency obligations 198,310 198,310 198,310 - - Alternative investment funds 147,378 147,378 - 147,378 - Corporate bonds 5,572,735 5,572,735 - 5,572,735 - Marketable equity securities 769,390 769,390 769,390 - - Beneficial interest in perpetual trusts 5,435,111 5,435,111 - - 5,435,111
Total $ 68,755,743 $ 68,755,743 $ 51,786,054 $ 11,534,578 $ 5,435,111
Disclosed at Fair Value Cash and cash equivalents $ 54,821,247 $ 54,821,247 $ 54,821,247 $ - $ -
Pledges receivable $ 703,210 $ 703,210 $ - $ 703,210 $ -
Long-term debt $ 141,191,928 $ 155,367,942 $ - $ 155,367,942 $ - 19 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
Fair Value as of December 31, 2016 Carrying Value Fair Value Level 1 Level 2 Level 3
Reported at Fair Value Investments: Cash and cash equivalents $ 1,395,636 $ 1,395,636 $ 1,395,636 $ - $ - Certificates of deposit 73,261 73,261 - 73,261 - U.S. government obligations 4,534,712 4,534,712 4,534,712 - - U.S. agency obligations 3,475,327 3,475,327 3,475,327 - - Exchange traded funds 2,057,743 2,057,743 2,057,743 - - Mutual funds - equities 3,577,036 3,577,036 3,577,036 - - Mutual funds - other 37,490 37,490 37,490 - - Alternative investment funds 165,637 165,637 - 165,637 - Corporate bonds 3,053,234 3,053,234 - 3,053,234 - Municipal bonds 713,145 713,145 713,145 - - Marketable equity securities 4,016,147 4,016,147 4,016,147 - -
Assets whose use is limited: Cash and cash equivalents 6,209,948 6,209,948 6,209,948 - - U.S. government obligations 16,859,105 16,859,105 16,859,105 - - U.S. government mortgage-backed obligations 4,132,172 4,132,172 - 4,132,172 - Exchange traded funds 1,077,074 1,077,074 1,077,074 - - Mutual funds - equities 3,911,895 3,911,895 3,911,895 - - Mutual funds - other 11,121 11,121 11,121 - - U.S. agency obligations 178,100 178,100 178,100 - - Alternative investment funds 138,951 138,951 - 138,951 - Corporate bonds 202,909 202,909 - 202,909 - Marketable equity securities 948,221 948,221 948,221 - - Beneficial interest in perpetual trusts 5,034,715 5,034,715 - - 5,034,715
Total $ 61,803,579 $ 61,803,579 $ 49,002,700 $ 7,766,164 $ 5,034,715
Disclosed at Fair Value Cash and cash equivalents $ 64,382,675 $ 64,382,675 $ 64,382,675 $ - $ -
Pledges receivable $ 669,726 $ 669,726 $ - $ 669,726 $ -
Long-term debt $ 148,607,245 $ 157,455,649 $ - $ 157,455,649 $ -
20 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
The carrying amounts of cash and cash equivalents approximate fair value at December 31, 2017 and 2016.
Investments and assets whose use is limited are stated at fair value, which are the amounts reported in the consolidated balance sheet, based on quoted market prices, if available, or estimated using quoted market prices of similar securities. Beneficial interest in perpetual trusts is valued using discounted cash flow methodologies.
The fair value of pledges receivable is based on the original pledge amount, adjusted by a discount rate that a market participant would demand and an evaluation of uncollectible pledges.
Long-term debt is valued based on current rates offered for similar issues with similar security terms and maturities, or estimated using a discount rate that a market participant would demand.
Level 3 investments are valued using discounted cash flow methodologies. Beneficial interest in perpetual trusts contain eleven trusts established in which MRMC receives between 2.5% and 100% of the annual income and gains and losses. These trusts are discounted using an average interest rate of 2.9%. Two of the trusts were established in which Muhlenberg Foundation receives between 25% and 100% of the annual income and gains and losses and are discounted using an average interest rate of 2.9%.
Changes to the beneficial interest in perpetual trusts in 2017 and 2016 were as follows:
2017 2016
Beginning balance $ 5,034,715 $ 5,023,693
Investment income from beneficial interest in perpetual trusts 293,561 163,474
Distributions from beneficial interest in perpetual trusts (293,561) (163,474)
Valuation gain, net 400,396 11,022
Ending balance $ 5,435,111 $ 5,034,715
Valuation gain is reported as changes in permanently restricted net assets within the statement of changes in net assets.
21 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
7. Property and Equipment
Property and equipment at December 31, 2017 and 2016 are as follows:
2017 2016
Land and land improvements $ 17,560,009 $ 17,369,919 Buildings and improvements 273,532,619 268,360,845 Fixed equipment 45,749,062 45,144,229 Movable equipment 78,428,941 183,835,768 Leasehold improvements 1,145,957 1,082,156 Capitalized leases 12,728,294 12,410,579 Construction in progress 617,267 33,204,122
Total 429,762,149 561,407,618
Less accumulated depreciation 283,593,953 379,601,874
Property and equipment, net $ 146,168,196 $ 181,805,744
During 2017, property and equipment of approximately $111,102,000, which were fully depreciated and no longer in-use, were removed from property and equipment.
Construction in progress as of December 31, 2016 primarily included costs related to the clinical and financial system conversion. JFK Medical Center is currently in a dispute with the vendor related to non-performance under the contract. The dispute is currently in arbitration and is expected to be resolved during 2018. The project will not be completed and total costs capitalized for the project of approximately $26,428,000 were written off during 2017, which is reported in loss on abandonment of construction in progress in the consolidated statement of operations. During 2017, the terms of a Master Lease Agreement with Key Equipment Finance, which was entered into to finance the system conversion, were amended to reduce the lease liability by $5,000,000. Since the dispute is not resolved, this amount remains payable to the vendor and is included in accrued expenses as of December 31, 2017.
8. Pledges Receivable
Capital pledge campaigns have been undertaken to raise funds for the purpose of constructing an Emergency Department Building. Pledges related to these campaigns have been recorded as temporarily restricted contributions.
22 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
Pledges receivable are recorded as follows as of December 31, 2017 and 2016:
2017 2016
Capital campaign pledges before unamortized discount and allowance for uncollectible pledges $ 778,402 $ 734,476
Unamortized discount (15,918) (7,382)
Subtotal 762,484 727,094
Allowance for uncollectible pledges (59,274) (57,368)
Net unconditional promises to give $ 703,210 $ 669,726
Amounts due in: Less than one year $ 422,315 $ 456,038 One to five years 356,087 278,438
Total $ 778,402 $ 734,476
The discount rate used was 2.25% at December 31, 2017 for new pledges. The discount rates used on old pledges remains consistent with the rates assigned during the year the pledge was made. Current portion of pledges receivable net of allowance for uncollectible pledges is included in prepaid expenses and other current assets.
9. Accrued Expenses
Accrued expenses at December 31, 2017 and 2016 are as follows:
2017 2016
Paid time off $ 16,470,646 $ 16,061,201 Salaries and wages 13,760,693 13,327,233 Employee benefits 5,533,468 5,448,532 System conversion costs payable 5,000,000 - Line of credit 3,000,000 - Refund over payments 1,955,757 3,151,368 Malpractice 3,209,244 3,209,244 Interest 1,813,920 1,894,948 Other 2,388,017 1,373,047 Payroll taxes 1,612,585 1,290,630 Occupational/physical therapy services 618,699 495,957 Provider tax assessment 384,934 376,576
Total $ 55,747,963 $ 46,252,160
23 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
In August 2014, JFK Medical Center renewed a line of credit agreement with a minimum withdrawal amount of $3 million and a maximum of $27 million which bears interest at a variable rate. As of December 31, 2017, JFK Medical Center had drawn $3,000,000 on the line of credit, which was included in accrued expenses in the consolidated balance sheet. In January 2018, the line of credit was paid in full and closed.
10. Long-Term Debt and Capital Lease Obligations
Series 2009 A-1 Bonds, Obligated Group
In June 2009, the New Jersey Health Care Facilities Financing Authority (the "Authority") issued $152,925,000 to JFK Medical Center, Oak Tree, and MRMC (the "Borrowers") Series 2009 A-1 Bonds ("Series 2009 A-1 Bonds") under the State of New Jersey Hospital Asset Transformation Program ("HATP"). The Series 2009 A-1 Bonds include serial bonds of $5,930,000, maturing through October 1, 2014 with interest at 4.0%, term bonds of $30,540,000 with interest at 5% due through October 1, 2019, term bonds of $40,735,000 with interest at 5.25% due through October 1, 2024, and term bonds of $75,720,000 with interest of 5.75% due through October 1, 2031. Principal payments began October 1, 2013. The Series 2009 A-1 Bonds refinanced various series of bonds issued on behalf of, and other indebtedness of JFK Medical Center, Hartwyck at Oak Tree, and MRMC, all in connection with the termination of the provision of hospital acute-care services at MRMC and pursuant to the State’s HATP, paying the costs of issuance of the Series 2009 A-1 Bonds and providing funds for various capacity expansion and capital improvement projects at JFK Medical Center.
Payments of principal and interest on the Series 2009 A-1 Bonds are collateralized by all property and gross receipts of the Borrowers.
The Borrowers are obligated by the Series 2009 A-1 Bonds to maintain certain financial covenants as stated in the bond documents. As of December 31, 2017, the Borrowers are in default with certain financial covenants. In an agreement dated April 4, 2018, the Authority agreed to waive the existing defaults.
JFK Health System is currently in the process of issuing new bonds under the Hackensack Meridian Health, Inc. Master Trust Indenture, of which the proceeds will be used to refund the Series 2009 A-1 Bonds. The new bonds are expected to be issued in April 2018 and JFK Medical Center will be the sole obligor.
Series 2001 Bonds, Whispering Knoll and Hartwyck West
In September 2001, the Authority issued $15,260,000 of Revenue Bonds to Whispering Knoll and Hartwyck West Nursing Home, Series 2001 ("Series 2001 Bonds"). The Series 2001 Bonds are payable in monthly installments of $79,993, including interest at 1.91% through September 1, 2019. On September 1, 2019, the interest rate will be reset to a fixed rate equal to the then-in-effect weekly average yield on United States Treasury Bonds. The Series 2001 Bonds mature on January 1, 2026. The proceeds of the Series 2001 Bonds were used to refinance a construction loan and other costs associated with the existing debt with the Authority and pay for issuance costs.
Payments of principal and interest on the Series 2001 Bonds are collateralized by a pledge of revenues and property of Whispering Knoll, guaranteed by Hartwyck West, and are insured by Old Republic National Title Insurance Company.
24 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
Hartwyck West and Whispering Knoll are obligated by the Series 2001 Bonds to maintain certain financial covenants as stated in the bond documents. As of December 31, 2017, Hartwyck West and Whispering Knoll are in default with certain financial covenants. In an agreement dated April 2, 2018, the bank, as trustee of the bonds, agreed to waive the existing defaults.
Mortgage Notes Payable
In August 2008, Hartwyck West entered into a mortgage with a bank for $5,680,000. The interest rate was 2.72% as of December 31, 2017. The mortgage has a maturity date of September 1, 2019. The mortgage is secured by the Cedar Brook facility.
In August 2008, Whispering Knoll entered into a mortgage with a bank for $3,500,000 which bears interest at a variable rate and has a maturity date of September 1, 2019. The interest rate was 2.72% as of December 31, 2017. The mortgage is secured by the Whispering Knoll facility.
Hartwyck West and Whispering Knoll are obligated by the mortgages to maintain certain financial covenants as stated in the debt agreements. As of December 31, 2017, Hartwyck West and Whispering Knoll are in default with certain financial covenants. In an agreement dated April 2, 2018, the bank agreed to waive the existing defaults.
The JFK Health System’s long-term debt at December 31, 2017 and 2016 consists of the following:
2017 2016
New Jersey Health Care Facilities Financing Authority Revenue Bonds: Series 2009 A-1 Bonds, Obligated Group $ 130,015,000 $ 136,300,000 Series 2001 Bonds, Whispering Knoll 6,510,638 7,273,307 Mortgage notes payable: Mortgage payable - Whispering Knoll 2,257,995 2,435,764 Mortgage payable - Hartwyck West 2,408,295 2,598,174
Total 141,191,928 148,607,245
Less current maturities 7,743,701 7,393,429
Long-term debt, excluding deferred financing costs 133,448,227 141,213,816
Less deferred financing costs 2,279,091 2,607,057
Long-term debt $ 131,169,136 $ 138,606,759
25 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
The JFK Health System’s scheduled principal repayments for long-term debt are as follows:
Years ending December 31 2018 $ 7,743,701 2019 12,007,108 2020 8,098,986 2021 8,509,092 2022 8,939,489 Thereafter 95,893,552
Total $ 141,191,928
Capital lease obligations consisted of the following at December 31, 2017 and 2016:
2017 2016
Capital lease obligations with interest ranging from 2.50% to 4.85% per annum, final payment due in 2020 $ 9,848,496 $ 18,565,785
Less current portion 3,995,540 5,239,754
Long-term portion $ 5,852,956 $ 13,326,031
JFK Medical Center’s future minimum lease payments under capital lease obligations are as follows:
Years ending December 31: 2018 $ 4,338,188 2019 4,237,223 2020 1,586,021 2021 190,008 2022 59,201
Total minimum payments 10,410,641
Less amounts representing interest 562,145
9,848,496
Less current installments 3,995,540
$ 5,852,956
26 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
11. Pension Plans and Postretirement Healthcare Benefits
Cash Balance Retirement Plan - The JFK Health System Health System
The JFK Health System has a defined benefit pension plan (the "Pension Plan") covering substantially all JFK Medical Center employees and the employees of other participating subsidiaries. Amounts are allocated by the JFK Health System to its subsidiaries based upon relative service costs. The JFK Health System uses a December 31 measurement date for the Pension Plan. The Pension Plan was frozen effective May 2, 2009.
On April 1, 2013, the Pension Plan was certified to permit 100% lump sum distributions. Each year on April 1, the Pension Plan’s actuary will certify the funded status. If the Pension Plan’s funded status equals or exceeds 80% of the projected benefit obligation, the Pension Plan will be allowed to pay 100% of benefits as a single lump sum. If the Pension Plan’s funded status is less than 80%, no single lump sum distributions will be permitted. In 2017 and 2016, the Pension Plan offered lump sum settlements to certain participants which were accepted which reduced the projected benefit obligation and assets by $12,039,176 and $11,544,625, respectively.
The changes in projected benefit obligations in 2017 and 2016 are as follows:
2017 2016
Projected benefit obligation at beginning of year $ 219,564,446 $ 227,558,923 Interest cost 6,468,166 6,931,129 Plan settlements (12,039,176) (11,544,625) Actuarial loss 2,331,721 1,795,237 Benefits paid (5,162,207) (5,176,218)
Projected benefit obligation at end of year $ 211,162,950 $ 219,564,446
Accumulated benefit obligation $ 211,162,950 $ 219,564,446
The changes in plan assets in 2017 and 2016 are as follows:
2017 2016
Fair value of plan assets at beginning of year $ 190,312,973 $ 189,157,267 Actual return on plan assets 24,314,995 17,876,549 Plan settlements (12,039,176) (11,544,625) Benefits paid (5,162,207) (5,176,218)
Fair value of plan assets at end of year $ 197,426,585 $ 190,312,973
27 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
The following is a summary of the funded status of the plan at December 31, 2017 and 2016:
2017 2016
Fair value of plan assets $ 197,426,585 $ 190,312,973 Projected benefit obligation 211,162,950 219,564,446
Funded status of the plan (under funded) $ (13,736,365) $ (29,251,473)
The components of net periodic pension credit for 2017 and 2016 are as follows:
2017 2016
Interest cost $ 6,468,166 $ 6,931,129 Expected return on plan assets (12,587,680) (13,265,963) Amortization of actuarial loss 1,700,034 1,893,102 Settlement loss recognized 3,315,997 3,815,868
Net periodic pension credit $ (1,103,483) $ (625,864)
A net actuarial loss of $58,161,439 and $72,629,064 represents the previously unrecognized components of net periodic pension cost included in unrestricted net assets at December 31, 2017 and 2016, respectively.
A net actuarial loss of $5,016,031 represents the unrecognized component of net periodic benefit cost included in unrestricted net assets at December 31, 2017 expected to be amortized into net periodic pension cost in 2018.
The actuarial loss of $2,331,721 in 2017 and $1,795,237 in 2016 is primarily attributed to the decrease in the discount rate.
During 2016, an additional $624,915 was calculated by the actuary and included in accrued pension cost to cover inactive MRMC participants through 2016. There was no additional accrual as of December 31, 2017.
The contribution to the Plan in 2018 is expected to be $-0-.
The weighted-average assumptions used in computing the Plan’s benefit obligation at December 31, 2017 and 2016 are as follows:
2017 2016
Discount rate 3.44 % 3.89 % Rate of compensation increase N/A N/A
28 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
The weighted-average assumptions used in the measurement of the Plan’s net periodic pension cost for the years ended December 31, 2017 and 2016 are as follows:
2017 2016
Discount rate 3.89 % 4.10 % Expected long-term rate of return on plan assets 7.20 7.40 Rate of compensation increase N/A N/A
The expected long-term rate of return on Plan assets assumption was developed based on historical returns for the major asset classes. This review also considered both current market conditions and projected future conditions. Adjustments are made to the expected long-term rate of return assumption when deemed necessary based upon revised expectations of future investment performance of the overall capital markets. The expected long-term rate of return assumption used in computing 2017 net periodic pension cost was 7.2%.
The following table sets forth the actual asset allocation and target asset allocation for Plan assets at December 31, 2017 and 2016:
Target Target Asset Asset 2017 Allocation 2016 Allocation Asset category: Equity securities 31 % 39 % 35 % 33 % Debt securities 41 44 46 50 U.S. Government agencies 8- Alternative investments - collective fund 20 17 19 17
The Plan assets are invested among and within various asset classes in order to achieve sufficient diversification in accordance with The JFK Health System’s risk tolerance. This is achieved through the utilization of asset managers and systemic allocation to investment management styles, providing a broad exposure to different segments of the fixed income and equity markets.
The following benefit payments, which reflect expected future services, as appropriate, are expected to be paid:
Years ending December 31: 2018 $ 11,986,397 2019 13,976,445 2020 13,829,235 2021 13,228,492 2022 14,618,184 2023 - 2027 78,899,200
The Plan’s collective fund, an alternative investment, is comprised of limited partnerships that invest primarily in securities that are traded in active markets. Its investment objective is to deliver a 7% rate of return, but with approximately half of the annualized volatility of equities. This approach can generate investment results that achieve higher long-term returns; however, this approach can also produce negative results depending on market conditions.
29 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
The following table sets forth by level, within the fair value hierarchy, the Plan assets at fair value as of December 31, 2017:
Assets at Fair Value as of December 31, 2017 Total Level 1 Level 2 Level 3
Money market $ 1,704 $ 1,704 $ - $ - Mutual funds: Large cap 26,370,178 26,370,178 - - Small cap 7,639,516 7,639,516 - - World equity 26,122,761 26,122,761 - - Emerging markets debt fund 4,632,439 4,632,439 - - Large value fund 7,419,144 7,419,144 - - Long duration funds 69,760,307 69,760,307 - -
U.S. Government agencies 16,766,246 - 16,766,246 - Total assets in the fair value hierarchy 158,712,295 $ 141,946,049 $ 16,766,246 $ -
Assets recorded at net asset value 38,714,290
Total assets at fair value $ 197,426,585
The following table sets forth by level, within the fair value hierarchy, the Plan assets at fair value as of December 31, 2016:
Assets at Fair Value as of December 31, 2016 Total Level 1 Level 2 Level 3
Money market $ 1,410 $ 1,410 $ - $ - Mutual funds: Large cap 35,722,085 35,722,085 - - Small cap 10,543,576 10,543,576 - - Equities 15,597,912 15,597,912 - - Emerging markets debt fund 3,701,450 3,701,450 - - Emerging markets equity fund 5,498,789 5,498,789 - - High yield bond fund 7,886,520 7,886,520 - - Long duration funds 76,083,098 76,083,098 - - Total assets in the fair value hierarchy 155,034,840 $ 155,034,840 $ - $ -
Assets recorded at net asset value 35,278,133
Total assets at fair value $ 190,312,973
30 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
The following is a description of the valuation methodologies used for the Plan’s assets measured at fair value:
Money market - Carrying value approximates fair value due to the short maturity of these instruments.
Mutual funds - Valued at the net asset value ("NAV") of shares held by the Plan at year-end.
U.S. Government agencies - valued at quoted market prices in active markets for the same or similar securities for other government bonds.
Certain investment funds are valued using NAV as a practical expedient by an independent advisor. There are no unfunded commitments for these investments as of December 31, 2017 and 2016. The following table sets forth additional disclosures of investments whose fair value is estimated using NAV as a practical expedient:
December 31, 2017 Redemption Redemption Fund Fair Value Investment Strategy Frequency Notice Period
Fully invests in SEI Core Property Collective diversified strategy of Fund $ 17,873,974 property funds Quarterly Quarterly Fully invests in debt SEI Energy Debt Collective securities of energy Fund 3,270,486 companies Monthly Monthly Fully invests in a diversified portfolio of SEI Structured Credit structured credit Collective Fund 17,569,830 instruments Monthly Monthly
Total $ 38,714,290
December 31, 2016 Redemption Redemption Fund Fair Value Investment Strategy Frequency Notice Period
Fully invests in SEI Core Property Collective diversified strategy of Fund $ 16,497,795 property funds Quarterly Quarterly Fully invests in debt SEI Energy Debt Collective securities of energy Fund 3,116,894 companies Monthly Monthly Fully invests in a diversified portfolio of SEI Structured Credit structured credit Collective Fund 15,663,444 instruments Monthly Monthly
Total $ 35,278,133
31 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the JFK Health System believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Defined Contribution Pension Plan
On January 1, 2010, the JFK Health System established the JFK Defined Contribution Pension Plan. All employees are eligible for participation in the plan. JFK Health System will contribute a maximum of 2% of employee contributions. Total expense recorded was approximately $4,082,000 in 2017 and $3,828,000 in 2016.
Tax Deferred Annuity Program - Oak Tree and Hartwyck West
Eligible employees of Oak Tree and Hartwyck West may participate in the Hartwyck Nursing Home Tax Deferred Annuity Program (the "Hartwyck Plan") pursuant to Section 403(b) of the Internal Revenue Code. The Hartwyck Plan is a noncontributory, defined contribution program covering substantially all employees. Effective November 15, 2006, a new plan was established which provided the same level of benefits as prior years, and the old plan was frozen to new participants. The new plan includes an employer contribution of 2% to a maximum of $500 per employee. Pension expense was approximately $236,000 in 2017 and $244,000 in 2016.
Union Multiemployer Plan - Hartwyck at Cedar Brook and Hartwyck at Edison Estates
Collective bargaining agreements between Hartwyck at Cedar Brook and 1199 SEIU United Healthcare Workers East and Hartwyck at Edison Estates and 1199 SEIU United Healthcare Workers East require Hartwyck West and Oak Tree, respectively, to make contributions for participating union employees into the SEIU National Industry Pension Fund, which is a multiemployer plan. The risks of participating in multiemployer plans are different from single- employer plans in the following aspects:
! Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.
! If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
! If an employer chooses to stop participating in some of its multiemployer plans, the employer may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
32 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
Hartwyck West and Oak Tree's participation in the plan for the year ended December 31, 2017 and 2016 is outlined in the tables below. The "EIN Number" column provides the Employer Identification Number ("EIN"). Unless otherwise noted, the most recent Pension Protection Act ("PPA") zone status available in 2017 and 2016 is for a plan’s fiscal year beginning January 1, 2017 and 2016, respectively. This zone status is based on information that Hartwyck West and Oak Tree received from the plan and is certified by the plan's actuary. Among other factors, plans in the red zone are generally less than 65% funded, plans in the yellow zone are less than 80% funded, and plans in the green zone are at least 80% funded. The "FIP/RP Status Pending/Implemented" column indicates plans for which a financial improvement plan ("FIP") or rehabilitation plan ("RP") is pending or has been implemented. The last column lists the expiration dates of the collective bargaining agreements to which the plans are subject.
Pension Expiration Date Protection Act FIP/RP Status Total Pension Expense of Collective Zone Status Pending/ (in thousands) Surcharge Bargaining Pension Fund EIN/Pension 2016 Implemented 2017 2016 Imposed Agreement
SEIU National Industry Pension Fund (a) 52-6148540/001 Red Implemented $237 $241 Yes June 30, 2018
(a) The SEIU National Industry Pension Fund has implemented a rehabilitation plan for the period January 1, 2010 through January 1, 2024.
Hartwyck West and Oak Tree were not listed in the SEIU National Industry Pension Fund's 2016 Form 5500 as providing more than 5% of the total plan contributions. Form 5500 is not available for the Plan’s year ended in 2017.
Postretirement Healthcare Benefits
In addition to the JFK Health System’s defined benefit pension plan, the JFK Health System sponsors two defined benefit medical and life insurance plans for eligible retirees.
JFK Medical Center - To be eligible, a retiring employee must have at least 25 years of service (effective January 1, 2005) and have attained age 60; however, those who were 55 years or older and have at least ten years of service as of December 31, 2004 will remain eligible at age 60 years with 15 years of service. No employee hired on or after January 1, 2005 will be eligible for retiree medical coverage. The medical insurance plan requires monthly retiree contributions. As covered, a retiree may elect to cover his or her spouse on a contributory basis. The JFK Health System sets these rates on an annual basis. The medical insurance plan contains other cost-sharing features such as deductibles and co- insurance. The life insurance benefit is provided on a noncontributory basis. The benefit is only for full-time employees who are eligible and enroll in the medical plan. The accounting for the plan anticipates future cost-sharing changes to the written plan that are consistent with past personnel practices and procedures. The JFK Health System’s funding policy is on a "pay-as-you-go" basis; the life insurance plan is funded through a group life insurance contract.
33 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
MRMC - To be eligible, a retiring employee must have at least 10 years of service and have attained age 55. Coverage under the life insurance benefit plan is provided on a noncontributory basis, and the medical insurance plan is partially contributory. The JFK Health System’s funding policy is on a "pay-as-you-go" basis; the life insurance plan is funded through individual life insurance contracts. Both coverages terminate at age 65, when a Medicare supplemental program is provided on a fully contributory basis.
In January 2011, the JFK Health System approved a five year phase out of the retiree medical program which also includes life insurance. The retirees with only the life insurance will continue. Beginning in 2012, the subsidy was reduced each year by $500 until January 1, 2016 when the medical program ended.
The changes in benefit obligations in 2017 and 2016 are as follows:
2017 2016
Benefit obligation at beginning of year $ 393,924 $ 398,585 Interest cost 10,072 10,524 Actuarial loss (gain) 9,438 15,315 Benefits paid (56,000) (30,500)
Benefit obligation at end of year $ 357,434 $ 393,924
The changes in plan assets in 2017 and 2016 are as follows:
2017 2016
Fair value of plan assets at beginning of year $-$- Employer contribution 56,000 30,500 Benefits paid (56,000) (30,500)
Fair value of plan assets at end of year $-$-
34 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
The following is a summary of the funded status and amounts recognized in the JFK Health System’s consolidated financial statements as of December 31, 2017 and 2016:
2017 2016
Fair value of plan assets $-$- Accumulated benefit obligation 357,434 393,924
Funded status of the postretirement plan (under funded) (357,434) (393,924)
Accrued postretirement healthcare benefit liability at end of year (357,434) (393,924)
Less current portion (45,855) (46,525)
Noncurrent portion of accrued postretirement healthcare benefit liability $ (311,579) $ (347,399)
The components of net periodic postretirement benefit credit for 2017 and 2016 are as follows:
2017 2016
Interest cost $ 10,072 $ 10,524 Amortization of prior service credit - (179,838) Amortization of actuarial loss (gain) 40,419 (35,838)
Net periodic postretirement benefit credit $ 50,491 $ (205,152)
A net actuarial loss of $238,357 and $269,338 represent the previously unrecognized component of net periodic postretirement benefit cost included in unrestricted net assets at December 31, 2017 and 2016, respectively.
A net actuarial loss of $40,419 is expected to be recognized in net periodic postretirement benefit cost in 2018.
Weighted-average assumptions used in determining the actuarial present value of the projected benefit obligation for 2017 and 2016 were:
2017 2016
Discount rate - MRMC Plan 3.08 % 3.29 % Discount rate - JFK Medical Center Plan 3.14 3.42 Healthcare cost trend rate N/A N/A Year ultimate increase reached N/A N/A
35 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the postretirement benefit plans. However, since the JFK Health System has reached the employer-paid cap on benefits, a one percentage point change in assumed healthcare cost trend rates would not have an effect on the components of net periodic postretirement benefit cost and the postretirement benefit obligations for 2017.
The JFK Medical Center expects to contribute $4,100 to its postretirement benefit plan in 2018. MRMC expects to contribute $41,755 to its postretirement benefit plan in 2018.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Years ending December 31: 2018 $ 45,855 2019 43,824 2020 41,496 2021 38,905 2022 36,121 Thereafter 135,996
12. Professional and General Liability Insurance
The JFK Health System maintains professional and general liability insurance coverage for all subsidiaries and their employees. The JFK Health System’s insurance coverages are provided under the provisions of two insurance arrangements, as follows:
! Primary coverage: Primary coverage is provided by AIE. Professional liability is under the terms of a claims-made insurance policy. General liability is under the terms of an occurrence based policy. Both policies have an individual claim limit of $1,000,000 and an annual aggregate limit of $3,000,000.
! Excess coverage: The JFK Health System has excess liability insurance coverage which insures against losses in excess of the above primary coverage reported during the period of policy coverage. Those commercial excess liability insurance policies have an individual occurrence limit of $30,000,000 and an annual aggregate limit of $30,000,000.
AIE was incorporated under the laws of Bermuda on June 24, 1987 and insures the risks of the JFK Health System and controlled entities.
36 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
The JFK Health System’s liability for the estimated future payments of its asserted and unasserted medical malpractice and general liability claims was approximately $18,094,000 and $19,572,000 at December 31, 2017 and 2016, respectively, and is included in self-insurance reserves in the consolidated balance sheet. The liability was discounted using a rate of 3%. In addition, JFK Medical Center has recorded a reserve of approximately $8,641,000 and $6,590,000 for asserted and unasserted professional and general claims which exceed primary coverage which is recorded in other long-term liabilities in the consolidated balance sheet as of December 31, 2017 and 2016, respectively. Of these claims, approximately $7,650,000 and $5,770,000 is recorded as a receivable under the claims-made excess liability insurance and is recorded within other long-term assets in the consolidated balance sheet as of December 31, 2017 and 2016, respectively. Otherwise, the JFK Health System believes that it has adequate insurance coverages for all asserted claims and has no knowledge of unasserted claims which would exceed insurance coverages.
13. Other Assets and Liabilities
JFK Medical Center has recorded a reserve of approximately $1,035,000 and $965,000 for asserted and unasserted workers compensation claims which exceed primary coverage which is recorded in other long-term liabilities in the consolidated balance sheet as of December 31, 2017 and 2016, respectively. Of these claims, approximately $1,035,000 and $965,000 is recorded as a receivable under the claims-made excess liability insurance and is recorded within other long- term assets in the consolidated balance sheet as of December 31, 2017 and 2016, respectively. Other liabilities also includes amounts for a deferred compensation plan and property taxes.
14. Health Insurance Benefits
JFK Medical Center and MRMC self-insure their employee health insurance coverages. JFK Medical Center and MRMC accrue the estimated costs of incurred and reported and incurred but not reported claims, after consideration of their individual and aggregate stop-loss insurance coverages, based upon data provided by the third-party administrator of the programs and their historical claims experience. JFK Medical Center and MRMC recorded liabilities of approximately $4,208,000 and $3,951,000 at December 31, 2017 and 2016, respectively, related to health insurance. The amount is included in employee benefits within accrued expenses in the accompanying consolidated balance sheet.
37 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
15. Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets are related to, or restricted for, the following:
2017 2016
Assets held for betterments to plant facilities and purchases of equipment $ 10,843,980 $ 9,236,066
Permanently restricted net assets are related to the following:
2017 2016
Investments to be held in perpetuity, the income from which is generally available for the JFK Health System operations and programs $ 3,600,820 $ 3,077,747 Beneficial interest in perpetual trusts 5,435,111 5,034,715
Total $ 9,035,931 $ 8,112,462
During 2017, the Muhlenberg Foundation made a $880,331 net asset transfer from unrestricted net assets to temporarily restricted net assets to reflect the donors’ intent.
Endowment Funds
The JFK Health System’s endowment funds consist of six funds established for a variety of purposes. The endowments include only donor-restricted endowment funds at the current time. As required by accounting principles generally accepted in the United States of America, net assets associated with endowment funds are classified and reported based upon the existence or absence of donor-imposed restrictions. The JFK Health System has interpreted relevant New Jersey state law governing the net asset classification of endowment funds as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result, the JFK Health System classifies as permanently restricted net assets (a) the original value of gifts donated as permanent endowments; (b) the original value of subsequent gifts to the permanent endowments, 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. Interest income earned on the endowment funds or market losses in excess of original value of the gift are recorded in either unrestricted or temporarily restricted net assets, depending upon the donor designation. The endowment fund is invested consistent with an investment policy statement that is monitored by the JFK Health System’s Board of Trustees. The investment policy employed is meant to achieve long-term growth while providing modest investment income which would be available for current funding. Funds in the trust are primarily invested in cash and cash equivalents, certificates of deposit, U.S. government obligations, mutual funds, corporate bonds and equities and, in total, strives for a forty/sixty split between fixed income securities and equities.
38 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
In 2015, based on a court action, it was determined that temporarily and permanently restricted net assets donated for specific purposes, which can no longer be honored following the closure of the MRMC acute care facility, could be repurposed for the Project (Note 2).
Changes in permanently restricted endowment net assets for the years ended December 31, 2017 and 2016 are comprised of the following:
2017 2016
Endowment net assets, beginning of year $ 3,077,747 $ 3,068,747 Contributions, net 523,073 9,000 Endowment net assets, end of year $ 10,802,460 $ 9,233,241
16. Concentrations of Credit Risk
The JFK Health System grants credit without collateral to its patients, some of whom are insured under third-party payor arrangements, primarily with Medicaid, Medicare, and various commercial insurance companies. The mix of receivables at December 31, 2017 and 2016 from patients and third-party payors is as follows:
2017 2016
Medicare 25 % 27 % Medicaid 43 Blue Cross 16 17 Aetna 78 Other third-party payors 43 38 Patients 57
Total 100 % 100 %
The JFK Health System maintains its cash and cash equivalents with several financial institutions. Cash and cash equivalents on deposit with any one financial institution are insured up to $250,000.
17. Contingencies
Asbestos MRMC’s building, which was constructed prior to the passage of the Clean Air Act, contains encapsulated asbestos material. Current law requires that this asbestos be removed in an environmentally safe fashion prior to the demolition and renovation of the building. At this time, MRMC does not have plans to renovate this building; and, therefore, a liability for such asbestos removal cannot be reasonably estimated and there is no liability recognized in the accompanying consolidated financial statements.
39 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
Other The health care industry is subject to numerous laws and regulations of federal, state, and local governments. Compliance with these laws and regulations is subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time. Government activity continues to increase with respect to investigations and allegations concerning possible violations by health care providers of fraud and abuse statutes and regulations, which could result in the imposition of significant fines and penalties as well as significant repayments for patient services previously billed. Management is not aware of any material incidents of noncompliance that have not been provided for in the accompanying consolidated financial statements; however, the possible future financial effects of this matter on the JFK Health System, if any, are not presently determinable.
18. Lease Commitments The JFK Health System is committed under the terms of operating leases for future minimum rental payments on space and equipment as follows: Years Ending December 31 2018 $ 7,561,321 2019 5,147,723 2020 2,471,861 2021 929,860 2022 330,683 Thereafter 259,745
Total 16,701,193
Rental expense on operating leases was $7,921,310 in 2017 and $5,516,781 in 2016.
19. Functional Expenses The JFK Health System provides health care and other related services to its patients. The classification of expenses related to providing these services approximates the following in 2017 and 2016:
2017 2016 (in thousands)
Program services $ 561,836 $ 506,898 General and administrative 107,486 86,939 Fundraising 214 351 Education and scholarship 164 120
Total $ 669,700 $ 594,308
40 JFK Health System, Inc. and Controlled Entities Notes to Consolidated Financial Statements December 31, 2017 and 2016
20. Discontinued Operations
On August 13, 2008, the acute care hospital operation of MRMC was closed as noted in Note 1. The following represents revenues and costs associated with the operation of the hospital that closed and were classified and presented in discontinued operations for 2017 and 2016:
2017 2016
Net patient service revenues $ 19,028 $ 83,429
Expenses: Employee benefits recovery (799,376) - Supplies and expenses 2,351 (2,257)
Total expenses (797,025) (2,257)
Gain from discontinued operations $ 816,053 $ 85,686
Accounts payable, accrued expenses, and other liabilities accrued associated with discontinued operations will be satisfied through remaining assets and support from the JFK Health System.
41 JFK Health System, Inc. and Controlled Entities Schedule of Consolidating Information, Balance Sheet December 31, 2017
JFK Atlantic JFK JFK MA Health Insurance Medical JFK Muhlenberg Hartwyck Hartwyck Hartwyck and JFK Consolidation System Exchange Center MRMC Healthshare Lifestyle Foundation Foundation Oak Tree West at JFK Medical Group Eliminations Consolidated
Assets
Current Assets Cash and cash equivalents $ 20,635 $ - $ 39,051,002 $ 351,183 $ 117,550 $ 418,835 $ 2,870,981 $ 4,918,993 $ 1,227,984 $ 4,592,447 $ 200 $ 1,251,437 $ - $ 54,821,247 Funds held for residents ------101,366 92,498 - - - 193,864 Investments - - 18,918,305 - - - 131,515 74,211 - - - - - 19,124,031 Assets whose use is limited - - 3,495,985 ------3,495,985 Accounts receivable, patients - - 70,289,386 - - 1,051,457 - - 4,385,563 1,361,543 - 3,285,526 - 80,373,475 Inventories of drugs and supplies - - 7,791,757 - - - 34,456 - 150,203 51,555 - - - 8,027,971 Prepaid expenses and other current assets 82,204 5,810,666 7,568,501 26,070 - 88,564 498,419 102,129 12,361 47,075 - 273,610 (5,810,666) 8,698,933 Note receivable, affiliate - - 51,984 ------(51,984) - Due from affiliates - - 334,372 - - - - - 150,545 417,004 - - (901,921) -
Total current assets 102,839 5,810,666 147,501,292 377,253 117,550 1,558,856 3,535,371 5,095,333 6,028,022 6,562,122 200 4,810,573 (6,764,571) 174,735,506
Investments ------3,361,027 2,183,172 - - - - - 5,544,199
Assets Whose Use is Limited 2,603,897 28,208,004 - 152,178 - - 2,060,528 2,131,810 - - - - - 35,156,417
Property and Equipment, Net 221,902 - 106,766,091 14,254,722 - 58,438 377,358 - 10,472,009 12,167,985 1,396,245 453,446 - 146,168,196
Pledges Receivable, Net ------316,358 ------316,358
Other Assets 1,760,968 - 9,599,180 660,907 - - 41,561 - - 233,853 - - - 12,296,469
Beneficial Interest in Net Assets of Affiliate - - 7,828,733 9,222,116 ------(17,050,849) -
Note Receivable, Affiliate - - 2,633,929 ------(2,633,929) -
Beneficial Interest in Perpetual Trusts - - - 2,825,179 - - - 2,609,932 - - - - - 5,435,111
Due from Affiliates - 1,994,000 ------201,359 (2,195,359) -
Total $ 4,689,606 $ 36,012,670 $ 274,329,225 $ 27,492,355 $ 117,550 $ 1,617,294 $ 9,692,203 $ 12,020,247 $ 16,500,031 $ 18,963,960 $ 1,396,445 $ 5,465,378 $ (28,644,708) $ 379,652,256
42 JFK Health System, Inc. and Controlled Entities Schedule of Consolidating Information, Balance Sheet December 31, 2017
JFK Atlantic JFK JFK MA Health Insurance Medical JFK Muhlenberg Hartwyck Hartwyck Hartwyck and JFK Consolidation System Exchange Center MRMC Healthshare Lifestyle Foundation Foundation Oak Tree West at JFK Medical Group Eliminations Consolidated
Liabilities and Net Assets (Deficit)
Current Liabilities Current maturities of long-term debt $ - $ - $ 5,171,137 $ 746,691 $ - $ - $ - $ - $ 692,171 $ 1,133,702 $ - $ - $ - $ 7,743,701 Current maturities of capital lease obligations - - 3,995,540 ------3,995,540 Funds held for residents ------101,366 92,498 - - - 193,864 Accounts payable 166,016 - 42,168,896 184,864 - 716,743 154,768 - 1,004,634 410,114 - 435,368 - 45,241,403 Accrued expenses 35,000 3,273,786 48,283,361 20,000 2,900 210,075 23,997 15,724 4,381,233 1,520,541 - 3,792,012 (5,810,666) 55,747,963 Estimated third-party payor settlements - - 3,213,777 1,940,730 - - - - 436,913 33,273 - - - 5,624,693 Accrued postretirement benefits - - 4,100 41,755 ------45,855 Other current liabilities - - 4,140,191 21,177 - - - - - 28,000 - - - 4,189,368 Notes payable to affiliates ------51,984 - - - (51,984) - Due to affiliates - 340,654 617,399 - - 40,065 - - - 102,103 - - (1,100,221) -
Total current liabilities 201,016 3,614,440 107,594,401 2,955,217 2,900 966,883 178,765 15,724 6,668,301 3,320,231 - 4,227,380 (6,962,871) 122,782,387
Long-Term Debt - - 94,756,161 13,730,534 - - - - 12,727,542 9,954,899 - - - 131,169,136
Capital Lease Obligations - - 5,852,956 ------5,852,956
Estimated Third-Party Payor Settlements - - 16,414,912 958,225 - - - - 1,718,938 773,797 - - - 19,865,872
Self-insurance Reserves - 18,093,513 ------18,093,513
Accrued Pension Cost - - 11,401,183 2,335,182 ------13,736,365
Accrued Postretirement Benefits - - 34,366 277,213 ------311,579
Other Liabilities 3,192,959 - 9,676,118 2,500,239 - 194,000 - - - 233,853 - - - 15,797,169
Note Payable, Affiliate ------2,633,929 - - - (2,633,929) -
Due to Affiliates 1,994,000 ------(1,994,000) -
Total liabilities 5,387,975 21,707,953 245,730,097 22,756,610 2,900 1,160,883 178,765 15,724 23,748,710 14,282,780 - 4,227,380 (11,590,800) 327,608,977
Net Assets (Deficit) Unrestricted (698,369) 14,304,717 20,770,395 (7,422,554) 114,650 456,411 1,684,705 2,782,407 (7,248,679) 4,681,180 1,396,445 1,237,998 104,062 32,163,368 Temporarily restricted - - 6,062,644 4,888,457 - - 6,062,644 4,777,453 - - - - (10,947,218) 10,843,980 Permanently restricted - - 1,766,089 7,269,842 - - 1,766,089 4,444,663 - - - - (6,210,752) 9,035,931
Total net assets (deficit) (698,369) 14,304,717 28,599,128 4,735,745 114,650 456,411 9,513,438 12,004,523 (7,248,679) 4,681,180 1,396,445 1,237,998 (17,053,908) 52,043,279
Total $ 4,689,606 $ 36,012,670 $ 274,329,225 $ 27,492,355 $ 117,550 $ 1,617,294 $ 9,692,203 $ 12,020,247 $ 16,500,031 $ 18,963,960 $ 1,396,445 $ 5,465,378 $ (28,644,708) $ 379,652,256
43 JFK Health System, Inc. and Controlled Entities Schedule of Consolidating Information, Statement of Operations Year Ended December 31, 2017
JFK Atlantic JFK JFK MA Health Insurance Medical JFK Muhlenberg Hartwyck Hartwyck Hartwyck and JFK Consolidation System Exchange Center MRMC Healthshare Lifestyle Foundation Foundation Oak Tree West at JFK Medical Group Eliminations Consolidated
Unrestricted Revenues, Gains, and Other Support: Patient service revenues, net of contractual allowances and discounts $ - $ - $ 554,534,715 $ - $ 83 $ 5,849,692 $ - $ - $ 38,730,705 $ 9,614,180 $ - $ 38,892,380 $ - $ 647,621,755 Resident fees ------7,736,063 - - - 7,736,063 Less provision for doubtful collections - - 20,278,073 - - 157,582 - - 3,431,701 690,437 - 1,635,391 - 26,193,184
Net patient and resident service revenues - - 534,256,642 - 83 5,692,110 - - 35,299,004 16,659,806 - 37,256,989 - 629,164,634
Other revenues 12 5,549,183 17,282,501 972,331 - - 548,805 - 372,000 - - 1,188,690 (6,330,277) 19,583,245 Special events ------260,800 ------260,800 Net assets released from restrictions used in operations - - 48,809 - - - 213,647 163,725 - - - - - 426,181 Contributions ------59,929 147,204 - - - - - 207,133
Total unrestricted revenues, gains, and other support 12 5,549,183 551,587,952 972,331 83 5,692,110 1,083,181 310,929 35,671,004 16,659,806 - 38,445,679 (6,330,277) 649,641,993
Expenses Salaries and wages - - 256,110,892 169,646 - 1,840,891 705,527 - 19,693,135 8,363,425 - 4,849,115 - 291,732,631 Employee benefits - - 47,489,122 - - 338,673 133,339 - 4,930,059 2,247,673 - 644,453 - 55,783,319 Supplies and expenses 804 213,818 196,777,143 1,516,765 4,091 4,395,474 786,011 190,431 13,974,667 4,920,204 - 54,263,266 (5,838,608) 271,204,066 Loss on abandonment of construction in progress - - 26,428,051 ------1,454,605 - - 27,882,656 Special events - unrestricted ------144,120 ------144,120 Depreciation - - 12,114,185 295 - 115,636 - - 1,047,886 676,622 - 331,412 - 14,286,036 Interest - - 6,694,000 864,766 - 3,230 - - 945,548 301,428 - - (142,007) 8,666,965
Total expenses 804 213,818 545,613,393 2,551,472 4,091 6,693,904 1,768,997 190,431 40,591,295 16,509,352 1,454,605 60,088,246 (5,980,615) 669,699,793
Operating income (loss) (792) 5,335,365 5,974,559 (1,579,141) (4,008) (1,001,794) (685,816) 120,498 (4,920,291) 150,454 (1,454,605) (21,642,567) (349,662) (20,057,800)
Pension Settlement Charge - - (2,752,278) (39,460) ------(2,791,738)
Investment Income (Loss) 12,382 209,778 790,031 77,882 - - (462) 251,565 16,275 10,753 - - (142,007) 1,226,197
Net Unrealized Gains on Trading Securities - 107,299 261,283 - - - 21,009 49,300 - - - - - 438,891
Other Losses - - - - (395,026) (27,912) ------(422,938)
Revenues in excess of (less than) expenses 11,590 5,652,442 4,273,595 (1,540,719) (399,034) (1,029,706) (665,269) 421,363 (4,904,016) 161,207 (1,454,605) (21,642,567) (491,669) (21,607,388)
Pension/Postretirement Liability Adjustment - - 11,962,389 2,536,217 ------14,498,606
Net Assets Released from Restrictions for Capital Purchases - - 1,010,739 37,660 ------1,048,399
Net Asset Transfer ------(880,331) - - - - - (880,331)
Other Gains - - - 63,700 ------63,700
Transfers (to) from Affiliates (679,430) - (24,959,490) 917,601 - 1,417,204 1,252,341 - 76,243 142,706 - 21,850,191 (17,366) -
Forgiveness of Amounts Due to (from) Affiliates 29,948,511 - (5,595,896) 41,339,077 - - - 2,449,674 12,207,961 (7,045,799) 2,996,050 - (76,299,578) - . Increase (decrease) in unrestricted net assets from continuing operations 29,280,671 5,652,442 (13,308,663) 43,353,536 (399,034) 387,498 587,072 1,990,706 7,380,188 (6,741,886) 1,541,445 207,624 (76,808,613) (6,877,014)
Loss From Discontinued Operations - - - 816,053 ------816,053
Increase (decrease) in unrestricted net assets $ 29,280,671 $ 5,652,442 $ (13,308,663) $ 44,169,589 $ (399,034) $ 387,498 $ 587,072 $ 1,990,706 $ 7,380,188 $ (6,741,886) $ 1,541,445 $ 207,624 $ (76,808,613) $ (6,060,961)
44 JFK Health System, Inc. and Controlled Entities Schedule of Consolidating Information, Changes in Net Assets (Deficit) Year Ended December 31, 2017
Eliminating JFK Atlantic JFK JFK MA and Health Insurance Medical JFK Muhlenberg Hartwyck Hartwyck Hartwyck and JFK Consolidating Consolidated System Exchange Center MRMC Healthshare Lifestyle Foundation Foundation at Oak Tree West at JFK Medical Group Entries Balance
Unrestricted Net Assets Revenues in excess of (less than) expenses $ 11,590 $ 5,652,442 $ 4,273,595 $ (1,540,719) $ (399,034) $ (1,029,706) $ (665,269) $ 421,363 $ (4,904,016) $ 161,207 $ (1,454,605) $ (21,642,567) $ (491,669) $ (21,607,388) Net asset transfer ------(880,331) - - - - - (880,331) Net asset transfer - - - 63,700 ------63,700 Transfers (to) from affiliates (679,430) - (24,959,490) 917,601 - 1,417,204 1,252,341 - 76,243 142,706 - 21,850,191 (17,366) - Forgiveness of amounts due to (from) affiliates 29,948,511 - (5,595,896) 41,339,077 - - - 2,449,674 12,207,961 (7,045,799) 2,996,050 - (76,299,578) - Minimum pension liability adjustment - - 11,962,389 2,536,217 ------14,498,606 Net assets released from restrictions for capital purchases - - 1,010,739 37,660 ------1,048,399
Increase (decrease) in unrestricted net assets from continuing operations 29,280,671 5,652,442 (13,308,663) 43,353,536 (399,034) 387,498 587,072 1,990,706 7,380,188 (6,741,886) 1,541,445 207,624 (76,808,613) (6,877,014)
Loss from discontinued operations - - - 816,053 ------816,053
Increase (decrease) in unrestricted net assets 29,280,671 5,652,442 (13,308,663) 44,169,589 (399,034) 387,498 587,072 1,990,706 7,380,188 (6,741,886) 1,541,445 207,624 (76,808,613) (6,060,961)
Temporarily Restricted Net Assets Contributions ------1,117,986 142,834 - - - - - 1,260,820 Investment income - - - 35,100 - - 154,102 134,501 - - - - - 323,703 Net asset transfer ------880,331 - - - - - 880,331 Transfers from (to) affiliates - - 1,059,548 37,660 - - (1,050,699) (63,875) - - - - 17,366 - Change in unrealized gains on investments ------382,410 242,200 - - - - - 624,610 Change in provision for uncollectible pledges ------(6,970) ------(6,970) Net assets released from restrictions for use in operations - - (48,809) - - - (213,647) (163,725) - - - - - (426,181) Net assets released from restrictions for capital purchases - - (1,010,739) (37,660) ------(1,048,399) Change in beneficial interest in net assets of affiliate - - 383,182 1,172,266 ------(1,555,448) -
Increase (decrease) in temporarily restricted net assets - - 383,182 1,207,366 - - 383,182 1,172,266 - - - - (1,538,082) 1,607,914
Permanently Restricted Net Assets Contributions ------521,463 1,610 - - - - - 523,073 Write-off of uncollectible pledge ------Change in beneficial interest in net assets of affiliate - - 521,463 178,647 ------(700,110) - Change in valuation of beneficial interest trusts - - - 223,359 - - - 177,037 - - - - - 400,396
Increase (decrease) in permanently - restricted net assets - - 521,463 402,006 - - 521,463 178,647 - - - - (700,110) 923,469
Increase (Decrease) in Net Assets 29,280,671 5,652,442 (12,404,018) 45,778,961 (399,034) 387,498 1,491,717 3,341,619 7,380,188 (6,741,886) 1,541,445 207,624 (79,046,805) (3,529,578)
Net Assets (Deficit), Beginning (29,979,040) 8,652,275 41,003,146 (41,043,216) 513,684 68,913 8,021,721 8,662,904 (14,628,867) 11,423,066 (145,000) 1,030,374 61,992,897 55,572,857
Net Assets (Deficit), Ending $ (698,369) $ 14,304,717 $ 28,599,128 $ 4,735,745 $ 114,650 $ 456,411 $ 9,513,438 $ 12,004,523 $ (7,248,679) $ 4,681,180 $ 1,396,445 $ 1,237,998 $ (17,053,908) $ 52,043,279
45 JFK Health System, Inc. and Controlled Entities Schedule of Consolidating Information, Balance Sheet December 31, 2016
JFK Atlantic JFK JFK MA Health Insurance Medical JFK Muhlenberg Hartwyck Hartwyck Hartwyck and JFK Consolidation System Exchange Center MRMC Healthshare Lifestyle Foundation Foundation Oak Tree West at JFK Group Eliminations Consolidated
Assets
Current Assets Cash and cash equivalents $ 373,158 $ - $ 48,402,879 $ 811,629 $ 158,888 $ 60,326 $ 2,478,487 $ 4,823,267 $ 1,434,976 $ 5,001,411 $ - $ 837,654 $ - $ 64,382,675 Funds held for residents ------103,136 80,175 - - - 183,311 Investments - - 18,078,193 - - - 244,472 233,956 - - - - - 18,556,621 Assets whose use is limited - - 3,480,722 ------3,480,722 Accounts receivable, patients - - 65,040,245 - 750 37,948 - - 6,220,335 1,435,680 - 2,939,503 - 75,674,461 Inventories of drugs and supplies - - 7,405,920 - - - 34,312 - 153,085 47,197 - - - 7,640,514 Prepaid expenses and other current assets 75,162 7,259,585 7,709,237 72,923 - 1,327 517,295 54,293 12,235 51,110 2,713 162,702 (7,260,912) 8,657,670 Note receivable, affiliate - - 51,984 ------(51,984) - Due from affiliates - - 1,415,835 - 470 - - - 59,459 - - - (1,475,764) -
Total current assets 448,320 7,259,585 151,585,015 884,552 160,108 99,601 3,274,566 5,111,516 7,983,226 6,615,573 2,713 3,939,859 (8,788,660) 178,575,974
Investments ------2,860,297 1,682,450 - - - - - 4,542,747
Assets Whose Use is Limited 3,355,825 23,110,760 - 115,240 - - 1,653,005 1,953,944 - - - - - 30,188,774
Property and Equipment, Net 276,012 - 138,831,623 14,981,487 - - 377,358 - 11,236,619 12,594,101 2,850,850 657,694 - 181,805,744
Pledges Receivable, Net ------252,082 ------252,082
Other Assets 2,291,635 - 7,850,629 960,196 271,608 - 81,038 - - 273,549 - - - 11,728,655
Beneficial Interest in Net Assets of Affiliate - - 6,924,088 7,871,203 ------(14,795,291) -
Note Receivable, Affiliate - - 2,685,913 ------(2,685,913) -
Beneficial Interest in Perpetual Trusts - - - 2,601,820 - - - 2,432,895 - - - - - 5,034,715
Due from Affiliates 315,572 1,994,000 1,226,029 - 86,945 - 242,948 101,697 4,260 7,702,883 1,433 48,410 (11,724,177) -
Total $ 6,687,364 $ 32,364,345 $ 309,103,297 $ 27,414,498 $ 518,661 $ 99,601 $ 8,741,294 $ 11,282,502 $ 19,224,105 $ 27,186,106 $ 2,854,996 $ 4,645,963 $ (37,994,041) $ 412,128,691
46 JFK Health System, Inc. and Controlled Entities Schedule of Consolidating Information, Balance Sheet December 31, 2016
JFK Atlantic JFK JFK MA Health Insurance Medical JFK Muhlenberg Hartwyck Hartwyck Hartwyck and JFK Consolidation System Exchange Center MRMC Healthshare Lifestyle Foundation Foundation Oak Tree West at JFK Group Eliminations Consolidated Liabilities and Net Assets (Deficit)
Current Liabilities Current maturities of long-term debt $ - $ - $ 4,916,883 $ 709,978 $ - $ - $ - $ - $ 658,139 $ 1,108,429 $ - $ - $ - $ 7,393,429 Current maturities of capital lease obligations - - 5,239,754 ------5,239,754 Funds held for residents ------103,136 80,175 - - - 183,311 Accounts payable 606,949 - 35,950,044 164,578 - - 49,832 - 1,507,677 489,611 - 300,521 - 39,069,212 Accrued expenses 45,000 3,292,206 41,946,156 33,703 3,650 2,133 30,696 18,000 3,880,128 1,322,908 - 3,315,068 (7,260,912) 46,628,736 Estimated third-party payor settlements - - 1,759,270 1,940,730 - - - - 317,510 81,110 - - - 4,098,620 Accrued postretirement benefits - - 4,057 42,468 ------46,525 Other current liabilities - - 2,450,220 19,867 - - - - - 41,300 - - - 2,511,387 Notes payable to affiliates ------51,984 - - - (51,984) - Due to affiliates - 847,412 48,880 - - 28,555 - - - 504,169 - - (1,429,016) -
Total current liabilities 651,949 4,139,618 92,315,264 2,911,324 3,650 30,688 80,528 18,000 6,518,574 3,627,702 - 3,615,589 (8,741,912) 105,170,974
Long-Term Debt - - 99,690,017 14,449,356 - - - - 13,393,821 11,073,565 - - - 138,606,759
Capital Lease Obligations - - 13,326,031 ------13,326,031
Estimated Third-Party Payor Settlements - - 27,895,219 958,225 - - - - 2,483,963 786,792 - - - 32,124,199
Self-insurance Reserves - 19,572,452 ------19,572,452
Accrued Pension Cost - - 24,278,723 5,597,665 ------29,876,388
Accrued Postretirement Benefits - - 40,287 307,112 ------347,399
Other Liabilities 4,206,287 - 10,554,610 2,495,859 1,327 - - - - 273,549 - - - 17,531,632
Note Payable, Affiliate ------2,685,913 - - - (2,685,913) -
Due to Affiliates 31,808,168 - - 41,738,173 - - 639,045 2,601,598 8,770,701 1,432 2,999,996 - (88,559,113) -
Total liabilities 36,666,404 23,712,070 268,100,151 68,457,714 4,977 30,688 719,573 2,619,598 33,852,972 15,763,040 2,999,996 3,615,589 (99,986,938) 356,555,834
Net Assets (Deficit) Unrestricted (29,979,040) 8,652,275 34,079,058 (51,592,143) 513,684 68,913 1,097,633 791,701 (14,628,867) 11,423,066 (145,000) 1,030,374 76,912,675 38,224,329 Temporarily restricted - - 5,679,462 3,681,091 - - 5,679,462 3,605,187 - - - - (9,409,136) 9,236,066 Permanently restricted - - 1,244,626 6,867,836 - - 1,244,626 4,266,016 - - - - (5,510,642) 8,112,462
Total net assets (deficit) (29,979,040) 8,652,275 41,003,146 (41,043,216) 513,684 68,913 8,021,721 8,662,904 (14,628,867) 11,423,066 (145,000) 1,030,374 61,992,897 55,572,857
Total $ 6,687,364 $ 32,364,345 $ 309,103,297 $ 27,414,498 $ 518,661 $ 99,601 $ 8,741,294 $ 11,282,502 $ 19,224,105 $ 27,186,106 $ 2,854,996 $ 4,645,963 $ (37,994,041) $ 412,128,691
47 JFK Health System, Inc. and Controlled Entities Schedule of Consolidating Information, Statement of Operations Year Ended December 31, 2016
JFK Atlantic JFK JFK MA Health Insurance Medical JFK Muhlenberg Hartwyck Hartwyck Hartwyck and JFK Consolidation System Exchange Center MRMC Healthshare Lifestyle Foundation Foundation Oak Tree West at JFK Medical Group Eliminations Consolidated
Unrestricted Revenues, Gains, and Other Support: Patient service revenues, net of contractual allowances and discounts $ - $ - $ 533,707,609 $ - $ 290 $ 829,107 $ - $ - $ 40,935,676 $ 9,665,962 $ - $ 28,203,876 $ - $ 613,342,520 Resident fees ------7,564,110 - - - 7,564,110 Less provision for (recovery of) doubtful collections - - 19,240,986 - - - - - 1,932,920 237,577 - (156,909) - 21,254,574
Net patient and resident service revenues - - 514,466,623 - 290 829,107 - - 39,002,756 16,992,495 - 28,360,785 - 599,652,056
Other revenues - 5,724,153 17,570,049 1,002,533 - - 524,943 - 372,750 7,500 - 434,324 (6,544,413) 19,091,839 Special events ------250,718 ------250,718 Net assets released from restrictions used in operations - - 67,760 1,455,645 - - 341,100 119,854 - - - - - 1,984,359 Contributions ------36,573 154,894 - - - - - 191,467
Total unrestricted revenues, gains, and other support - 5,724,153 532,104,432 2,458,178 290 829,107 1,153,334 274,748 39,375,506 16,999,995 - 28,795,109 (6,544,413) 621,170,439
Expenses Salaries and wages - - 242,088,017 189,120 - 50,420 680,805 - 19,963,176 8,116,633 - 3,976,710 - 275,064,881 Employee benefits - - 45,971,358 - - 8,873 119,823 - 5,161,448 2,266,275 - 535,300 - 54,063,077 Supplies and expenses - 1,321,194 184,140,194 976,380 12,919 434,671 856,226 144,491 14,496,168 5,006,454 - 40,254,859 (6,510,543) 241,133,013 Special events - unrestricted ------98,985 ------98,985 Depreciation - - 13,324,526 2,122 - - - - 1,038,109 675,276 - 158,443 - 15,198,476 Interest - - 6,620,808 900,268 - - - - 980,372 391,671 - - (143,826) 8,749,293
Total expenses - 1,321,194 492,144,903 2,067,890 12,919 493,964 1,755,839 144,491 41,639,273 16,456,309 - 44,925,312 (6,654,369) 594,307,725
Operating income (loss) - 4,402,959 39,959,529 390,288 (12,629) 335,143 (602,505) 130,257 (2,263,767) 543,686 - (16,130,203) 109,956 26,862,714
Pension Settlement Charge - - (3,167,171) (45,409) ------(3,212,580)
Recovery of (Provision for) Doubtful Collections on Related Party Receivables 122,455 - (1,416,200) ------1,293,745 -
Investment Income (Loss) - 277,575 679,324 179,991 - - 5,079 115,298 12,875 8,979 - - (143,826) 1,135,295
Net Unrealized (Losses) Gains on Trading Securities (27,390) (139,798) 109,127 (5,301) - - 7,781 51,239 - - - - - (4,342)
Other Gains - - - - (1,406) (39) ------(1,445)
Revenues in excess of (less than) expenses 95,065 4,540,736 36,164,609 519,569 (14,035) 335,104 (589,645) 296,794 (2,250,892) 552,665 - (16,130,203) 1,259,875 24,779,642
Pension/Postretirement Liability Adjustment - - 7,070,704 1,509,638 ------8,580,342
Net Assets Released from Restrictions for Capital Purchases - - 203,434 61,853 ------265,287
Transfers (to) from Affiliates (83,900) - (16,291,198) (87,116) - (337,597) 741,212 - 110,721 83,900 - 15,974,699 (110,721) -
Increase (decrease) in unrestricted net assets from continuing operations 11,165 4,540,736 27,147,549 2,003,944 (14,035) (2,493) 151,567 296,794 (2,140,171) 636,565 - (155,504) 1,149,154 33,625,271
Loss From Discontinued Operations - - - 85,686 ------85,686
Increase (decrease) in unrestricted net assets $ 11,165 $ 4,540,736 $ 27,147,549 $ 2,089,630 $ (14,035) $ (2,493) $ 151,567 $ 296,794 $ (2,140,171) $ 636,565 $ - $ (155,504) $ 1,149,154 $ 33,710,957
48 JFK Health System, Inc. and Controlled Entities Schedule of Consolidating Information, Changes in Net Assets (Deficit) Year Ended December 31, 2016
Eliminating JFK Atlantic JFK JFK MA and Health Insurance Medical JFK Muhlenberg Hartwyck Hartwyck Hartwyck and JFK Consolidating Consolidated System Exchange Center MRMC Healthshare Lifestyle Foundation Foundation at Oak Tree West at JFK Medical Group Entries Balance
Unrestricted Net Assets Revenues in excess of (less than) expenses $ 95,065 $ 4,540,736 $ 36,164,609 $ 519,569 $ (14,035) $ 335,104 $ (589,645) $ 296,794 $ (2,250,892) $ 552,665 $ - $ (16,130,203) $ 1,259,875 $ 24,779,642 Transfers (to) from affiliates (83,900) - (16,291,198) (87,116) - (337,597) 741,212 - 110,721 83,900 - 15,974,699 (110,721) - Minimum pension liability adjustment - - 7,070,704 1,509,638 ------8,580,342 Net assets released from restrictions for capital purchases - - 203,434 61,853 ------265,287
Increase (decrease) in unrestricted net assets from continuing operations 11,165 4,540,736 27,147,549 2,003,944 (14,035) (2,493) 151,567 296,794 (2,140,171) 636,565 - (155,504) 1,149,154 33,625,271
Loss from discontinued operations - - - 85,686 ------85,686
Increase (decrease) in unrestricted net assets 11,165 4,540,736 27,147,549 2,089,630 (14,035) (2,493) 151,567 296,794 (2,140,171) 636,565 - (155,504) 1,149,154 33,710,957
Temporarily Restricted Net Assets Contributions ------1,588,742 139,727 - - - - - 1,728,469 Investment income - - - 9,242 - - 96,851 20,641 - - - - - 126,734 Transfers from (to) affiliates - - 271,194 61,853 - - (351,935) (91,833) - - - - 110,721 - Change in unrealized gains on investments ------137,048 58,409 - - - - - 195,457 Change in provision for uncollectible pledges ------(65,366) ------(65,366) Net assets released from restrictions for use in operations - - (67,760) (1,455,645) - - (341,100) (119,854) - - - - - (1,984,359) Net assets released from restrictions for capital purchases - - (203,434) (61,853) ------(265,287) Change in beneficial interest in net assets of affiliate - - 1,064,240 7,380 ------(1,071,620) -
Increase (decrease) in temporarily restricted net assets - - 1,064,240 (1,439,023) - - 1,064,240 7,090 - - - - (960,899) (264,352)
Permanently Restricted Net Assets Contributions ------11,000 - - - - - 11,000 Write-off of uncollectible pledge ------(2,000) ------(2,000) Change in beneficial interest in net assets of affiliate - - (2,000) 28,414 ------(26,414) - Change in valuation of beneficial interest trusts - - - (6,682) - - - 17,704 - - - - - 11,022
Increase (decrease) in permanently - restricted net assets - - (2,000) 21,732 - - (2,000) 28,704 - - - - (26,414) 20,022
Increase (Decrease) in Net Assets 11,165 4,540,736 28,209,789 672,339 (14,035) (2,493) 1,213,807 332,588 (2,140,171) 636,565 - (155,504) 161,841 33,466,627
Net Assets (Deficit), Beginning (29,990,205) 4,111,539 12,793,357 (41,715,555) 527,719 71,406 6,807,914 8,330,316 (12,488,696) 10,786,501 (145,000) 1,185,878 61,831,056 22,106,230
Net Assets (Deficit), Ending $ (29,979,040) $ 8,652,275 $ 41,003,146 $ (41,043,216) $ 513,684 $ 68,913 $ 8,021,721 $ 8,662,904 $ (14,628,867) $ 11,423,066 $ (145,000) $ 1,030,374 $ 61,992,897 $ 55,572,857
49
[THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX C
Forms of the Trust Indenture and the Master Indenture
[THIS PAGE INTENTIONALLY LEFT BLANK] Appendix C
HMH - SERIES 2018 (Taxable)
HACKENSACK MERIDIAN HEALTH, INC.
