This Preliminary Official Statement and the information contained herein are subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted prior to the time of formal award by the issuer. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. * Preliminary, subjecttochange. Dated: DateofDelivery individuals andcorporations.See“TAXEXEMPTION”hereinforamorecompletediscussion. federal incometaxpurposesandisnotincludedasanitemofpreferenceincomputingthealternativeminimumfor Bond Counsel,underpresentlaw,interestontheSeries2017Bondsisexcludablefromgrossincomeofownersthereoffor BOOK-ENTRY ONLY NEW ISSUE September 7,2017. It isexpectedthattheSeries2017 Bondsindefinitiveformwillbeavailablefordeliveryto theUnderwritersviaDTConorabout WhitneyLLP,Minneapolis,Minnesota. matters will be passed upon for the Underwriters by counsel to the Representative, Dorsey & by theGeneralCounselof Corporation andcounseltotheMembers of theObligatedGroup,TeresaBurroff,Esq.Certainlegal Redstone LawFirmLLP,SiouxFalls,SouthDakota.Certainlegal matterswillbepasseduponfortheMembersofObligatedGroup Chicago, Illinois,BondCounseltotheAuthority.Certainlegal matterswillbepasseduponfortheAuthoritybyitsgeneralcounsel, or modificationoftheofferwithoutanynotice,andtoapproval oflegalitytheSeries2017BondsbyChapmanandCutlerLLP, Lynch, Pierce, Fenner & SmithIncorporated(togetherwith the Representative, the “Underwriters”), subject to prior sale, to withdrawal OR AGENCYTHEREOFISPLEDGEDTOTHEPAYMENTOF SERIES2017BONDS.THEAUTHORITYHASNOTAXINGPOWER. THEREOF, ANDNEITHERTHEFAITHCREDITNOR TAXINGPOWEROFTHESTATEORANYPOLITICALSUBDIVISION THE AUTHORITYORAPLEDGEOFFAITHANDCREDIT OFTHESTATEORANYPOLITICALSUBDIVISIONAGENCY DEBT, LIABILITYOROBLIGATIONOFTHESTATEANY POLITICALSUBDIVISIONORAGENCYTHEREOFOTHERTHAN MASTER INDENTUREANDDELIVEREDTOTHEAUTHORITY. THE AUTHORITY AND THE CORPORATION, AND A DIRECT NOTE OBLIGATION ISSUED BY THE CORPORATION UNDER THE THE AUTHORITY UNDER A LOAN AGREEMENT DATED AS OF SEPTEMBER 1, 2017 (THE “LOAN AGREEMENT”), BETWEEN INDENTURE. PURSUANTTOTHEBONDINDENTURE,AUTHORITYHASPLEDGEDANDASSIGNEDCERTAINRIGHTS OF GROUP UNDERAMASTERINDENTURE(ASDEFINEDHEREIN),ANDSECUREDTHEPROVISIONSOF BOND RECEIVED BYORONBEHALFOFTHEAUTHORITYFROMPAYMENTSTOBEMADEMEMBERSOBLIGATED PUBLIC INSTRUMENTALITYOFTHESTATESOUTHDAKOTA(THE“STATE”),PAYABLESOLELYFROMREVENUES “THE SERIES2017BONDS–Redemption”herein. redemption, optionalpurchase,extraordinaryredemptionandmandatorypriortomaturity,allassetforthherein. See Holders ofrecordastheapplicableRecordDate,definedinBondIndenture.TheSeries2017Bondsaresubject to optional hereto. of DTCDirectParticipantsandIndirect(asdefinedinAPPENDIXF).See“APPENDIXF–BOOK-ENTRYONLY SYSTEM” and disbursementofsuchpaymentstothepurchasersbeneficialownershipinterestsinSeries2017Bondsisresponsibility Bondholder. DisbursementofsuchpaymentstotheDTCDirectParticipants(asdefinedinAPPENDIXF)isresponsibility ofDTC interest ontheSeries2017BondswillbepaidbyBondTrusteefortoCede&Co.,aslong Co.isthe certificates representing their beneficial interests in the Series 2017 Bonds purchased. The principal of and premium, if any, and Purchases ofbeneficialownershipinterestsintheSeries2017Bondswillbemadebook-entryform.Purchasers not receive for TheDepositoryTrustCompany(“DTC”),NewYork,York.DTCwillactassecuritiesdepositorytheSeries2017 Bonds. thereof, and when issued, will be registered in the name of Cede & Co. as registered owner (the “Bondholder” or “Holder”) and nominee OF FINANCE”herein. Obligated Group(asdefinedherein)locatedinSouthDakotaandrefundingalloraportionofcertainoutstandingbonds. See “PLAN (the “Corporation”),forthepurposeoffinancingimprovementcertainfacilitiesCorporationandotherMembers Series 2017Bonds(the“BondTrustee”),andloantheproceedsthereoftoRegionalHealth,Inc.,aSouthDakotanonprofitcorporation September 1,2017(the“BondIndenture”),betweentheAuthorityandTheFirstNationalBankinSiouxFalls,asbondtrusteefor Series 2017(RegionalHealth)(the“SeriesBonds”)throughabook-entrysystemunderBondTrustIndenturedatedasof Subject to compliance by the Authority and the Members of the Obligated Group with certain covenants, in the opinion of The Series2017Bondsareofferedwhen,asandifissued receivedbyPiperJaffray&Co.(the“Representative”)andMerrill THE SERIES2017BONDSARELIMITEDOBLIGATIONSOF THE AUTHORITYANDDONOTCONSTITUTEORCREATEANY THE SERIES2017BONDSARELIMITEDOBLIGATIONSOFAUTHORITY,ABODYPOLITICANDCORPORATE AND Interest ontheSeries2017BondswillbepayableMarch1andSeptemberofeachyear,commencing1,2018,to the The Series2017Bondswillbeissuedasfullyregisteredbondswithoutcouponsindenominationsof$5,000orintegralmultiples The South Dakota Health and Educational Facilities Authority (the “Authority”) will issue its $213,690,000* Revenue Bonds,
PRELIMINARY OFFICIAL STATEMENT DATED AUGUST 14, 2017 Maturities, PrincipalAmounts,InterestRates,Yields/PricesandCUSIPs
EDUCATIONAL FACILITIES AUTHORITY The dateofthisOfficial StatementisAugust__,2017. SOUTH DAKOTA HEALTH AND as ShownontheInsideFrontCover Revenue Bonds,Series2017 (Regional Health) $213,690,000* Due: September1,asshownontheinsidefrontcover RATINGS: See“RATINGS”herein. ®
SUMMARY OF THE OFFERING
$213,690,000* SOUTH DAKOTA HEALTH AND EDUCATIONAL FACILITIES AUTHORITY Revenue Bonds, Series 2017 (Regional Health)
Maturity Principal Interest (September 1) Amount Rate Yield Price CUSIP®
$______% Term Bonds due September 1, 20__ priced at ______% to yield _____%, CUSIP® $______% Term Bonds due September 1, 20__ priced at ______% to yield _____%, CUSIP®
* Preliminary, subject to change.
® CUSIP is a registered trademark of the American Bankers Association (“ABA”). CUSIP data herein is provided by CUSIP Global Services, managed by S&P Global Market Intelligence on behalf of ABA, and is set forth herein for convenience for reference only. Neither the Authority, nor the Underwriters or the Members of the Obligated Group are responsible for the selection of CUSIP numbers and none make any representation as to their correctness on the Series 2017 Bonds or as set forth in this Official Statement.
ISSUER
South Dakota Health and Educational Facilities Authority
OBLIGATED GROUP
Regional Health, Inc. Rapid City Regional Hospital, Inc. Regional Health Network, Inc. Regional Health Physicians, Inc.
UNDERWRITERS
Piper Jaffray & Co. Minneapolis, Minnesota
Bank of America Merrill Lynch New York, New York
BOND COUNSEL
Chapman and Cutler LLP Chicago, Illinois
COUNSEL TO THE AUTHORITY
Redstone Law Firm LLP Sioux Falls, South Dakota
COUNSEL TO THE UNDERWRITERS
Dorsey & Whitney LLP Minneapolis, Minnesota
TRUSTEE
The First National Bank in Sioux Falls
REGARDING USE OF THIS OFFICIAL STATEMENT
No dealer, broker, salesperson or other person has been authorized by the Authority, the Members of the Obligated Group or the Underwriters to give information or to make any representations with respect to the Series 2017 Bonds, other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, and there shall not be any sale of the Series 2017 Bonds, in any jurisdiction in which it is unlawful to make such offer, solicitations or sale. Certain information contained herein has been obtained from the Members of the Obligated Group, DTC and other sources which are believed to be reliable, but is not guaranteed as to accuracy or completeness by, and is not to be construed to be the representations of, the Authority or the Underwriters. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of any of the parties referred to above since the date hereof. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the 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 EFFECT CERTAIN TRANSACTIONS THAT STABILIZE THE PRICE OF THE SERIES 2017 BONDS. SUCH TRANSACTIONS MAY CONSIST OF BIDS OR PURCHASES FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE SERIES 2017 BONDS. IN ADDITION, IF THE UNDERWRITERS OVERALLOT (THAT IS, SELL MORE THAN THE AGGREGATE PRINCIPAL AMOUNT OF THE SERIES 2017 BONDS SET FORTH ON THE COVER PAGE OF THIS OFFICIAL STATEMENT) AND THEREBY CREATE A SHORT POSITION IN THE SERIES 2017 BONDS IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY REDUCE THAT SHORT POSITION BY PURCHASING SERIES 2017 BONDS IN THE OPEN MARKET. IN GENERAL, PURCHASES OF A SECURITY FOR THE PURPOSE OF STABILIZATION OR TO REDUCE A SHORT POSITION COULD CAUSE THE PRICE OF A SECURITY TO BE HIGHER THAN IT MIGHT OTHERWISE BE IN THE ABSENCE OF SUCH PURCHASES. THE UNDERWRITERS MAKE NO REPRESENTATION OR PREDICTION AS TO THE DIRECTION OR THE MAGNITUDE OF ANY EFFECT THAT THE TRANSACTIONS DESCRIBED ABOVE MAY HAVE ON THE PRICE OF THE SERIES 2017 BONDS. IN ADDITION, THE UNDERWRITERS MAKE NO REPRESENTATION THEY WILL ENGAGE IN SUCH TRANSACTIONS OR THAT SUCH TRANSACTIONS, IF COMMENCED, WILL NOT BE DISCONTINUED WITHOUT NOTICE.
THE SERIES 2017 BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR HAS THE BOND INDENTURE OR THE MASTER INDENTURE BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS. THE REGISTRATION OR QUALIFICATION OF THE SERIES 2017 BONDS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF SECURITIES LAWS OF THE STATES IN WHICH THE SERIES 2017 BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE STATES NOR ANY OF THEIR AGENCIES HAVE PASSED UPON THE MERITS OF THE SERIES 2017 BONDS OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT
Certain statements included or incorporated by reference in this Official Statement constitute “forward- looking statements.” Such statements are generally identifiable by the terminology used such as “plan,” “expect,” “estimate,” “budget” or similar words. Such forward-looking statements include, among others, certain statements contained under the heading “MANAGEMENT DISCUSSION AND ANALYSIS” in APPENDIX A hereto.
THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVES KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE MEMBERS OF THE OBLIGATED GROUP DO NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN THEIR EXPECTATIONS, OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED, OCCUR.
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION BY REASON OF THE PROVISIONS OF SECTION 3(A)(2) OF THE SECURITIES ACT OF 1933, AS AMENDED. THE REGISTRATION OR QUALIFICATION OF THESE SECURITIES IN ACCORDANCE WITH APPLICABLE PROVISIONS OF SECURITIES LAWS OF THE STATES IN WHICH THESE SECURITIES HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES SHALL NOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE STATES NOR ANY OF THEIR AGENCIES HAVE PASSED UPON THE MERITS OF THE SECURITIES OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page INTRODUCTION ...... 1 THE AUTHORITY ...... 5 PLAN OF FINANCE ...... 7 ESTIMATED SOURCES AND USES OF FUNDS ...... 8 THE SERIES 2017 BONDS ...... 8 SECURITY FOR THE SERIES 2017 BONDS ...... 13 ANNUAL DEBT SERVICE REQUIREMENTS ...... 17 BONDHOLDERS’ RISKS ...... 18 LITIGATION ...... 51 LEGAL MATTERS ...... 51 RELATIONSHIPS AMONG THE PARTIES ...... 52 CONTINUING DISCLOSURE ...... 52 TAX EXEMPTION ...... 52 VERIFICATION OF CERTAIN MATHEMATICAL COMPUTATIONS ...... 54 FINANCIAL ADVISOR ...... 55 INDEPENDENT AUDITORS ...... 55 RATINGS ...... 55 UNDERWRITING ...... 55 FUTURE FINANCING ...... 56 MISCELLANEOUS ...... 56
APPENDIX A – INFORMATION REGARDING THE REGIONAL HEALTH SYSTEM ...... A - 1 APPENDIX B – AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2016 AND 2015 ...... B-1 APPENDIX C – DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE, THE BOND INDENTURE AND THE LOAN AGREEMENT ...... C-1 APPENDIX D – FORM OF BOND COUNSEL OPINION ...... D-1 APPENDIX E – FORM OF CONTINUING DISCLOSURE AGREEMENT ...... E-1 APPENDIX F – BOOK-ENTRY ONLY SYSTEM ...... F-1
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OFFICIAL STATEMENT RELATING TO
$213,690,000* SOUTH DAKOTA HEALTH AND EDUCATIONAL FACILITIES AUTHORITY Revenue Bonds, Series 2017 (Regional Health)
INTRODUCTION
Purpose of this Official Statement
The purpose of this Official Statement, including the cover page, the inside cover page and the appendices, is to set forth certain information in connection with the offering by the South Dakota Health and Educational Facilities Authority (the “Authority”) of its $213,690,000∗ Revenue Bonds, Series 2017 (Regional Health) (the “Series 2017 Bonds”) and to provide certain information about Regional Health, Inc., a South Dakota nonprofit corporation (the “Corporation”), the entity to which the proceeds of the Series 2017 Bonds will be loaned, the other Members of the Obligated Group (as defined herein) and certain other non-obligated affiliates of the System (as defined herein). Certain capitalized terms used in this Official Statement and not otherwise defined herein are defined in APPENDIX C hereto. This Official Statement speaks only as of its date, and the information contained herein is subject to change.
The Authority
The Authority is a body corporate and politic and public instrumentality of the State of South Dakota (the “State”) created and existing under and by virtue of the South Dakota Health and Educational Facilities Authority Act, as it may from time to time be amended (the “Act”). For further information regarding the Authority, see “THE AUTHORITY” herein.
The System
The Corporation and its affiliates operate a nonprofit healthcare system headquartered in Rapid City, South Dakota, which delivers healthcare services to patients in South Dakota and surrounding states. The Corporation is the sole member of three other South Dakota nonprofit corporations: Rapid City Regional Hospital, Inc. (the “Hospital”), Regional Health Network, Inc. (“Health Network”) and Regional Health Physicians, Inc. (“RH Physicians,” and together with the Corporation, the Hospital and Health Network, and certain other non-obligated affiliates of such entities, collectively, the “System”). The Corporation was established for the purpose of planning for, establishing policy for and coordinating and overseeing the Members of the Obligated Group, as well as the non-obligated affiliates of the System. Each Member of the Obligated Group has been determined to be exempt from federal income taxation under Section 501(a) of the Internal Revenue Code of 1986, as amended (the “Code”), as an organization described in Section 501(c)(3) of the Code. A more complete description of the Corporation, the other Members of the Obligated Group, and the non-obligated affiliates of the System can be found in APPENDIX A hereto.
The Project
The Series 2017 Bonds will be issued pursuant to a Bond Trust Indenture dated as of September 1, 2017 (the “Bond Indenture”), between the Authority and The First National Bank in Sioux Falls, as bond trustee (the “Bond Trustee”). The proceeds of the Series 2017 Bonds will be loaned to the Corporation pursuant to a Loan Agreement dated as of September 1, 2017 (the “Loan Agreement”), between the Authority and the Corporation, and such proceeds will be applied to (i) advance refund a portion of the outstanding $54,390,000 original principal amount South Dakota Health and Educational Facilities Authority Revenue Bonds, Series 2010 (Regional Health)
∗ Preliminary, subject to change.
(the “Series 2010 Bonds”); (ii) advance refund all of the outstanding $50,460,000 original principal amount South Dakota Health and Educational Facilities Authority Revenue Bonds, Series 2011 (Regional Health) (the “Series 2011 Bonds” and, together with the Series 2010 Bonds, the “Refunded Bonds”); (iii) pay or reimburse the “costs” (as such term is defined in the Act) of acquiring, constructing, renovating, remodeling, renovating and equipping certain “facilities” of “health institutions” (as such terms are defined in the Act) of the System, as further described herein (collectively, the “Project”); and (iv) pay certain expenses incurred in connection with the issuance of the Series 2017 Bonds and the refunding of the Refunded Bonds. See “PLAN OF FINANCE” and “ESTIMATED SOURCES AND USES OF FUNDS” herein.
Security for the Series 2017 Bonds
The Corporation, the Hospital, Health Network and RH Physicians and The First National Bank in Sioux Falls, Sioux Falls, South Dakota (the “Master Trustee”), have heretofore entered into the First Amended and Restated Master Trust Indenture, dated as of March 1, 1998, as supplemented and amended (the “Prior Master Indenture”). In connection with the issuance of the Series 2017 Bonds, the Corporation, the Hospital, Health Network and RH Physicians and the Master Trustee will enter into a Master Trust Indenture (the “New Master Indenture”) and a First Supplemental Master Trust Indenture (the “First Supplemental Master Indenture”), each dated as of September 1, 2017 (the New Master Indenture, as supplemented and amended by the First Supplemental Master Indenture, and as it may from time to time be further amended or supplemented in accordance with the terms thereof, the “Master Indenture”).
The Master Indenture provides for the creation of a group of entities (the “Obligated Group” or “Members of the Obligated Group”), the members of which are jointly and severally obligated for the payment of debt service on all Obligations (as defined herein) issued under the Master Indenture. Upon the issuance of the Series 2017 Bonds, the Obligated Group will consist of the Corporation, the Hospital, Health Network, and RH Physicians. Upon compliance with certain conditions set forth in the Master Indenture and described in APPENDIX C hereto, additional members may be added to the Obligated Group and existing Members of the Obligated Group may withdraw from the Obligated Group. The obligations of the Members of the Obligated Group under the Master Indenture are secured by a security interest in the Unrestricted Receivables of the Obligated Group, subject to Permitted Encumbrances (as defined in the Master Indenture) and the potential release thereof as further described in, and all as limited by, the Master Indenture. The obligations of the Members of the Obligated Group under the Master Indenture are not secured by any security interest in the Obligated Group’s other property, real or personal, other than the Unrestricted Receivables. See “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE” in APPENDIX C to this Official Statement for a summary of certain provisions of the Master Indenture. Non-obligated affiliates of the System are not obligated to pay debt service on the Obligations issued pursuant to the Master Indenture. The consolidated financial statements in APPENDIX B contain information with respect to all entities whose financial information is required to be consolidated with the Corporation’s for financial reporting purposes under accounting principles generally accepted in the United States of America, including the other Members of the Obligated Group, but also including certain non-obligated affiliates of the System which are not Members of the Obligated Group. See “MEMBERS OF THE OBLIGATED GROUP” and “NON- OBLIGATED AFFILIATES” in APPENDIX A. The Members of the Obligated Group are the only entities that are obligated for the payment of debt service on the Obligations issued pursuant to the Master Indenture. See also APPENDIX B.
As security for the payment of the Series 2017 Bonds, the Corporation will issue to the Authority its Direct Note Obligation, Series 2017 (South Dakota Health and Educational Facilities Authority) in the principal amount of $213,690,000∗ (the “Series 2017 Obligation”) under the Master Indenture, pursuant to the First Supplemental Master Indenture. The Series 2017 Obligation will be assigned by the Authority to the Bond Trustee pursuant to the Bond Indenture. The Series 2017 Obligation will be in the same aggregate principal amount and bear interest at the same rates as the Series 2017 Bonds, will have provisions as to redemption corresponding to the Series 2017 Bonds and will be payable in installments corresponding to the payments, when due, of principal of and interest and any premium on the Series 2017 Bonds (subject to certain credits relating to investment income and other monies held by the Bond Trustee). The Series 2017 Obligation will be issued by the Corporation in consideration of the loan by the Authority to the Corporation of the proceeds of the Series 2017 Bonds. Under the terms of the Series 2017 Obligation, the Members of the Obligated Group are obligated to make payments on the Series 2017 Obligation to
∗ Preliminary, subject to change.
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the Bond Trustee in amounts sufficient to provide for timely and full payment of principal of and interest and any premium on the Series 2017 Bonds when due. The Series 2017 Obligation will entitle the Bond Trustee, as the holder thereof, to the protection of the covenants, restrictions and other obligations imposed upon the Members of the Obligated Group by the Master Indenture.
Pursuant to the Master Indenture, each Member of the Obligated Group has pledged and granted a security interest in its Unrestricted Receivables to secure all Obligations issued under the Master Indenture, including the Series 2017 Obligation, as further described in and limited by the Master Indenture. A portion of accounts receivable of the Members which constitute Unrestricted Receivables and are pledged as security under the Master Indenture may be sold (despite such pledge and free and clear of such pledge and the pledge of the Master Indenture) if such sale is in accordance with the provisions of the Master Indenture and is on commercially reasonable terms. Any lien created under the Master Indenture on such accounts receivable would terminate and be immediately released upon any such sale with respect to any such accounts receivable so sold. See “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE” in APPENDIX C.
The Series 2017 Obligation will entitle the Bond Trustee, as the holder thereof, to the protection of the covenants, restrictions and other obligations imposed upon the Members of the Obligated Group by the Master Indenture. The Series 2017 Obligation will be secured on a parity with the Prior Obligations (as defined herein) and any Additional Obligations (as defined herein) issued and outstanding under the Master Indenture, and is entitled to the benefit and security thereof on a parity, simultaneously and equally, without preference, priority or distinction of any one Obligation over any other. The Members of the Obligated Group will be jointly and severally obligated on all Obligations issued under the Master Indenture, including the Series 2017 Obligation and the Prior Obligations. However, uncertainties exist as to the enforceability of the covenant of each Member of the Obligated Group to be jointly and severally liable for each Obligation. See “BONDHOLDERS’ RISKS – Certain Matters Relating to Enforceability of Master Indenture” herein.
Outstanding and Additional Indebtedness
The Members of the Obligated Group have previously issued (i) an outstanding Obligation (the “Series 2015 Bond Obligation”) under the Prior Master Indenture to secure the Variable Rate Demand Revenue Bonds, Series 2015 (Regional Health) (the “Series 2015 Bonds”) issued by the Authority on behalf of the Obligated Group under a bond indenture separate and apart from the Bond Indenture, the aggregate principal balance of which is approximately $60,745,000 as of June 30, 2017; (ii) an outstanding Obligation (the “Series 2015 Purchaser Obligation”) to secure the amounts payable, other than amounts due as bondholder, to the direct bank purchaser of the Series 2015 Bonds; and (iii) an outstanding $57,040,000 notional amount Direct Note Obligation, Series 2003 (the “Series 2003 Swap Obligation”) to secure the Swap Agreement (as defined herein), the principal amount of which varies from time to time (see “BONDHOLDERS’ RISKS – Interest Rate Swap Risk” herein) (the Series 2015 Bond Obligation, the Series 2015 Purchaser Obligation and the Series 2003 Swap Obligation are collectively referred to herein as the “Prior Obligations”). Simultaneously with the execution of the New Master Indenture, the Corporation will issue, with the consent of the holders of the Prior Obligations, Obligations under the First Supplemental Master Indenture in replacement and exchange for such Prior Obligations, such replacement Obligations to become Prior Obligations under the New Master Indenture. The Obligations issued under the Prior Master Indenture to secure the Refunded Bonds will no longer be outstanding under the Prior Master Indenture upon the refunding and defeasance of the Refunded Bonds, as described herein. See “PLAN OF FINANCE – The Refunding.”
The Series 2017 Obligation, the Prior Obligations and any Additional Obligations issued under the Master Indenture (whether or not pledged under the Bond Indenture) are collectively referred to herein as the “Obligations.” Upon the issuance of the Series 2017 Bonds, there will be approximately $274,085,000∗ in aggregate principal amount of Obligations outstanding under the Master Indenture (excluding for these purposes the Series 2003 Swap Obligation and the Series 2015 Purchaser Obligation).
In certain circumstances, the Members of the Obligated Group and any future Member of the Obligated Group may issue additional obligations (“Additional Obligations”) under the Master Indenture to the Authority or persons other than the Authority, which Additional Obligations will not be pledged under the Bond Indenture but
∗ Preliminary, subject to change.
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will be equally and ratably secured (except as described herein) with the other Obligations, including the Series 2017 Obligation. Under the terms of the Master Indenture, any Additional Obligations may be entitled to the benefit of security in addition to that securing the Series 2017 Obligation and the Prior Obligations presently outstanding under the Master Indenture, which additional security, Liens (as defined in the Master Indenture), letters or lines of credit or insurance need not be extended to any other Obligation (including the Series 2017 Obligation); provided, however, that the Master Indenture prohibits the Members of the Obligated Group from mortgaging any real property (other than Excluded Property (as defined in the Master Indenture)) unless such mortgage also equally and ratably secures all Obligations issued and to be issued under the Master Indenture. The Master Indenture also permits the incurrence of indebtedness by Members of the Obligated Group in forms other than Obligations issued under the Master Indenture. See “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE – Permitted Additional Indebtedness” in APPENDIX C hereto.
Except as described herein, the Series 2017 Obligation is secured on a parity with the Prior Obligations and any Additional Obligations under the Master Indenture, and the Obligations are entitled to the benefit and security thereof on a parity, simultaneously and equally, without preference, priority or distinction of any one Obligation over any other. See “SECURITY FOR THE SERIES 2017 BONDS.”
The Obligated Group has made certain covenants with the direct bank purchaser of the Series 2015 Bonds which are in addition to those described herein with respect to the Series 2017 Bonds.
Exchange of Series 2017 Obligation
The Bond Trustee is required to surrender the Series 2017 Obligation to the Master Trustee in exchange for a substitute Obligation under certain circumstances. See “SECURITY FOR THE SERIES 2017 BONDS – Exchange of Series 2017 Obligation” herein.
Limited Obligations
The Series 2017 Bonds are limited obligations of the Authority payable, except to the extent payable from the proceeds of the Series 2017 Bonds and investment income thereon, or proceeds of insurance and condemnation awards, solely from revenues derived by the Authority from payments to be made by the Obligated Group pursuant to the Series 2017 Obligation. See “SECURITY FOR THE SERIES 2017 BONDS” herein.
The Series 2017 Bonds do not constitute a debt or liability of the State or any political subdivision thereof, other than the Authority, or a pledge of the faith and credit of the State or any political subdivision thereof and shall be payable solely from the funds pledged therefor in accordance with the Bond Indenture. The Authority has no taxing power.
Appendices and Summaries
Information with respect to the Obligated Group, including certain financial information, and the organization, operation and utilization with respect to the Obligated Group is set forth in APPENDIX A to this Official Statement.
For summaries of the Master Indenture, the Bond Indenture and the Loan Agreement, as well as definitions of terms used herein, see APPENDIX C to this Official Statement.
This Official Statement contains descriptions of, among other matters, the Series 2017 Bonds, the Master Indenture, the Series 2017 Obligation, the Bond Indenture, the Loan Agreement and the Obligated Group. Such descriptions and information do not purport to be comprehensive or definitive. All references herein to the Master Indenture, the Series 2017 Obligation, the Bond Indenture and the Loan Agreement (as well as any other documents relating to the Series 2017 Bonds) are qualified in their entirety by reference to such documents, and references herein to the Series 2017 Bonds are qualified in their entirety by reference to the forms thereof included in the Bond Indenture. During the period of the offering, copies of such documents and other documents herein described will be available for inspection at the office of the Authority, 330 South Poplar, Pierre, South Dakota 57501, and at the principal office of Piper Jaffray & Co., 800 Nicollet Mall, Minneapolis, Minnesota 55402. Copies of such
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documents related to the Series 2017 Bonds will be available for inspection at the principal corporate trust office of the Master Trustee and the Bond Trustee after delivery of the Series 2017 Bonds.
Bondholders’ Risks
There are certain risks involved in the purchase of the Series 2017 Bonds. See the information herein under the caption “BONDHOLDERS’ RISKS.”
Capitalized Terms
Capitalized terms not otherwise defined herein shall have the meanings set forth in APPENDIX C hereto. The description and summaries of various documents hereinafter set forth do not purport to be comprehensive or definitive, and reference is made to each document for the complete details of all terms and conditions thereof. All statements herein are qualified in their entirety by reference to each document.
THE AUTHORITY
The Authority was created as a body politic and corporate and public instrumentality of the State for the purpose of exercising the powers conferred on it by virtue of the Act. The purpose of the Authority is to assist private nonprofit health and educational institutions in the State in the construction, acquisition, financing and refinancing of projects to be undertaken for health care and higher education programs and to assist South Dakota school districts to alleviate cash flow shortages and to finance vocational education facilities.