and
THE BANK OF NEW YORK MELLON, as Trustee
TRUST INDENTURE
Dated as of April 1, 2018
$300,000,000 HACKENSACK MERIDIAN HEALTH Taxable Bonds, Series 2018
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
SECTION 1.1. DEFINITIONS ...... 3 SECTION 1.2. INDENTURE, ANY SUPPLEMENTAL INDENTURE AND BONDS CONSTITUTE A CONTRACT ...... 13 SECTION 1.3. SECURITY FOR BONDS ...... 14
ARTICLE II
AUTHORIZATION AND DETAILS OF BONDS
SECTION 2.1. INSTITUTION COVENANTS AND REPRESENTATIONS ...... 14 SECTION 2.2. BONDS AUTHORIZED ...... 16 SECTION 2.3. DATE, MATURITY AND INTEREST RATE OF BONDS ...... 17 SECTION 2.4. DENOMINATION, NUMBERS AND LETTERS ...... 17 SECTION 2.5. OPTIONAL REDEMPTION OF BONDS ...... 17 SECTION 2.6. [RESERVED] ...... 18 SECTION 2.7. DEPOSITORY TRUST COMPANY REGISTRATION OF BONDS ...... 18 SECTION 2.8. FORM OF BONDS AND TRUSTEE’S AUTHENTICATION CERTIFICATE ...... 21
ARTICLE III
PARTICULARS FOR ALL BONDS
SECTION 3.1. MEDIUM OF PAYMENT OF BONDS ...... 21 SECTION 3.2. LEGENDS ...... 22 SECTION 3.3. EXECUTION AND AUTHENTICATION ...... 22 SECTION 3.4. REGISTRATION AND TRANSFER OF BONDS ...... 22 SECTION 3.5. BONDS MUTILATED, DESTROYED, LOST OR STOLEN ...... 23 SECTION 3.6. ADDITIONAL BONDS ...... 24
ARTICLE IV
REDEMPTION OF BONDS
SECTION 4.1. AUTHORIZATION OF REDEMPTION ...... 24 SECTION 4.2. NOTICE OF REDEMPTION ...... 25 SECTION 4.3. PAYMENT OF REDEEMED BONDS ...... 25
i
Table of Contents (continued) Page
ARTICLE V
BOND PROCEEDS, FUNDS, ACCOUNTS, REVENUES AND APPLICATION AND DISBURSEMENT THEREOF
SECTION 5.1. ESTABLISHMENT OF FUNDS AND ACCOUNTS ...... 26 SECTION 5.2. APPLICATION OF BOND PROCEEDS AND ALLOCATION THEREOF...... 26 SECTION 5.3. APPLICATION OF MONEYS IN CERTAIN FUNDS FOR RETIREMENT OF BONDS...... 27 SECTION 5.4. DEPOSIT OF REVENUES AND ALLOCATION THEREOF ...... 27 SECTION 5.5. APPLICATION OF MONEYS IN THE DEBT SERVICE FUND ...... 29 SECTION 5.6. APPLICATION OF MONEYS IN THE REDEMPTION FUND ...... 29 SECTION 5.7. INVESTMENT OF MONEYS ...... 29
ARTICLE VI
PARTICULAR COVENANTS
SECTION 6.1. PAYMENT OF PRINCIPAL AND INTEREST ...... 30 SECTION 6.2. REVENUES ...... 31 SECTION 6.3. ACCOUNTS ...... 31 SECTION 6.4. LIMITATIONS ON CONSOLIDATED BONDS ...... 32
ARTICLE VII
CONCERNING THE TRUSTEE
SECTION 7.1. CONCERNING THE TRUSTEE; ACCEPTANCE OF TRUSTEE ...... 32 SECTION 7.2. OBLIGATION OF TRUSTEE ...... 32 SECTION 7.3. RESPONSIBILITIES OF TRUSTEE ...... 32 SECTION 7.4. PROPERTY HELD IN TRUST ...... 34 SECTION 7.5. EVIDENCE ON WHICH TRUSTEE MAY ACT ...... 34 SECTION 7.6. COMPENSATION AND INDEMNIFICATION...... 34 SECTION 7.7. PERMITTED ACTS ...... 35 SECTION 7.8. RESIGNATION OF TRUSTEE ...... 35 SECTION 7.9. REMOVAL OF TRUSTEE ...... 35 SECTION 7.10. SUCCESSOR TRUSTEE ...... 35 SECTION 7.11. TRANSFER OF RIGHTS AND PROPERTY TO SUCCESSOR TRUSTEE ...... 36 SECTION 7.12. MERGER OR CONSOLIDATION OF THE TRUSTEE ...... 36 SECTION 7.13. SEVERAL CAPACITIES ...... 36
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Table of Contents (continued) Page
SECTION 7.14. CO-TRUSTEES ...... 37 SECTION 7.15. TRUSTEE MAY FIX RECORD DATE ...... 37 SECTION 7.16. WHEN BONDS DISREGARDED ...... 37 SECTION 7.17. INDEMNIFICATION...... 38
ARTICLE VIII
EVENTS OF DEFAULT
SECTION 8.1. EVENTS OF DEFAULT ...... 39 SECTION 8.2. ACCELERATION OF MATURITY ...... 39 SECTION 8.3. ENFORCEMENT OF REMEDIES ...... 40 SECTION 8.4. PRIORITY OF PAYMENTS AFTER DEFAULT...... 40 SECTION 8.5. EFFECT OF DISCONTINUANCE OF PROCEEDINGS ...... 42 SECTION 8.6. CONTROL OF PROCEEDINGS ...... 42 SECTION 8.7. RESTRICTIONS UPON ACTION BY INDIVIDUAL BONDOWNERS ...... 42 SECTION 8.8. ACTIONS BY TRUSTEE ...... 43 SECTION 8.9. REMEDIES NOT EXCLUSIVE ...... 43 SECTION 8.10. WAIVER AND NON-WAIVER ...... 43 SECTION 8.11. NOTICE OF DEFAULT...... 43
ARTICLE IX
SUPPLEMENTAL INDENTURES
SECTION 9.1. ADOPTION AND FILING ...... 44 SECTION 9.2. GENERAL PROVISIONS RELATING TO SUPPLEMENTAL INDENTURES ...... 44 SECTION 9.3. ADOPTION AND FILING OF SUPPLEMENTAL INDENTURES ...... 44 SECTION 9.4. NOTATION ON BONDS ...... 44
ARTICLE X
CONSENTS TO SUPPLEMENTAL INDENTURES
SECTION 10.1. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF BONDOWNERS ...... 45 SECTION 10.2. SUPPLEMENTAL INDENTURES WITH CONSENT OF BONDOWNERS ...... 45 SECTION 10.3. SUPPLEMENTAL INDENTURES BY UNANIMOUS ACTION ...... 46
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Table of Contents (continued) Page
ARTICLE XI
PROCEDURES FOR BONDOWNER CONSENTS
SECTION 11.1. MAILING ...... 46 SECTION 11.2. CONSENT OF BONDOWNERS ...... 47 SECTION 11.3. EXCLUSION OF BONDS ...... 47
ARTICLE XII
DEFEASANCE
SECTION 12.1. DEFEASANCE...... 48
ARTICLE XIII
MISCELLANEOUS
SECTION 13.1. MISCELLANEOUS POWERS AS TO BONDS AND PLEDGE ...... 49 SECTION 13.2. FURTHER ASSURANCE ...... 50 SECTION 13.3. NO RIGHTS CONFERRED ON OTHERS ...... 50 SECTION 13.4. EVIDENCE OF SIGNATURES OF BONDOWNERS AND OWNERSHIP OF BONDS ...... 50 SECTION 13.5. REMEDIES...... 51 SECTION 13.6. PRESERVATION AND INSPECTION OF DOCUMENTS ...... 51 SECTION 13.7. MONEYS AND FUNDS HELD FOR PARTICULAR BONDS ...... 51 SECTION 13.8. CANCELLATION OF BONDS ...... 51 SECTION 13.9. NO RECOURSE ON THE BONDS ...... 51 SECTION 13.10. SEVERABILITY OF INVALID PROVISION ...... 52 SECTION 13.11. NOTICES ...... 52 SECTION 13.12. SECONDARY MARKET DISCLOSURE...... 53 SECTION 13.13. HOLIDAYS ...... 53 SECTION 13.14. SUCCESSORS AND ASSIGNS ...... 53 SECTION 13.15. ARTICLE AND SECTION HEADINGS ...... 53 SECTION 13.16. EFFECTIVE DATE ...... 53 SECTION 13.17. GOVERNING LAW ...... 53 SECTION 13.18. COUNTERPARTS ...... 54
ATTACHMENT A – FORM OF BOND
ATTACHMENT B – STANDING INVESTMENT INSTRUCTIONS
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TRUST INDENTURE
This TRUST INDENTURE, dated as of April 1, 2018, between HACKENSACK MERIDIAN HEALTH, INC., a nonprofit corporation (the “Institution”), and THE BANK OF NEW YORK MELLON, a banking corporation organized and existing under the laws of the State of New York with fiduciary and trust powers in the State of New Jersey (the “State”), as trustee, bond registrar and paying agent, with a corporate trust office in Woodland Park, New Jersey (the “Trustee”).
W I T N E S S E T H:
WHEREAS, the Institution is a nonprofit corporation duly organized and existing under the laws of the State; and
WHEREAS, the Institution is authorized, among other things, to finance the costs of activities in furtherance of the “exempt purposes” as defined in Section 501(c)(3) of the Code (as defined herein) as designated by the Institution (the “Identified Purposes”) and the other Members of the Obligated Group, to issue bonds for such purpose, and to enter into a trust indenture providing for the issuance of such bonds and for their payment and security; and
WHEREAS, the Institution has agreed to secure the payment obligations of the Institution under this Indenture and the Bonds of the Institution described below by the issuance of the Institution’s Series 2018 Note No. 1 (the “Note”), which Note is a joint and several obligation of the Institution and the other Members of the Obligated Group (as defined herein), and will be issued to the Trustee pursuant to the Master Indenture and the Supplemental Master Indenture (as such terms are defined herein) as security for such Bonds; and
WHEREAS, the Institution has determined to issue $300,000,000 aggregate principal amount of its Taxable Bonds, Series 2018 (the “Bonds”) pursuant to this Indenture; and
WHEREAS, all things necessary to make the Bonds, when authenticated by the Trustee and issued as in this Indenture provided, the valid, binding and legal general obligations of the Institution according to the import thereof, and to constitute this Indenture a valid assignment and pledge of the Revenues derived under the Note have been done and performed, and the creation, execution and delivery of this Indenture, and the creation, execution and issuance of the Bonds, subject to the terms hereof, have in all respects been duly authorized:
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
That the Institution in consideration of the premises and of the purchase of the Bonds and of other good and lawful consideration, the receipt of which is hereby acknowledged, and to secure the payment of the principal of, premium, if any, and interest on the Bonds and the performance and observance of all of the covenants and conditions herein or therein contained, has executed and delivered this Indenture and the Note and has conveyed, granted, assigned, transferred, pledged, set over and confirmed and granted a security interest in and by these presents does hereby convey, grant, assign, transfer, pledge, set over and confirm and grant a security interest in, unto the Trustee, its successor or successors and its or their assigns forever,
with power of sale, all and singular the property, real and personal, hereinafter described (such property being herein sometimes referred to as the “trust estate”) to wit:
GRANTING CLAUSES
CLAUSE I
All right, title and interest of the Institution in and to the Note and the Revenues (as defined herein) payable to the Trustee for the account of the Institution and to the moneys and securities deposited and held from time to time by the Institution or by the Trustee in the Funds and Accounts created hereunder subject to the provisions of this Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in this Indenture; and
CLAUSE II
Any and all other property of every kind and nature from time to time hereafter, by delivery or by writing of any kind, conveyed, pledged, assigned or transferred as and for additional security hereunder by the Institution or by anyone on its behalf to the Trustee, including without limitation funds of the Institution held by the Trustee as security for the Bonds.
TO HAVE AND TO HOLD, all and singular, the properties and the rights and privileges hereby conveyed, assigned and pledged by the Institution or intended so to be, unto the Trustee and its successors and assigns forever, in trust, nevertheless, with power of sale and for the equal and pro rata benefit and security of each and every Owner of the Bonds issued and to be issued hereunder, without preference, priority or distinction as to participation in the lien, benefit and protection hereof of one Bond over or from the others, by reason of priority in the issue or negotiation or maturity thereof, or for any other reason whatsoever, except as herein otherwise expressly provided, so that each and all of such Bonds shall have the same right, lien and privilege under this Indenture and shall be equally secured hereby with the same effect as if the same had all been made, issued and negotiated simultaneously with the delivery hereof and were expressed to mature on one and the same date;
PROVIDED, NEVERTHELESS, and these presents are upon the express condition, that if the Institution or its successors or assigns shall well and truly pay or cause to be paid the principal of such Bonds with interest, according to the provisions set forth in the Bonds and each of them or shall provide for the payment or redemption of such Bonds by depositing or causing to be deposited with the Trustee the entire amount of funds or securities requisite for payment or redemption thereof when and as authorized by the provisions hereof, and shall also pay or cause to be paid all other sums payable hereunder by the Institution, then these presents and the estate and rights hereby granted shall cease, be discharged and become void, and thereupon the Trustee, on payment of its lawful charges and disbursements then unpaid, on demand of the Institution and upon the payment of the cost and expenses thereof, shall duly execute, acknowledge and deliver to the Institution such instruments of satisfaction or release as may be necessary or proper to discharge this Indenture, including, if appropriate, any required discharge of record, and, if necessary, shall grant, reassign and deliver to the Institution, its successors or assigns, all and singular the property, rights, privileges and interests by it hereby
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granted, conveyed and assigned, and all substitutes therefor, or any part thereof, not previously disposed of or released as herein provided; otherwise this Indenture shall be and remain in full force.
PROVIDED, FURTHER, that the pledge of the right, title and interest of the Institution in and to the Note and the Revenues is given with recognition by the Trustee of the ability of the Institution to issue other bonds, and the ability of the Institution to incur additional Indebtedness, secured on a parity basis by the liens, security interests and pledges set forth in the Master Indenture.
AND IT IS HEREBY COVENANTED, DECLARED AND AGREED by and between the parties hereto that all Bonds are to be issued, authenticated and delivered, and that all of the trust estate is to be held and applied, subject to the further covenants, conditions, releases, uses and trusts hereinafter set forth, and the Institution, for itself and its successors, does hereby covenant and agree to and with the Trustee and its respective successors in said trust, for the benefit of those who shall own the Bonds or any of them as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. DEFINITIONS. Unless the context requires otherwise, terms used herein shall have the meaning ascribed thereto below. In addition, the terms used herein and not otherwise defined shall have the meaning ascribed thereto in the Master Indenture.
Words importing persons include firms, associations and corporations, and words importing the singular number include the plural number and vice versa. All times refer to local time in the City of New York, New York.
“Account” or “Accounts” means, as the case may be, each or all of the accounts established in Section 5.1 of this Indenture.
“Additional Bonds” means bonds issued under this Indenture subsequent to the initial issuance of the Institution’s Taxable Bonds, Series 2018 that, at the election of the Institution, are consolidated with such bonds or which are issued as a separate series. The Additional Bonds consolidated with the Series 2018 Bonds shall be treated as a single series of the Series 2018 Bonds for all purposes hereof.
“Authorized Denomination” means $1,000 or any integral multiple thereof.
“Authorized Officer” means: (i) in the case of the Institution, the chairman, vice chairman, president, vice president for finance, treasurer, chief executive officer, chief financial officer, or chief operating officer of the Institution and any other person or persons authorized by resolution of the Institution to perform any act or execute any document; and (ii) in the case of the Trustee, means any officer in its corporate trust department, and when used with reference to any act or document also means any other person authorized to perform any act or sign any document by or pursuant to a resolution of the governing body of the Trustee.
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“Bondowner” or “Owner” or “Holder” or any similar term, when used with reference to a Bond or Bonds, means any person who shall be the registered owner of any Bond.
“Bonds” means bonds authorized by, and at any time Outstanding pursuant to, this Indenture, including any Additional Bonds.
“Bond Year” means a period of twelve (12) consecutive months beginning on July 2 in any calendar year and ending on July 1 of the succeeding calendar year.
“Business Day” means any day other than (i) a Saturday or a Sunday; or (ii) a day on which the Trustee or a paying agent (other than the Trustee), as applicable, is required, or authorized or not prohibited, by law (including without limitation, executive orders) to close and is closed.
“Code” means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.
“Comparable Treasury Issue” means the United States Treasury security or securities selected by a Designated Investment Banker as having an actual 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 after excluding the highest and lowest of such Reference Treasury Dealer Quotations or, if the Designated Investment Banker obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such Reference Treasury Dealer Quotations.
“Corporate Trust Office” shall mean the designated office of the Bond Trustee at which its corporate trust business is conducted, which at the date hereof is located at 385 Rifle Camp Road, 3rd Floor, Woodland Park, New Jersey 07424, Attention: Corporate Trust Department, except that with respect to presentation of Bonds for payment or for registration of transfer or exchange, such term shall mean the office or agency of the Bond Trustee at which, at any particular time, its corporate trust agency business shall be conducted.
“Cost of Issuance” means all costs and expenses of the Institution incurred in connection with the authorization, issuance, sale and delivery of the Bonds including, but not limited to, legal fees and expenses, financial advisory fees, trustee’s acceptance fees and expenses under this Indenture and initial (including first annual) fees, fiscal or escrow agent fees, printing fees and travel expenses.
“Cost of Issuance Account” means the account for the Bonds so designated, created and established pursuant to Section 5.1 of this Indenture.
“Debt Service Fund” means the fund so designated, created and established pursuant to Section 5.1 of this Indenture.
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“Defeasance Obligations” means: (i) non-callable direct obligations of, or obligations the timely payment of principal of and interest on which are unconditionally guaranteed by, the United States of America; and (ii) any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local government unit of any such state (a) which are not callable prior to maturity or as to which irrevocable instructions have been given to the trustee of such bonds or other obligations by the obligor to give due notice of redemption and to call such bonds for redemption on the date or dates specified in such instructions, (b) which are secured as to principal and interest and redemption premium by a fund consisting only of cash or bonds or other obligations of the character described in clause (i) hereof which fund may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the redemption date or dates specified in the irrevocable instructions referred to in subclause (a) of this clause (ii), as appropriate, (c) as to which the principal of and interest on the bonds and obligations of the character described in clause (i) hereof which have been deposited in such fund along with any cash on deposit in such fund are sufficient to pay principal of and interest and redemption premium, if any, on the bonds or other obligations described in this clause (ii) 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 (ii) as appropriate, and (d) which are rated “AAA” by Standard & Poor’s, “Aaa” by Moody’s, or “AAA” by Fitch.
“Designated Investment Banker” means one of the Reference Treasury Dealers appointed by the Institution.
“DTC” means The Depository Trust Company, New York, New York, a New York State limited purpose trust company, subject to regulation by the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System and the New York State Banking Department, or its successors appointed under this Indenture.
“Electronic Means” means telecopy, telegraph, facsimile transmission, e-mail, or other similar electronic means of communication, including a telephonic communication confirmed in writing or written transmission.
“Event of Default” means any of the events of default set forth in Section 8.1 of this Indenture.
“Fiscal Year” means the fiscal year of the Institution, currently ending the last day of the calendar year.
“Fitch” means Fitch Ratings, Inc., a corporation organized and existing under the laws of the State of New York, its successors and assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, “Fitch” shall be deemed to refer to any other nationally recognized securities rating agency designated by the Institution, by notice to the Trustee.
“Fund” or “Funds” means, as the case may be, each or all of the funds established in Section 5.1 of this Indenture.
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“Indenture” means this Trust Indenture, by and between the Institution and the Trustee, dated as of April 1, 2018, as the same may from time to time be amended or supplemented by a Supplemental Indenture or Indentures.
“Institution” means Hackensack Meridian Health, Inc., a nonprofit corporation duly organized and existing under the laws of the State and the principal place of business of which is presently located in Edison, New Jersey, and its successor or successors entities.
“Institution Documents” means, collectively, this Indenture, the Letter of Representation, the Purchase Contract, the Note and the Master Indenture including all supplements thereto.
“Interest Account” means the account so designated, created and established in the Debt Service Fund pursuant to Section 5.1 of this Indenture.
“Interest Payment Date” means January 1 and July 1 of each year, commencing January 1, 2019, or, with respect to any Additional Bonds, such dates as shall be specified in the Supplemental Indenture authorizing their issuance.
“Investment Agreement” means an agreement for the investment of moneys held by the Trustee pursuant to this Indenture with a Qualified Financial Institution (which may include the entity acting as Trustee).
“Letter of Representation” means the Letter of Representation of the Institution to the underwriters of the Bonds, dated the date of the sale of the Bonds.
“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 and unpaid to the date of redemption) discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus __ basis points.
“Master Indenture” means the Master Trust Indenture, dated as of April 1, 2017, by and among the current members of the Obligated Group, any other future Members of the Obligated Group, and the Master Trustee, and when amended or supplemented, such Master Indenture, as amended or supplemented.
“Master Trustee” means The Bank of New York Mellon and its successor or successors and any other entity which may at any time be substituted in its place pursuant to the Master Indenture.
“Maturity Date” means July 1, 2048.
“Members of the Obligated Group” or “Obligated Group” means the Institution and any future Members of the Obligated Group under the Master Indenture.
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“Moody’s” means Moody’s Investors Service, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, “Moody’s” shall be deemed to refer to any other nationally recognized securities rating agency designated by the Institution, by notice to the Trustee.
“Note” means the Hackensack Meridian Health, Inc. Obligated Group Series 2018 Taxable Promissory Note No. 1 of the Institution and the other Members of the Obligated Group, dated as of April __, 2018, given to the Trustee pursuant to this Indenture in order to secure the Series 2018 Bonds, in a principal amount equal to the principal amount of the Series 2018 Bonds, to evidence the obligations of the Institution with respect to the Series 2018 Bonds, in substantially the form attached to the Supplemental Master Indenture as Exhibit A thereto.
“Officer’s Certificate” means a certificate signed by an Authorized Officer of the Institution.
“Offering Memorandum” means the Offering Memorandum of the Institution relating to the Series 2018 Bonds, containing information, data and statistics concerning the Institution, the Bonds and other information, and the appendices thereto, including a letter from the Institution.
“Opinion of Counsel” means an opinion in writing signed by legal counsel acceptable to the Trustee and who may be an employee of or counsel to the Institution.
“Outstanding” when used in reference to Bonds, means as of a particular date, all Bonds authenticated and delivered under this Indenture except: (i) any Bond canceled by the Trustee at or before such date; (ii) any Bond or portion thereof paid or deemed paid in accordance with Section 12.1 of this Indenture; (iii) any Bond in lieu of or in substitution for which another Bond shall have been authenticated and delivered pursuant to this Indenture; and (iv) any unsurrendered Bond deemed to have been purchased as provided in this Indenture.
“Person” means an individual, a corporation, a partnership, an association, a joint stock company, a joint venture, a trust, any unincorporated organization, a limited liability company, a governmental body or a political subdivision, a municipality, a municipal authority or any other group or organization of individuals.
“Preliminary Offering Memorandum” means the Preliminary Offering Memorandum relating to the Bonds, containing information, data and statistics concerning the Institution and other information, and the appendices thereto, including a letter from the Institution, but without pricing, yield, redemption or maturity information on the Series 2018 Bonds.
“Principal Account” means the account so designated, created and established in the Debt Service Fund pursuant to Section 5.1 of this Indenture.
“Proceeds Account” means the account for the Bonds so designated, created and established in the Proceeds Fund pursuant to Section 5.1 of this Indenture.
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“Proceeds Fund” means the fund for the Bonds so designated, created and established pursuant to Section 5.1 of this Indenture.
“Project” means the corporate purposes as designated by the Institution to which proceeds of the Bonds are to be applied.
“Purchase Contract” means the Purchase Contract with respect to the Bonds by and between the Institution and the underwriters of the Bonds.
“Qualified Financial Institution” means a financial institution that is a domestic corporation, a bank, a trust company, a national banking association, a corporation subject to registration with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956 or any successor provisions of law, a federal branch pursuant to the International Banking Act of 1978 or any successor provisions of law, a foreign bank acting through a domestic branch or agency which branch or agency is duly licensed or authorized to do business under the laws of any state or territory of the United States of America, a savings bank, a savings and loan association, or an insurance company or association chartered or organized under the laws of any state of the United States of America; provided that for each such entity its unsecured or uncollateralized long-term debt obligations, or obligations secured or supported by a letter of credit, contract, guarantee, agreement or surety bond issued by any such organization, directly or by virtue of a guarantee of a corporate parent thereof have been assigned a long-term credit rating by any two Rating Agencies which is not lower than the two highest ratings (with respect to a foreign bank, the highest rating category) then assigned (i.e., at the time an Investment Agreement or Repurchase Agreement is entered into) by such rating service without qualification by symbols “+” or “-“ or a numerical notation.
“Qualified Investments” means the obligations described below:
A. Direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury) or obligations the timely payment of principal of and interest on which are unconditionally guaranteed by the United States of America.
B. Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies, provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself; mortgage pass-through securities, mortgage-backed securities pools, collateralized mortgage obligations and all mortgage derivative securities trusts shall not constitute Qualified Investments):
(1) Direct obligations of or fully guaranteed certificates of beneficial ownership of the Export Import Bank of the United States;
(2) Federal Financing Bank;
(3) Participation certificates of the General Services Administration;
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(4) Guaranteed mortgage-backed bonds and guaranteed pass-through obligations of the Government National Mortgage Association; and
(5) Project Notes, Local Housing Authority Bonds, New Communities Debentures and U.S. public housing notes and bonds fully guaranteed by the U.S. Department of Housing and Urban Development.
C. Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies, provided such agency is rated “AAA” at the time of purchase by at least two Rating Agencies (stripped securities are only permitted if they have been stripped by the agency itself):
(1) Federal Home Loan Bank System senior debt obligations;
(2) Participation Certificates and senior debt obligations of the Federal Home Loan Mortgage Corporation;
(3) Mortgage-backed securities and senior debt obligations of the Federal National Mortgage Association; and
(4) Consolidated system wide bonds and notes of the Farm Credit System Corporation.
D. Money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating of “AAAm” or equivalent by at least two Rating Agencies.
E. Certificates of deposit secured at all times by collateral described in (A) and/or (B) above, issued by commercial banks, savings and loan associations or mutual savings banks where the collateral is held by a third party and the Trustee has a perfected first security interest in the collateral.
F. Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by the FDIC.
G. Unsecured Investment Agreements; any Investment Agreement with a term greater than three (3) years must be with an issuer rated “AA” by at least two Rating Agencies unless a lower rating is consented to by the Institution.
In the event the counterparty is downgraded below either AA- or Aa3 by Standard & Poor’s or Moody’s, respectively, or equivalent by a Rating Agency:
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i. The agreement will be transferred to an acceptable institution that meets the ratings requirement described above, or
ii. Collateral consisting of securities outlined in (A) or (B) above shall be posted that has a value equal to at least 104% of the principal plus accrued interest, or collateral consisting of securities outlined in (C) above shall be posted that has a value equal to at least 105% of the principal plus accrued interest, or
iii. The agreement must be converted into a Repurchase Agreement (See clause (L) below), or
iv. The agreement shall terminate at par plus accrued interest within ten (10) business days should (i), (ii) or (iii) above not be accomplished.
H. Collateralized Investment Agreements with providers rated at least “A-” and “A3” by Standard & Poor’s and Moody’s, respectively, or equivalent by at least two Rating Agencies, provided that (i) the same collateral requirements as outlined in (G)(ii) are followed and (ii) if the provider is downgraded below “A-” and “A3”, or equivalent by at least two Rating Agencies, the agreement shall terminate at par plus accrued interest.
I. Commercial paper rated “Prime-1” by Moody’s and “A-1+” by Standard & Poor’s, or equivalent by at least two Rating Agencies, and which matures no more than 270 days from the date of purchase and subject to the following limitations:
a. Only United States issuers of corporate (issued to provide working capital funding) commercial paper including United States issuers with a foreign parent; and
b. Limited-purpose trusts, structured investment vehicles, asset- backed commercial paper conduits, and any other type of specialty finance company, whose purpose is generally limited to acquiring and funding a defined pool of assets that are used to repay obligations, shall not constitute Qualified Investments.
J. Bonds or notes issued by any state or municipality which are rated by any two Rating Agencies in one of the two highest long-term rating categories assigned by such agencies (without qualification by symbols “+” or “-” or a numerical notation).
K. Federal funds or bankers’ acceptances, with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of “Prime-1” by Moody’s and “A-1” by Standard & Poor’s, or equivalent by at least two Rating Agencies.
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L. Repurchase Agreements.
M. Forward delivery agreements with providers rated at least “A-” and “A3” by Standard & Poor’s and Moody’s, respectively, or equivalent by at least two Rating Agencies, provided that (i) permitted deliverables are limited to securities described in (A), (B) and (C) above and (ii) if the provider is downgraded below “A-” or “A3”, or equivalent by a Rating Agency, the agreement shall terminate at par plus accrued interest.
“Rating Agency” means Standard & Poor’s, Moody’s, Fitch or any other similar nationally-recognized securities rating agency acceptable to the Institution and maintaining a credit rating with respect to the Bonds. Except as otherwise provided herein, if more than one Rating Agency maintains a credit rating with respect to the Bonds, then any action, approval or consent by or notice to a Rating Agency shall be effective only if such action, approval, consent or notice is given by or to all such Rating Agencies.
“Rating Category” means one of the generic rating categories of a Rating Agency, without regard to any refinement or gradation of such rating category by a numerical modifier, plus or minus sign, or otherwise.
“Record Date” means the fifteenth day of each June and December.
“Redemption Fund” means the fund for the Bonds so designated, created and established pursuant to Section 5.1 of this Indenture.
“Redemption Price” when used with respect to a Bond, means the principal amount of the Bonds to be redeemed pursuant to this Indenture, plus the applicable premium, if any, payable upon redemption, or the Make-Whole Redemption Price, if any, payable upon optional redemption of the Bonds pursuant to this Indenture, as applicable.
“Reference Treasury Dealer” means each of four firms, as designated by the Institution, and their respective successors; provided, however, that if any of them ceases to be a primary U.S. Government securities dealer in the City of New York (a “Primary Treasury Dealer”), the Institution will substitute therefore another Primary 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.
“Repurchase Agreement” means a written repurchase agreement entered into with a Qualified Financial Institution, a bank acting as a securities dealer or a securities dealer which is listed by the Federal Reserve Bank of New York as a “Primary Dealer” and rated “AA” or “Aa2” or better by at least two Rating Agencies, under which securities are transferred from a dealer bank or securities firm for cash with an agreement that the dealer bank or securities firm will repay the cash plus a yield in exchange for the securities on a specified date and under which
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(i) the Institution is the real party in interest and has the right to proceed against the obligor on the underlying obligations which must be obligations of, or guaranteed by, the United States of America; (ii) the term of which shall not exceed one hundred eighty (180) days, unless the Institution shall consent to a longer period; (iii) the collateral must be delivered to the Institution, the Trustee (if the Trustee is not supplying the collateral) or a third party acting as agent for the Trustee (if the Trustee is supplying the collateral) prior to or simultaneous with investment of moneys therein; (iv) such collateral is held free and clear of any lien by the Trustee or an independent third party acceptable by the Institution, acting solely as agent for the Trustee; and (v) the collateral shall be valued weekly, marked to market at current market prices plus accrued interest; provided that at all times the value of the collateral must at least equal the required percentage of the amount invested in the Repurchase Agreement. If the value of such collateral is less than the amount specified, the Qualified Financial Institution or Primary Dealer must invest additional cash or securities such that the collateral value of the amount invested thereafter at least equals as follows: (a) if collateralized by securities described in clause (A) or (B) of the definition of Qualified Investments, at least 104%, or (b) if collateralized by securities described in clause (C) of the definition of Qualified Investments, at least 105%.
“Revenues” means all amounts paid or payable to the Trustee for the account of the Institution (excluding fees and expenses payable to the Trustee and the rights to indemnification of the Trustee) under and pursuant to this Indenture and the Note, and as may be further described in a Supplemental Indenture.
“Securities Depository” means the securities depository designated as such in Section 2.7 of this Indenture and any successor thereto.
“Securities Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Series 2018 Bonds” means the Institution’s Taxable Bonds, Series 2018, dated April __, 2018 and any Additional Bonds that are consolidated with such Series 2018 Bonds as set forth in Section 6.4 hereof.
“Standard & Poor’s” means S&P Global Ratings, a business of Standard & Poor’s Financial Services, LLC, a corporation organized and existing under the laws of the State of New York, its successors and assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, “Standard & Poor’s” shall be deemed to refer to any other nationally recognized securities rating agency designated by the Institution, by notice to the Trustee.
“State” means the State of New Jersey.
“Supplemental Indenture” means any indenture of the Institution authorizing the issuance of Additional Bonds or modifying, altering, amending, supplementing or confirming this Indenture for any purpose, in accordance with the terms thereof.
“Supplemental Master Indenture” means the Third Supplemental Indenture to the Master Indenture, dated as of April 1, 2018, by and among the Institution, on behalf of itself
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and any future Members of the Obligated Group, and the Master Trustee, and when amended or supplemented, such Supplemental Master Indenture, as amended or supplemented.
“Treasury Rate” means, with respect to any redemption date, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue with respect thereto, computed as of the second Business Day immediately preceding that redemption date, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price with respect thereto for that redemption date.
“Trustee” means The Bank of New York Mellon and its successor or successors and any other entity which may at any time be substituted in its place pursuant to this Indenture.
SECTION 1.2. INDENTURE, ANY SUPPLEMENTAL INDENTURE AND BONDS CONSTITUTE A CONTRACT. In consideration of the purchase and acceptance of any and all of the Bonds secured and issued under this Indenture: (i) this Indenture shall be deemed to be and shall constitute a contract among the Institution, the Trustee and the Owners from time to time of such Bonds; (ii) the pledge made herein and the covenants and agreements set forth to be performed by or on behalf of the Institution shall be for the equal and ratable benefit, protection and security of the Owners from time to time of any and all of such Bonds, all of which, regardless of the time or times of their issue or maturity, shall be of equal rank without preference, priority or distinction of any of such Bonds over any other thereof except as expressly provided in or permitted hereby or by the applicable Supplemental Indenture, if any; (iii) the Institution does hereby pledge and assign to the Trustee, for the benefit of the Owners of the Bonds, the trust estate, the Revenues and all moneys and securities from time to time held by the Trustee and the Institution in any of the funds and accounts established under the terms of this Indenture, and all income and receipts earned thereon, subject to the terms and provisions of this Indenture; (iv) the pledge made hereby shall be valid and binding from the time when the pledge is made and the Revenues and all income and receipts earned on funds held by the Trustee and the Institution hereunder and any further pledge of property under the applicable Supplemental Indenture, if any, shall immediately be subject to the lien of such pledge without any physical delivery thereof or further act, and the lien of such pledge shall be valid and binding as against all parties having claims of any kind in tort, contract or otherwise against the Institution irrespective of whether such parties have notice thereof; and (v) the Bonds shall be general obligations of the Institution secured by a pledge of Revenues and certain moneys and funds as provided hereby and by the applicable Supplemental Indenture, if any.
All Bonds issued hereunder and at any time Outstanding shall in all respects be equally and ratably secured hereby, 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 hereunder shall have the same right, lien, and preference hereunder, and shall all be equally and ratably secured hereby. The Bonds shall constitute general obligations of the Institution. In addition, the Series 2018 Bonds are secured by the Note issued by the Institution and the other Members of the Obligated Group to the Trustee.
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This Indenture is a general obligation of the Institution and the obligations of the Institution to make payments pursuant hereto and pursuant to the Bonds and to perform and observe all agreements on its part contained herein shall be absolute and unconditional. Until this Indenture is terminated or payment in full of all Bonds is made or is provided for in accordance with this Indenture, the Institution (i) will not suspend or discontinue any payments hereunder or neglect to perform any of its duties required hereunder; (ii) will perform and observe all of its obligations set forth in this Indenture; and (iii) except as provided herein, will not terminate this 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; or 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 State.
SECTION 1.3. SECURITY FOR BONDS. The Institution agrees that the principal and Redemption Price of and the interest on the Series 2018 Bonds shall be payable in accordance with this Indenture, and shall be secured by the Note.
ARTICLE II
AUTHORIZATION AND DETAILS OF BONDS
SECTION 2.1. INSTITUTION COVENANTS AND REPRESENTATIONS.
(a) 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 herein. Notwithstanding any schedule of payments to be made on the Bonds set forth therein or herein, 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 this 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 hereunder by the Institution, except as otherwise expressly provided herein, shall be paid to the 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 hereunder.
(b) The Institution represents that it is validly existing as a nonprofit corporation under the laws of the State, it has full legal right, power and authority to enter into this Indenture, and to carry out and consummate all transactions contemplated hereby, and it has, by proper action, duly authorized the execution and delivery of this Indenture, the Purchase Contract, the other Institution Documents, and the Bonds.
(c) The Institution represents that the execution and delivery of this Indenture, the Purchase Contract, the other Institution Documents, the Bonds, and the consummation of the transactions herein and therein contemplated, including the application of the proceeds of the Bonds as so contemplated, will not conflict with, or constitute a breach of, or default by it under its charter, its by-laws, or any statute, indenture, mortgage, deed of trust, lease, note, indenture or
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other agreement or instrument to which it is a party or by which it or its properties are bound, and will not constitute a violation of any order, rule or regulation of any court or governmental agency or body having jurisdiction over it or any of its activities or properties. Additionally, the institution is not in breach, default or violation of any statute, indenture, mortgage, deed of trust, note, indenture or other agreement or instrument which would allow the obligee or obligees thereof to take any action which would preclude performance of this Indenture, the Purchase Contract, the other Institution Documents, or the Bonds by the Institution.
(d) Except as may be reflected in the Offering Memorandum of the Institution distributed in connection with the Bonds, the Institution represents that there are no actions, suits or proceedings of any type whatsoever pending or, to its knowledge, threatened against or affecting it or its assets, properties or operations which, if determined adversely to it or its interests, could have a material adverse effect upon its financial condition, assets, properties or operations and it is not in default with respect to any order or decree of any court or any order, regulation or decree of any federal, state, municipal or governmental agency, which default would materially and adversely affect its financial condition, assets, properties or operations, or the financing for the Identified Purposes.
(e) The Institution represents that: (i) it is an organization described in Section 501(c)(3) of the Code, or corresponding provisions of prior law and that it is not a “private foundation” as defined in the Code; (ii) it has received a letter or letters from the Internal Revenue Service to such effect; (iii) such letter or letters have not been modified, limited or revoked; (iv) it is in compliance with all terms, conditions and limitations, if any, contained in such letter; (v) the facts and circumstances which formed the basis of such letter as represented to the Internal Revenue Service continue to substantially exist; and (vi) it is exempt from Federal income taxes under Section 501(a) of the Code. The Institution covenants that: (i) it shall not perform any acts nor enter into any agreements which shall cause any revocation or adverse modification of its status as an organization exempt from Federal income taxes pursuant to Section 501(a) of the Code; and (ii) it shall not carry on or permit to be carried on any trade or business the conduct of which is not substantially related to the exercise or performance by the Institution of the purposes or functions constituting the basis for its exemption under Section 501 of the Code if such use would result in the loss of the Institution’s exempt status under Section 501 of the Code. The Institution represents and covenants that proceeds of the Bonds will be used in furtherance of the Institution’s “exempt purpose” as defined in Section 501(c)(3) of the Code. The Institution represents that it has not impaired its status as an exempt organization and will not, while any of the Bonds remain Outstanding, impair its status as an exempt organization.
(f) The Institution represents that it is an organization organized and operated: (i) exclusively for educational or charitable purposes; (ii) not for pecuniary profit; and (iii) no part of the net earnings of which inures to the benefit of any person, private stockholder or individual, all within the meaning, respectively, of the Securities Act of 1933, as amended, and of the Securities Exchange Act of 1934, as amended.
(g) The Institution represents that neither any information, exhibit or report furnished to the underwriters by the Institution in connection with the negotiation of this Indenture, the other Institution Documents, or the Purchase Contract, nor any of the foregoing
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representations contains any untrue statement of a material fact, or when taken as a whole with the Preliminary Offering Memorandum or the Offering Memorandum, as applicable, omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(h) The Institution represents that it is in compliance in all material respects with, and covenants that it will comply in all material respects with, all federal, state and local laws, regulations and ordinances relating to its business, including, but not limited to, the Employee Retirement Income Security Act of 1974, as amended, and all applicable laws and regulations relating to nondiscrimination in employment and employment opportunities, except in each case for violations the effect of which, individually and collectively, would not have a material adverse effect upon the financial condition, assets, properties or operations of the Institution.
(i) The Institution agrees that it will pay all expenses, including reasonable attorneys’ fees and expenses, incurred by the Trustee in connection with (i) any amendment, modification or waiver of the provisions of the Institution Documents, (ii) any merger, consolidation or transfer of assets by the Institution, or any person related to it within the meaning of section 147(a)(2) of the Code, or (iii) in connection with the enforcement by the Trustee of the rights of the Trustee under any of the Institution Documents.
(j) The Institution shall notify the Trustee promptly of any condition, event, action or failure to take any action which constitutes or would constitute, with notice or the passage of time, an Event of Default.
(k) The Institution, subject to the satisfaction of the applicable provisions of the Master Indenture, reserves the right to issue additional Indebtedness and, subject to the satisfaction of the applicable provisions of the Master Indenture, to pledge its Gross Receipts to secure additional Indebtedness on a parity with or subordinate to the Note or any other Indebtedness of the Institution.
SECTION 2.2. BONDS AUTHORIZED. The Institution has heretofore authorized the issuance of $300,000,000 aggregate principal amount of “Hackensack Meridian Health Taxable Bonds, Series 2018” so as to provide moneys to finance the Identified Purposes and to pay Costs of Issuance of the Series 2018 Bonds and for the general corporate purposes as designated by the Institution to be expended solely in furtherance of the “exempt purpose” (as defined in Section 501(c)(3) of the Code) of the Institution and the other Members of the Obligated Group. Nothing contained herein shall be deemed to preclude or restrict the consolidation of any Additional Bonds issued pursuant hereto with the Institution’s Taxable Bonds, Series 2018 theretofore issued or restrict the issuance of one or more series of Additional Bonds; provided, however, that each of the conditions and other requirements contained herein for the authorization and issuance of Additional Bonds shall be met and complied with. The Additional Bonds consolidated with the Institution’s Taxable Bonds, Series 2018 shall be treated as a single series of Bonds for all purposes hereof. The aggregate principal amount of Bonds that may be issued and Outstanding under this Indenture is not limited. This Indenture constitutes a continuing agreement with the Holders from time to time of the Bonds to secure the full payment
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of the principal or Make-Whole Redemption Price of and interest on all such Bonds subject to the covenants, provisions and conditions contained herein and in the Bonds.
Upon the execution and delivery hereof, the Institution shall execute the Bonds and deliver them to the Trustee for authentication. At the direction of the Institution, the Trustee shall authenticate the Bonds and deliver them to the purchasers thereof.
SECTION 2.3. DATE, MATURITY AND INTEREST RATE OF THE SERIES 2018 BONDS. The Series 2018 Bonds shall be dated their date of issuance and delivery and shall mature on the Maturity Date. The Series 2018 Bonds shall be issued in fully registered form as herein provided, and shall be payable as to interest on each Interest Payment Date in each year during the term of the Bonds. Interest payments on the Series 2018 Bonds shall be on each January 1 and July 1, commencing January 1, 2019. Interest on the Series 2018 Bonds shall be calculated based on a 360-day year of twelve thirty-day months. The Series 2018 Bonds shall be dated and bear interest from their date of delivery, except with respect to Series 2018 Bonds authenticated and delivered on and after the first Interest Payment Date, which Bonds shall bear interest (i) as of the Interest Payment Date next preceding the date of their authentication or as of the date of their authentication if authenticated on an Interest Payment Date, or (ii) if on the date of their authentication payment of interest thereon is in default, as of the date to which interest has been paid. Interest on all Series 2018 Bonds initially delivered shall accrue from their date of delivery. Thereafter, interest on all Series 2018 Bonds shall accrue from the dated date or from the most recent Interest Payment Date to which interest has been paid.
The Series 2018 Bonds shall bear interest from their date at a rate of interest equal to __% per annum as aforesaid and shall mature on their Maturity Date, being July 1, 2048.
The Bonds are not registered under the Securities Act of 1933, as amended, in reliance upon the exemption from registration set forth in Section 3(a)(4) of the Securities Act of 1933, as amended.
SECTION 2.4. DENOMINATION, NUMBERS AND LETTERS. The Bonds shall be issued in fully registered form in any Authorized Denomination. Unless the Institution shall otherwise direct, the Bonds shall be numbered separately from one upward preceded by the letter “R” prefixed to the number.
SECTION 2.5. OPTIONAL REDEMPTION OF BONDS. The Series 2018 Bonds are subject to optional redemption by the Institution prior to maturity, in whole or in part, at any time, (i) prior to January 1, 2048, at a Redemption Price equal to the Make-Whole Redemption Price, and (ii) on or after January 1, 2048, at a Redemption Price equal to the principal amount of the Bonds to be redeemed, in either case plus accrued interest thereon to the date set for redemption. The Series 2018 Bonds are not subject to mandatory sinking fund redemption.
So long as all of the Bonds Outstanding are held in book-entry form, if less than all of the Bonds are to be so redeemed, the portions thereof to be so redeemed shall be selected by the DTC in such manner of selection as determined by DTC. If the Bonds Outstanding are
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not held in book-entry form, whenever provision is made in this Indenture for the redemption of less than all of the Bonds, the Trustee shall select the portions of the Bonds to be redeemed from all Bonds subject to redemption or such given portion thereof not previously called for redemption, on a pro-rata basis, based on the portion of the original principal amount of any such Bonds to be redeemed.
If the Bonds are registered in book-entry form and for 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 prior redemption, the portions thereof to be redeemed shall be selected 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 portions of the Bonds shall be made in accordance with the operational arrangements of DTC then in effect.
For purposes of calculation of the pro-rata pass-through distribution of principal, “pro-rata” means, for any amount of principal to be paid, the application of a fraction to the Bonds where (a) the numerator is equal to the amount due to the respective Bondowners on a payment date, and (b) the denominator is equal to the total original par amount of the Bonds.
It is the Institution’s intent that all partial redemption allocations made by DTC be made on a pro rata pass-through distribution of principal basis as described above. However, neither the Institution nor the Trustee can provide any assurance that DTC, DTC’s direct and indirect participants or any other intermediary will allocate the partial redemption of Bonds on such basis. If DTC operational arrangements do not allow for the redemption of the Bonds on 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.
Redemption of the Bonds, in addition to the provisions set forth hereinabove, shall be effected in accordance with Article IV of this Indenture.
The Institution may provide prior written direction to the Trustee, together with available funds, to purchase, or cause to be purchased, Bonds for which optional redemption has been established at prices which have been identified by the Institution and delivery of binding purchase contracts therefor (not including brokerage and other charges) not exceeding the Redemption Price for such Bonds when such Bonds are redeemable by application of the applicable redemption provision, plus accrued interest to the date of purchase. Upon purchase of such Bonds under the provisions of this subsection, such Bonds shall be canceled and no longer considered to be Outstanding.
SECTION 2.6. [RESERVED.]
SECTION 2.7. DEPOSITORY TRUST COMPANY REGISTRATION OF BONDS. (a) The Bonds shall be issued initially in book-entry form. DTC shall serve, subject to this Section, as the securities depository for the Bonds, and the ownership of one fully registered Bond for each maturity of the Bonds shall be registered in the name of Cede & Co. (“Cede”), as nominee of DTC.
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(b) With respect to Bonds so registered in the name of Cede, the Institution and the Trustee shall have no responsibility or obligation to any DTC participant or to any beneficial owner of such Bonds. Without limiting the immediately preceding sentence, the Institution and the Trustee shall have no responsibility or obligation with respect to (i) the accuracy of the records of DTC, Cede or any DTC participant with respect to any beneficial ownership interest in the Bonds, (ii) the delivery to any DTC participant, beneficial owner or other person, other than DTC, of any notice with respect to the Bonds, including any notice of redemption, or (iii) the payment to any DTC participant, beneficial owner or other person, other than DTC, of any amount with respect to the principal or Redemption Price of, or interest on, the Bonds. The Institution and the Trustee may treat DTC as, and deem DTC to be, the absolute owner of each Bond for all purposes whatsoever, including (but not limited to) (i) payment of the principal or Redemption Price of, and interest on, each such Bond, (ii) giving notices of redemption and other matters with respect to such Bonds, and (iii) registering transfers with respect to such Bonds. The Trustee shall pay the principal or Redemption Price of, and interest on, all Bonds only to or upon the order of DTC, and all such payments shall be valid and effective to fully satisfy and discharge the Institution’s obligations with respect to such principal or Redemption Price, and interest, to the extent of the sum or sums so paid. No person other than DTC shall receive a Bond evidencing the obligation of the Institution to make payments of principal or Redemption Price of, and interest on, the Bonds pursuant to this Indenture. Upon delivery by DTC to the Trustee of written notice to the effect that DTC has determined to substitute a new nominee in place of Cede, and subject to the transfer provisions hereof, the word “Cede” in this Indenture shall refer to such new nominee of DTC.
(c) (1) DTC may determine to discontinue providing its services with respect to the Bonds at any time by giving written notice to the Institution and the Trustee and discharging its responsibilities with respect thereto under applicable law.
(2) 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 the continuation of the system of book-entry-only transfers through DTC (or a successor securities depository) is not in the best interests of the beneficial owners of the Bonds or is burdensome to the Institution.
(3) Upon the termination of the services of DTC with respect to the Bonds pursuant to this subsection, after which no substitute securities depository willing to undertake the functions of DTC hereunder can be found which, in the opinion of the Institution, is willing and able to undertake such functions upon reasonable and customary terms, the Bonds shall no longer be restricted to being registered in the registration books kept by the Trustee in the name of Cede as nominee of DTC. In such event, the Institution shall issue and the Trustee shall transfer and exchange Bond certificates as requested by DTC or DTC participants of like principal amount, series, maturity and interest rate, in Authorized Denominations, without references to DTC or other book-entry provisions, to the identifiable beneficial owners in replacement of such beneficial owners’ beneficial interests in the Bonds.
(4) Anything in this Indenture to the contrary notwithstanding, payment of the Redemption Price of a Bond, or portion thereof, called for redemption prior to maturity may be paid to DTC by check mailed to DTC or by wire transfer. Anything in this Indenture to the
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contrary notwithstanding, such Redemption Price may be paid without presentation and surrender to the Trustee of the Bond, or portion thereof, called for redemption; provided, however, that payment of (a) the principal payable at maturity of a Bond and (b) the Redemption Price of a Bond as to which the entire principal amount thereof has been called for redemption shall be payable only upon presentation and surrender of such Bond to the Trustee; and provided, further, that no such Redemption Price shall be so payable without presentation and surrender unless such Bond shall contain or have endorsed thereon a legend to the following effect:
“AS PROVIDED IN THE INDENTURE REFERRED TO HEREIN, UNTIL THE TERMINATION OF THE SYSTEM OF BOOK-ENTRY-ONLY TRANSFERS THROUGH THE DEPOSITORY TRUST COMPANY (TOGETHER WITH ANY SUCCESSOR SECURITIES DEPOSITORY APPOINTED PURSUANT TO THE INDENTURE, “DTC”), AND NOTWITHSTANDING ANY OTHER PROVISION OF THE INDENTURE TO THE CONTRARY, A PORTION OF THE PRINCIPAL AMOUNT OF THIS BOND MAY BE PAID OR REDEEMED WITHOUT SURRENDER HEREOF TO THE TRUSTEE. DTC OR A NOMINEE, TRANSFEREE OR ASSIGNEE OF DTC AS OWNER OF THIS BOND MAY NOT RELY UPON THE PRINCIPAL AMOUNT INDICATED HEREON AS THE PRINCIPAL AMOUNT HEREOF OUTSTANDING AND UNPAID. THE PRINCIPAL AMOUNT HEREOF OUTSTANDING AND UNPAID SHALL FOR ALL PURPOSES BE THE AMOUNT DETERMINED IN THE MANNER PROVIDED IN THE INDENTURE.
UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED OFFICER OF DTC (A) TO THE TRUSTEE FOR REGISTRATION OF TRANSFER OR EXCHANGE OR (B) TO THE TRUSTEE FOR PAYMENT OF PRINCIPAL, AND ANY BOND ISSUED IN REPLACEMENT THEREOF OR SUBSTITUTION THEREFOR IS REGISTERED IN THE NAME OF DTC OR ITS NOMINEE CEDE & CO., OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC AND ANY PAYMENT IS MADE TO DTC, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, DTC OR ITS NOMINEE, CEDE & CO., HAS AN INTEREST HEREIN.”
(5) Anything in this Indenture to the contrary notwithstanding, upon any such payment to DTC without presentation and surrender, for all purposes of (i) the Bond as to which such payment has been made and (ii) this Indenture, the unpaid principal amount of such Bond Outstanding shall automatically be reduced by the principal amount so paid. In such event, the Trustee shall note the particular Bond as to which such payment has been made, and the principal amount of such Bond so paid, on the registration books of the Institution maintained by it, but failure to make any such notation shall not affect the automatic reduction of the principal amount of such Bond Outstanding as provided in this subsection.
(6) For all purposes of this Indenture authorizing or permitting the purchase of Bonds by, or for the account of, the Institution for cancellation, and anything in this Indenture to
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the contrary notwithstanding, a portion of a Bond may be deemed to have been purchased and cancelled without surrender thereof upon delivery to the Trustee of a certificate executed by the Institution and a participant of DTC therefor, agreed to and accepted by DTC in writing, to the effect that a beneficial ownership interest in such Bond, in the principal amount stated therein, has been purchased by, or for the account of, the Institution through the participant of DTC executing such certificate; provided, however, that any purchase for cancellation of the entire principal amount of a Bond shall be effective for purposes of this Indenture only upon surrender of such Bond to the Trustee; and provided, further, that no portion of a Bond may be deemed to have been so purchased and cancelled without surrender thereof unless such Bond shall contain or have endorsed thereon the legend referred to in subsection (c)(4) above. Anything in this Indenture to the contrary notwithstanding, upon delivery of any such certificate to the Trustee, for all purposes of (i) the Bond to which such certificate relates and (ii) this Indenture, the unpaid principal amount of such Bond Outstanding shall automatically be reduced by the principal amount so purchased. In such event, the Trustee shall note such reduction on the registration books of the Institution maintained by it, but failure to make any such notation shall not affect the automatic reduction of the principal amount of such Bond Outstanding as provided in this subsection.
(7) Anything in this Indenture to the contrary notwithstanding, DTC may make a notation on a Bond (i) redeemed in part or (ii) purchased by, or for the account of, the Institution in part for cancellation, to reflect, for informational purposes only, the date of such redemption or purchase and the principal amount thereof redeemed or cancelled, but failure to make any such notation shall not affect the automatic reduction of the principal amount of such Bond Outstanding as provided in subsection (c)(4), (c)(5) or (c)(6) of this Section, as the case may be.
(8) The procedures described in this Section may be supplemented or modified pursuant to a letter of representation or other agreement in writing among DTC, the Institution and the Trustee to effect the purposes of a book-entry system of bond certificates.
SECTION 2.8. FORM OF BONDS AND TRUSTEE’S AUTHENTICATION CERTIFICATE. Subject to the provisions of this Indenture, the form of the Bonds and the Trustee’s certificate of authentication shall be of substantially the form of bond in Attachment A with such changes as are required hereby.
ARTICLE III
PARTICULARS FOR ALL BONDS
SECTION 3.1. MEDIUM OF PAYMENT OF BONDS. The Bonds shall be payable as to principal and Redemption Price, if any, and interest thereon in lawful money of the United States of America. Payment of the interest on the Bonds shall be made to the person appearing on the registration books of the Institution provided for herein as the Bondowner thereof on the Record Date, by wire or by check or draft mailed by the Trustee to the Bondowner at the address of such Bondowner as shown on such registration books of the Institution, kept by the Trustee unless an alternate method of payment is agreed to by the Trustee and the Bondowner, subject to the approval of the Institution, which approval shall not be unreasonably
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withheld, conditioned or delayed. The principal or Redemption Price of Bonds shall be paid to the Bondowner upon presentation and surrender of the Bonds at the Corporate Trust Office of the Trustee or in the manner provided in any Supplemental Indenture.
SECTION 3.2. LEGENDS. The Bonds may contain, or have endorsed thereon, such provisions, specifications and descriptive words not inconsistent with the provisions authorizing the issuance thereof, as may be necessary or desirable and as may be determined by the Institution prior to their authentication and delivery.
SECTION 3.3. EXECUTION AND AUTHENTICATION. The Bonds shall be executed in the name and on behalf of the Institution by the manual or facsimile signature of an Authorized Officer of the Institution. In case any officer whose signature appears on such Bonds shall cease to be such officer before delivery of such Bonds, such signature shall, nevertheless, be valid and sufficient for all purposes as if he had remained in office until such delivery. The Bonds when so executed shall be delivered to the Trustee for manual authentication by it, and the Trustee shall, upon written order of the Institution, signed by an Authorized Officer thereof, authenticate and deliver such Bonds as herein provided and not otherwise.
No Bond shall be valid or obligatory for any purpose or shall be entitled to any right or benefit hereunder unless there shall be endorsed on such Bond a certificate of authentication in the form set forth in Attachment A, duly executed by the Trustee, and such certificate of the Trustee, upon any Bond executed on behalf of the Institution, shall be conclusive evidence and the only evidence required that the Bonds so authenticated have been duly issued hereunder and that the owner thereof is entitled to the benefit of this Indenture. The certificate of the Trustee may be executed by any Authorized Officer of the Trustee.
SECTION 3.4. REGISTRATION AND TRANSFER OF BONDS. The Bonds shall be registered as to both principal and interest.
The Institution shall cause to be prepared books for registration of the Bonds, which registration books shall be kept by the Trustee which is hereby designated as the registrar for the purpose of registering the Bonds. The Trustee shall also act as transfer agent for the Bonds.
So long as any of the Bonds shall remain Outstanding, the Trustee shall maintain and keep, at the Corporate Trust Office, books for the registration and transfer of such Bonds; and, upon presentation thereof for such purpose at such office, the Trustee shall register or cause to be registered, and permit to be transferred, under such reasonable regulations as the Trustee may prescribe, any Bond entitled to registration or transfer. So long as any of the Bonds remain Outstanding, the Trustee shall make all necessary provisions to permit the exchange of such Bonds at the Corporate Trust Office.
Each Bond shall be transferable only upon the books of the Institution which shall be kept for that purpose at the Corporate Trust Office of the Trustee, at the written request of the Bondowner thereof or such Bondowner’s attorney duly authorized in writing, upon surrender thereof at such office, together with a written instrument of transfer satisfactory to the Trustee
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and such other documents as shall be reasonably required by the Trustee duly executed by the Bondowner or his duly authorized attorney. Upon the transfer of any such Bond or Bonds, the Trustee shall issue in the name of the transferee, in Authorized Denominations, a new Bond or Bonds, of the same aggregate principal amount, maturity and interest rate as the surrendered Bond or Bonds.
The Institution and the Trustee may deem and treat the Bondowner of any Bond as the absolute owner of such Bond, whether such Bond shall be overdue or not, for the purpose of receiving payment of, or on account of, the principal of and premium, if any, and interest on such Bond and for all other purposes, and all such payments so made to any such Bondowner or upon such Bondowner’s order shall be valid and effectual to satisfy and discharge the liability upon such Bond to the extent of the sum or sums so paid, and neither the Institution nor the Trustee shall be affected by any notice to the contrary.
In all cases in which the privilege of exchanging or transferring is exercised, the Trustee shall authenticate and deliver Bonds in accordance with the provisions of this Indenture. All Bonds surrendered in any such exchanges or transfers shall forthwith be cancelled by the Trustee. For every such exchange or transfer of Bonds, whether temporary or definitive, the Institution or the Trustee may make a charge sufficient to reimburse it for any tax, fee or other governmental charge required to be paid with respect to such exchange or transfer, which sum or sums shall be paid by the person requesting such exchange or transfer as a condition precedent to the exercise of the privilege of making such exchange or transfer. The Trustee shall not be obliged to make any such exchange or transfer of Bonds, during the period from each Record Date to the following Interest Payment Date or, in the case of a proposed redemption of Bonds if such Bonds are eligible to be selected or have been selected for redemption, during the forty-five (45) days next preceding the date fixed for such redemption.
SECTION 3.5. BONDS MUTILATED, DESTROYED, LOST OR STOLEN. In case any Bond shall become mutilated or be destroyed, lost or stolen, upon request, the Trustee shall authenticate and deliver a new Bond in exchange for the mutilated Bond or in lieu of and substitution for the Bond so destroyed, lost or stolen. In every case of exchange or substitution, the applicant shall furnish to the Institution and to the Trustee such security or indemnity as may be required by them to save each of them harmless from all risks, however remote, and the applicant shall also furnish to the Institution and to the Trustee evidence to their satisfaction of the mutilation, destruction, loss or theft of the applicant’s Bond and of the ownership thereof. The Trustee may authenticate any Bond issued upon such exchange or substitution and deliver the same upon the written request or authorization of an Authorized Officer of the Institution. Upon the issuance of any Bond upon such exchange or substitution, the Institution and the Trustee may require the payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto and any other expenses, including counsel fees and expenses, of the Institution or the Trustee. In case any Bond which has matured or is about to mature shall become mutilated or be destroyed, lost or stolen, the Institution may, instead of issuing a Bond in exchange or substitution therefor, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Bond) if the applicant for such payment shall furnish to the Institution and the Trustee such security or indemnity as they may require to save them harmless, and evidence to the satisfaction of the
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Institution and the Trustee of the mutilation, destruction, loss or theft of such Bond and of the ownership thereof.
Every Bond issued pursuant to the provisions of this Section in exchange or substitution for any Bond which is destroyed, lost or stolen shall constitute a contractual obligation of the Institution, whether or not the destroyed, lost or stolen Bond shall be found at any time, or be enforceable by anyone, and shall be entitled to all the benefits hereof equally and proportionately with any and all other Bonds duly issued under this Indenture. All Bonds shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Bonds, and shall preclude any and all rights or remedies, notwithstanding any law or statute (to the extent permitted under such law or statute) existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender.
SECTION 3.6. ADDITIONAL BONDS. Additional Bonds shall be authorized by a Supplemental Indenture. The Additional Bonds so authorized shall from time to time and in such amounts as directed by the Institution be authenticated by the Trustee and delivered to or upon the order of the Institution upon receipt of the consideration therefor. Each Supplemental Indenture authorizing the issuance of Bonds shall specify the following:
(a) The authorized principal amount of Additional Bonds to be issued;
(b) The purpose for which the Additional Bonds are to be issued;
(c) To the extent such Additional Bonds are consolidated with the Series 2018 Bonds, the first Interest Payment Date for the Additional Bonds and adjustments to the principal amounts, as necessary, for the Series 2018 Bonds, as consolidated;
(d) For Additional Bonds which are not consolidated with the Series 2018 Bonds, the Interest Payment Dates (including the first Interest Payment Date), principal payment date and the Maturity Dates for the Additional Bonds;
(e) Directions for the applications of the proceeds of the Additional Bonds;
(f) An Opinion of Counsel stating that the promissory note securing the Institution’s obligations related to such Bonds has satisfied each of the conditions to issuance of an Obligation under the Master Indenture; and
(g) Such other provisions as the Institution deems advisable.
ARTICLE IV
REDEMPTION OF BONDS
SECTION 4.1. AUTHORIZATION OF REDEMPTION. Bonds subject to redemption prior to maturity shall be redeemable, in accordance with this Article, at such times, at such Redemption Prices and upon such terms as specified in Article II. Additional Bonds shall
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be subject to such redemption provisions as are set forth in the Supplemental Indenture authorizing the issuance thereof.
SECTION 4.2. NOTICE OF REDEMPTION. When Bonds (or portions thereof) are to be redeemed, the Institution shall give or cause to be given notice of the redemption of the Bonds to the Trustee no later than forty-five (45) days prior to the redemption date. Thereafter, the Trustee shall give or cause to be given notice of the redemption of the Bonds (or portions thereof) in the name of the Institution which notice shall specify: (i) the Bonds to be redeemed in whole or in part; (ii) the redemption date and the Redemption Price; (iii) the numbers and other distinguishing marks, if any, of the Bonds to be redeemed (except in the event that all of the Outstanding Bonds are to be redeemed); (iv) that such Bonds will be redeemed at the Corporate Trust Office of the Trustee; and (v) any conditions applicable to such redemption. Such notice shall further state that on such date there shall become due and payable upon each Bond (or a portion thereof) to be redeemed the Redemption Price thereof, together with interest accrued to the redemption date, and that, from and after such date, interest thereon shall cease to accrue. Such notice shall be given, not more than forty-five (45) nor less than thirty (30) days prior to the redemption date, by the Trustee by mail, postage prepaid, or by Electronic Means to the Bondowners of any Bonds which are to be redeemed, at their addresses appearing on the registration books maintained by the Trustee. Any notice of optional redemption shall state that it is conditional and that the redemption of such Bonds is subject to there being on deposit with the Trustee on the redemption date funds sufficient to pay the Redemption Price of such Bonds. Notice having been given in accordance with the foregoing, failure to receive any such notice by any of such Bondowners or any defect therein, shall not affect the redemption or the validity of the proceedings for the redemption of the Bonds. Upon mailing such notice to Bondowners the Trustee shall submit a copy of the notice of such redemption to any securities depository in the event that the Bonds are registered in the name of a securities depository or its nominee. The Trustee shall also indicate on such notices, the contact person or persons and telephone number of the person or persons handling the redemption.
SECTION 4.3. PAYMENT OF REDEEMED BONDS. Notice having been given in the manner provided in Section 4.2 hereof, and the conditions for such redemption having been met, the Bonds (or portions thereof) so called for redemption shall become due and payable on the redemption date so designated at the Redemption Price, plus accrued interest to the redemption date, and upon presentation and surrender thereof at the office specified in such notice, such Bonds (or portions thereof) shall be paid at the Redemption Price, plus accrued interest to the redemption date; provided, however, that Bonds containing or having endorsed thereon a legend in accordance with Section 2.7(c) of this Indenture need not be presented or surrendered in the manner described in this Section. If, on the redemption date, moneys for the redemption of all Bonds (or portions thereof) to be redeemed, together with interest to the redemption date, shall be held by the Trustee so as to be available therefor on such date, and after notice of redemption shall have been given as aforesaid, then, from and after the redemption date, the Bonds (or portions thereof) so called for redemption shall cease to bear interest and such Bonds (or portions thereof) shall no longer be considered as Outstanding hereunder. If such moneys shall not be so available on the redemption date, such Bonds (or portions thereof) shall continue to bear interest until paid at the same rate as they would have borne had they not been
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called for redemption, and in the case of optional redemption, the Bonds shall continue to be due on their original maturity date as if the Bonds had not been called for redemption.
ARTICLE V
BOND PROCEEDS, FUNDS, ACCOUNTS, REVENUES AND APPLICATION AND DISBURSEMENT THEREOF
SECTION 5.1. ESTABLISHMENT OF FUNDS AND ACCOUNTS. The following funds and separate accounts within funds are hereby established, held and maintained by the Trustee pursuant to this Indenture:
Proceeds Fund Proceeds Account Cost of Issuance Account Debt Service Fund Interest Account Principal Account Redemption Fund Each Supplemental Indenture may contain provisions with respect to Funds and Accounts, and with respect to the Revenues and the application thereof, which are in addition to or in lieu of the provisions of this Article.
For accounting purposes only, the Funds and Accounts above may be further divided into subaccounts to facilitate, among other items, the disposition of Revenues.
SECTION 5.2. APPLICATION OF BOND PROCEEDS AND ALLOCATION THEREOF. (a) All moneys received by the Institution from the sale of the Bonds shall be simultaneously disbursed in such amounts and in such manner as directed in writing by an Authorized Officer of the Institution as set forth in the General Certificate of the Institution delivered on the date of issuance of the Bonds.
The proceeds of the sale of the Bonds shall be and constitute trust funds for the purposes hereinabove provided and there is hereby created a lien upon such moneys, until so applied, in favor of the Trustee for the benefit of the Owners of the Bonds. The Institution may transfer funds between the Cost of Issuance Account and the Proceeds Account.
The proceeds of any Additional Bonds shall be applied in accordance with the Supplemental Indenture authorizing the issuance thereof.
(b) The Trustee may for administrative purposes establish a fund hereunder to receive funds to be simultaneously transferred in accordance with this Section 5.2.
(c) Upon the Trustee’s receipt of a certificate from the Institution in accordance with Section 5.2(e), the Trustee shall pay from the Cost of Issuance Account to the firms, corporations or persons entitled thereto the Cost of Issuance relating to the issuance of such Bonds solely from moneys deposited in the Cost of Issuance Account. Any moneys
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remaining on hand in the Cost of Issuance Account upon payment of all Costs of Issuance shall be (i) paid to the Institution (or applied at the written direction of the Institution), or (ii) otherwise transferred to the Interest Account and/or the Principal Account as directed in writing by the Institution.
(d) Except as otherwise provided in this Article V or in any Supplemental Indenture, any moneys deposited in the Proceeds Account within the Proceeds Fund shall be used by the Institution only to pay the costs of or relating to the Identified Purposes to which this Indenture relates, including reimbursement to the Institution for such costs paid by the Institution in connection with the Identified Purposes; provided, however, that to the extent an Event of Default described in clause (a) or (b) of Section 8.1 hereof shall have occurred and be continuing and no other moneys are available under this Indenture to cure such Event of Default, moneys on deposit in the Proceeds Fund shall be applied in accordance with Section 8.4 hereof. Upon the Trustee’s receipt of a certificate from the Institution in accordance with Section 5.2(e), the Trustee shall pay from the Proceeds Account to the firms, corporations or persons entitled thereto the amounts set forth in said certificate.
(e) Payments pursuant to paragraph (c) of this Section shall be made in accordance with a certificate submitted to the Trustee by the Institution signed by an Authorized Officer of the Institution stating the names of the payees, the purpose of each payment in terms sufficient for identification and the respective amounts of each such payment. Payments pursuant to paragraph (d) of this Section shall be made in accordance with a certificate submitted to the Trustee by the Institution signed by an Authorized Officer of the Institution stating the purpose for which such moneys were used and the amount thereof. The Trustee shall keep the certificates provided in this paragraph (e) until the Bonds are paid in full but the Trustee shall have no duty to review or approve any such certificate.
SECTION 5.3. APPLICATION OF MONEYS IN CERTAIN FUNDS FOR RETIREMENT OF BONDS. Notwithstanding any other provisions of this Indenture and any Supplemental Indenture, if at any time the amounts held in the Debt Service Fund and the Redemption Fund are sufficient to pay the principal or Redemption Price of all Outstanding Bonds and the interest accruing on such Bonds to the next date when all such Bonds are redeemable, the Institution may request the Trustee to redeem all such Outstanding Bonds. The Trustee shall, upon receipt of such request in writing by the Institution, proceed to redeem all such Outstanding Bonds in the manner provided for redemption of such Bonds by this Indenture and any Supplemental Indenture, and in such event all provisions of Section 12.1 hereof shall be operative.
SECTION 5.4. DEPOSIT OF REVENUES AND ALLOCATION THEREOF. The Institution shall pay to the Trustee the amounts required at all times for the payment of the principal of, and premium if any, and interest on the Bonds when due, whether at maturity, upon redemption, by acceleration or otherwise. The Revenues received from the Institution or from any other Members of the Obligated Group and any other moneys required by any of the provisions of this Indenture to be paid or transferred to the Trustee shall be promptly paid or transferred to the Trustee.
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The Institution shall repay the principal of the Bonds in annual installments on the twentieth (20th) day of each June of each Bond Year in an amount equal to all of the principal, as the case may be, of the Bonds becoming due on the July 1 immediately succeeding the expiration of such Bond Year (provided, however, in all events, the payment made on June 20 of each Bond Year shall provide for sufficient funds necessary to make payment in full of the principal becoming due on the July 1 immediately succeeding the expiration of such Bond Year) after crediting to such amount becoming due any amount in the Principal Account, prior to such July 1 available for the payment of such principal.
The Institution shall pay the interest on the Bonds in semiannual installments on the twentieth (20th) day of each December and June of each Bond Year (or if such date is not a Business Day, the next succeeding Business Day) in an amount equal to all of the interest coming due on the Bonds on the next succeeding Interest Payment Date after crediting to such amount becoming due any amount in the Interest Account available for the payment of such interest (provided, however, in all events, the payment due immediately prior to each Interest Payment Date shall provide for sufficient funds necessary to make payment in full of the interest becoming due on the Bonds on such next succeeding Interest Payment Date).
The Institution agrees to provide, at all times required under this Indenture, such additional amounts as are required to fund or make up any deficiency in the Debt Service Fund on any date on which principal of or interest on the Bonds is due. In the event of any such deficiency in the Debt Service Fund, the Trustee shall notify the Institution of such deficiency and the Institution shall pay the amount of any such deficiency to the Trustee by no later than 11:00 a.m. on the date on which principal of, or interest on, the Bonds is due.
Notwithstanding any other provisions of this Indenture, moneys received by the Trustee as an optional prepayment shall be deposited in the Redemption Fund if the Bonds are then subject to redemption, or otherwise in the Debt Service Fund for payment of the next due principal of or interest on the Bonds.
Subject to the prior paragraph of this Section, moneys paid or transferred to the Trustee shall on or before the next Business Day after receipt thereof be applied as follows and in the following order of priority:
FIRST: To the Interest Account, the amount equal to all of the interest becoming due on the Outstanding Bonds on the next Interest Payment Date of such Bonds; and
SECOND: To the Principal Account, the amount equal to all of the principal amount becoming due on the Bonds on the next succeeding principal payment date, after taking into account any amounts on deposit therein available for the payment thereof.
After making the payments required by paragraphs FIRST and SECOND above, any balance remaining shall be paid, as the Institution may direct in writing, to the Debt Service Fund and credited against the next due payment of debt service from the Institution (provided the amount in the Debt Service Fund may not exceed the amount of debt service due on the Bonds
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during the next twelve months) or to the Redemption Fund and applied by the Trustee to the purchase or redemption of Bonds.
SECTION 5.5. APPLICATION OF MONEYS IN THE DEBT SERVICE FUND. The Trustee shall transfer moneys out of the Interest Account on each Interest Payment Date for the payment of interest then due on the Bonds. The Trustee shall pay out of such Interest Account any amounts required for the payment of accrued interest upon any redemption or purchase of the Bonds.
The Trustee shall transfer moneys out of the Principal Account on each principal maturity date for the payment of the principal amount of the Bonds then due.
SECTION 5.6. APPLICATION OF MONEYS IN THE REDEMPTION FUND. (a) Moneys in the Redemption Fund derived from optional prepayment shall, at the written direction of the Institution, be applied to payment of the Redemption Price of Bonds, plus accrued interest, if any, thereon to the date set for redemption, in accordance with Section 2.5 hereof.
(b) Subject to the provisions of paragraph (a) hereof, moneys in the Redemption Fund may be applied to the purchase of Bonds at purchase prices not exceeding the Redemption Price applicable to the Bonds to be purchased plus accrued interest due, in such manner as the Institution may direct. Bonds so purchased shall be cancelled by the Trustee if so directed in writing by the Institution.
(c) Moneys in the Redemption Fund may be applied to the purchase of Bonds in lieu of redemption in accordance with Section 2.5 hereof if so directed in writing by the Institution.
(d) Any excess moneys on deposit in the Redemption Fund and not needed to pay the Redemption Price of Bonds called for redemption shall be paid to the Institution or deposited to the Principal Account of the Debt Service Fund or the Interest Account of the Debt Service Fund, or applied to the optional redemption of Bonds in accordance with Section 2.5 hereof, as the Institution shall direct in writing.
SECTION 5.7. INVESTMENT OF MONEYS. Any moneys held in any of the funds or accounts established hereunder shall be invested by the Trustee, as directed by the Institution in a written order signed by an Authorized Officer thereof, which written order shall contain investment instruction consistent with the requirements of this Indenture, but only as follows:
(a) Moneys in the Debt Service Fund only in Qualified Investments maturing in such amounts and on such dates as may be necessary to provide moneys to meet the payments from such Fund;
(b) Moneys in the Redemption Fund only in Qualified Investments maturing or redeemable at the option of the owner not later than the next succeeding date on which the Bonds are subject to redemption; and
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(c) Any moneys held by the Trustee in the Proceeds Fund may be invested by the Trustee at the written direction of an Authorized Officer of the Institution in any manner permitted hereunder.
Notwithstanding any other provisions of this Indenture concerning the requirement that all investment instructions shall be given to the Trustee or any depository by the Institution, in the event that the Trustee has not received instructions from the Institution to invest any moneys remaining in any Fund or Account hereunder, the Trustee shall invest such moneys in accordance with Attachment B attached hereto.
The Trustee is hereby authorized, in making or disposing of any investment permitted by this Section, to deal with itself (in its individual capacity) or with any one or more of its affiliates, whether it or such affiliate is acting as an agent of the Trustee or for any third person or dealing as principal for its own account.
Any securities or investments held by the Trustee shall be transferred by the Trustee, if requested in writing by an Authorized Officer of the Institution, from any of the funds or accounts mentioned in this Section to any other of the funds or accounts mentioned in this Section at the then current market value thereof without having to be sold and purchased or repurchased; provided, however, that after any such transfer or transfers the investments in each such fund or account shall be in accordance with the provisions as stated in this Section.
Unless otherwise directed by the Institution, interest earned, profits realized and losses suffered by reason of any investment shall be credited or charged, as the case may be, to the Fund or Account for which such investment shall have been made.
The Trustee and the Institution may sell or redeem any obligations in which moneys shall have been invested, to the extent necessary to provide cash in the respective funds or accounts, to make any payments required to be made therefrom, or to facilitate the transfers of moneys, securities or investments between various funds and accounts as may be required or permitted from time to time pursuant to the provisions of this Article.
In computing the value of the assets in any fund or account hereunder, the Trustee and the Institution, if required hereunder to value any fund or account under its control, shall value such assets at the current market value thereof. In computing such value, accrued interest on any investment shall be deemed a part thereof.
The Trustee shall not be liable for any depreciation in the value of any obligations in which moneys of the funds or accounts shall be invested, as aforesaid, or for any loss arising from any investment made in accordance with the written instructions of the Institution.
ARTICLE VI
PARTICULAR COVENANTS
SECTION 6.1. PAYMENT OF PRINCIPAL AND INTEREST. The Institution shall pay or cause to be paid the principal or Redemption Price of and interest on
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every Bond on the date and at the places and in the manner mentioned in such Bonds according to the true intent and meaning thereof.
SECTION 6.2. REVENUES. The Institution covenants that it shall pay amounts sufficient to provide Revenues sufficient at all times: (i) to pay the principal of and interest on the Bonds as the same respectively become due and payable by redemption or otherwise; and (ii) to pay the expenditures of the Trustee incurred in relation to this Indenture for which the Institution is obligated hereunder to reimburse the Trustee.
SECTION 6.3. ACCOUNTS. The Institution shall keep proper books of records and accounts in which complete and correct entries shall be made of its transactions relating to the Institution’s facilities and this Indenture, which books and accounts, at reasonable hours and subject to the reasonable rules and regulations of the Institution, shall be subject to the inspection of the Trustee or of any owner of a Bond or of the owner’s representative duly authorized in writing.
SECTION 6.4. LIMITATIONS ON CONSOLIDATED BONDS. The Institution covenants and agrees that:
(a) Additional Bonds that are consolidated with the Institution’s Taxable Bonds, Series 2018 constitute a part of the Series 2018 Bonds;
(b) The Additional Bonds that are consolidated with the Institution’s Taxable Bonds, Series 2018, shall mature on any of the dates as the Series 2018 Bonds, bear interest at the corresponding rates per annum as the Series 2018 Bonds, and shall be subject to redemption at the same times and at the same Redemption Price as the Bonds;
(c) Each Additional Bond to be consolidated with the Institution’s Taxable Bonds, Series 2018 shall have the same minimum denominations; and
(d) As a condition to the issuance of such Additional Bonds to be consolidated with the Institution’s Taxable Bonds, Series 2018, there shall be delivered to the Trustee a certificate of the Institution, certifying that, after consultation with counsel experienced in federal securities and tax laws, the issuance and consolidation of such Additional Bonds will not require (i) the Outstanding Series 2018 Bonds to be registered under the Securities Act of 1933, as amended or (ii) this Indenture to be qualified under the Trust Indenture Act of 1939, as amended.
The limitations in paragraph (a), (b), (c) and (d) of this Section 6.4 shall not apply to any Additional Bonds issued under this Indenture which will not be consolidated with the Institution’s Taxable Bonds, Series 2018.
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ARTICLE VII
CONCERNING THE TRUSTEE
SECTION 7.1. CONCERNING THE TRUSTEE; ACCEPTANCE OF TRUSTEE. The Trustee hereby accepts and agrees to execute the trusts imposed upon it by this Indenture, but only upon the terms and conditions set forth in this Article and subject to the provisions of this Indenture, to all of which the parties hereto and the respective Owners of the Bonds agree.
SECTION 7.2. OBLIGATION OF TRUSTEE. Except as set forth in Section 7.6 hereof, the Trustee shall be under no obligation to institute any suit, or to take any action or proceeding under this Indenture or to enter any appearance or in any way defend in any suit in which it may be made defendant, or to take any steps in the execution of the trusts hereby created or in the enforcement of any rights and powers hereunder, including, without limitation, pursuant to the direction of, or on behalf of, any of the Bondowners, until it shall be paid or reimbursed or indemnified to its satisfaction against any and all reasonable costs and expenses, outlays, liabilities, damages and reasonable counsel fees and expenses and other reasonable disbursements. The Trustee may nevertheless begin suit, or appear in and defend suit, or do anything else in its judgment proper to be done by it as the Trustee, and in such case the Institution shall reimburse the Trustee for all costs and expenses, outlays, liabilities, damages and reasonable counsel fees and expenses and other reasonable disbursements properly incurred in connection therewith. If the Institution shall fail to make such reimbursement, the Trustee may reimburse itself from any moneys in its possession under the provisions of this Indenture (other than any money on deposit in any irrevocable trust or escrow fund established with respect to any defeased Bonds) upon notice to the Institution of its intention to reimburse itself and the Trustee shall be entitled to a preference therefor over any of the Bonds Outstanding hereunder.
SECTION 7.3. RESPONSIBILITIES OF TRUSTEE. (a) The recitals contained in this Indenture, any Supplemental Indenture, in the Bonds or any offering documents for the Bonds shall be taken as the statements of the Institution and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Indenture, any Supplemental Indenture or of the Bonds or in respect of the security afforded by this Indenture or any Supplemental Indenture and the Trustee shall incur no responsibility in respect thereof. The Trustee shall be under no responsibility or duty with respect to: (i) the issuance of the Bonds for value; or (ii) the application of the proceeds thereof provided such proceeds are paid out in accordance with this Indenture; or (iii) the application of any moneys paid to the Institution or others in accordance with this Indenture; or (iv) the recording or rerecording, registration or reregistration, filing or refiling of this Indenture or any security documents contemplated thereby, provided, however, the Trustee shall be responsible for the filing of Uniform Commercial Code continuation statements; or (v) the validity of the execution by the Institution of this Indenture; or (vi) compliance by the Institution with the terms of this Indenture. The Trustee may require of the Institution full information and advice regarding the performance of the covenants, conditions and agreements contained in this Indenture. The Trustee shall not be liable in connection with the performance of its duties hereunder except for its own negligence or willful misconduct. The Trustee shall be
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reimbursed for any costs and expenses incurred with the filing of Uniform Commercial Code continuation statements.
(b) Except as otherwise provided in this Indenture, the Trustee shall not be bound to recognize any person as a Holder of any Bond or to take action at such person’s request, unless such person shall be the Bondowner of such Bond. Any action duly taken by the Trustee pursuant to this Indenture upon the request, authority or consent of any person who at the time of making such request or giving such authority or consent is the Bondowner of any Bond secured hereby shall be conclusive and binding upon all future Bondowners of such Bond.
(c) The duties and obligations of the Trustee shall be determined by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture. The permissive right of the Trustee to do things enumerated in this Indenture shall not be construed as a duty. In the case of an event of default specified in Article VIII hereof, in exercising such rights and the rights given the Trustee in this Indenture, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and shall use the same degree of care and skill in its exercise thereof as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs.
(d) The Trustee shall not be charged with knowledge of any event hereunder unless an officer or administrator in the Trustee’s corporate trust department has actual knowledge of such event.
(e) The Trustee, upon receipt of documents furnished to it by or on behalf of the Institution pursuant to this Indenture, shall examine the same to determine whether or not such documents conform to the requirements of this Indenture, provided that to the extent this Indenture or the Agreement requires such document or statement contained therein to be in accordance with any law, the Trustee shall have no obligation to determine whether such document or statement therein is in accordance with or complies with such law.
(f) Except as otherwise expressly provided by the provisions of this Indenture, the Trustee shall not be obligated and may not be required to give or furnish any notice, demand, report, request, reply, statement, advice or opinion to the Bondowner of any Bond and the Trustee shall not incur any liability for its failure or refusal to give or furnish the same unless obligated or required to do so by an express provision hereof. The Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture. The Trustee shall incur no liability in respect of any action taken or omitted by it without negligence or willful misconduct in accordance with the direction of the Bondowners of the percentage of the Bonds specified herein relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred upon the Trustee under this Indenture.
(g) Subject to Section 8.6 hereof, in the event the Trustee shall receive inconsistent or conflicting requests and indemnity from two or more groups of Bondowners, each
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representing less than a majority of the aggregate principal amount of the Bonds then Outstanding, the Trustee, in its sole discretion, may determine what action, if any, shall be taken.
(h) The Trustee shall not be liable for interest on any funds deposited with it hereunder, except as provided herein or as the Trustee may otherwise specifically agree in writing.
SECTION 7.4. PROPERTY HELD IN TRUST. All moneys and securities held by the Trustee at any time pursuant to the terms of this Indenture shall be and hereby are assigned, transferred and set over unto the Trustee in trust for the purposes and under the terms and conditions of this Indenture.
SECTION 7.5. EVIDENCE ON WHICH TRUSTEE MAY ACT. The Trustee shall be protected in acting upon any notice, resolution, request, consent, order, certificate, report, opinion, bond or other paper or document believed by it to be genuine, and to have been signed or presented by the proper party or parties. The Trustee may consult with counsel, who may or may not be counsel to the Institution, and may rely on an Opinion of Counsel. Any such Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered, or any action not taken, by it in good faith and in accordance therewith, and the Trustee shall not be liable for any action taken or omitted in good faith in reliance on such Opinion of Counsel. The Trustee shall have the right to act through its attorneys and agents. Whenever the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering or not taking any action under this Indenture, such matter (unless other evidence in respect thereof be hereby specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by an Authorized Officer of the Institution. Such certificate shall be full warrant for any action taken or suffered, or any action not taken, in good faith under the provisions hereof, but the Trustee may (but shall not be required to) in addition thereto or in lieu thereof require or accept other evidence of such fact or matter or may require such further or additional evidence as it may deem reasonable. Except as otherwise expressly provided herein, any request, order, notice or other direction required or permitted to be furnished pursuant to any provision hereof by the Institution to the Trustee shall be sufficiently executed if executed in the name of the Institution by an Authorized Officer.
SECTION 7.6. COMPENSATION AND INDEMNIFICATION. Unless otherwise provided by written contract between the Trustee and the Institution, the Institution shall pay or cause to be paid to the Trustee after reasonable notice to the Institution in light of the compensation sought to be received, reasonable compensation for all services rendered by it hereunder, including, if applicable, its services as registrar, paying agent and transfer agent, and also all its reasonable expenses, charges, reasonable counsel fees, expenses and other disbursements and those of its attorneys, agents, and employees, incurred in and about the performance of its powers and duties hereunder. The Institution shall indemnify and save the Trustee harmless against any expenses and liabilities which it may incur in the exercise and performance of its powers and duties hereunder which are not due to its negligence or willful misconduct. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties or in the exercise of any of its rights or powers. The obligations of the Institution under
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this Section to compensate the Trustee, to pay or reimburse the Trustee for expenses, disbursements, charges and reasonable counsel fees and to indemnify and hold harmless the Trustee shall survive the satisfaction and discharge of this Indenture and the removal or resignation of the Trustee. If the monies from the Institution are not adequate to pay such obligations, the Trustee may, upon written notice to the Institution, reimburse itself from any moneys in its possession under the provisions of this Indenture (other than any money on deposit in any irrevocable trust or escrow fund established with respect to any defeased Bonds) and shall be entitled to a preference therefor over any of the Bonds Outstanding hereunder.
SECTION 7.7. PERMITTED ACTS. The Trustee may become the owner of or may deal in Bonds or may deal with the Institution as fully and with the same rights as if it were not the Trustee. The Trustee may act as depository for, and permit any of its officers or directors to act as a member of, or in any other capacity with respect to, the Institution or any committee formed to protect the rights of Bondowners or to effect or aid in any reorganization growing out of the enforcement of the Bonds or this Indenture, whether or not such committee shall represent the Owners of a majority in principal amount of the Outstanding Bonds in respect of which any such action is taken.
SECTION 7.8. RESIGNATION OF TRUSTEE. The Trustee, or any successor thereof, may at any time resign and be discharged of its duties and obligations hereunder by giving not less than forty-five (45) days’ written notice to the Institution and the Bondowners, specifying the date when such resignation shall take effect, provided such resignation shall not take effect until a successor shall have been appointed by the Institution or a court of competent jurisdiction as provided in Section 7.10 and shall have accepted such appointment.
SECTION 7.9. REMOVAL OF TRUSTEE. The Trustee, or any successor thereof, may be removed with or without cause at any time by the Institution upon thirty (30) days written notice, if no Event of Default under this Indenture shall have occurred and be continuing, or upon and during the continuation of an Event of Default under this Indenture by the owners of a majority in principal amount of Outstanding Bonds, excluding any Bonds held by or for the account of the Institution, by an instrument or concurrent instruments in writing signed and acknowledged by such Bondowners or by their attorneys-in-fact duly authorized and delivered to the Institution, provided that such removal shall not take effect until a successor is appointed. Such removal shall take effect on the date a successor shall have been appointed by the Institution or a court of competent jurisdiction as provided in Section 7.10 and shall have accepted such appointment. Copies of each instrument providing for any such removal shall be delivered by the Institution to the Trustee and any successor thereof.
SECTION 7.10. SUCCESSOR TRUSTEE. In case the Trustee, or any successor thereof, shall resign or shall be removed or shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or if a receiver, liquidator or conservator of the Trustee or of its property shall be appointed, or if any public officer shall take charge of control of the Trustee, or of its property or affairs, the Institution shall forthwith appoint a Trustee to act. Notice of any such appointment shall be delivered by the Institution to the Trustee so appointed and the predecessor Trustee. The Institution shall give or cause to be given written notice of any such appointment to the Bondowners.
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If no appointment of a successor shall be made within forty-five (45) days after the giving of written notice in accordance with Section 7.8 or after the occurrence of any other event requiring or authorizing such appointment, the Trustee or any Bondowner may apply to any court of competent jurisdiction for the appointment of such a successor, and such court may thereupon, after such notice, if any, as such court may deem proper, appoint such successor.
Any successor appointed under the provisions of this Section shall be a bank or trust company or national banking association, in each case with corporate trust powers, which is able to accept the appointment on reasonable and customary terms and authorized by law to perform all the duties required by this Indenture, which is approved by the Institution (unless an event of default under Section 8.1 exists, in which case a successor shall be appointed by the owners of a majority in principal amount of Outstanding Bonds or by a court pursuant to the above paragraph, or unless a successor is appointed by a court pursuant to the above paragraph) and which has a combined capital and surplus aggregating at least $50,000,000 (or such other financial resources acceptable to the Institution in its sole discretion), if there be such a bank or trust company or national banking association willing to serve as Trustee hereunder.
SECTION 7.11. TRANSFER OF RIGHTS AND PROPERTY TO SUCCESSOR TRUSTEE. Any successor appointed under the provisions of Section 7.10 shall execute, acknowledge and deliver to its predecessor, and also to the Institution, an instrument accepting such appointment, and thereupon such successor, without any further act, deed or conveyance shall become fully vested with all moneys, estates, properties, rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally appointed as Trustee. However, the Trustee then ceasing to act shall nevertheless, on request by the Institution or of such successor, execute, acknowledge and deliver such instruments of conveyance and further assurance and do such other things as may reasonably be required for more fully and certainly vesting and confirming in such successor all the right, title and interest of such Trustee in and to any property held by it hereunder, and upon payment of its fees and expenses to which it is entitled hereunder shall pay over, assign and deliver to such successor any moneys or other properties subject to the trusts and conditions herein set forth and subject to any indemnification rights of the Trustee hereunder. Should any deed, conveyance or instrument in writing from the Institution be required by such successor for more fully and certainly vesting in and confirming to it any such moneys, estates, properties, rights, powers, duties or obligations, any and all such deeds, conveyances and instruments in writing shall, on request, and so far as may be authorized by law, be executed, acknowledged and delivered by the Institution.