Membership and Organization
The Authority’s Act provides that the Authority be comprised of seven members who shall be appointed by the Governor. All members of the Authority serve without compensation but are entitled to reimbursement for actual or necessary expenses incurred in the performance of their duties under the Authority’s Act. The Authority shall annually elect one member to serve as Chairman, one member to serve as Vice Chairman and one member as Treasurer.
Members
Norbert Sebade, Chairman; resident of Rapid City; Past Regional President SD Southern Hills Region, First Interstate Bank of Rapid City; member of South Dakota Community Foundation, Children’s Home Society Foundation and Black Hills State University Foundation, former Chairman of the Board of Dakota Resources, and former Trustee of Regional Health Rapid City Hospital. Term expires June 30, 2018.
William F. Lynch, Treasurer; resident of Pierre; retired Chief Financial Officer of the Associated School Boards of South Dakota; member and former President of the Association of School Business Officials, a member of the Association of School Business Officers International; a member and former President of School Administrators of South Dakota Association. Term expires June 30, 2022.
James L. Scull, Jr., member; resident of Rapid City; CEO of Scull Construction Services, Inc.; President of Site Work Specialists, Inc.; BS Civil Engineering 1974, SDSMT; Vietnam Veteran, Army; Chairman of the Board, Black Hills Community Bank; Past President of Associated General Contractors of SD; Past President of Services Board and Operations Board, Black Hills Works; Past President of Rapid City Economic Development; President of South Dakota Youth Hunting Adventures; Past President of Wellspring, Inc.; South Dakota Philanthropist of the Year 2010. Term expires June 30, 2020.
David Timpe, member; resident of Hartford; CPA, FHFMA; Former Partner in regional CPA firm, Eide Bailly LLP for 37 years; interim CFO and CEO for six different healthcare organizations in Iowa and South Dakota. Board member and Audit Committee member for First Bank and Trust; Board member for Avera Health Plans; Board member for four South Dakota trust companies; Finance and Investment Committee member for the Corporation; Board member for Lloyd Companies; and Investment Committee member for the Presentation Sisters. Term expires June 30, 2018.
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David F. Fleck, member; resident of Brandon; Chairman of the Board for the Journey Group, Sioux Falls, South Dakota. Chairman of the Board of Directors for the Sioux Falls Area Chamber of Commerce, member of the Board and Past President of the Associated General Contractors of South Dakota, member of the Board of Trustees of Avera McKennan, member of the Board of Directors of the Associated General Contractors of America and member of the Board of Directors and Past President of DakotAbilities. Term expires June 30, 2020.
Gene N. Lebrun, member; resident of Pennington County; former partner and now of counsel with Lynn, Jackson, Shultz & Lebrun, P.C.; counsel for South Dakota School of Mines & Technology, counsel and former member of Board of Directors for Westhills Village, Commissioner South Dakota Uniform Laws Commission, member and past president of National Conference of Commissioners on Uniform State Laws, former member of Advisory Commission on Electronic Commerce, former member and Speaker of the South Dakota House of Representatives. Term expires June 30, 2018.
Donald E. Scott, PhD; member; resident of Sioux Falls; former Vice President and CFO of Augustana College, former Vice President and Trust Officer of The First National Bank in Sioux Falls; former Chairman and President of the State Bank of Hendricks (MN); current Governor of the General Society of Mayflower Descendants in South Dakota; former President of the First Lutheran Church Foundation; former Treasurer of the South Dakota Hall of Fame; former President of the Mary Chilton Chapter of the Daughters of the American Revolution Foundation; Chairman of the Initial Steering Committee of the Boe Forum on Public Events at Augustana University; former Chair of the Lutheran Social Services of South Dakota Foundation; member American Legion Post 184. Term expires June 30, 2020.
Representatives and General Counsel
Donald A. Templeton, Executive Director and Secretary of the Authority, is responsible for the general management of its affairs. Mr. Templeton is a resident of Pierre, South Dakota. He is the past President and is currently the Treasurer and a member of the Board of Directors for the National Association of Health and Educational Facilities Finance Authorities. He is on the board of managers of the South Dakota Authority Captive Insurance Company, LLC and is a past member of the Muni Council. He is also a current member of the South Dakota Chapter of Healthcare Financial Management Association and has served as a member on its Board of Directors.
Redstone Law Firm LLP, attorneys, Sioux Falls, South Dakota, serve as general counsel for the Authority.
Powers of the Authority
Under the Authority’s Act, the Authority is authorized and empowered, among other things: to issue bonds, notes and other obligations for any of its corporate purposes and to refund the same; to charge and collect rates, rents, fees and charges for the use of projects or for services furnished by facilities in relation thereto; to construct, reconstruct, renovate, replace, maintain, repair, operate, lease or regulate projects for participating health institutions or participating educational institutions incurred with respect to the construction or acquisition of facilities by such institutions; to establish or cause to be established rules and regulations for the use of projects; to receive in relation to project loans or grants from any public agency or any other source; to make loans to participating health institutions or participating educational institutions for the costs of projects; to mortgage any project and the site thereof for the benefit of the holders of bonds issued to finance such project; and to do all things necessary or convenient to carry out the purpose of the Act. The bonds, notes and other obligations of the Authority, including the Series 2017 Bonds, do not constitute indebtedness of the State. The Authority has no taxing power.
The Authority’s Act provides that the Authority shall have the power to employ consulting engineers, architects, attorneys, accountants, construction and financial experts, and such other employees as in its judgment may be necessary.
Indebtedness of the Authority
As of June 30, 2017 the Authority had issued $4,299,503,017 of bonds, leases or notes for 243 projects or programs (including certificates of participation issued in school district borrowing programs sponsored by the Authority), of which $1,501,243,388 was then outstanding.
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With respect to additional indebtedness of the Authority, the Authority intends to enter into separate agreements with participating health or educational institutions in the State for the purpose of providing financing for eligible projects and the Authority may enter into other arrangements for financing programs for students in health care, for South Dakota school districts or other programs as may be authorized under the Act.
PLAN OF FINANCE
The proceeds of the Series 2017 Bonds will be loaned by the Authority to the Corporation and applied to, together with certain other funds, (i) refund all or a portion of the Refunded Bonds (the “Refunding”); (ii) pay, or reimburse the “costs” (as such term is defined in the Act) of the Project as further described herein; and (iii) pay certain expenses incurred in connection with the issuance of the Series 2017 Bonds and the Refunding.
The Refunding
A portion of the proceeds of the Series 2017 Bonds will be used to refund the Refunded Bonds. The proceeds of the Series 2010 Bonds were used, among other things, to (i) pay costs of acquiring, constructing, remodeling, renovating and/or equipping projects at the Hospital, Regional Health Medical Clinic North Avenue (formerly known as Spearfish Regional Medical Clinic), Regional Health Medical Clinic North 10th Street (formerly known as Queen City Regional Medical Clinic) and certain other facilities of the System located in Spearfish and Rapid City, South Dakota; (ii) currently refund all of the outstanding $78,405,000 original principal amount South Dakota Health and Educational Facilities Authority Revenue Refunding Bonds, Series 1998 (Rapid City Regional Hospital Issue) (the “Series 1998 Bonds”); (iii) currently refund all of the outstanding $14,880,000 original principal amount South Dakota Health and Educational Facilities Authority Revenue Refunding Bonds, Series 1999 (Rapid City Regional Hospital Issue) (the “Series 1999 Bonds” and, together with the Series 1998 Bonds, the “Series 1998/1999 Bonds”); and (iv) pay certain expenses incurred in connection with the issuance of the Series 2010 Bonds and the current refunding of the Series 1998/1999 Bonds, the proceeds of which, among other things, refunded several prior bond issues dating back to 1976.
The proceeds of the Series 2011 Bonds were used, among other things, to (i) pay costs of acquiring, constructing, remodeling, renovating and/or equipping projects at the Regional Health Medical Clinic – Flormann Street (formerly known as the Aspen Center), Regional Health Rapid City Hospital, Regional Health Spearfish Hospital (formerly known as Spearfish Regional Hospital), and certain other facilities of the System located in Rapid City, South Dakota; (ii) refund all of the outstanding $39,750,000 original principal amount South Dakota Health and Educational Facilities Authority Revenue Bonds, Series 2001 (Rapid City Regional Hospital) (the “Series 2001 Bonds”); and (iii) pay certain expenses incurred in connection with the issuance of the Series 2011 Bonds and the refunding of the Series 2001 Bonds, the proceeds of which, among other things, paid for costs of projects at Regional Health Rapid City Hospital and in other facilities of the System in South Dakota.
For a further description of the health care facilities of the System, see APPENDIX A.
The Refunded Bonds will be advance refunded and defeased to their respective Redemption Date (as hereinafter defined). The Series 2010 Bonds will be called for redemption on September 1, 2020, and the Series 2011 Bonds will be called for redemption on September 1, 2020 (the “Redemption Date”). On the Redemption Date, the respective Refunded Bonds will be redeemed at a redemption price equal to 100% of the principal amount thereof. Escrow agreements among the Corporation, the Authority and The First National Bank in Sioux Falls, as escrow agent (the “Escrow Agent”), will provide for the refunding of all of the Refunded Bonds and their call for redemption. The amounts deposited with the Escrow Agent will be held in cash and certain obligations of the United States of America, maturing as to principal and interest in such amounts and at such times so as to be sufficient to pay principal and interest on the Refunded Bonds until the Redemption Date and to pay the respective redemption price of the Refunded Bonds on the Redemption Date. See “VERIFICATION OF CERTAIN MATHEMATICAL COMPUTATIONS” herein. The portion of the Series 2010 Bonds that cannot be advance refunded with proceeds of the Series 2017 Bonds will be defeased with funds of the Corporation (see “ESTIMATED SOURCES AND USES” herein).
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The Project
The Project consists of acquiring, constructing, remodeling, renovating and equipping certain health care facilities of the System, and all necessary and attendant facilities, equipment, site work and utilities appurtenant thereto, including, but not limited to (i) projects in or attached to the Hospital (the “Main Unit”), including, but not limited to the following projects: (1) construction of a three-story, approximately 760 space parking structure and a two-story, approximately 738 space parking structure, (2) construction and equipping of an approximately 81,000 square foot, four-story hospital office building adjacent to the Main Unit to provide physician office space, (3) the construction and equipping of an approximately 290,000 square foot, four-story patient bed tower adjacent to the Main Unit, which will include, among other things, one floor with 32 beds, one floor with shelled space for 32 additional beds, a new emergency department, an on-roof helipad and a new entrance/lobby, (4) the expansion, renovation and equipping of the central utility plant to accommodate the foregoing new facilities, and (5) the renovation and equipping of the Main Unit to connect the Main Unit with the new facilities; (ii) construction of an approximately 115,000 square foot, two-story eight licensed bed orthopedic, sports medicine and rehabilitation specialty hospital in Rapid City, South Dakota, which specialty hospital will include inpatient beds, surgery and recovery suites, procedure rooms, physician clinic space, space for ancillary patient care services and rehabilitative and sports medicine services, and other patient care, supply and support areas; (iii) projects in or attached to Regional Health Sturgis Hospital and Clinic, including, but not limited to (1) the construction of an approximately 26,000 square foot addition to the existing hospital building to house additional physician clinic space and to expand the emergency department, (2) construction of a new main entrance to the hospital and (3) renovations to the patient care, support and supply areas of the existing hospital building; and (iv) construction of an approximately 46,000 square foot, one story, 11 licensed bed replacement acute care hospital and clinic in Custer, South Dakota, which acute care hospital will include inpatient beds, an emergency department, ancillary and other patient care services, physician clinic space and supply and support areas.
For a further description of the Project and the health care facilities of the System, see APPENDIX A.
ESTIMATED SOURCES AND USES OF FUNDS
The proceeds of the sale of the Series 2017 Bonds (other than accrued interest, if any) and the estimated uses of such proceeds and other funds are as follows:
Sources of Funds* Principal Amount of Series 2017 Bonds $213,690,000 Net Original Issue [Premium] [Discount] Corporation Equity Contribution(1) 15,120,000 Total Sources $
Uses of Funds* Deposit to Project Fund $140,071,465 Deposit to Refunding Escrows 69,595,339 Reimbursement for Prior Expenditures 37,500,000 Costs of Issuance(2) Total Uses $
* Preliminary, subject to change. (1) To be applied to refunding escrow for the Series 2010 Bonds. (2) Includes the Underwriters’ discount, legal, accounting, administrative, and miscellaneous fees and expenses.
THE SERIES 2017 BONDS
General Description of the Series 2017 Bonds
The Series 2017 Bonds will be issued as fully registered bonds in denominations of $5,000 or any integral multiple thereof. The Series 2017 Bonds, as initially issued, will be dated the date of the original issuance thereof. Except as described in the next sentence, subsequently issued Series 2017 Bonds will be dated as of the later of the
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date of the original issuance thereof or the most recent preceding Interest Payment Date to which interest has been paid thereon. Series 2017 Bonds issued on an Interest Payment Date to which interest has been paid will be dated as of such date. Interest on the Series 2017 Bonds will be payable on March 1 and September 1 of each year, commencing March 1, 2018.
The Series 2017 Bonds shall bear interest (based on a 360-day year of twelve 30-day months) at the respective rates and shall mature, subject to prior redemption as described herein, at such times as are shown on the inside front cover page of this Official Statement. The principal of and interest on the Series 2017 Bonds 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. Principal shall be payable (i) upon presentment of the Series 2017 Bonds at the principal corporate trust office of the Bond Trustee in Sioux Falls, South Dakota, or of a successor trustee under the Bond Indenture, or at the office of any alternate Paying Agent, if any, named in any such Series 2017 Bond or (ii) as to any registered owner of $1,000,000 or more in aggregate principal amount of Series 2017 Bonds who so elects and who has presented its Series 2017 Bond on or prior to the payment date, by wire transfer of funds to such wire transfer address within the continental United States as such registered owner shall have furnished to the Bond Trustee in writing on or prior to the payment date. Payment of the interest (other than defaulted interest, which is paid as described in the following paragraph) on any Series 2017 Bond shall be made to the person appearing on the Bond Register as the registered owner thereof as of the close of business of the Bond Trustee on the Record Date for such interest payment and shall be paid (i) by check or draft of the Bond Trustee mailed on the Interest Payment Date to the registered owner of the Series 2017 Bond at the address of the registered owner as it appears on the Bond Register or at such other address as is furnished to the Bond Trustee in writing by such owner on or prior to the Record Date for such interest payment or (ii) as to any registered owner of $1,000,000 or more in aggregate principal amount of Series 2017 Bonds who so elects, by wire transfer of funds to such owner on the applicable Interest Payment Date to such wire transfer address within the continental United States as such registered owner shall have furnished to the Bond Trustee in writing prior to the Record Date for such Interest Payment Date.
In the event of default in the payment of interest due on an Interest Payment Date, the defaulted interest will be paid to the holders of the Series 2017 Bonds on which such defaulted interest is to be paid in whose names such Series 2017 Bonds are registered at the close of business of the Bond Trustee on a special record date for the payment of such defaulted interest established by notice mailed by the Bond Trustee to the registered owners of such Series 2017 Bonds at the addresses of such owners as they appear on the Bond Register, such special record date to be not more than 15 days nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Bond Trustee of the notice of the proposed payment.
For a description of the method of payment of principal and interest on the Series 2017 Bonds while in the Book-Entry System, see APPENDIX F hereto.
Redemption
General. The Series 2017 Bonds are subject to mandatory, optional and extraordinary redemption, all as described below. No redemption (other than mandatory sinking fund redemptions) of less than all of the Series 2017 Bonds at the time outstanding shall be made unless the aggregate principal amount of all such Series 2017 Bonds to be redeemed is equal to or greater than $100,000. In lieu of redeeming Series 2017 Bonds pursuant to the provisions of the Bond Indenture described under this caption, the Bond Trustee may, at the request of the Corporation, use such funds otherwise available under the Bond Indenture for redemption of Series 2017 Bonds to purchase Series 2017 Bonds in the open market for cancellation at a price not exceeding their then applicable redemption price.
In the case of any optional or extraordinary redemption or any purchase and cancellation of Series 2017 Bonds with serial maturities, the Authority will receive credit against its required Bond Sinking Fund deposits with respect to the Series 2017 Bonds of such serial maturities. In the case of any optional or extraordinary redemption or any purchase and cancellation of term Series 2017 Bonds, the Authority will receive credit against its required Bond Sinking Fund deposits with respect to such term Series 2017 Bonds in such order as the Corporation elects in writing prior to such optional or extraordinary redemption or purchase and cancellation or, if no such election is made, in the inverse order thereof.
Optional Redemption of the Series 2017 Bonds. The Series 2017 Bonds maturing prior to September 1, 20[__] are not subject to redemption prior to maturity. The Series 2017 Bonds maturing on or after September 1,
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20[__] are subject to redemption prior to maturity on or after September 1, 20__ at the option of the Authority, upon direction of the Corporation, out of amounts prepaid on the Series 2017 Obligation and deposited in the Optional Redemption Fund under the Bond Indenture, in whole or in part at any time, and if in part by maturities, or portions thereof as may be designated by the Corporation or if not so designated, in inverse order of maturity (less than all of a single maturity of such Series 2017 Bonds to be selected randomly by lot in such manner as may be designated by the Bond Trustee), at the principal amount of the Series 2017 Bonds to be redeemed, plus accrued interest thereon to the date of redemption, without premium.
Option to Purchase. The Authority and, by their acceptance of the Series 2017 Bonds, the Bondholders, irrevocably grant to the Corporation the option to purchase, at any time and from time to time, any Series 2017 Bond which is redeemable pursuant to the provisions of the Bond Indenture described above, at a purchase price equal to the redemption price therefor. To exercise such option, the Corporation shall give the Bond Trustee a Written Request exercising such option within the same time period as described below under the subcaption “Notice of Redemption” as though such Written Request were a written request of the Authority for redemption, and the Bond Trustee shall thereupon give the owners of the Series 2017 Bonds to be purchased notice of such purchase in the manner specified under the subcaption “Notice of Redemption” below as though such purchase were a redemption. Any such purchase of Series 2017 Bonds shall be mandatory and enforceable against the owners of the Series 2017 Bonds. On the date fixed for purchase pursuant to any exercise of such option, the Corporation is required to pay the purchase price of the Series 2017 Bonds then being purchased to the Bond Trustee in immediately available funds, and the Bond Trustee is required to pay the same to the owners of such Series 2017 Bonds against delivery thereof. Following such purchase, the Bond Trustee is required to cause such Series 2017 Bonds to be registered in the name of the Corporation or its nominee and is required to deliver such Series 2017 Bonds to the Corporation or its nominee. In the case of the purchase of less than all of the Series 2017 Bonds, the Series 2017 Bonds to be purchased will be selected in accordance with the provisions of the Bond Indenture as though such purchase were a redemption. No purchase of Series 2017 Bonds pursuant to the provisions of the Bond Indenture summarized in this paragraph will operate to extinguish the indebtedness of the Authority evidenced thereby. Notwithstanding the foregoing, no purchase shall be made pursuant to the provisions of the Bond Indenture summarized in this paragraph unless the Corporation shall have delivered to the Bond Trustee and the Authority concurrently therewith an Opinion of Bond Counsel to the effect that such purchase will not adversely affect the exclusion of interest on the Series 2017 Bonds from gross income for federal income tax purposes.
Mandatory Redemption. The Series 2017 Bonds are subject to mandatory redemption by lot under the Bond Sinking Fund provisions of the Bond Indenture at 100% of the principal amount so redeemed or paid, without premium, in accordance with the schedule set forth below:
Series 2017 Term Bonds Maturing September 1, 20__
September 1 Principal of the Year Amount
(1) Final Maturity
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Series 2017 Term Bonds Maturing September 1, 20__
September 1 Principal of the Year Amount
(1) Final Maturity
Extraordinary Redemption. The Series 2017 Bonds are subject to redemption prior to maturity under the terms of the Bond Indenture in the event of damage to or destruction of the Facilities of any Member of the Obligated Group or any part thereof, or condemnation or sale consummated under threat of condemnation of the Facilities of any Member of the Obligated Group or any part thereof, if the Net Proceeds of insurance, condemnation or sale received in connection therewith and applied to make prepayments on the Series 2017 Obligation pledged under the Bond Indenture exceeds 5% of the value of all of the net Property, Plant and Equipment of the Obligated Group, but only to the extent of the funds provided for under the Master Indenture. If called for redemption in the events referred to above, the Series 2017 Bonds shall be subject to redemption by the Authority at the direction of the Corporation at any time, in whole or in part, and if in part by maturities designated by the Corporation (less than all of a single maturity to be randomly selected by lot utilizing such method as may be designated by the Bond Trustee), at the principal amount thereof plus accrued interest to the redemption date and without premium; provided, however, that in no event shall the principal amount of Series 2017 Bonds so redeemed exceed the amount of such Net Proceeds. See “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE – Damage or Destruction” and “– Condemnation” in APPENDIX C hereto.
Notice of Redemption. Notice of the call for redemption of any Series 2017 Bonds shall be given by mailing a copy of the notice not less than 30 days or more than 60 days prior to the redemption date to the registered owner of each Series 2017 Bond to be redeemed to the address shown on the Bond Register; provided, however, that failure to give such notice by mailing or any defect in the notice of mailing as to any Series 2017 Bond will not affect the validity of any proceedings for redemption as to any Series 2017 Bond with respect to which notice was otherwise properly given to the owner thereof. Except in the case of mandatory redemption of the Series 2017 Bonds, prior to the date that the redemption notice is first mailed to the owners of the Series 2017 Bonds as aforesaid, funds shall be placed with the Bond Trustee to pay the principal of such Series 2017 Bonds, the accrued interest thereon to the redemption date, and the premium, if any, thereon or such notice shall state that the redemption is conditional on such funds being deposited on or prior to the redemption date and that failure to make such a deposit will not constitute an event of default under the Bond Indenture.
Cessation of Interest. Upon the happening of the redemption conditions in the Bond Indenture, all Series 2017 Bonds, or portions thereof, called for redemption will cease to bear interest after the applicable redemption date, shall no longer be protected by the Bond Indenture and shall not be deemed to be outstanding under the provisions of the Bond Indenture.
Mutilated, Lost, Stolen or Destroyed Bonds
In the event any temporary or definitive Series 2017 Bond is mutilated, lost, stolen or destroyed, the Authority may execute and the Bond Trustee may authenticate a new Series 2017 Bond of like form, date, maturity and denomination as that mutilated, lost, stolen or destroyed; provided that, in the case of any mutilated Series 2017
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Bond, such mutilated Series 2017 Bond shall first be surrendered to the Bond Trustee, and in the case of any lost, stolen or destroyed Series 2017 Bond, there shall be first furnished to the Authority and the Bond Trustee evidence of such loss, theft or destruction satisfactory to the Authority and the Bond Trustee, together with indemnity satisfactory to them. In the event any such Series 2017 Bond shall have matured, instead of issuing a duplicate Series 2017 Bond the Bond Trustee may pay the same without surrender thereof. The Authority and the Bond Trustee may charge the owner of such Series 2017 Bond with their reasonable fees and expenses in this connection.
Registration, Transfer and Exchange of Bonds; Persons Treated as Owners
For a description of matters pertaining to transfer and exchanges of Series 2017 Bonds while in the Book- Entry System, see APPENDIX F hereto.
The Bond Register shall be kept by the Bond Trustee at its principal corporate trust office, and the Bond Trustee is constituted and appointed the Bond Registrar of the Authority. At reasonable times and under reasonable regulations established by the Bond Trustee and upon payment of reasonable fees to the Bond Trustee, said Bond Register may be inspected and copied by the Corporation, the Authority or the authorized representative of any owner or owners of 10% or more of the principal amount of the Series 2017 Bonds then outstanding.
Upon surrender for transfer of any Series 2017 Bond at the principal corporate trust office of the Bond Trustee, the Authority will execute and the Bond Trustee will authenticate and deliver in the name of the transferee or transferees a new fully registered Series 2017 Bond or Bonds of the same maturity and of authorized denominations for the aggregate principal amount which the registered owner is entitled to receive. Any Series 2017 Bond or Series 2017 Bonds may be exchanged at said office of the Bond Trustee for a like aggregate principal amount of Series 2017 Bond or Series 2017 Bonds of the same maturity of other authorized denominations.
All Series 2017 Bonds presented for transfer or exchange shall be accompanied by a written instrument or instruments of transfer or authorization for exchange, in form and with guaranty of signature satisfactory to the Bond Trustee, duly executed by the registered owner or by such registered owner’s duly authorized attorney.
A service charge may be imposed upon the owner of any Series 2017 Bond for any exchange or transfer of such Series 2017 Bond. The Authority and the Bond Trustee may also require the payment by the owner requesting an exchange or transfer of Bonds of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto, except in the case of the issuance of a Series 2017 Bond or Bonds for the unredeemed portion of a Series 2017 Bond surrendered for redemption.
The Authority and the Bond Trustee will not be required to register the transfer of or exchange of any Series 2017 Bonds after notice calling such Series 2017 Bond or portion thereof for redemption has been mailed or during the 15-day period next preceding the mailing of notice of redemption with respect to Series 2017 Bonds of the same maturity.
As to any Series 2017 Bond, the Authority and the Bond Trustee may treat the registered owner of any Series 2017 Bond as the absolute owner thereof for all purposes and shall not be bound by any notice to the contrary. All payments of or on account of the principal of and interest on any such Series 2017 Bond shall be made only to or upon the written order of the registered owner thereof or such registered owner’s legal representative, but such registration may be changed as described above. All such payments shall be valid and effectual to satisfy and discharge the liability upon such Series 2017 Bond to the extent of the sum or sums so paid.
Defeasance and Retained Call Rights
The Bond Indenture provides that the Series 2017 Bonds may be defeased prior to payment or redemption by the deposit of cash or Government Obligations, or a combination thereof, sufficient to provide for the payment of all principal of and interest on the Series 2017 Bonds through maturity or the date upon which the Series 2017 Bonds will be redeemed pursuant to the Bond Indenture. Series 2017 Bonds that are defeased will no longer be entitled to any security under the Bond Indenture or the Master Indenture, except for the right to payment from such moneys or Government Obligations.
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All or a portion of the Series 2017 Bonds may, in the future, be refunded or defeased to any redemption date or maturity date for the Series 2017 Bonds. In connection with the issuance of the Series 2017 Bonds, the Authority (based upon direction of the Corporation) has reserved all of the call rights pertaining thereto, unless the Authority, at the direction of the Corporation, shall have irrevocably elected to waive any future right to call the Series 2017 Bonds or portions thereof for redemption prior to maturity. Therefore, subject to certain requirements in the Bond Indenture, subsequent to the date that cash and/or Government Obligations are deposited with the Bond Trustee to provide for the payment of all or any portion of the Series 2017 Bonds at the respective maturity dates therefor or any redemption date therefor, the Authority may, if directed by the Corporation, elect to pay such Series 2017 Bonds (or any portion thereof) prior to such maturity date or redemption date therefor. See “SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE — Defeasance; Bonds Deemed Paid” in APPENDIX C hereto.
SECURITY FOR THE SERIES 2017 BONDS
Limited Obligation of Authority and the State of South Dakota
The Series 2017 Bonds are special and limited obligations of the Authority and are payable solely from payments to be made under the Loan Agreement and on the Series 2017 Obligation (excluding Unassigned Rights). The Series 2017 Bonds and the interest and premium, if any, payable thereon do not constitute a debt or liability of the State or of any political subdivision thereof other than the Authority or a pledge of the faith and credit of the State or any political subdivision thereof, but shall be payable solely from the funds pledged therefor in accordance with the Bond Indenture. Issuance of the Series 2017 Bonds does not, directly, indirectly or contingently, obligate the State or any political subdivision thereof to levy any form of taxation for the payment thereof or to make any appropriation for their payment. The Series 2017 Bonds and the interest payable thereon do not now and shall never constitute a debt of the State within the meaning of the Constitution or the statutes of the State and do not now and shall never constitute a charge against the credit or taxing power of the State or of any political subdivision thereof. The State shall not in any event be liable for the payment of the principal of, premium, if any, or interest on the Series 2017 Bonds or for the performance of any pledge, mortgage, obligation or agreement of any kind whatsoever which may be undertaken by the Authority. No breach by the Authority of any such pledge, mortgage, obligation or agreement may impose any liability, pecuniary or otherwise, upon the State or any charge upon its general credit or against its taxing power. The Authority has no taxing power.
The Loan Agreement
The Loan Agreement provides that the Authority shall loan the proceeds of the Series 2017 Bonds to the Corporation and that the Corporation shall repay such loan by making payments to the Bond Trustee in amounts sufficient to pay the principal of, premium, if any, and interest on the Series 2017 Bonds when due. The Authority will pledge and assign certain of its rights under the Loan Agreement to the Bond Trustee as security for the Series 2017 Bonds. The Loan Agreement also imposes certain restrictions on the actions of the Corporation for the benefit of the Authority and the owners of the Series 2017 Bonds. See “SUMMARY OF CERTAIN PROVISIONS OF THE LOAN AGREEMENT” in APPENDIX C hereto.
The Master Indenture and the Series 2017 Obligation
Pursuant to the Master Indenture, the Corporation will issue the Series 2017 Obligation to the Authority as security for the Series 2017 Bonds. The Series 2017 Obligation will obligate the Members of the Obligated Group to make payments to the Authority in the same amounts and at the same times as the loan repayments are due from the Corporation as set forth under the Loan Agreement. The Corporation’s obligations to make loan repayments under the Loan Agreement will be satisfied to the extent payments are made on the Series 2017 Obligation.
The Series 2017 Obligation is the joint and several obligation of each Member of the Obligated Group. The Master Indenture permits the Members of the Obligated Group to (i) issue Additional Obligations, (ii) incur other Indebtedness, (iii) enter into guarantees or (iv) sell, lease or otherwise dispose of Property, all upon the terms and conditions specified therein. See “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE – Permitted Additional Indebtedness” and “ – Sale, Lease or Other Disposition of Property” in APPENDIX C. Pursuant to the terms of the Master Indenture, the Members of the Obligated Group will covenant that they will not create or permit Liens on their Property (which does not include certain property defined as
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Excluded Property in the Master Indenture), other than Permitted Encumbrances (as the foregoing terms are defined in the Master Indenture) unless certain requirements set forth in the Master Indenture are met. The Master Indenture prohibits the Members of the Obligated Group from mortgaging any real property (other than Excluded Property) unless such mortgage also equally and ratably secures all Obligations issued and to be issued under the Master Indenture. See “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE – Liens on Property” and “DEFINITIONS OF CERTAIN TERMS” in APPENDIX C.
The Series 2017 Obligation will entitle the Bond Trustee, as the holder thereof, to the protection of the covenants, restrictions and other obligations imposed upon the Members of the Obligated Group by the Master Indenture. The Master Indenture provides that payments on all outstanding Obligations, including the Prior Obligations, the Series 2017 Obligation and any Additional Obligations issued under the Master Indenture, shall be the joint and several obligations of each Member of the Obligated Group. Notwithstanding limitations on and uncertainties as to the enforceability of the covenant of each Member of the Obligated Group in the Master Indenture to be jointly and severally liable for each Obligation (see “BONDHOLDERS’ RISKS – Certain Matters Relating to Enforceability of Master Indenture”), the accounts of the Members of the Obligated Group will be combined for financial reporting purposes and such combined accounts will be used in determining whether various covenants and tests contained in the Master Indenture (including tests relating to the incurrence of Additional Indebtedness) are met.
Under the Master Indenture, Members may cease to be part of the Obligated Group and have no ongoing responsibility for payment of the Series 2017 Obligation and other entities may become Members of the Obligated Group. See “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE – Entrance Into the Obligated Group” and “ – Cessation of Status as a Member of the Obligated Group” in APPENDIX C.
For a more detailed description of the Master Indenture, see APPENDIX C hereto.
Security Interest in Unrestricted Receivables
Pursuant to the Master Indenture, each Member of the Obligated Group has pledged and granted a security interest in its Unrestricted Receivables to secure all Obligations issued under the Master Indenture, including the Series 2017 Obligation, as further described in and limited by the Master Indenture. Accounts receivable of the Members which constitute Unrestricted Receivables and are pledged as security under the Master Indenture may be sold (despite such pledge and free and clear of such pledge and the pledge of the Master Indenture) if such sale is in accordance with the provisions of the Master Indenture and is on commercially reasonable terms. Any lien created under the Master Indenture on such accounts receivable would terminate and be immediately released upon any such sale with respect to any such accounts receivable so sold.
For a description of the ability of the Members of the Obligated Group to sell, lease, transfer assets and encumber property, including Unrestricted Receivables, see “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE – Liens on Property” and “– Sale, Lease or Other Disposition of Property” in APPENDIX C hereto.
The Bond Indenture
Pursuant to the Bond Indenture, the Authority will assign to the Bond Trustee, as security for repayment of the Series 2017 Bonds, the following (collectively, the “Trust Estate”):
1. All right, title and interest of the Authority in and to the Series 2017 Obligation pledged and assigned under the Bond Indenture for the payment of the Series 2017 Bonds and all sums payable in respect of the indebtedness evidenced thereby.
2. All right, title and interest of the Authority in and to the Loan Agreement and the amounts payable to the Authority thereunder (excluding fees and expenses payable to the Authority and the Authority’s right to indemnification under the Loan Agreement, the Authority’s right to execute and deliver supplements and amendments to the Loan Agreement and the Authority’s right to exercise the same rights of discretion as are granted to the Master Trustee under the Master Indenture).
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3. Any and all other property of every kind and nature from time to time after the execution of the Bond Indenture, by delivery or by writing of any kind, conveyed, pledged, assigned or transferred as and for additional security under the Bond Indenture by the Authority, the Corporation or any other Member of the Obligated Group or by anyone on their behalf to the Bond Trustee, including, without limitation, funds of the Corporation held by the Bond Trustee as security for the Series 2017 Bonds.
Additional Indebtedness
After giving effect to the issuance of the Series 2017 Bonds and the application of the proceeds thereof, the Series 2017 Obligation and the Prior Obligations will constitute the only Obligations outstanding under the Master Indenture. The Master Indenture permits the current Members and any future Members of the Obligated Group to incur Additional Indebtedness (including guaranties), all upon the terms and subject to the conditions specified therein. Such Additional Indebtedness may, but need not, be evidenced or secured by an Obligation. See information under the caption “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE – Permitted Additional Indebtedness” in APPENDIX C hereto. Except to the extent entitled to the benefits of additional security as permitted by the Master Indenture, all Obligations will be equally and ratably secured by the Master Indenture with the Prior Obligations and the Series 2017 Obligation.
Subject to certain conditions set forth in the Master Indenture, such Additional Indebtedness (including Additional Obligations) may be entitled to the benefit of security in addition to that securing the Series 2017 Obligation and the Prior Obligations presently outstanding under the Master Indenture, which additional security, Liens (as defined in the Master Indenture), letters or lines of credit or insurance need not be extended to any other Obligation (including the Series 2017 Obligation); provided, however, that the Master Indenture prohibits the Members of the Obligated Group from mortgaging any real property (other than Excluded Property (as defined in the Master Indenture)) unless such mortgage also equally and ratably secures all Obligations issued and to be issued under the Master Indenture. See “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE – Liens on Property” in APPENDIX C hereto. The Master Indenture provides that a Supplemental Master Indenture pursuant to which one or more series of Obligations entitled to additional security are issued may provide for such amendments to the provisions of the Master Indenture, including the provisions thereof relating to the exercise of remedies upon the occurrence of an event of default, as are necessary to provide such security and to permit realization upon such security solely for the benefit of the Obligations entitled thereto.
In determining compliance with a number of provisions of the Master Indenture, including the provisions governing the incurrence of Additional Indebtedness, the Members of the Obligated Group and any future Members of the Obligated Group may, under certain circumstances, assume that certain types of Indebtedness which bear interest at varying rates and which may not be payable over an extended term on a level annual debt service basis will in fact bear interest over time at interest rates approximating current or recent long term fixed rates, will remain outstanding for a long term and will be amortized on a level debt service basis. The actual interest rates and payments on such Indebtedness may vary from such assumptions, and such variance may be material. See “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE – Calculation of Debt Service and Debt Service Coverage” in APPENDIX C hereto.
Exchange of Series 2017 Obligation
The Bond Trustee is required to surrender the Series 2017 Obligation to the Master Trustee in exchange for a substitute Obligation issued pursuant to a different master indenture and by a different obligated group upon the delivery of certain showings, including an opinion of bond counsel and written confirmation from each rating agency then rating the Series 2017 Bonds that the replacement of the Series 2017 Obligation will not, by itself, result in a reduction in, or withdrawal of, the then current ratings (not considering outlook) on the Series 2017 Bonds. None of the current Members of the Obligated Group are required to be members of the new obligated group. See “SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE – Release and Substitution of Series 2017 Obligation” in APPENDIX C.
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Book-Entry Only System
Payments of principal of, premium, if any, and interest on the Series 2017 Bonds will be made directly to Cede & Co. by the Bond Trustee, so long as Cede & Co. is the registered owner of the Series 2017 Bonds. Disbursement of such payments to the DTC Direct Participants (as defined in APPENDIX F) is the responsibility of The Depository Trust Company, New York, New York (“DTC”) and disbursement of such payments to the purchasers of beneficial ownership interests in the Series 2017 Bonds is the responsibility of DTC Direct Participants and Indirect Participants (as defined in APPENDIX F). For further information regarding Cede & Co., DTC and the book-entry only system, see “APPENDIX F – BOOK-ENTRY ONLY SYSTEM.”
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ANNUAL DEBT SERVICE REQUIREMENTS
The following table sets forth, for each Fiscal Year ending June 30, the amounts to be required in each year for the payment of interest when due and of principal at maturity or upon mandatory redemption for the Series 2017 Bonds and the other long-term debt, including outstanding bonded indebtedness, of the Members of the Obligated Group.
Series 2017 Bonds Fiscal Year Ended Series 2015 Bonds Total Debt June 30, Principal* Interest* Debt Service (1) Service*
2018 $ - $ 4,954,215 $ 5,670,918 $ 10,625,133 2019 4,870,000 10,128,350 5,613,676 20,612,026 2020 5,180,000 9,877,100 5,551,344 20,608,444 2021 5,510,000 9,609,850 5,486,202 20,606,052 2022 5,820,000 9,326,600 5,455,799 20,602,399 2023 6,220,000 9,025,600 5,363,868 20,609,468 2024 4,520,000 8,757,100 7,332,391 20,609,491 2025 4,760,000 8,525,100 7,323,433 20,608,533 2026 3,135,000 8,327,725 9,143,077 20,605,802 2027 675,000 8,232,475 10,073,776 18,981,251 2028 1,175,000 8,186,225 9,386,828 18,748,053 2029 6,705,000 7,989,225 14,694,225 2030 5,590,000 7,681,850 13,271,850 2031 5,875,000 7,395,225 13,270,225 2032 6,175,000 7,093,975 13,268,975 2033 6,495,000 6,777,225 13,272,225 2034 6,775,000 6,496,288 13,271,288 2035 7,015,000 6,254,963 13,269,963 2036 7,285,000 5,986,500 13,271,500 2037 7,580,000 5,689,200 13,269,200 2038 7,890,000 5,379,800 13,269,800 2039 8,255,000 5,015,625 13,270,625 2040 8,680,000 4,592,250 13,272,250 2041 9,120,000 4,147,250 13,267,250 2042 9,590,000 3,679,500 13,269,500 2043 10,080,000 3,187,750 13,267,750 2044 10,600,000 2,670,750 13,270,750 2045 11,140,000 2,127,250 13,267,250 2046 11,715,000 1,555,875 13,270,875 2047 12,315,000 955,125 13,270,125 2048 12,945,000 323,625 13,268,625
* Preliminary, subject to change.
(1) Assumes an average annual interest rate of approximately 4.079% and 3.500% on the hedged and unhedged Series 2015 Bonds, respectively. Actual rates will differ.
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BONDHOLDERS’ RISKS
The following is a discussion of certain risks that could affect payments to be made with respect to the Series 2017 Bonds. Such discussion is not exhaustive and should be read in conjunction with all other parts of this Official Statement and should not be considered as a complete description of all risks that could affect such payments. Prospective purchasers of the Series 2017 Bonds should analyze carefully the information contained in this Official Statement, including the appendices hereto and additional information in the form of the complete documents summarized herein, copies of which are available as described in this Official Statement.
General
The Series 2017 Bonds will be payable by the Authority solely from the Trust Estate, including amounts payable under the Loan Agreement and the Series 2017 Obligation issued to the Bond Trustee. See “SECURITY FOR THE SERIES 2017 BONDS” above. The ability of the Obligated Group to realize revenues in amounts sufficient to pay debt service on the Series 2017 Bonds when due is 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. No representation or assurance is given or can be made that revenues will be realized by the Obligated Group in amounts sufficient to pay debt service when due on the Series 2017 Bonds and their other obligations. None of the provisions of the Loan Agreement or the Master Indenture provide any assurance that the obligations of the Obligated Group will be paid as and when due if a Member of the Obligated Group becomes unable to pay its debts as they come due or the Obligated Group otherwise become insolvent.
The receipt of future revenues by the Members of the Obligated Group is subject to, among other factors, federal and state laws, regulations and policies affecting the health care industry and the policies and practices of major managed care providers, private insurers and other third party payors and private purchasers of health care services. The effect on the Obligated Group of recently enacted laws and regulations and recently adopted policies and of future changes in federal and state laws, regulations and policies and private policies, cannot be determined at this time. Loss of established third-party payor contracts of the Obligated Group could also adversely affect its future revenues.
Future economic conditions, which may include an inability to control expenses in periods of inflation and other conditions, including demand for health care services, the availability and affordability of insurance, including without limitation, malpractice and casualty insurance, availability of physicians, nurses and other professional personnel, the capability of the Obligated Group’s management, the receipt of grants and contributions, referring physicians’ and self-referred patients’ confidence in the Members of the Obligated Group, economic and demographic developments in the United States, the State, the States of North Dakota, Wyoming, Nebraska, and Montana and the service areas of the Members of the Obligated Group and competition from other health care institutions in the service areas, together with changes in rates, costs, third party payments and governmental laws, regulations and policies, may adversely affect revenues and expenses and, consequently, the ability of the Members of the Obligated Group to make payments on the Series 2017 Obligation.
Government Regulation of Health Care Industry
The health care industry is subject to regulation by a number of governmental and private agencies, including those that administer the Medicare and Medicaid programs. The health care industry is affected by federal, state and local laws, regulations, executive orders and policies developed to regulate the manner in which health care is provided, administered and paid for nationally and locally, some of which are described herein. As a result, the health care industry is sensitive to frequent and substantial legislative and regulatory changes, and the impact of any such changes cannot be predicted.
Federal and State Budget Matters
The Members of the Obligated Group depend significantly on Medicare and Medicaid as sources of revenue; both of these programs are described in detail below. Fiscal considerations of both federal and state governments in establishing their budgets directly affect the funds available to health care providers for payment of services rendered to Medicare and Medicaid beneficiaries. If and to the extent Medicare and/or Medicaid spending
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is reduced, this could have a material adverse effect upon the financial condition of the Members of the Obligated Group.
As part of the federal budgetary process, Congress has regularly amended the Medicare law to reduce increases in payments that are otherwise scheduled to occur, or to provide for reductions in payments for particular services. Similarly, federal legislation is regularly passed that affects payments made under Medicare. For example, such legislation may add, eliminate or reduce categories of funding. These actions could have a material adverse effect on the revenues of the Members of the Obligated Group.
Through legislation, the federal government has created a debt “ceiling” or limit on the amount of debt that may be issued by the United States Treasury. In the past several years, political disputes have arisen within the federal government in connection with discussions concerning the authorization for an increase in the federal debt ceiling that have threatened to shut down substantial portions of the federal government. Any failure by Congress to increase the federal debt limit may impact the federal government’s ability to incur additional debt, pay its existing debt instruments and to satisfy its obligations relating to the Medicare and Medicaid programs, which could have a material adverse effect on the revenues of the Members of the Obligated Group. Additionally, the market price or marketability of the Series 2017 Bonds in the secondary market may be materially adversely impacted by any failure of Congress to increase the federal debt limit.
States may, from time to time, face severe financial challenges, which include erosion of general fund tax revenues. These factors often result in a shortfall between revenue and spending demands. Financial challenges facing states may negatively affect providers in such states in a number of ways, including, but not limited to, reductions in Medicaid reimbursement rates, a decrease in the percentage of patients who have private insurance, a greater number of indigent patients who are unable to pay for their care and a greater number of individuals who qualify for Medicaid. These factors may materially increase costs of operations for the Members of the Obligated Group and could have a material adverse effect on the revenues of the Members of the Obligated Group.
Economic Conditions
The United States economy is unpredictable. Economic downturns and other unfavorable economic conditions have previously impacted the health care industry and health care providers’ business and financial condition. If general economic conditions worsen, the Members of the Obligated Group may not be able to sustain future profitability, and its liquidity and ability to repay outstanding debt, including debt service on the Series 2017 Bonds, may be adversely affected. Broad economic factors – such as unemployment rates or instabilities in consumer spending – could affect the Obligated Group’s volumes and its ability to collect outstanding receivables. Other economic conditions that from time to time may adversely affect Obligated Group revenues and expenses, and consequently, its ability to make payments on the Series 2017 Obligation, include but are not limited to: (a) an inability to access financial markets on acceptable terms at a desired time, (b) investment portfolios losses, (c) increased business failures and consumer and business bankruptcies, (d) federal and state budget challenges resulting in reduced or delayed Medicare and Medicaid reimbursement, (e) a reduction in the demand for health care services or patient decisions to postpone or cancel elective and non-emergency health care procedures, (f) increased malpractice and casualty insurance expenses, (g) reduced availability or affordability of health insurance, (h) a shortage of nursing and other professional personnel, (i) increased operating costs, (j) a reduction in the receipt of grants and charitable contributions, (k) unfavorable demographic developments in the Obligated Group’s service areas, or (l) increased competition from other health care institutions.
Readers should refer to APPENDIX A of this Official Statement for a more comprehensive discussion of the Obligated Group’s recent financial performance and its financial condition. In particular, reference is made to information in APPENDIX A under the caption heading, “MANAGEMENT DISCUSSION AND ANALYSIS.”
Federal Health Care Reform
Federal health care reform legislation, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively referred to as “ACA”), was enacted in March 2010. This legislation impacts almost all aspects of hospital and provider operations and health care delivery, and has changed and is changing how health care services are covered, delivered, and reimbursed. These changes are resulting in lower hospital reimbursement from Medicare, utilization changes, increased government enforcement and the necessity for
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health care providers to assess, and alter, their business strategy and practices, among other consequences. The ACA has also required, and will continue to require, the promulgation of substantial regulations with significant effects on the health care industry. Thus, the health care industry is the subject of significant statutory and regulatory requirements and consequently will be subject to structural and operational changes and challenges for a substantial period of time. The full ramifications of health care reform may also become apparent only over additional time and through further regulatory and judicial interpretations.
The ACA and its implementation have been, and remain, politically controversial. Accordingly, the ACA has continually faced legal and legislative challenges, including repeated repeal efforts, since its enactment. Management cannot predict the impact any major modification or repeal of the ACA, or any replacement health care reform legislation, might have on the Obligated Group’s business or financial condition, though such effects could be material. In particular, any legal, legislative or executive action that reduces federal health care program spending, increases the number of individuals without health insurance, reduces the number of people seeking health care, or otherwise significantly alters the health care delivery system or insurance markets could have a material adverse effect on the Obligated Group’s business or financial condition. President Donald J. Trump and Republican leaders of Congress have repeatedly cited health care reform, and particularly, repeal and replacement of the ACA, as a key goal. To that end, Congressional leaders have taken steps to repeal or rescind certain provisions of the ACA, including introducing and voting on various bills aimed at repealing and replacing all or portions of the ACA (generally, the “Repeal Bills”). To date, no Repeal Bills have passed both chambers of Congress. The Congressional Budget Office (“CBO”) has issued reports estimating the economic effects of certain versions of the Repeal Bills. Those CBO reports predict that enactment of the Repeal Bills would shrink the federal deficit, but increase the uninsured by as much as 32 million people by 2026. Management cannot predict the likelihood of any Repeal Bills or other health care reform bill becoming law, or the subsequent effects of any such laws, though such effects could materially impact the Obligated Group’s business or financial condition.
The uncertainties regarding the implementation, revision or rescission of the ACA create unpredictability for the strategic and business planning efforts of health care providers, which in itself constitutes a risk. There can be no assurance that any such legislative efforts to rescind, modify, replace or repeal provisions of the ACA will not materially adversely affect the Obligated Group, which material effects may include potential decrease in the market for health care services or in a decrease in the Obligated Group’s ability to receive reimbursement for health care services provided.
The constitutionality of the ACA has been challenged in courts around the country. On June 28, 2012, the U.S. Supreme Court, in its decision in National Federation of Independent Business v. Sebelius, held that the individual mandate for individuals to buy health insurance was a constitutional exercise of Congress’s power to levy taxes. However, the Court found that the provision of the ACA that requires states to expand Medicaid to all people with an income below 138% of the poverty level or lose the states’ existing Medicaid funds, is an improper exercise of Congress’ spending powers under the Constitution and amounted to coercion. The Court held that this requirement was severable from the rest of the law; therefore, the additional Medicaid funds may still be made available to states which voluntarily agree to the expansion of their Medicaid programs, but Congress cannot withhold all Medicaid funds from those states that opt out of the expansion. As a result, some states have elected not to expand their Medicaid program, which may affect the number of uninsured people to whom the Members of the Obligated Group must provide care. Of the states comprising the service area of the Obligated Group, Montana and North Dakota have chosen to expand Medicaid; Nebraska, South Dakota and Wyoming have not adopted Medicaid expansion at this time.
Among other provisions of the ACA (some of which are described herein), the ACA created “health insurance exchanges” in which health insurance can be purchased by certain groups and segments of the population, expanded the availability of subsidies and tax credits for premium payments by some consumers and employers, and required that certain terms and conditions be included by commercial insurers in contracts with providers. In addition, the ACA imposed many obligations on states related to health insurance. The exchanges are still relatively new, participation in them is changing, there is ongoing litigation regarding the subsidies and the Trump administration has taken and proposed recent actions related to the health insurance marketplaces (including proposing to eliminate subsidies). The effects of the exchanges upon the financial condition of any third-party payor that offers health insurance, the rates paid by third-party payors to providers and, thus, upon the operations, results of operations and financial condition of the Obligated Group, cannot be predicted.
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Payment for Health Care Services
A substantial portion of the net patient service revenues of the Members of the Obligated Group is derived from third-party payors that pay for the services provided to patients covered by these third parties for such services. These third-party payors include, among others, Medicare, Medicaid and private health plans and insurers, including health maintenance organizations (“HMOs”) and preferred provider organizations (“PPOs”).
Medicare and Medicaid are the commonly used names for reimbursement or payment programs governed by certain provisions of the federal Social Security Act. Medicare is an exclusively federal program and Medicaid is jointly funded by federal and state governments. Medicare provides certain health care benefits to beneficiaries who are 65 years of age or older, disabled, or qualify for the End Stage Renal Disease Program. Medicaid, which is designed to pay providers for care given to the indigent and certain other qualifying persons, is funded by federal and state appropriations, and is administered by the individual states. As described above, health care providers have been and will be affected significantly by changes in the last several years in federal and state health care laws and regulations, particularly those pertaining to Medicare and Medicaid. In general, the purpose of much of the statutory and regulatory activity has been to reduce the rate of increase in health care costs, particularly costs paid under the Medicare and Medicaid programs. Diverse and complex mechanisms to limit the amount of money paid to health care providers under both the Medicare and Medicaid programs have been enacted, and have caused reductions in reimbursement from the Medicare program.
The ability of the Members of the Obligated Group to develop and expand their services and, therefore, profitability is dependent upon the reimbursement rates set by government programs and upon their ability to enter into contracts with private third-party payors at competitive rates. Many government and private third-party payors make payments to health care organizations at rates that may not reflect the actual costs the organizations incur in providing services and items to patients. Accordingly, there can be no assurance that payments made under these programs will be adequate to cover the organization’s actual costs of furnishing health care services and items. In addition, the financial performance of the organizations could be adversely affected by the insolvency of, or other delay in receipt of payments from, third party payors. Set forth below is a further description of certain categories of third-party payor programs, but this is not an exhaustive description of all ways in which the Members of the Obligated Group have or may receive payments from these or other third-party payors.
Medicare
Medicare is a federal governmental health insurance system under which physicians, hospitals and other health care providers are reimbursed or paid directly for services provided to eligible elderly and disabled persons. Medicare is administered by the Centers for Medicare and Medicaid Services (“CMS”). Approximately 47.1% of the gross patient charges for acute care hospital facilities and 48.2% of the gross patient charges for physician clinic facilities of the Obligated Group for the fiscal year ended June 30, 2017, were derived from Medicare. As a consequence, changes in the Medicare program may have a material adverse effect on the Obligated Group. The cost of providing a unit of care may exceed the compensation realized from Medicare for providing that service. Additionally, the aggregate costs to a provider of providing care to Medicare beneficiaries may exceed aggregate Medicare payments received during the relevant fiscal year period. Reductions in Medicare reimbursement, or increases in Medicare reimbursement in amounts less than increases in the costs of providing care, may have a material adverse financial effect on the Obligated Group.
Under a prospective payment system (“PPS”), the amount paid to the provider for an episode of care is established by federal regulation and is not related to the provider’s charges or costs of providing that care. Presently, most hospital inpatient and outpatient services are paid on the basis of a prospective payment system. Under the hospital inpatient PPS, fixed payment amounts per inpatient discharge are established based on the patient’s assigned diagnosis related group, or DRG. DRGs classify treatments for illnesses according to the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis. CMS may make additional payments to hospitals for certain Medicare beneficiaries who have unusually long or costly hospital stays (“outliers”). All services paid under the PPS for hospital outpatient services are classified into groups called ambulatory payment classifications, or APCs. Services in each APC are similar clinically and in terms of the resources they require. A payment rate is established for each APC. The capital component of care is also paid on a fully prospective basis. CMS makes additional payment adjustments under the outpatient PPS, including, among other things, “outlier” payments for services where the hospital’s cost exceeds the APC rate for that service, and transitional pass-through payments for certain drugs and medical devices.
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The Secretary of the Department of Health and Human Services (“HHS”) is required to review annually the DRG categories to take into account any new procedures, reclassify DRGs and recalibrate the DRG relative weights that reflect the relative resources used by hospitals with respect to discharges classified within a given DRG category. There is no assurance that the Obligated Group will be paid amounts that will reflect adequately changes in the cost of providing health care or in the cost of health care technology being made available to patients. CMS may only adjust DRG weights on a budget neutral basis.
PPS-exempt hospitals and units (inpatient psychiatric, rehabilitation and long-term hospital services) are currently reimbursed under prospective payment systems separate from the PPS/DRG system used for general acute care hospitals and units. However, these exempt hospital/unit PPS payment methodologies are similar in that they utilize nationally determined payment rates (per discharge for rehabilitation and long-term care; per diem for psychiatric). These national rates are then generally subject to patient and/or facility specific adjustments for such factors as: case mix, regional wage or cost differences, medical education, disproportionate share, and outliers. The types of adjustments vary for each of the exempt PPS programs.
Effective October 1, 2013, CMS adopted a policy known as the Inpatient Hospital Prepayment Review “Probe & Educate” review process, or the “Two-Midnight” rule. The “Two-Midnight” policy specifies that hospital stays spanning two or more midnights after the beneficiary is properly and formally admitted as an inpatient will be presumed to be “reasonable and necessary” for purposes of inpatient reimbursement. With some exceptions, stays not expected to extend past two midnights should not be admitted as an inpatient and instead be admitted and billed as outpatient. The “Two-Midnight” rule has had an adverse financial impact on hospitals. In December 2016, the HHS Office of Inspector General (the “OIG”) issued a report concluding that “vulnerabilities remain” under the CMS “Two-Midnight” rule and that CMS needs to improve oversight of hospital billing under this policy. Therefore, CMS may be increasing scrutiny of short inpatient stays in the near future.
Beginning in 2008, CMS refused to reimburse hospitals for medical costs arising from certain “never events,” which include specific preventable medical errors. Certain private insurers and HMOs followed suit. The occurrence of “never events” is more likely to be publicized and may negatively impact a hospital’s reputation, thereby reducing future utilization and potentially increasing the possibility of liability claims.
In addition to other provisions of the ACA described herein, the ACA instituted multiple mechanisms for reducing the costs of the Medicare program and thus actually or potentially reducing reimbursements paid to hospitals and other health care providers. For example, beginning in federal fiscal year 2015, Medicare inpatient payments to hospitals that are in the top quartile nationally for frequency of certain “hospital-acquired conditions” identified by CMS are reduced by 1% of what would otherwise be payable to each hospital for the applicable federal fiscal year. Further, federal payments to states for Medicaid services related to health care-acquired conditions are prohibited. Additionally, Medicare inpatient payments to those hospitals with excess readmissions compared to the national average for certain medical conditions are being reduced based on the dollar value of that hospital’s percentage of excess preventable Medicare readmissions within 30 days of discharge for those medical conditions. The ACA made further changes to Medicare reimbursement, including, among other things, reducing the annual market basket update for certain providers. Finally, under the ACA, payments to certain providers are more closely tied to quality outcomes, such as through accountable care organizations, the value-based purchasing program, and bundled payment initiatives.
The 21st Century Cures Act, enacted in December 2016 (the “Cures Act”), is intended to create broadened patient access to care, involving patients in new research, and leveraging technology to create efficiencies. The Cures Act will support efforts to improve telehealth services in Medicare and is intended to improve the process for determining which Medicare treatments are covered, potentially leading to increased access to treatments for Medicare beneficiaries. In addition to numerous provisions related to research and clinical trials, the Cures Act includes a number of changes to the Medicare program. Also see “Research Matters and Increased Enforcement Affecting Research” for more information.
Critical Access Hospitals. While generally, Medicare pays acute care facilities for most services provided to inpatients and outpatients under PPS, some facilities are designated for Medicare purposes as critical access hospitals (“CAH”). A CAH is reimbursed by Medicare not by using PPS, but rather is reimbursed on a cost-based system. A facility designated as a CAH must meet criteria established in federal legislation, as well as those required by the state in which it is located. Unlike other acute care hospitals, a CAH is reimbursed by Medicare for the reasonable costs of its inpatient and outpatient services, as determined under applicable Medicare principles of
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reimbursement. Often, such reimbursement is greater than a CAH would receive under PPS reimbursement, but Medicare payments may not always be sufficient to cover a CAH’s costs in providing care to Medicare beneficiaries.