SECTION 7.12. MERGER OR CONSOLIDATION OF THE TRUSTEE. Any company into which the Trustee may be merged or with which it may be consolidated or any company resulting from any merger or consolidation to which it shall be a party or any company to which such Trustee may sell or transfer all or substantially all of its corporate trust business, provided such company shall be a bank or trust company or national banking association qualified to be a successor to such Trustee under the provisions of Section 7.10 (except that the approval of the Institution shall not be required), shall be the successor to such Trustee, without any further act, deed or conveyance.
SECTION 7.13. SEVERAL CAPACITIES. Anything in this Indenture to the contrary notwithstanding, the same entity may serve hereunder as the Trustee and in any other
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capacities, to the extent permitted by law. The Trustee is hereby appointed to serve initially in the capacity of Trustee.
SECTION 7.14. CO-TRUSTEES. (a) With the consent of the Institution, for the purpose of meeting the legal requirements of any applicable jurisdiction, the Trustee shall have power to appoint one or more persons to act as co-trustee under this Indenture, with such powers as may be provided in the instrument of appointment, and to vest in such person or persons any property, title, right or power deemed necessary or desirable, subject to the remaining provisions of this Section.
(b) Each co-trustee shall, to the extent permitted by applicable law, be appointed subject to the following terms:
(i) The rights, powers, duties and obligations conferred or imposed upon any such trustee shall not be greater than those conferred or imposed upon the Trustee, and such rights and powers shall be exercisable only jointly with the Trustee, except to the extent that, under any law of any jurisdiction in which any particular act or acts are to be performed, the Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights and powers shall be exercised by such co-trustee subject to the provisions of subsection (b) (iv) of this Section.
(ii) The Trustee may at any time, by an instrument in writing executed by it and with written notice to the Institution, accept the resignation of or remove any co-trustee appointed under this Section.
(iii) No co-trustee under this Indenture shall be liable by reason of any act or omission of any other co-trustee appointed under this Indenture.
(iv) No power given to such co-trustee shall be separately exercised hereunder by such co-trustee except with the consent in writing of the Trustee, anything herein contained to the contrary notwithstanding.
SECTION 7.15. TRUSTEE MAY FIX RECORD DATE. The Trustee may, but shall not be obligated to, fix a record date for the purpose of determining the Bondowners entitled to give their consent or take any other action pursuant to this Indenture. If a record date is fixed, then at such record date only those persons (or their duly designated proxies), shall be entitled to give such consent or to revoke any consent previously given or to take any such action, whether or not such persons continue to be Owners after such record date. No such consent shall be valid or effective for more than 120 days after such record date.
SECTION 7.16. WHEN BONDS DISREGARDED. In determining whether the Owners of the required principal amount of Bonds have concurred in any direction, waiver or consent, Bonds owned by 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, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Bonds which
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the Trustee knows are so owned shall be so disregarded. Also, subject to the foregoing, only Bonds Outstanding at the time shall be considered in any such determination.
SECTION 7.17. INDEMNIFICATION. The Institution hereby releases and agrees to hold harmless and indemnify the Trustee and its members, directors, officers, counsel, consultants, agents and employees (the “Trustee Indemnified Parties”) from and against all, and agrees that the Trustee Indemnified Parties shall not be liable for any, (i) liabilities, suits, actions, claims, demands, damages, losses, expenses and costs of every kind and nature resulting from any action taken in accordance with, or permitted by, the Institution Documents or this Indenture or by reason of its duties and responsibilities under this Indenture, or arising from or incurred by the Trustee by reason of this Indenture or the failure of the Institution to comply with the provisions of the Institution Documents, including but not limited to those arising out of any environmental hazard or violation of any environmental law, rule or regulation (but excluding any loss, damage or liability which may arise as a result of the negligence or willful misconduct of any Trustee Indemnified Party and excluding any loss, damage or liability which may arise as a result of the negligence or willful misconduct of any Trustee Indemnified Party), including, without limiting the generality of the foregoing, reasonable attorneys’ fees and other expenses incurred in defending or investigating any claims, suits or actions which may arise as a result of any of the foregoing. The Institution agrees to deliver at the request of the Trustee, any further instrument or instruments in form satisfactory to the Trustee to effectuate more fully the provisions of this Section. In case any action shall be brought against one or more of the Trustee Indemnified Parties in respect of which indemnity may be sought against the Institution under the provision of this Section, the Trustee Indemnified Parties shall promptly (and in no event later than thirty (30) days after knowledge of such action) notify the Institution in writing, and the Institution shall, if the applicable Trustee Indemnified Party is entitled to indemnification hereunder or if the Institution otherwise elects in its discretion, promptly assume the defense thereof, including the employment of counsel, the payment of all reasonable expenses and the right to negotiate and consent to settlement and the Trustee Indemnified Parties shall cooperate with the Institution at the expense of the Institution in asserting such defense. Any failure of the Trustee to notify the Institution of an action in respect of which indemnity is sought shall not relieve the Institution of its obligation to indemnify the Trustee for such actions as provided herein. Any one or more of the Trustee Indemnified Parties shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the reasonable fees and expenses of such counsel shall be at the expense of such Trustee Indemnified Party or Trustee Indemnified Parties unless the employment of such counsel has been specifically authorized in writing by the Institution, which authorization shall not be unreasonably withheld, or unless by reason of conflict of interest, or there are legal defenses available to the Trustee that are not available to the Institution in the reasonable judgment of any Trustee Indemnified Party, it is advisable for it to be represented by separate counsel, in which case the reasonable fees and expenses of such separate counsel shall be borne by the Institution. The Institution shall not be liable for any settlement of any such action effected without its written consent, but if settled with the written consent of the Institution or if there be a final judgment for the plaintiff in any such action with or without such consent, the Institution agrees to indemnify and hold harmless the Trustee Indemnified Parties from and against any loss or liability by reason of such settlement or judgment in accordance with the terms and conditions of this Section 7.17. The hold harmless and indemnification provisions provided by this Section shall be in addition to and not limited by any of the provisions of Section 7.6 above. The Institution shall not, without the
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prior written consent of the Trustee, effect any settlement of any pending or threatened proceeding in respect of which the Trustee is or could have been a party and indemnity could have been sought hereunder by the Trustee, unless such settlement (x) includes an unconditional release of the Trustee from all liability on claims that are the subject matter of such proceeding, and (v) does not include a statement or admission of fault, culpability, or a failure to act, by or on behalf of the Trustee. The provisions of this Section shall survive the expiration of this Indenture and the resignation or the removal of the Trustee, and each Trustee Indemnified Party shall be deemed a third party beneficiary hereunder.
ARTICLE VIII
EVENTS OF DEFAULT
SECTION 8.1. EVENTS OF DEFAULT. Each of the following events is hereby declared an “Event of Default” hereunder (herein called an “Event of Default”):
(a) Payment of the principal of any of the Bonds shall not be made when the same shall become due and payable, either at maturity or by proceedings for redemption or otherwise; or
(b) Payment of an installment of interest on any Bonds shall not be made when the same shall become due and payable; or
(c) An Event of Default shall have occurred under and as defined in the Master Indenture; or
(d) Failure by the Institution to observe and perform any covenant, condition or agreement in the Institution Documents on its part to be observed or performed, or failure of any representation made by the Institution in the Institution Documents to be correct in all material respects, which failure shall continue for a period of thirty (30) days after written notice, specifying such failure and requesting that it be remedied, shall have been given to the Institution by the Trustee; provided, however, that if such performance, observation or compliance requires work to be done, action to be taken, or conditions to be remedied which by their nature cannot reasonably be done, taken or remedied, as the case may be, within such 30-day period, no Event of Default shall be deemed to have occurred or to exist if, and so long as the Institution shall in good faith commence such performance, observation or compliance within such period and shall diligently and continuously prosecute the same to completion.
SECTION 8.2. ACCELERATION OF MATURITY. Upon the happening of any Event of Default specified in Section 8.1, the Trustee may, and shall, upon the written request of the owners of not less than a majority in principal amount of the Outstanding Bonds, declare an acceleration of the payment of principal on the Bonds. All such declarations shall be by a notice in writing to the Institution, declaring the principal of all of the Outstanding Bonds to be due and payable immediately. Upon the giving of notice of such declaration of acceleration such principal shall become and be immediately due and payable, and if principal of the Bonds is so paid in full upon acceleration, all interest on the Bonds shall cease to accrue, anything in the Bonds or in this Indenture to the contrary notwithstanding. Interest on all Bonds shall accrue
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until the principal of such Bonds shall be paid in full. At any time after the principal of the Bonds shall have been so declared to be due and payable, 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 this Indenture, the Trustee shall, with the written consent of the owners of not less than a majority in principal amount of the Bonds not then scheduled to be due by their terms and then Outstanding and by written notice to the Institution, annul such declaration and its consequences if: (i) moneys shall have accumulated in the Debt Service Fund sufficient to pay all arrears of principal and interest, if any, upon all of the Outstanding Bonds (except the interest accrued on such Bonds since the last Interest Payment Date and the principal of such Bonds then due only because of a declaration under this Section); (ii) moneys shall have accumulated and be available sufficient to pay the charges, compensation, expenses, disbursements, advances and liabilities of the Trustee that are payable or reimbursable by the Institution hereunder; (iii) all other amounts then payable by the Institution hereunder shall have been paid or a sum sufficient to pay the same shall have been deposited with the Trustee; and (iv) every other default known to the Trustee in the observance or performance of any covenant, condition or agreement contained in the Bonds or in this Indenture (other than a default in the payment of the principal of such Bonds then due only because of a declaration under this Section) shall have been remedied to the satisfaction of the Trustee or waived pursuant to Section 8.10. No such annulment shall extend to or affect any subsequent default or impair any right consequent thereon.
SECTION 8.3. ENFORCEMENT OF REMEDIES. Upon the happening and continuance of any Event of Default specified in Section 8.1, then and in every such case, the Trustee may proceed, and upon the written request of the Owners of not less than a majority in principal amount of the Outstanding Bonds shall proceed (subject to the provisions of Sections 7.2 and 8.6), to protect and enforce its rights and the rights of the owners of the Bonds under the laws of the State of New Jersey or under this Indenture, the Bonds, or the Note by such suits, actions or special proceedings in equity or at law, either for the specific performance of any covenant contained hereunder or in aid or execution of any power herein granted, or for the enforcement of the Note, or for an accounting against the Institution as if the Institution were the trustee of an express trust, or for the enforcement of any proper legal or equitable remedy as the Trustee shall deem most effectual to protect and enforce such rights.
In the enforcement of any remedy under this Indenture, the Trustee shall be entitled to sue for, enforce payment of, and receive any and all amounts then or during any default becoming, and at any time remaining, due from the Institution for principal or interest or otherwise under any of the provisions of this Indenture or of the Bonds, with interest on overdue payments at the rate or rates of interest specified in such Bonds, together with any and all costs and expenses of collection and of all proceedings hereunder and under such Bonds, without prejudice to any other right or remedy of the Trustee or of the Owners of such Bonds, and to recover and enforce any judgment or decree against the Institution but solely as provided herein and in such Bonds, for any portion of such amounts remaining unpaid, with interest, cost and expenses, and to collect in any manner provided by law, the moneys adjudged or decreed to be payable.
SECTION 8.4. PRIORITY OF PAYMENTS AFTER DEFAULT. If at any time the moneys held by the Trustee under this Indenture shall not be sufficient to pay the
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principal of and interest on the Bonds as the same become due and payable (either by their terms or by acceleration of maturity under the provisions of Section 8.2), such moneys together with any moneys then available or thereafter becoming available for such purpose, whether through exercise of the remedies provided for in this Article or otherwise, shall be applied (after payment of all amounts owing to the Trustee from moneys under this Indenture other than from moneys in any irrevocable trust or escrow fund established with respect to any defeased Bonds) as follows:
(a) Unless the principal of all the Bonds shall have become due and payable, all such moneys shall be applied:
FIRST: To the payment to the persons entitled thereto of all installments of interest on any of the Bonds then due, in the order of the maturity of the installments of such interest, and, if the amount available shall not be sufficient to pay in full any particular installment, then to the payment ratably, according to the amounts due on such installment, to the persons entitled thereto, without any discrimination or preference;
SECOND: To the payment to the persons entitled thereto of the unpaid principal of any of the Bonds which shall have become due (other than Bonds called for redemption or contracted to be purchased for the payment of which moneys are held pursuant to the provisions of this Indenture) with interest upon such Bonds from the respective dates upon which they shall have become due, in the order of their due dates, and, if the amount available shall not be sufficient to pay in full Bonds due on any particular due date, together with such interest, then to the payment ratably, according to the amount of principal due on such date, to the persons entitled thereto, without any discrimination or preference; and
THIRD: To the payment of the interest on and the principal of the Bonds as the same become due and payable.
(b) If the principal of all the Bonds shall have become due and payable, either by their terms or by a declaration of acceleration, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon the Bonds, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto, without any discrimination or preference.
Whenever moneys are to be applied by the Trustee pursuant to the provisions of this Section, such moneys shall be applied by the Trustee at such times, and from time to time, as the Trustee in its sole discretion shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for
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such application in the future. The setting aside of such moneys in trust for the proper purpose shall constitute proper application by the Trustee, and the Trustee shall incur no liability whatsoever to the Institution, to any Bondowner or to any other person for any delay in applying any such moneys, so long as the Trustee acts with reasonable diligence, having due regard to the circumstances, and ultimately applies the same in accordance with such provisions of this Indenture as may be applicable at the time of application by the Trustee. Whenever the Trustee shall exercise such discretion in applying such moneys it shall fix the date (which shall be an Interest Payment Date unless the Trustee shall deem another date more suitable) upon which such application is to be made, and upon such date, interest on the amounts of principal to be paid on such date shall cease to accrue. The Trustee shall give such notice as it may deem appropriate of the fixing of any such date. The Trustee shall not be required to make payment to the owner of any unpaid interest or any Bond unless such Bond shall be presented to the Trustee for appropriate endorsement.
SECTION 8.5. EFFECT OF DISCONTINUANCE OF PROCEEDINGS. In case any proceedings taken by the Trustee on account of any default in respect of Bonds shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Trustee, then and in every such case the Institution, the Trustee and the Bondowners shall be restored to their former positions and rights hereunder, respectively, and all rights, remedies, powers and duties of the Trustee shall continue as though no such proceeding had been taken.
SECTION 8.6. CONTROL OF PROCEEDINGS. Anything in this Indenture to the contrary notwithstanding, the owners of a majority in principal amount of the Outstanding Bonds, shall have the right, subject to the provisions of Section 7.2, by an instrument in writing executed and delivered to the Trustee, to direct the method and place of conducting all remedial proceedings to be taken by the Trustee under this Indenture, provided such direction shall not be otherwise than in accordance with law and the provisions of this Indenture.
SECTION 8.7. RESTRICTIONS UPON ACTION BY INDIVIDUAL BONDOWNERS. No Owner of any of the Bonds shall have any right to institute any suit, action or proceeding in equity or at law for the execution of any trust hereunder or for any other remedy hereunder unless such Owner previously shall have given to the Trustee written notice of the Event of Default on account of which such suit, action or proceeding is to be instituted, and unless also the owners of not less than a majority in principal amount of all Outstanding Bonds shall have made written request to the Trustee after the right to exercise such powers or right of action, as the case may be, shall have accrued, and shall have afforded the Trustee a reasonable opportunity either to proceed to exercise the powers granted by this Indenture or to institute such action, suit or proceeding in its or their name, and unless, also, there shall have been offered to the Trustee security and indemnity as required by Section 7.2 hereof against the costs, expenses, and liabilities to be incurred therein or thereby, and the Trustee shall have refused or neglected to comply with such request within a reasonable time. Such notification, request and offer of indemnity are hereby declared in every such case, at the option of the Trustee, to be conditions precedent to the execution of the powers and trusts of this Indenture or for any other remedy hereunder. It is understood and intended that no one or more Owners of the Bonds secured by this Indenture shall have any right in any manner whatever by his or their action to affect, disturb or prejudice the security of this Indenture or to enforce any right hereunder except in the manner
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herein provided, and that all proceedings at law or in equity shall be instituted, had and maintained in the manner herein provided and for the benefit of all Owners of the Outstanding Bonds.
SECTION 8.8. ACTIONS BY TRUSTEE. All rights of action under this Indenture or under any of the Bonds secured hereby, enforceable by the Trustee may be enforced by it without the possession of any of such Bonds or the production thereof at the trial or other proceeding relative thereto, and any such suit, action or proceeding instituted by the Trustee shall be brought in its name for the benefit of all the Owners of the Bonds, subject to the provisions of this Indenture.
SECTION 8.9. REMEDIES NOT EXCLUSIVE. No remedy herein conferred upon or reserved to the Trustee or to the Owners of the Bonds is intended to be exclusive of any other remedy or remedies, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute.
SECTION 8.10. WAIVER AND NON-WAIVER. No delay or omission of the Trustee or of any Owner of the Bonds to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver of any such default or an acquiescence therein. Every power and remedy given by this Article to the Trustee and the Owners of the Bonds may be exercised from time to time and as often as may be deemed expedient.
The Trustee may, and upon written request of the Owners of not less than a majority of the principal amount of the Outstanding Bonds shall, waive any default or Event of Default with respect to the Bonds 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 this Indenture or before the completion of the enforcement of any other remedy under this Indenture; but no such waiver shall extend to or affect any other existing or any subsequent default or defaults or Event(s) of Default or impair any rights or remedies consequent thereon.
SECTION 8.11. NOTICE OF DEFAULT. The Trustee shall mail or cause to be mailed to all Bondowners written notice of the occurrence of any Event of Default set forth in clause (a) or (b) of Section 8.1 promptly after any such Event of Default shall have occurred of which the Trustee has actual knowledge. If in any Bond Year the total amount of deposits to the credit of the Debt Service Fund shall be less than the amounts required so to have been deposited under the provisions of this Indenture and any Supplemental Indenture, the Trustee, on or before the thirtieth (30th) day of the next succeeding Bond Year, shall mail to all Bondowners a written notice of the failure to make such deposits. The Trustee shall not, however, be subject to any liability to any such Bondowner by reason of its failure to mail or cause to be mailed any notice required by this Section.
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ARTICLE IX
SUPPLEMENTAL INDENTURES
SECTION 9.1. ADOPTION AND FILING. The Institution and the Trustee may enter into Supplemental Indentures at any time or from time to time as provided in Articles IX and X hereof, and a copy thereof shall be filed with the Trustee and the Institution, as provided in Section 9.3 hereof.
SECTION 9.2. GENERAL PROVISIONS RELATING TO SUPPLEMENTAL INDENTURES. Neither this Indenture, nor any Supplemental Indenture nor the Bonds shall be modified or amended in any respect except in accordance with and subject to the provisions of this Article IX and Article X. Nothing contained in Article IX or Article X shall affect or limit the right or obligations of the Institution to adopt, make, do, execute or deliver any resolution, act or other instrument pursuant to the provisions of Section 1.2 or Section 13.2 or the right or obligation of the Institution to execute and deliver to the Trustee any instrument elsewhere in this Indenture or any Supplemental Indenture provided or permitted to be delivered to the Trustee.
Prior to entering into each Supplemental Indenture with the Institution, the Trustee shall receive an Opinion of Counsel addressed to the Trustee stating that such Supplemental Indenture has been duly and lawfully executed by the Institution in accordance with the provisions of this Indenture, is authorized or permitted by this Indenture, is valid and binding upon the Institution and enforceable in accordance with its terms, and that its enforceability may be limited by bankruptcy, insolvency or other laws affecting creditors’ rights generally.
The Trustee is hereby authorized to enter into any Supplemental Indenture permitted or authorized pursuant to the provisions of this Indenture and to make all further agreements and stipulations which may be contained therein, and, in taking such action, the Trustee shall be fully protected in relying on an Opinion of Counsel that such Supplemental Indenture is authorized or permitted by this Indenture.
SECTION 9.3. ADOPTION AND FILING OF SUPPLEMENTAL INDENTURES. Any Supplemental Indenture referred to and permitted or authorized by Articles IX or X may be executed by the Institution and the Trustee, but shall become effective only on the conditions, to the extent and at the time provided in such Articles. Every such Supplemental Indenture so becoming effective shall thereupon form a part of this Indenture, and this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Institution, the Trustee and the Bondowners shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments. Any Supplemental Indenture shall be filed with the Trustee and the Institution. A copy of such Supplemental Indenture shall be delivered to any Rating Agency then rating the Bonds.
SECTION 9.4. NOTATION ON BONDS. Bonds authenticated and delivered after the effective date of any action taken as in Article IX or Article X may bear a notation by
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endorsement or otherwise in form approved by the Institution and the Trustee as to such action, and in that case, upon demand of the Owner of any Outstanding Bond at such effective date and presentation of such owner’s Bond for such purpose to the Trustee, suitable notation shall be made on such Bond by the Trustee as to any such action. If the Institution shall so determine, new Bonds so modified as in the opinion of the Institution to conform to such action shall be prepared, authenticated and delivered, and upon demand of the owner of any Outstanding Bond shall be exchanged, without cost to such Bondowner, for such Outstanding Bond upon surrender of such Outstanding Bond to the Trustee.
ARTICLE X
CONSENTS TO SUPPLEMENTAL INDENTURES
SECTION 10.1. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF BONDOWNERS. Notwithstanding any other provisions of this Article X, the Institution and the Trustee may at any time or from time to time enter into a Supplemental Indenture supplementing this Indenture or any Supplemental Indenture so as to modify or amend such indentures, for one or more of the following purposes:
(a) To add to the covenants and agreements of the Institution contained in this Indenture or any Supplemental Indenture, other covenants and agreements thereafter to be observed relative to the application, custody, use and disposition of the proceeds of the Bonds; or
(b) To confirm, as further assurance, any pledge under and the subjection to any lien on or pledge of the Revenues created or to be created by this Indenture or a Supplemental Indenture; or
(c) To cure any ambiguity, supply any omission, or cure or correct any defect or inconsistent provision in this Indenture; or
(d) To grant to or confer on the Trustee for the benefit of the Bondowners any additional rights, remedies, powers, authority, or security which may lawfully be granted or conferred and which are not contrary to or inconsistent with this Indenture as theretofore in effect; or
(e) to authorize the issuance of Additional Bonds in accordance with the provisions of Section 3.6; or
(f) To amend any provisions of this Indenture if, prior to the execution of any such amendment there shall be delivered to the Trustee an Opinion of Counsel to the effect that such amendment will not have a material adverse effect on the security, remedies or rights of the Bondowners.
Supplemental Indentures for the above purposes may be adopted and executed without the consent of any Bondowner.
SECTION 10.2. SUPPLEMENTAL INDENTURES WITH CONSENT OF BONDOWNERS. (a) At any time or from time to time but subject to the conditions or
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restrictions contained in this Indenture and each Supplemental Indenture, a Supplemental Indenture may be entered into by the Institution and the Trustee amending or supplementing this Indenture, any Supplemental Indenture or any of the Bonds or releasing the Institution from any of the obligations, covenants, agreements, limitations, conditions or restrictions therein contained. However, no such Supplemental Indenture shall be effective unless such Supplemental Indenture is approved or consented to by the Owners, obtained as provided in Section 11.2, of at least a majority in aggregate principal amount of all Outstanding Bonds affected thereby. In computing any such required percentage there shall be excluded from such consent, and from such Outstanding Bonds, any such Outstanding Bonds owned or held by or for the account of the Institution.
(b) Notwithstanding the provisions of paragraph (a) of this Section, except as provided in Section 10.3, no such modification changing any terms of redemption of Bonds, due date of principal of or interest on Bonds or making any reduction in principal or Redemption Price of and interest on any Bonds shall be made without the consent of the affected Bondowner.
(c) Notwithstanding any other provisions of this Section, no Supplemental Indenture shall be entered into by the Institution and the Trustee, except as provided in Section 10.3, reducing the percentage of consent of Bondowners required for any modification of this Indenture or any Supplemental Indenture or diminishing the pledge of the Revenues securing the Bonds.
(d) The provisions of paragraph (a) of this Section shall not be applicable to Supplemental Indentures adopted in accordance with the provisions of Section 10.1.
SECTION 10.3. SUPPLEMENTAL INDENTURES BY UNANIMOUS ACTION. Notwithstanding anything contained in the foregoing provisions of this Article, the rights and obligations of the Institution and of the owners of the Bonds and the terms and provisions of this Indenture, any Supplemental Indenture or the Bonds may be modified or amended in any respect upon the adoption of a Supplemental Indenture by the Institution with the consent of the Owners of all the Outstanding Bonds affected by such modification or amendment, such consent to be given as provided in Section 11.2, except that no notice to Bondowners by mailing shall be required; provided, however, that no such modification or amendment shall change or modify any of the rights or obligations of the Trustee without its written consent thereto in addition to the consent of the Bondowners so affected.
ARTICLE XI
PROCEDURES FOR BONDOWNER CONSENTS
SECTION 11.1. MAILING. Any provision in this Article or in Article IV hereof for the mailing of a notice or other paper to the owners of the Bonds shall be fully complied with if it is mailed or caused to be mailed, postage prepaid, by the Institution to each registered Owner of Outstanding Bonds at the Bondowner’s address appearing upon the registry books of the Institution and to the Trustee.
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SECTION 11.2. CONSENT OF BONDOWNERS. When the Institution and the Trustee enter into a Supplemental Indenture making a modification or amendment permitted by and requiring the consent of the Bondowners pursuant to the provisions of Sections 10.2 or 10.3, such Supplemental Indenture shall take effect when and as provided in this Section. Upon the execution of such Supplemental Indenture, a copy thereof, certified by an Authorized Officer of the Institution, shall be filed with the Trustee for the inspection of the Bondowners affected. A copy of such Supplemental Indenture (or summary thereof) together with a request to such Bondowners for their consent thereto in form satisfactory to the Trustee, shall be mailed or caused to be mailed by the Institution to such Bondowners. Such Supplemental Indenture shall not be effective unless and until there shall have been filed with the Trustee the written consents of the percentages of owners of Outstanding Bonds in accordance with Sections 10.2 or 10.3. Each such consent shall be effective only if accompanied by proof of ownership of the Bonds for which such consent is given, which proof shall be such as is permitted hereinafter by this Section or Section 13.4. A certificate or certificates by the Trustee, which shall be placed on file, that it examined such proof and that such proof is sufficient, shall be conclusive that the consents have been given by the owners of the Bonds described in such certificate or certificates of the Trustee. Any consent shall be binding upon the owner of the Bonds giving such consent and on any subsequent owner of such Bonds (whether or not such owner has notice thereof) unless such consent is revoked in writing by the owner of such Bonds giving such consent or a subsequent owner by filing revocation with the Trustee prior to the date when the notice hereinafter in this Section provided for is first given. The fact that a consent has not been revoked may likewise be proved by a certificate of the Trustee which shall be placed on file. At any time after the owners of the required percentage of Bonds shall have filed their consent to any Supplemental Indenture a notice shall be given or caused to be given to such Bondowners by the Institution by mailing such notice to such Bondowners (but failure to mail such notice shall not prevent such Supplemental Indenture from becoming effective and binding as herein provided). The Institution shall file with the Trustee proof of giving such notice. Such notice shall state in substance that any Supplemental Indenture (which may be referred to as an indenture executed by and between the Institution and the Trustee on a stated date, a copy of which is on file with the Trustee) has been consented to by the owners of the required percentage of Bonds and shall be effective as provided in this Section. A record, consisting of the papers required or permitted by this Section to be filed with the Trustee, shall be proof of the matters therein stated. Upon such notice, such Supplemental Indenture making such amendment or modification shall become effective and conclusively binding upon the Institution, the Trustee, and the owners of all Bonds.
SECTION 11.3. EXCLUSION OF BONDS. Bonds owned or held by or for the account of the Institution shall not be deemed Outstanding Bonds for the purpose of any consent or other action or any calculation of Outstanding Bonds provided for in Article X, and shall not be entitled to consent or take any other action provided for in Article X. At the time of any consent or other action taken under Article X, the Institution shall furnish the Trustee a certificate signed by an Authorized Officer upon which the Trustee may rely, describing all Bonds so to be excluded.
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ARTICLE XII
DEFEASANCE
SECTION 12.1. DEFEASANCE. (a) If the Institution shall pay or cause to be paid, or there shall be otherwise paid, to the owners of all or any of the Bonds then Outstanding, the principal or Redemption Price of and interest thereon, at the times and in the manner stipulated therein and in this Indenture and any Supplemental Indenture, and all fees and expenses of the Trustee and the Institution, then the pledge of any Revenues or other moneys and securities hereby pledged to such Bonds and all other rights granted hereby to such Bonds shall be discharged and satisfied. In such event, the Trustee shall, upon the request of the Institution, execute and deliver to the Institution all such instruments as may be desirable to evidence such discharge and satisfaction and the Trustee or other fiduciary shall pay or deliver to the Institution all moneys or securities held by it pursuant to this Indenture and any Supplemental Indenture which are not required for the payment or redemption of Bonds not theretofore surrendered for such payment or redemption to be used by the Institution in any lawful manner including distribution to the Institution.
(b) Any Bonds for which moneys shall then be held by a trustee, which may be the Trustee (through deposit by the Institution of funds for such payment or redemption or otherwise), whether at or prior to the maturity or the redemption date of such Bonds, shall be deemed to have been paid within the meaning and with the effect expressed in this Section. Any Outstanding Bonds shall prior to the maturity or redemption date thereof be deemed to have been paid within the meaning and with the effect expressed in subparagraph (a) of this Section if: (i) in case any of such Bonds are to be redeemed on any date prior to their maturity, the Institution shall have given to the Trustee, in form satisfactory to the Trustee, irrevocable instructions to give notice of redemption on such date of such Bonds; (ii) there shall have been deposited with the Trustee either moneys in an amount which shall be sufficient, or Defeasance Obligations, the principal of and the interest on which when due will provide moneys which, together with the moneys, if any, deposited with the Trustee at the same time, shall be sufficient, to pay when due the principal or Redemption Price, if applicable, and interest due and to become due on such Bonds on and prior to the redemption date or maturity date thereof, as the case may be; (iii) there shall have been filed with the Trustee and the Institution (x) a report of a firm of certified public accountants, acceptable to the Institution, confirming the arithmetical accuracy of the computations showing the cash or Defeasance Obligations, the principal of and interest on which, together with cash, if any, deposited at the same time will be sufficient to pay when due, the principal or Redemption Price, if applicable, and interest due or to become due on such Bonds, on and prior to the redemption date or maturity date thereof, as the case may be and (y) an Opinion of Counsel, acceptable to the Institution, to the effect that upon provision for the payment of the principal or Redemption Price, if applicable, of, and interest due or to become due on such Bonds, the pledge of Revenues and other moneys and securities hereunder and the grant of all rights to the Owners of such Bonds hereunder shall be discharged and satisfied and all conditions precedent to defeasance set forth in this Indenture have been satisfied; and (iv) in the event such Bonds are not by their terms subject to redemption within the next succeeding sixty (60) days, the Institution shall have given the Trustee, in form satisfactory to the Trustee, irrevocable instructions to mail, as soon as practicable, a notice to the owners of such Bonds that the deposit required by (ii) above has been made with the Trustee and that such Bonds are
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deemed to have been paid in accordance with this Section 12.1 and stating such maturity or redemption date upon which moneys are to be available for the payment of the principal or Redemption Price, if applicable, on such Bonds. Neither Defeasance Obligations deposited with the Trustee pursuant to this Section nor principal or interest payments on any such securities shall be withdrawn or used for any purpose other than the payment of the principal or Redemption Price, if applicable, and interest on such Bonds; provided that any cash received from such principal or interest payments on such Defeasance Obligations deposited with the Trustee, if not then needed for such purpose, may, to the extent practicable, be reinvested in Defeasance Obligations maturing at times and in amounts sufficient to pay when due the principal or Redemption Price, if applicable, and interest to become due on such Bonds on and prior to such redemption date or maturity date thereof, as the case may be, and interest earned from such reinvestment shall be paid over to the Institution to be used by it in any lawful manner in furtherance of its “exempt purpose” as defined in Section 501(c)(3) of the Code, provided all amounts owing to the Institution and the Trustee have been satisfied, free and clear of any trust, lien or pledge. Nothing in this paragraph (b) shall be, or be deemed to be, a restriction on the Institution’s ability to provide for Defeasance Obligation substitutions or restructuring provided that the Defeasance Obligations shall at all times be in compliance with clause (ii) above, as evidenced by a report of a firm of certified public accountants in compliance with clause (iii)(x) above. Notwithstanding any provision of this Indenture, the Trustee shall have no right of set off against any moneys and securities deposited under this subsection (b).
(c) Anything in this Indenture to the contrary notwithstanding, any moneys held by the Trustee in trust for the payment and discharge of any of the Bonds which remain unclaimed for two (2) years after the date when all of the Bonds have become due and payable either at their stated maturity dates or by a call for earlier redemption, if such moneys were held by the Trustee at such date, or for two (2) years after the date of deposit of such moneys if deposited with the Trustee after such date when all of the Bonds become due and payable, shall, at the written request of the Institution be repaid by the Trustee to the Institution as its absolute property and free from trust (to the extent permitted by law) to be used by the Institution in any lawful manner in furtherance of its “exempt purpose” as defined in Section 501(c)(3) of the Code, and the Institution and the Trustee shall thereupon be released and discharged of its obligations with respect to the Bonds; provided, however, that, before being required to make any such payment to the Institution, the Trustee shall mail to the Bondowners a notice that such moneys remain unclaimed and that, after a date named in such notice, which date shall be not less than forty (40) nor more than ninety (90) days after the date of mailing of such notice, the balance of such moneys then unclaimed shall be returned to the Institution to be used by the Institution in any lawful manner in furtherance of its “exempt purpose” as defined in Section 501(c)(3) of the Code.
ARTICLE XIII
MISCELLANEOUS
SECTION 13.1. MISCELLANEOUS POWERS AS TO BONDS AND PLEDGE. The Institution represents that it is duly authorized under all applicable laws to create and issue the Bonds, to execute this Indenture and any Supplemental Indenture, and to pledge the Revenues and other moneys, securities and funds pledged by this Indenture in the manner and to
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the extent provided herein and in any Supplemental Indenture. The Institution covenants that the Revenues and other moneys, securities and funds so pledged are and shall be free and clear of any pledge, lien, charge or encumbrance thereon or with respect thereto, prior to, or of equal rank with, the pledge created by this Indenture and any Supplemental Indenture, and all corporate action on the part of the Institution to that end has been duly and validly taken. The Institution further covenants that the Bonds and the provisions of this Indenture and any Supplemental Indenture are and shall be the valid and binding special obligations of the Institution in accordance with their terms and the terms of this Indenture and any Supplemental Indenture. The Institution further covenants that it shall at all times, to the extent permitted by law, defend, preserve and protect the pledge of the Revenues and other moneys, securities and funds pledged under and in accordance with this Indenture and any Supplemental Indenture, and all of the rights of the Bondowners under and in accordance with this Indenture against all claims and demands of all persons whomsoever.
SECTION 13.2. FURTHER ASSURANCE. The Institution covenants that at any and all times the Institution shall, so far as it may be authorized by law, pass, make, do, execute, acknowledge and deliver, all and every such further resolutions, acts, deeds, conveyances, assignments, transfers and assurances as may be necessary or desirable for the better assuring, conveying, granting, assigning and confirming all and singular the rights and Revenues and other moneys, securities and funds hereby pledged or assigned, or intended so to be, or which the Institution may hereafter bind itself to pledge or assign.
SECTION 13.3. NO RIGHTS CONFERRED ON OTHERS. Nothing herein contained shall confer any right upon any person other than the Trustee, the Institution and the Owners of the Bonds.
SECTION 13.4. EVIDENCE OF SIGNATURES OF BONDOWNERS AND OWNERSHIP OF BONDS. Any request, consent or other instrument which this Indenture may require or permit to be signed and executed by the Bondowners may be in one or more instruments of similar tenor, and shall be signed or executed by such Bondowners in person or by their attorneys or DTC proxies duly appointed in writing. Proof of the execution of any such instrument, or of an instrument appointing any such attorney, or the holding by any person of such Bonds, shall be sufficient for any purpose of this Indenture (except as otherwise herein expressly provided) if made in the following manner:
(a) The fact and date of the execution by any Bondowner or his attorney of such instrument may be proved by the certificate, which need not be acknowledged or verified, of an officer of a bank or trust company satisfactory to the Trustee or of any notary public or other officer authorized to take acknowledgments of deeds to be recorded in the state in which he purports to act, the person signing such request or other instrument acknowledged to him the execution thereof, or by an affidavit of a witness of such execution, duly sworn to before such notary public or other officer. The authority of the person or persons executing any such instrument on behalf of a corporate Bondowner may be established without further proof if such instrument is signed by a person purporting to be the president or a vice-president of such corporation with a
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corporate seal affixed and attested by a person purporting to be its secretary or an assistant secretary.
(b) The amount of Bonds held by any person executing such request or other instrument as a Bondowner, and the numbers and other identification thereof, and the date of his holding such Bonds, may be proved by a certificate (which need not be acknowledged or verified) satisfactory to the Trustee, executed by an officer or partner of a bank, trust company, or other financial firm or corporation satisfactory to the Trustee, showing that at the date therein mentioned such person exhibited to such officer or partner or had on deposit with such depository the Bonds described in such certificate. Continued ownership after the date stated in such certificate shall be presumed unless and until a certificate complying with the provisions of this paragraph (b), bearing a subsequent date and relating to the same Bonds, shall be delivered to the Trustee.
The ownership of Bonds and the amount, numbers and other identification, and date of holding the same shall be proved by the registry books. Any request, consent or vote of the owner of any Bond shall bind all future owners of such Bond in respect of anything done or suffered to be done or omitted to be done by the Institution or the Trustee in accordance therewith.
SECTION 13.5. REMEDIES. The Bondowners and the Trustee acting for the Bondowners shall be entitled to all of the rights and remedies provided or permitted by law except as otherwise provided by this Indenture or any Supplemental Indenture.
SECTION 13.6. PRESERVATION AND INSPECTION OF DOCUMENTS. All documents received by the Trustee from the Institution or Bondowners under the provisions of this Indenture shall be retained in its possession and shall be subject at all reasonable times to the inspection of the Institution, any Bondowner and their agents and their representatives, any of whom may make copies thereof.
SECTION 13.7. MONEYS AND FUNDS HELD FOR PARTICULAR BONDS. Subject to Section 12.1(c) hereof, the amounts held by the Trustee for the payment of the principal or Redemption Price of and interest on the Bonds due on any date with respect to particular Bonds shall, pending such payment, be set aside and held in trust by it for the owners of such Bonds entitled thereto, and for the purposes of this Indenture such principal or Redemption Price of and interest on such Bonds, due after such date thereof, shall no longer be considered to be unpaid.
SECTION 13.8. CANCELLATION OF BONDS. The Trustee shall forthwith cancel or cause to be cancelled all Bonds which have been redeemed or paid by it and may cremate or otherwise destroy or dispose of such Bonds in accordance with its customary practices and deliver a certificate to that effect to the Institution. No such Bonds shall be deemed Outstanding Bonds under this Indenture and no Bonds shall be issued in lieu thereof.
SECTION 13.9. NO RECOURSE ON THE BONDS. No recourse shall be had for the payment of the principal or Redemption Price of and interest on the Bonds or for any
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claims based thereon or on this Indenture against any trustee, director, officer, employee or agent of the Institution or any other Member of the Obligated Group or any person executing the Bonds, all such liability, if any, being expressly waived and released by every Bondowner by the acceptance of the Bond.
SECTION 13.10. SEVERABILITY OF INVALID PROVISION. If any one or more of the covenants or agreements provided in this Indenture or a Supplemental Indenture on the part of the Institution or the Trustee to be performed should be contrary to law, then such covenant or covenants, agreement or agreements shall be null and void and shall in no way affect the validity of the other provisions of this Indenture, such Supplemental Indenture or of the Bonds.
SECTION 13.11. NOTICES. Any notices or other instruments delivered to the Institution pursuant to this Indenture or a Supplemental Indenture shall be in writing and shall be delivered or sent by registered or certified mail or overnight courier or Electronic Means to it at its office at Hackensack Meridian Health, Inc, 343 Thornall Street, Edison, NJ 08837, Attention: Chief Financial Officer, or such other address as it shall designate to the Trustee in writing, and any notice, directions, instructions or other instrument delivered to the Trustee pursuant to this Indenture or a Supplemental Indenture shall be in writing and shall be delivered or sent by registered or certified mail or overnight courier or Electronic Means to it at the office of the Trustee at The Bank of New York Mellon, 385 Rifle Camp Road, 3rd Floor, Woodland Park, NJ 07424, Attention: Corporate Trust Department, or such other address as it shall designate to the Institution in writing. Notwithstanding the foregoing, unless otherwise consented to by the Trustee, all notices sent to the Trustee with investment instructions shall be sent only by facsimile, registered or certified mail, or overnight courier. The Trustee shall have the right to accept and act upon instructions or directions pursuant to this Indenture in the form of a manually signed document sent by Electronic Means, provided, however, that the Institution shall provide to the Trustee an incumbency certificate listing designed persons with the authority to provide such instructions and containing specimen signatures of such designated persons, which incumbency certificate shall be amended whenever a person is to be added or deleted from the listing. If the Institution elects to give the Trustee instruction or other communications via Electronic Means, and the Trustee in its discretion elects to act upon such instructions, the Trustee’s understanding of such instructions shall be deemed controlling. The Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee’s reliance upon and compliance with such instructions notwithstanding that such instructions conflict or are inconsistent with a subsequent written instruction. The Institution agrees to assume all risks arising out of the use of such electronic methods to submit instructions and directions to the Trustee, including, without limitation, the risk of the Trustee acting on unauthorized instructions, and the risk of interception and misuse by third parties.
In addition to notice provisions provided elsewhere in this Indenture, the Institution shall provide notice of the following events to each Rating Agency for so long as such Rating Agency shall maintain a rating on any Outstanding Bonds: (i) a change in the Trustee, (ii) any amendment to this Indenture or (iii) any redemption, defeasance or acceleration of the Bonds.
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SECTION 13.12. SECONDARY MARKET DISCLOSURE. Certain members of the Obligated Group have entered into continuing disclosure undertakings (the “Continuing Disclosure Undertakings”) in connection with tax-exempt revenue bonds issued for the benefit of the Institution and the other members of the Obligated Group (the “Tax-Exempt Bonds”). Holders and prospective purchasers of the Bonds may obtain copies of the information provided by the Institution and the other members of the Obligated Group 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 Bonds are paid or deemed paid in full. The Institution hereby covenants that unless otherwise available on EMMA or any successor thereto or to the functions thereof pursuant to the Continuing Disclosure Undertakings, copies of the Institution’s and its affiliates’ unaudited quarterly consolidated financial statements, and consolidated annual audited financial statements, each with consolidating schedules for the Obligated Group, will either be posted on the Institution’s website, posted on EMMA, or filed with the Trustee, provided, however, that the Trustee shall have no responsibility whatsoever to determine if any such posting has occurred. The failure of the Institution to comply with the covenants of this Section 13.12 shall not be considered an Event of Default. As the sole and exclusive remedy for the Institution’s failure to comply with this Section 13.12, the Trustee may (and, at the request of the Holders of at least 51% in aggregate principal amount of the Outstanding Bonds, shall), or any Bondowner or any owner of a beneficial interest in a Bond or Bonds may, take such actions to seek specific performance by court order and to cause the Institution to comply with its obligations under this Section 13.12 and no person, including any Holder or any Beneficial Owner of the Bonds, may recover monetary damages.
SECTION 13.13. HOLIDAYS. If the date for making any payment or the last date for performance of any act or the exercising of any right as provided herein, shall not be a Business Day, such payment may be made or act performed or right exercised on the next succeeding Business Day, with the same force and effect as if done on the nominal date provided herein, and no interest shall accrue for the period after such nominal date.
SECTION 13.14. SUCCESSORS AND ASSIGNS. All the covenants, promises and agreements in this Indenture contained by or on behalf of the Institution or by or on behalf of the Trustee shall bind and inure to the benefit of their respective successors and assigns, whether so expressed or not.
SECTION 13.15. ARTICLE AND SECTION HEADINGS. The article and section headings have been prepared for convenience only and are not a part of this Indenture and shall not be taken as an interpretation of any provision of this Indenture.
SECTION 13.16. EFFECTIVE DATE. This Indenture and the lien thereof shall become effective on the date and at the time on which the Bonds initially issued under this Indenture are delivered.
SECTION 13.17. GOVERNING LAW. THE EFFECT AND MEANING OF THIS INDENTURE AND THE RIGHTS OF ALL PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW JERSEY.
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SECTION 13.18. COUNTERPARTS. This Indenture may be executed in multiple counterparts, each of which shall be regarded for all purposes as an original and such counterparts shall constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have each caused this Indenture to be executed by its duly authorized officer.
HACKENSACK MERIDIAN HEALTH, INC.
By: President, Financial Services Division and Chief Financial Officer
THE BANK OF NEW YORK MELLON, as Trustee
By: Vice President
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ATTACHMENT A
(FORM OF SERIES 2018 BOND)
UNITED STATES OF AMERICA
STATE OF NEW JERSEY
AS PROVIDED IN THE INDENTURE REFERRED TO HEREIN, UNTIL THE TERMINATION OF THE SYSTEM OF BOOK-ENTRY-ONLY TRANSFERS THROUGH THE DEPOSITORY TRUST COMPANY (TOGETHER WITH ANY SUCCESSOR SECURITIES DEPOSITORY APPOINTED PURSUANT TO THE INDENTURE, “DTC”), AND NOTWITHSTANDING ANY OTHER PROVISION OF THE INDENTURE TO THE CONTRARY, A PORTION OF THE PRINCIPAL AMOUNT OF THIS BOND MAY BE PAID OR REDEEMED WITHOUT SURRENDER HEREOF TO THE TRUSTEE. DTC OR A NOMINEE, TRANSFEREE OR ASSIGNEE OF DTC AS OWNER OF THIS BOND MAY NOT RELY UPON THE PRINCIPAL AMOUNT INDICATED HEREON AS THE PRINCIPAL AMOUNT HEREOF OUTSTANDING AND UNPAID. THE PRINCIPAL AMOUNT HEREOF OUTSTANDING AND UNPAID SHALL FOR ALL PURPOSES BE THE AMOUNT DETERMINED IN THE MANNER PROVIDED IN THE INDENTURE.
UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED OFFICER OF DTC (A) TO THE TRUSTEE FOR REGISTRATION OF TRANSFER OR EXCHANGE OR (B) TO THE TRUSTEE FOR PAYMENT OF PRINCIPAL, AND ANY BOND ISSUED IN REPLACEMENT THEREOF OR SUBSTITUTION THEREFOR IS REGISTERED IN THE NAME OF DTC OR ITS NOMINEE CEDE & CO., OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC AND ANY PAYMENT IS MADE TO DTC, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, DTC OR ITS NOMINEE, CEDE & CO., HAS AN INTEREST HEREIN.
HACKENSACK MERIDIAN HEALTH TAXABLE BOND, SERIES 2018
NUMBER: R-_ DATED DATE: ______, 20__ INTEREST RATE: __% MATURITY DATE: July 1 , 2048 CUSIP: REGISTERED OWNER: Cede & Co. PRINCIPAL AMOUNT: $______
A-1
For value received, HACKENSACK MERIDIAN HEALTH, INC., a nonprofit corporation duly organized and existing under laws of the State of New Jersey (the “Institution”), acknowledges itself indebted and hereby promises to pay to the order of the Registered Owner, or registered assigns, the Principal Amount on the Maturity Date, unless this bond shall have been previously called for redemption and payment of the Redemption Price shall have been duly made or provided for, with interest thereon from the Dated Date hereof to the Maturity Date, payable on each Interest Payment Date (as provided in the hereinafter defined Indenture) at a per annum interest rate (calculated as provided in the Indenture) equal to the Interest Rate stated above. The interest on this bond is payable by wire or by check or draft mailed by the Trustee to the Registered Owner of record at the close of business on the applicable Record Date preceding each Interest Payment Date at the address shown on the registration books unless an alternate method of payment shall be agreed upon by the Trustee and the Registered Owner; provided, however, that such alternate method of payment is subject to the approval of the Institution, which approval will not unreasonably be withheld. The Principal Amount is payable when due only upon presentation and surrender of this bond at the Corporate Trust Office of The Bank of New York Mellon, or its successor as Trustee (the “Trustee”); except that until termination of the system of book-entry-only transfers through The Depository Trust Company or a successor securities depository appointed pursuant to the Indenture (hereinafter defined), and notwithstanding any other provision of the Indenture to the contrary, a portion of the Principal Amount (other than a portion payable upon redemption in whole or upon final maturity) may be paid or redeemed in accordance with the Indenture without surrender of this bond to the Trustee as hereinbefore described.
This bond is issuable in the denominations authorized under the Indenture.
This bond has been duly issued by the Institution under and pursuant to the Trust Indenture, dated as of April 1, 2018 (as may be amended and supplemented, the “Indenture”), by and between the Institution and the Trustee. This bond is a general obligation of the Institution secured by a pledge of, equally and ratably with all other bonds of this issue, the Revenues (as defined in the Indenture) derived by or for the account of the Institution. This bond is one of a total authorized issue of $___ all of like tenor except as to date, interest rate, maturity, number and amount. The bonds of this issue shall be issued as the Institution’s Taxable Bonds, Series 2018 (the “Bonds”). Reference is hereby made to the Indenture for a description of the funds, revenues and charges pledged thereunder, the nature and extent of the security thereby created, and the rights, limitation of rights, obligations, duties and immunities of the Institution, the Trustee, and the owners of the bonds. Certified copies of the Indenture are on file in the office of the Institution.
Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Indenture.
The Bonds are subject to redemption prior to maturity as provided in the Indenture. If less than all the Bonds of a maturity are to be redeemed, the Bonds (or portions thereof) to be so redeemed shall be selected by the Trustee as provided in the Indenture.
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In the event this bond shall be called for redemption, notice of such redemption shall be given by the Trustee in accordance with the terms of the Indenture by mail addressed to the Registered Owner not more than forty-five (45) nor less than thirty (30) days prior to the redemption date. Notice of redemption having been given as aforesaid, and any conditions for such redemption having been met, the Bonds so called for redemption, on the date specified in such notice, shall become due and payable at 100% of the principal amount thereof plus any applicable premium and from and after the date so fixed for redemption, interest on the Bonds so called for redemption shall cease to accrue if, on the redemption date, moneys for the redemption of all Bonds to be redeemed, together with interest to the redemption date, shall be held by the Trustee so as to be available therefor on such date. If such moneys shall not be so available on the redemption date, such Bonds shall continue to bear interest until paid at the same rate as they would have borne had they not been called for redemption, and in the case of optional redemption, the Bonds shall continue to be due on their original maturity dates as if the Bonds had not been called for redemption.
In case an Event of Default, as defined in the Indenture, shall occur, the principal of this bond may be declared due and payable in the manner and with the effect provided in the Indenture.
No recourse shall be had for the payment of the principal of or interest on this bond against any trustee, director, officer, employee or agent of any member of the Obligated Group (as defined in the Indenture), or any person executing this bond, all such liability, if any, being hereby expressly waived and released by the Registered Owner of this bond by the acceptance hereof and as a part of the consideration hereof, as provided in the Indenture.
The Indenture contains provisions permitting the Institution, with the consent of the Registered Owners of not less than a majority in aggregate principal amount of the Bonds Outstanding, evidenced as in the Indenture provided, to adopt supplemental indentures modifying any of the provisions of the Indenture or any supplemental indenture or of the Bonds or releasing the Institution from any of the obligations, covenants, agreements, limitations, conditions or restrictions therein contained; provided, however, that no such supplemental indenture shall: (i) change any terms of redemption of Bonds or the due date of principal of or interest on Bonds or make any reduction in principal or redemption price of and interest on any Bond, without the consent of the Registered Owners affected thereby; or (ii) diminish the pledge of the Revenues securing the Bonds or reduce the aforesaid percentage of Bonds, the consent of the Registered Owners of which is required for any such supplemental indenture, without the consent of the Registered Owners of all Bonds then Outstanding. In addition, the Indenture contains provisions permitting the Institution to adopt supplemental indentures without the consent of the Owners of the Bonds upon the terms and conditions specified in the Indenture.
This bond is a negotiable instrument for all purposes and shall be transferable, as provided in the Indenture, only upon the books of the Institution kept for that purpose at the above-mentioned office of the Trustee by the Registered Owner hereof in person, or by his or her duly authorized attorney, upon surrender of this bond together with a written instrument of transfer satisfactory to the Trustee duly executed by the Registered Owner or his or her duly authorized attorney, and thereupon a new registered Bond or Bonds, and in the same aggregate principal amount, maturity date and interest rate, shall be issued to the transferee in exchange
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therefor as provided in the Indenture, and upon payment of the charges therein prescribed. The Trustee will not be required to make an exchange or transfer of this bond during the period from each Record Date to the following Interest Payment Date or during the forty-five (45) days preceding any date fixed for redemption if this bond (or any part thereof) is eligible to be selected or has been selected for redemption.
The Institution and the Trustee may deem and treat the person in whose name this bond is registered as the absolute owner hereof for the purpose of receiving payment of, or on account of, the principal and interest due and for all other purposes and neither the Institution nor the Trustee shall be affected by any notice to the contrary.
It is hereby certified and recited by the Institution that all acts, conditions and things necessary to be done, precedent to and in the issuance of the Bonds of the issue of which this bond is a part in order to make them the legal, valid and binding general obligations of the Institution in accordance with their terms, have been done, have happened and have been performed in regular and due form as required by law, and that the issuance of such Bonds does not exceed or violate any constitutional, statutory or other limitation upon the amount of the bonded indebtedness prescribed by law for the Institution.