There can be no guarantee that the Obligated Group’s hospitals that are designated as CAHs, presently, Regional Health Lead-Deadwood Hospital, Regional Health Sturgis Hospital, and Regional Health Custer Hospital, will maintain their designation as CAHs. If they were to lose such designation, their payment methodology under Medicare would change significantly, which could have a material adverse effect on the operations and financial condition of the CAHs. There also can be no guarantee that reimbursements to CAHs under Medicare will continue at current levels, and a reduction in such payment methodology could have a material adverse effect on the operations and financial condition of the CAHs.
Hospital Outpatient Departments. Effective January 1, 2017, off-campus provider-based clinics, physician offices, and ambulatory surgical centers that began furnishing services on or after November 2, 2015 receive reimbursement payments for only professional fees under the Medicare Physician Fee Schedule or Ambulatory Surgical Center Payment System, as applicable, and are no longer eligible to receive an additional facility fee paid under the Medicare hospital outpatient PPS (“OPPS”) as an “off-campus hospital outpatient department.” This decrease in reimbursement payments does not apply to (i) any off-campus hospital outpatient departments that existed and were billing as off-campus hospital outpatient departments for covered off-campus hospital outpatient department services prior to November 2, 2015, (ii) any on-campus hospital outpatient departments, (iii) dedicated emergency departments, or (iv) any off-campus organizations, other than off-campus hospital outpatient departments, that are required to satisfy the provider-based regulations including satellite facilities and provider- based entities such as rural health clinics.
Effective January 1, 2016, the 2015 OPPS final rule requires hospitals to use new modifiers for services provided to Medicare beneficiaries at off-campus hospital outpatient departments. The stated purpose of the new modifiers is to permit CMS to obtain information regarding the effect of the trend of the conversion of physician offices to off-campus hospital outpatient departments. A potential result of this information could be a future reduction in reimbursement for certain services provided at certain types of off-campus hospital outpatient departments. In any event, failure to use the modifiers correctly could jeopardize the provider-based status of associated off-campus locations.
CMS published the final rule implementing the site-neutral payment provisions on November 1, 2016. Under the final rule, hospitals have very limited ability to replace or expand their existing off-campus hospital outpatient departments and continue to be reimbursed under OPPS. The final rule also establishes reduced reimbursement for services provided at certain new off-campus hospital outpatient departments. It is unclear what the financial impact of the site-neutral payment provisions will be.
The Cures Act expands the categories of projects that would be exempt from the decrease in OPPS reimbursement payments. They include: (i) off-campus outpatient department if the host hospital had submitted a voluntary provider-based attestation to CMS before December 2, 2015, as long as the construction of the new off- campus outpatient department is complete and the hospital is accepting or poised to accept patients; (ii) off-campus outpatient department locations providing services on or after January 1, 2018, that had a “binding written agreement with an outside unrelated party for the actual construction” of the new off-campus outpatient department before November 2, 2015, as long as the host hospital made certain attestations and certifications to CMS within 60 days of the enactment of the Cures Act and adds the department to the host hospital’s Medicare enrollment form; and (iii) off-campus outpatient departments of certain cancer hospitals that file provider-based attestations within 60 days of the date of enactment of the Cures Act (for departments meeting provider-based requirements between November 2, 2015 and the date of enactment) or within 60 days of the date of meeting provider-based requirements.
Disproportionate Share Payments. Beginning in federal fiscal year 2014, the ACA mandated that hospitals receiving supplemental Disproportionate Share (“DSH”) payments from Medicare (i.e., those hospitals that care for a disproportionate share of low-income Medicare beneficiaries) have their DSH payments reduced by 75%. This reduction was potentially adjusted by adding back payments based on the volume of uncompensated care provided by a DSH hospital, and was anticipated to be offset by a higher proportion of covered patients as other provisions of the ACA went into effect. The ACA also mandated cuts to Medicaid DSH payments to account for anticipated reductions in uninsured individuals and uncompensated care. The Medicaid DSH payment reduction schedule has been delayed by various pieces of legislation, and is currently scheduled to go into effect in federal fiscal year 2018.
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The System hospitals do not receive federal DSH payments and there can be no assurance that they will qualify for DSH status in the future.
Medicare Advantage. Medicare beneficiaries may obtain Medicare coverage through a managed care Medicare Advantage plan instead of through the traditional Medicare fee-for-service program. A Medicare Advantage plan may be offered by a coordinated care plan (such as an HMO or PPO), a private fee-for-service plan, a combination of a medical savings account (“MSA”) and contributions to a Medicare Advantage plan, or certain plans characterized by special enrollment. With the exception of an MSA plan, each Medicare Advantage plan is required to provide benefits approved by the Secretary of HHS. A Medicare Advantage plan receives a monthly capitated payment from HHS for each Medicare beneficiary who has elected coverage under the plan. Health care providers, such as those of the Obligated Group, generally must contract with Medicare Advantage plans to treat Medicare Advantage enrollees at agreed-upon rates. Covered inpatient and emergency services rendered to a Medicare Advantage beneficiary by a hospital that is an out-of-plan provider (i.e., that has not entered into a contract with a Medicare Advantage plan) will be paid at Medicare fee-for-service payment rates as payment in full.
Under the ACA, payments under the Medicare Advantage program are or will be reduced, which may result in increased premiums or out-of-pocket costs to Medicare beneficiaries enrolled in Medicare Advantage plans. These beneficiaries may terminate their participation in such Medicare Advantage plans and opt instead for the traditional Medicare fee-for-service program. The reduction in payments to Medicare Advantage plans may also lead to decreased payments to providers by managed care companies operating Medicare Advantage plans. There can be no assurance that rates negotiated for the treatment of Medicare Advantage enrollees will be sufficient to cover the cost of providing services to such patients of the Obligated Group. All or any of these outcomes will have a disproportionately negative effect upon those providers that rely more upon Medicare managed care revenues.
Medicare Physician Payments. Certain physician services are reimbursed on the basis of a national fee schedule called the “resource based-relative value scale” (“RB-RVS”). The RB-RVS fee schedule establishes payment amounts for physician services, including services of provider-based physicians, and is subject to annual updates. Historically, Medicare payments for physician services have been linked to the Sustainable Growth Rate (“SGR”) formula. The SGR acted as a limit to the growth of Medicare payments and was linked to changes in the U.S. Gross Domestic Product over a ten-year period. The use of the SGR in determining physician fee schedule updates was widely criticized. On April 16, 2015, the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) was signed into law, replacing the SGR formula with statutorily prescribed physician payment updates and incentives comprising the Quality Payment Program. MACRA shifts physician reimbursement from a fee-for- service to a pay-for-performance model that is intended to control the growth of physician payments and incentivize better clinical outcomes. MACRA eliminated the cut to physician payments required by the SGR formula, and substituted annual 0.5% payment increases through 2019. In 2019, MACRA will increase Medicare reimbursement for physicians who excel in meeting certain quality and cost metrics, and will reduce Medicare reimbursement for physicians who are underperforming according to those metrics. Beginning in 2026, payment rates will be updated 0.25% annually for providers participating in the Merit-Based Incentive Payment System, and 0.75% annually for providers participating in Alternative Payment Models. Physicians who participate in Alternative Payment Models may also receive bonus payments.
On October 14, 2016, CMS issued the final rule implementing the Quality Payment Program as part of MACRA. Under the final rule, physicians may participate in one of two reimbursement tracks: a Merit-Based Incentive Payment System (or “MIPS”), or advanced Alternative Payment Models (“APMs”). In MIPS, physicians’ pay will be based on success in four performance categories: quality, resource use, clinical practice improvement and advancing care information, which is based on the meaningful use program. Certain providers are exempt from MIPS, including those with a low volume of Medicare patients. For providers that decide to take part in the APMs, the provider may earn a Medicare incentive payment for their participation in a designated innovative payment model. The first performance year for the Quality Payment Program began on January 1, 2017 for providers ready to participate, but participation is not required until October 2, 2017. The first payment adjustments based on performance under the Quality Payment Program will go into effect on January 1, 2019. Failure to participate in the Quality Payment Program will result in a negative 4% payment adjustment. Implementation of the final rule could adversely impact physicians employed by the Obligated Group.
Medical Education Payments. Medicare pays for certain costs associated with both direct and indirect medical education, including portions of the salaries of residents and teachers and other overhead costs directly attributable to medical education programs for training residents, nurses and allied health professionals. There can
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be no assurance that payments to the Members of the Obligated Group for providing medical education will be adequate to cover the costs attributable to medical education programs for training residents, nurses and allied health professionals.
Skilled Nursing Facility Services. Medicare covers nursing services furnished by or under the supervision of a registered professional nurse, as well as physical, occupational and speech therapy provided by skilled nursing facilities (“SNFs”) that are certified for participation in the Medicare program. Medicare coverage of SNF services is available only if the patient is hospitalized for at least three consecutive days, the need for SNF services is related to the reason for the hospitalization and the patient is admitted to the SNF within 30 days following discharge from a Medicare participating hospital. Medicare coverage of SNF services is limited to 100 days per benefit period after discharge from a Medicare participating hospital or critical access hospital. The patient must pay coinsurance amounts for the twenty first and each of the remaining days of covered care per benefit period.
Medicare payments for SNF services are paid on a case-mix adjusted per diem PPS for all routine, ancillary and capital-related costs. Reimbursement under PPS also incorporates adjustments to account for facility case-mix using the Resource Utilization Groups system. SNF PPS payment rates are adjusted annually based on the skilled nursing facility “market basket” index, or the cost of providing SNF services. Future actions by the federal government relative to limiting or reducing the total amount of funds available under Medicare, or otherwise restructuring Medicare, may decrease or eliminate the amount of reimbursement available to the Obligated Group. No assurance can be given as to the timing, nature or extent of any further reductions.
SNFs are also required to perform consolidated billing for items and services furnished to patients during a Part A covered stay and therapy services furnished during Part A and Part B covered stays. The consolidated billing requirement essentially confers on the SNF itself the Medicare billing responsibility for the entire package of care that its residents receive in these situations. Further, post-hospitalization SNF services must be “bundled” into the hospital’s DRG payment in certain circumstances. Where this rule applies, the hospital and the SNF must, in effect, divide the payment which otherwise would have been paid to the hospital alone for the patient’s treatment, and no additional funds are paid by Medicare for SNF care of the patient. This provision is apparently having a negative effect on SNF utilization and payments, either because hospitals are finding it difficult to place patients in SNFs which will not be paid as before or because hospitals are reluctant to discharge the patients to SNFs and lose part of their payment. It is possible that the bundling requirement could be extended to more DRGs in the future, increasing the negative impact on SNF utilization and payments.
There is no guarantee that SNF prospective payment rates, as they may change from time to time, will cover the Members of the Obligated Group’s actual costs of providing skilled nursing services to Medicare patients. In addition, there is no assurance that the Members of the Obligated Group will be fully reimbursed for all services for which each bills through consolidated billing.
Home Health Care and Hospice Reimbursement. Generally, Medicare pays home health agencies under the home health prospective payment system on the basis of a national, standardized 60-day episode payment, adjusted for case mix and wage index. Medicare also adjusts the 60-day episode payment for certain intervening events that give rise to a partial episode adjustment or a significant change in condition adjustment. For certain cases that exceed a specific cost threshold, an outlier adjustment may also be available. There can be no assurance that the amount received by the Obligated Group will be sufficient to cover its costs of providing services.
Hospice services are reimbursed on a cost-based prospective payment method, subject to a “cap” amount. CMS establishes daily payment amounts, which are adjusted to reflect local differences in wages, to reimburse four categories of covered hospice care: routine home care; continuous home care; inpatient respite care; and general inpatient care. There can be no assurance that the prospective payment amounts for hospice services provided by the Obligated Group will be sufficient to cover the actual costs of providing such services.
Outpatient Renal Dialysis Reimbursement. Renal dialysis services are reimbursed on the basis of prospective reimbursement on a per treatment basis. End Stage Renal Dialysis PPS includes patient-level adjustment, facility-level adjustments and training adjustments, as well as an outlier payment. There can be no assurance that the amount received by the Obligated Group will be sufficient to cover its costs in providing these services.
Medicare Conditions of Participation. Hospitals must comply with standards called “Conditions of Participation” in order to be eligible for Medicare and Medicaid reimbursement. CMS is responsible for ensuring
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that hospitals meet these regulatory Conditions of Participation. Under the Medicare rules, hospitals accredited by the Joint Commission are deemed to meet the Conditions of Participation. However, CMS may request that the state agency responsible for approving hospitals on behalf of CMS, conduct a “sample validation survey” of a hospital to determine whether it is complying with the Conditions of Participation. Failure to maintain Joint Commission accreditation or to otherwise comply with the Conditions of Participation could have a materially adverse effect on the continued participation in the Medicare and Medicaid programs, and ultimately, the revenues of the Obligated Group.
Audits and Withholds. Hospitals that participate in the Medicare and Medicaid programs are subject, from time to time, to audits and other investigations relating to various aspects of their operations and billing practices, as well as to retroactive audit adjustments with respect to reimbursements claimed under these programs. These audits often require several years to reach the final determination of amounts earned under the programs. Although management of the Obligated Group believes its reserves are adequate for the purpose, any such future adjustments could be material. Both Medicare and Medicaid regulations also provide for withholding payments in certain circumstances. Any such withholding with respect to any Member of the Obligated Group could have a material adverse effect on the ability of such Member to generate funds sufficient to pay the debt service on the Series 2017 Bonds or on the overall financial condition of the Obligated Group.
Billing rules and reporting requirements for which there is no clear guidance from CMS or state Medicaid agencies could result in claims submissions being considered inaccurate. The penalties for violations may include an obligation to refund money to the Medicare or Medicaid program, payment of criminal or civil fines and, for serious or repeated violations, exclusion from participation in federal health programs.
Most Medicare and Medicaid audits involve the auditing of a random sample of claims, from which any alleged overpayment is calculated and then statistically extrapolated to a larger universe of claims. Consequently, such audits typically result in alleged overpayments that are equal to many multiples of the value of the claims actually audited, and can sometimes be measured in the millions of dollars. Such audits may be conducted by a variety of entities, including HHS, the Department of Justice (“DOJ”), state attorney general offices and private contractors of the state and federal health care programs, including Medicare Administrative Contractors and other contractors described further below. CMS is in the process of consolidating several of its contractor programs and replacing them with the Unified Program Integrity Contractor program. These multiple auditing efforts reflect increased governmental concern, enforcement and resources devoted to monitoring the Medicare and Medicaid Programs.
The Medicare Integrity Program (“MIP”) was established to deter fraud and abuse in the Medicare program. MIP allows CMS to enter into contracts with outside entities to ensure the “integrity” of the Medicare program. These entities include, but are not limited to, recovery audit contractors (“RACs”) and Medicare zone program integrity contractors (“ZPICs”). Under the RAC program, CMS contracts with private contractors to conduct post-payment reviews to detect and correct improper payments in the fee-for-service Medicare program. There is also a demonstration for RACs to conduct pre-payment reviews. The ACA expanded the RAC program’s scope to include, for example, managed Medicare plans and Medicaid claims. ZPICs are contracted by CMS to review claims and medical charts, both on a pre- and post-payment basis, conduct cost report audits and identify cases of suspected fraud. ZPICs have the authority to initiate overpayment recovery actions as well as to refer cases to the OIG. ZPICs have the ability to compile claims data from multiple sources in order to analyze the complete claims histories of beneficiaries for inconsistencies.
The federal Medicaid Integrity Program combats fraud and abuse in state Medicaid programs. Congress determined a federal program was necessary due to the substantial variations in state Medicaid enforcement efforts. The Medicaid Integrity Program’s enforcement efforts support existing state Medicaid Fraud Control Units. Federal Medicaid Integrity Contractors (“MICs”) are classified into Review MICs, Audit MICs and Education MICs. Review MICs perform review audits generally to determine trends and patterns of aberrant Medicaid billing practices through data mining. Audit MICs perform post-payment reviews of individual providers through desk or field audits. Education MICs are responsible for developing and carrying out a variety of education activities to increase and improve Medicaid enforcement efforts by state government. Once a Medicaid overpayment is identified, the state has one year to recover, or attempt to recover, such overpayment before making an adjustment to refund the state’s share of federal financial participation to CMS. If a state is unable to recover an overpayment due to fraud within one year of discovery because there is not a final determination of the amount of the overpayment
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under an administrative or judicial proceeding, no adjustment can be made to the federal share prior to 30 days after the date on which the final judgment is made.
Medicare and Medicaid audits may result in reduced reimbursement or repayment obligations related to past alleged overpayments and may also delay Medicare or Medicaid payments to providers pending resolution of the appeals process. They also result in higher administrative costs to hospitals. The ACA explicitly gives HHS the authority to suspend Medicare and Medicaid payments to a provider or supplier during a pending investigation of fraud. The ACA also amended certain provisions of the False Claims Act (discussed below) to include retention of overpayments as a violation. It also added provisions respecting the timing of the obligation to identify, report and reimburse overpayments (discussed below). The effect of these changes on existing programs of the Obligated Group cannot be predicted.
Uncertainty continues to surround the future determination of all Medicare reimbursement systems, including those related to PPS payments, DRG classifications, outpatient services, and graduate medical education. In addition, the Medicare program is subject to judicial interpretations, administrative rulings, governmental funding restrictions and requirements for utilization review (such as second opinions for surgery and preadmission criteria). Such matters, as well as more general governmental budgetary concerns, may reduce payments made to the Obligated Group under such program, and future Medicare payment rates may not be sufficient to cover increases in the cost of providing services to Medicare patients.
Management of the Obligated Group does not anticipate that any future Medicare audits or cost report settlements for either the Medicare or Medicaid program will materially adversely affect the future financial condition, cash flows or operations of the Obligated Group. Moreover, management of the Obligated Group does not believe that any of the Members of the Obligated Group has improperly submitted claims. However, in light of the complexity of the regulations relating to both the Medicare and Medicaid programs, and the threat of ongoing compliance initiatives and current investigations described above, there can be no assurance that significant difficulties will not develop in the future.
In addition, contracts between hospitals and third-party payors often have contractual audit, setoff and withhold language that may cause substantial, retroactive adjustments. Such contractual adjustments also could have a materially adverse effect on the future financial condition of the Obligated Group.
Medicaid
Medicaid is a health insurance program for certain low-income individuals that is jointly funded by the federal government and the states. Pursuant to 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. Approximately 11.8% of the gross patient charges for acute care hospital facilities and 7.7% of the gross patient charges for physician clinic facilities of the Obligated Group for the fiscal year ended June 30, 2017, were derived from Medicaid.
Under the Medicaid program, the federal government supplements funds provided by the various states for medical assistance to the medically indigent. Payment for medical and health services is made to providers in amounts determined in accordance with procedures and standards established by state law under federal guidelines. Fiscal considerations of both federal and state governments in establishing their budgets directly affect the funds available for payment of services rendered to Medicaid beneficiaries, and there can be no guarantees that such funds adequately cover the cost of care for Medicaid beneficiaries.
Payment for Medicaid services is subject to appropriation by the respective state legislatures of sufficient funds to pay the incurred obligations. The federal government continues to explore options for a long-term solution to the funding difficulties with Medicaid. Certain additional proposals being examined may ultimately result in reduced federal Medicaid funding to the states, which could adversely impact the amount of revenue received by the Obligated Group. Further, changes to the ACA could result in additional pressure on Medicaid funding. A repeal or modification of the ACA could reduce the number of individuals qualifying for treatment as Medicaid patients, resulting in a greater number of uninsured individuals.
For states that expanded Medicaid under the ACA, the federal government paid 100% of the cost of the newly eligible Medicaid recipients in 2014, 2015 and 2016, with matching level phasing down (beginning in 2017, by about 2% per year) to 90% by 2020 and subsequent years. As stated above, of the states comprising the service
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area of the Obligated Group, Montana and North Dakota have chosen to expand Medicaid under the ACA; Nebraska, South Dakota and Wyoming have not adopted Medicaid expansion at this time. The Members of the Obligated Group are subject to Medicaid laws and regulations in each of these states; certain aspects of the South Dakota Medicaid program are described below.
In South Dakota, the Department of Social Services administers the Medicaid program. Inpatient hospital services are generally reimbursed on the basis of DRGs calculated according to the Medicare prospective payment system formula (among other factors). Outpatient services in hospitals that are Medicare PPS hospitals are reimbursed based on the Medicaid agency’s outpatient prospective payment system. Physician services are reimbursed under South Dakota’s Medicaid program at the lower of: (1) billed charges; or (2) the state-adopted fee schedule rates. Nursing facility services are reimbursed on the basis of an annual per diem charge established by the Department of Social Services for each participating facility, which is primarily based on the facility’s allowable costs with a case-mix component and certain potential add-on amounts.
The following South Dakotans who are eligible for Medicaid (and who are not also Medicare beneficiaries) must receive coverage through the state’s managed care program: (1) Supplemental Security Income recipients (blind, disabled people age 19 and older); (2) families eligible for the Low Income Family Program; (3) low income children eligible for Medicaid; (4) children eligible for the Children’s Health Insurance Program (described below); and (5) women eligible for low income pregnancy coverage. The program is based on the primary care case management model, and reimbursement is based on fee-for-service plus a monthly case management fee.
Children’s Health Insurance Program
The Children’s Health Insurance Program (“CHIP”), which is funded jointly by the federal government and states, is an insurance program for children whose families earn too much money to be eligible for Medicaid, but cannot afford commercial health insurance. CMS administers CHIP, but each state creates its own program based upon minimum federal guidelines. Any loss of funding for CHIP or federal or state budget cuts to the program could have an adverse effect on provider revenues, and, thus, on the financial condition of the Obligated Group.
Under MACRA, federal funding for CHIP was extended through September 30, 2017. When such funding expires, there can be no assurances that funding for an increase will be reestablished at either a state or federal level, or that professional and/or facility reimbursement rates will not subsequently be reduced in efforts to manage costs. On May 6, 2016, CMS published a final rule to modernize and enhance the provision of quality care to Medicaid managed care and CHIP beneficiaries. The final rule aligns Medicaid and CHIP managed care requirements with other major health coverage programs; enhances the beneficiary experience of care and strengthens beneficiary protections; strengthens the actuarial soundness payment provisions and program integrity provisions; promotes quality of care; and supports efforts to reform the delivery systems that serve Medicaid and CHIP beneficiaries. It is uncertain what impact the final rule will have on the Obligated Group.
Section 340B Drug Pricing Program
Health care providers that participate in the prescription drug discount program established under Section 340B of the federal Public Health Service Act (the “340B Program”) are able to purchase certain outpatient drugs for their patients at reduced cost. The Health Resources and Services Administration within DHHS (“HRSA”), through the Office of Pharmacy Affairs, administers the 340B Program. HRSA issued a final rule on January 5, 2017 regarding 340B Program pricing and manufacturer civil monetary penalties, but the effective date for this rule has been delayed until October 1, 2017. Additionally, on August 28, 2015, HRSA issued proposed 340B Drug Pricing Program Omnibus Guidance, which addressed key policy issues related to the 340B Program, including, but not limited to, eligibility and registration of hospitals and outpatient facilities, individuals eligible to receive 340B drugs, drugs eligible for purchase under the 340B Program, and manufacturer compliance. On January 30, 2017, HRSA withdrew this guidance before it was finalized. If the guidance had been adopted in its current form, it could have, among other things, restricted the ability of the Obligated Group and certain of its subsidiaries to purchase drugs under the 340B Program. Such restrictions could have a materially adverse effect on the future financial condition of the Obligated Group. It is possible that HRSA will address guidance on aspects of the 340B Program through smaller subregulatory guidance, or that other changes may be made to the program through legislative means, in the near future. In addition, HRSA has authority to audit covered entities for compliance with 340B Program requirements. Audit findings that a 340B covered entity has failed to comply with 340B Program requirements may make the 340B covered entity liable to manufacturers for refunds of discounts, or cause HRSA to
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remove the covered entity from the 340B Program. The impact of any such audit, future guidance or changes related to the 340B Program on the operations of the Obligated Group cannot be predicted. As part of the calendar year 2018 proposed updates to the Medicare Hospital Outpatient Prospective Payment System, HHS has proposed to decrease Medicare Part B payments to hospitals for 340B drugs by almost 30 percent. The cut in payment is explained in the proposed rule as necessary to slow growth in the 340B Program, shift trends of growing amounts paid by Medicare for outpatient hospital drugs and reduce Medicare beneficiary cost-sharing. If implemented as proposed, the payment cut would begin effective January 1, 2018. Public comments on the proposed rule may be submitted through September 11, 2017. Any reduction in Medicare reimbursement for 340B drugs could have a materially adverse effect on the future financial condition of the Obligated Group.
Commercial Payors
Approximately 26.1% of the gross patient charges for acute care hospital facilities and 34.1% of the gross patient charges for physician clinic facilities of the Obligated Group for the fiscal year ended June 30, 2017, were derived from commercial payors. Certain aspects of commercial payor programs are described below.
Most private health insurance coverage is provided by various types of “managed care” plans, including HMOs and PPOs. 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 co-payments and deductibles, and channel patients to contracted providers of health care services. Medicare and Medicaid also purchase health care services using managed care options, as described above. Payments to hospitals from managed care plans typically are lower than those received from traditional indemnity or commercial insurers.
Many HMOs and PPOs pay providers on a negotiated fee-for-service basis or, for institutional care, on a fixed rate per day of care or per inpatient stay, which, in each case, usually is discounted from the typical charges for the care provided. As a result, the discounts offered to HMOs and PPOs may result in payment to a provider that is less than its actual cost. Additionally, the volume of patients directed to a provider may vary significantly from projections, and/or changes in the utilization may be dramatic and unexpected, thus jeopardizing the provider’s ability to manage this component of revenue and cost.
Some HMOs employ a “capitation” payment method under which hospitals are paid a predetermined periodic rate for each enrollee in the HMO who is “assigned” or otherwise directed to receive care at a particular hospital. A hospital may assume financial risk for the cost and scope of institutional care given. If payment is insufficient to meet a hospital’s actual costs of care, or if utilization by such enrollees materially exceeds projections, the financial condition of a hospital could erode rapidly and significantly. In addition to this standard managed care risk-sharing approach, private health insurance companies are increasingly adopting various additional risk-sharing/cost-containing measures, sometimes similar to those introduced by government payors. Commercial insurers are also adopting total cost of care and pay for performance strategies with providers, such as accountable care organizations. Health care cost containment and its associated risk sharing is likely to continue to increase in the coming years.
Often, managed care contracts are enforceable for a stated term, regardless of provider losses. Furthermore, managed care contracts and insurance laws may require that a provider continue to provide care for enrollees for a certain time period irrespective of whether the plan has funds to make payment to the provider. Providers from time to time have disputes with managed care payors concerning payment and contract interpretation issues.
There is no assurance that the Obligated Group will maintain managed care or similar contracts in the future. Failure to maintain such contracts could have the effect of reducing market share and net patient services revenues. Conversely, participation may maintain or increase the patient base but could result in lower net income or operating losses if participating providers are unable to adequately contain their costs.
In part to reduce costs, health plans are increasingly implementing, and offering to purchasing employers, tiered provider networks, which involve classification of a plan’s network providers into different tiers based on care quality and cost. With tiered benefit designs, plan enrollees are generally encouraged, through incentives or reductions in co-payments or deductibles, to seek care from providers in the top tier. Classification of a provider in a non-preferred or lower tier by a significant payor may result in a material loss of patient volume (and, thus patient service revenues) to that provider.
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In addition to tiered provider networks, managed care plans are also implementing narrow provider networks in which only a select group of providers participate as in-network providers. Managed care plans often look at quality performance and cost in selecting providers to participate in their narrow networks. A provider’s exclusion from a narrow network may result in a material loss of patient volume (and, thus, patient service revenues) to that provider. Further, managed care plans may offer lower reimbursement for providers in their narrow network(s) in exchange for additional volume expected from being one of a select group of network providers. This reimbursement may be insufficient to cover a network provider’s cost in providing the services. The new demands of dominant health plans and other shifts in the managed care industry may also reduce patient volume and revenue. Thus, managed care plans pose one of the most significant business risks (and opportunities) that health care organizations face.
The current trend of consolidation in the health insurance industry is also likely to increase the leverage of commercial insurers when negotiating rates with health care providers. Large health insurers that assume dominant positions in local markets threaten to increase health insurer concentration, reduce competition and decrease choice. If a Member of the Obligated Group was to terminate its agreement with any of the major managed care payors or not agree to terms proposed by such payors, or if the payors were to exit the regional marketplace in some or all of their product lines, it could have a significant material adverse impact on the financial condition of the Members of the Obligated Group. Rising deductibles also correlate with rising uncollectibles, which may also have a material adverse effect on the Members of the Obligated Group.
Licensing, Surveys, Investigations and Audits
Health facilities, including those of the Obligated Group, are subject to numerous legal, regulatory, licensing, professional certification and private accreditation requirements. These include, but are not limited to, requirements relating to Medicare Conditions of Participation, requirements for participation in Medicaid, state licensing agencies, private payors and the accreditation standards of applicable accrediting bodies. Renewal and continuation of certain of these licenses, certifications and accreditations are based on inspections, surveys, audits, investigations or other reviews, some of which may require affirmative action. Management of the Obligated Group currently anticipates no difficulty renewing or continuing currently held licenses, certifications and accreditations, nor does management anticipate a reduction in third-party payments from events that would materially adversely affect the operations or financial condition of the Obligated Group, except as described in “SELECTED FINANCIAL AND UTILIZATION INFORMATION – Beds Available for Service” in APPENDIX A hereto (describing delays in license renewal for certain System facilities). Nevertheless, actions in any of these areas could result in the loss of utilization or revenues or the ability to operate all or a portion of its health care facilities and, consequently, could have a material and adverse effect on the Obligated Group.
Anti-Fraud and Abuse Laws
Health care “fraud and abuse” laws have been enacted at the federal and state levels to broadly regulate the provision of services to government program beneficiaries (and sometimes to individuals insured by private payors) and the methods and requirements for submitting claims for services rendered to these beneficiaries. Under these laws, individuals and organizations can be penalized for a wide variety of conduct, including but not limited to submitting claims for services that were: not provided, billed in a manner other than as actually provided, not medically necessary, provided by an improper person, accompanied by an illegal inducement to utilize or refrain from utilizing a service or product, or billed in a manner that does not otherwise comply with applicable legal requirements. The ACA significantly increased funding for enforcement efforts under these laws.
Federal and state governments have a broad range of criminal, civil and administrative sanctions available to penalize and remediate health care fraud, including the exclusion of a hospital or other health care provider from participation in the Medicare and Medicaid programs, civil monetary penalties, and suspension of Medicare and Medicaid payments. Fraud and abuse cases may be prosecuted or initiated by one or more government entities and/or private individuals, and more than one of the available sanctions may be, and often are, imposed for each violation.
Laws governing fraud and abuse apply to hospitals and other health care providers, and to nearly all individuals and entities with which a hospital or other health care provider does business. Fraud investigations, settlements, prosecutions and related publicity can have a material adverse effect on hospitals and other health care
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providers. See “Enforcement Activity” below. Major elements of certain of these often highly technical laws and regulations are generally summarized herein.
False Claims Laws. The federal False Claims Act (“FCA”) makes it illegal to, among other activities, knowingly present or cause to be presented a false or fraudulent claim for payment or approval for payment for which the federal government provides, or reimburses, at least some portion of the requested money or property. Because the term “knowingly” is defined broadly under the law to include not only actual knowledge but also deliberate ignorance or reckless disregard of the facts, the FCA can be used to punish a wide range of conduct. FCA investigations and cases have become common in the health care field and may cover a range of activity from submission of intentionally inflated billings, to highly technical billing infractions, to allegations of inadequate care. Penalties under the FCA are severe and may include damages equal to three times the amount of the alleged false claims, as well as substantial civil monetary penalties. As a result, violations or alleged violations of the FCA frequently result in settlements that require multi-million dollar payments and costly corporate integrity agreements. In June 2016 the DOJ issued a rule that more than doubles civil monetary penalties under the FCA (and other laws). The FCA also permits individuals to initiate civil actions on behalf of the government in lawsuits called “qui tam” actions. Qui tam plaintiffs, or “whistleblowers,” can share in the damages recovered by the government or recover independently if the government does not participate. Because qui tam lawsuits are kept under seal while the federal government evaluates whether the United States will join the lawsuit, it is impossible to determine at this time whether any such actions are pending against a Member of the Obligated Group and no assurances can be made that such actions will not be filed in the future. The FCA has become one of the government’s primary weapons against health care fraud and suspected fraud. FCA violations or alleged violations could lead to settlements, fines, exclusion or reputation damage that could have a material adverse impact on a hospital or other health care provider.
Under the ACA, the FCA has been expanded to include retention of overpayments as a violation. Specifically, the FCA is now violated when overpayments that are discovered by a health care provider are not reported and returned to the applicable federal health care program by the date which is 60 days after the date on which the overpayment was “identified” or the date the corresponding cost report is due, if applicable, even if the claims relating to the overpayment were initially submitted without any knowledge that they were false. If the overpayment is not so reported and returned, it becomes an “obligation” under the FCA. In February 2016, CMS issued a final rule addressing the requirement to report and return overpayments, with an emphasis for providers on developing robust compliance programs. This final rule, which took effect on March 14, 2016, clarifies the 60-day timeframe for reporting and returning overpayments. Specifically, the 60-day timeframe for reporting and returning begins when either reasonable diligence is completed (including determination of the overpayment amount) or on the day the person received credible information of a potential overpayment if the person failed to conduct reasonable diligence and the person in fact received an overpayment. This expansion of the FCA exposes hospitals and other health care providers to liability under the FCA for a considerably broader range of claims than in the past. There was initially great uncertainty in the industry as to when an overpayment is technically “identified” and the ability of a provider to determine the total amount of an overpayment and satisfy its repayment obligation within the required time period. The CMS final rule clarified that an overpayment is considered to have been identified when the person has or should have, through the exercise of reasonable diligence, determined that the person has received an overpayment and quantified the amount of the overpayment. This final rule also established a six-year lookback period for identifying historical overpayments, meaning overpayments must be reported and returned only if a person identifies the overpayment within six years of the date the overpayment was received. The effect of these changes on existing programs and systems of the Members of the Obligated Group cannot be predicted.
In June 2016, the United States Supreme Court announced its decision in Universal Health Services, Inc. v. United States ex rel. Escobar, No. 15-7 (U.S. June 16, 2016). Prior to Escobar, lower courts had split on the issue of whether the FCA extended to so-called “implied certification” of compliance with laws, and whether such compliance was limited to express conditions of payment or extended to conditions of participation. The United States Supreme Court affirmed the theory of “implied certification” and rejected the distinction between conditions of payment and conditions of participation for these purposes, ruling that the relevant inquiry is whether the alleged noncompliance, if known to the government, would have in fact been material to the government’s determination as to whether to pay the claim. There is considerable uncertainty as to the application of the Escobar holding, but depending on how it is interpreted by the lower courts, it could result in an expanded scope of potential FCA liability for noncompliance with applicable laws, regulations and sub-regulatory guidance.
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Health care providers are also subject to a variety of state laws related to false claims similar to the FCA or that are generally applicable or program-specific false claims laws. A violation of these laws could have a material adverse impact on a health care provider.
Federal Anti-Kickback Statute. The federal anti-kickback statute (the “Anti-Kickback Statute”) is a criminal statute that prohibits anyone from soliciting, receiving, offering or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for (or to induce) a referral of a patient for, or the purchasing, leasing, ordering, arranging for or recommending of, any item or service that is paid by any federal health care program. The Anti-Kickback Statute can potentially be implicated by many common health care transactions between persons and entities with which a hospital does business, including hospital-physician joint ventures, services agreements, director agreements, physician recruitment agreements, physician office leases, and other transactions. The Members of the Obligated Group participate in such arrangements in the ordinary course of business. The ACA amended the Anti-Kickback Statute to provide explicitly that a claim that includes items or services resulting from a violation of the Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA. Another amendment provides that an Anti-Kickback Statute violation may be established without showing that an individual knew of the statute’s proscriptions or acted with specific intent to violate the Anti- Kickback Statute, but only that the conduct was generally unlawful. The Anti-Kickback Statute has been interpreted to cover any arrangement where one purpose of the remuneration was to obtain or pay money for the referral of services or to induce further referrals.
In addition to certain statutory exceptions to the Anti-Kickback Statute, the OIG has promulgated regulatory “safe harbors” under the Anti-Kickback Statute designed to protect certain payment and business practices. However, these safe harbors are narrow and do not cover a wide range of common economic relationships involving hospitals. The regulations do not purport to comprehensively describe all lawful or unlawful economic arrangements or other relationships between health care providers and referral sources. While the failure to comply with a statutory exception or regulatory safe harbor does not mean that an arrangement is unlawful, such failure may increase the likelihood of a regulatory challenge or the potential for investigation. To date, a limited number of final safe harbors have been established.
Violations or alleged violations of the Anti-Kickback Statute often result in settlements that require multi- million dollar payments and onerous corporate integrity agreements. The Anti-Kickback Statute can be prosecuted either criminally or civilly. A criminal violation may be prosecuted as a felony, subject to substantial fines and/or imprisonment, either of which would have a significant detrimental effect on the financial stability of most health care providers. In addition, substantial civil monetary penalties and an assessment of up to three times the prohibited remuneration may be imposed. Violators can also be excluded from federal healthcare programs, including Medicare and Medicaid. Increasingly, the federal government and qui tam relators are prosecuting violations of the Anti-Kickback Statute or bringing actions involving alleged Anti-Kickback Statute violations under the FCA. See the discussion under the subheading “False Claims Laws,” above. Finally, the Internal Revenue Service has taken the position that hospitals that are in violation of the Anti-Kickback Statute may also be subject to revocation of their tax-exempt status (see below for more information on tax exemption).
Although the Anti-Kickback Statute applies only to federal health care programs, a number of states have passed similar laws pursuant to which similar types of prohibitions are made applicable to other health plans or third-party payors. A violation of these laws could have a material adverse impact on a health care provider.
Management of the Obligated Group believes that the Members of the Obligated Group are in compliance with the Anti-Kickback Statute. However, because of the breadth of the Anti-Kickback Statute and the narrowness of the safe harbor regulations, there can be no assurance that regulatory authorities will not take a contrary position or that in the future a Member of the Obligated Group will not be found or alleged to have violated the Anti- Kickback Statute. Any sanction imposed or settlement reached with respect to such actual or alleged violation could have a material adverse effect upon the operations and financial condition of such Member and/or the continued tax- exempt status of such Member.
Physician Self-Referral Prohibition. The federal physician self-referral law (known as the “Stark Law”) prohibits the referral by a physician of Medicare patients for certain “designated health services” to entities (including hospitals) with which the referring physician (or immediate family member of the referring physician) has a financial relationship, unless an exception applies. It also prohibits the entity furnishing the designated health
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services from billing for the services performed pursuant to a prohibited referral. Unlike the Anti-Kickback Statute, no finding of intent to violate the Stark Law is required. Stark Law designated health services are: (1) physical therapy, occupational therapy, and outpatient speech-language pathology services; (2) radiology and certain other imaging services; (3) durable medical equipment and supplies; (4) radiation therapy services and supplies; (5) parenteral and enteral nutrients, equipment and supplies; (6) prosthetics, orthotics and prosthetic devices and supplies; (7) home health services; (8) outpatient prescription drugs; (9) inpatient and outpatient hospital services; and (10) clinical laboratory services.
The types of financial arrangements between a physician (or a physician’s immediate family member) and an entity that trigger the prohibitions of the Stark Law are broad and include ownership and investment interests and compensation arrangements. Most providers of designated health services that have physician relationships have some exposure to liability under the Stark Law. There are, however, exceptions for certain specified services and arrangements. If certain substantive and technical requirements of an applicable exception are not satisfied, however, many ordinary business practices and economically desirable arrangements between hospitals and physicians may constitute “financial relationships” within the meaning of the Stark Law, thus triggering the prohibition on referrals and billing. Regulations promulgated under the Stark Law are subject to frequent amendment. Such amendments could require Members of the Obligated Group to amend or terminate certain arrangements with physicians in order to avoid triggering the Stark Law’s prohibitions.
Medicare may deny payment for all services related to a prohibited referral and a hospital that has billed for prohibited services is obligated to report and return the amounts collected from the Medicare program. For example, if an office lease between a hospital and a large group of heart surgeons is found not to meet an applicable Stark Law exception, the hospital could be obligated to repay CMS for the payments received from Medicare for designated health services performed at the hospital pursuant to referrals by all of the physicians in the group for the duration of the lease, which could potentially be a significant amount. As a result, even relatively minor, technical failures to meet each element of a Stark law exception may trigger substantial refund obligations. Sanctions for violation of the Stark Law include denial of payment for the services provided in violation of the referral prohibition, refunds of amounts improperly collected, substantial civil monetary penalties and/or exclusion from participation in the federal health care programs. Potential repayments to CMS, settlements, fines or exclusion for a Stark Law violation or alleged violation could have a material adverse impact on a hospital or other health care provider. Increasingly, the federal government and qui tam relators are prosecuting violations of the Stark Law or bringing actions involving alleged Stark Law violations under the FCA, based on arguments, for example, that claims submitted in violation of the Stark Law are false claims for FCA purposes. See the discussion under the subheading “False Claims Laws,” above.
Pursuant to the ACA, CMS established a voluntary self-referral disclosure protocol (“SRDP”) under which hospitals and other entities may report actual or potential Stark Law violations and seek a reduction in potential refund obligations. The limited publicly available information with respect to the SRDP suggests that most SRDP submissions remain under consideration by CMS for an extended period of time, and that it is difficult to predict how CMS will react to any specific submission. Members of the Obligated Group may make future submissions under the SRDP as appropriate from time to time as part of their ongoing efforts to comply with the Stark Law. Any submission pursuant to the SRDP does not waive or limit the ability of the OIG or DOJ to seek or prosecute for violations of the Anti-Kickback Statute or impose civil monetary penalties.
Although the Stark Law only applies to Medicare, a number of courts have interpreted the Stark Law as also applying to Medicaid. Further, a number of states have passed similar statutes pursuant to which similar types of prohibitions are made applicable to Medicaid and/or all other health plans or third-party payors. A violation of these laws could have a material adverse impact on a health care provider.
The Obligated Group believes that the Members of the Obligated Group are presently in material compliance with the Stark Law. However, in view of the broad scope of the Stark Law, the technical nature of the Stark Law exceptions, and the fact that no finding of intent is required to violate the Stark Law, there can be no assurance that violations of the Stark Law will not be found or alleged in the future, or that any sanctions imposed or settlements reached with respect to such actual or potential violations will not have a material adverse effect on the operations, the financial condition, or results of operations or cash flows of the Members of the Obligated Group.
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Civil Monetary Penalties Law. The federal Civil Monetary Penalties Law (“CMPL”) provides for administrative sanctions against health care providers for a broad range of billing and other abuses. A health care provider is liable under the CMPL if it, among other activities, knowingly presents, or causes to be presented, an improper claim for reimbursement under Medicare, Medicaid and other federal health care programs. Further, a hospital that participates in certain arrangements known as “gainsharing” and pays a physician to limit or reduce medically necessary services to Medicare or Medicaid beneficiaries also could be subject to CMPL penalties. A health care provider that provides remuneration to Medicare or Medicaid beneficiaries that such provider knows or should know is likely to influence the beneficiaries to order or receive items or services from a particular provider, practitioner or supplier also could be subject to CMPL penalties. There are several exceptions to the definition of “remuneration” and the OIG has provided guidance on certain payments that are nominal in value and therefore do not invoke the CMPL’s beneficiary inducement prohibition.
The CMPL authorizes the imposition of a civil money penalty, up to treble damages, and exclusion from participation in federal health care programs, depending on the conduct at issue. The Secretary of HHS, acting through the OIG, has both mandatory and permissive authority to exclude individuals and entities from participation in federal health care programs pursuant to this statute. Health care providers may be found liable under the CMPL even when they did not have actual knowledge of the impropriety of their action. Knowingly undertaking the action is sufficient. Ignorance of the Medicare regulations is no defense. A finding of a CMPL violation and associated penalties including but not limited to imposition of civil monetary penalties could have a material adverse impact on a health care provider’s financial condition.
The ACA amended the CMPL to establish various new grounds for exclusion and civil monetary penalties, as well as increased penalty thresholds for existing civil monetary penalties. Regulations implementing certain changes to the CMPL under the ACA were recently or will soon be published and/or effective. Among other things, the revised CMPL regulations set forth a list of factors, both aggravating and mitigating, that the OIG considers when determining the amount of penalties to assess and period of exclusion to impose. Changes to CMPL enforcement activity based on recent revisions to the CMPL regulations cannot be predicted at this time.
Exclusions from Medicare or Medicaid Participation. The government may exclude a hospital or other health care provider from Medicare and Medicaid program participation if it is convicted of a criminal offense relating to the delivery of any item or service reimbursed under Medicare or a state health care program, any criminal offense relating to patient neglect or abuse in connection with the delivery of health care, felony fraud against any federal, state or locally financed health care program or a felony 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 and Medicaid programs means that a hospital or other health care provider would be terminated from participation and no program payments can be made. Any hospital or other health care entity exclusion could be a materially adverse event, even within a large health care system. In addition, exclusion of employees or contractors may be another source of potential liability for hospitals or health systems, as employing or contracting with an excluded individual subjects the employing or contracting party to civil monetary penalties. Also see information on the OIG’s exclusion authorities described in “Civil Monetary Penalties Law,” above.
Enforcement Activity. As discussed above, enforcement activity against hospitals and other health care providers has increased and enforcement authorities have adopted aggressive approaches. Hospitals and other health care providers are frequently subject to audits, investigations or other enforcement actions regarding their billing and coding practices and the health care fraud and abuse laws described above. In addition, enforcement agencies increasingly pursue sanctions through civil administrative actions. Administrative regulations may require less proof of a violation than do criminal laws and, thus, health care providers may have a higher risk of imposition of monetary penalties as a result of administrative enforcement actions.
Enforcement actions may pertain to not only deliberate violations, but also frequently relate to violations resulting from actions of which management is unaware, from mistakes or from circumstances where the individual participants do not know that their conduct is in violation of law. Enforcement actions may extend to conduct that occurred in the past. The government may seek a wide array of penalties, including withholding essential payments under the Medicare or Medicaid programs or exclusion from those programs.
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Enforcement authorities are often in a position to compel settlements by providers charged with or being investigated for false claims violations by withholding or threatening to withhold Medicare, Medicaid and/or similar payments and/or by instituting criminal action. In addition, the cost of defending such an action, the time and management attention consumed, and the facts of a case may dictate settlement. Therefore, regardless of the merits of a particular case, a hospital or other health care provider could experience materially adverse settlement costs, as well as materially adverse costs associated with implementation of any agreements related to a settlement. Prolonged and publicized investigations could be damaging to the reputation and business of a hospital or other health care provider, regardless of outcome.
Certain acts or transactions may result in violation or alleged violation of a number of the federal health care fraud and abuse laws described above and, therefore, penalties or settlement amounts can be compounded. Generally these risks are not covered by insurance. Enforcement actions may involve multiple hospitals or health care providers in a health system, as the government often extends enforcement actions regarding health care fraud and abuse to other hospitals or health care providers in the same organization. Therefore, health care fraud and abuse related risks identified as being materially adverse as to a hospital or other health care provider could have materially adverse consequences to a health system taken as a whole.
EMTALA
The federal Emergency Medical Treatment and Active Labor Act (“EMTALA”) requires that hospitals and other facilities with emergency departments provide “appropriate medical screening” to patients who come to the emergency department to determine if an emergency medical condition exists. If so, the hospital must stabilize the patient within the capabilities of the hospital and the patient cannot be transferred unless stabilization has occurred or the transfer is done pursuant to EMTALA requirements. EMTALA and its implementing regulations are complex, and a hospital’s compliance is dependent, in part, upon the volition of medical staff members. Failure to comply with EMTALA may result in termination of a hospital’s Medicare provider agreement, exclusion from the Medicare and/or Medicaid programs, as well as the imposition of civil monetary penalties. In addition, EMTALA creates a private cause of action for individuals who suffer personal harm as a result of an EMTALA violation, and for any hospital that suffers financial loss as a result of another hospital’s violation of EMTALA. As such, failure of a Member of the Obligated Group to meet its responsibilities under EMTALA could adversely affect the financial condition of the Obligated Group.
Management of the Obligated Group believes its policies and procedures are in material compliance with EMTALA, but allegations of EMTALA violations have been made in the past and one or more corrective action plans have been accepted. No assurance can be given that a violation of EMTALA will not be found. Any sanctions imposed as a result of an EMTALA violation could have a material adverse effect on the future operations or financial condition of the Obligated Group.
Nonprofit Health Care Environment; Risks Related to Maintenance of Tax-Exempt Status
The tax-exempt status of interest on the Series 2017 Bonds depends upon maintenance by each Member of the Obligated Group receiving proceeds of the Series 2017 Bonds of its status as a tax-exempt organization by reason of it being an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”).
The maintenance of tax-exempt status by each Member of the Obligated Group is contingent on compliance with general rules based on the Code, regulations, and judicial decisions regarding the organization and operation of tax-exempt entities (and tax-exempt hospitals/health systems in particular), including their operation for charitable and other permissible purposes. In order to maintain its tax-exempt status under federal law, each Member of the Obligated Group must not operate on more than an insubstantial basis for the benefit of private individuals and its net earnings must not inure to the benefit of any individuals having a personal and private interest in the organization or its operations. As these general principles were developed primarily for public charities that do not conduct large-scale business operations and activities, they often do not adequately address the myriad of operations and transactions entered into by a modern health care organization. There can often be a tension between the rules designed to regulate a charitable organization and the day-to-day operations of a complex health care organization. Hospitals or other health care providers may be forced to forgo otherwise favorable opportunities for certain joint ventures, recruitment and other arrangements in order to maintain their tax-exempt status.
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Although certain traditional activities of health care providers have been the subject of interpretations by the Internal Revenue Service (“IRS”), many activities or categories of activities have not been fully addressed in any official opinion, interpretation or policy of the IRS. The IRS’s interpretation of and position on rules related to tax exemption, particularly as they affect the organization and operation of health care organizations (for example, with respect to providing charity care, joint ventures, physician and executive compensation, physician recruitment and retention, etc.), is constantly evolving. The IRS reserves the power to, and in fact occasionally does, alter or reverse its positions concerning tax-exemption issues, even concerning long-held positions upon which tax-exempt health care organizations have relied.
In addition, the IRS has taken the position that tax-exempt hospitals that are in violation of the Anti- Kickback Statute (discussed above) may also be subject to revocation of their tax-exempt status. As a result, tax- exempt entities such as the Members of the Obligated Group that have extensive transactions with physicians are subject to an increased degree of scrutiny and perhaps enforcement by the IRS. Further, the ACA imposed additional requirements for tax exemption upon tax-exempt hospitals through Section 501(r) of the Code, as described below.
The IRS may impose a penalty in the form of excise taxes on certain “excess benefit transactions” involving 501(c)(3) organizations and “disqualified persons.” An excess benefit transaction is one in which a disqualified person or entity receives more than fair market value from the exempt organization or pays the exempt organization less than fair market value for property or services, or shares the net revenues of the tax-exempt entity. A disqualified person is a person (or an entity) who is in a position to exercise substantial influence over the affairs of the exempt organization during the five years preceding an excess benefit transaction. The statute imposes excise taxes on the disqualified person and any “organization manager” who knowingly participates in an excess benefit transaction. These rules do not penalize the exempt organization itself, so there would be no direct impact on the Obligated Group or the tax status of the tax-exempt debt of the Obligated Group if an excess benefit transaction were subject to IRS enforcement, pursuant to these “intermediate sanctions” rules. However, in certain cases, the IRS may also propose revocation of tax-exempt status, whether or not excise taxes are imposed.
The IRS has periodically conducted audit and other enforcement activity regarding tax-exempt health care organizations. Such audits may be conducted by teams of revenue agents, often take years to complete and require the expenditure of significant staff time by both the IRS and taxpayers. These audits may examine a wide range of possible issues, including community benefit, private inurement and private benefit, tax-exempt bond financing, partnerships and joint ventures, retirement plans, employee benefits, employment taxes, political contributions, and other matters. In recent years, the IRS and state, county and local tax authorities have audited the operations of tax- exempt hospitals and health care systems with respect to their exempt activities and the generation of unrelated business taxable income (“UBTI”). Most hospitals and health care systems participate in activities that may generate UBTI. An investigation or audit could result in assessment of taxes, interest and penalties with respect to unreported UBTI and in some cases ultimately could affect the tax-exempt status of such entity, as well as the exclusion from gross income for federal income tax purposes of the interest payable on tax-exempt debt.
Members of the Obligated Group have been and most likely will be audited from time to time by the IRS. Management of the Obligated Group believes it has properly complied with tax laws related to its tax-exempt status and to any tax-exempt debt issued for its benefit. Nevertheless, due to the complexity of tax laws, including issues about which reasonable persons can differ, an audit could result in additional taxes, interest and penalties. An audit could ultimately affect tax-exempt status as well as the exclusion from gross income for federal income tax purposes of the interest payable with respect to tax-exempt debt issued for the benefit of the Obligated Group, including the Series 2017 Bonds.
If the IRS were to find that a tax-exempt entity has participated in activities in violation of certain regulations or rulings, the tax-exempt status of such entity could be jeopardized. Although the IRS has not frequently revoked the 501(c)(3) tax-exempt status of nonprofit health care corporations, it could do so in the future. Loss of tax-exempt status by a Member of the Obligated Group could result in loss of tax exemption of the Series 2017 Bonds, and of other tax-exempt debt of a Member of the Obligated Group, and defaults in covenants regarding the Series 2017 Bonds and other related tax-exempt debt and obligations would likely be triggered in such an event. Loss of tax-exempt status also could result in substantial tax liabilities on income of a Member of the Obligated Group. For these reasons, loss of tax-exempt status of a Member of the Obligated Group could have a material adverse effect on the financial condition and results of operations of the Obligated Group.
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In some cases, the IRS has imposed substantial monetary penalties on tax-exempt hospitals in lieu of revoking their tax-exempt status. In those cases, the IRS and exempt hospitals have entered into settlement agreements requiring the hospital to make substantial payments to the IRS. Given the potential exemption risks, a Member of the Obligated Group could be at risk for incurring monetary and other liabilities imposed by the IRS.
The failure to comply with certain legal requirements may cause the interest on the Series 2017 Bonds to become included in gross income of the recipients thereof for federal income tax purposes. In such event, the Series 2017 Bonds may be accelerated at the discretion of the Bond Trustee or, at the written request of holders of not less than 25% of the aggregate principal amount of all outstanding Series 2017 Bonds under the Bond Indenture. The Bond Indenture does not provide for the payment of any additional interest or penalty in the event the interest on the Series 2017 Bonds becomes included in gross income for federal income tax purposes.
The IRS has previously reviewed a number of bond issues and concluded that such bond issues did not comply with applicable provisions of the Code and related regulations. The IRS has typically entered into closing agreements with issuers and beneficiaries of such bond issues under which potentially substantial payments have been made to the IRS to settle the issue of whether the interest on such bond issues could be treated as tax-exempt. No assurance can be given that the IRS will not examine a Bondholder, the Members of the Obligated Group or the Series 2017 Bonds. If such an examination were to occur, it could have an adverse impact on the marketability and price of the Series 2017 Bonds and could lead to claims by the IRS for payment of substantial amounts by Members of the Obligated Group to resolve any issue. The IRS has made recent public pronouncements that in any adverse determination situation involving an audit of tax-exempt bonds, it expects to directly pursue bondholders for taxes on amounts of interest paid on such bonds which it determines are not entitled to exclusion from federal gross income, in addition to simultaneously pursuing remedies against issuers and conduit borrowers.
IRS officials have indicated that resources will be invested in compliance projects and audits of tax-exempt bonds, including the use of bond proceeds, in the charitable organization sector, with specific reviews of private use. The IRS sent post-issuance compliance questionnaires to several hundred nonprofit corporations that had borrowed on a tax-exempt basis. After analyzing responses, IRS representatives indicated that it had commenced a number of examinations of hospital tax-exempt bond issuances with wide-ranging areas of inquiry. In the final report, issued July 1, 2011, summarizing the findings and conclusions of the questionnaires, the IRS stressed the importance of formal post-issuance compliance and record-keeping procedures which, once implemented, borrowers should continuously review. The IRS suggested that it may issue future questionnaires as part of its goal to promote post- issuance compliance.
There can be no assurance that responses by the Borrowers or the Obligated Group to an IRS examination or questionnaire, or Form 990, will not lead to an IRS review that could adversely affect the tax-exempt status or the market value of the Series 2017 Bonds or of other outstanding tax-exempt indebtedness of the Borrowers or the Obligated Group. Additionally, the Series 2017 Bonds, or other tax-exempt obligations issued for the benefit of the Borrowers or the Obligated Group may be, from time to time, subject to examination by the IRS.
The operations and practices of nonprofit, tax-exempt hospitals are routinely challenged or criticized for inconsistency or inadequate compliance with the regulatory requirements for, and societal expectations of, nonprofit tax-exempt organizations. These challenges, in some cases, are broader than concerns about compliance with federal and state statutes and regulations, such as Medicare and Medicaid compliance, and instead in many cases are examinations of core business practices of the health care organizations. A common theme of these challenges is that nonprofit hospitals may not be conferring community benefits that equal the benefits received from tax-exempt status. Areas that have come under examination have included pricing practices, billing and collection practices, charitable care, methods of providing and reporting community benefit, executive compensation, exemption of property from real property taxation, private use of facilities financed with tax-exempt bonds and others. These challenges and questions have come from a variety of sources, including state attorneys general, the IRS, labor unions, Congress, state legislatures and patients, and in a variety of forums, including hearings, audits, litigation and proposed ballot initiatives. These challenges and examinations, and any resulting legislation, regulations, judgments or penalties, could have a material adverse effect on the Obligated Group. These challenges and examinations include the following, among others.