This bond shall not be valid or obligatory for any purpose until the certificate of authentication hereon shall have been manually signed by the Trustee.
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IN WITNESS WHEREOF, HACKENSACK MERIDIAN HEALTH, INC. has caused this bond to be executed in its name by a manual or a facsimile signature of its Authorized Officer, all as of the Dated Date.
HACKENSACK MERIDIAN HEALTH, INC.
By: Name: Title:
TRUSTEE’S AUTHENTICATION CERTIFICATE
This bond is one of the Bonds of Hackensack Meridian Health, Inc. described in the within-mentioned Indenture.
THE BANK OF NEW YORK MELLON, as Trustee
By: Name: Title: Vice President
Date of Authentication: ______, 20__
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[FORM OF ASSIGNMENT]
Assignment
For value received the undersigned hereby sells, assigns and transfers this bond to
(Name and Address of Assignee)
(Social Security or Other Taxpayer Identification Number of Assignee) issued by Hackensack Meridian Health, Inc., and all rights thereunder, hereby irrevocably appointing ______to transfer this bond on the books of Hackensack Meridian Health, Inc. kept and maintained for registration of this bond by such entity as Trustee with full power of substitution in the premises.
Dated:
SIGNATURE GUARANTY:
Signatures must be guaranteed by an “eligible guarantor institution” meeting the requirements of the registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program (“STAMP”) or such other “signature guarantee program” as may be determined by the registrar in addition to, or in substitution for STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.
Signature Guaranteed:
By: Authorized Signature
Note: The signature to this assignment must correspond with the name as written on the face of this bond without alterations or enlargement or other change.
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ATTACHMENT B
STANDING INVESTMENT INSTRUCTIONS
B-1
[THIS PAGE INTENTIONALLY LEFT BLANK]
MASTER TRUST INDENTURE
by and between
HACKENSACK MERIDIAN HEALTH, INC.
and
THE BANK OF NEW YORK MELLON, as Master Trustee
Dated as of April 1, 2017
TABLE OF CONTENTS Page
ARTICLE I DEFINITIONS AND CERTAIN GENERAL PROVISIONS
Section 101. Definitions...... 2 Section 102. Interpretation ...... 20 Section 103. Accounting Principles and Financial Reporting ...... 21 Section 104. Delivery of Financial Statements ...... 22 Section 105. Treatment of Debt Obligations Securing Related Bonds ...... 22
ARTICLE II THE OBLIGATIONS
Section 201. Series, Designation and Amount of Obligations ...... 23 Section 202. Payment of Obligations ...... 23 Section 203. Execution ...... 24 Section 204. Authentication ...... 24 Section 205. Form of Obligations ...... 25 Section 206. Mutilated, Lost, Stolen or Destroyed Obligations ...... 25 Section 207. Registration; Negotiability; Cancellation Upon Surrender; Exchange of Obligations ...... 25 Section 208. Security for Obligations; Pledge of Gross Revenues; Collateral Assignment ...... 26 Section 209. Issuance of Obligations in Forms Other than Notes ...... 29 Section 210. Substitute Obligations upon Withdrawal of a Member ...... 30 Section 211. Appointment of Combined Group Agent ...... 30 Section 212. Conditions to Issuance of Obligations Hereunder ...... 31
ARTICLE III PREPAYMENT OR REDEMPTION OF OBLIGATIONS
Section 301. Prepayment or Redemption Dates and Prices ...... 31
ARTICLE IV GENERAL COVENANTS
Section 401. Payment of Principal, Premium, if any, and Interest and Other Amounts; Designated Affiliates and System Affiliates ...... 31 Section 402. Performance of Covenants ...... 33 Section 403. Entrance into the Obligated Group ...... 33 Section 404. Cessation of Status as a Member of the Obligated Group ...... 34 Section 405. General Covenants; Right of Contest ...... 35 Section 406. Insurance; Proceeds; Awards ...... 37 Section 407. Annual Debt Service Coverage Ratio ...... 38 Section 408. Permitted Reorganizations ...... 39 Section 409. Financial Statements, Etc...... 41
(i)
TABLE OF CONTENTS (continued)
Page
Section 410. Permitted Indebtedness ...... 42 Section 411. Permitted Dispositions ...... 45 Section 412. No Lien on Gross Revenues; Permitted Encumbrances ...... 46 Section 413. Permitted Releases ...... 46 Section 414. Indemnity ...... 47 Section 415. Debt Service on Balloon Indebtedness ...... 48 Section 416. Debt Service on Variable Rate Indebtedness ...... 49 Section 417. Debt Service on Discount Indebtedness ...... 49 Section 418. Debt Service on Guarantees ...... 49 Section 419. Right to Consent, Etc...... 50
ARTICLE V REMEDIES
Section 501. Events of Default ...... 50 Section 502. Acceleration ...... 52 Section 503. Remedies; Rights of Obligation Holders ...... 52 Section 504. Direction of Proceedings by Holders ...... 53 Section 505. Appointment of Receivers ...... 54 Section 506. Application of Moneys ...... 54 Section 507. Remedies Vested in Master Trustee ...... 56 Section 508. Rights and Remedies of Obligation Holders ...... 56 Section 509. Termination of Proceedings ...... 56 Section 510. Waiver of Events of Default ...... 57 Section 511. Members’ Rights of Possession and Use of Property ...... 57 Section 512. Related Bond Trustee or Bondholders Deemed To Be Obligation Holders ...... 57 Section 513. Remedies Subject to Provisions of Law ...... 58 Section 514. Notice of Default ...... 58
ARTICLE VI THE MASTER TRUSTEE
Section 601. Acceptance of the Trusts ...... 58 Section 602. Fees, Charges and Expenses of Master Trustee ...... 61 Section 603. Notice to Obligation Holders if Default Occurs ...... 61 Section 604. Intervention by Master Trustee ...... 61 Section 605. Successor Master Trustee ...... 62 Section 606. Corporate Master Trustee Required; Eligibility ...... 62 Section 607. Resignation by the Master Trustee ...... 62 Section 608. Removal of the Master Trustee ...... 62 Section 609. Appointment of Successor Master Trustee by the Obligation Holders; Temporary Master Trustee ...... 62 Section 610. Concerning Any Successor Master Trustee ...... 63 Section 611. Master Trustee Protected in Relying Upon Resolutions, Etc...... 63 Section 612. Successor Master Trustee as Trustee of Funds and Obligation Registrar ...... 63
(ii)
TABLE OF CONTENTS (continued)
Page
Section 613. Maintenance of Records ...... 64 Section 614. List of Obligation Holders ...... 64 Section 615. Master Trustee as Registrar ...... 64
ARTICLE VII SUPPLEMENTAL INDENTURES
Section 701. Supplemental Indentures Not Requiring Consent of Obligation Holders ...... 64 Section 702. Supplemental Indentures Requiring Consent of Obligation Holders ...... 66 Section 703. Note and Document Substitution ...... 67 Section 704. Execution of Supplemental Indentures ...... 70
ARTICLE VIII SATISFACTION OF THE MASTER TRUST INDENTURE
Section 801. Defeasance ...... 70 Section 802. Provision for Payment of a Particular Series of Obligations or Portion Thereof ..71 Section 803. Satisfaction of Related Bonds ...... 72
ARTICLE IX MANNER OF EVIDENCING OWNERSHIP OF OBLIGATIONS
Section 901. Proof of Ownership ...... 72
ARTICLE X MISCELLANEOUS
Section 1001. Limitation of Rights ...... 73 Section 1002. Unclaimed Moneys ...... 73 Section 1003. Severability ...... 73 Section 1004. Notices ...... 74 Section 1005. Instructions to the Master Trustee ...... 74 Section 1006. Counterparts ...... 74 Section 1007. Applicable Law ...... 75 Section 1008. Immunity of Officers, Employees and Members ...... 75 Section 1009. Holidays ...... 75 Section 1010. No Additional Terms or Restrictions ...... 75
Exhibit A — List of Members of the Obligated Group ...... A-1 Exhibit B — List of Designated Affiliates ...... B-1 Exhibit C — Pre-Existing Liens ...... C-1 Exhibit D — Acknowledgement and Authentication of Security Agreement ...... D-1
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MASTER TRUST INDENTURE
This MASTER TRUST INDENTURE dated as of April 1, 2017 (this “Master Trust Indenture”), by and between HACKENSACK MERIDIAN HEALTH, INC., a New Jersey nonprofit corporation (the “Corporation” or the “Combined Group Agent”), on behalf of itself and any future members of the Obligated Group (as hereinafter defined), and THE BANK OF NEW YORK MELLON, a banking corporation organized and existing under the laws of the State of New York with fiduciary and trust powers in the State of New Jersey, and having a designated corporate trust office at 385 Rifle Camp Road, Woodland Park, New Jersey 07424, as master trustee (the “Master Trustee”).
RECITALS:
The Corporation is authorized by law, and deems it necessary and desirable that it and any other future Members of the Obligated Group be able to issue promissory notes, guarantees and other evidences of indebtedness or to evidence or secure other financial obligations (collectively, as defined herein, the “Obligations”) of several series in order to secure the financing or refinancing of health care and other facilities and for other lawful and proper corporate purposes of the Members of the Obligated Group and their affiliates.
The Corporation desires to provide in this Master Trust Indenture for other legal entities in the future to become jointly and severally liable with the Corporation for the payment of the Obligations and the performance of all covenants contained herein. The Corporation and each other entity incurring such joint and several liability in accordance with the terms hereof are hereinafter referred to individually as a “Member of the Obligated Group” and collectively as the “Members of the Obligated Group” or the “Obligated Group.”
All acts and things necessary to constitute these presents a valid indenture and agreement according to its terms, have been done and performed, and the execution of this Master Trust Indenture has in all respects been duly authorized, and the Corporation, in its capacity as the Combined Group Agent, and in the exercise of the legal right and power vested in it, executes this Master Trust Indenture, on behalf of itself and any future Member of the Obligated Group, and the Corporation and any future Member of the Obligated Group may make, execute, issue and deliver one or more Obligations of various series.
In order to declare the terms and conditions upon which Obligations of each series are authenticated, issued and delivered, and in consideration of the premises, the purchase and acceptance of Obligations of each series by the holders thereof and the sum of One Dollar to it duly paid by the Master Trustee at the execution of these presents, the receipt whereof is hereby acknowledged, the Corporation and each future Member of the Obligated Group, covenant and agree with the Master Trustee, for the equal and proportionate benefit of the respective holders from time to time of Obligations of each series, as follows:
ARTICLE I DEFINITIONS AND CERTAIN GENERAL PROVISIONS
Section 101. Definitions. In addition to the words and terms elsewhere defined in this Master Trust Indenture, the following words and terms as used in this Master Trust Indenture shall have the following meanings unless the context or use indicates another or different meaning or intent:
“Accounts” has the meaning set forth in the New Jersey Uniform Commercial Code.
“Affiliate” means a corporation, limited liability company, partnership, joint venture, association, business trust or similar entity (a) which is controlled directly or indirectly by a Member of the Obligated Group or any Designated Affiliate; or (b) a majority of the members of the Directing Body of which are members of the Directing Body of a Member of the Obligated Group or any Designated Affiliate. For the purposes of this definition, control 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 the directors of such corporation; (b) a not for profit corporation not having stock, having the power to elect or appoint, directly or indirectly, a majority of the members of the Directing Body of such corporation; or (c) 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 Directing Body, by contract or otherwise. For the purposes of this definition, “Directing Body” means with respect to: (a) a corporation having stock, such corporation’s board of directors and the owners, 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 the corporation’s directors (both of which groups shall be considered a Directing Body); (b) a not for profit corporation not having stock, such corporation’s members if the members have complete discretion or reserved approval rights to elect the corporation’s directors, or the corporation’s directors or governing board or body if the corporation’s members do not have such discretion or if the corporation is a non-member corporation; and (c) any other entity, its governing board or body. For the purposes of this definition, all references to directors and members shall be deemed to include all entities performing the function of directors or members however denominated.
“Ancillary Obligation” means an Obligation, expressly identified as an Ancillary Obligation in such Obligation, in a Supplemental Indenture or in an Officer’s Certificate delivered to the Master Trustee, as being entered into in order to evidence or secure financial obligations of a Member of the Obligated Group in an agreement that is ancillary to any direct Indebtedness, such as a reimbursement agreement, liquidity agreement, standby bond purchase agreement, bond insurance or credit enhancement agreement, continuing covenants agreement, bondholder agreement, rate maintenance agreement or similar agreement, unless and until and to the extent any such agreement constitutes a direct obligation of a Member of the Obligated Group to repay money borrowed, credit extended or the equivalent thereof, at which time such Obligation shall be deemed to be a Debt Obligation.
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“Balloon Indebtedness” means (1) Long-Term Indebtedness, fifteen percent (15%) or more of the initial principal amount of which Long-Term Indebtedness matures (or is payable at the option of the holder) in any twelve month period, if such fifteen percent (15%) or more is not to be amortized to below fifteen percent (15%) by mandatory redemption prior to such twelve month period, or (2) any portion of an issue of Indebtedness which, if treated as a separate issue of Long-Term Indebtedness, would meet the test set forth in clause (1) of this definition and which Indebtedness is designated as Balloon Indebtedness in an Officer’s Certificate stating that such portion shall be deemed to constitute a separate issue of Balloon Indebtedness.
“Board Resolution” means a copy of a resolution certified by the Secretary or an Assistant Secretary of a Person to have been duly adopted by the Governing Body of such Person and to be in full force and effect on the date of such certification, and delivered to the Master Trustee.
“Bondholder,” “holder of Bonds” or “owner of the Bonds” means the registered owner of any Related Bond.
“Bond Index” means, at the option of the Combined Group Agent as set forth in an Officer’s Certificate, either (i) the 30-year Revenue Bond Index published most recently by The Bond Buyer, or a comparable index if such Revenue Bond Index is not so published, (ii) the SIFMA Index, or (iii) such other interest rate or interest index as may be certified in writing to the Master Trustee as appropriate to the situation by the Combined Group Agent.
“Book Value,” when used with respect to Property, means the value of such Property, net of accumulated depreciation and amortization, as reflected in the most recent consolidated audited financial statements of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture), which have been prepared in accordance with GAAP, provided that such aggregate value shall be calculated in such a manner so that no portion of the value of any Property of any System Affiliate or Member of the Combined Group, as the case may be, is included more than once.
“Business Day” means a day which is not (a) a Saturday, Sunday or legal holiday on which banking institutions in the State of New Jersey or the State of New York are authorized or required by law to close or (b) a day on which the New York Stock Exchange is closed.
“Capitalization” means, as of any date of calculation, the sum of all outstanding Long- Term Indebtedness and Unrestricted Net Assets of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture).
“Capitalized Interest” means amounts irrevocably deposited in escrow to pay interest on Long-Term Indebtedness or Related Bonds and interest earned on amounts irrevocably deposited in escrow to the extent such interest earned is required to be applied to pay interest on Long- Term Indebtedness or Related Bonds.
“Capitalized Lease” means any lease of real or personal property which, in accordance with GAAP, is required to be capitalized on the balance sheet of the lessee; provided, however, that no Capitalized Operating Lease or lease between a Member of the Combined Group and
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either another Member of the Combined Group or a System Affiliate shall be considered a Capitalized Lease.
“Capitalized Operating Lease” means any lease of real or personal property entered into by a Member of the Combined Group or any other Person, as the case may be, which was initially deemed to be an operating lease in accordance with GAAP, but is subsequently and retroactively deemed to be a capital operating lease in accordance with GAAP at a later date and is required to be capitalized on the balance sheet of such Member of the Combined Group or other Person.
“Capitalized Rentals” means, as of the date of determination, the amount at which the aggregate Net Rentals due and to become due under a Capitalized Lease under which a Person is a lessee would be reflected as a liability on a balance sheet of such Person.
“Chattel Paper” has the meaning set forth in the New Jersey Uniform Commercial Code.
“Code” means the Internal Revenue Code of 1986, as amended from time to time. Each reference to a section of the Code herein shall be deemed to include the United States Treasury Regulations, including temporary and proposed regulations, relating to such section which are applicable to the Related Bonds or the use of the proceeds thereof.
“Combined Group” means, collectively, all of the Members of the Combined Group.
“Combined Group Agent” means the Corporation 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 an authorized officer of the Corporation or, if the Corporation is no longer a Member of the Obligated Group, of each Member of the Obligated Group.
“Commodities Accounts” has the meaning set forth in the New Jersey Uniform Commercial Code.
“Completion Indebtedness” means any Indebtedness incurred for the purpose of financing the completion of constructing or equipping facilities for the construction or equipping of which some Indebtedness has theretofore been incurred in accordance with the provisions of this Master Trust Indenture, to the extent necessary to provide a completed and equipped facility of the type and scope contemplated at the time, and in accordance with the general plans and specifications for such facility as originally prepared with only such changes as have been made in conformity with the documents pursuant to which such Indebtedness was originally incurred, including funding debt service reserve funds related thereto.
“Consultant” means a professional consulting, financial advisory, accounting, investment banking or commercial banking firm selected by the Combined Group Agent and not unacceptable to the Master Trustee, having the skill and experience necessary to render the particular report required and having a favorable and nationally recognized reputation for such skill and experience, which firm does not control any Member of the Combined Group or any Affiliate thereof and is not controlled by or under common control with any Member of the Combined Group or an Affiliate thereof.
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“Contract Rights” has the meaning set forth in the New Jersey Uniform Commercial Code.
“Controlling Member” means the Member of the Obligated Group or the Member of the Combined Group, as applicable, designated by the Combined Group Agent to establish and maintain control over a Designated Affiliate as provided by Section 401(C).
“Corporation” means Hackensack Meridian Health, Inc., a New Jersey nonprofit corporation, and its successors and assigns and any surviving, resulting or transferee corporation.
“Counsel” means an attorney duly admitted to practice law before the highest court of any state and, without limitation, may include legal counsel for any Member of the Combined Group or for the Master Trustee.
“Current Assets” means cash and cash equivalent deposits, marketable securities, accounts receivable, accrued interest receivable and any other assets of a Person ordinarily considered current assets under GAAP.
“Current Value” means the estimated fair market value of Property as reasonably determined by the Combined Group Agent, which fair market value shall be evidenced by an Officer’s Certificate delivered to the Master Trustee.
“Days Cash on Hand” means (a) cash, marketable securities, internally and Governing Body-designated funds (but excluding donor restricted gifts, grants, bequests, donations or contributions and any income therefrom and funds held by any Related Bond Trustee for the payment of the principal of and interest on any Related Bonds or the Master Trustee or any other trustee for the payment of the principal of and interest on any Obligations) of all Members of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture) at the conclusion of each Fiscal Year of the Combined Group or the System, as applicable, divided by (b) the amount resulting from dividing (i) Operating Expenses less non-cash expenses (including, but not limited to, depreciation, amortization, and any provision for bad debt), as determined in accordance with GAAP, at the conclusion of such Fiscal Year of the Combined Group or the System, as applicable, by (ii) the number of days in such Fiscal Year. All securities shall be valued at fair market value for purposes of this definition. “Debt Obligation” means an Obligation issued to secure or evidence any Indebtedness, including but not limited to a Guaranty (other than an Obligation expressly identified as an Ancillary Obligation or a Hedging Obligation), authorized to be issued by a Member of the Obligated Group pursuant to this Master Trust Indenture that has been authenticated by the Master Trustee pursuant to Section 204 hereof. “Debt Service Requirement” means, when not otherwise specified herein, as the context requires, either the Historic Debt Service Requirement or the Pro-forma Debt Service Requirement. “Debt to Capitalization Ratio” means, as of any date of calculation, the ratio determined by dividing (i) the Long-Term Indebtedness of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust
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Indenture), by (ii) the Capitalization of the Combined Group or, at the option of the Combined Group Agent, the System (consistent with whether Indebtedness was used for the Combined Group or the System for purposes of clause (i) of this definition).
“Designated Affiliate” means any Person which has been designated as such in accordance with Section 401(B) hereof so long as such Person’s status as a Designated Affiliate has not been terminated as provided in Section 401(B). The Designated Affiliates, as of the date of this Master Trust Indenture, are listed on Exhibit B hereto. The Combined Group Agent may from time to time deliver a revised Exhibit B to the Master Trustee, indicating additions or deletions of Designated Affiliates.
“Discount Indebtedness” means Indebtedness sold to the original purchaser thereof (other than any underwriter or other similar intermediary) at a discount from the par amount of such Indebtedness.
“Documents” means all documents, as that term is defined in the New Jersey Uniform Commercial Code, including, but not limited to, documents of title (as that term is defined in the New Jersey Uniform Commercial Code) and any and all receipts of the kind described in Article 7 of the New Jersey Uniform Commercial Code.
“Electronic Means” means the following communications methods: e-mail, facsimile transmission, secure electronic transmission containing applicable authorization codes, passwords and/or authentication keys issued by the Master Trustee, or another method or system specified by the Master Trustee as available for use in connection with its services hereunder.
“Escrow Securities” means, (i) with respect to any Obligation which secures a series of Related Bonds, the securities permitted to be used to refund or advance refund such series of Related Bonds under the Related Bond Indenture, or (ii) with respect to any other Obligation, those securities identified as such in the Supplemental Indenture pursuant to which such Obligations were issued.
“Expenses” means, for any period, the aggregate of all unrestricted expenses calculated under GAAP, including without limitation any taxes, incurred by the Person or group of Persons involved during such period, minus or before (or adding back) interest on Long-Term Indebtedness, depreciation, amortization, and payments on Obligations to the extent such payments are treated as an expense; provided that no calculation of Expenses shall take into account: (a) any unrealized loss resulting from changes in the value of, investment securities, including, but not limited to, any unrealized other-than-temporary impairment loss that is recognized in accordance with GAAP, (b) extraordinary or nonrecurring expenses or losses (including without limitation any losses on the sale or other disposition of assets or facilities not in the ordinary course of business), (c) any losses resulting from discontinued operations or any reappraisal, revaluation or write-down of any asset, facility or good-will, and any loss or expense resulting from adjustments to prior periods, (d) any unrealized losses on or related to, including marking to market, any Hedging Obligations or other hedges or derivatives, (e) any accounting reserves or losses or expenses or other items that would be considered by the Combined Group Agent to be non-cash items of the Person or group of Persons involved, and (f) if such calculation is being made with respect to the Combined Group, any losses or expenses
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attributable to transactions between any Member of the Combined Group and any other Member of the Combined Group.
“Event of Default” means any one or more of those events set forth in Section 501 of this Master Trust Indenture.
“Facilities” means all land, leasehold interests and buildings and all fixtures and equipment (as defined in the New Jersey Uniform Commercial Code or equivalent statute in effect in the state where such fixtures or equipment are located) of a Person.
“Fiscal Year” means any twelve-month period beginning on January 1 of any calendar year and ending on December 31 of such calendar year or such other consecutive twelve-month period selected by the Combined Group Agent as the fiscal year for the System or the Combined Group and designated from time to time in writing by the Combined Group Agent to the Master Trustee; for purposes of making historical calculations or determinations set forth in this Master Trust Indenture on a Fiscal Year basis, or for purposes of combinations or consolidation of accounting information, with respect to those entities whose actual fiscal year is different from that designated above, the actual fiscal year of such entities which ended within the Fiscal Year of the System or the Combined Group shall be used; provided, however, that for purposes of making any calculations or determinations as set forth in this Master Trust Indenture, the Combined Group Agent may designate in writing to the Master Trustee as the “Fiscal Year” the most recent period of twelve (12) consecutive calendar months for which audited financial statements of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture), are available. Whenever this Master Trust Indenture refers to a Fiscal Year of a specific entity, such reference shall be to the actual fiscal year adopted by such entity.
“Future Test Period” means each of the two full consecutive Fiscal Years immediately following the computation then being made, or, if such computation is then being made in connection with the provision of funds for capital improvements or expenditures, each of the two full consecutive Fiscal Years immediately following the estimated date of completion of the capital improvements or expenditures then being financed.
“GAAP” means generally accepted accounting principles as applied in the United States of America, consistently applied.
“General Intangibles” has the meaning set forth in the New Jersey Uniform Commercial Code.
“Governing Body” means the board of directors, board of trustees or similar group in which the right to exercise the powers of corporate directors or trustees is vested or an executive committee of such board or any duly authorized committee of that board to which the relevant powers of that board have been lawfully delegated.
“Gross Revenues” means all revenues, rents, profits, receipts, benefits, royalties, and income of any Member of the Combined Group arising from goods or services provided by Members of the Combined Group or arising in any manner with respect to, incident to or on account of the Members of the Combined Group’s operations, including, without limitation, (i)
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the Members of the Combined Group’s rights under agreements with insurance companies, Medicare, Medicaid, governmental units and prepaid health organizations, including health care insurance receivables and rights to Medicare and Medicaid loss recapture under applicable regulations to the extent not prohibited by applicable law, rules or regulations; (ii) gifts, grants, bequests, donations, contributions and pledges to any Member of the Combined Group; (iii) insurance proceeds of any kind, and any award, or payment in lieu of an award, resulting from condemnation proceedings; (iv) all proceeds from the sale or other transfer of any goods, inventory and other tangible and intangible property, and all rights to receive the foregoing, whether now owned or hereafter acquired by any Member of the Combined Group and regardless of whether generated in the form of Accounts, accounts receivable, Contract Rights, Chattel Paper, Documents, General Intangibles, Instruments, Investment Property, and proceeds of insurance; and (v) all proceeds of the foregoing; excluding, however, gifts, grants, bequests, donations, contributions and pledges to any Member of the Combined Group heretofore or hereafter made, and the income and gains derived therefrom, which are specifically restricted by the donor or grantor to a particular purpose which is inconsistent with its use for payments required under this Master Trust Indenture or on any Obligations or Indebtedness.
“Gross Revenues Account” means the account of that name established pursuant to Section 208 of this Master Trust Indenture.
“Guaranty” means all obligations of a Person guaranteeing, or in effect guaranteeing, any Indebtedness or other obligation of any Primary Obligor in any manner, whether directly or indirectly including but not limited to obligations incurred through an agreement, contingent or otherwise, by such Person: (l) to purchase such Indebtedness or obligation or any Property constituting security therefor; (2) to advance or supply funds to the Primary Obligor: (i) for the purchase or payment of such Indebtedness or obligation, or (ii) to maintain working capital or other balance sheet condition for a Primary Obligor; (3) to purchase securities or other Property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the Primary Obligor to make payment of the Indebtedness or obligation; or (4) otherwise to assure the owner of such Indebtedness or obligation against loss in respect thereof. For purposes of this definition, a guaranty by one or more Members of the Combined Group or any System Affiliate of Indebtedness of one or more other Members of the Combined Group or a System Affiliate shall not be considered a Guaranty.
“Hedging Obligation” means an Obligation, expressly identified as a Hedging Obligation in such Obligation, in a Supplemental Indenture or in an Officer’s Certificate delivered to the Master Trustee as being 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, a basis swap, a yield curve swap, a currency swap, a forward or futures contract or an option (e.g., a call, put, cap, floor or collar) and which arrangement does not constitute an obligation to repay money borrowed, credit extended or the equivalent thereof.
“Historic Annual Debt Service Coverage Ratio” means, for any period of time, the ratio determined by dividing (i) Income Available for Debt Service of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture), for that period by (ii) the Historic Debt Service Requirements of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture) (consistent with whether Income Available for Debt 8
Service was used for the Combined Group or the System for purposes of clause (i) of this definition), required to be paid during such period; provided that when such calculation is being made with respect to the System or the Combined Group, Income Available for Debt Service and Historic Debt Service Requirements shall be determined only with respect to those Persons who are System Affiliates or Members of the Combined Group, as the case may be, at the close of such period; provided, however, that if the financial statements that would be used to calculate Income Available for Debt Service of the System or the Combined Group under clause (i) of this definition cover a period consisting of fewer than 12 months, then, at the election of the Combined Group Agent, either (a) the Historic Debt Service Requirements of the System or the Combined Group under clause (ii) of this definition shall be pro-rated to reflect such shorter period, or (b) Income Available for Debt Service of the System or the Combined Group under clause (i) of this definition shall be based on financial statements of the System or the Combined Group covering a consecutive 12-month period selected by the Combined Group Agent that ends within 180 days preceding the date of calculation of the Historic Debt Service Coverage Ratio, and such consecutive 12-month period shall be deemed to be a Fiscal Year for purposes of such calculation of the Historic Debt Service Coverage Ratio.
“Historic Debt Service Requirements” means, with respect to the period of time for which calculated, the aggregate of the payments required to be made during such period in respect of principal (whether at maturity, as a result of mandatory sinking fund redemption or mandatory prepayment) and interest on outstanding Long-Term Indebtedness of each Person or a group of Persons with respect to which calculated; provided that: (a) interest shall be excluded from the determination of the Historic Debt Service Requirements to the extent that Capitalized Interest was available and applied to pay such interest; and (b) principal of and/or interest on Indebtedness shall be excluded from the determination of Historic Debt Service Requirements to the extent that amounts were on deposit in an irrevocable escrow and such amounts (including, where appropriate, the earnings or other increment to accrue thereon) were actually applied to pay such principal and/or interest and to such extent as such amounts so applied were sufficient to pay such principal and/or interest.
“Historic Test Period” means, at the option of the Combined Group Agent, either (i) the most recent period of twelve (12) full consecutive calendar months for which audited financial statements of the Combined Group are available, or (ii) the most recent Fiscal Year of the Obligated Group.
“Income Available for Debt Service” means, for any period, the amount by which Revenues exceed Expenses of the Person or group of Persons involved.
“Indebtedness” means, for any Person, (a) indebtedness incurred or assumed by such Person for borrowed money or for the acquisition, construction or improvement of Property other than goods that are acquired in the ordinary course of business of such Person; (b) Capitalized Rentals or Capitalized Lease obligations of such Person (other than Capitalized Operating Lease obligations); (c) all Guaranties by such Person (weighted, with respect to Permitted Guarantees, as provided in Section 418 hereof), and (d) Non-Recourse Indebtedness; provided that Indebtedness shall not include Indebtedness of one System Affiliate or Member of the Combined Group to another System Affiliate or Member of the Combined Group, any Guaranty by any System Affiliate or Member of the Combined Group of Indebtedness of any other System Affiliate or Member of the Combined Group, the joint and several liability of any System 9
Affiliate or Member of the Combined Group on Indebtedness issued by another System Affiliate or Member of the Combined Group, any Hedging Obligation, any Ancillary Obligation, any trade payables, current salaries, current pension contributions, insurance premiums and similar obligations incurred, or any obligation to repay moneys deposited by patients or others with a System Affiliate or Member of the Combined Group as security for or as prepayment of the cost of patient care or any rights of residents of life care, elderly housing or similar facilities to endowment or similar funds deposited by or on behalf of such residents.
“Instruments” has the meaning set forth in the New Jersey Uniform Commercial Code.
“Investment Property” means (i) all securities, or securities certificates or uncertificated securities representing the securities, (ii) security entitlements, (iii) Securities Accounts, (iv) commodity contracts, or (v) Commodities Accounts.
“Lien” means any mortgage or pledge of, security interest in, lien on, hypothecation of, or any other encumbrance, priority or preference on any Property of a Member of the Combined Group that secures any Indebtedness, any Obligation or any other obligation of a Member of the Combined Group.
“Long-Term Indebtedness” means, with respect to any Person, (a) all Indebtedness of such Person which is not Short-Term; (b) all Indebtedness of such Person incurred or assumed in connection with the acquisition or construction of Property which is not Short-Term; (c) the Person’s Guaranties of Indebtedness which are not Short-Term; and (d) Capitalized Rentals under Capitalized Leases entered into by the Person; provided, however, that Indebtedness that could be described by more than one of the foregoing categories shall not in any case be considered more than once for the purpose of any calculation made pursuant to this Master Trust Indenture.
“Master Trustee” means The Bank of New York Mellon, or any successor trustee under this Master Trust Indenture.
“Master Trust Indenture” means this Master Trust Indenture, dated as of April 1, 2017, by and between the Corporation and any future Members of the Obligated Group and the Master Trustee, as it may from time to time be amended and supplemented in accordance with the terms hereof, including as supplemented by the First Supplemental Indenture, dated as of April 1, 2017, by and between the Corporation and any future Members of the Obligated Group and the Master Trustee.
“Material Combined Group Member” means any Member of the Combined Group whose total revenues as set forth on its financial statements for the most recently completed Fiscal Year for such Member of the Combined Group exceed 15% of the combined total revenues of the Combined Group and the System Affiliates as set forth on the combined financial statements for the most recently completed Fiscal Year of the System.
“Maximum Annual Debt Service” means, at the time of computation, the greatest annual Pro-forma Debt Service Requirements on Long-Term Indebtedness for the then current or any future Fiscal Year.
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“Maximum Annual Debt Service Coverage Ratio” means, for any period of time, the ratio determined by dividing (i) Income Available for Debt Service of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture), for that period by (ii) the Maximum Annual Debt Service of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture) (consistent with whether Income Available for Debt Service was used for the Combined Group or the System for purposes of clause (i) of this definition); provided that when such calculation is being made with respect to the System or the Combined Group, Income Available for Debt Service and Pro-forma Debt Service Requirements shall be determined only with respect to those Persons who are System Affiliates or Members of the Combined Group, as the case may be, at the close of such period; provided, however, that if the financial statements that would be used to calculate Income Available for Debt Service of the System or the Combined Group under clause (i) of this definition cover a period consisting of fewer than 12 months, then, at the election of the Combined Group Agent, either (a) the Maximum Annual Debt Service of the System or the Combined Group under clause (ii) of this definition shall be pro-rated to reflect such shorter period, or (b) Income Available for Debt Service of the System or the Combined Group under clause (i) of this definition shall be based on financial statements of the System or the Combined Group covering a consecutive 12-month period selected by the Combined Group Agent that ends within 180 days preceding the date of calculation of the Maximum Annual Debt Service Coverage Ratio, and such consecutive 12- month period shall be deemed to be a Fiscal Year for purposes of such calculation of the Maximum Annual Debt Service Coverage Ratio.
“Member” means, unless the contexts clearly requires otherwise, any Member of the Combined Group.
“Member of the Combined Group” means any Member of the Obligated Group and any Designated Affiliate.
“Member of the Obligated Group” means the Corporation or any other Person listed on Exhibit A hereto which has fulfilled the requirements for entry into the Obligated Group set forth in Section 403 hereof and has not ceased such status pursuant to Section 404 hereof. The Combined Group Agent may from time to time deliver a revised Exhibit A to the Master Trustee, indicating additions or deletions of Members of the Obligated Group.
“Net Assets” means (i) for a Person that is a Tax-Exempt Organization, the aggregate net assets of such Person, and (ii) for a Person that is not a Tax-Exempt Organization, the shareholders’ equity or member’s equity of such Person, or the excess of assets over unrestricted liabilities of such Person.
“Net Proceeds” means, when used with respect to any insurance or condemnation award, the gross proceeds from the insurance or condemnation award less all expenses (including attorney’s fees and expenses, adjuster’s fees and any expenses of the Master Trustee) incurred in the collection of such gross proceeds.
“Net Rentals” means all fixed rents (including as such all payments which the lessee is obligated to make to the lessor on termination of the lease or surrender of the Property other than upon termination of the lease for a default thereunder) payable under a lease or sublease of real 11
or personal Property excluding any amounts required to be paid by the lessee (whether or not designated as rents or additional rents) on account of maintenance, repairs, utilities, insurance, taxes and similar charges. Net Rentals for any future period under any so-called “percentage lease” shall be computed on the basis of the amount reasonably estimated to be payable thereunder for such period, but in any event not less than the amount paid or payable thereunder during the immediately preceding period of the same duration as such future period; provided that the amount estimated to be payable under any such percentage lease shall in all cases recognize any change in the applicable percentage called for by the terms of such lease.
“Non-Recourse Indebtedness” means any Indebtedness the liability for which is effectively limited to Property, Plant and Equipment and the income therefrom, the cost of which Property, Plant and Equipment shall have been financed solely with the proceeds of such Indebtedness with no recourse, directly or indirectly, to any other Property of any Member of the Combined Group or to the general credit of any Member of the Combined Group.
“Obligated Group” means, collectively, all of the Members of the Obligated Group.
“Obligation holder,” “holder of an Obligation” or “owner of an Obligation” means the registered owner of any fully registered or book entry Obligation unless alternative provision is made in the Supplemental Indenture pursuant to which such Obligation is issued for establishing ownership of such Obligation, in which case such alternative provision shall control.
“Obligations” means any Debt Obligations, Hedging Obligations or Ancillary Obligations authorized to be issued by a Member of the Obligated Group pursuant to this Master Trust Indenture which has been authenticated by the Master Trustee pursuant to Section 204 hereof.
“Officer’s Certificate” means a certificate signed, in the case of a certificate delivered by or on behalf of the Obligated Group and/or the Combined Group, by the President or any Vice- President or any other authorized officer of the Combined Group Agent.
“Operating Expenses” means the total operating expenses of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture), as determined in accordance with GAAP consistently applied.
“Operating Revenues” means the total operating revenues of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture), less applicable deductions from operating revenues, as determined in accordance with GAAP consistently applied.
“Outstanding” means, in the case of any Obligations, any Indebtedness, or any Related Bonds, all Obligations, all Indebtedness or all Related Bonds, as the case may be, except:
(a) Obligations, Indebtedness or Related Bonds canceled after purchase in the open market or after payment at or prepayment or redemption prior to maturity;
(b) Obligations, Indebtedness or Related Bonds for the payment or redemption of which cash or non-callable Escrow Securities, or a combination thereof, have been
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deposited with the Master Trustee, the lender or a trustee or fiduciary for such lender, or the Related Bond Trustee, as applicable (whether upon or prior to their maturity or redemption date thereof) in an amount that is sufficient to pay the amounts due thereon; provided that if such Obligations, Indebtedness or Related Bonds are to be prepaid or redeemed prior to their maturity, notice of prepayment or redemption has been given or irrevocable arrangements satisfactory to the Master Trustee, the lender or a trustee or fiduciary for such lender, or the Related Bond Trustee, as applicable, have been made therefor, or waiver of such notice by the Person entitled to such notice has been provided;
(c) Obligations, Indebtedness or Related Bonds in lieu of which other instruments or securities have been authenticated and delivered; and
(d) For the purpose of all consents, approvals, waivers and notices required to be obtained or given under this Master Trust Indenture, any relevant loan document relating to Indebtedness, or any Related Bond Indenture, as applicable, Obligations, Indebtedness or Related Bonds held or owned by a Member of the Obligated Group.
Notwithstanding the foregoing, any Obligation or other Indebtedness securing Related Bonds shall be deemed Outstanding only if such Related Bonds are Outstanding.
“Permitted Dispositions” means dispositions of Property permitted by Section 411 of this Master Trust Indenture.
“Permitted Encumbrances” means, as of any particular time:
(a) any Lien on Property newly acquired subject to an existing Lien, if at the time of such acquisition, the aggregate amount remaining unpaid on the Indebtedness secured thereby (whether or not assumed by a Member of the Combined Group) does not exceed the fair market value or (if such Property has been purchased) the lesser of the acquisition price or the fair market value of the Property subject to such Lien, as determined in good faith by the Combined Group Agent;
(b) any Lien on any Property of any Member of the Combined Group granted in favor of or securing Indebtedness to any System Affiliate;
(c) (i) any Lien on Property if such Lien equally and ratably secures all of the Obligations, and (ii) the Lien on Gross Revenues pledged pursuant to Section 208 hereof;
(d) Liens on or in Property given, granted, bequeathed or devised by the owner thereof existing at the time of such gift, grant, bequest or devise, provided that such Liens secure Indebtedness which is not assumed by a Member of the Combined Group and such Liens attach solely to the Property (including the income therefrom) which is the subject of such gift, grant, bequest or devise;
(e) Liens on proceeds of Indebtedness (or on income from the investment of such proceeds) pending application to the purposes for which such Indebtedness was incurred, or that secure payment of such Indebtedness and any security interest in any rebate fund established pursuant to the Code, any depreciation reserve, debt service reserve or interest reserve, debt
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service fund or any similar fund established pursuant to the terms of any Supplemental Indenture, Related Bond Indenture or Related Loan Document in favor of the Master Trustee, a Related Bond Trustee, a Related Issuer or the holder of the Indebtedness issued pursuant to such Supplemental Indenture, Related Bond Indenture or Related Loan Document or the provider of any liquidity or credit support for such Related Bond or Indebtedness;
(f) Liens on Escrow Securities;
(g) any Lien on any Related Bond or any evidence of Indebtedness of any Member of the Combined Group acquired by or on behalf of any Member of the Combined Group by the provider of liquidity or credit support for such Related Bond or Indebtedness;
(h) Liens on accounts receivable to secure Indebtedness incurred pursuant to Section 410 hereof (in such case the Master Trustee shall cooperate in releasing any accounts receivable from the Lien on Gross Revenues);
(i) Liens on any Property in effect on the effective date of this Master Trust Indenture, including but not limited to those listed on Exhibit C hereto, or existing at the time any Person becomes a Member of the Combined Group; 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 such Member of the Combined Group not subject to such Lien on such date unless such Lien as so increased, extended, renewed or modified is otherwise permitted under this Master Trust Indenture;
(j) Liens on Property of a Person existing at the time such Person is merged into or consolidated with a Member of the Combined Group, or at the time of a sale, lease or other disposition of the properties of a Person as an entirety or substantially as an entirety to a Member of the Combined Group which becomes part of a Property that secures Indebtedness that is assumed by a Member of the Combined Group as a result of any such merger, consolidation or acquisition; provided, that no such Lien may be increased, extended, renewed, or modified after such date to apply to any Property of a Member of the Combined Group not subject to such Lien on such date unless such Lien as so increased, extended, renewed or modified is otherwise permitted under this Master Trust Indenture;
(k) Liens which secure Non-Recourse Indebtedness incurred pursuant to Section 410(b)(6) hereof but from no other Gross Revenues of a Member of the Combined Group;
(l) Liens arising out of (i) Capitalized Leases (ii) leases, installment purchase contracts and other similar borrowing instruments incurred pursuant to Section 410 hereof, or (iii) leases between System Affiliates;
(m) Liens on Property, in addition to those Liens permitted elsewhere in this definition of Permitted Encumbrances, if the total aggregate Book Value (or at the option of the Combined Group Agent, Current Value) of the Property subject to a Lien of the type described in this subsection (m) does not exceed twenty percent (20%) of the combined Value of the Property of the System Affiliates (calculated on the same basis as the Value of Property subject to such Lien and calculated at the time such Lien is granted); and
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(n) Liens on any Property given (by mortgage, security interest, conveyance in trust, deed, sale, or lease) in order to satisfy the legal or policy requirements of any Related Issuer with respect to their issuance of any Related Bonds;
(o) any Lien securing any Hedging Obligation that is related to Permitted Indebtedness or that may be required from time to time to satisfy any collateralization requirements relating to any Hedging Obligation;
(p) any Lien in the nature of a purchase money mortgage if, after giving effect to such Lien, such purchase money mortgage secures an amount not in excess of the cost of the particular asset to which such Lien relates and any related financing charges, where such purchase money mortgage constitutes a Lien on fixed assets acquired or constructed by a Member of the Combined Group and granted contemporaneously with such acquisition or construction, and which Lien secures all or a portion of the related purchase price or construction cost of such assets;
(q) with respect to any account in which Gross Revenues (or the proceeds thereof) are received, deposited or held, any Liens, rights of setoff and recoupment, or other encumbrances that any depository bank that is not a holder of an Obligation has (i) as collecting bank in an item for deposit pursuant to the laws of the jurisdiction in which the account is located, and (ii) for debits for scheduled, reasonable and customary account maintenance fees;
(r) any Lien that a Member of the Combined Group is not obligated to remove pursuant to Section 405 of this Master Trust Indenture; and
(s) subject to the provisions of Section 412 of this Master Trust Indenture, any other Lien on any Property for any purpose provided that an Officer’s Certificate is delivered to the Master Trustee demonstrating that the Unsecured Debt Ratio of the Combined Group shall not be less than 1.20 to 1 after giving effect to such Lien.
“Permitted Guaranty” means any Guaranty by any Member of the Obligated Group permitted under Section 410(b)(9) of this Master Trust Indenture.
“Permitted Indebtedness” means Indebtedness of any Members of the Combined Group permitted under Section 410 of this Master Trust Indenture.
“Permitted Investments” means (i) with respect to any Obligation which secures a series of Related Bonds, the obligations in which the Related Bond Trustee may invest funds under the Related Bond Indenture, (ii) with respect to any Obligations for which a Supplemental Indenture specifies certain permitted investments, the investments so specified and (iii) in all other cases such legal and prudent investments as are determined and designated by the Combined Group Agent.
“Permitted Release” means any release of Property or portions thereof from the covenant against Liens set forth in Section 412 of this Master Trust Indenture, or from any security interests, liens, pledges or negative pledges of such Property, including but not limited to the pledge of Gross Revenues granted pursuant to this Master Trust Indenture, securing Obligations, permitted by Section 413 of this Master Trust Indenture.
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“Permitted Reorganization” means any consolidation, merger, sale of assets or reorganization of any Members of the Obligated Group permitted by Section 408 of this Master Trust Indenture.
“Person” means any natural person, firm, joint venture, joint operating agreement, association, partnership, business trust, corporation, limited liability company, public body, agency or political subdivision thereof or any other similar entity.
“Primary Obligor” means the Person who is primarily obligated on an obligation which is guaranteed by another Person.
“Pro-forma Annual Debt Service Coverage Ratio” means, for any period of time, the ratio determined by dividing (i) Income Available for Debt Service of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture), for that period by (ii) the Pro-forma Debt Service Requirements of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture) (consistent with whether Income Available for Debt Service was used for the Combined Group or the System for purposes of clause (i) of this definition), required to be paid during such period; provided that when such calculation is being made with respect to the System or the Combined Group, Income Available for Debt Service and Pro-forma Debt Service Requirements shall be determined only with respect to those Persons who are System Affiliates or Members of the Combined Group, as the case may be, at the close of such period; provided, however, that if the financial statements that would be used to calculate Income Available for Debt Service of the System or the Combined Group under clause (i) of this definition cover a period consisting of fewer than 12 months, then, at the election of the Combined Group Agent, either (a) the Pro-forma Debt Service Requirements of the System or the Combined Group under clause (ii) of this definition shall be pro-rated to reflect such shorter period, or (b) Income Available for Debt Service of the System or the Combined Group under clause (i) of this definition shall be based on financial statements of the System or the Combined Group covering a consecutive 12-month period selected by the Combined Group Agent that ends within 180 days preceding the date of calculation of the Pro-forma Annual Debt Service Coverage Ratio, and such consecutive 12-month period shall be deemed to be a Fiscal Year for purposes of such calculation of the Pro-forma Annual Debt Service Coverage Ratio.
“Pro-forma Debt Service Requirements” means, with respect to the period of time for which calculated, the aggregate of the payments required to be made during such period in respect of principal (whether at maturity, as a result of mandatory sinking fund redemption or mandatory prepayment) and interest on outstanding Long-Term Indebtedness of each Person or a group of Persons with respect to which calculated; provided that: (a) interest shall be excluded from the determination of the Pro-forma Debt Service Requirements to the extent that Capitalized Interest is available to pay such interest; (b) principal of and/or interest on Indebtedness shall be excluded from the determination of Pro-forma Debt Service Requirements to the extent that amounts are on deposit in an irrevocable escrow and such amounts (including, where appropriate, the earnings or other increment to accrue thereon) are required to be applied to pay such principal and/or interest and such amounts so required to be applied are sufficient to pay such principal and/or interest; (c) principal of and/or interest on any Indebtedness shall be excluded from the determination of Pro-forma Debt Service Requirements to the extent that the principal of and/or interest on such Indebtedness is the subject to a binding commitment for the 16
refinancing of such principal and/or interest at a rate of interest and an amortization schedule specified in such refinancing commitment, as determined by an Officer’s Certificate, in which case the principal of and interest on the Indebtedness to be incurred pursuant to such commitment shall be included in the calculation and determination of the Pro-forma Debt Service Requirements; (d) to the extent that interest on any Indebtedness is the subject of or related to any Hedging Obligation, the Obligated Group at its option may determine from time to time whether or not to treat such interest payments due on Indebtedness as being equal to the net amounts paid and received by the Obligated Group pursuant to such Hedging Obligation; (e) to the extent that interest on any Indebtedness is the subject of or related to any rate maintenance agreement or other similar agreement, the Obligated Group at its option may determine from time to time whether or not to treat such interest payments due on Indebtedness as being equal to the net amount paid and received by the Obligated Group pursuant to such rate maintenance agreement or other similar agreement; (f) with respect to any credit facility or liquidity facility securing or enhancing any Indebtedness, any principal and interest relating to, or due or payable under, any such facility shall not be included in the calculation of the Pro-forma Debt Service Requirements so long as such facility has not been drawn upon or, if drawn upon, the provider of such facility has been fully reimbursed for such drawing; and (g) to the extent that any Indebtedness constitutes Balloon Indebtedness, Variable Rate Indebtedness, Discount Indebtedness or a Guaranty, the principal of (and premium, if any) and interest and other debt service charges on such Indebtedness shall be calculated in accordance with Sections 415, 416, 417 and 418 of this Master Trust Indenture, respectively.
“Property” means any and all rights, titles and interests in and to any and all property, whether real or personal, tangible (including cash) or intangible, wherever situated and whether now owned or hereafter acquired, including but not limited to Property, Plant and Equipment and Gross Revenues.
“Property, Plant and Equipment” means all Property of each System Affiliate or, at the option of the Combined Group Agent, each Member of the Combined Group, that is classified as property, plant and equipment under GAAP.
“Related Bonds” means (a) any revenue bonds or similar obligations issued by any state, commonwealth or territory of the United States or any municipal corporation or other political subdivision formed under the laws thereof or any constituted authority, agency or instrumentality of any of the foregoing empowered to issue obligations on behalf thereof, the proceeds of which are loaned or otherwise made available to any Member of the Combined Group or System Affiliate in consideration, whether in whole or in part, of the execution, authentication and delivery of an Obligation or Obligations to or upon the order of such governmental issuer and (b) any revenue or general obligation bonds issued by or on behalf of any Member of the Combined Group, any System Affiliate or any other Person in consideration, whether in whole or in part, of the execution, authentication and delivery of an Obligation or Obligations to the holder of such bonds or the Related Bond Trustee.
“Related Bond Indenture” means any indenture, bond resolution or similar instrument pursuant to which any series of Related Bonds is issued.
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“Related Bond Trustee” means any trustee under any Related Bond Indenture and any successor trustee thereunder or, if no trustee is appointed under a Related Bond Indenture, the Related Issuer.
“Related Issuer” means any issuer of a series of Related Bonds.
“Related Loan Document” means any document or documents (including without limitation any loan agreement, lease, sublease or installment sales contract) pursuant to which any proceeds of any Related Bonds are loaned to, advanced to or made available to or for the benefit of any Member of the Combined Group or System Affiliate (or any Property financed or refinanced with such proceeds is leased, sublet or sold to a Member of the Combined Group or System Affiliate).
“Revenues” means, for any period, (a) in the case of any Person providing health care services, the sum of (i) all unrestricted gross patient service revenues less contractual allowances and less provision for bad debt plus (ii) all other operating revenues, plus (iii) all non-operating revenues; and (b) in the case of any other Person, gross revenues less sale discounts and sale returns and allowances, as determined in accordance with GAAP; provided that no calculation of Revenues shall take into account: (i) any unrealized gain resulting from changes in the value of investment securities, (ii) extraordinary or nonrecurring gains or revenues (including without limitation any gains on the sale or other disposition of assets or facilities not in the ordinary course of business), provided that for such purpose any revenues that represent payments of incentive payments or shared savings amounts from payors, accountable care organizations or similar entities, any unrestricted charitable donations and unrestricted grants and any dividends or other equity distributions from entities in which such Person owns an interest shall not be considered to be extraordinary or non-recurring, (iii) any gains on the extinguishment of Indebtedness (including any termination payments received on Hedging Obligations or other hedges or derivatives related to or integrated with the Indebtedness being extinguished), (iv) any gains resulting from discontinued operations or any reappraisal, revaluation or write-up of any asset, facility or good-will, and any gain or revenue resulting from adjustments to prior periods, (v) any unrealized gains on or related to any Hedging Obligations or other hedges or derivatives, (vi) any revenue or income or other items that would be considered by the Combined Group Agent to be non-cash items of the Person or group of Persons involved, (vii) earnings which constitute Capitalized Interest or earnings on amounts which are irrevocably deposited in escrow to pay the principal of or interest on Indebtedness); and (viii) if such calculation is being made with respect to the Combined Group, any gains or revenues attributable to transactions between any Member of the Combined Group and any other Member of the Combined Group.
“Securities Account” has the meaning set forth in the New Jersey Uniform Commercial Code.
“Short-Term” when used in connection with Indebtedness, means Indebtedness of a Person for money borrowed or credit extended (including without limitation credit extended in connection with the acquisition or construction of Property, Guaranties of Indebtedness and Capitalized Rentals under Capitalized Leases) having an original maturity or term less than or equal to one year and not renewable at the option of the debtor for, or subject to any binding commitment to refinance or otherwise provide for such Indebtedness having, a term greater than one year beyond the date of original issuance. For purposes of this definition, (i) only the stated 18
maturity date of Indebtedness (any not any tender or put right of the holder of such Indebtedness) shall be taken into account in determining if such Indebtedness constitutes Short-Term Indebtedness under this Master Trust Indenture, and (ii) classification of Indebtedness as current or short-term under GAAP shall not be controlling.
“SIFMA” means the Securities Industry and Financial Markets Association, any successor thereto, or any person acting in cooperation with or under the sponsorship of SIFMA and acceptable to the Combined Group Agent.