Congressional Action. Senate and House committees have conducted hearings and investigations into issues related to nonprofit tax-exempt healthcare organizations, including, among others, a nationwide investigation
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of hospital billing and collection practices, charity care and community benefit standards, prices charged to uninsured patients and possible reforms to the nonprofit sector. These hearings and investigations could result in new legislation. Neither the effect of any such legislation on the nonprofit health care sector nor its effect on the Obligated Group can be determined at this time.
IRS Examination of Compensation Practices. In 2004, the IRS began a compliance program to measure compliance by tax-exempt organizations with requirements that they not pay excessive compensation and benefits to their officers and other “insiders.” In February 2009, the IRS issued its Hospital Compliance Project Final Report (the “IRS Final Report”), which examined tax-exempt hospitals’ practices and procedures with regard to compensation and benefits paid to these individuals. The IRS Final Report and other recent developments indicate that the IRS (i) will continue to scrutinize executive compensation arrangements, practices and procedures very closely and (ii) may, in certain circumstances, conduct further investigations or impose fines on tax-exempt organizations.
IRS Form 990 and Schedules. The IRS Form 990 is used by most nonprofit organizations exempt from federal income taxation under Section 501(c)(3) of the Code to submit information required by the federal government. The IRS Form 990 requires detailed public disclosure of compensation practices, corporate governance, loans to executive management and others, joint ventures and other types of transactions, political campaign activities, and other areas the IRS deems to be compliance risk areas. The IRS Form 990 also requires disclosure concerning community benefit and compliance with financial assistance policy and billing and collection requirements (on Schedule H, which must be completed by hospital organizations), as well as reporting of information relating to tax-exempt bonds, including compliance with the arbitrage rules and rules limiting private use of bond-financed facilities (on Schedule K). Schedule K to the IRS Form 990 is intended to enhance transparency as to the operations of exempt organizations and address what the IRS believes is significant noncompliance by tax-exempt organizations with recordkeeping and record retention requirements relating to their outstanding tax-exempt bonds. It is likely that the IRS will use the information provided by the IRS Form 990 and Schedule K (as well as other schedules) to assist in, and expand, its enforcement efforts.
Charity Care and Tax-Exempt Status; 501(r). Hospitals are permitted to obtain tax-exempt status under the Code because the provision of health care historically has been treated as a “charitable” enterprise. This treatment arose before most Americans had health insurance, when charitable donations were required to fund the health care provided to the sick and disabled. Some commentators and others have taken the position that, with the onset of employer health insurance and governmental reimbursement programs, there is no longer any justification for special tax treatment for the health care industry, and the availability of tax-exempt status should be eliminated.
The ACA imposed additional requirements for tax exemption upon tax-exempt hospitals through Section 501(r) of the Code. Specifically, each tax-exempt hospital facility is required to (i) conduct a community health needs assessment at least every three years and adopt an implementation strategy to meet the identified community needs (and failing to do so can result in a penalty on the organization of up to $50,000); (ii) adopt, implement and widely publicize a written financial assistance policy that contains the statutory and regulatory required minimums and a policy to provide emergency medical treatment without discrimination; (iii) limit charges to individuals who qualify for financial assistance under such tax-exempt hospital’s financial assistance policy to no more than the amounts generally billed to individuals who have insurance covering such care and refrain from using “gross charges” when billing such individuals; and (iv) refrain from taking extraordinary collection actions without first making reasonable efforts to determine whether the individual is eligible for assistance under such tax-exempt hospital’s financial assistance policy.
In December 2014, the IRS published a final rule establishing regulations implementing the requirements of Section 501(r) applicable to tax-exempt organizations. Among other things, the final rule provides guidance on the community health needs assessment requirements (which must be conducted at least every three years and made available to the public) and related tax and reporting obligations, clarifies the consequences for failing to meet the various requirements under Section 501(r) and explains that minor omissions and inadvertent errors will not result in loss of tax-exempt status, provided that certain specified correction and disclosure steps are taken.
Management of the Obligated Group has adopted policies required to achieve and remain in compliance with the provisions of Section 501(r) and the final regulations. A failure to comply with the provisions of Section
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501(r) and the final regulations could result in a loss of Section 501(c)(3) tax-exempt status or otherwise subject revenues of a hospital facility to federal income tax.
In addition, the Treasury Department is required to review information about each tax-exempt hospital’s community benefit activities at least once every three years, as well as to submit an annual report to Congress with information regarding the levels of charity care, bad debt expenses, unreimbursed costs of government programs, and costs incurred by tax-exempt hospitals for community benefit activities. The periodic reviews and reports to Congress regarding the community benefits provided by 501(c)(3) hospitals may increase the likelihood that Congress will require such hospitals to provide a minimum level of charity care in order to retain tax-exempt status and may increase IRS scrutiny of particular 501(c)(3) hospital organizations.
Litigation Relating to Billing and Collection Practices. Lawsuits have been filed in both federal and state courts alleging, among other things, that hospitals have failed to fulfill their obligations to provide charity care to uninsured patients and have overcharged uninsured patients. Some of these cases have since been dismissed by the courts and some hospitals and health systems have entered into substantial settlements. Cases are pending in various courts around the country and others could be filed.
Challenges to Real Property Tax Exemptions. The real property tax exemptions afforded to certain nonprofit health care providers by state and local taxing authorities have been challenged on the grounds that the health care providers were not engaged in sufficient charitable activities. These challenges have been based on a variety of grounds, including allegations of aggressive billing and collection practices and excessive financial margins and operations that closely resemble for-profit businesses. Several of these disputes have been determined in favor of the taxing authorities or have resulted in settlements.
Privacy and Security of Health Information; Health Information Technology
HIPAA. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) addressed, among other things, the confidentiality of individuals’ health information. Under HIPAA, disclosure of certain broadly defined protected health information is prohibited unless expressly permitted under the provisions of the HIPAA statute and regulations or authorized by the patient. HIPAA’s confidentiality provisions extend not only to patient medical records, but also to a wide variety of health care clinical and financial settings where patient privacy restrictions often impose communication, operational, accounting and billing restrictions.
HHS has promulgated privacy regulations under HIPAA that protect patient medical records and other personal health information maintained by health care providers, hospitals, health plans, health insurers and health care clearinghouses (the “Privacy Regulations”). Management of the Obligated Group believes that its operations and information systems comply with the Privacy Regulations. Security regulations have also been promulgated under HIPAA (the “Security Regulations”). Additionally, HHS has promulgated regulations to standardize the electronic transfer of information pursuant to certain enumerated transactions (the “Code Set Transactions”). Management of the Obligated Group believes that it is in substantial compliance with the Security Regulations and the Code Set Transactions. However, as national and international security breaches show, no organization is immune from any number of intentional or unintentional attacks or breaches of information security.
HIPAA imposes civil monetary penalties for violations and criminal penalties for knowingly obtaining or using individually identifiable health information, as described further below. Also as described below, the HITECH Act (defined below) and regulations promulgated thereunder made broad, sweeping changes to HIPAA.
The Office for Civil Rights (“OCR”) is the administrative office that is tasked with enforcing HIPAA. OCR has stated that it has moved from education to enforcement in its implementation of the law. Recent settlements of HIPAA violations for breaches involving lost data have reached the millions of dollars. Any breach of HIPAA, regardless of intent or scope, may result in penalties or settlement amounts that are material to a covered health care provider.
Additionally, other federal laws and state laws address the confidentiality of individuals’ health information. These federal and state restrictions related to privacy and confidentiality add costs and create potentially unanticipated sources of legal liability.
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The HITECH Act. Provisions in the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), enacted as part of the American Recovery and Reinvestment Act of 2009, made dramatic changes to HIPAA. On January 25, 2013, DHHS issued comprehensive modifications to the existing HIPAA regulations to implement the requirements of the HITECH Act, commonly known as the “HIPAA Omnibus Rule.” The HIPAA Omnibus Rule became effective on March 26, 2013, and covered entities were required to be in compliance by September 23, 2013 (though certain requirements have a longer timeframe). Key aspects of the HIPAA Omnibus Rule include, but are not limited to: (i) a new standard for what constitutes a breach of protected health information, (ii) establishing four levels of culpability with respect to civil monetary penalties assessed for HIPAA violations, (iii) direct liability of business associates for certain violations of HIPAA, (iv) modifications to the rules governing research, (v) stricter requirements regarding non-exempt marketing practices, (vi) modification and re-distribution of notices of privacy practices, and (vii) stricter requirements regarding the protection of genetic information. OCR performs periodic audits of covered entities to assess their compliance with HIPAA and the HITECH Act. Covered entities and their business associates can expect continued audit activity by OCR in the future. The obligations imposed under the HIPAA Omnibus Rule could have a material adverse effect on the financial condition of the Members of the Obligated Group.
The HITECH Act revised the civil monetary penalties associated with violations of HIPAA and provided state attorneys general with authority to enforce the HIPAA Privacy Regulations and Security Regulations in some cases. The revised civil monetary penalty provisions establish a tiered system. Penalties are a minimum of $100 per violation for an unknowing violation and $1,000 per violation for a violation due to reasonable cause, but not willful neglect. For a violation due to willful neglect, the penalty is between $10,000 and $50,000 per violation, depending on whether the violation was corrected within 30 days of the date the violator knew or should have known of the violation. Maximum penalties may reach $1,500,000 for identical violations. Criminal penalties can be enforced for, among other things, knowingly obtaining or disclosing personal health information in violation of HIPAA. Criminal penalties include fines and/or imprisonment for up to 10 years, depending on the offense. Finally, while there is currently no private cause of action for violations of HIPAA or the HITECH Act, an individual may have a right to sue under state law for privacy-related causes of action. Furthermore, HHS has authority to promulgate rules to allow individuals harmed by such violations to recover a percentage of monetary penalties or a monetary settlement.
The HITECH Act also established programs under Medicare and Medicaid to provide incentive payments for the “meaningful use” of certified electronic health record (“EHR”) technology. The Medicare and Medicaid EHR incentive programs provide incentive payments to eligible professionals and eligible hospitals for demonstrating meaningful use of certified EHR technology. Health care providers demonstrate their meaningful use of EHR technology by meeting objectives specified by CMS for using health information technology and by reporting on specified clinical quality measures. In 2014, the federal government began auditing hospitals’ and providers’ records related to their attestation of being “meaningful users” in order to obtain incentive payments. A hospital or provider that fails the audit will have an opportunity to appeal. Ultimately, hospitals or providers that fail on appeal will have to repay any incentive payments they received through these programs.
Since fiscal year 2015, providers that have not satisfied the performance and reporting criteria for demonstrating meaningful use have had their Medicare payments significantly reduced. The payment adjustments under the meaningful use program for eligible professionals (but not eligible hospitals) sunset in 2018 pursuant to MACRA, which combined certain aspects of this and other programs under the Medicare Physician Fee Schedule. (For more information on MACRA, see above.)
Management of the Obligated Group believes that the Members of the Obligated Group are and will continue to be in compliance with the HITECH Act and further, management of the Obligated Group does not anticipate that continued compliance with the HITECH Act will have a material adverse effect on the operations of the Obligated Group.
The Cures Act and Health Information Technology and Privacy. The Cures Act contains a number of provisions regarding health information technology and health care privacy, including: (i) the privacy of protected health information used and disclosed as part of research; (ii) permitted uses and disclosures of mental health and substance abuse treatment information; and (iii) the interoperability of EHR networks and patient access to their information in EHRs. The legislation calls for a number of studies and for guidance from HHS implementing and clarifying Cures Act provisions. Certain of the Cures Act provisions and anticipated regulations are intended to reduce regulatory or administrative burdens related to EHRs in the Medicare EHR incentive program and other
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Medicare programs. The impact of these recent and anticipated regulatory, policy and legislative changes on the operations of the Members of the Obligated Group cannot be predicted.
Security Breaches and Unauthorized Releases of Personal Information. Federal, state and local authorities are increasingly focused on the importance of protecting the confidentiality of individuals’ personal information, including patient health information. Many states have enacted laws requiring businesses to notify individuals of security breaches that result in the unauthorized release of personal information. In some states, notification requirements may be triggered even where information has not been used or disclosed, but rather has been inappropriately accessed. State consumer protection laws may also provide the basis for legal action for privacy and security breaches and frequently, unlike HIPAA, authorize a private right of action. In particular, the public nature of security breaches exposes health organizations to increased risk of individual or class action lawsuits from patients or other affected persons, in addition to government enforcement and negative media attention. Failure to comply with restrictions on patient privacy or to maintain robust information security safeguards, including taking steps to ensure that contractors who have access to sensitive patient information maintain the confidentiality of such information, could consequently damage a health care provider’s reputation and materially adversely affect business operations.
Cybersecurity Risks. Despite the implementation of network security measures by the Members of the Obligated Group, their information technology systems may be vulnerable to breaches, hacker attacks (including “ransomware”), computer viruses, physical or electronic break-ins and other similar events or issues. Such events or issues could lead to the inadvertent disclosure of protected health information or other confidential information or could have an adverse effect on the ability of the Members of the Obligated Group to provide health care services.
Information Technology. The ability to adequately price and bill health care services and to accurately report financial results depends on the integrity of the data stored within information systems, as well as the operability of such systems. Information systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards. There can be no assurance that efforts to upgrade and expand information systems capabilities, protect and enhance these systems, and develop new systems to keep pace with continuing changes in information processing technology will be successful or that additional systems issues will not arise in the future.
Electronic media is also increasingly being used in clinical operations, including the conversion from paper medical records to EHRs (see APPENDIX A hereto for a more complete description of the System’s investment in and implementation of the Epic EHR system), computerization of order entry functions and the implementation of clinical decision-support software. The reliance on information technology for these purposes imposes new expectations on physicians and other workforce members to be adept in using and managing electronic systems. It also introduces risks related to patient safety, and to the privacy, accessibility and preservation of health information. Technology malfunctions or failure to understand and use information systems properly could result in the dissemination of or reliance on inaccurate information, as well as in disputes with patients, physicians and other health care professionals. Health information systems are subject to different or higher standards and greater regulation than other information technology or the paper-based systems previously used by health care providers, which increases the cost, complexity and risks of operations. All of these risks may have adverse consequences on hospitals and health care providers.
Payment Card Industry Data Security Standards. Health care providers have seen significant changes in the method, amount of transactions and dollar amount of patient payments. Health care providers recognize that financial data security is a paramount concern as is continuing to protect and secure patient information. Chip cards used at Europay, MasterCard and Visa (“EMV”) terminals protect against counterfeit transactions by replacing static data with dynamic data. Merchants are in the process of migrating to EMV chip card technology to improve the security of the card-present payments infrastructure. As a result, EMV is being introduced to health care providers.
Payment Card Industry, or PCI, is a self-regulatory organization founded by its founding members, American Express, Discover Financial Services, JCB International, MasterCard and Visa Inc. Participating organizations in PCI may include merchants, banks, processors, hardware and software developers and point-of-sale vendors. PCI has defined a set of twelve industry security standards called the Payment Card Industry Data Security Standards, or PCI DSS, which are designed to ensure that all companies that accept, process, store or transmit credit card information maintain a secure environment. These are: (1) Install and maintain a firewall configuration to
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protect cardholder data; (2) do not use vendor-supplied defaults for system passwords and other security parameters; (3) protect stored cardholder data; (4) encrypt transmission of cardholder data across open, public networks; (5) use and regularly update antivirus software; (6) develop and maintain secure systems and applications; (7) restrict access to cardholder data by business need-to-know; (8) assign a unique ID to each person with computer access; (9) restrict physical access to cardholder data; (10) track and monitor all access to network resources and cardholder data; (11) regularly test security systems and processes; and (12) maintain a policy that addresses information security.
Compliance with the PCI DSS and implementing related procedures, technology and information security measures requires significant resources and ongoing attention. Costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology such as those necessary to achieve compliance with the PCI DSS or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of the operations of the Members of the Obligated Group. Any material interruptions or failures in these systems could have a material adverse effect on the Members of the Obligated Group.
In addition, beginning October 1, 2015, the liability for card-present fraud shifted to whichever party is the least EMV-compliant in a fraudulent transaction. This means in practice that if a health care provider has not updated its system to accept chip cards and fraud occurs when a chip card is inserted into the terminal, the health care provider would be liable for the costs. It is not mandatory to begin using EMV compliant terminals on or after October 1, 2015 and there are no fines or other penalties; however, a health care provider that does not use EMV- compliant terminals may face much higher costs in the event of a large data breach. At this time, it is too early to predict the impact that this new technology will have on the Members of the Obligated Group.
Market Dynamics and Other Factors That Could Result in Increased Competition
In providing health care services, Members of the Obligated Group compete with a number of other providers in their service areas, including for-profit and not-for-profit providers of acute health care services. In addition, other affiliations among health care providers in the service areas of the Obligated Group may be either in a formative phase or under negotiation. Competition could also result from certain health care providers that may be able to offer lower priced services to the populations served by the Members of the Obligated Group. These services could be substituted for some of the revenue-generating hospital and other services currently offered by the Obligated Group. The services that could serve as substitutes for hospital treatment include skilled, specialized and residential nursing facilities, home care, drug and alcohol abuse programs, ambulatory surgical centers, expanded preventive medicine and outpatient treatment, freestanding birthing centers, freestanding independent diagnostic testing facilities, and increasingly sophisticated physician group practices. Additionally, physicians are increasingly providing care in their offices that was previously provided in hospitals, which results in reduced utilization of hospital facilities. Certain of such forms of health care delivery are designed to offer comparable services at lower prices, and the federal government and private third-party payors may increase their efforts to encourage the development and use of such programs. The effect on the Obligated Group of any such affiliations or entry into the market by alternative providers of certain services, if completed, cannot be determined at this time, but the management of the Obligated Group believes that it has positioned itself to effectively provide community-based health care throughout the service areas of each Member. See “MARKET ENVIRONMENT – Competition” in APPENDIX A hereto.
Additionally, for various reasons, including the changes in methods of payments for health care services described above, hospitals generally have experienced reductions in the average length of stay for patients and a decline in hospital admissions. Purchasers of health care services other than Medicare and Medicaid are also reconsidering the manner in which health care services are provided. Private employers have begun to revise the way in which health care benefits are provided to their employees in order to create incentives for cost containment. Traditional health insurance programs, which pay for services on a fee-for-service basis, are giving way to health insurance programs being offered with economic incentives for employees and employers. High deductible health plans are also becoming more popular. The traditional programs are being supplemented by managed care organizations, such as HMOs (described above). As government purchasers continue to attempt to limit the amounts they pay for health care services, and as private employers continue to provide access to alternative delivery systems, health care providers have responded to such pressures through reorganizations, mergers and acquisitions, and development of systems that provide a variety of health care services. In addition, future changes in state and federal law may have the effect of increasing competition in the health care industry. Any competition could have a material adverse effect on the future operations and financial condition of the Obligated Group.
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Additionally, scientific and technological advances, new procedures, drugs and devices (including digital health technologies) may reduce utilization and revenues of a hospital in the future or otherwise lead the way to new avenues of competition. See “Technological Changes” below.
Antitrust
Antitrust liability may arise in a wide variety of circumstances, including medical staff privilege disputes, payor contracting, physician relations, joint ventures, merger, affiliation and acquisition activities, certain pricing or salary setting activities, and anticompetitive business conduct or practices. The application of the federal and state antitrust laws to health care is evolving (especially as the ACA and other coordination of care initiatives are implemented), and therefore not always clear. Currently, the most common areas of potential liability for hospitals and other health care providers are joint action among providers with respect to payor contracting, medical staff credentialing disputes and mergers and acquisitions.
Violation of the antitrust laws could result in criminal and/or civil enforcement proceedings by federal and state agencies, as well as actions by private litigants. In certain actions, private litigants may be entitled to treble damages, and in others, governmental entities may be able to assess substantial monetary fines. Moreover, successful private or governmental litigants may obtain injunctive relief that can affect the defendant’s ability to conduct or continue certain business practices or activities. There cannot be any assurances that enforcement authorities or private parties will not assert that the Members of the Obligated Group or their affiliates, or any transaction in which they are involved, are in violation of the antitrust laws. Any significant antitrust investigation or finding that the Members of the Obligated Group have violated antitrust laws could have a material adverse effect on the Members of the Obligated Group.
Joint Ventures
To the extent the Members of the Obligated Group have or enter into strategic alliances or joint ventures with other health care organizations, such arrangements do or will materially comply with guidance from the OIG regarding such joint venture arrangements. The OIG has expressed its concern in various advisory bulletins that many types of joint venture arrangements involving hospitals may implicate the Anti-Kickback Statute, since the parties to joint ventures are typically in a position to refer patients of federal health care programs. In its 1989 Special Fraud Alert, the OIG raised concern about certain physician joint ventures where the intent is not to raise investment capital to start a business but rather to lock up a stream of referrals from the physician investors and compensate the investors indirectly for the referrals. The OIG listed various features of suspect joint ventures, but noted that its list was not exhaustive. These features include: (i) whether investors are chosen because they are in a position to make referrals; (ii) whether physicians with more potential referrals are given larger investment interests; (iii) whether referrals are tracked and referral sources shared with investing physicians; (iv) whether the overall structure is a “shell” (i.e., one of the parties is an ongoing entity already engaged in a particular line of business); and (v) whether investors are required to invest a disproportionately small amount or are paid extraordinary returns in comparison with their risk.
In April 2003, the OIG issued a Special Advisory Bulletin, which indicated that “contractual joint ventures” (where a provider expands into a new line of business by contracting with an entity that already provides the items or services) may violate the Anti-Kickback Statute and expressed skepticism that existing statutory or regulatory safe harbors would protect suspect contractual joint ventures. In January 2005, the OIG published its Supplemental Compliance Program Guidance for Hospitals and reiterated its concerns regarding joint ventures entered into by hospitals.
In addition, under the federal tax laws governing Section 501(c)(3) organizations, a tax-exempt hospital’s participation in a joint venture with for-profit entities must further the hospital’s exempt purposes and the joint venture arrangement must permit the hospital to act exclusively in the furtherance of its exempt purposes, with only incidental benefit to any for-profit partners. If the joint venture does not satisfy these criteria, the hospital’s tax exemption may be revoked, the hospital’s income from the joint venture may be subject to tax or the parties may be subject to some other sanction.
Finally, many hospital joint ventures with physicians may also implicate the federal Stark Law.
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Any evaluation of compliance with the Anti-Kickback Statute or tax laws governing Section 501(c)(3) organizations depends on the totality of the facts and circumstances, while the Stark Law requires strict compliance with an exception to avoid triggering the referral and billing prohibition. While management of the Obligated Group believes that the joint venture arrangements to which the Members of the Obligated Group are a party are in material compliance with the Anti-Kickback Statute, OIG pronouncements, the tax laws governing Section 501(c)(3) organizations and the Stark Law, there can be no assurance that regulatory authorities will not take a contrary position or that such transactions will not be found to have violated these laws and related regulations. Any determination that a Member of the Obligated Group is not in compliance with these laws and related regulations could have a material adverse effect on the future financial condition of the Obligated Group.
Compliance Program
The Members of the Obligated Group are committed to create and maintain an environment in which compliance with local, state and federal rules, regulations and ethical business practices are integrated into the culture. However, due to the complexity of health care regulations giving rise to potentially differing interpretations and ambiguity of regulatory requirements, the Obligated Group’s practices and procedures could be challenged by regulatory authorities. Notwithstanding good faith efforts to achieve compliance, it is likely that the Members of the Obligated Group will be faced in the future with challenges to practices and procedures they believe are appropriate and it is also likely that instances of noncompliance will occur and may be discovered in the future. The Members of the Obligated Group have undertaken a corporate compliance program in an attempt to reduce the risk and adverse economic consequences of noncompliance.
Environmental Laws and Regulations
Health care facilities are subject to a wide variety of federal, state and local environmental, occupational and health and safety laws and regulations that address, among other things, health care operations or facilities and properties owned or operated by health care providers. Among the types of regulatory requirements faced by health care providers are: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos, polychlorinated biphenyls and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at the hospitals, clinics and nursing homes; and requirements for training employees in the proper handling and management of hazardous materials and wastes. In their role as owners and operators of properties or facilities, health care providers may be subject to liability for investigating and remedying any hazardous substances that have come to be located on the property, including any such substances that may have migrated off of or onto the property. Typical health care operations include, in various combinations, the handling, use, storage, transportation, disposal and discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants or contaminants. For this reason, health care operations are particularly susceptible to the practical, financial and legal risks associated with compliance with such laws and regulations. Such risks may result in damage to individuals, property or the environment; may interrupt operations or increase their cost, or both; may result in legal liability, damages, injunctions or fines; or may trigger investigations, administrative proceedings, penalties or other government agency actions, and may not be covered by insurance. There can be no assurance that a Member of the Obligated Group will not encounter such risks in the future, and such risks may result in material adverse consequences to its operations or financial condition.
Liability Claims and Liability Insurance
Professional liability and other actions alleging wrongful conduct and seeking punitive damages are often filed against hospitals and other health care providers. Insurance does not provide coverage for judgments for punitive damages. Litigation also arises from the corporate and business activities of hospitals, from a hospital’s status as an employer or as a result of medical staff or provider network peer review or the denial of medical staff or provider network privileges. As with professional liability, many of these risks are covered by insurance, but some are not. For example, some antitrust claims or business disputes are not covered by insurance or other sources and may, in whole or in part, be a liability of the hospital or other health care provider if determined or settled adversely.
The dollar amount of patient damage recoveries in professional liability lawsuits filed against physicians and hospitals remains potentially significant. The ability of, and the cost to, the Obligated Group to insure or otherwise protect itself against professional liability and other claims may adversely affect their future results of operations or financial condition. The ability of health care providers to obtain professional liability insurance in South Dakota and surrounding states comprising the System’s service areas, including particularly the State of
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Wyoming, like in most of the rest of the United States, has significantly deteriorated as rates for such insurance have increased and commercial providers have reduced their participation in, or withdrawn entirely from, the medical malpractice insurance realm. The ability of the Obligated Group to insure or otherwise protect itself against professional liability claims remains in question and the cost of such protection will likely continue to rise, which may adversely affect the financial condition of the Obligated Group. There is no assurance that the Members of the Obligated Group will be able to maintain coverage amounts currently in place in the future, that the coverage will be sufficient to cover malpractice or other judgments rendered against the Members of the Obligated Group or that such coverage will be available at a reasonable cost in the future.
Physicians, Nurses and Other Employees
Health care systems are large employers with a wide diversity of employees. The ability of the Members of the Obligated Group to employ and retain qualified employees, including any senior management, and their ability to maintain good relations with such employees and the unions they may be represented by may affect the quality of services to patients and the financial condition of the Members of the Obligated Group. Additionally, employees of health care providers are increasingly becoming unionized and many providers have collective bargaining agreements with one or more labor organizations. Recent rules have been issued with the intent of making it easier to form, join or assist labor organizations. These factors may materially increase costs of operation for the Obligated Group.
Labor Relations and Collective Bargaining. There are currently no unions or professional associations representing any employees of either the Members of the Obligated Group or the Non-Obligated Affiliates. Management considers employee relations to be positive overall and scores in employee engagement surveys across the System suggest that employees believe management is leading the System well.
Physician and Staffing Shortages. From time to time, the health care industry suffers from a scarcity of nursing personnel, respiratory therapists, pharmacists and other trained health care technicians. In addition, aging medical staffs and difficulties in recruiting individuals to the medical profession are predicted to result in physician shortages. A significant factor underlying this trend includes a decrease in the number of persons entering such professions. This is expected to intensify in the future, aggravating the general shortage and increasing the likelihood of hospital-specific shortages. As hospitals and other health care providers transition to a population health model of care delivery, there is expected to be a greater need for care coordinators and such need may outpace the supply of qualified personnel. Competition for physicians and other health care professionals, coupled with increased recruiting and retention costs, may increase hospital operating costs, possibly significantly. This trend could have a material adverse impact on the financial conditions and results of operations of hospitals and other health care providers. This scarcity may be further intensified for certain health care providers from increased utilization of health care services as a consequence of the ACA’s expansion of the number of insured consumers.
The System has experienced difficulties in recruiting and retaining physicians and, as with most health systems throughout the country, regularly struggles with nursing shortages. The System currently has over 250 nursing positions open and for fiscal year 2017, experienced a nursing turnover rate of 18.8% for RN positions and 27.8% for LPN positions. On occasion, the Hospital has been forced to reduce the number of staffed beds due to insufficient staffing. The System is continuously evaluating staffing models and compensation structures and has made recruitment of physicians and reduction of open nursing positions and nursing turnover strategic objectives. The need to contract for nursing services and seek out locum tenens physicians creates additional staffing costs for the System. The most significant barrier to physician recruitment is the System’s geographical location. In fiscal year 2017, the System recruited 29 physicians and lost 8 to departure. However, in fiscal year 2016, 23 physicians were recruited and 17 departed. The majority of the departing physicians in each year were not physicians recruited that year. No trend has been identified as the primary cause of physician departures. See “MEDICAL STAFF” in APPENDIX A hereto for additional information.
Management. Changes in System leadership and focus since 2015, including recruitment of employed specialists, plans for a new specialty orthopedic hospital (see “THE PROJECT” in APPENDIX A hereto), and certain other factors, have created tensions between System management and certain members of the Hospital medical staff in Rapid City (primarily independent physicians). At an April 4, 2017, Hospital medical staff meeting, physicians entered a vote of “no confidence” in the Corporation’s President and Chief Executive Officer. The Regional Health board responded with a unanimous vote of confidence in the President and Chief Executive Officer and his efforts to reshape the System to meet the evolving challenges of health care delivery, service and
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reimbursement. Since 2015, System leadership has made and will continue to make efforts to collaborate with both employed and independent physicians to meet these challenges. Physicians currently serve in several administrative roles, facilitating communication with the medical staff and giving physicians a direct voice in decision- making. There can be no guaranty that relations between System management and medical staff, particularly the medical staff of the Hospital, will improve in the future, and there can be no guaranty that existing tensions will not impact competition, physician recruitment and retention or the financial condition of the Obligated Group.
Wage and Hour Class Actions and Litigation. Federal law and many states impose standards related to worker classification, eligibility and payment for overtime, liability for providing rest periods and similar requirements. Large employers with complex workforces are susceptible to actual and alleged violations of these standards. In recent years, there has been a proliferation of lawsuits over these “wage and hour” issues, often in the form of large, sometimes multi-state, class actions. For large employers such as hospitals and health systems, such class actions can involve multi-million dollar claims, judgments and/or settlements. A major class action decided or settled adversely to any Obligated Group Member could have a material adverse impact on its financial condition and result of operations. Currently, no such class action lawsuits are pending against any of the Members of the Obligated Group.
Research Matters and Increased Enforcement Affecting Research
From time to time the Obligated Group receives public and private contributions and/or payments in the form of grants, contracted drug studies and private donations related to the conduct of medical research and development. Conducting such research and development is an important component of certain programs, both financially and in terms of their respective missions. Obtaining such financing is competitive, and retaining physicians and scientists to maintain a healthy research program depends in part upon maintaining facilities and support for such research. There is no assurance that the availability of research funding will continue or that the Obligated Group will be able to attract such funding. A decrease of such funding or such research programs could have an adverse effect upon the Obligated Group.
Conducting research involving human subjects entails risk that may be more pronounced than the risk associated with, for example, medical malpractice. Research subjects may often have an adverse response to therapy administered as part of research protocols, researchers may make mistakes, and new technology may have unintended side effects. In research contexts, adverse effects of research have the potential to generate substantial adverse publicity, and the potential conflict of interest that a researcher may have could increase liability risk and worsen the public’s reaction to any bad outcomes. The government has also subjected certain research institutions to increased scrutiny related to research mishaps or perceived conflicts of interest.
Moreover, the relationships between the sponsors of research and physicians or hospitals may implicate the Anti-Kickback Statute or the FCA (both as defined herein). In addition to increasing enforcement of laws governing payment and reimbursement (as described herein), the federal government has stepped up enforcement of laws and regulations governing the conduct of clinical trials at hospitals. HHS elevated and strengthened its Office for Human Research Protections, one of the agencies with responsibility for monitoring federally funded research. 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. The DOJ may also become involved in enforcement actions relating to the use of federal funds or submission of information to federal agencies. 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 federal programs for care provided to patients enrolled in clinical trials that is not eligible for reimbursement can subject the Obligated Group to sanctions as well as repayment obligations. There have been a number of recent government investigations and settlements involving hospital use of federal grant funding in connection with clinical trials and the submission of claims to federal programs for services provided in a clinical trial. In addition to risks under the FCA (as described herein), should there be a finding of improper conduct on the part of the Obligated Group related to research, it is possible that the government could suspend the Obligated Group’s research operations or terminate its ability to participate in government-sponsored research programs.
The Cures Act contains many provisions related to research and clinical trials, including making significant changes to the way that FDA approves new drugs and medical devices. Among other things, the legislation calls on FDA to consider new types of data, such as patient experience data, in its drug approval process. The legislation
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also permits drug manufacturers to utilize new types of clinical trial designs in order to collect data in the drug approval process. The intent of many of the statute’s provisions is to speed the approval of new drugs and medical devices. Whether the Cures Act realizes these goals will depend on the adoption of new FDA regulations, policy guidance, and FDA approval practices. Furthermore, final revisions to the Federal Policy for the Protection of Human Subjects (known as the “Common Rule”) were issued on January 19, 2017. These revisions are intended to reduce burden, delay and ambiguity for investigators and better protect human subjects involved in research. The impact of these recent and anticipated regulatory, policy and legislative changes on the operations of the Obligated Group related to research cannot be predicted.
Technological Changes
Medical research and resulting discoveries have grown exponentially in the last decades. These new discoveries may add greatly to the cost of the Members of the Obligated Group providing services with no or little offsetting increase in federal reimbursement and may also render obsolete certain of the Obligated Group’s health services. 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.
Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures
Health plans, Medicare and Medicaid programs, employers, trade groups and other purchasers of health services, private standard-setting organizations and accrediting agencies and state legislatures are increasingly 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 other health care providers. The ACA shifts payments from paying for volume to paying for value, based on various health outcome measures, reporting requirements and quality and efficiency metrics, and also requires public disclosure of certain financial relationships. Published rankings such as Medicare’s “Hospital Compare” quality ranking systems, “score cards,” tiered hospital networks with higher co-payments and deductibles for non-emergent use of lower-ranked providers, “pay for performance” and other financial and non-financial incentive programs have been and are being introduced to affect the reputation and/or revenue of hospitals, the members of their medical staffs and other health care providers and to influence the behavior of consumers and providers such as the Obligated Group. Currently prevalent are measures of quality based on clinical outcomes of patient care, reduction in costs, patient satisfaction and investment in health information technology. Measures of performance set by others that characterize a hospital or a health care provider negatively may adversely affect its reputation and financial condition.
Interest Rate Swap Risk
The Obligated Group has entered into an interest rate swap agreement with respect to a portion of the Series 2015 Bonds (the “Swap Agreement”) with U.S. Bank National Association, as counterparty (the “Counterparty”). The Swap Agreement constitutes an Interest Rate Agreement under the Master Indenture, which permits any Interest Rate Agreement to be authenticated as an Obligation under the Master Indenture. The Obligated Group issued and delivered the Series 2003 Swap Obligation pursuant to the Prior Master Indenture at the fixed rate payable of 4.079%; however, the terms of the Swap Agreement and the Series 2003 Swap Obligation, including the interest rate on the Series 2003 Swap Obligation, are currently being renegotiated in connection with the execution of the New Master Indenture and the replacement and exchange of the Series 2015 Bond Obligation and Series 2015 Purchaser Obligation. It is expected that upon conclusion of negotiations with the direct bank purchaser of the Series 2015 Bonds, the amortized amount of the Series 2003 Swap Obligation will be approximately $54 million. The Swap Agreement is subject to periodic “mark-to-market” valuations and may have a negative value to the Obligated Group. The Counterparty may terminate the Swap Agreement upon nonpayment by the Obligated Group or upon the occurrence of certain credit events. If the Obligated Group or the Counterparty terminates the Swap Agreement during a negative value situation, the Obligated Group may be subject to a termination payment to the Counterparty, and such payment could be material. The Swap Agreement does not require the posting of collateral. Under the Swap Agreement, the Counterparty is obligated to make variable rate payments to the Obligated Group, which payments may be more or less than the amount of interest the Obligated Group is required to pay with respect to a corresponding principal amount of the Series 2015 Bonds.
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Matters Relating to the Security for the Series 2017 Bonds
Certain amendments to the Master Indenture may be made with the consent of the Holders of not less than 51% in aggregate principal amount of the Obligations which are outstanding under the Master Indenture. Such amendments may adversely affect the security of the holders of the Series 2017 Bonds and, in the event additional Obligations are issued in the future, such percentage may be composed wholly or partially of the holders of Obligations other than the Series 2017 Obligation. In addition, certain of the rights and remedies afforded to the holders of Obligations by the Master Indenture, including without limitation the right to demand acceleration of Obligations (including the Series 2017 Obligation), may be controlled by the holders of not less than 25% in aggregate principal amount of the Obligations outstanding under the Master Indenture. Immediately following the issuance of the Series 2017 Bonds, the Series 2017 Obligation will constitute approximately 78.8%∗ of the outstanding Obligations (excluding for these purposes the Series 2003 Swap Obligation and the Series 2015 Purchaser Obligation) under the Master Indenture.
Pursuant to the terms of the Master Indenture, the Members of the Obligated Group may incur Additional Indebtedness (including Indebtedness secured by Additional Obligations). Under the terms of the Master Indenture, any Additional Obligations may be entitled to the benefit of security in addition to that securing the Series 2017 Obligation and the Prior Obligations presently outstanding under the Master Indenture, which additional security, Liens (as defined in the Master Indenture), letters or lines of credit or insurance need not be extended to any other Obligation (including the Series 2017 Obligation); provided, however, that the Master Indenture prohibits the Members of the Obligated Group from mortgaging any real property (other than Excluded Property (as defined in the Master Indenture)) unless such mortgage also equally and ratably secures all Obligations issued and to be issued under the Master Indenture. See “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE – Permitted Additional Indebtedness” in APPENDIX C hereto.
Certain Matters Relating to Enforceability of Security Interest in Unrestricted Receivables
The effectiveness of the security interest in Unrestricted Receivables granted pursuant to the Master Indenture may be limited by a number of factors, including: (i) provisions prohibiting the direct payment of amounts due to health care providers from Medicaid and Medicare programs to persons other than such providers; (ii) the absence of an express provision permitting assignment of receivables due under the contracts with Blue Cross, and present or future prohibitions against assignment contained in any particular statutes or regulations; (iii) certain judicial decisions which cast doubt upon the right of the Master Trustee, in the event of the bankruptcy of a Member of the Obligated Group, to collect and retain account receivables due such Member from Medicare, Medicaid, General Assistance and other governmental programs; (iv) commingling of Unrestricted Receivables with other moneys of the Obligated Group not so pledged under the Master Indenture; (v) statutory liens; (vi) rights arising in favor of the United States of America or any agency thereof; (vii) constructive trusts, equitable or other rights impressed or conferred by a federal or state court in the exercise of its equitable jurisdiction; (viii) federal bankruptcy laws which may affect the enforceability of the security interest in the Unrestricted Receivables of any Member of the Obligated Group which are earned by such Member within 90 days preceding and after any effectual institution of bankruptcy proceedings by or against such Member; (ix) rights of third parties in Unrestricted Receivables converted to cash and not in the possession of the Master Trustee; and (x) claims that might arise if appropriate financing or continuation statements are not filed in accordance with the South Dakota Uniform Commercial Code as from time to time in effect.
Furthermore, accounts receivable of the Members which constitute Unrestricted Receivables and are pledged as security under the Master Indenture may be sold (despite such pledge and free and clear of such pledge and the pledge of the Master Indenture) if such sale is in accordance with the provisions of the Master Indenture and is on commercially reasonable terms. Any lien created under the Master Indenture on such Unrestricted Receivables will terminate and be immediately released upon any such sale with respect to any such accounts receivable so sold.
∗ Preliminary, subject to change.
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Certain Matters Relating to Enforceability of Master Indenture
The accounts of the Obligated Group are, and the accounts of all present and future Members, if any, of the Obligated 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 incurrence of Additional Indebtedness) are met, notwithstanding uncertainties as to the enforceability of certain obligations of Members of the Obligated Group contained in the Master Indenture. Such uncertainties bear on the availability of the assets of each Member of the Obligated Group for payment of debt service on the Obligations, including the Series 2017 Obligation pledged under the Bond Indenture as security for the Series 2017 Bonds. The joint and several obligations of the Members of the Obligated Group to make payments in respect of the Obligations (directly or indirectly) are, in the opinion of Teresa Burroff, Esq., General Counsel of the Corporation, and counsel to the other Members of the Obligated Group, enforceable under the laws of South Dakota except to the extent payments by a Member (i) are requested with respect to any Obligation (issued subsequent to the Series 2017 Obligation and Prior Obligations under the Master Indenture) which is issued for a purpose which is not consistent with the charitable purposes of such Member, or which is issued for the benefit of any entity other than a nonprofit corporation which is exempt from federal income taxes under Section 501(a) and 501(c)(3) of the Code, and which is not a “private foundation” as defined in Section 509(a) of the Code; (ii) are required to be made from any moneys or assets which are donor restricted or which are subject to a direct or express trust which does not permit the use of such moneys or assets for such a payment; (iii) would result in the cessation or discontinuation of any material portion of the health care or related services previously provided by such Member; or (iv) are requested to be made pursuant to any loan violating applicable usury laws. Due to the absence of clear legal precedent in this area, the extent to which the assets of any present or future Members of the Obligated Group fall within the category referred to in clause (ii) above cannot now be determined. The amount of such assets which fall within such category could be substantial. The joint and several liability of the Members of the Obligated Group may be further limited by applicable principles of charitable trust law, applicable provisions relating to fraudulent conveyances and bankruptcy, provisions of the nonprofit corporation laws of the state of South Dakota, and equitable principles, including the principles that such payments may be held to be against public policy.
A Member may not be required to make any payment on an Obligation, or portion thereof, the proceeds of which Obligations were not lent or otherwise disbursed to such Member, to the extent that such payment or use would render the Member insolvent, may be voided by a trustee in bankruptcy in the event of a bankruptcy of such Member, or may be voided by third party creditors in an action brought pursuant to any applicable state fraudulent conveyance statutes. Under the United States Bankruptcy Code, a trustee in bankruptcy and, under South Dakota fraudulent conveyance statutes, a creditor of a related guarantor, may avoid any obligation incurred by a related guarantor if, among other bases therefor, (1) the guarantor has not received fair compensation or reasonably equivalent value in exchange for the guaranty, (2) the guaranty renders the guarantor insolvent, as defined in the United States Bankruptcy Code or South Dakota fraudulent conveyance statutes, or (3) 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 on an Obligation for which it was not the direct beneficiary, a court might not enforce such obligation to pay in the event it is determined that the Member against whom such payment is sought is analogous to a guarantor of the debt of the Member who directly benefited from the borrowing and that sufficient consideration for such Member’s guaranty was not received or that the incurrence of such Obligation has rendered or will render such member insolvent.
There exists common law authority and authority under state statutes pursuant to which a court may 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 a state attorney general or such other persons who have interests different from those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to see to the application of their funds to their intended charitable uses.
In at least one instance an attorney general of a state other than South Dakota brought suit pursuant to his statutory and common law authority to represent the public interest in the protection of gifts, bequests and devises intended for charitable purposes and obtained a temporary injunction enjoining a convalescent home, constructed
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and maintained in large part with private contributions, from transferring any of its revenues or assets or making any payments to an out-of-state not–for–profit corporation with which it was affiliated pursuant to the provisions of a proposed master trust indenture and the master notes to be entered into in connection with a bond financing. The convalescent home was not going to receive any of the proceeds of the proposed bond issue.
An action to enforce a charitable trust and to see to the application of its funds would also arise if an action to enforce the obligation to make payments on Obligations would result in the cessation or discontinuation of any material portion of the health care or related services previously provided by the Member of the Obligated Group from which payment is requested.
Finally, the obligations of the Members of the Obligated Group to make payments on Obligations may not be enforceable if payments are requested to be made with respect to any Obligation which was issued for a purpose which was not consistent with the charitable purposes of the Members of the Obligated Group from which such payments are requested or which was issued for the benefit of any entity other than a nonprofit corporation which is exempt from federal income taxes under Section 501(a) and 501(c)(3) of the Code and is not a “private foundation” as defined in Section 509(a) of the Code.
Market for Bonds
Subject to prevailing market conditions, the Underwriters (as defined herein) intend, but are not obligated, to make a market in the Series 2017 Bonds. There is presently no secondary market for the Series 2017 Bonds and no assurance can be given that a secondary market will develop. Consequently, investors may not be able to resell the Series 2017 Bonds purchased should they need or wish to do so.
Unaudited 2017 Consolidated Financial Statements
The consolidated financial statements of the Corporation as of and for the year ended June 30, 2017 included in APPENDIX A to this Official Statement have not been audited and, as a result, such financial statements remain subject to change upon audit. Changes to the financial statements as a result of the auditing process may be material if new or subsequent information with respect to accounting positions taken or estimates made becomes or may become available between the time the unaudited consolidated financial statements were prepared and the issuance of the audited consolidated financial statements.
Bond Ratings
There can be no assurance that the ratings assigned to the Series 2017 Bonds at the time of issuance will not be lowered or withdrawn at any time, the effect of which could adversely affect the market price for and marketability of the Series 2017 Bonds. See the information under the heading “RATINGS.”
No Debt Service Reserve
The Bond Indenture does not establish a debt service reserve fund and no such fund is otherwise available for payment of debt service on the Series 2017 Bonds.
Additional Risk Factors
In the future, the following factors, among others, may adversely affect the operations of health care providers, including the Members of the Obligated Group, to an extent that cannot be determined at this time:
• Adoption of legislation establishing a national health insurance program, or repeal or modification of the ACA.
• Adoption of legislation establishing a state rate-setting agency with statutory control over hospitals.
• Employee strikes and other adverse labor actions that could result in a substantial reduction in revenues without corresponding decreases in costs.
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• Reduced need for hospitalization or other services arising from future medical and scientific advances.
• Reduced demand for the services that might result from decreases in population.
• Increased unemployment or other adverse economic conditions in the provider’s service area 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 service area or by the closing of operations of one or more major employers in the service area may result in a loss of health insurance benefits for a portion of the patients of the provider.
• Efforts by insurers and governmental agencies to limit the cost of health care services, to reduce the number of beds and to reduce the utilization of hospital facilities by such means as preventive medicine, improved occupational health and safety and outpatient care.
• Developments affecting the federal or state tax-exempt status of nonprofit organizations.
• Cost and availability of any insurance such as professional liability, fire, automobile, and general comprehensive liability, that health care facilities of a similar size and type generally carry.
• The occurrence of natural disasters, including floods and earthquakes, may damage the facilities of the provider, interrupt utility service to the facilities, or otherwise impair the operation of the provider’s facilities and the generation of revenues from the hospital facilities.
• Developments adversely affecting the federal or state tax-exempt status of municipal bonds or the ability of hospitals to borrow funds pursuant to tax-exempt municipal financings, and changes in federal income tax rates which may adversely affect the marketability or market values of the Series 2017 Bonds.
• Regulatory limitations affecting the ability of the Members of the Obligated Group to undertake capital projects or develop new services.
LITIGATION
The Authority
There is not now pending or, to the knowledge of the Authority, threatened any litigation restraining or enjoining the issuance or delivery of the Series 2017 Bonds or questioning or affecting the validity of the Series 2017 Bonds or the proceedings or authority under which they are to be issued. Neither the creation, organization or existence of the Authority nor the title of any of the present members or other officials of the Authority to their respective offices is being contested. There is no litigation pending or, to the Authority’s knowledge, threatened which in any manner questions the right of the Authority to enter into the Bond Indenture or the Loan Agreement or to secure the Series 2017 Bonds in the manner provided in the Bond Indenture and the Act.
The Obligated Group
For a discussion of pending litigation concerning the Corporation or other Members of the Obligated Group, see the caption “OTHER MATTERS – Litigation” in APPENDIX A to this Official Statement.
LEGAL MATTERS
Certain legal matters incident to the authorization, issuance and sale of the Series 2017 Bonds by the Authority are subject to the approving legal opinion of Chapman and Cutler LLP, Chicago, Illinois, as Bond Counsel (“Bond Counsel”), who has been retained by, and acts as Bond Counsel to, the Authority. Bond Counsel has not been retained or consulted on disclosure matters and has not undertaken to review or verify the accuracy, completeness or sufficiency of this Official Statement or other offering materials relating to the Series 2017 Bonds and assumes no responsibility for the statements or information contained in or incorporated by reference in this Official Statement, except to the extent described in a supplemental opinion of Bond Counsel with respect to this
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Official Statement. Certain legal matters will be passed upon for the Authority by its General Legal Counsel, Redstone Law Firm LLP, Sioux Falls, South Dakota. Certain legal matters will be passed upon for the Members of the Obligated Group by General Counsel of the Corporation and counsel to the other Members of the Obligated Group, Teresa Burroff, Esq., Certain legal matters will be passed upon for the Underwriters by Dorsey & Whitney LLP, Minneapolis, Minnesota, counsel to the Representative.
RELATIONSHIPS AMONG THE PARTIES
In other transactions not related to the Series 2017 Bonds, the law firms listed under the heading “LEGAL MATTERS” may have served as bond counsel or represented the Authority, the Obligated Group or one or more Members of the Obligated Group, the Underwriters, the Bond Trustee, the Master Trustee, or their affiliates, in capacities different from those described herein, and there will be no limitations imposed as a result of the issuance of the Series 2017 Bonds on the ability of these law firms or attorneys therewith to act as bond counsel or represent any of these parties in any future transaction. Potential purchasers of the Series 2017 Bonds should assume that the Authority, the Obligated Group, the Bond Trustee, the Master Trustee and the Underwriters or their respective counsel have previously engaged in or will, after the issuance of the Series 2017 Bonds, engage in, other transactions with each other or with any affiliates of any of them, and no assurances can be given that there are or will be no past or future relationship or transaction between or among any of these parties or these law firms.
CONTINUING DISCLOSURE
The Corporation, on behalf of itself and the other Members of the Obligated Group, will enter into a Continuing Disclosure Agreement dated as of the date of issuance of the Series 2017 Bonds (the “Continuing Disclosure Agreement”) for the benefit of the bondholders in accordance with the requirements of Section (b)(5) of Rule 15c2-12 (the “Rule”) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934 to provide certain information annually and quarterly and to provide notice of certain events to information repositories designated in the Continuing Disclosure Agreement pursuant to the requirements of Section (b)(5) of the Rule. The information to be provided on an annual and quarterly basis, the events which will be noticed on an occurrence basis and the other terms of the Continuing Disclosure Agreement, including termination, amendment and remedies, are set forth in the form of the Continuing Disclosure Agreement set forth in APPENDIX E hereto.
Failure by the Corporation to comply with the Continuing Disclosure Agreement will not constitute an event of default under the Master Indenture, the Bond Indenture or the Loan Agreement and bondholders are limited to the remedies described in the Continuing Disclosure Agreement. See the information in APPENDIX E hereto. Failure by the Corporation to comply with the Continuing Disclosure Agreement must be reported in accordance with the Rule and must be considered by any broker, dealer or municipal securities dealer before recommending the purchase or sale of the Series 2017 Bonds in the secondary market. Consequently, any such failure may adversely affect the transferability and liquidity of the Series 2017 Bonds and their market price.
The Corporation has previously entered into other continuing disclosure undertakings for the benefit of certain outstanding bonds and during the last five years has complied with its obligations thereunder.
Because the Series 2017 Bonds are limited obligations of the Authority, the Authority does not intend to provide the Bond Trustee with any additional information regarding itself or the Series 2017 Bonds after the date of issuance of the Series 2017 Bonds.
TAX EXEMPTION
Federal tax law contains a number of requirements and restrictions which apply to the Series 2017 Bonds, including investment restrictions, periodic payments of arbitrage profits to the United States, requirements regarding the proper use of bond proceeds and the facilities financed therewith, and certain other matters. The Authority and the Members of the Obligated Group have covenanted to comply with all requirements that must be satisfied in order for the interest on the Series 2017 Bonds to be excludable from gross income for federal income tax purposes. Failure to comply with certain of such covenants could cause interest on the Series 2017 Bonds to become includible in gross income for federal income tax purposes retroactively to the date of issuance of the Series 2017 Bonds.
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Subject to compliance by the Authority and the Members of the Obligated Group with the above-referenced covenants, under present law, in the opinion of Bond Counsel, interest on the Series 2017 Bonds is excludable from the gross income of the owners thereof for federal income tax purposes, and is not included as an item of tax preference in computing the federal alternative minimum tax for individuals and corporations, but Bond Counsel expresses no opinion as to whether interest on the Series 2017 Bonds is taken into account in computing adjusted current earnings, which is used in determining the federal alternative minimum tax for certain corporations.
In rendering its opinion, Bond Counsel will rely upon certifications of the Authority and the Members of the Obligated Group with respect to certain material facts within the Authority’s knowledge and the knowledge of the Members of the Obligated Group and will rely on an opinion of the General Counsel of the Corporation and counsel to the Members of the Obligated Group, that each Member of the Obligated Group is a 501(c)(3) organization and certain other matters and will rely upon the computations of the yield on the Series 2017 Bonds and the yield on certain investments by Causey Demgen & Moore P.C., Certified Public Accountants (the “Verification Agent”). Bond Counsel’s opinion represents its legal judgment based upon its review of the law and the facts that it deems relevant to render such opinion and is not a guarantee of a result.
Ownership of the Series 2017 Bonds may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, corporations subject to the alternative minimum tax, corporations subject to the branch profits tax, financial institutions, certain insurance companies, certain S corporations, individual recipients of Social Security or Railroad Retirement benefits and taxpayers who may be deemed to have incurred (or continued) indebtedness to purchase or carry tax-exempt obligations. Prospective purchasers of the Series 2017 Bonds should consult their tax advisors as to applicability of any such collateral consequences.
The issue price for original issue discount (as further discussed below) and market discount purposes (the “OID Issue Price”) for each maturity of the Series 2017 Bonds is the price at which a substantial amount of such maturity of the Series 2017 Bonds is first sold to the public (excluding bond houses and brokers and similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The OID Issue Price of a maturity of the Series 2017 Bonds may be different from the price set forth, or the price corresponding to the yield set forth, on the cover page hereof.
If the OID Issue Price of a maturity of the Series 2017 Bonds is less than the principal amount payable at maturity, the difference between the OID Issue Price of each such maturity of the Series 2017 Bonds (the “OID Bonds”) and the principal amount payable at maturity is original issue discount.
For an investor who purchases an OID Bond in the initial public offering at the OID Issue Price for such maturity and who holds such OID Bond to its stated maturity, subject to the condition that the Authority and the Members of the Obligated Group comply with the covenants discussed above, (a) the full amount of original issue discount with respect to such OID Bond constitutes interest which is excludable from the gross income of the owner thereof for federal income tax purposes; (b) such owner will not realize taxable capital gain or market discount upon payment of such OID Bond at its stated maturity; (c) such original issue discount is not included as an item of tax preference in computing the alternative minimum tax for individuals and corporations under the Code, but owners of OID Bonds should consult their own tax advisors as to whether such original issue discount is taken into account in computing an adjustment used in determining the alternative minimum tax for certain corporations under the Code; and (d) the accretion of original issue discount in each year may result in an alternative minimum tax liability for corporations or certain other collateral federal income tax consequences in each year even though a corresponding cash payment may not be received until a later year. Owners of OID Bonds should consult their own tax advisors with respect to the state and local tax consequences of original issue discount on such OID Bonds.
Owners of Series 2017 Bonds who dispose of Series 2017 Bonds prior to the stated maturity (whether by sale, redemption or otherwise), purchase Series 2017 Bonds in the public offering, but at a price different from the OID Issue Price or purchase Series 2017 Bonds subsequent to the initial public offering should consult their own tax advisors.
If a Series 2017 Bond is purchased at any time for a price that is less than the Series 2017 Bond’s stated redemption price at maturity or, in the case of an OID Bond, its OID Issue Price plus accreted original issue discount (the “Revised Issue Price”), the purchaser will be treated as having purchased a Series 2017 Bond with market discount subject to the market discount rules of the Code (unless a statutory de minimis rule applies). Accrued
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market discount is treated as taxable ordinary income and is recognized when a Series 2017 Bond is disposed of (to the extent such accrued discount does not exceed gain realized) or, at the purchaser’s election, as it accrues. Such treatment would apply to any purchaser who purchases an OID Bond for a price that is less than its Revised Issue Price. The applicability of the market discount rules may adversely affect the liquidity or secondary market price of such Series 2017 Bond. Purchasers should consult their own tax advisors regarding the potential implications of market discount with respect to the Series 2017 Bonds.
An investor may purchase a Series 2017 Bond at a price in excess of its stated principal amount. Such excess is characterized for federal income tax purposes as “bond premium” and must be amortized by an investor on a constant yield basis over the remaining term of the Series 2017 Bond in a manner that takes into account potential call dates and call prices. An investor cannot deduct amortized bond premium relating to a tax-exempt bond. The amortized bond premium is treated as a reduction in the tax-exempt interest received. As bond premium is amortized, it reduces the investor’s basis in the Series 2017 Bond. Investors who purchase a Series 2017 Bond at a premium should consult their own tax advisors regarding the amortization of bond premium and its effect on the Series 2017 Bond’s basis for purposes of computing gain or loss in connection with the sale, exchange, redemption or early retirement of the Series 2017 Bond.
There are or may be pending in the Congress of the United States legislative proposals, including some that carry retroactive effective dates, that, if enacted, could alter or amend the federal tax matters referred to above or affect the market value of the Series 2017 Bonds. It cannot be predicted whether or in what form any such proposal might be enacted or whether, if enacted, it would apply to bonds issued prior to enactment. Prospective purchasers of the Series 2017 Bonds should consult their own tax advisors regarding any pending or proposed federal tax legislation. Bond Counsel expresses no opinion regarding any pending or proposed federal tax legislation.