“SIFMA Index” means, on any date, a rate determined on the basis of the seven-day high grade market index of tax-exempt variable rate demand obligations (the SIFMA Municipal Swap Index), as produced by Municipal Market Data and published or made available by SIFMA, or any person acting in cooperation with or under the sponsorship of SIFMA and acceptable to the Combined Group Agent, and effective from such date.
“Subordinated Indebtedness” means all obligations incurred or assumed, the payment of which is by its terms specifically subordinated to payments on all Obligations, or the principal of and interest on which cannot be accelerated and would not be paid (whether by the terms of such obligation or by agreement of the obligee) while an Event of Default exists hereunder or while bankruptcy, insolvency, receivership or other similar proceedings are instituted and implemented.
“Supplemental Indenture” means an indenture amending or supplementing this Master Trust Indenture entered into pursuant to Article VII hereof after the date hereof.
“System” means the affiliated group of Persons comprised of all of the System Affiliates.
“System Affiliate” means each Member of the Obligated Group, each Affiliate of the Corporation or of any other Member of the Obligated Group, each Designated Affiliate and each other Person with whom a Member of the Obligated Group or Designated Affiliate has in place a contract or other agreement whereby such Person is obligated to make payments in respect of Obligations as described in Section 401(B) hereof.
“Tax-Exempt Organization” means a Person organized under the laws of the United States of America or any state thereof which is an organization described in Section 501(c)(3) of the Code, which is exempt from federal income taxation under Section 501(a) of the Code, and which is not a “private foundation” within the meaning of Section 509(a) of the Code, or corresponding provisions of federal income tax laws from time to time in effect.
“Transaction Test” means the Master Trustee shall have received (A) an Officer’s Certificate of the Combined Group Agent stating that no Event of Default has occurred and is continuing under this Master Trust Indenture and then exists or would result from the proposed transaction, and (B)(i) an Officer’s Certificate of the Combined Group Agent demonstrating that either (a) the Maximum Annual Debt Service Coverage Ratio of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture) for the Historic Test Period, assuming that the proposed additional Long-Term Indebtedness had been incurred, or that the proposed transaction had occurred, at the beginning of the Historic Test Period, is not less than 1.15 to 1, (b) the Maximum Annual Debt Service
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Coverage Ratio of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture) for the Future Test Period is projected to be not less than 1.30 to 1, or (c) immediately after the completion of the proposed transaction, the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture), shall have an amount of Days Cash on Hand at least equal one hundred fifty (150) Days Cash on Hand, and the Debt to Capitalization Ratio is not in excess of 0.65 to 1, or (ii) a report of a Consultant demonstrating that the Maximum Annual Debt Service Coverage Ratio for the Future Test Period is projected to be not less than 1.20 to 1.
“Unrestricted Net Assets” means the unrestricted net assets of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture), as determined in accordance with GAAP. For purposes of this definition, “Unrestricted Net Assets” shall be calculated in the same manner as reported on the audited financial statements of the System or the Combined Group, plus accumulated changes in other comprehensive income resulting from minimum pension liabilities recorded under Statement of Financial Accounting Standards No. 158 (Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans) or any successor Statement of Financial Accounting Standards or other provision thereto.
“Unsecured Debt Ratio” means, as of any date of calculation, the ratio of (A)(i) the net Book Value of the Plant, Property and Equipment of the Combined Group based upon the financial statements of the Combined Group for the most recent Fiscal Year, or (ii) the appraised value of the Plant, Property and Equipment of the Combined Group, as determined in writing within the preceding twenty-four (24) months by a qualified appraiser not unsatisfactory to the Master Trustee, minus the aggregate principal amount of all Long-Term Indebtedness then outstanding the payment of which is secured by a Lien which constitutes a Permitted Encumbrance, to (B) the aggregate principal amount of all unsecured Long-Term Indebtedness then outstanding.
“Value” means, as determined by the Combined Group Agent, the Book Value or the Current Value of all Property, Plant and Equipment, plus the Current Value of all Property (other than Property, Plant and Equipment).
“Variable Rate Indebtedness” means Indebtedness that bears interest at a variable, adjustable or floating rate.
Section 102. Interpretation. Words of the masculine gender shall be deemed and construed to include correlative words of the feminine and neuter genders. Unless the context shall otherwise indicate, words importing the singular number shall include the plural and vice versa. Headings of articles and sections herein and the table of contents hereof are solely for the convenience of reference, do not constitute a part hereof and shall not affect the meaning, construction or effect hereof. Any reference herein to any officer of a Member of the Obligated Group or the Combined Group shall include those succeeding to their functions, duties or responsibilities pursuant to or by operation of law or who are lawfully performing their functions.
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Section 103. Accounting Principles and Financial Reporting . (a) All accounting terms not specifically defined herein shall be construed in accordance with GAAP consistently applied, except as otherwise stated herein. For the avoidance of doubt, subsidiaries that are consolidated with the financial results of a Member of the Combined Group or the Obligated Group shall be included for all purposes with respect to financial covenants and financial reporting herein. If any change in accounting principles from those used in the preparation of the financial statements of the System, the Obligated Group or the Combined Group as of December 31, 2016 results from the promulgation of rules, regulations, pronouncements and opinions by or required by the Financial Accounting Standards Board, American Institute of Certified Public Accountants or other authoritative bodies that determine GAAP (or successors thereto or agencies with similar functions) and such change results in a change in the accounting terms used in this Master Trust Indenture, at the option of the Combined Group Agent, the accounting terms used herein shall be modified to reflect such change in accounting principles so that the criteria for evaluating the compliance of the Obligated Group, the Combined Group or the System with all financial covenants and tests contained in this Master Trust Indenture shall be the same after such change as if no such change in the accounting principles from those used in the preparation of the financial statements of the System, the Obligated Group or the Combined Group as of December 31, 2016 had been made. If any such modification of the accounting terms used in this Master Trust Indenture shall occur and the Combined Group Agent elects to have the accounting terms used in this Master Trust Indenture modified as provided in the preceding sentence, the Combined Group Agent shall file an Officer’s Certificate with the Master Trustee, which shall contain a certification to the effect that (i) such modifications are occasioned by such a change in accounting principles, and (ii) such modifications will not have a materially adverse effect on the Obligation holders or result in materially different criteria for evaluating the compliance of the Obligated Group, the Combined Group or the System with all financial covenants and tests contained in this Master Trust Indenture.
(b) Notwithstanding anything else in this Master Trust Indenture to the contrary, in addition to those provisions of this Master Trust Indenture which expressly permit the use of financial or other information on the basis of the System, in computing or calculating Historic Annual Debt Service Coverage Ratio, Pro-forma Annual Debt Service Coverage Ratio, Book Value, Current Assets, Debt Service Requirements, Income Available for Debt Service, Indebtedness, Maximum Annual Debt Service, Maximum Annual Debt Service Coverage Ratio, Operating Expenses, Operating Revenues, Property, Property Plant and Equipment, Revenues, Transaction Test, Unrestricted Net Assets and any other quantitative financial test or provision, the Combined Group, at the option of the Combined Group Agent, may, unless the context specifically requires otherwise, utilize financial and other information either (i) with respect to the Members of the Combined Group in the aggregate or (ii), so long as the Combined Group constitutes, is responsible for or otherwise controls at least seventy-five percent (75%) of the Unrestricted Net Assets or the combined total revenues of the System for the most recent Fiscal Year of the System, with respect to the System in the aggregate, with such percentage being calculated in a manner that excludes intercompany eliminations from the numerator of such calculation. Except where the context otherwise requires, all references herein to “as the case may be” shall be deemed to require an election by the Combined Group Agent of one (and only one) of the foregoing clauses (i) or (ii) applied consistently for the applicable definition, provision or covenant; provided, however, that in computing or calculating any quantitative
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financial test or provision described or contemplated by this Section 103(b), the Combined Group Agent may elect between the provisions in clauses (i) and (ii) from time to time so long as the Combined Group meets the foregoing seventy-five percent (75%) test and the use of clauses (i) and (ii) are consistent in a single ratio or amount. The Combined Group Agent shall include in any Officer’s Certificate filed with the Master Trustee, which would set forth any such quantitative financial test or provision under clause (ii), financial information setting forth that the Combined Group constitutes, is responsible for or otherwise controls at least seventy-five percent (75%) of the Unrestricted Net Assets and revenues of the System for the most recent Fiscal Year of the System, with respect to the System in the aggregate, with such percentage being calculated in a manner that excludes intercompany eliminations from the numerator of such calculation.
(c) Notwithstanding anything else in this Master Trust Indenture to the contrary, if the Combined Group wishes to effect a transaction for which it is necessary to determine or report certain financial information based upon financial statements of the System or the Combined Group for the immediately preceding Fiscal Year or the most recently ended Fiscal Year, and fewer than 180 days have passed since the end of such Fiscal Year and financial statements of the System or the Combined Group for such Fiscal Year are not available that have been audited by an independent certified public accountant and contain such independent certified public accountant’s report thereon (or are otherwise contained in financial statements that have been audited by an independent certified public accountant and contain such independent certified public accountant’s report thereon), the Combined Group may affect the transaction in question if the appropriate conditions are met, as evidenced by, at the election of the Combined Group Agent, information contained in (i) the audited financial statements of the System or the Combined Group for the Fiscal Year preceding the one just ended or (ii) the unaudited financial statements of the System or the Combined Group for the Fiscal Year just ended.
Section 104. Delivery of Financial Statements. At the option of the Combined Group Agent, any requirement for the delivery of the audited or unaudited financial statements of the System or the Combined Group required to be provided pursuant to Section 409 hereof shall be deemed to be satisfied by the delivery of the consolidated financial statements (i) of the Corporation and subsidiaries, or (ii) of any ultimate corporate parent of, and that controls, the Members of the Combined Group so long as such financial statements, in either case, include consolidating schedules specifically reflecting the corresponding figures for the Combined Group, either for each Member of the Combined Group individually or for the Members of the Combined Group in the aggregate.
Section 105. Treatment of Debt Obligations Securing Related Bonds. If any Debt Obligations are issued under this Master Trust Indenture to secure Related Bonds, which Related Bonds are valued, in accordance with the provisions of a Related Bond Indenture, at other than their principal amount for purposes of the provisions of such Related Bond Indenture relating to redemption, acceleration, defeasance, computation of Related Bonds Outstanding, application of moneys in payment of the Related Bonds and actions by holders of such Related Bonds, then, for purposes of this Master Trust Indenture, references in this Master Trust Indenture to the principal amount of the Debt Obligations issued to evidence or secure such Related Bonds contained herein shall be deemed to refer to an amount equal, at any time of
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calculation, to the valuation of such Related Bonds, at such time of calculation, as set forth in such Related Bond Indenture.
ARTICLE II THE OBLIGATIONS
Section 201. Series, Designation and Amount of Obligations. No Obligations may be issued under the provisions of this Master Trust Indenture except in accordance with this Article. Other than the Combined Group Agent, no authorization or approval of any Member of the Obligated Group, Designated Affiliate or System Affiliate is required under this Master Trust Indenture for the issuance of Obligations. No Obligations may be issued under this Master Trust Indenture unless (i) such Obligation is executed by the Combined Group Agent; or (ii) with the written consent of the Combined Group Agent, such Obligation is executed by any other Member of the Obligated Group. The total amount of Obligations, the number of Obligations and the series of Obligations that may be created under this Master Trust Indenture is not limited and shall be as set forth in the Supplemental Indenture providing for the issuance thereof. Each series of Obligations shall be issued pursuant to a Supplemental Indenture. Each series of Obligations shall be designated so as to differentiate the Obligations of such series from the Obligations of any other series. Unless provided to the contrary in a Supplemental Indenture, Obligations shall be issued as fully registered Obligations.
Section 202. Payment of Obligations. The principal of, premium, if any, and interest on the Obligations, and any other amounts due under an Obligation, shall be payable in any currency of the United States of America which, at the respective dates of payment thereof, is legal tender for the payment of public and private debts, and such amounts shall be payable at the designated corporate trust office of the Master Trustee or at the office of any Related Bond Trustee named in any such Obligations or in a Related Bond Indenture or to the registered owner of such Obligation, as may be provided in such Obligation. Unless contrary provision is made in the Supplemental Indenture pursuant to which such Obligation is issued or the election referred to in the next sentence is made, payments on the Obligations shall be made to the person appearing on the registration books of the Obligated Group (kept in the corporate trust office of the Master Trustee or its agent as Obligation registrar) as the registered owner thereof and shall be paid by check or draft mailed to the registered owner at its address as it appears on such registration books or at such other address as is furnished to the Master Trustee in writing by such holder; provided, however, that any Supplemental Indenture creating any Obligation may provide that amounts due under such Obligation may be paid, upon the request of the holder of such Obligation, by wire transfer or by such other means as are then commercially reasonable and acceptable to the holder thereof and the Master Trustee. The foregoing notwithstanding, if a Member of the Obligated Group so elects, or if an Obligation so provides, payments on such Obligation shall be made directly by such Member of the Combined Group, by check or draft hand delivered to the holder thereof or its designee or shall be made by such Member of the Combined Group by wire transfer to such holder, or by such other means as are then commercially reasonable and acceptable to the holder thereof, in any case delivered on or prior to the date on which such payment is due. Upon the reasonable written request of the Master Trustee, each Member of the Obligated Group shall provide information identifying the Obligation or Obligations with respect to which such payment, specifying the amount, was made, by series, designation, number and registered holder. Except with respect to Obligations directly 23
paid to or upon the order of the holder thereof, or as otherwise may be provided in a Supplemental Indenture, the Members of the Obligated Group agree to deposit with the Master Trustee prior to each due date of the principal of, premium, if any, or interest on any of the Obligations a sum sufficient to pay such principal, premium, if any, or interest so becoming due. Any such moneys shall upon written request and direction of the Combined Group Agent be invested in Permitted Investments. The foregoing notwithstanding, amounts deposited with the Master Trustee to provide for the payment of Obligations pledged to the payment of Related Bonds shall be invested in accordance with the provisions of the Related Bond Indenture and Related Loan Document. The Master Trustee shall not be liable or responsible for any loss resulting from any such investments made in accordance with the terms hereof. Supplemental Indentures may create such security including debt service reserve funds and other funds as are necessary to provide for payment or to hold moneys deposited for payment or as security for a related series of Obligations.
Section 203. Execution. Obligations shall be executed on behalf of a Member of the Obligated Group by the manual or, if permitted by law, facsimile signature of the Chairman of its Governing Body, its President or any Vice President or any other authorized officer of the Member of the Obligated Group (or on their behalf by a similar authorized officer of the Combined Group Agent). In case any officer whose signature or facsimile of whose signature shall appear on the Obligations shall cease to be such officer before the delivery of such Obligations, such signature or such facsimile shall nevertheless be valid and sufficient for all purposes, the same as if he had remained in office until delivery.
Section 204. Authentication. No Obligation shall be valid or obligatory for any purpose or entitled to any security or benefit under this Master Trust Indenture unless and until a certificate of authentication on such Obligation substantially in the form set forth below shall have been duly executed by the Master Trustee, and such executed certificate of the Master Trustee upon any such Obligation shall be conclusive evidence that such Obligation has been authenticated and delivered under this Master Trust Indenture. The Master Trustee’s certificate of authentication on any Obligation shall be deemed to have been executed by it if signed by an authorized officer or signer of the Master Trustee, but it shall not be necessary that the same officer or signer sign the certificate of authentication on all of the Obligations issued hereunder.
The Master Trustee’s authentication certificate shall be in substantially the following form:
Master Trustee’s Authentication Certificate
This Obligation is one of the Obligations described in the within-mentioned Master Trust Indenture.
______, as Master Trustee
By Authorized Officer
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Section 205. Form of Obligations. All Obligations issued under this Master Trust Indenture shall be substantially in the form set forth or referred to in the Supplemental Indenture pursuant to which such Obligations are issued, to reflect the terms and conditions thereof as established hereby and by any Supplemental Indenture. Unless Obligations of a series have been registered under the Securities Act of 1933, as amended, each Obligation of such series shall be endorsed with a legend which shall read substantially as follows: “This [Obligation/Note/Guarantee] has not been registered under the Securities Act of 1933, as amended.”
Section 206. Mutilated, Lost, Stolen or Destroyed Obligations. In the event any temporary or definitive Obligation is mutilated, lost, stolen or destroyed, the Member of the Obligated Group issuing such Obligation may execute and the Master Trustee may authenticate a new Obligation of like form, date, maturity and denomination as that mutilated, lost, stolen or destroyed; provided that, in the case of any mutilated Obligation, such mutilated Obligation shall first be surrendered to the Master Trustee, and in the case of any lost, stolen or destroyed Obligation, there shall be first furnished to the Combined Group Agent, such Member of the Obligated Group and the Master Trustee evidence of such loss, theft or destruction satisfactory to the Combined Group Agent, such Member of the Obligated Group and the Master Trustee, together with indemnity satisfactory to them. In the event any such Obligation shall have matured, instead of issuing a duplicate Obligation the Obligated Group may pay the same without surrender thereof. The Obligated Group and the Master Trustee may charge the holder or owner of such Obligation with their reasonable fees and expenses in this connection.
Section 207. Registration; Negotiability; Cancellation Upon Surrender; Exchange of Obligations. Upon surrender for transfer of any Obligation at the designated corporate trust office of the Master Trustee, the Member of the Obligated Group issuing such Obligation shall execute and the Master Trustee shall authenticate and deliver in the name of the transferee or transferees a new fully registered Obligation or Obligations of the same series, designation and maturity without coupons for a like aggregate amount.
The execution by a Member of the Obligated Group of any Obligation of any denomination shall constitute full and due authorization of such denomination and the Master Trustee shall thereby be authorized to authenticate and deliver such Obligation.
As to any Obligation, the person in whose name the same shall be registered shall be deemed and regarded as the absolute owner thereof for all purposes, and payment of or on account of the amounts due under any such Obligation shall be made only to or upon the order of the registered owner thereof or his legal representative, but such registration may be changed as herein provided. All such payments shall be valid and effectual to satisfy and discharge the liability upon such Obligation to the extent of the sum or sums so paid.
Any Obligation surrendered for the purpose of payment or retirement or for replacement pursuant to Section 206 hereof shall be canceled upon surrender thereof to the Master Trustee. Certification of Obligations canceled by the Master Trustee shall be made to the Combined Group Agent. Canceled Obligations may be destroyed by the Master Trustee unless instructions to the contrary are received from the Combined Group Agent. 25
The Obligated Group and the Master Trustee may charge each Obligation holder requesting an exchange, registration, change in registration or transfer of an Obligation any tax, fee or other governmental charge required to be paid with respect to such exchange, registration or transfer.
Section 208. Security for Obligations; Pledge of Gross Revenues; Collateral Assignment.
Security. All Obligations issued and outstanding under this Master Trust Indenture are and shall be joint and several obligations of each Member of the Obligated Group, and are and shall be equally and ratably secured by this Master Trust Indenture except to the extent specifically provided otherwise as permitted by this Master Trust Indenture. All Obligations issued and outstanding under this Master Trust Indenture are and shall be equally and ratably secured by the pledge of Gross Revenues of the Combined Group described below, except to the extent specifically provided otherwise as permitted by this Master Trust Indenture.
Pledge of Gross Revenues. In order to secure the prompt payment of all amounts due on all Obligations issued under this Master Trust Indenture and the performance by the Members of the Obligated Group of their obligations under this Master Trust Indenture and the Obligations, the Members of the Combined Group hereby pledge and assign to the Master Trustee, and grant a security interest in, for the equal and ratable benefit of the Holders from time to time of all of the Obligations, all of their Gross Revenues, but the existence of such pledge, assignment and security interest shall not prevent the expenditure, deposit or commingling of Gross Revenues by the Members of the Combined Group for any purpose so long as no Event of Default under Sections 501(a), (g), (h) or (i) hereof has occurred and is continuing and all required payments with respect to the Obligations are made when due. Without limiting the generality of the foregoing, this security interest shall apply to all rights to receive Gross Revenues whether in the form of Accounts, accounts receivable, Contract Rights, Chattel Paper, Documents, General Intangibles, Instruments, Investment Property or other rights, and to the proceeds of such rights. This security interest shall apply to all of the foregoing, whether now existing or hereafter coming into existence and whether now owned or held or hereafter acquired by the Members of the Combined Group. The Combined Group Agent, on behalf of all Members of the Combined Group, hereby represents that, as of the date hereof, no Member of the Combined Group has granted any security interest in Gross Revenues prior to the security interest granted by this Section, except for the Liens on Gross Revenues, if any, described on Exhibit C hereto. The Combined Group Agent, on behalf of all Members of the Combined Group, hereby further covenants and agrees that, except for Permitted Encumbrances, the Members of the Combined Group will not pledge, suffer to exist, or grant a Lien on Gross Revenues. This Master Trust Indenture is intended to be a security agreement pursuant to the New Jersey Uniform Commercial Code and each Member of the Combined Group hereby acknowledges and authenticates the security interest created hereby by its signature on Exhibit D attached hereto.
The Members of the Combined Group agree to execute and file, if and to the extent required by law, such financing statements covering the Gross Revenues from time to time and in such form as may be required to perfect and continue a security interest in the Gross Revenues, and to deliver file-stamped copies thereof to the Master Trustee. The Master Trustee shall file, in a timely manner, continuation statements with respect to such financing statements which list the Master Trustee as secured party. The Members of the Combined Group shall pay 26
all costs of filing such financing statements and continuation statements and any renewals thereof and shall pay all reasonable costs and expenses of any record searches and preparation fees for financing statements and continuation statements that may be required. The pledge of Gross Revenues does not extend to, or constitute a pledge of or Lien upon, any funds, cash or investments held by any Member of the Combined Group, except to the extent such funds, cash or investments are proceeds of Gross Revenues received after the occurrence of an Event of Default under Section 501(a) hereof.
The Combined Group Agent, on behalf of all Members of the Combined Group, hereby further covenants that if an Event of Default of the type described in Section 501(a) hereof shall occur and be continuing, any Gross Revenues then received and any Gross Revenues thereafter received, shall not be commingled or deposited but shall immediately, or upon receipt, be transferred by the Members of the Combined Group on a daily basis to the Master Trustee and deposited into the Gross Revenues Account as provided below. Such daily deposits shall continue until such Event of Default described in the preceding sentence shall have been cured. Any such proceeds on deposit with the Master Trustee shall be disbursed by the Master Trustee pursuant to the provisions of Section 506 of this Master Trust Indenture and as provided below.
Notwithstanding anything to the contrary in this Master Trust Indenture, upon the occurrence and during the continuation of an Event of Default of the type described in Section 501(a) of this Master Trust Indenture, the Master Trustee may exercise all of the rights and remedies of a secured party, under the New Jersey Uniform Commercial Code or otherwise, with respect to the Lien on Gross Revenues created by this Section 208. Without limiting the generality of the foregoing, upon the occurrence and during the continuation of an Event of Default of the type described in Section 501(a) of this Master Trust Indenture and upon notice to the Combined Group Agent, to the extent permitted by law, the Master Trustee may realize upon such Lien by any one or more the following actions: (i) take possession of the financial books and records of any Member of the Combined Group relating to the Gross Revenues and of all checks or other orders for payment of money and cash in the possession of the Member of the Combined Group representing Gross Revenues or proceeds thereof; (ii) notify account debtors obligated on any Gross Revenues to make payment directly to the order of the Master Trustee; (iii) collect, compromise, settle, compound or extend Gross Revenues which are in the form of accounts receivable or contract rights from the Member of the Combined Group's account debtors by suit or other means and give a full acquittance therefor and receipt therefor in the name of the Member of the Combined Group, whether or not the full amount of any such account receivable or contract right owing shall be paid to the Master Trustee; (iv) require the Member of the Combined Group to deposit all cash, money and checks or other orders for the payment of money which represent Gross Revenues within five (5) Business Days after receipt of written notice of such requirement, and thereafter as received, into the Gross Revenues Account to be established for such purpose by the Master Trustee pursuant to the following paragraph, provided, however, that the requirement to make such deposits shall cease, and the balance in the Gross Revenues Account shall be paid to the Member of the Combined Group, when all Events of Default of the type described in Section 501(a) have been cured; (v) forbid the Member of the Combined Group to extend, compromise, compound or settle any accounts receivable or contract rights which represent Gross Revenues, or release, wholly or partly, any Person liable for the payment thereof (except upon receipt of the full amount due) or allow any credit or discount thereon; and (vi) endorse in the name of the Member of the Combined Group
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any checks or other orders for the payment of money representing Gross Revenues or the proceeds thereof.
The Master Trustee is hereby authorized and directed to establish a Gross Revenues Account, or Accounts, into which there shall be deposited upon the occurrence and continuation of any Event of Default under Section 501(a) of this Master Trust Indenture, upon receipt by the Master Trustee, any and all Gross Revenues of the Combined Group. Upon the occurrence of an event that requires the funding of the Gross Revenues Account, the Combined Group shall take all action necessary to insure that all such Gross Revenues are deposited into the Gross Revenues Account including, but not limited to, depositing directly all payments received and directing all debtors and payors of the Combined Group to make all payments due to the Members of the Combined Group into the Gross Revenues Account. The Gross Revenues Account shall be subject to the lien of this Master Trust Indenture in favor of the holders of all Obligations. Amounts on deposit in such Account shall be transferred first to the payment of current Operating Expenses of the Members of the Combined Group as may be directed by the Combined Group Agent and in accordance with budgeted amounts proposed by the Combined Group Agent and approved by the Master Trustee, and second to the payment of debt service on all Obligations due and past due and thereafter shall otherwise be transferred as may be directed by the Combined Group Agent to and applied by the Combined Group for its corporate purposes until the Master Trustee gives written notice to the Combined Group of the acceleration of the Obligations and the exercise of remedies under this Master Trust Indenture as a secured party and the Master Trustee enforces its rights and interests in and to the Gross Revenues Account and the amounts on deposit therein. Upon the giving of such written notice of acceleration and exercise of remedies, the Master Trustee is hereby authorized to take such self-help and other measures that a secured party is entitled to take under the New Jersey Uniform Commercial Code. Upon a cure or waiver of the Event of Default that requires the funding of the Gross Revenues Account, the Master Trustee shall transfer the amounts on deposit in the Gross Revenues Account to or at the direction of the Combined Group Agent.
The Combined Group Agent, on behalf of each Member of the Combined Group, represents, warrants and covenants for and on behalf of such Member of the Combined Group (except as specified below) that the following shall apply to the pledge of such Member of the Combined Group’s Gross Revenues created by this Master Trust Indenture:
(a) Creation: This Master Trust Indenture creates a valid and binding pledge of, assignment of, Lien on and security interest in its Gross Revenues in favor of the Master Trustee, as security for payment of the Obligations, enforceable by the Master Trustee in accordance with the terms hereof.
(b) Perfection: Under the laws of the jurisdiction in which such Member of the Combined Group is organized, such pledge, assignment, Lien and security interest is and shall be prior to any judicial lien hereafter imposed on such collateral to enforce a judgment against the Combined Group or any Member thereof on a simple contract. The Combined Group Agent represents, warrants and covenants that by the date of the effectiveness of this Master Trust Indenture, the Combined Group Agent will have filed or caused to be filed all financing statements describing, and transferred such possession or control over, such collateral (and for so long as any Obligation is outstanding under this Master Trust Indenture the Combined Group Agent will file, continue, and amend or cause to be amended all such financing statements and 28
transfer or cause to be transferred such possession and control) as may be necessary to establish and maintain such priority in each jurisdiction in which the Combined Group or any Member thereof is organized or such collateral may be located or that may otherwise be applicable pursuant to New Jersey Uniform Commercial Code §§9.301-9.306 (provided that the Master Trustee shall be responsible for filing continuation statements to perpetuate the perfection of any security interest hereunder prior to the expiration of the financing statements originally filed with respect thereto which name the Master Trustee as secured party and filed copies (or in connection with the issuance of the first Obligation hereunder, unfiled copies) of which were delivered to the Master Trustee).
(c) Priority: No Member of the Combined Group (i) has heretofore made a pledge of, granted a lien on or security interest in, or made an assignment or sale of its Gross Revenues that ranks on a parity with or prior to the pledge, assignment, lien and security interest in its Gross Revenues granted hereby, except for the Liens on Gross Revenues, if any, described on Exhibit C hereto, (ii) has described such collateral in a New Jersey Uniform Commercial Code financing statement that will remain effective after the date of the effectiveness of this Master Trust Indenture, except for the Liens on Gross Revenues, if any, described on Exhibit C hereto, and (iii) shall hereafter make or suffer to exist any pledge or assignment of, lien on, or security interest in such collateral that ranks prior to or on a parity with the pledge, assignment, lien and security interest in its Gross Revenues granted hereby, or file any financing statement describing any such pledge, assignment, lien, or security interest, except as expressly permitted under this Master Trust Indenture.
Section 209. Issuance of Obligations in Forms Other than Notes. To the extent that any Debt Obligation, any Hedging Obligation or any Ancillary Obligation is not in the form of a promissory note, an Obligation in the form of a promissory note may be issued hereunder and pledged as security for the payment of the amounts due under any such Obligation. Nevertheless, the parties hereto agree that Obligations may be issued hereunder to evidence any type of obligation, including but not limited to, Indebtedness (other than Non- Recourse Indebtedness), including without limitation any obligation or Indebtedness in a form other than a promissory note. In addition, any Hedging Obligation or Ancillary Obligation may be authenticated as an Obligation hereunder. Consequently, the Supplemental Indenture pursuant to which any Obligation is issued may provide for such supplements or amendments to the provisions hereof, including without limitation Articles II and V hereof, as are necessary to permit the issuance of such Obligation hereunder and as are not inconsistent with the intent hereof that, except as otherwise expressly provided herein, all Obligations issued hereunder be equally and ratably secured hereunder, including by the pledge of Gross Revenues created under Section 208 hereof. Any Hedging Obligation or Ancillary Obligation which is authenticated as an Obligation hereunder shall be equally and ratably secured hereunder with all other Obligations issued hereunder, except as otherwise expressly provided herein; provided, however, that any such Hedging Obligation or Ancillary Obligation shall be deemed to be Outstanding hereunder solely for the purpose of receiving payment hereunder and shall not be entitled to exercise any rights hereunder, including but not limited to any rights to direct the exercise of remedies, to vote or to grant consents.
Anything in this Master Trust Indenture to the contrary notwithstanding, the Obligated Group or any Member of the Obligated Group may issue Hedging Obligations pursuant to this
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Master Trust Indenture, without designating in such Hedging Obligation or in the Supplemental Indenture pursuant to which such Hedging Obligation is issued, and without regard to, a notional or principal amount, to any provider of one or more interest rate swaps, forward or futures contracts, or options, in order to evidence and secure one or more of such swaps, contracts or options issued by or with the same provider during a single Fiscal Year or calendar year, as designated by the Combined Group Agent.
Section 210. Substitute Obligations upon Withdrawal of a Member of the Obligated Group. In the event any Member of the Obligated Group ceases to be a Member of the Obligated Group in accordance with Section 404 and, in compliance with Section 404(a), another Member of the Obligated Group issues an Obligation hereunder pursuant to a Supplemental Indenture evidencing or assuming the Obligated Group’s obligation in respect of Related Bonds, if so provided for in such Obligation originally issued by such withdrawing Member of the Obligated Group, such Obligation shall be surrendered to the Master Trustee in exchange for a substitute Obligation without notice to or consent of any Related Bondholder, provided that such substitute Obligation provides for payments of principal, interest, premium and other amounts due under such Obligation identical to the surrendered Obligation and sufficient to provide all payments on any Related Bonds.
Section 211. Appointment of Combined Group Agent. Each Member of the Combined Group, by becoming a Member of the Combined Group, irrevocably appoints the Combined Group Agent as its agent and true and lawful attorney in fact and grants to the Combined Group Agent full and exclusive power to (a) authorize, negotiate and determine the terms of, and execute and deliver, Obligations and Supplemental Indentures authorizing the issuance of Obligations or series of Obligations; (b) as applicable, negotiate and determine the terms of, approve, execute, deliver, perform, amend, waive provisions of, grant consents related to, extend and terminate: loan agreements, bond indentures, bond purchase agreements related to liquidity or insurance, disclosures, and all such other agreements and instruments as are reasonably related to entering into and managing the specific transactions represented by such Supplemental Indentures; (c) negotiate and determine the terms of, approve, execute, deliver, perform, amend, waive provisions of, grant consents related to, extend and terminate certificates and other undertakings as are reasonably necessary or appropriate to entering into and managing the specific transactions represented by such Supplemental Indentures and/or Obligations; and (d) manage, oversee, direct, authorize, control, and implement (i) all Outstanding Indebtedness and financial relationships related in any manner to such Indebtedness, including, but not limited to: credit support and liquidity facilities; (ii) swaps, hedges, interest rate exchanges and any other derivative instruments of any classification; (iii) related insurance products and policies; (iv) debt management policy setting and determinations such as the mix of fixed and variable debt and similar determinations; (v) allocation, calculations, accounting for, collections from Members of the Combined Group, and payment of debt service, discounts, premiums, costs of issuance and other costs and fees related to Indebtedness, including termination, amendment and similar fees; (vi) planning, authorization and implementation of conversions, refunding, defeasances and other debt management or modification activities; (vii) all waivers, consents or amendments to any document or agreement, directly or indirectly, related to one or more of the Obligations, this Master Trust Indenture and any Supplemental Indenture, including, but not limited to, any of the types of documents or agreements mentioned in subsections (b) and (c) above and this subsection (d); and (viii) direction of agents and control, direction and management of third party
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relationships (such as trustees, paying agents, registrars, issuing authorities, underwriters, remarketing agents, swap counterparties, financial and other advisors, and counsel) related to Indebtedness or the issuance of Obligations. The authority granted in this Section shall be and remain irrevocable until and unless any Member of the Combined Group is permitted to withdraw from the Combined Group in accordance with the terms hereof. Notwithstanding the foregoing and for the avoidance of doubt, the provisions of this Section 211 may be amended in accordance with the terms of Article VII hereof.
Section 212. Conditions to Issuance of Obligations Hereunder. With respect to Obligations to be issued hereunder, simultaneously with or prior to the execution, authentication and delivery of Obligations pursuant to this Master Trust Indenture:
(a) All requirements and conditions to the issuance of such Obligations, if any, set forth in the Supplemental Indenture or in this Master Trust Indenture shall have been complied with and satisfied, as provided in an Officer’s Certificate of the Combined Group Agent delivered to the Master Trustee; and
(b) The issuer of such Obligations shall have delivered to the Master Trustee an Opinion of Counsel to the effect that (1) registration of such Obligations under the Securities Act of 1933, as amended, and qualification of this Master Trust Indenture or the Supplemental Indenture under the Trust Indenture Act of 1939, as amended, is not required, or, if such registration or qualification is required, that all applicable registration and qualification provisions of said acts have been complied with, and (2) this Master Trust Indenture and the Obligations are valid, binding and enforceable obligations of the Members of the Obligated Group in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance and other laws affecting creditors’ rights generally and usual equity principles and subject to such other exceptions as are not reasonably objected to by the Master Trustee.
ARTICLE III PREPAYMENT OR REDEMPTION OF OBLIGATIONS
Section 301. Prepayment or Redemption Dates and Prices. Obligations shall be subject to optional and mandatory prepayment or redemption in whole or in part and may be prepaid or redeemed prior to maturity as provided in the Supplemental Indenture or the Related Loan Document pertaining to the series of Obligations to be prepaid or redeemed.
ARTICLE IV GENERAL COVENANTS
Section 401. Payment of Principal, Premium, if any, and Interest and Other Amounts; Designated Affiliates and System Affiliates. Each Member of the Obligated Group unconditionally and irrevocably (subject to the right of such Member of the Obligated Group to cease its status as a Member of the Obligated Group pursuant to the terms and conditions of Section 404 hereof), jointly and severally covenants that it will promptly pay the principal of, premium, if any, and interest on, and all other amounts due under, every Obligation issued under
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this Master Trust Indenture and any other payments, including the purchase price of Related Bonds tendered or deemed tendered for purchase pursuant to the terms of a Related Bond Indenture or Related Loan Document required by the terms of such Obligations, at the place, on the dates and in the manner provided herein and in said Obligations according to the true intent and meaning thereof. Notwithstanding any schedule of payments upon the Obligations set forth herein or in the Obligations, each Member of the Obligated Group unconditionally and irrevocably (subject to the right of such Member of the Obligated Group to cease its status as a Member of the Obligated Group pursuant to the terms and conditions of Section 404 hereof), jointly and severally agrees to make payments upon each Obligation and be liable therefor at the times and in the amounts (including principal, interest and premium, if any, and all other amounts due thereunder) equal to the amounts to be paid as interest, principal at maturity or by mandatory sinking fund redemption, or premium, if any, upon any Related Bonds from time to time outstanding and upon any other financial obligations evidenced or secured by an Obligation. If any Member of the Obligated Group does not tender payment of any installment of principal, premium or interest on, or any other amounts due under, any Obligation when due and payable and such payment was to have been made to the Master Trustee, the Master Trustee shall provide prompt written notice of such nonpayment to such Member of the Obligated Group and the Combined Group Agent.
(A) The Combined Group Agent shall cause each Controlling Member to cause each of its Designated Affiliates and to use reasonable efforts to cause each of its other System Affiliates (subject to contractual and organizational limitations) to pay, loan or otherwise transfer to the Combined Group Agent or any other Member of the Obligated Group such amounts as are necessary to duly and punctually pay the principal of, premium, if any, and interest on all Outstanding Obligations and any other payments due under any Obligation, including the purchase price of Related Bonds tendered for purchase pursuant to the terms of a Related Bond Indenture or Related Loan Document, required by the terms of such Obligations, on the dates, at the times and at the places and in the manner provided in such Obligations, the applicable Supplemental Indenture and this Master Trust Indenture, when and as the same become payable, whether at maturity, upon call for redemption, by acceleration of maturity or otherwise.
(B) The Combined Group Agent shall at all times maintain an accurate and complete list of all Persons that are Members of the Obligated Group, Designated Affiliates and System Affiliates. Any Person may be designated by the Combined Group Agent as a Designated Affiliate hereunder in addition to those Designated Affiliates, if any, initially designated on Exhibit B, by the delivery to the Master Trustee of an Officer’s Certificate, attaching thereto a substitute Exhibit B to be appended to this Master Trust Indenture. The Combined Group Agent by an Officer’s Certificate delivered to the Master Trustee shall designate any Member of the Obligated Group as the Controlling Member of any such additional Designated Affiliate. With respect to each such Person, and so long as such Person is designated as a Designated Affiliate, the Member of the Obligated Group designated by the Combined Group Agent as the Controlling Member, shall either (a) maintain, directly or indirectly, control of each Designated Affiliate, including the power to direct the management, policies, disposition of assets and actions of such Designated Affiliate to the extent required to cause such Designated Affiliate to comply with the terms and conditions of this Master Trust Indenture, whether through the ownership of voting securities, by contract, partnership interests, membership,
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reserved powers, or the power to appoint members, trustees or directors or otherwise, or (b) execute and have in effect such contracts or other agreements that the Combined Group Agent or Controlling Member, in its sole judgment, deems sufficient for it to cause such Designated Affiliate to comply with the terms and conditions of this Master Trust Indenture. Any Person will cease to be a Designated Affiliate upon the declaration of the Combined Group Agent in an Officer’s Certificate delivered to the Master Trustee, and upon such declaration, such Person shall no longer be subject to any of the covenants applicable to a Designated Affiliate hereunder. Notwithstanding anything to the contrary herein, no Person shall cease to be a Designated Affiliate or a System Affiliate if any Outstanding Related Bonds have been issued for the benefit of such Person until there is delivered to the Master Trustee an opinion of nationally recognized bond counsel to the effect that, under then existing law, the cessation by such Person of its status as a Designated Affiliate or System Affiliate will not adversely affect the validity of any Related Bond or any exemption from federal or state income taxation of interest payable thereon to which such Related Bond would otherwise be entitled. In addition, no Designated Affiliate which generated at least 25% of the combined total revenues of the Combined Group and the System Affiliates as set forth on the combined financial statements for the most recently completed Fiscal Year of the System shall be declared to no longer be a Designated Affiliate by the Combined Group Agent unless the Combined Group Agent shall have delivered an Officer’s Certificate to the Master Trustee demonstrating that the Transaction Test will be met, assuming the incurrence of $1.00 of additional Long-Term Indebtedness, after giving effect to such proposed declaration by the Combined Group Agent.
(C) The Combined Group Agent covenants that it will cause each Controlling Member to cause each of its Designated Affiliates to comply with the terms and conditions of this Master Trust Indenture which are applicable to such Designated Affiliate, and of the Related Loan Document, if any, to which such Designated Affiliate is a party. The Members of the Combined Group covenant that they will take such action as they deem reasonably necessary to ensure that the System Affiliates comply with the terms or conditions of this Master Trust Indenture applicable to the System Affiliates.
Section 402. Performance of Covenants. The Combined Group Agent shall cause each Member of the Combined Group to faithfully perform at all times any and all covenants, undertakings, stipulations and provisions contained in this Master Trust Indenture and in each and every Obligation executed, authenticated and delivered hereunder and to perform all covenants and requirements imposed on the Combined Group Agent or such Member of the Combined Group under the terms of any Related Bond Indenture.
Section 403. Entrance into the Obligated Group. Any Person may become a Member of the Obligated Group if:
(a) Such Person is a corporation or other legal entity;
(b) Such Person shall execute and deliver to the Master Trustee a Supplemental Indenture acceptable to the Master Trustee which shall be executed by the Master Trustee and the Combined Group Agent on behalf of each then current Member of the Obligated Group, containing the agreement of such Person (i) to become a Member of the Obligated Group and thereby to become subject to compliance with all provisions of this Master Trust Indenture, including, but not limited to, agreeing to pledge, and pledging, its Gross Revenues in accordance 33
with Section 208 hereof, and (ii) unconditionally and irrevocably (subject to the right of such Person to cease its status as a Member of the Obligated Group pursuant to the terms and conditions of Section 404 hereof) to jointly and severally make payments upon each Obligation at the times and in the amounts provided in each such Obligation;
(c) The Combined Group Agent shall have approved the admission of such Person into the Obligated Group, which approval shall be evidenced by the Combined Group Agent executing the Supplemental Indenture referred to in Section 403(b);
(d) The Master Trustee shall have received (1) an Officer’s Certificate which demonstrates that, immediately upon such Person becoming a Member of the Obligated Group, the Members of the Obligated Group would not, as a result of such transaction, be in default in the performance or observance of any covenant or condition to be performed or observed by them under this Master Trust Indenture, (2) an opinion of Counsel to the effect that (x) the instrument described in paragraph (b) above has been duly authorized, executed and delivered and constitutes a legal, valid and binding agreement of such Person, enforceable in accordance with its terms, subject to customary exceptions for bankruptcy, insolvency and other laws generally affecting enforcement of creditors’ rights and application of general principles of equity and to such other exceptions as are not reasonably objected to by the Master Trustee and (y) the addition of such Person to the Obligated Group will not adversely affect the status as a Tax-Exempt Organization of any Member of the Obligated Group which otherwise has such status, and (3) if all amounts due or to become due on all Related Bonds have not been paid to the holders thereof and provision for such payment has not been made in such manner as to have resulted in the defeasance of all Related Bond Indentures, an opinion of nationally recognized municipal bond counsel to the effect that, under then existing law, the consummation of such transaction will not adversely affect the validity of any Related Bond or any exemption from federal or state income taxation of interest payable on such Related Bond to which such Related Bond would otherwise be entitled;
(e) The Combined Group Agent shall have delivered an Officer’s Certificate to the Master Trustee demonstrating that the Transaction Test will be met, assuming the incurrence of $1.00 of additional Long-Term Indebtedness, after giving effect to the proposed transaction; and
(f) Exhibit A to this Master Trust Indenture shall be amended or replaced by the Combined Group Agent to add such Person as a Member of the Obligated Group.
Except in the case of any succession, assignment or other change in status of a Member of the Obligated Group resulting from the operation of law, each successor, assignee, surviving, resulting or transferee corporation or other legal entity of a Member of the Obligated Group must agree to become, and satisfy the above-described conditions to becoming, a Member of the Obligated Group prior to any such succession, assignment or other change in such Member of the Obligated Group’s corporate status.
Section 404. Cessation of Status as a Member of the Obligated Group. Each Member of the Obligated Group covenants that it will not take any action, corporate or otherwise, which would cause it or any successor thereto into which it is merged or consolidated
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under the terms of this Master Trust Indenture to cease to be a Member of the Obligated Group unless:
(a) if the Member of the Obligated Group proposing to withdraw from the Obligated Group is a party to any Related Loan Documents with respect to Related Bonds which remain outstanding, another Member of the Obligated Group has issued an Obligation hereunder evidencing or assuming the obligation of the Obligated Group in respect of such Related Bonds;
(b) prior to cessation of such status, there is delivered to the Master Trustee an opinion of nationally recognized municipal bond counsel to the effect that, under then existing law, the cessation by the Member of the Obligated Group of its status as a Member of the Obligated Group will not adversely affect the validity of any Related Bond or any exemption from federal or state income taxation of interest payable on such Related Bond to which such Bond would otherwise be entitled;
(c) immediately after such cessation, no Event of Default exists hereunder and no event shall have occurred which with the passage of time or the giving of notice, or both, would become such an Event of Default;
(d) prior to such cessation there is delivered to the Master Trustee an opinion of Counsel to the effect that the cessation by such Member of the Obligated Group of its status as a Member of the Obligated Group will not adversely affect the status as a Tax-Exempt Organization of any Member of the Obligated Group which otherwise has such status;
(e) The Combined Group Agent shall have delivered an Officer’s Certificate to the Master Trustee demonstrating that the Transaction Test will be met, assuming the incurrence of $1.00 of additional Long-Term Indebtedness, after giving effect to the proposed transaction;
(f) prior to the cessation of such status, the Combined Group Agent consents in writing to the withdrawal of such Member of the Obligated Group; and
(g) Exhibit A to this Master Trust Indenture shall be amended or replaced by the Combined Group Agent to delete such Person as a Member of the Obligated Group.
Notwithstanding anything in this Master Trust Indenture to the contrary, the Corporation shall not be permitted to withdraw from the Obligated Group so long as any Obligations remain Outstanding under this Master Trust Indenture.
Section 405. General Covenants; Right of Contest. Each Member of the Obligated Group hereby covenants to, and the Combined Group Agent covenants that it will cause each Controlling Member to cause each of its Designated Affiliates to:
(a) Except as otherwise expressly provided herein (i) preserve its corporate or other separate legal existence, (ii) preserve all its rights and licenses to the extent necessary or desirable in the operation of its business and affairs as then conducted and (iii) 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 qualification; provided, however, that nothing
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contained in this Master Trust Indenture shall be construed to obligate such Member of the Obligated Group or Designated Affiliate to retain, preserve or keep in effect the rights, licenses or qualifications no longer used or useful in the conduct of its business.
(b) In the case of any Person that is a Tax-Exempt Organization at the time it becomes a Member of the Obligated Group or Designated Affiliate, so long as this Master Trust Indenture shall remain in force and effect and so long as all amounts due or to become due on all Related Bonds have not been fully paid to the holders thereof or provision for such payment has not been made, to take no action or suffer any action to be taken by others, including any action which would result in the alteration or loss of its status as a Tax-Exempt Organization, which could result in any such Related Bond being declared invalid or result in the interest on any Related Bond, which is otherwise exempt from federal or state income taxation, becoming subject to such taxation.
(c) At its sole cost and expense, promptly comply with all present and future laws, ordinances, orders, decrees, decisions, rules, regulations and requirements of every duly constituted governmental authority, commission and court and the officers thereof which may be applicable to it or any of its affairs, business, operations and Property, any part thereof, any of the streets, alleys, passageways, sidewalks, curbs, gutters, vaults and vault spaces adjoining any of its Property or any part thereof or to the use or manner of use, occupancy or condition of any of its Property or any part thereof, if the failure to so comply could reasonably be expected have a materially adverse effect on the operations, business assets or financial affairs of the Obligated Group, taken as a whole.
The foregoing notwithstanding, no Member of the Obligated Group or Designated Affiliate which owns, occupies or otherwise uses Facilities which have been financed or refinanced from the proceeds of any Related Bonds may (i) cease to be a not for profit corporation or (ii) take actions which could result in the alteration or loss of its status as a Tax- Exempt Organization unless prior thereto there shall have been delivered to the Master Trustee an opinion of nationally recognized municipal bond counsel to the effect that such actions would not adversely affect the validity of any Related Bond, the exemption from federal or state income taxation of interest payable on any Related Bond otherwise entitled to such exemption or adversely affect the enforceability in accordance with its terms of this Master Trust Indenture against any Person.
No Member of the Obligated Group or Designated Affiliate shall be required to remove any Lien required to be removed under Section 412, pay or otherwise satisfy and discharge its obligations, Indebtedness (other than any Obligations), demands and claims against it or to comply with any Lien prohibited by Section 412, or with any law, ordinance, rule, order, decree, decision, regulation or requirement referred to in Section 412, so long as such Member of the Obligated Group or Designated Affiliate shall contest, in good faith and at its cost and expense, in its own name and behalf, the amount or validity thereof, in an appropriate manner or by appropriate proceedings which shall operate during the pendency thereof to prevent the collection of or other realization upon the obligation, Indebtedness, demand, claim or Lien so contested, and the sale, forfeiture, or loss of its Property or any part thereof, provided, that no such contest shall subject any Related Issuer, any Obligation holder or the Master Trustee to the risk of any liability. While any such matters are pending, such Member of the Obligated Group or Designated Affiliate shall not be required to pay, remove or cause to be discharged the 36
obligation, Indebtedness, demand, claim or Lien being contested unless such Member of the Obligated Group or Designated Affiliate agrees to settle such contest. Each such contest shall be promptly prosecuted to final conclusion (subject to the right of such Member of the Obligated Group or Designated Affiliate engaging in such a contest to settle such contest), and in any event the Member of the Obligated Group or Designated Affiliate will save all Obligation holders and the Master Trustee harmless from and against all losses, judgments, decrees and costs (including attorneys’ fees and expenses in connection therewith) as a result of such contest and will, promptly after the final determination of such contest or settlement thereof, pay and discharge the amounts which shall be determined to be payable therein, together with all penalties, fines, interests, costs and expenses thereon or incurred in connection therewith.
Section 406. Insurance; Proceeds; Awards. (a) Each Member of the Obligated Group shall maintain or cause to be maintained at its sole cost and expense, with financially sound and reputable insurers (which may include System Affiliates or other captive insurers), such public liability insurance, third party property damage insurance, business interruption insurance and casualty insurance with respect to liabilities, losses or damage in respect of the assets, properties and businesses of the Obligated Group as may customarily be carried or maintained under similar circumstances by healthcare service providers of established reputation engaged in similar businesses (or, in the case of a Member of the Obligated Group that is not a healthcare services provider, customarily carried or maintained under similar circumstances by entities of established reputation engaged in similar businesses), in each case in such amounts (giving effect to self-insurance), with such deductibles, covering such risks and otherwise on such terms and conditions as are customary for corporations similarly situated in the industry and as are determined to be consistent with reasonably prudent business practices, which determination can be based upon the advice of an independent insurance consultant.
(b) Insurance proceeds (including title insurance proceeds) or condemnation awards paid or payable to the Obligated Group, or to the Master Trustee pursuant to, or in connection with, any Related Bond Indenture or any Related Loan Document, shall be applied, at the direction of the Combined Group Agent, either to (i) repair, reconstruct, restore or replace the damaged or condemned Property, or (ii) prepay all Outstanding Obligations pro-rata among all such Outstanding Obligations. Any such insurance proceeds or condemnation awards remaining after application as provided in the preceding sentence shall be paid or applied as directed by the Combined Group Agent for any purpose as may be determined by the Combined Group Agent. Notwithstanding the foregoing, (x) the Obligated Group agrees that it shall not permit or direct the application of any insurance proceeds or condemnation awards received with respect to any Property financed with the proceeds of Related Bonds in any manner that would adversely affect the tax-exempt status of any Related Bonds; (y) upon the direction of the Combined Group Agent, the Master Trustee shall deposit or cause to be deposited into an account or accounts, as may be required by any Related Bond Indenture or Related Loan Document, any insurance proceeds or condemnation awards (or allocable portion thereof) to be applied to the restoration, reconstruction or repair of any Property or the prepayment of Related Bonds and (z) if an Event of Default under this Master Trust Indenture is continuing and the Master Trustee gives written notice to the Obligated Group of the acceleration of the Obligations and the exercise of remedies under this Master Trust Indenture as a secured party, such insurance proceeds or condemnation awards shall be paid to Master Trustee and applied in accordance with Section 506.
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Section 407. Historic Annual Debt Service Coverage Ratio. Each Member of the Obligated Group covenants and agrees to, and each Controlling Member covenants to cause each of its Designated Affiliates to, conduct its business on a revenue producing basis and to charge such fees and rates and to exercise such skill and diligence as to provide income from its Property together with other available funds sufficient to pay promptly all payments of principal and interest on its Indebtedness, all expenses of operation, maintenance and repair of its Property and all other payments required to be made by it hereunder to the extent permitted by law. Each Member of the Obligated Group further covenants and agrees that it will, and each Controlling Member covenants that it will cause each of its Designated Affiliates to, from time to time as often as necessary and to the extent permitted by law, revise its rates, fees and charges in such manner as may be necessary or proper to comply with the provisions of this Section.
The Combined Group Agent shall calculate the Income Available for Debt Service of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture), for each Fiscal Year as of the end of such Fiscal Year and the Historic Annual Debt Service Coverage Ratio of the Combined Group or the System, as the case may be, for such Fiscal Year as of the end of such Fiscal Year and deliver a copy of such calculations to the Persons to whom and at the time at which annual financial statements are required to be delivered under Section 409 hereof.
If in any Fiscal Year the Historic Annual Debt Service Coverage Ratio of the Combined Group or the System, as the case may be, is less than 1.10 to 1, the Combined Group Agent shall at the expense of the Combined Group retain a Consultant, in a timely manner but in no event later than ninety (90) days after the date on which the Combined Group Agent determines that such Historic Annual Debt Service Coverage Ratio is less than 1.10 to 1, to prepare a report and make recommendations with respect to the rates, fees and charges of the Combined Group or the System, as the case may be, and the methods of operation of the Combined Group or the System, as the case may be, and other factors affecting their financial condition in order to increase such Historic Annual Debt Service Coverage Ratio to at least 1.10 to 1. Any Consultant so retained shall be required to submit such report and recommendations within sixty (60) days after being retained. So long as the Combined Group has retained a Consultant and has followed the report and recommendations of the Consultant to the extent permitted by applicable laws, the Combined Group shall not be deemed to have violated the provisions of this Section 407.
A copy of the Consultant’s report and recommendations, if any, shall be filed with the Combined Group Agent and the Master Trustee. Each Member of the Obligated Group shall follow and each Controlling Member shall cause each Designated Affiliate to follow each recommendation of the Consultant applicable to it to the extent feasible (as determined in the reasonable judgment of the Governing Body of such Member of the Obligated Group) and permitted by law, applicable regulations and the legal obligations binding upon such Member of the Obligated Group. The Members of the Obligated Group shall take such steps as they consider feasible to cause System Affiliates that are not Members of the Obligated Group or Designated Affiliates to follow each recommendation of the Consultant applicable to such System Affiliate. This Section shall not be construed to prohibit any Person from serving indigent patients to the extent required for such Person to continue its qualification as a Tax- Exempt Organization or from serving any other class or classes of patients without charge or at
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reduced rates so long as such service does not prevent the Combined Group or the System, as the case may be, from satisfying the other requirements of this Section.
The foregoing provisions notwithstanding, if in any Fiscal Year the Historic Annual Debt Service Coverage Ratio of the Combined Group or the System, as the case may be, is less than 1.10 to 1, the Combined Group Agent shall not be required to retain a Consultant to make such recommendations if: (a) there is filed with the Master Trustee a written report of a Consultant which contains an opinion of such Consultant to the effect that applicable laws or regulations have prevented the Combined Group or the System, as the case may be, from generating Income Available for Debt Service during such Fiscal Year in an amount sufficient to produce a Historic Annual Debt Service Coverage Ratio of the Combined Group or the System, as the case may be, of 1.10 to 1 or higher; (b) the report of such Consultant indicates that the fees and rates charged by the System Affiliates or the Members of the Combined Group, as the case may be, are such that, in the opinion of the Consultant, the System Affiliates or the Members of the Combined Group, as the case may be, have generated the maximum amount of Revenues reasonably practicable given such laws or regulations or other legal obligations; and (c) the Historic Annual Debt Service Coverage Ratio of the Combined Group or the System, as the case may be, was at least 1.00 to 1 for such Fiscal Year. The Combined Group Agent shall not be required to cause the Consultant’s report referred to in the preceding sentence to be prepared more frequently than once every two Fiscal Years if at the end of the first of such two Fiscal Years the Combined Group Agent provides to the Master Trustee an Officer’s Certificate or an opinion of Counsel to the effect that the applicable laws and regulations underlying the Consultant’s report delivered in respect of the previous Fiscal Year have not changed in any material way.
Notwithstanding anything else in this Section to the contrary, it shall be an Event of Default under Section 501(c) hereof if, as of the end of any two consecutive Fiscal Years, the Historic Annual Debt Service Coverage Ratio of the Combined Group is less than 1.00 to 1.
Section 408. Permitted Reorganizations. (a) Each Member of the Combined Group agrees that it will not (x) merge into, or consolidate with, one or more corporations or other legal entities, or (y) allow one or more of such corporations or other legal entities to merge into it, or (z) sell or convey all or substantially all of its Property to any Person, unless (A) after giving effect to such merger, consolidation, sale or conveyance, the successor, resulting, surviving or transferee Person is a Member of the Combined Group, or (ii) the following requirements are satisfied:
(i) Any successor corporation or other legal entity to such Member of the Combined Group (including without limitation any purchaser of all or substantially all the Property of such Member of the Combined Group) is a corporation or other legal entity organized and existing under the laws of the United States of America or a state thereof and shall execute and deliver to the Master Trustee an appropriate instrument, satisfactory to the Master Trustee, containing the agreement of such successor corporation or other legal entity to assume, jointly and severally, the due and punctual payment of the principal of, premium, if any, and interest on, and any other amounts due under, all Obligations according to their tenor and the due and punctual performance and observance of all the covenants and conditions of this Master Trust Indenture to be kept and performed by such Member of the Combined Group;
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(ii) Immediately after such merger or consolidation, or such sale or conveyance, no Member of the Combined Group would be in default in the performance or observance of any covenant or condition of any Related Loan Document or this Master Trust Indenture;
(iii) If all amounts due or to become due on all Related Bonds have not been fully paid to the holders thereof or fully provided for, there shall be delivered to the Master Trustee (i) an opinion of Counsel to the effect that the consummation of such merger, consolidation, sale or conveyance will not adversely affect the status as a Tax- Exempt Organization of any Member of the Combined Group which otherwise has such status; and (ii) an opinion of nationally recognized municipal bond counsel to the effect that under then existing law the consummation of such merger, consolidation, sale or conveyance would not adversely affect the validity of such Related Bonds or the exemption otherwise available from federal or state income taxation of interest payable on such Related Bonds;
(iv) The Combined Group Agent shall have consented to such Permitted Reorganization; and
(v) The Combined Group Agent shall have delivered an Officer’s Certificate to the Master Trustee demonstrating that the Transaction Test will be met, assuming the incurrence of $1.00 of additional Long-Term Indebtedness, after giving effect to the proposed Permitted Reorganization.
(b) In case of any such consolidation, merger, sale or conveyance and upon any such assumption by the successor corporation or other legal entity, such successor corporation or other legal entity shall succeed to and be substituted for its predecessor, with the same effect as if it had been named herein as such Member of the Combined Group and the Member of the Combined Group party to such transaction, if it is not the survivor, shall thereupon be relieved of any further obligation or liabilities hereunder or upon the Obligations and such Member of the Combined Group as the predecessor or non-surviving corporation or other legal entity may thereupon or at any time thereafter be dissolved, wound up or liquidated. Any successor corporation or other legal entity to such Member of the Combined Group thereupon may cause to be signed and may issue in its own name Obligations hereunder and the predecessor corporation or other legal entity shall be released from its obligations hereunder and under any Obligations, if such predecessor corporation or other legal entity shall have conveyed all or substantially all Property owned by it (or all such Property shall be deemed conveyed by operation of law) to such successor corporation or other legal entity. All Obligations so issued by such successor corporation or other legal entity hereunder shall in all respects have the same legal rank and benefit under this Master Trust Indenture as Obligations theretofore or thereafter issued in accordance with the terms of this Master Trust Indenture as though all of such Obligations had been issued hereunder by such prior Member of the Combined Group without any such consolidation, merger, sale or conveyance having occurred.
(c) In case of any such consolidation, merger, sale or conveyance such changes in phraseology and form (but not in substance) may be made in Obligations thereafter to be issued as may be appropriate.
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(d) The Master Trustee may rely upon an opinion of Counsel to the effect that any such consolidation, merger, sale or conveyance, and any such assumption, complies with the provisions of this Section and that it is proper for the Master Trustee under the provisions of Article VII and of this Section to join in the execution of any instrument required to be executed and delivered by this Section.
(e) Except as may be expressly provided in any Supplemental Indenture, the ability of any System Affiliate that, in either case, is not a Member of the Combined Group to merge into, or consolidate with, one or more corporations, or allow one or more corporations to merge into it, or sell or convey all or substantively all of its Property to any Person is not limited by the provisions of this Master Trust Indenture. Notwithstanding anything to the contrary herein, no System Affiliate (other than in a transaction between the initial Designated Affiliates under this Master Trust Indenture as to which this sentence shall not apply) shall engage in any merger or consolidation or disposition of substantially all of its assets if any Outstanding Related Bonds have been issued for the benefit of such System Affiliate until there is delivered to the Master Trustee an opinion of nationally recognized municipal bond counsel to the effect that, under then existing law, such action will not (i) adversely affect the validity of any Related Bond or any exemption from federal or state income taxation of interest payable thereon to which such Related Bond would otherwise be entitled, or (ii) result in the occurrence of an Event of Default under this Master Trust Indenture or any event which with the passage of time or the giving of notice, or both, would become such an Event of Default.
Section 409. Financial Statements, Etc. Each Member of the Combined Group covenants that it will, and will cause each System Affiliate controlled by any such Member of the Combined Group to, keep or cause to be kept proper books of records and accounts in which full, true and correct entries will be made of all dealings or transactions of or in relation to the business and affairs of such Member of the Combined Group in accordance with GAAP consistently applied except as may be disclosed in the notes to the audited financial statements referred to in subparagraph (A) below, and the Combined Group Agent will furnish to the Master Trustee:
(A) As soon as practicable after they are available, but in no event more than 150 days after the last day of each Fiscal Year, a financial report of the Combined Group or, at the option of the Combined Group Agent, the System (if permitted by Section 103(b) of this Master Trust Indenture), for such Fiscal Year certified by a firm of nationally recognized independent certified public accountants selected by the Combined Group Agent prepared on a combined or consolidated, or combining or consolidating, basis in accordance with GAAP, covering the operations of the Combined Group or the System, as the case may be, for such Fiscal Year and containing an audited consolidated statement of financial position of the Combined Group or, at the option of the Combined Group Agent, the System, as of the end of such Fiscal Year and an audited consolidated and an unaudited consolidating statement of operations of the Combined Group or, at the option of the Combined Group Agent, the System, for such Fiscal Year, showing in each case in comparative form the financial figures for the preceding Fiscal Year.
(B) As soon as practicable after they are available, but in no event more than 60 days after the last day of each of the first three fiscal quarters of each Fiscal Year, quarterly
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unaudited financial statements of the System with respect to such fiscal quarter and for the portion of the Fiscal Year ending with such quarter.
(C) At the time of delivery of the financial report referred to in subsection (A) above, an Officer’s Certificate, stating that the Combined Group Agent has made a review of the activities of each Member of the Combined Group and System Affiliate during the preceding Fiscal Year for the purpose of determining whether or not the Members of the Combined Group and System Affiliates have complied with all of the terms, provisions and conditions of this Master Trust Indenture and that each Member of the Combined Group and System Affiliate has kept, observed, performed and fulfilled each and every covenant, provision and condition of this Master Trust Indenture on its part to be performed and is not in default in the performance or observance of any of the terms, covenants, provisions or conditions hereof, or if an Event of Default shall have occurred or be continuing such certificate shall specify all such Events of Default and the nature thereof.
(D) The Master Trustee shall have no duty to review any financial statements submitted to it pursuant to this Master Trust Indenture and shall not be considered to have notice of the contents of such financial statements or a default based on such content and does not have a duty to verify the accuracy of such financial statements.
Section 410. Permitted Indebtedness. (a) The Members of the Obligated Group covenant that, except for Permitted Indebtedness described in paragraph (b) of this Section 410, Material Combined Group Members shall not incur additional Indebtedness, directly, indirectly or contingently. Notwithstanding anything in this Master Trust Indenture to the contrary, Members of the Combined Group which are not Material Combined Group Members may incur Indebtedness without regard to amount or term or compliance with any of the terms and restrictions set forth in this Section 410.
(b) Permitted Indebtedness shall include only the following:
(1) Any Indebtedness, if prior to or simultaneously with the incurrence of such Indebtedness there is delivered to the Master Trustee an Officer’s Certificate demonstrating that the Transaction Test will be or has been met for, and giving effect to, the incurrence of such Indebtedness;
(2) Long-Term Indebtedness, if prior to the incurrence of such Long- Term Indebtedness there is delivered to the Master Trustee an Officer’s Certificate to the effect that the total principal amount of Long-Term Indebtedness to be incurred at such time, when added to the aggregate principal amount of all other Long-Term Indebtedness theretofore issued pursuant to this paragraph (b)(2) and then Outstanding, will not exceed fifteen percent (15%) of the Operating Revenues of the Combined Group for the Historic Test Period. Any Long-Term Indebtedness or portion thereof incurred under this paragraph (b)(2) which is Outstanding at any time shall be deemed to have been incurred under any one of the paragraphs of the Transaction Test if at any time subsequent to the incurrence thereof there shall be filed with the Master Trustee an Officer’s Certificate to the effect that such Outstanding Indebtedness or portion thereof would satisfy such other provision, specifying such other provision, and thereupon the amount deemed to have
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been incurred and to be Outstanding under this paragraph (b)(2) shall be deemed to have been reduced by such amount and to have been incurred under such other provision;
(3) Completion Indebtedness, if prior to the incurrence of such Completion Indebtedness there is delivered to the Master Trustee an Officer’s Certificate (i) to the effect that the net proceeds of such proposed Completion Indebtedness is needed for the completion of the construction or equipping of the facilities in question; (ii) to the effect that the original Indebtedness for the facilities in question when incurred was assumed to be sufficient for the projected costs; (iii) describing the reasons why such Completion Indebtedness is necessary; and (iv) certifying as to the amount needed for the completion of the facilities in question;
(4) Long-Term Indebtedness incurred for the purpose of refunding, including advance refunding, any Outstanding Long-Term Indebtedness, if prior to the incurrence of such Long-Term Indebtedness there is delivered to the Master Trustee an Officer’s Certificate to the effect that either (i) such refunding will not increase Maximum Annual Debt Service in any year (calculated for the period during which the Indebtedness to be refunded would have been Outstanding but for such proposed refunding) by more than ten percent (10%), or (ii) such refunding will result in a present value savings in the debt service requirements as compared to that of the Outstanding Long-Term Indebtedness being refunded; provided, however, refundings in the nature of the rolling-over of Indebtedness in the form of commercial paper or the payment of the purchase price of any Indebtedness which is payable upon demand of the holder or owner thereof or may be tendered by and at the option of the holder or owner thereof for payment prior to the stated maturity date thereof shall be permitted, without limitation and without the need for the delivery of any Officer’s Certificate;
(5) Short-Term Indebtedness, provided that immediately after the incurrence of such Indebtedness the aggregate Outstanding principal amount of all Short- Term Indebtedness does not exceed ten percent (10%) of the aggregate Operating Revenues of the Combined Group for the Historic Test Period, and provided further that the Obligated Group maintains the Outstanding Short-Term Indebtedness in an amount not greater than three percent (3%) of the aggregate Operating Revenues of the Combined Group for thirty (30) consecutive days in a Fiscal Year. Notwithstanding the above, the Members of the Obligated Group may incur Short-Term Indebtedness in the aggregate Outstanding principal amount up to twenty-five percent (25%) of the aggregate Operating Revenues of the Combined Group for the Historic Test Period, upon delivery to the Master Trustee of a report of a Consultant and an Officer’s Certificate setting forth (i) the recommended time period for such increase in such Short-Term Indebtedness, (ii) the recommended amount of such Short-Term Indebtedness for such period and (iii) the legal, statutory, regulatory or administrative reasons why such Short-Term Indebtedness must be increased to such level;
(6) Non-Recourse Indebtedness, in a principal amount Outstanding at any one time not in excess of twenty-five percent (25%) of Operating Revenues of the Combined Group for the Historic Test Period, which Non-Recourse Indebtedness is: (i) secured by a Lien on Property which is part of the Property, Plant and Equipment; or (ii) secured by a Lien on Property which is inventory or pledges of gifts or grants to be 43
received in the future; provided that such gifts or grants shall be excluded from the calculation of Income Available for Debt Service so long as such Non-Recourse Indebtedness is Outstanding;
(7) Subordinated Indebtedness, without limitation;
(8) Indebtedness in the form of installment purchase contracts, Capitalized Leases, purchase money mortgages, loans, sale agreements or other typical borrowing instruments; provided that the aggregate annual debt service on the Indebtedness permitted under this paragraph (b)(8) shall not in any Fiscal Year exceed five percent (5%) of the Operating Revenues of the System or the Combined Group, as the case may be, for the Historic Test Period;
(9) Guarantees, (i) if such Guaranty could then be incurred by the Obligated Group as Indebtedness under Section 410(b)(1), (2) or (5) hereof (with the Pro- forma Debt Service Requirements on such Guaranty for purposes of such Sections being calculated in accordance with the provisions of Section 418 of this Master Trust Indenture), (ii) if such Guaranty is of Indebtedness of another Member of the Obligated Group, which Indebtedness has been or could be incurred as Permitted Indebtedness under this Section 410(b); or (iii) if such Guaranty is of Indebtedness of a System Affiliate;
(10) Indebtedness represented by a letter of credit reimbursement agreement, standby bond purchase agreement, continuing covenants agreement or other similar agreement entered into by any Member of the Obligated Group and a financial institution providing either a liquidity or credit support with respect to any other Indebtedness incurred in accordance with any other provision of this Section 410(b);
(11) Indebtedness in the form of a borrowing from another Member of the Obligated Group or from a System Affiliate;
(12) Indebtedness in the form of any other financial obligation to another Member of the Obligated Group or to a System Affiliate;
(13) Indebtedness incurred on an interim basis with respect to any construction project for which money is available therefor in the construction fund for such project;
(14) Indebtedness incurred in the ordinary course of business;
(15) Indebtedness in the form of a guaranty or confirmation of liability of an Affiliate incurred directly or indirectly with respect to a self-insurance or captive insurance program benefiting any Member of the Obligated Group;
(16) Indebtedness incurred or deemed incurred by virtue of any recourse obligation associated with any sale or assignment of accounts receivable, but in no event in an amount in excess of the monetary consideration received from any such sale or assignment; and in any event not in excess of twenty percent (20%) of the total
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amount of accounts receivable (net of contractual allowances) of the Obligated Group as of the end of the Historic Test Period; and
(17) any Indebtedness (or obligations not for borrowed money), which Indebtedness or obligation is not generally treated as Indebtedness, such as obligations to make contributions to employee benefit plans, social security alternative plans, self- insurance programs, captive insurance companies and unemployment insurance liabilities.
Section 411. Permitted Dispositions. (a) The Members of the Obligated Group covenant that, except for Permitted Dispositions described in paragraph (b) of this Section 411, the Material Combined Group Members shall not sell, lease, remove, release from the Lien of this Master Trust Indenture, transfer, assign, convey or otherwise dispose of any Property of the Material Combined Group Members. Notwithstanding anything in this Master Trust Indenture to the contrary, Members of the Combined Group which are not Material Combined Group Members may sell, lease, transfer, assign, convey or otherwise dispose of any Property in any manner without the need to comply with any of the terms and restrictions set forth in this Section 411.
(b) Permitted Dispositions shall include only the following:
(1) the disposition of Property if the Value of such Property disposed of in any one Fiscal Year is not in excess of five percent (5%) of the Value of the Property of the System as of the end of the Historic Test Period;
(2) the disposition of Property if the Value of such Property disposed of in any one Fiscal Year exceeds five percent (5%) of the Value of the Property of the System; provided, however, that an Officer’s Certificate is delivered to the Master Trustee demonstrating that the Transaction Test shall have been met for, and giving effect to, such proposed Permitted Disposition;
(3) the disposition of real property that is unused or surplus upon which none of the Facilities are situated;
(4) the disposition of Property in the case of any proposed, pending or potential condemnation or taking for public or quasi-public use of the Property or any portion thereof;
(5) the disposition of Property to any Person if such Property has, or within the next succeeding twenty-four (24) calendar months is reasonably expected to, become inadequate, obsolete, worn out, unsuitable, unprofitable, undesirable or unnecessary and the disposition thereof will not impair the structural soundness, efficiency or economic value of the remaining Property;
(6) the disposition of Property in the ordinary course of business;
(7) the disposition of Property if such Property is replaced promptly by other Property of comparable utility or worth, evidenced in the case of dispositions of
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real property with a Value in excess of the greater of twenty million dollars ($20,000,000) or one-half of one percent (0.5%) of the Value of the Property of the System or the Obligated Group, as the case may be, by an appraisal by a qualified appraiser satisfactory to the Master Trustee and dated and filed with the Master Trustee not more than thirty (30) days prior to such disposition;
(8) the disposition of Property (other than Current Assets or Gross Revenues) that does not constitute part of the health care facilities of the Obligated Group;
(9) the disposition of Property if the Obligated Group, or any Member of the Combined Group, receives fair market value therefor;
(10) the disposition of Property constituting the sale, assignment or other disposition of not in excess of twenty-five percent (25%) of the Combined Group’s accounts receivable in the immediately preceding Fiscal Year; provided that the transaction is commercially reasonable and for consideration deemed fair and adequate in an Officer’s Certificate delivered to the Master Trustee (in such case the Master Trustee shall cooperate in releasing any accounts receivable from the Lien on Gross Revenues);
(11) the disposition of Property to another Member of the Combined Group or to a System Affiliate;
(12) the disposition of Property in connection with a Permitted Reorganization;
(13) the disposition of Property in the form of a contribution to any employee benefit plan; and
(14) notwithstanding any other provision of this Section 411 or elsewhere in this Master Trust Indenture to the contrary, the disposition of Property to any other Person in any amount or Value; provided, however, that an Officer’s Certificate is delivered to the Master Trustee demonstrating that (i) the Transaction Test shall have been met for, and giving effect to, such proposed Permitted Disposition, and (ii) the Unsecured Debt Ratio of the Obligated Group shall not be less than 1.20 to 1 after giving effect to such Permitted Disposition.
Section 412. No Lien on Gross Revenues; Permitted Encumbrances. Notwithstanding anything in this Master Trust Indenture to the contrary, other than the Lien on Gross Revenues created pursuant to Section 208 hereof, no Member of the Combined Group shall create or incur or permit to be created or incurred or to exist any Lien, whether superior or inferior to the Lien of this Master Trust Indenture, on the Gross Revenues of such Member of the Combined Group. Additionally, no Material Combined Group Member shall create or incur or permit to be created or incurred or to exist any Lien on any other Property of such Member of the Combined Group, except for Permitted Encumbrances.
Section 413. Permitted Releases. (a) The Members of the Combined Group covenant that, except for Permitted Releases described in paragraph (b) of this Section 413, the
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Members of the Combined Group shall not release any of the Gross Revenues from the security interest created by this Master Trust Indenture or release any of the Property or portions thereof from the covenant against Liens set forth in Section 412 hereof.
(b) Permitted Releases shall include only the following:
(1) a release made with respect to the Property that is to be disposed of in conjunction with a Permitted Disposition of the Property;
(2) a release made with respect to the Property (other than with respect to Property, Plant and Equipment) that is permitted to be disposed of, but in fact is not to be disposed of, in accordance with the provisions of this Master Trust Indenture relating to Permitted Dispositions; and
(3) a release made with respect to the Property of a Member of the Obligated Group upon the withdrawal of such Member from the Obligated Group in accordance with Section 404 hereof.
(c) The Master Trustee is authorized to cooperate with the Combined Group to implement any such Permitted Release.
Section 414. Indemnity. Each Member of the Obligated Group will pay, and will protect, indemnify and save the Master Trustee (and its directors, officers, employees and agents) harmless from and against any and all liabilities, losses, damages, costs and expenses (including reasonable attorneys’ fees and expenses of such Member of the Obligated Group and the Master Trustee), causes of action, suits, claims, demands and judgments of whatsoever kind and nature (including those arising or resulting from any injury to or death of any person or damage to Property) arising from or in any manner directly or indirectly growing out of or connected with the following:
(1) the use, non-use, condition or occupancy of any of the Property of any Member of the Obligated Group, any repairs, construction, alterations, renovation, relocation, remodeling and equipping thereof or thereto or the condition of any of such Property including adjoining sidewalks, streets or alleys and any equipment or Facilities at any time located on such Property or used in connection therewith but which are not the result of the negligence of the Master Trustee;
(2) violation of any agreement, warranty, covenant or condition of this Master Trust Indenture, except by the Master Trustee;
(3) violation of any contract, agreement or restriction by any Member of the Obligated Group relating to its Property, which shall have existed at the time of execution and delivery of this Master Trust Indenture;
(4) violation of any law, ordinance, regulation or court order affecting any Property of any Member of the Obligated Group or the ownership, occupancy or use thereof;
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(5) any statement or information concerning any Member of the Obligated Group or its officers and members or its Property, contained in any official statement or other offering document furnished to the Master Trustee or the purchaser of any Obligations or any Related Bonds, that is untrue or incorrect in any material respect, and any omission from such official statement or other offering document of any statement or information which should be contained therein for the purpose for which the same is to be used or which is necessary to make the statements therein concerning any Member of the Obligated Group, its officers and members and its Property not misleading in any material respect, provided that the official statement or other offering document has been approved by a Member of the Obligated Group and the indemnified party did not have knowledge of the omission or misstatement or did not use the official statement or other offering document with reckless disregard of or gross negligence in regard to the accuracy or completeness of the official statement or other offering document; and
(6) the performance by the Master Trustee of its powers, duties and obligations under this Master Trust Indenture except in the case of its negligence or willful misconduct.
Such indemnity shall extend to each Person, if any, who “controls” the Master Trustee as that term is defined in Section 15 of the Securities Act of 1933, as amended. The respective obligations of the Members of the Obligated Group under this Section 414 to indemnify and hold harmless the Master Trustee shall survive satisfaction and discharge of this Master Trust Indenture and the replacement or resignation of the Master Trustee.
In the event of settlement of any litigation commenced or threatened, such indemnity shall be limited to the aggregate amount paid under a settlement effected with the written consent of the Combined Group Agent.
The Master Trustee shall promptly notify the Combined Group Agent in writing of any claim or action brought against the Master Trustee, its directors, officers, employees and agents, or any controlling person, as the case may be, in respect of which indemnity may be sought against any Member of the Obligated Group, setting forth the particulars of such claim or action, and the Obligated Group will assume the defense thereof, including the employment of counsel satisfactory in the reasonable discretion of the Master Trustee or such controlling person, as the case may be, and the payment of all expenses. The Master Trustee or any such controlling person, as the case may be, may employ separate counsel in any such action and participate in the defense thereof, and the reasonable fees and expenses of such counsel shall not be payable by the Obligated Group unless such employment has been specifically authorized by the Combined Group Agent.
Section 415. Debt Service on Balloon Indebtedness. For purposes of the calculation of the Debt Service Requirements, Balloon Indebtedness shall, at the election of the Combined Group Agent, be deemed to be Indebtedness which is payable over (a) thirty (30) years from the date of such calculation at a rate of interest equal to (i) the actual rate of interest on such Indebtedness, or (ii) that derived from the Bond Index, as determined by an Officer’s Certificate, and in each case with level annual debt service on such Indebtedness, or (b) the remaining term to maturity of such Indebtedness, at a rate of interest equal to (i) the actual rate of interest on such Indebtedness, or (ii) that derived from the Bond Index, as determined by an 48
Officer’s Certificate, and in each case with level annual debt service on such Indebtedness. In addition, upon delivery to the Master Trustee of (a) an Officer’s Certificate, dated within 90 days of the date of calculation of the Debt Service Requirements, stating that financing of a stated term (which shall not extend beyond 30 years after such date of calculation), amortization, and interest rate is reasonably attainable to refund or otherwise directly or indirectly to refinance any amount of such Balloon Indebtedness, then the principal of and premium, if any, and interest and other debt service charges on the amount of such Balloon Indebtedness so certified to be refundable or refinanceable shall be excluded from the calculation of the Debt Service Requirements and the principal of and premium, if any, and interest and other debt service charges on the refunding Indebtedness as so certified which would result from such refunding or refinancing if incurred on the first day of the Fiscal Year for which the Debt Service Requirements are being calculated, shall be added to the calculation of such Debt Service Requirements; or (b) a written consent of the obligor of such Balloon Indebtedness agreeing to retire (and such Balloon Indebtedness shall permit the retirement of), or to fund a sinking fund for, the principal of such Balloon Indebtedness according to a fixed schedule stated in such consent ending on or before the Fiscal Year in which such amount is due or could become due or payable in respect of any required purchase of such Balloon Indebtedness, then the principal of (and, in the case of retirement, the premium, if any, and interest and other debt service charges on) such Balloon Indebtedness shall be computed as if the same were due in accordance with such schedule; provided that this clause (b) shall only be applicable to Balloon Indebtedness for which the installments of principal previously scheduled have been paid or funded on or before the times required by such previous schedule.
Section 416. Pro-forma Debt Service on Variable Rate Indebtedness. For purposes of the computation of the projected Pro-forma Debt Service Requirements, Variable Rate Indebtedness shall be deemed Indebtedness maturing in accordance with its terms, and which bears interest at a rate equal to (i) the average rate of interest on such Variable Rate Indebtedness during any 12 consecutive month period ending within 30 days prior to the date of calculation of the Pro-forma Debt Service Requirements (or such lesser time as such Variable Rate Indebtedness has been outstanding), or (ii) that rate of interest which is equal to the average rate of the Bond Index during any 12 consecutive month period ending within 30 days prior to the date of calculation of the Pro-forma Debt Service Requirements, all as determined by an Officer’s Certificate delivered to the Master Trustee.
Section 417. Debt Service on Discount Indebtedness. For purposes of the computation of the Debt Service Requirements, the amount of principal represented by Discount Indebtedness shall, at the election of the Combined Group Agent, be deemed to be the accreted value of such Indebtedness computed on the basis of a constant yield to maturity.
Section 418. Debt Service on Guarantees. Notwithstanding any provision of this Master Trust Indenture to the contrary, for purposes of the computation of the Debt Service Requirements on a Guaranty, whether historic or projected (including, without limitation, for purposes of Section 410(b)(9)(i) of this Master Trust Indenture), as of the date of any calculation, (a) if the Obligated Group has made a payment pursuant to such Guaranty, one hundred percent (100%) of the principal of (and premium, if any) and interest and other debt service charges on the Indebtedness of the Primary Obligor which is the subject of such Guaranty shall be included in the calculation of the Debt Service Requirements in the Fiscal Year in which such payment
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was made and for the next two complete Fiscal Years thereafter, and (b) otherwise, if, as of the date of calculation, the Historic Annual Debt Service Coverage Ratio of the Primary Obligor is (i) less than 2.00 to 1, twenty percent (20%) of the principal of (and premium, if any) and interest and other debt service charges on the Indebtedness of the Primary Obligor which is the subject of such Guaranty shall be included in the calculation of the Debt Service Requirements in the applicable Fiscal Year and thereafter, or (ii) 2.00 to 1 or greater, the Debt Service Requirements on such Guaranty shall be deemed to be zero for purposes of the calculation of the Debt Service Requirements in the applicable Fiscal Year and thereafter; provided, however, that, regardless of whether the Obligated Group has made any payments on such Guaranty at any time, (A) if the principal of (and premium, if any) and interest and other debt service charges on such Indebtedness of the Primary Obligor is included in the calculation of the Debt Service Requirements, the Debt Service Requirements on such Guaranty shall be deemed to be zero for purposes of the calculation of the Debt Service Requirements in the applicable Fiscal Year and thereafter, and (B) if the payment of the principal of (and premium, if any) and interest and other debt service charges on such Indebtedness of the Primary Obligor has also been guaranteed or otherwise assured by a letter of credit, insurance policy or guarantee from an institution the long term debt of which has a rating assigned to it by any rating agency that is at least as high as the rating on the Long-Term Indebtedness of the Obligated Group immediately prior to the delivery by such institution of its letter of credit, insurance policy or guarantee, the Debt Service Requirements on such Guaranty shall be deemed to be zero for purposes of the calculation of the Debt Service Requirements in the applicable Fiscal Year and thereafter.
Section 419. Right to Consent, Etc. Each Member of the Obligated Group, with the prior written consent of the Combined Group Agent, shall have the right to agree in any Related Bond Indenture, Related Loan Document or Supplemental Indenture pursuant to which an Obligation is issued that, so long as any Related Bonds remain outstanding under such Related Bond Indenture or such Obligation remains outstanding, any or all provisions of this Master Trust Indenture that provide for approval, consent, direction or appointment by the Master Trustee, provide that anything must be satisfactory or acceptable to the Master Trustee or not unacceptable to the Master Trustee, allow the Master Trustee to request anything or contain similar provisions granting discretion to the Master Trustee may also require or allow, as the case may be, the approval, consent, appointment, satisfaction, acceptance, request or like exercise of discretion by the Related Issuer, the Related Bond Trustee, the credit or liquidity enhancer of any Related Bonds, or the holders of some specified percentage of such Obligations as provided for in such Obligations, or any one thereof, and that all items required to be delivered or addressed to the Master Trustee hereunder may also be delivered or addressed to the Related Issuer, such Obligation holders, the credit enhancer of any Related Bonds, and the Related Bond Trustee, or any one thereof, unless waived thereby.
ARTICLE V EVENTS OF DEFAULT AND REMEDIES
Section 501. Events of Default. Each of the following events is hereby declared an “Event of Default”:
(a) any failure of the Obligated Group to pay any installment of interest or principal, or any premium, or any other amount due, on any Obligation when the same shall 50
become due and payable, whether at maturity, upon any date fixed for prepayment or by acceleration or otherwise (giving effect to any grace period provided in the Supplemental Indenture pursuant to which such Obligation was issued); or
(b) except with respect to the provisions of Section 407 hereof, any failure of any Member of the Combined Group to comply with, observe or perform any other covenants, conditions, agreements or provisions hereof or of any Obligation and to remedy such default within 60 days after written notice thereof to such Member of the Combined Group and the Combined Group Agent from the Master Trustee or the holders of at least 25% in aggregate principal amount of the outstanding Debt Obligations; provided, that if such default cannot with due diligence and dispatch be wholly cured within 60 days but can be wholly cured, the failure of such Member of the Combined Group to remedy such default within such 60-day period shall not constitute a default hereunder if such Member of the Combined Group shall immediately upon receipt of such notice commence with due diligence and dispatch the curing of such default and, having so commenced the curing of such default, shall thereafter prosecute and complete the same with due diligence and dispatch; or
(c) as provided in Section 407 hereof, if, as of the end of any two consecutive Fiscal Years, the Historic Annual Debt Service Coverage Ratio of the Combined Group is less than 1.00 to 1.00; or
(d) any representation or warranty made by any Member of the Combined Group herein or in any Supplemental Indenture or in any statement or certificate furnished to the Master Trustee or the purchaser of any Obligation or Related Bond in connection with the delivery of any Obligation or sale of any Related Bond or furnished by any Member of the Combined Group pursuant hereto or any Supplemental Indenture proves untrue in any material respect as of the date of the issuance or making thereof and the facts or circumstances that make such representation or warranty materially untrue shall not be corrected or brought into compliance within 60 days after written notice thereof to the Combined Group Agent by the Master Trustee or the holders of at least 25% in aggregate principal amount of the outstanding Debt Obligations; or
(e) any default in the payment of the principal of, premium, if any, or interest on any Indebtedness (other than Non-Recourse Indebtedness) of any Member of the Obligated Group, including without limitation any Indebtedness created by any Related Loan Document, as and when the same shall become due, or an event of default as defined in any mortgage, indenture, loan agreement or other instrument under or pursuant to which there was issued or incurred, or by which there is secured, any such Indebtedness (including any Obligation) of any Member of the Obligated Group, and which default in payment or event of default results in the acceleration of such Indebtedness prior to the date on which it would otherwise become due and payable; provided, however, that if such Indebtedness is not evidenced by an Obligation or issued, incurred or secured by or under a Related Loan Document, a default in payment thereunder shall not constitute an “Event of Default” hereunder unless the unpaid principal amount of such Indebtedness, together with the unpaid principal amount of all other Indebtedness so in default, exceeds the greater of two percent (2%) of the Operating Revenues of the Combined Group or the System, as the case may be, or ten percent (10%) of the Value of the Current Assets of the System or the Obligated Group, as the case may be, as shown on or derived
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from the then latest available audited financial statements of the System, the Combined Group or the Obligated Group, as applicable; or
(f) any judgment, writ or warrant of attachment or of any similar process shall be entered or filed against any Member of the Obligated Group or against any Property of any Member of the Obligated Group and remains unvacated, unpaid, unbonded, unstayed or uncontested in good faith for a period of 60 days; provided, however, that none of the foregoing shall constitute an Event of Default hereunder unless the amount of such judgment, writ, warrant of attachment or similar process, together with the amount of all other such judgments, writs, warrants or similar processes so unvacated, unpaid, unbonded, unstayed or uncontested, exceeds the greater of five percent (5%) of the Operating Revenues of the Combined Group or the System, as the case may be, or fifteen percent (15%) of the Value of the Current Assets of the System or the Obligated Group, as the case may be, as shown on or derived from the then latest available audited financial statements of the System, the Combined Group or the Obligated Group, as applicable; or
(g) any Material Combined Group Member admits insolvency or bankruptcy or its inability to pay its debts as they mature, or is generally not paying its debts as such debts become due, or makes an assignment for the benefit of creditors or applies for or consents to the appointment of a trustee, custodian or receiver for such Member of the Combined Group, or for the major part of its Property; or
(h) a trustee, custodian or receiver is appointed for any Material Combined Group Member or for the major part of its Property and is not discharged within 60 days after such appointment; or
(i) bankruptcy, dissolution, reorganization, arrangement, insolvency or liquidation proceedings, proceedings under Title 11 of the United States Code, as amended, or other proceedings for relief under any bankruptcy law or similar law for the relief of debtors are instituted by or against any Material Combined Group Member (other than bankruptcy proceedings instituted by any Material Combined Group Member against third parties), and if instituted against any Material Combined Group Member are allowed against such Member of the Combined Group or are consented to or are not dismissed, stayed or otherwise nullified within 60 days after such institution.
Section 502. Acceleration. If an Event of Default has occurred and is continuing, the Master Trustee may, and if requested by the holders of not less than 25% in aggregate principal amount of Outstanding Debt Obligations shall, by notice in writing delivered to the Combined Group Agent, declare the entire principal amount of or other amounts evidenced under all Obligations then outstanding hereunder and the interest accrued thereon immediately due and payable, and the entire principal or other amounts and such interest shall thereupon become immediately due and payable, subject, however, to the provisions of Section 510 hereof with respect to waivers of Events of Default, or contrary direction pursuant to the provisions of Section 504 hereof.
Section 503. Remedies; Rights of Obligation Holders. Upon the occurrence of any Event of Default hereunder, the Master Trustee may pursue any available remedy including a suit, action or proceeding at law or in equity to enforce the payment of the principal 52
of, premium, if any, and interest on the Obligations outstanding hereunder and any other sums due under the Obligations or hereunder and may collect such sums in the manner provided by law out of the Property of any Member of the Combined Group wherever situated.
If an Event of Default shall have occurred and is continuing, and if it shall have been requested so to do by the holders of 25% or more in aggregate principal amount of Debt Obligations outstanding (and upon the provision of indemnity satisfactory to the Master Trustee in its sole discretion), the Master Trustee shall be obligated to exercise such one or more of the rights and powers conferred by this Section 503 as the Master Trustee shall deem most expedient in the interests of the holders of Debt Obligations; provided, however, that the Master Trustee shall have the right to decline to comply with any such request if the Master Trustee shall be advised by Counsel (who may be its own Counsel) that the action so requested may not lawfully be taken or the Master Trustee in good faith shall determine that such action would be unjustly prejudicial to the holders of Obligations not parties to such request.
No remedy by the terms of this Master Trust Indenture conferred upon or reserved to the Master Trustee (or to the holders of Debt Obligations) is intended to be exclusive of any other remedy, but each and every such remedy shall be cumulative and shall be in addition to any other remedy given to the Master Trustee or to the holders of Debt Obligations hereunder now or hereafter existing at law or in equity or by statute.
No delay or omission to exercise any right or power accruing upon any default or Event of Default shall impair any such right or power or shall be construed to be a waiver of any such default or Event of Default, or acquiescence therein; and every such right and power may be exercised from time to time and as often as may be deemed expedient.
No waiver of any default or Event of Default hereunder, whether by the Master Trustee or by the holders of Debt Obligations, shall extend to or shall affect any subsequent default or Event of Default or shall impair any rights or remedies consequent thereon.
Section 504. Direction of Proceedings by Holders. The holders of a majority in aggregate principal amount of all Debt Obligations then outstanding which have become due and payable in accordance with their terms or have been declared due and payable pursuant to Section 502 hereof and have not been paid in full in the case of remedies exercised to enforce such payment, or the holders of a majority in aggregate principal amount of the Debt Obligations then outstanding in the case of any other remedy, shall have the right, at any time, by an instrument or instruments in writing executed and delivered to the Master Trustee, to direct the method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of this Master Trust Indenture or for the appointment of a receiver or any other proceedings hereunder; provided, that such direction shall not be otherwise than in accordance with the provisions of law and of this Master Trust Indenture and that the Master Trustee shall have the right to decline to comply with any such request if the Master Trustee shall be advised by Counsel (who may be its own Counsel) that the action so directed may not lawfully be taken or the Master Trustee in good faith shall determine that such action would be unjustly prejudicial to the holders of the Obligations not parties to such direction.
The foregoing notwithstanding, the holders of a majority in aggregate principal amount of all Debt Obligations then outstanding which are entitled to the exclusive benefit of certain 53
security in addition to that intended to secure all or other Obligations shall have the right, at any time, by an instrument or instruments in writing executed and delivered to the Master Trustee, to direct the method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of this Master Trust Indenture, the Supplemental Indentures pursuant to which such Obligations were issued or so secured or any separate security document in order to realize on such security; provided, however, that such direction shall not be otherwise than in accordance with the provisions of law and of this Master Trust Indenture.
Section 505. Appointment of Receivers. Upon the occurrence of an Event of Default, and upon the filing of a suit or other commencement of judicial proceedings to enforce the rights of the Master Trustee and the holders of Obligations under this Master Trust Indenture, the Master Trustee shall be entitled, as a matter of right, to the appointment of a receiver or receivers of the rights and properties pledged hereunder and of the revenues, issues, payments and profits thereof, pending such proceedings, with such powers as the court making such appointment shall confer. Each Member of the Obligated Group hereby consents and agrees, and will if requested by the Master Trustee consent and agree at the time of application by the Master Trustee for appointment of a receiver of its Property, to the appointment of such receiver of its Property and that such receiver may be given the right, power and authority, to the extent the same may lawfully be given, to take possession of and operate and deal with such Property and the revenues, profits and proceeds therefrom, with like effect as the Member of the Obligated Group could do so, and to borrow money and issue evidences of indebtedness as such receiver.
Section 506. Application of Moneys. All moneys received by the Master Trustee pursuant to any right given or action taken under the provisions of this Article V (except moneys held for the payment of Obligations called for prepayment or redemption which have become due and payable) shall, after payment of the cost and expenses of the proceedings resulting in the collection of such moneys and of the fees of, expenses, liabilities and advances incurred or made by the Master Trustee, any Related Issuers and any Related Bond Trustees, be applied as follows:
(a) Unless all Obligations shall have become or shall have been declared due and payable, all such moneys shall be applied:
First: To the payment to the persons entitled thereto of all installments of interest (and fees, if any) then due on the Obligations, in the order of the maturity of the installments of such interest (including but not limited to the reimbursement of interest paid by a letter of credit provider under any letter of credit securing an issue or series of Related Bonds), and, if the amount available shall not be sufficient to pay in full any particular installment, then to the payment ratably, according to the amounts due on such installment, to the persons entitled thereto, without any discrimination or privilege; and
Second: To the payment to the persons entitled thereto of the unpaid principal and premium, if any, on the Obligations which shall have become due (other than Obligations called for redemption or payment for payment of which moneys are held pursuant to the provisions of this Master Trust Indenture), in the order of the scheduled dates of their payment, and, if the amount available shall not be sufficient to pay in full Obligations due on any particular date, then to the payment ratably, according to the
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amount of principal and premium due on such date, to the persons entitled thereto without any discrimination or privilege; and
Third: To the payment to the persons entitled thereto of any other amounts which have become due under any and all Obligations, including but not limited to any payments under Hedging Obligations or Ancillary Obligations.
(b) If all Obligations shall have become due or shall have been declared due and payable, all such moneys shall be applied to the payment of the principal, premium, if any, and interest and all other amounts then due and unpaid upon the Obligations without preference or priority of principal, premium, interest or other amounts over the others, or of any installment of interest over any other installment of interest, or of any Obligation over any other Obligation, ratably, according to the amounts due respectively for principal, premium, if any, interest and all other amounts to the persons entitled thereto without any discrimination or privilege; provided, however, if any holder of a Hedging Obligation has been granted a Lien, pursuant to subpart (o) of the definition of Permitted Encumbrances to satisfy any collateralization requirements in connection with such Hedging Obligation, then the application of moneys pursuant to this Section 506(b) shall be made as if all such collateral shall have first been applied to satisfy and reduce the amounts owing with respect such Hedging Obligation; and
(c) If all Obligations shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled under the provisions of this Article V, then, subject to the provisions of paragraph (b) of this Section 506 in the event that all Obligations 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 506.
Whenever moneys are to be applied by the Master 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 Master 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 Master Trustee shall apply such moneys, it shall fix the date upon which such application is to be made and upon such date interest on the amounts to be paid on such date shall cease to accrue. The Master 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 unpaid Obligation until such Obligation shall be presented to the Master Trustee for appropriate endorsement or for cancellation if fully paid.
Whenever all Obligations and interest thereon have been paid under the provisions of this Section 506 and all expenses and charges of the Master 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 Combined Group Agent on behalf of the Members of the Combined Group. When all Obligations and interest thereon have been paid under the provisions of this Section 506 and all expenses and charges of the Master Trustee have been paid, the Combined Group Agent shall be authorized to terminate of record any financing statements or other filings or evidence of any Lien granted hereunder.
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Section 507. Remedies Vested in Master Trustee. All rights of action including the right to file proof of claims under this Master Trust Indenture or under any of the Obligations may be enforced by the Master Trustee without the possession of any of the Obligations or the production thereof in any trial or other proceedings relating thereto and any such suit or proceeding instituted by the Master Trustee shall be brought in its name as Master Trustee without the necessity of joining as plaintiffs or defendants any holders of the Obligations, and any recovery of judgment shall be for the equal benefit of the holders of the Outstanding Obligations. Upon the occurrence of an Event of Default under this Master Trust Indenture, the Master Trustee shall, in addition to any other remedies available hereunder or under applicable law, have the right to enforce the covenants of each Controlling Member to cause its Designated Affiliates to comply, and to enforce the covenant to cause each System Affiliate to comply, with the covenants applicable thereto as provided in Section 401 hereof.
Section 508. Rights and Remedies of Obligation Holders. No holder of any Obligation shall have any right to institute any suit, action or proceeding in equity or at law for the enforcement of this Master Trust Indenture or for the execution of any trust hereof or for the appointment of a receiver or any other remedy hereunder, unless a default shall have become an Event of Default and the holders of 25% or more in aggregate principal amount (i) of all Debt Obligations then Outstanding which have become due and payable in accordance with their terms or have been declared due and payable pursuant to Section 502 hereof and have not been paid in full in the case of powers exercised to enforce such payment or (ii) of all Debt Obligations then Outstanding in the case of any other exercise of power, shall have made written request to the Master Trustee and shall have offered it reasonable opportunity either to proceed to exercise the powers hereinbefore granted or to institute such action, suit or proceeding in its own name, and shall have offered indemnity to the Master Trustee for its fees and expenses in an amount satisfactory to the Master Trustee in its sole discretion, and unless the Master Trustee shall thereafter fail or refuse to exercise the powers hereinbefore granted, or to institute such action, suit or proceeding in its own name; and such notification, request and offer of indemnity are hereby declared in every case at the option of the Master Trustee to be conditions precedent to the execution of the powers and trusts of this Master Trust Indenture and to any action or cause of action for the enforcement of this Master Trust Indenture, or for the appointment of a receiver or for any other remedy hereunder; it being understood and intended that no one or more holders of the Obligations shall have any right in any manner whatsoever to affect, disturb or prejudice the lien of this Master Trust Indenture by its, his or their action or to enforce any right hereunder except in the manner herein provided, and that all proceedings at law or in equity shall be instituted, had and maintained in the manner herein provided and for the equal benefit of the holders of all Obligations outstanding. Nothing in this Master Trust Indenture contained shall, however, affect or impair the right of any holder to enforce the payment of the principal of, premium, if any, and interest on, or any other amounts due under, any Obligation at and after the maturity thereof, or the obligation of the Members of the Obligated Group to pay the principal, premium, if any, and interest on, or any other amounts due under, each of the Obligations issued hereunder to the respective holders thereof at the time and place, from the source and in the manner in said Obligations expressed.
Section 509. Termination of Proceedings. In case the Master Trustee shall have proceeded to enforce any right under this Master Trust Indenture by the appointment of a receiver, or otherwise, and such proceedings shall have been discontinued or abandoned for any
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reason, or shall have been determined adversely to the Master Trustee, then and in every case the Members of the Obligated Group and the Master Trustee shall, subject to any determination in such proceeding, be restored to their former positions and rights hereunder with respect to the Property pledged and assigned hereunder, and all rights, remedies and powers of the Master Trustee shall continue as if no such proceedings had been taken.
Section 510. Waiver of Events of Default. If, at any time after all Obligations shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided and before the acceleration of any Related Bond, any Member of the Obligated Group shall pay or shall deposit with the Master Trustee (in connection with any Event of Default described in Section 501(a) hereof) a sum sufficient to pay all matured installments of interest upon all such Obligations and the principal and premium, if any, of, and any other amounts due under, all such Obligations that shall have become due otherwise than by acceleration (with interest on overdue installments of interest and on such principal and premium, if any, at the rate borne by such Obligations to the date of such payment or deposit, to the extent permitted by law) and the expenses of the Master Trustee, and any and all Events of Default under this Master Trust Indenture, other than the nonpayment of any amounts due under such Obligations that shall have become due by acceleration, shall have been remedied, then and in every such case the holders of a majority in aggregate principal amount of all Debt Obligations then outstanding, by written notice to the Combined Group Agent and to the Master Trustee, may waive all Events of Default and rescind and annul such declaration and its consequences; but no such waiver or rescission and annulment shall extend to or affect any subsequent Event of Default, or shall impair any right consequent thereon.
No delay or omission of the Master Trustee or of any holder 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 this Article to the Master Trustee and the holders, respectively, may be exercised from time to time and as often as may be deemed expedient by them.
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 hereof, or before the completion of the enforcement of any other remedy hereunder.
In case of any waiver by the Master Trustee of an Event of Default hereunder, the Members of the Obligated Group, the Master Trustee and the holders shall be restored to their former positions and rights hereunder, respectively, but no such waiver shall extend to any subsequent or other Event of Default or impair any right consequent thereon.
Section 511. Members’ Rights of Possession and Use of Property. So long as no Event of Default shall have occurred and is continuing, each Member of the Combined Group shall be suffered and permitted to possess, use and enjoy its Property and appurtenances thereto free of claims of the Master Trustee.
Section 512. Related Bond Trustee or Bondholders Deemed To Be Obligation Holders. For the purposes of this Master Trust Indenture, unless a Related Bond 57
Trustee elects to the contrary or contrary provision is made in a Related Bond Indenture and written notice thereof is given to the Master Trustee in either such case, each Related Bond Trustee shall be deemed the holder of the Obligation or Obligations pledged to secure the Related Bonds with respect to which such Related Bond Trustee is acting as trustee. If such a Related Bond Trustee so elects or the Related Bond Indenture so provides and written notice thereof is given to the Master Trustee in either such case, the holders of each series of Related Bonds (or, in lieu thereof, the credit enhancer for such Related Bonds) shall be deemed the holders of the Obligations to the extent of the principal amount of the Obligations to which such Related Bonds relate. Notwithstanding the above, but subject to any limitations set forth in any Related Bond Indenture, the holder of any Related Bonds, or if there is a credit enhancer for any Related Bond, the credit enhancer for any Related Bonds (i.e., a bond insurer or other financial institution providing a bond insurance policy or surety bond, or a bank or other financial institution providing a letter of credit, in any case securing, insuring or guaranteeing all principal of and interest on any Related Bonds) shall be deemed to be the holder of the Obligation securing such Related Bonds for all purposes of this Master Trust Indenture, including without limitation, all approvals, consents and directions under this Master Trust Indenture.
Section 513. Remedies Subject to Provisions of Law. All rights, remedies and powers provided by this Article may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Article are intended to be subject to all applicable mandatory provisions of law which may be controlling and to be limited to the extent necessary so that they will not render this instrument or the provisions hereof invalid or unenforceable under the provisions of any applicable law.
Section 514. Notice of Default. The Master Trustee shall, within ten (10) days after it has actual knowledge of the occurrence of an Event of Default, mail, by first class mail, to all holders as the names and addresses of such holders appear upon the books of the Master Trustee, notice of such Event of Default known to the Master Trustee, unless such Event of Default shall have been cured before the giving of such notice; provided that, except in the case of default in the payment of the principal of or premium, if any, or interest or any other amounts on any of the Obligations and the Events of Default specified in subsections (g), (h) or (i) of Section 501, 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 any responsible officers of the Master Trustee in good faith determines that the withholding of such notice is in the interests of the holders.
ARTICLE VI THE MASTER TRUSTEE
Section 601. Acceptance of the Trusts. The Master Trustee accepts and agrees to execute the trusts imposed upon it by this Master Trust Indenture, but only upon the terms and conditions set forth herein. The Master Trustee, prior to the occurrence of an Event of Default and after the curing of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Master Trust Indenture and to perform such duties as an ordinarily prudent trustee under a corporate indenture, and no implied covenants or obligations should be read into this Master Trust Indenture against the Master Trustee. If an Event of Default under this Master Trust Indenture shall have occurred and be 58
continuing, the Master Trustee shall exercise such of the rights and powers vested in it by this Master Trust Indenture and shall use the same degree of care as a prudent Person would exercise or use in the circumstances in the conduct of his or her own affairs. The Master Trustee agrees to perform such trusts only upon and subject to the following express terms and conditions:
(a) The Master Trustee may execute any of the trusts or powers hereof and perform any of its duties by or through attorneys, agents, receivers, or employees but shall be answerable for the conduct of the same in accordance with the standard specified above, and shall be entitled to advice of counsel concerning all matters of trusts hereof and duties hereunder, and may in all cases pay such reasonable compensation to any attorney, agent, receiver or employee retained or employed by it in connection herewith. The Master Trustee may act upon the opinion or advice of an attorney, surveyor, engineer or accountant selected by it in the exercise of reasonable care or, if selected or retained by any Member of the Obligated Group, approved by the Master Trustee in the exercise of such care. The Master Trustee shall not be responsible for any loss or damage resulting from any action or nonaction based on its good faith reliance upon such opinion or advice.
(b) The Master Trustee shall not be responsible for any recital herein, or in the Obligations (except with respect to the certificate of authentication of the Master Trustee endorsed on the Obligations), or for the investment of moneys as herein provided (provided that no investment shall be made by the Master Trustee except in compliance with the provisions of this Master Trust Indenture applicable to such investment), or for the recording or re-recording, filing or re-filing of this Master Trust Indenture, or any supplement or amendment thereto, or the filing of financing statements to perfect any security interest hereunder (provided that the Master Trustee shall be responsible for filing continuation statements to perpetuate the perfection of any security interest hereunder prior to the expiration of the financing statements originally filed with respect thereto which name the Master Trustee as secured party and filed copies of which were delivered to the Master Trustee), or for the validity of the execution by any Member of the Obligated Group of this Master Trust Indenture, or by any Member of the Obligated Group of any supplemental indentures or instruments of further assurance, or for the sufficiency of the security for the Obligations issued hereunder or intended to be secured hereby, or for the value or title of the Property herein conveyed or otherwise as to the maintenance of the security hereof. The Master Trustee may (but shall be under no duty to) require of any Member of the Obligated Group full information and advice as to the performance of the covenants, conditions and agreements in this Master Trust Indenture and shall use its best efforts, but without any obligation, to advise the Members of the Obligated Group of any impending default known to the Master Trustee. The Master Trustee shall have no obligation to perform any of the duties of the Obligated Group hereunder.
(c) The Master Trustee shall not be accountable for the use or application by the Obligated Group of any of the Obligations or the proceeds thereof or for the use or application of any money paid over by the Master Trustee in accordance with the provisions of this Master Trust Indenture. The Master Trustee may become the owner of Obligations secured hereby with the same rights it would have if it were not Master Trustee, and may enter into other business and financial transactions with any Member of the Combined Group.
(d) The Master Trustee shall be protected in acting upon any notice, order, requisition, request, consent, certificate, order, opinion (including an opinion of Counsel), 59
affidavit, letter, telegram, email or other paper or document in good faith reasonably deemed by it to be genuine and correct and to have been signed or sent by the proper person or persons. Any action taken by the Master Trustee pursuant to this Master Trust Indenture upon the request or authority or consent of any Person who at the time of making such request or giving such authority or consent is the owner of any Obligation shall be conclusive and binding upon all future owners of the same Obligation and upon Obligations issued in exchange therefor or in place thereof.
(e) As to the existence or non-existence of any fact or as to the sufficiency or validity of any instrument, paper or proceeding, the Master Trustee shall be entitled to rely upon an Officer’s Certificate as sufficient evidence of the facts therein contained and, prior to the occurrence of a default of which the Master Trustee has been notified as provided in subsection (g) of this Section, or of which by said subsection it is deemed to have notice, shall also be at liberty to accept a similar certificate to the effect that any particular dealing, transaction or action is necessary or expedient, but may at its discretion secure such further evidence deemed necessary or advisable, but shall in no case be bound to secure the same. The Master Trustee may accept an Officer’s Certificate to the effect that a resolution in the form therein set forth has been adopted by such Member of the Obligated Group as conclusive evidence that such resolution has been duly adopted, and is in full force and effect.
(f) The permissive right of the Master Trustee to do things enumerated in this Master Trust Indenture shall not be construed as a duty and the Master Trustee shall not be answerable for other than its negligence or willful default.
(g) The Master Trustee shall not be required to take notice or be deemed to have notice of any default hereunder except failure by the Obligated Group to cause to be made any of the payments to the Master Trustee required to be made by Section 202 or Section 401 unless the Master Trustee shall be specifically notified in writing of such default by a Member of the Obligated Group, by any Related Issuer, by any Related Bond Trustee, or by the holders of at least 25% in aggregate principal amount of all Debt Obligations then outstanding and all notices or other instruments required by this Master Trust Indenture to be delivered to the Master Trustee must, in order to be effective, be delivered at the corporate trust office of the Master Trustee, and in the absence of such notice so delivered, the Master Trustee may conclusively assume there is no default except as aforesaid.
(h) The Master Trustee shall not be required to give any bond or surety in respect of the execution of the said trusts and powers or otherwise in respect of the premises.
(i) Notwithstanding anything contained elsewhere in this Master Trust Indenture, the Master Trustee shall have the right, but shall not be required, to demand, in respect of the authentication of any Obligation, the withdrawal of any cash, the release of any property, or any action whatsoever within the purview of this Master Trust Indenture, any showings, certificates, opinions, appraisals or other information, or corporate action or evidence thereof, in addition to that by the terms hereof required as a condition of such action by the Master Trustee deemed desirable for the purpose of establishing the right of any Member of the Obligated Group to the authentication of any Obligations, the withdrawal of any cash, the release of any property or the taking of any other action by the Master Trustee.
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(j) All moneys received by the Master Trustee shall, until used or applied or invested as herein provided, be held in trust for the purposes for which they were received but need not be segregated from other funds except to the extent required by law or by this Master Trust Indenture. The Master Trustee shall not be under any liability for interest on any moneys received hereunder except such as may be agreed upon.
(k) No provision of this Master Trust Indenture shall require the Master Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.
(l) Whether or not therein expressly so provided, every provision of this Master Trust Indenture relating to the conduct or affecting the liability of or affording protection to the Master Trustee shall be subject to the provisions of this Section 601.
(m) The Master Trustee shall have no responsibility with respect to any information in any offering memorandum or any other disclosure material distributed with respect to the Obligations or any Related Bonds or for compliance with securities laws in connection with the sale and issuance of the Obligations or any Related Bonds.
Section 602. Fees, Charges and Expenses of Master Trustee. The Master Trustee shall be entitled to payment and/or reimbursement by the Members of the Obligated Group for reasonable fees and for its services rendered hereunder and all advances, counsel fees and expenses and other expenses reasonably and necessarily made or incurred by the Master Trustee in connection with such services. The Master Trustee shall be entitled to payment and reimbursement for the reasonable fees and charges of the Master Trustee as Obligation registrar for the Obligations as hereinabove provided. Upon an Event of Default, but only upon an Event of Default, the Master Trustee shall have a right of payment prior to payment on account of principal of, or premium, if any, or interest on, or any other amounts due under, any Obligation for the foregoing advances, fees, costs and expenses incurred. The respective obligations of the Members of the Obligated Group under this Section 602 to compensate the Master Trustee to pay or reimburse the Master Trustee for expenses, disbursements or advances, shall survive satisfaction and discharge of this Master Trust Indenture.
Section 603. Notice to Obligation Holders if Default Occurs. If a default occurs of which the Master Trustee is by subsection (g) of Section 601 hereof required to take notice or if notice of default be given as in said subsection (g) provided, then the Master Trustee shall give written notice thereof by mail to the last known owners of all Obligations then outstanding shown by the list of Obligation holders required by the terms of this Master Trust Indenture to be kept at the office of the Master Trustee or its agent.
Section 604. Intervention by Master Trustee. In any judicial proceeding to which any Member of the Obligated Group is a party and which in the opinion of the Master Trustee and its counsel has a substantial bearing on the interests of owners of the Obligations, the Master Trustee may intervene on behalf of Obligation holders and shall do so if requested in writing by the owners of at least 25% in aggregate principal amount of all Debt Obligations then outstanding if indemnification satisfactory to the Master Trustee in its sole discretion is provided 61
to the Master Trustee. The rights and obligations of the Master Trustee under this Section 604 are subject to the approval of a court of competent jurisdiction.
Section 605. Successor Master Trustee. Any corporation or association into which the Master Trustee may be converted or merged, or with which it may be consolidated, or to which it may sell or transfer its corporate trust business and assets as a whole or substantially as a whole, or any corporation or association resulting from any such conversion, sale, merger, consolidation or transfer to which it is a party, ipso facto, shall be and become successor Master Trustee hereunder and vested with all of the title to the whole property or trust estate and all the trusts, powers, discretions, immunities, privileges and all other matters as was its predecessor, without the execution or filing of any instrument or any further act, deed or conveyance on the part of any of the parties hereto, anything herein to the contrary notwithstanding.
Section 606. Corporate Master Trustee Required; Eligibility. There shall at all times be a Master Trustee hereunder which shall be a bank or trust company organized under the laws of the United States of America or any state thereof, authorized to exercise corporate trust powers, subject to supervision or examination by federal or state authorities, and (except for the Master Trustee initially appointed under this Master Trust Indenture and its successors under Section 605) having a reported combined capital and surplus of at least $50,000,000. If at any time the Master Trustee shall cease to be eligible in accordance with the provisions of this Section 606, it shall resign immediately in the manner provided in Section 607 hereof. No resignation or removal of the Master Trustee and no appointment of a successor Master Trustee shall become effective until the successor Master Trustee has accepted its appointment under Section 610 hereof.
Section 607. Resignation by the Master Trustee. The Master Trustee and any successor Master Trustee may at any time resign from the trusts hereby created by giving thirty days’ written notice to the Combined Group Agent and by registered or certified mail to each registered owner of Obligations then outstanding as shown by the list of Obligation holders required by this Master Trust Indenture to be kept at the office of the Master Trustee or its agent. Such resignation shall take effect at the end of such thirty days or when a successor Master Trustee has been appointed and has assumed the trusts created hereby, whichever is later, or upon the earlier appointment of a successor Master Trustee by the Obligation holders or by the Obligated Group. Such notice to the Combined Group Agent may be served personally or sent by registered or certified mail.
Section 608. Removal of the Master Trustee. The Master Trustee may be removed at any time, by an instrument or concurrent instruments in writing delivered to the Master Trustee and to the Combined Group Agent, and signed by the owners of a majority in aggregate principal amount of all Debt Obligations then outstanding. So long as no Event of Default or event which with the passage of time or giving of notice or both would become such an Event of Default has occurred and is continuing hereunder, the Master Trustee may be removed with or without cause at any time by an instrument or concurrent instruments in writing signed by the Combined Group Agent, delivered to the Master Trustee.
Section 609. Appointment of Successor Master Trustee by the Obligation Holders; Temporary Master Trustee. In case the Master Trustee hereunder shall resign or be removed, or be dissolved, or shall be in the process of dissolution or liquidation, or otherwise 62
becomes incapable of acting hereunder, or in case it shall be taken under the control of any public officer or officers, or of a receiver appointed by a court, a successor may be appointed by the owners of a majority in aggregate principal amount of all Debt Obligations then outstanding, by an instrument or concurrent instruments in writing signed by such owners, or by their attorneys in fact, duly authorized. The foregoing notwithstanding, so long as no Event of Default or event which with the passage of time or giving of notice or both would become such an Event of Default has occurred, the Combined Group Agent shall have the right to approve any such successor trustee and to appoint any such successor trustee in lieu of the owners of a majority in aggregate principal amount of all Debt Obligations then Outstanding. Every such successor Master Trustee appointed pursuant to the provisions of this Section shall be a trust company or bank in good standing under the law of the jurisdiction in which it was created and by which it exists, having corporate trust powers and subject to examination by federal or state authorities, and having a reported capital and surplus of not less than $50,000,000. If the Master Trustee has provided written notice of its resignation and no successor Master Trustee has been appointed in accordance with the terms of this Article VI within 30 days after such notice, the Master Trustee may make a request to a court of competent jurisdiction to appoint a successor.
Section 610. Concerning Any Successor Master Trustee. Every successor Master Trustee appointed hereunder shall execute, acknowledge and deliver to its predecessor and also to the Combined Group Agent an instrument in writing accepting such appointment hereunder, and thereupon such successor, without any further act, deed or conveyance, shall become fully vested with all the estates, properties, rights, powers, trusts, duties and obligations of its predecessor; but such predecessor shall, nevertheless, on the written request of the Combined Group Agent, or of its successor, execute and deliver an instrument transferring to such successor Master Trustee all the estates, properties, rights, powers and trusts of such predecessor hereunder; and every predecessor Master Trustee shall deliver all securities and moneys held by it as Master Trustee hereunder to its successor. Should any instrument in writing from any Member of the Obligated Group be required by any successor Master Trustee for more fully and certainly vesting in such successor the estate, rights, powers and duties hereby vested or intended to be vested in the predecessor, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by such Member of the Obligated Group. The resignation of any Master Trustee and the instrument or instruments removing any Master Trustee and appointing a successor hereunder, together with all other instruments provided for in this Article VI shall be filed and/or recorded by the successor Master Trustee in each recording office, if any, where this Master Trust Indenture shall have been filed and/or recorded.
Section 611. Master Trustee Protected in Relying Upon Resolutions, Etc. The resolutions, opinions, certificates and other instruments provided for in this Master Trust Indenture may be accepted by the Master Trustee as conclusive evidence of the facts and conclusions stated therein and shall be full warrant, protection and authority to the Master Trustee for the release of property and the withdrawal of cash hereunder.
Section 612. Successor Master Trustee as Trustee of Funds and Obligation Registrar. In the event of a change in the office of Master Trustee, the predecessor Master Trustee which has resigned or been removed shall cease to be trustee of any funds provided hereunder and Obligation registrar, and the successor Master Trustee shall become such Master Trustee and Obligation registrar. The resigned or removed Master Trustee shall be responsible
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for transferring to the successor Master Trustee all books, records and assets (including without limitation the Gross Revenues Account and any balance therein) theretofore maintained by the resigned or removed Master Trustee hereunder.
Section 613. Maintenance of Records. The Master Trustee agrees to maintain such records with respect to any and all moneys or investments held by the Master Trustee pursuant to the provisions hereof as are reasonably requested by the Combined Group Agent. The Master Trustee shall be entitled to reasonable compensation for its maintenance of any such records.
Section 614. List of Obligation Holders. The Master Trustee will keep on file at its office or at the office of its agent a list of the names and addresses of the last known holders of all Obligations and the serial numbers of such Obligations held by each of such holders. At reasonable times, upon prior written notice, and under reasonable regulations established by the Master Trustee, said list may be inspected and copied by any Member of the Obligated Group, any Obligation holder or the authorized representative thereof, provided that the ownership of such holder and the authority of any such designated representative shall be evidenced to the satisfaction of the Master Trustee.
Section 615. Master Trustee as Registrar. The Master Trustee is hereby designated and agrees to act as Obligation registrar for and in respect to the Obligations.
ARTICLE VII SUPPLEMENTAL INDENTURES
Section 701. Supplemental Indentures Not Requiring Consent of Obligation Holders. Subject to the limitations set forth in Section 702 hereof with respect to this Section 701, the Members of the Obligated Group (or the Combined Group Agent on their behalf) and the Master Trustee may, without the consent of, or notice to, any of the Obligation holders, amend or supplement this Master Trust Indenture, for any one or more of the following purposes:
(a) To cure any ambiguity or defective provision in or omission from this Master Trust Indenture in such manner as is not inconsistent with and does not impair the security of this Master Trust Indenture or adversely affect the holder of any Obligation;
(b) To grant to or confer upon the Master Trustee for the benefit of the Obligation holders any additional rights, remedies, powers or authority that may lawfully be granted to or conferred upon the Obligation holders and the Master Trustee, or either of them, to add to the covenants of the Members of the Obligated Group for the benefit of the Obligation holders or to surrender any right or power conferred hereunder upon any Member of the Obligated Group, including, but not limited to, any amendments necessary to establish or maintain any credit ratings applicable to the Obligated Group;
(c) To assign and pledge under this Master Trust Indenture any additional revenues, properties or collateral;
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(d) To evidence the succession of another entity to the agreements of a Member of the Obligated Group or the Master Trustee, or the successor to any thereof hereunder;
(e) To permit the qualification of this Master Trust Indenture under the Trust Indenture Act of 1939, as then amended, or under any similar federal statute hereafter in effect or to permit the qualification of any Obligations for sale under the securities laws of any state of the United States;
(f) To provide for the refunding or advance refunding of any Obligation (subject to the provisions of Section 410(b) hereof;
(g) To provide for the issuance of Obligations as permitted hereunder;
(h) To reflect the addition to or withdrawal of a Member from the Obligated Group or the addition or deletion of any Designated Affiliate, including the necessary changes to Exhibit A and Exhibit B hereto, or to reflect any release of Property to be released from the Lien on Gross Revenues created under this Master Trust Indenture to the extent such release constitutes a Permitted Disposition;
(i) To provide for the issuance of Obligations with original issue discount, provided such issuance would not materially adversely affect the holders of Outstanding Obligations;
(j) To permit an Obligation to be secured by security that is not extended to all Obligation holders to the extent not prohibited hereunder;
(k) To permit the issuance of Obligations which are not in the form of a promissory note;
(l) To modify or eliminate any of the terms of this Master Trust Indenture; provided, however, that such Supplemental Indenture shall expressly provide that any such modifications or eliminations shall become effective only when there is no Obligation outstanding of any series created prior to the execution of such Supplemental Indenture;
(m) To modify, eliminate or add to the provisions of this Master Trust Indenture if the Master Trustee shall have received (i) written confirmation from each rating agency that such change will not result in a withdrawal or reduction of its credit rating assigned to any series of Obligations or Related Bonds, as the case may be, or a report, opinion or certification of a Consultant to the effect that such change is consistent with then current industry standards, and (ii) an Officer’s Certificate to the effect that, in the judgment of the Combined Group Agent, such change is necessary to permit any Member of the Obligated Group to affiliate or merge with, on acceptable terms, one or more corporations that provide health care services and such modification is in the best interests of the holders of the Outstanding Obligations; and
(n) To make any other change that does not materially adversely affect the rights or interests of the holders of any of the Obligations and does not materially adversely affect the rights or interests of the holders of any Related Bonds, including without limitation any modification, amendment or supplement to this Master Trust Indenture or any indenture
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supplemental hereto in such a manner as to establish or maintain exemption of interest on any Related Bonds under a Related Bond Indenture from federal income taxation under applicable provisions of the Code.
Any Supplemental Indenture providing for the issuance of Obligations shall set forth the date thereof, the date or dates upon which principal of, premium, if any, and interest on, and any other amounts due under, such Obligations shall be payable, the other terms and conditions of such Obligations, the form of such Obligations and the conditions precedent to the delivery of such Obligations which shall include, among other things:
(a) delivery to the Master Trustee of an opinion of Counsel acceptable to the Master Trustee to the effect that all requirements and conditions to the issuance of such Obligations, if any, set forth herein and in the Supplemental Indenture have been complied with and satisfied; and
(b) delivery to the Master Trustee of an opinion of Counsel acceptable to the Master Trustee to the effect that neither registration of such Obligations under the Securities Act of 1933, as amended, nor qualification of such Supplemental Indenture under the Trust Indenture Act of 1939, as amended, is required, or, if such registration or qualification is required, that the Obligated Group has complied with all applicable provisions of said acts.
If at any time the Combined Group Agent shall request the Master Trustee to enter into any Supplemental Indenture pursuant to subsection (m) above, the Master Trustee shall cause notice of the proposed execution of such Supplemental Indenture to be given to each rating agency then maintaining a rating on any Obligations or Related Bonds, in the manner provided in Section 1004 hereof at least 15 days prior to the execution of such Supplemental Indenture, which notice shall include a copy of the proposed Supplemental Indenture.
Section 702. Supplemental Indentures Requiring Consent of Obligation Holders. In addition to Supplemental Indentures covered by Section 701 hereof and subject to the terms and provisions contained in this Section 702, and not otherwise, the holders of not less than a majority in aggregate principal amount of all Debt Obligations which are outstanding hereunder at the time of the execution of such Supplemental Indenture or, in case less than all of the several series of Debt Obligations are affected thereby, the holders of not less than a majority in aggregate principal amount of all Debt Obligations of each series affected thereby which are outstanding hereunder at the time of the execution of such Supplemental Indenture, shall have the right, from time to time, anything contained in this Master Trust Indenture to the contrary notwithstanding, to consent to and approve the execution by the Members of the Obligated Group and the Master Trustee of such Supplemental Indentures as shall be deemed necessary and desirable by the Members of the Obligated Group for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in this Master Trust Indenture or in any Supplemental Indenture; provided, however, that nothing contained in this Section 702 or in Section 701 hereof shall permit, or be construed as permitting, (a) an extension of the stated maturity or reduction in the principal or other amount of or reduction in the rate or extension of the time of paying of interest on or reduction of any premium payable on the redemption of, any Obligation, without the consent of the holder of such Obligation, (b) a reduction in the aforesaid aggregate principal or other amount or percentage of Obligations the holders of which are required to consent to any such Supplemental Indenture, 66
without the consent of the holders of all the Obligations at the time outstanding that would be affected by the action to be taken, (c) modification of the rights, duties or immunities of the Master Trustee, without the written consent of the Master Trustee, or (d) the preference of any Obligation over any other Obligation.
If at any time the Combined Group Agent shall request the Master Trustee to enter into any such Supplemental Indenture for any of the purposes of this Section 702, the Master Trustee shall, upon being satisfactorily indemnified with respect to expenses, cause notice of the proposed execution of such Supplemental Indenture to be mailed by first class mail postage prepaid to each holder of an Obligation or, in case less than all of the series of Obligations are affected thereby, of an Obligation of the series affected thereby. Such notice shall briefly set forth the nature of the proposed Supplemental Indenture and shall state that copies thereof are on file at the corporate trust office of the Master Trustee identified in such notice for inspection by all Obligation holders. The Master Trustee shall not, however, be subject to any liability to any Obligation holder by reason of its failure to mail such notice, and any such failure shall not affect the validity of such Supplemental Indenture when consented to and approved as provided in this Section 702. If the holders of not less than a majority in aggregate principal amount of all Debt Obligations or the Debt Obligations of each series affected thereby, as the case may be, which are outstanding hereunder at the time of the execution of any such Supplemental Indenture shall have consented to and approved the execution thereof as herein provided, no holder of any Obligation shall have any right 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 Master Trustee or the Members of the Obligated Group from executing the same or from taking any action pursuant to the provisions thereof. Upon the execution of any such Supplemental Indenture as in this Section 702 permitted and provided, this Master Trust Indenture shall be and be deemed to be modified and amended in accordance therewith.
For the purpose of obtaining the foregoing consents, the determination of who is deemed the holder of an Obligation held by a Related Bond Trustee shall be made in the manner provided in Section 512.
Section 703. Note and Document Substitution. (a) This Master Trust Indenture may be amended or supplemented as provided in Sections 701 and 702 of this Master Trust Indenture.
(b) In addition, the Obligated Group and the Master Trustee, may, without the consent of any of the Holders of any Obligations or any Related Bonds, but only (i) with the prior written consent of the credit enhancers, if any, of the Related Bonds of the affected series of Related Bonds if the documentation relating to the Related Bonds expressly provides therefor, and (ii) upon receipt by the Master Trustee of an Officer’s Certificate demonstrating satisfaction of the Substitution Transaction Test (as defined below), enter into one or more supplements, amendments, restatements, replacements or substitutions to this Master Trust Indenture, to modify, amend, restate, supplement, replace, substitute, change or remove any covenant, agreement, term or provision of this Master Trust Indenture, in whole or in part, including, but not limited to, an amendment, restatement or substitution of this Master Trust Indenture, in whole to relate to all Related Bonds, or in part to relate to a portion of the Related Bonds, including but not limited to a series or subseries of the Related Bonds secured by payment obligations of the health care facilities on whose behalf the allocable portion of the proceeds of 67
the Related Bonds were utilized, or an affiliate of such health care facilities, in order to effect (i) the affiliation of the Corporation, the Obligated Group, any Members of the Obligated Group, any System Affiliates or any Designated Affiliates with any of the foregoing or with another entity or entities in order to create a new or modified credit group or structure or in order to provide for the inclusion of the Corporation, the Obligated Group, any Members of the Obligated Group, any System Affiliates or any Designated Affiliates in another obligated group, combined group or other unified credit group or structure, (ii) the release or discharge of any collateral securing the Related Bonds, including, but not limited to, the release or discharge of (A) any or all Obligations, in whole or in part, issued pursuant to this Master Trust Indenture to secure the Related Bonds and (B) the Corporation, the Obligated Group, any Members of the Obligated Group, any System Affiliates or any Designated Affiliates from any or all liability (whether direct or indirect) with respect to the Related Bonds or a portion thereof, any Related Loan Document, any Related Bond Indenture, the Obligations, or this Master Trust Indenture or any portion of any hereof, in consideration for the issuance of a note or notes to secure the Related Bonds or portion of the Related Bonds that are to become an obligation of the new affiliated entities or the new obligated group, combined group or other unified credit group, which note or notes would constitute obligations of the new affiliated entities or the members of the new obligated group, combined group or other unified credit group, (iii) the replacement of all or a portion of the financial and operating covenants and related definitions set forth in this Master Trust Indenture with those of the new affiliated entities or the new obligated group, combined group or other unified credit group, set forth in the new agreement or master indenture, and (iv) the termination of the status of any Designated Affiliates as Designated Affiliates (the “Undesignated Affiliates”), concurrently with (A) the substitution of the underlying credit source for any Related Bonds the proceeds of which are allocable to the facilities of such Undesignated Affiliates, from being the Corporation under any Related Loan Document, and the Obligated Group under the Obligations and this Master Trust Indenture to being such Undesignated Affiliates or any affiliate of such Undesignated Affiliates, under a replacement or substitute loan agreement, bond indenture, note or notes and master indenture, and (B) the release and discharge of (I) any or all Obligations, in whole or in part, issued pursuant to this Master Trust Indenture to secure such Related Bonds allocable to such Undesignated Affiliates and (II) the Corporation, the Obligated Group, any Members of the Obligated Group, any System Affiliates or any Designated Affiliates from any or all liability (whether direct or indirect) with respect to the Related Bonds allocable to the Undesignated Affiliates, any Related Loan Document, any Related Bond Indenture, the Obligations, or this Master Trust Indenture or any portion of any thereof allocable to the Undesignated Affiliates (such transaction is referred to collectively herein as the “Substitution Transaction”).
(c) The Substitution Transaction Test shall mean, and be satisfied if, the Combined Group Agent delivers to the Master Trustee either:
(A) An Officer’s Certificate demonstrating that, upon consummation of the Substitution Transaction, and after giving effect to such Substitution Transaction, (i) at least one rating agency that has provided a long-term rating on the publicly sold Related Bonds provides written confirmation or assigns a rating which has the effect of setting forth that the long-term rating by such rating agency on such Related Bonds will be no less than “Aa3” or “AA-” or its equivalent, as applicable, as a result of and giving effect to the implementation of the Substitution Transaction; and (ii) the new obligated
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group satisfies the Transaction Test, assuming the incurrence of $1.00 of additional Long-Term Indebtedness; or
(B) An Officer’s Certificate demonstrating that, upon consummation of the Substitution Transaction, and after giving effect to such Substitution Transaction, (i) at least one rating agency that has provided a long-term rating on the publicly sold Related Bonds provides written confirmation or assigns a rating which has the effect of setting forth that the long-term ratings by such rating agency on such Related Bonds, as a result of and giving effect to the implementation of the Substitution Transaction, will be no less than the then-current rating on such Related Bonds immediately prior to the implementation of the Substitution Transaction, or such rating agency provides written confirmation that the then-current rating will not be decreased or withdrawn (a rating decrease shall include instances where the rating category level remains unchanged but the rating modifier (such as “+” or “-ˮ) is decreased as a result of the implementation of the Substitution Transaction, but a rating decrease shall not include instances where the outlook alone is decreased); (ii) the new obligated group satisfies the Transaction Test, assuming the incurrence of $1.00 of additional Long-Term Indebtedness; and (iii) the new master indenture contains a pledge of gross revenues.
(d) Upon the implementation of the Substitution Transaction pursuant to paragraph (c)(A) above, and concurrently therewith, the Master Trustee shall, as may be directed in writing by the Combined Group Agent, at the option of the Combined Group Agent, release and discharge the pledge of and security interest in Gross Revenues or any portion thereof, and file or record or allow to be filed or recorded any termination statements that may be applicable thereto.
(e) If all amounts due or to become due on the Related Bonds have not been fully paid to the Holder thereof, at or prior to the implementation of the Substitution Transaction there shall also be delivered to the Master Trustee: (i) an opinion of nationally recognized bond counsel to the effect that under then existing law the implementation of the Substitution Transaction and the execution of the amendments, supplements, restatements, replacements or substitutions contemplated in this Section, in and of themselves, would not adversely affect the validity of the Related Bonds or the exclusion from federal income taxation of interest payable on the Related Bonds, and (ii) an opinion of counsel to the new affiliated entities or the new obligated group, combined group or other unified credit group to the effect that (1) the note or notes of the new affiliated entities or the new obligated group, combined group or other unified credit group to be delivered to secure the Related Bonds allocable to the Undesignated Affiliates constitute legal, valid and binding obligations of the new affiliated entities or the new obligated group, combined group or other unified credit group enforceable in accordance with their terms, except to the extent that the enforceability of such note or notes may be limited by any applicable bankruptcy, insolvency, liquidation, rehabilitation or other similar laws or enactment affecting the enforcement of creditors’ rights, and (2) the issuance of the note or notes will not cause the Related Bonds or such note or notes to become subject to the registration requirements pursuant to the Securities Act of 1933, as amended.
(f) In addition, upon the implementation of the Substitution Transaction, the Combined Group Agent shall direct the Master Trustee to give written notice thereof, by first- class mail, to the Holders of the Obligations then Outstanding. 69
Section 704. Execution of Supplemental Indentures. The Master Trustee shall not be required to execute any proposed Supplemental Indenture pursuant to this Article VII unless it is provided with (i) an opinion of Counsel satisfactory to the Master Trustee to the effect that such proposed Supplemental Indenture and its execution by the Master Trustee are permitted or authorized under this Article VII; and (ii) an opinion of nationally recognized bond counsel to the effect that such Supplemental Indenture will not adversely affect the exemption of interest on any Related Bonds from income tax under the Code.
ARTICLE VIII SATISFACTION OF THE MASTER TRUST INDENTURE
Section 801. Defeasance. If the Members of the Obligated Group shall pay or provide for the payment of the entire indebtedness on all Obligations (including, for the purposes of this Section 801, any Obligations owned by a Member of the Obligated Group) outstanding in any one or more of the following ways:
(a) by paying or causing to be paid the principal of (including redemption premium, if any) and interest on, and any other amounts due under, all Obligations outstanding, as and when the same become due and payable;
(b) by depositing with the Master Trustee, in trust, at or before maturity, moneys in an amount sufficient to pay or redeem (when redeemable) all Obligations outstanding (including the payment of premium, if any, and interest payable on, and any other amounts due under, such Obligations to the maturity or redemption date thereof), provided that such moneys, if invested, shall be invested at the direction of the Combined Group Agent in Escrow Securities, in an amount, without consideration of any income or increment to accrue thereon, sufficient to pay or redeem (when redeemable) and discharge the indebtedness on all Obligations outstanding at or before their respective maturity dates; it being understood that the investment income on such Escrow Securities may be used at the direction of the Combined Group Agent for any other purpose permitted by law;
(c) by delivering to the Master Trustee, for cancellation by it, all Obligations outstanding; or
(d) by depositing with the Master Trustee, in trust, before maturity, non- callable Escrow Securities in such amount as will, together with the income or increment to accrue thereon, without consideration of any reinvestment thereof, be fully sufficient to pay or redeem (when redeemable) and discharge the amounts due on all Obligations outstanding at or before their respective maturity or due dates; and if the Obligated Group shall also pay or cause to be paid all other sums payable hereunder by the Obligated Group and, if any such Obligations are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given in accordance with the requirements of this Master Trust Indenture or provisions satisfactory to the Master Trustee shall have been made for the giving of such notice, then and in that case (but subject to the provisions of Section 803 hereof) this Master Trust Indenture and the estate and rights granted hereunder shall cease, determine, and become null and void, and thereupon the Master Trustee shall, upon written
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request of the Combined Group Agent, and upon receipt by the Master Trustee of an Officer’s Certificate and an opinion of Counsel acceptable to the Master Trustee, each stating that in the opinion of the signer all conditions precedent to the satisfaction and discharge of this Master Trust Indenture have been complied with, forthwith execute proper instruments acknowledging satisfaction of and discharging this Master Trust Indenture and the lien hereof. The satisfaction and discharge of this Master Trust Indenture shall be without prejudice to the rights of the Master Trustee to charge and be reimbursed by the Obligated Group for any expenditures which it may thereafter incur in connection herewith. Thereafter the holders of the Obligations shall be entitled to payment only out of the moneys or Escrow Securities deposited with the Master Trustee as aforesaid.
Any moneys, funds, securities, or other property remaining on deposit under this Master Trust Indenture (other than said Escrow Securities or other moneys deposited in trust as above provided) shall, upon the full satisfaction of this Master Trust Indenture, forthwith be transferred, paid over and distributed to the Combined Group Agent.
The Obligated Group may at any time surrender to the Master Trustee for cancellation by it any Obligations previously authenticated and delivered which the Obligated Group may have acquired in any manner whatsoever, and such Obligations, upon such surrender and cancellation, shall be deemed to be paid and retired.
Upon the defeasance of any of the Obligations pursuant to an advance refunding, the Master Trustee shall be entitled to receive and rely upon a verification report and an opinion of Counsel relating thereto.
Section 802. Provision for Payment of a Particular Series of Obligations or Portion Thereof. If the Obligated Group shall pay or provide for the payment of the entire indebtedness on all Obligations of a particular series or a portion of such a series (including, for the purpose of this Section 802, any such Obligations owned by a Member of the Combined Group) in one of the following ways:
(a) by paying or causing to be paid the principal of (including redemption premium, if any) and interest on, and any other amounts due under, all Obligations of such series or portion thereof outstanding, as and when the same shall become due and payable;
(b) by depositing with the Master Trustee, in trust, at or before maturity, moneys in an amount sufficient to pay or redeem (when redeemable) all Obligations of such series or portion thereof outstanding (including the payment of premium, if any, and interest payable on, and any other amounts due under, such Obligations to the maturity or redemption date), provided that such moneys, if invested, shall be invested at the direction of the Combined Group Agent in Escrow Securities in an amount, without consideration of any income or increment to accrue thereon, sufficient to pay or redeem (when redeemable) and discharge the indebtedness on all Obligations of such series or portion thereof outstanding at or before their respective maturity dates; it being understood that the investment income on such Escrow Securities may be used at the direction of the Combined Group Agent for any other purpose permitted by law;
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(c) by delivering to the Master Trustee, for cancellation by it, all Obligations of such series or portion thereof outstanding; or
(d) by depositing with the Master Trustee, in trust, non-callable Escrow Securities in such amount as will, together with the income or increment to accrue thereon without consideration of any reinvestment thereof, be fully sufficient to pay or redeem (when redeemable) and discharge the indebtedness on all Obligations of such series or portion thereof at or before their respective maturity dates; and if the Obligated Group shall also pay or cause to be paid all other sums payable hereunder by the Obligated Group with respect to such series of Obligations or portion thereof, and, if any such Obligations of such series or portion thereof are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given in accordance with the requirements of this Master Trust Indenture or provisions satisfactory to the Master Trustee shall have been made for the giving of such notice, then in that case (but subject to the provisions of Section 803 hereof) such Obligations shall cease to be entitled to any lien, benefit or security under this Master Trust Indenture except for such Liens solely on amounts held by the Master Trustee for the payment or redemption of such Obligations as may then exist.
Section 803. Satisfaction of Related Bonds. The provisions of Section 801 and Section 802 of this Master Trust Indenture notwithstanding, any Obligation which secures Related Bonds (i) shall be deemed paid and shall cease to be entitled to the lien, benefit and security under this Master Trust Indenture in the circumstances relating to the satisfaction, repayment or defeasance of such Related Bonds described in the definition of “Outstanding” contained in Article I; and (ii) shall not be deemed paid and shall continue to be entitled to the lien, benefit and security under this Master Trust Indenture unless and until such Related Bond shall cease to be entitled to any lien, benefit or security under the Related Bond Indenture pursuant to the provisions thereof.
ARTICLE IX MANNER OF EVIDENCING OWNERSHIP OF OBLIGATIONS
Section 901. Proof of Ownership. Any request, direction, consent or other instrument provided by this Master Trust Indenture to be signed and executed by the Obligation holders may be in any number of concurrent writings of similar tenor and may be signed or executed by such Obligation holders in person or by an agent appointed in writing. Proof of the execution of any such request, direction or other instrument or of the writing appointing any such agent and of the ownership of Obligations, if made in the following manner, shall be sufficient for any of the purposes of this Master Trust Indenture and shall be conclusive in favor of the Master Trustee and the Obligated Group, with regard to any action taken by them, or either of them, under such request or other instrument, namely:
(a) The fact and date of the execution by any person of any such writing may be proved by the certificate of any officer in any jurisdiction who by law has power to take acknowledgements in such jurisdiction, that the person signing such writing acknowledged before him the execution thereof, or by the affidavit of a witness of such execution; and
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(b) The ownership of Obligations shall be proved by the registration of such Obligations.
Any action taken or suffered by the Master Trustee pursuant to any provision of this Master Trust Indenture, upon the request or with the assent of any person who at the time is the holder of any Obligation or Obligations, shall be conclusive and binding upon all future holders of the same Obligation or Obligations or any Obligation or Obligations issued in exchange therefor.
ARTICLE X MISCELLANEOUS
Section 1001. Limitation of Rights. With the exception of rights herein expressly conferred, nothing expressed or mentioned in or to be implied from this Master Trust Indenture or the Obligations is intended or shall be construed to give to any Person other than the parties hereto, and the holders of the Obligations, any legal or equitable right, remedy or claim under or in respect to this Master Trust Indenture or any covenants, conditions and provisions herein contained; this Master Trust Indenture and all of the covenants, conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and the holders of the Obligations as herein provided.
Section 1002. Unclaimed Moneys. If any Obligation or evidence of beneficial ownership of such Obligation shall not be presented for payment when the principal thereof becomes due (whether at maturity, by acceleration, upon call for redemption, upon purchase or otherwise), all liability of the Obligated Group to the registered Owner thereof for the payment of such Obligation shall forthwith cease, terminate and be completely discharged if funds sufficient to pay such Obligation and interest due thereon, if any, are held by the Master Trustee uninvested for the benefit of the registered Owner thereof. Thereupon it shall be the duty of the Master Trustee to comply with the Uniform Unclaimed Property Act, N.J.S.A. 46:30B-1 et seq. with respect to such funds in accordance with the Master Trustee’s escheat policies and procedures, which must not be in conflict with the Uniform Unclaimed Property Act, N.J.S.A. 46:30B-1 et seq. The registered Owner shall thereafter be restricted exclusively to such funds for any claim of whatever nature on his or her part under this Master Trust Indenture or on, or with respect to, such Obligation.
Section 1003. Severability. If any provision of this Master Trust Indenture shall be held or deemed to be or shall, in fact, be inoperative or unenforceable as applied in any particular case in any jurisdiction or jurisdictions or in all jurisdictions, or in all cases because it conflicts with any other provision or provisions or any constitution or statute or rule of public policy, or for any other reason, such circumstances shall not have the effect of rendering the provision in question inoperative or unenforceable in any other case or circumstance, or of rendering any other provision or provisions herein contained invalid, inoperative, or unenforceable to any extent whatever. The invalidity of any one or more phrases, sentences, clauses or Sections in this Master Trust Indenture contained, shall not affect the remaining portions of this Master Trust Indenture, or any part thereof.
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Section 1004. Notices. It shall be sufficient service of any notice, complaint, demand or other paper on the Combined Group Agent or any other Member of the Combined Group if the same shall be delivered in person, by overnight courier, or duly mailed by registered or certified mail addressed as follows: Hackensack Meridian Health, Inc., 343 Thornall Street, Edison, New Jersey 08837, Attention: Chief Financial Officer, with a copy to its General Counsel. It shall be sufficient service of any notice, complaint, demand or other paper on the Master Trustee if the same shall be delivered in person, by overnight courier, or duly mailed by registered or certified mail addressed as follows: 385 Rifle Camp Road, Woodland Park, New Jersey 07424, Attention: Corporate Trust Administration.
Section 1005. Instructions to the Master Trustee. The Master Trustee shall have the right to accept and act upon instructions, including funds transfer instructions (“Instructions”) given pursuant to this Master Trust Indenture and delivered using Electronic Means; provided, however, that the Combined Group Agent shall provide to the Master Trustee an incumbency certificate listing officers with the authority to provide such Instructions (“Authorized Officers”) and containing specimen signatures of such Authorized Officers, which incumbency certificate shall be amended by the Combined Group Agent whenever a person is to be added or deleted from the listing. If the Combined Group Agent elects to give the Master Trustee Instructions using Electronic Means and the Master Trustee in its discretion elects to act upon such Instructions, the Master Trustee’s understanding of such Instructions shall be deemed controlling. The Combined Group Agent understands and agrees that the Master Trustee cannot determine the identity of the actual sender of such Instructions and the Master Trustee shall conclusively presume that Instructions which are purportedly sent by an Authorized Officer listed on the incumbency certificate provided to the Master Trustee have been sent by such Authorized Officer. The Combined Group Agent shall be responsible for ensuring that only Authorized Officers transmit such Instructions to the Master Trustee and the Combined Group Agent and all Authorized Officers are solely responsible to safeguard the use and confidentiality of applicable user and authorization codes, passwords and/or authentication keys upon receipt by the Combined Group Agent. The Master Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Master Trustee’s reliance upon and compliance with such Instructions notwithstanding such Instructions conflict or are inconsistent with a subsequent written instruction. The Combined Group Agent agrees: (a) to assume all risks arising out of the use of Electronic Means to submit Instructions to the Master Trustee, including without limitation the risk of the Master Trustee acting on unauthorized Instructions, and the risk of interception and misuse by third parties; (b) that it is fully informed of the protections and risks associated with the various methods of transmitting Instructions to the Master Trustee and that there may be more secure methods of transmitting Instructions than the method(s) selected by the Combined Group Agent; (c) that the security procedures (if any) to be followed in connection with its transmission of Instructions provide to it a commercially reasonable degree of protection in light of its particular needs and circumstances; and (d) to notify the Master Trustee immediately upon learning of any compromise or unauthorized use of the security procedures.
Section 1006. Counterparts. This Master Trust Indenture may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.
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Section 1007. Applicable Law. This Master Trust Indenture shall be governed exclusively by the applicable laws of the State of New Jersey.
Section 1008. Immunity of Officers, Employees and Members. No recourse shall be had for the payment of any amounts due under any of the Obligations or for any claim based thereon or upon any obligation, covenant or agreement in this Master Trust Indenture contained against any past, present or future officer, director, trustee, employee, member or agent of any Member of the Combined Group, or of any successor corporation or other legal entity, as such, either directly or through any Member of the Combined Group or any successor corporation or other legal entity, under any rule of law or equity, statute or constitution or by the enforcement of any assessment or penalty or otherwise, and all such liability of any such officers, directors, trustees, employees, members or agents as such is hereby expressly waived and released as a condition of and consideration for the execution of this Master Trust Indenture and the issuance of such Obligations.
Section 1009. Holidays. If the date for making any payment or the date for performance of any act or the exercising of any right, as provided in this Master Trust Indenture, is not a Business Day, such payment may be made or act performed or right exercised on the next succeeding Business Day with the same force and effect as if done on the nominal date provided in this Master Trust Indenture.
Section 1010. No Additional Terms or Restrictions. It is expressly understood that the express terms and restrictions of this Master Trust Indenture applicable to each of the Corporation, the Combined Group Agent, the Members of the Obligated Group, the Members of the Combined Group and the System Affiliates, as the case may be, are set forth fully in this Master Trust Indenture and no additional terms and restrictions applicable to such entities shall be inferred in this Master Trust Indenture.
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IN WITNESS WHEREOF, the Corporation has caused these presents to be signed in its name and on its behalf and attested by duly authorized officers of the Corporation, and to evidence its acceptance of the trusts hereby created the Master Trustee has caused these presents to be signed in its name and on its behalf by its duly authorized officer, all as of the day and year first above written.
HACKENSACK MERIDIAN HEALTH, INC., ATTEST: on behalf of itself and any future Members of the Obligated Group
By: Name: Name: Title: Title:
THE BANK OF NEW YORK MELLON, ATTEST: as Master Trustee
By: Name: Name: Title: Title:
[Signature Page to Master Trust Indenture]
EXHIBIT A
LIST OF MEMBERS OF THE OBLIGATED GROUP AS OF APRIL 1, 2017
HACKENSACK MERIDIAN HEALTH, INC.
A-1
EXHIBIT B
LIST OF DESIGNATED AFFILIATES AS OF APRIL 1, 2017
HACKENSACK UNIVERSITY MEDICAL CENTER
MERIDIAN HOSPITALS CORPORATION
PALISADES MEDICAL CENTER, INC.
RARITAN BAY MEDICAL CENTER
[Note: As of January 1, 2018, HMH Hospitals Corporation (as successor to the above listed entities) is the sole Designated Affiliate under the Master Indenture. Upon the issuance of the Series 2018 Bonds, JFK Health System, Inc. and The Community Hospital Group, Inc. T/A JFK Medical Center are to become Designated Affiliates under the Master Indenture.]
B-1
EXHIBIT C
PRE-EXISTING LIENS AS OF APRIL 1, 2017
C-1
EXHIBIT D
ACKNOWLEDGEMENT AND AUTHENTICATION OF SECURITY AGREEMENT
Each of the undersigned as a Member of the Combined Group agrees to be bound by the terms and conditions of the Master Trust Indenture dated as of April 1, 2017 by and between Hackensack Meridian Health, Inc. and The Bank of New York Mellon, as Master Trustee (the “Indenture”) and grants a security interest in its Gross Revenues under the terms of Section 208 of the Indenture securing the obligations of each such Member of the Combined Group.
HACKENSACK UNIVERSITY MEDICAL CENTER By: Hackensack Meridian Health, Inc., its sole member
By: Name: Title:
MERIDIAN HOSPITALS CORPORATION By: Hackensack Meridian Health, Inc., its sole member
By: Name: Title:
PALISADES MEDICAL CENTER, INC. By: Hackensack Meridian Health, Inc., its sole member
By: Name: Title:
RARITAN BAY MEDICAL CENTER By: Meridian Hospitals Corporation, its sole member By: Hackensack Meridian Health, Inc., its sole member
By: Name: Title:
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APPENDIX D
Approving Opinion of Institution Counsel
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Upon issuance of the Series 2018 Taxable Bonds, McCarter & English, LLP, Newark, New Jersey, Special Counsel to the Institution, anticipates rendering its final opinion in substantially the following form:
April __, 2018
Hackensack Meridian Health, Inc. Edison, New Jersey
Re: Hackensack Meridian Health Taxable Bonds, Series 2018
Ladies and Gentlemen:
We have acted as special counsel to the Institution (as defined below) in connection with the issuance of $300,000,000 Hackensack Meridian Health Taxable Bonds, Series 2018 (the “Series 2018 Taxable Bonds”). The Series 2018 Taxable Bonds are issued under and pursuant to a Trust Indenture, dated as of April 1, 2018 (the “Trust Indenture”) by and between Hackensack Meridian Health, Inc., a New Jersey nonprofit corporation (the “Institution”), and The Bank of New York Mellon, as Trustee (the “Trustee”) The Series 2018 Taxable Bonds are dated, mature, bear interest at a fixed rate of interest and are subject to redemption prior to maturity upon the terms and conditions stated therein and in the Trust Indenture. All capitalized terms used herein and not defined herein shall have the meaning ascribed to such terms in the Trust Indenture.
The Series 2018 Taxable Bonds are issued under and pursuant to (a) a resolution adopted by the Board of Trustees of the Institution on April 2, 2018 (the “Resolution”), authorizing, among other things, the issuance of the Series 2018 Taxable Bonds; and (b) the Trust Indenture.
To secure the repayment obligations of the Institution pursuant to the Trust Indenture, the Institution, on behalf of itself and any other future member of the obligated group (together, the “Obligated Group”) has issued a note, dated April __, 2018 in connection with the Series 2018 Taxable Bonds (the “Series 2018 Taxable Note”) to the Trustee pursuant to the terms of that certain Master Trust Indenture, dated as of April 1, 2017 (the “Master Trust Indenture”), as supplemented by the Third Supplemental Indenture, dated as of April 1, 2018 (the “Third Supplemental Indenture”; the Master Trust Indenture as amended and supplemented from time to time as permitted therein, including by the Third Supplemental Indenture, shall be referred to herein as the “Master Indenture”), each by and between the Institution and the Bank of New York Mellon, as master trustee (the “Master Trustee”).
To secure its obligations under the Master Indenture, each member of the Combined Group (as defined in the Master Indenture) has granted to the Master Trustee a security interest in its Gross Revenues for the equal and ratable benefit of the holders of any Notes, including the Series 2018 Taxable Note, and any other Obligations issued from time to time under the Master Indenture.
ME1 26870045v.1 D-1 Hackensack Meridian Health, Inc. April __, 2018 Page 2
In our capacity as special counsel to the Institution, we have examined the proceedings related to the authorization and issuance of the Series 2018 Taxable Bonds, including, among other things: (a) a certified copy of the Resolution authorizing the issuance of the Series 2018 Taxable Bonds, the execution and delivery of the Trust Indenture and other necessary action; (b) original counterparts or certified copies of the executed Trust Indenture, Series 2018 Taxable Note, Series 2018 Taxable Bonds and Master Indenture; (c) various certificates executed by the Institution; and (d) such other opinions, agreements, proceedings, certificates, records, approvals, resolutions and documents as to various matters with respect to the issuance of the Series 2018 Taxable Bonds as we have deemed necessary.
For the purposes of rendering the opinions set forth below, we have assumed with your permission: (i) the accuracy and genuineness of all representations made by the Institution in the Trust Indenture; (ii) the genuineness of the signatures of all persons (other than the officers of the Institution) and the authenticity of all documents submitted to us purporting to be originals and conformity with the originals of all documents submitted to us as copies and the legal capacity of all natural persons; and (iii) the proper authorization and due execution and delivery by, and enforceability against, all parties, other than the Institution, of the documents and other instruments which we have examined.
Based upon and subject to the foregoing and the further assumptions and qualifications set forth below, it is our opinion that:
1. Each member of the Combined Group has been organized and is validly existing as a nonprofit corporation in good standing under the laws of the State of New Jersey, and the Institution has full corporate power and authority to execute and deliver (as applicable), the Trust Indenture, the Third Supplemental Indenture, the Series 2018 Taxable Bonds and all other documents necessary to consummate the transactions associated with the delivery of the Series 2018 Taxable Bonds.
2. The Trust Indenture, the Series 2018 Taxable Note and the Series 2018 Taxable Bonds have each been duly authorized, executed and delivered by the Institution.
3. The Trust Indenture and the Series 2018 Taxable Note are valid and binding obligations of the Institution, enforceable in accordance with their terms.
4. The Series 2018 Taxable Bonds, when authenticated and delivered, will be valid and binding obligations, enforceable in accordance with their terms and entitled to the benefit and security of the Trust Indenture.
5. The Series 2018 Taxable Bonds are payable from amounts derived from the Series 2018 Taxable Note and other amounts available therefor under the Trust Indenture.
6. We have examined one of the executed Series 2018 Taxable Bonds in registered form and, in our opinion, its form, execution, and authentication are regular and proper.
The foregoing opinions are qualified to the extent that the enforceability of the Series 2018 Taxable Bonds, the Trust Indenture and the other documents mentioned herein may be limited by limitations imposed by state and federal laws, rulings and decisions relating to equitable remedies regardless of whether enforceability is sought in a proceeding at law or in equity,
D-2 Hackensack Meridian Health, Inc. April __, 2018 Page 3
fraudulent conveyances and fraudulent transfers, bankruptcy, reorganization, insolvency, receivership or other similar laws affecting the rights of creditors generally or as otherwise limited by state and federal laws prohibiting, limiting or restricting liens on Gross Revenues derived from the Medicare or Medicaid programs or other federal healthcare programs, the ability of a charitable corporation to pledge its assets to secure the debt of another and the use or pledge of any assets subject to a direct, express or charitable trust. In rendering the opinion herein respecting the good standing of each member of the Combined Group under the laws of the State of New Jersey, we have relied solely on good standing certificates issued by the Treasurer of the State of New Jersey.
The opinions expressed herein are based upon, and limited to, the laws and judicial decisions of the State of New Jersey, exclusive of conflicts of law provisions, and the federal laws and judicial decisions of the United States as of the date hereof and are subject to any amendment, repeal or other modification of the applicable laws or judicial decisions that served as the basis for our opinion, or laws or judicial decisions hereafter enacted or rendered. Our engagement by the Institution with respect to the opinions expressed herein does not require, and shall not be construed to constitute, a continuing obligation on our part to notify or otherwise inform the addressee hereof of the amendment, repeal or other modification of the applicable laws or judicial decisions that served as the basis for this opinion letter or of laws or judicial decisions hereafter enacted or rendered which impact on this opinion letter.
This opinion letter is being furnished solely to the party to whom it is addressed and may not be relied upon by any other person or quoted in whole or in part or otherwise referred to without our prior written consent except as required by law. This is only an opinion letter and not a warranty or guaranty of the matters discussed herein.
Very truly yours,
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HACKENSACK MERIDIAN HEALTH • Taxable Bonds, Series 2018