The Internal Revenue Service (the “Service”) has an ongoing program of auditing tax-exempt obligations to determine whether, in the view of the Service, interest on such tax-exempt obligations is includible in the gross income of the owners thereof for federal income tax purposes. It cannot be predicted whether or not the Service will commence an audit of the Series 2017 Bonds. If an audit is commenced, under current procedures the Service may treat the Authority as a taxpayer and the Bondholders may have no right to participate in such procedure. The commencement of an audit could adversely affect the market value and liquidity of the Series 2017 Bonds until the audit is concluded, regardless of the ultimate outcome.
Payments of interest on, and proceeds of the sale, redemption or maturity of, tax-exempt obligations, including the Series 2017 Bonds, are in certain cases required to be reported to the Service. Additionally, backup withholding may apply to any such payments to any Series 2017 Bond owner who fails to provide an accurate Form W-9 Request for Taxpayer Identification Number and Certification, or a substantially identical form, or to any Series 2017 Bond owner who is notified by the Service of a failure to report any interest or dividends required to be shown on federal income tax returns. The reporting and backup withholding requirements do not affect the excludability of such interest from gross income for federal tax purposes.
Bond Counsel expresses no opinion as to the treatment of interest expense for financial institutions owning the Series 2017 Bonds for purposes of Section 265(b)(7) of the Code. Financial institutions should consult their tax advisors concerning such treatment.
Ownership of the Series 2017 Bonds may result in other state and local tax consequences to certain taxpayers. Bond Counsel expresses no opinion regarding any such collateral consequences arising with respect to the Series 2017 Bonds. Prospective purchasers of the Series 2017 Bonds should consult their tax advisors regarding the applicability of any such state and local taxes.
VERIFICATION OF CERTAIN MATHEMATICAL COMPUTATIONS
The Verification Agent will deliver to the Corporation, on or before the date of issuance of the Series 2017 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 securities to be deposited with the Escrow Agent to pay, when due, the maturing principal of and interest on the Refunded Bonds and to pay the respective redemption price of the
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Refunded Bonds on the respective Redemption Dates. The Verification Agent will also compute the yield on the Series 2017 Bonds and the yield on certain investments in the escrows for the Refunded Bonds.
The verification performed by the Verification Agent will be solely based upon data, information and documents provided to the Verification Agent by the Corporation and its representatives, including the Underwriters. The Verification Agent has restricted its procedure to recalculating the computations provided by the Corporation and its representatives and has not evaluated or examined the assumptions or information used in the computations.
FINANCIAL ADVISOR
The Corporation has retained Kaufman, Hall & Associates, LLC., Skokie, Illinois, as financial advisor in connection with the issuance of the Series 2017 Bonds. Although Kaufman, Hall & Associates, LLC. has assisted in the preparation of this Official Statement, Kaufman, Hall & Associates, LLC. 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 Official Statement.
INDEPENDENT AUDITORS
The consolidated financial statements of the Corporation as of June 30, 2016 and 2015 and for the fiscal years then ended, included in APPENDIX B to this Official Statement, have been audited by Eide Bailly LLP, independent auditors, as stated in their report appearing in APPENDIX B.
RATINGS
Moody’s Investors Service, Inc. has assigned the Series 2017 Bonds a rating of “A1” with a negative outlook. Fitch Ratings, Inc. has assigned the Series 2017 Bonds a rating of “A+” with a stable outlook. Any explanation as to the significance of the above ratings may only be obtained from the rating agency furnishing the same.
Any such credit rating will reflect only the views of such credit rating agency. There is no assurance that any such rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by the rating agency if in its judgment circumstances so warrant. Any revision or withdrawal of a rating may have an adverse effect on the market price of the Series 2017 Bonds. Neither rating is a recommendation to buy, sell or hold the Series 2017 Bonds and each such rating should be evaluated independently.
UNDERWRITING
The Series 2017 Bonds are being purchased by Piper Jaffray & Co. (the “Representative”) and Bank of America Merrill Lynch (together with the Representative, the “Underwriters”) pursuant to a Bond Purchase Agreement (the “Bond Purchase Agreement”) among the Representative, on its own behalf and on behalf of the Underwriters, the Authority and the Corporation, on behalf of itself and the Obligated Group. The Underwriters have agreed to purchase the Series 2017 Bonds at an aggregate purchase price of $[______] (representing the principal amount of the Series 2017 Bonds, less an underwriting discount of $[______] [plus] [less] an aggregate original issue [premium] [discount] of $[______]). The Bond Purchase Agreement provides that the Underwriters will purchase all of the Series 2017 Bonds if any are purchased.
The Underwriters intend to offer the Series 2017 Bonds to the public initially at the offering prices set forth on the inside front cover page of this Official Statement, which may subsequently change without any requirement of prior notice. The Underwriters reserve the right to join with dealers and other underwriters in offering the Series 2017 Bonds to the public. The Underwriters may offer and sell the Series 2017 Bonds to certain dealers (including dealers depositing the Series 2017 Bonds into investment trusts) at prices lower than the public offering prices. In connection with this offering, the Underwriters may over allot or effect transactions which stabilize or maintain the market price of the Series 2017 Bonds at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time.
The Corporation has agreed to indemnify the Underwriters against certain civil liabilities, including certain liabilities under the federal securities laws.
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The Underwriters and their affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage services. Under certain circumstances, the Underwriters and their affiliates may have certain creditor or other rights against the Authority or the Corporation and its affiliates in connection with such activities. In the course of their various business activities, the Underwriters and their affiliates, officers, directors and employees may purchase, sell or hold a broad array of investments and actively trade securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments for their own account and for the accounts of their customers, and such investment and trading activities may involve or relate to assets, securities and/or instruments of the Authority or the Corporation (directly, as collateral securing other obligations or otherwise) or persons and entities with relationships with the Authority and the Corporation. The Underwriters and their affiliates may also communicate independent investment recommendations, market color or trading ideas 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 or short term positions in such assets, securities and instruments.
The Representative has entered into a distribution agreement (for purposes of this paragraph only, the “Distribution Agreement”) with Charles Schwab & Co., Inc. (“CS&Co.”) for the retail distribution of certain securities offerings at the original issue prices. Pursuant to the Distribution Agreement, CS&Co. will purchase Series 2017 Bonds from the Representative at the original issue price less a negotiated portion of the selling concession applicable to any Series 2017 Bonds that CS&Co. sells.
FUTURE FINANCING
Members of the Obligated Group regularly evaluate the benefits of and need for additional financing or refinancing. The size and timing of any debt issuances depends on the funding needs of authorized capital projects and several other considerations.
MISCELLANEOUS
This Official Statement contains descriptions of, among other matters, the Series 2017 Bonds, the Master Indenture, the Series 2017 Obligation, the Bond Indenture, the Loan Agreement, and the Obligated Group. Such descriptions and information do not purport to be comprehensive or definitive. All references herein to the Master Indenture, the Series 2017 Obligation, the Bond Indenture and the Loan Agreement (as well as any other documents relating to the Series 2017 Bonds) are qualified in their entirety by reference to such documents, and references herein to the Series 2017 Bonds are qualified in their entirety by reference to the forms thereof included in the Bond Indenture. During the period of the offering, copies of such documents and other documents herein described will be available for inspection at the office of the Authority, 330 South Poplar, Pierre, South Dakota 57501, and at the principal office of Piper Jaffray & Co., 800 Nicollet Mall, Minneapolis, Minnesota 55402. Copies of such documents related to the Series 2017 Bonds will be available for inspection at the principal corporate trust office of the Master Trustee and the Bond Trustee after delivery of the Series 2017 Bonds.
So far as any statements made in this Official Statement involve matters of opinion or estimates, whether or not expressly stated, they are set forth as such and not as representations of fact, and no representation is made that any of such statements will be realized. Neither this Official Statement nor any statement which may have been made orally or in writing is to be construed as a contract with the owners of the Series 2017 Bonds.
It is anticipated that CUSIP identification numbers will be printed on the Series 2017 Bonds, but neither the failure to print such numbers on any Series 2017 Bond nor any error in the printing of such numbers shall constitute cause for a failure or refusal by the purchaser thereof to accept delivery of and pay for any Series 2017 Bonds.
The attached appendices are integral parts of this Official Statement and must be read together with all of the foregoing statements.
The Members of the Obligated Group have reviewed the information contained herein which relates to the Members of the Obligated Group, their Property and operations, and have approved all such information for use within this Official Statement.
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This Official Statement is approved:
REGIONAL HEALTH, INC., on behalf of itself and the other Members of the Obligated Group
By: ______President & Chief Executive Officer
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APPENDIX A
INFORMATION REGARDING THE REGIONAL HEALTH SYSTEM
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Page
INTRODUCTION ...... A-1 THE REGIONAL HEALTH SYSTEM ...... A-1 MEMBERS OF THE OBLIGATED GROUP ...... A-5 NON-OBLIGATED AFFILIATES ...... A-7 GOVERNANCE AND MANAGEMENT ...... A-9 HEALTH CARE DELIVERY ...... A-12 THE PROJECT ...... A-18 MARKET ENVIRONMENT ...... A-21 MEDICAL STAFF ...... A-25 SELECTED FINANCIAL AND UTILIZATION INFORMATION ...... A-27 MANAGEMENT DISCUSSION AND ANALYSIS ...... A-35 OTHER MATTERS ...... A-37
[THIS PAGE INTENTIONALLY LEFT BLANK] INTRODUCTION
Regional Health, Inc. (the “Corporation”) and its affiliates (the Corporation and its affiliates collectively, the “Regional Health System” or the “System”1), headquartered in Rapid City, South Dakota, comprise the largest health care system in western South Dakota, serving a 38-county, five-state region. The System is the only tertiary care provider in a nearly 350-mile radius. See “MARKET ENVIRONMENT” herein.
The System consists of five acute care hospitals and related clinics, ten stand-alone clinics, two stand-alone urgent care centers, three senior care facilities and related home health services located in a dozen communities in the Black Hills region of western South Dakota and eastern Wyoming. As of the year ended June 30, 2017, the System employed over 5,100 employees, including 191 physicians, and served over 136,100 patients with total operating revenues of approximately $671.3 million.
The Corporation, a South Dakota nonprofit corporation exempt from federal income taxation pursuant to Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”) is the parent organization in the System. As more fully described in the forepart of this Official Statement, the $[______] Revenue Bonds, Series 2017A (Regional Health) (the “Bonds”) of the South Dakota Health and Educational Facilities Authority, are secured by the joint and several obligations of certain members of the Regional Health System described herein. Certain other members of the Regional Health System, including joint ventures, are not obligated with respect to the Bonds (collectively, the “Non- Obligated Affiliates”).
Upon issuance of the Bonds, the following members of the Regional Health System (each a “Member of the Obligated Group”) will be obligated with respect to the payment of the Bonds pursuant to the Master Indenture (as defined in this Official Statement): (i) the Corporation; (ii) Rapid City Regional Hospital, Inc., a South Dakota nonprofit corporation exempt from federal income taxation under Section 501(c)(3) of the Code (the entity and its hospital, the “Hospital”); (iii) Regional Health Network, Inc., a South Dakota nonprofit corporation exempt from federal income taxation under Section 501(c)(3) of the Code (the “Health Network”); and (iv) Regional Health Physicians, Inc., a South Dakota nonprofit corporation exempt from federal income taxation under Section 501(c)(3) of the Code (“RH Physicians,” and together with the Corporation, the Hospital, Health Network and RH Physicians, the “Obligated Group” or “Members of the Obligated Group”). The Obligated Group and Non-Obligated Affiliates comprise the Regional Health System.
This Appendix A provides information regarding the Obligated Group and the Non-Obligated Affiliates of the Regional Health System, but all the information herein is provided solely for the purpose of providing context and background related to the Members of the Obligated Group. The Members of the Obligated Group are the only Regional Health System entities obligated with respect to the Bonds. See “SECURITY FOR THE BONDS” in this Official Statement.
THE REGIONAL HEALTH SYSTEM
System Overview
The System has a long history of serving western South Dakota, beginning with the consolidation of Bennett Clarkson Memorial Hospital and St. John’s McNamara Hospital in Rapid City in 1973. The
1 All references to financial measures of the System as a whole include the Members of the Obligated Group and Non-Obligated Affiliates, provided that certain joint venture investments are recorded on the equity method. See “THE REGIONAL HEALTH SYSTEM – Consolidated Financial Statements” herein.
A-1 map below shows the cities in which the System operates and the locations of its nearest tertiary care competitors. See “MARKET ENVIRONMENT” herein. The construction and improvements in Custer, Rapid City, and Sturgis, South Dakota, to be financed, in part, with proceeds of the Bonds, are expected to further enhance the System’s market position as the major provider of health care services across the western South Dakota region. See “THE PROJECT” herein.
Regional Health System Locations
A-2 Regional Health System Overview • Approximately 5,100 employees as of June 30, 2017 • 191 employed physicians as of June 30, 2017 • Approximately 136,100 patients served in fiscal year ended June 30, 2017 • 5 acute care hospitals2 o 417-licensed bed Regional Health Rapid City Hospital (including three on-campus and four off-campus clinic locations) o 44-licensed bed Regional Health Spearfish Hospital (including one on- campus and three off-campus clinic locations) o 25-licensed bed Regional Health Sturgis Hospital o 18-licensed bed Regional Health Lead-Deadwood Hospital (including one on-campus clinic) o 11-licensed bed Regional Health Custer Hospital (including one on- campus clinic) • 3 senior care facilities3 o 84-licensed bed Regional Health Care Center – Custer o 16-licensed bed Regional Health Assisted Living – Custer o 76-licensed bed Regional Health Care Center – Sturgis • 2 stand-alone urgent care centers4 o Regional Urgent Care – North (Rapid City) o Regional Urgent Care – West (Rapid City) • 10 stand-alone medical clinics5 o Buffalo, SD o Belle Fourche, SD o Hill City, SD o Hot Springs, SD (two locations) o Rapid City, SD o Sturgis, SD o Wall, SD o Newcastle, WY o Upton, WY • Home health services • Hospice care • Home medical equipment • Retail and specialty pharmacy services
2 The hospitals operate listed medical clinics as outpatient departments. Bed counts reflect licensed beds for fiscal year 2017 unless otherwise noted in this Official Statement. The System is also part-owner of Same Day Surgery Center, LLC, a specialty hospital located in Rapid City, South Dakota (see “NON-OBLIGATED AFFILIATES” herein for additional information). The System also manages two hospitals in Philip, South Dakota, and Newcastle, Wyoming. The System is also in the process of constructing a specialty hospital in Rapid City, South Dakota, devoted to orthopedic and related surgical procedures (see “THE PROJECT” herein for additional information). 3 Bed counts reflect licensed beds for fiscal year 2017 unless otherwise noted. 4 The System also owns and operates Lead-Deadwood Urgent Care Services, a department of Regional Health Lead- Deadwood Hospital, Regional Urgent Care Services, a department of Regional Health Spearfish Hospital, and Massa Berry Clinic Urgent Care Services in Sturgis, South Dakota. 5 In addition to clinics operated in conjunction with System-owned hospitals.
A-3 System Strategy
All strategic planning for the System is coordinated by the Corporation. As the sole member of each of the other Members of the Obligated Group, the Corporation has certain reserved powers (see “GOVERNANCE AND MANAGEMENT” herein). The System is committed to helping patients and communities live well and strives to provide its employees with consistent leadership, current medical technology, quality health care environments and innovative resources. The purpose, vision and values of the System are used to establish priorities, goals and strategic initiatives. The System’s strategic plan is shared with the System’s boards, board committees and employees on a regular basis.
The System has aligned its strategy and leadership to support growth in programs such as orthopedics, urgent care, and post-acute care services, which include home health, home medical equipment, home infusion, retail pharmacy and specialty pharmacy. Future growth plans will focus on expanding existing services and developing new methods to deliver such care. In addition to growth strategies the System focuses on internal transformation to optimize its investment in new information systems, such as the industry-leading Epic electronic health record system currently being installed (see “HEALTH CARE DELIVERY” herein). Additional transformation goals focus on improving patient experience and access to care. System leadership is also dedicated to performance improvement with increased focus on enterprise intelligence which leads to better execution of its strategies.
A-4 System Organization
The organizational chart below shows the Members of the Obligated Group and certain Non- Obligated Affiliates comprising the Regional Health System and how they relate to each other within the corporate structure.6
Regional Health, Inc.
Rapid City Regional Health Network, Regional Health Physicians, Regional Hospital, Inc. Inc. Inc.
Member of Obligated Group Regional Health Home Plus, LLC Non-Obligated Affiliate
Consolidated Financial Statements
The consolidated financial information included in this Appendix A includes the accounts of the Members of the Obligated Group and the Non-Obligated Affiliates as of the date of this Official Statement, provided that certain joint venture investments are recorded on the equity method. The consolidated financial information excludes the revenues and expenses or other financial information of the Managed Facilities not owned and controlled by the System.
MEMBERS OF THE OBLIGATED GROUP
Upon issuance of the Bonds, the Obligated Group will include the four entities described below. The Obligated Group accounted for approximately 95.6% ($642.1 million) of the consolidated total operating revenue in 2017 and approximately 98.1% ($986.2 million) of the consolidated total assets of the Regional Health System as of June 30, 2017. Of the 5,131 employees of the System as of June 30, 2017, over 4,900 were employed by the Members of the Obligated Group. The Members of the Obligated Group are the only entities comprising the Regional Health System that are obligated to repay the Bonds. No other entities related to or a part of the System are obligated to repay the Bonds.
6 See “Non-Obligated Affiliates” herein for a description of other entities, including joint ventures, which are also Non-Obligated Affiliates, but not included in the organizational chart.
A-5 Regional Health, Inc.
The Corporation was incorporated in 2003, and on July 1, 2005, became the sole member of each of the other Members of the Obligated Group (the Hospital, Health Network and RH Physicians). The Corporation is a South Dakota nonprofit corporation and 501(c)(3) organization under the Code. Its principal supporting purpose is to act exclusively for the benefit of, and to carry out some or all of the purposes of, the other Members of the Obligated Group. The Corporation accomplishes its purpose primarily through planning and establishing policy for the coordination and oversight of the Members of the Obligated Group. As the sole member of each of the other Members of the Obligated Group, the Corporation has certain reserved powers (see “GOVERNANCE AND MANAGEMENT” herein).
Rapid City Regional Hospital, Inc.
The Hospital is a South Dakota nonprofit corporation and 501(c)(3) organization under the Code. With 417 licensed and 357 staffed beds, it is the third largest hospital in the State of South Dakota and the largest tertiary care provider in the western half of the State. The Hospital provides health care services in multiple locations in Rapid City, South Dakota. See “HEALTH CARE DELIVERY” herein. The Hospital is home to the System’s residency program, the Family Medicine Residency Program (the “Residency Program”), which maintains an affiliation with the Sanford School of Medicine at the University of South Dakota. There are no competing residency programs in the area. The Hospital participates in health care research, is the single member of Regional Health Home Plus, LLC (“Home+”), and has an ownership interest in several other entities (see “NON-OBLIGATED AFFILIATES” herein). As of June 30, 2017, the Hospital had a medical staff of 345 and employed 137 physicians, including 18 residents and 5 faculty members in the Residency Program (see “MEDICAL STAFF” herein). For additional information regarding the Hospital and its services, see “HEALTH CARE DELIVERY” herein.
Regional Health Network, Inc.
Health Network (f/k/a West Dakota Health Care, Inc., and successor in interest to Regional Senior Care, Inc.) is a South Dakota nonprofit corporation and 501(c)(3) organization under the Code. Health Network owns and operates the four general acute care hospitals (and the hospitals’ clinics) in the System other than the Hospital, as well as the three senior care facilities of the System. Health Network also contracts to provide an administrator for Philip Health Services, which operates a critical access hospital (18 licensed beds), a nursing home, an assisted living facility and a clinic in Philip, South Dakota, as well as a clinic in Kadoka, South Dakota; and also contracts to provide an administrator for Weston County Health Services, which operates a critical access hospital (12 licensed beds) in Newcastle, Wyoming (such managed facilities, the “Managed Facilities”). As of June 30, 2017, Health Network employed 54 physicians (see “MEDICAL STAFF” herein). For additional information regarding the Health Network facilities and services, see “HEALTH CARE DELIVERY” herein.
Regional Health Physicians, Inc.
RH Physicians (f/k/a Rushmore Community Health Resources, Inc.) is a South Dakota nonprofit corporation and 501(c)(3) organization under the Code. Until 2015 RH Physicians owned and/or operated a majority of the System’s clinics. In June, 2015, the RH Physicians’ clinics were transferred to and most became hospital outpatient departments of either the Hospital or Health Network, and RH Physicians entered into staffing agreements with the Hospital and Health Network under which RH Physicians provided physician staffing for what were then and are now the Hospital’s and Health Network’s clinics. As of July 1, 2017, the physicians previously employed by RH Physicians were also
A-6 transferred to and became employed by the Hospital or Health Network. RH Physicians may be merged into another Member of the Obligated Group in the future.
NON-OBLIGATED AFFILIATES
The revenues of the Non-Obligated Affiliates described below are included in the Corporation’s consolidated financial statements (see “THE REGIONAL HEALTH SYSTEM – Consolidated Financial Statements” herein). In the aggregate, the Non-Obligated Affiliates accounted for approximately $29.2 million and $0.9 million (approximately 4.4% and 0.1%)7 of the System’s total consolidated operating revenues for the years ended June 30, 2017 and 2016, respectively. As of June 30, 2017 and 2016, the Non-Obligated Affiliates had aggregate total assets of $18.8 million and $3.3 million (approximately 1.9% and 0.3%)8 of the System’s total consolidated assets, respectively. The Non-Obligated Affiliates are not obligated to repay the Bonds. Only the Members of the Obligated Group are obligated to repay the Bonds.
Regional Health Home Plus, LLC
Home+ is a South Dakota limited liability company whose sole member is the Hospital. Home+ offers home health, hospice, home medical equipment and pharmacy services. Home+ was incorporated in 2016 to integrate multiple service lines of the System into a single business unit offering a comprehensive range of primarily post-acute care services. Home+ now accounts for the majority of all operating revenues and assets of Non-Obligated Affiliates. Home+ accounted for approximately $27.5 million (approximately 4.1%) of the System’s total consolidated operating revenues for the year ended June 30, 2017. As of June 30, 2017, Home+ had aggregate total assets of $15.4 million (approximately 1.5% of the System’s total consolidated assets). The release of the Home+ service lines from the Obligated Group was carried out in accordance with the terms of the Master Indenture. See “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE – Sale, Lease or Other Disposition of Property” in Appendix C hereto. For a more detailed description of Home+ services, see “HEALTH CARE DELIVERY” herein.
Joint Ventures and Other Investments
The Corporation, the Hospital and Home+ have taken an ownership interest in related health care entities or entered into partnerships, joint ventures, cooperatives, group purchasing organizations, affiliations or other agreements with similar or related health care entities to assist in the efficient delivery of health care products and services. The general goal of these relationships is to enhance the quality, experience and affordability of health care products and services in the communities served by the Regional Health System.
Western Providers, Inc. Western Providers, Inc. (“WPI”), is a South Dakota nonprofit corporation. Its two members are the Hospital (50% owner) and Western Providers Physician Organization, Inc. (“WPPO”). WPPO is also a South Dakota nonprofit corporation whose members are physicians and other providers. Neither WPI nor WPPO is tax-exempt under the Code. WPI’s purpose is primarily to serve as a physician-hospital organization providing a panel of healthcare providers for employers’ self-funded health plans.
7 Increase primarily the result of the move of Home+ revenues and assets outside of the Obligated Group. 8 Increase primarily the result of the move of Home+ revenues and assets outside of the Obligated Group.
A-7 Same Day Surgery Center, LLC. Same Day Surgery Center, LLC (“SDSC”), is a South Dakota limited liability company licensed as a six-bed surgical specialty hospital located in Rapid City, South Dakota, in close proximity to the Hospital’s Main Unit campus (as defined herein). The building and land where the SDSC is located are owned by the Hospital and leased to SDSC. SDSC has two members: the Hospital (40% owner) and Rapid City Ambulatory Surgery, LLC, whose members are surgeons and other physicians or providers who hold privileges at SDSC, and in some cases, the Hospital.
Black Hills Medical Office Building, LLC. Black Hills Medical Office Building, LLC (“BHMOB”), is a South Dakota limited liability company that owns a three-story office building in Rapid City, South Dakota. The building is adjacent to the SDSC and is also on land owned by the Hospital and leased to BHMOB. BHMOB has two members: the Hospital (66.41% owner) and Black Hills Obstetrics and Gynecology, LLC (“Black Hills Obstetrics”), a five-member physician group. The membership percentage owned also reflects the percentage of space the member is entitled to occupy or lease. The building houses Black Hills Obstetrics’ practice and also houses several Regional Health System support services including information systems, accounting, and budget and reimbursement. At present, BHMOB is 100% occupied.
Medical Dental Partnership, LLP. Medical Dental Partnership, LLP (“MDP”), is a South Dakota limited liability partnership that owns a two-story office building (the “Western Hills Professional Building”) in Rapid City, South Dakota, across the street from the Hospital’s Main Unit campus and adjacent to the SDSC. MDP’s partners are the Hospital (72% owner) and Geib Elston & Frost, P.A., a six-member pathology group. The partnership percentage owned also reflects the percentage of space the partner is entitled to occupy or lease. The Western Hills Professional Building houses the pathology group’s practice and a clinic that is an outpatient department of the Hospital offering professional services in the specialties of neurosurgery, orthopedic surgery, urology, ENT, plastic surgery and dermatology. At present, the Western Hills Professional Building is 100% occupied.
The Imaging Center, LLC. The Imaging Center, LLC (the “Imaging Center”) is a South Dakota limited liability company that owns and operates a medical imaging facility that provides MRI, CT, PET and basic X-ray services. The Imaging Center has two members: the Hospital (50% owner) and Radiology Associates, a 12-member physician group.
Northern Plains Premier Collaborative, LLC. Northern Plains Premier Collaborative, LLC (“NPPC”) is a South Dakota limited liability company. Its two members are the Hospital (50% owner) and Avera Health, Inc., an integrated health care delivery system operating primarily in eastern South Dakota and Minnesota. NPPC’s primary purpose is to act as a non-exclusive contracting agent for its members for the aggregated purchase of supplies and equipment.
Healthy Lifestyle Solutions, LLC. Home+ is a 20% member of Healthy Lifestyle Solutions, LLC, a South Dakota limited liability company which offers weight management, nutrition and lifestyle services. Its members are Home+, Dr. James Bertus and Sanford Frontiers, an affiliate of Sanford Health, an integrated health care delivery system operating primarily in eastern South Dakota, North Dakota and Minnesota.
ExceleraRx Corp. ExceleraRx Corp., originally an LLC, was formed by the Corporation and five other health care systems to improve the ability of the members of the System and others to purchase specialty and limited distribution pharmaceuticals. Now a corporation, there are seven shareholders (health care systems from across the country) and an additional thirteen systems
A-8 which participate on a fee paying basis. The Corporation currently owns an approximate 9.9% interest.
GOVERNANCE AND MANAGEMENT
Governance Overview
Each Member of the Obligated Group has a governing body. The Corporation’s bylaws provide that it is governed by a board of directors consisting of at least nine, but not more than fifteen voting members; and that a majority of its voting members be independent members (“independent” based on the definition provided in the Glossary of the IRS’ Form 990 Instructions). The bylaws also provide that at least one voting member of the Corporation’s board of directors also serve as a member of the board of directors of each of the other Members of the Obligated Group to perpetuate the Corporation’s continued responsiveness to the organizations it supports. Currently, four voting members of the Corporation’s board of directors also serve as voting members of the boards of directors of the Hospital and of Health Network, and the members of the Corporation’s board of directors are the same people as the members of RH Physicians’ board of directors. Overlapping board membership and the development of System Committees (as further described herein) has helped improve decision-making and communication among the Corporation and the other Members of the Obligated Group. The boards of directors for the Hospital, Health Network and RH Physicians are each responsible for the governance of their respective corporation, subject to the powers reserved to the Corporation as the sole member of each other corporation.
The articles of incorporation and bylaws of the Members of the Obligated Group grant certain reserved powers to the Corporation to support its ability to oversee and coordinate the activities of the Members of the Obligated Group. The reserved powers include:
1. To establish and amend articles of incorporation, bylaws and the mission of each. 2. To select and appoint or remove the members of each governing board. 3. To select the independent auditor and designate the System’s accounting, financial and purchasing policies. 4. To approve and amend annual operating and capital budgets. 5. To perform all treasury functions and provide for the solvency and financial stability of each. 6. To cause and approve System-wide plans including, but not limited to, strategic, corporate compliance, human resources, performance improvement, customer satisfaction, risk management and safety. 7. To cause or, where in excess of monetary thresholds, approve or deny capital expenditures, debt, and affiliations, joint ventures, consolidations or the like.
The Corporation’s bylaws provide for an Executive Committee and the Regional Health Foundation board (see “OTHER MATTERS – Philanthropy” herein for a description of the Regional Health Foundation). The Executive Committee, which consists of the board’s elected officers and the CEO (and which may also include an additional two independent Board members appointed by the Chair), has the power to act on certain urgent matters between board meetings and additionally has board delegated authority to act on matters of executive compensation and transactions with other parties that meet the definition of a “Disqualified Person” under the Code.
A-9 To improve communication among the boards of the Members of the Obligated Group, increase efficiency of decision-making, and promote integration among the Members of the Obligated Group, System Committees of each board were implemented in 2015. The System Committees’ membership consists of at least one board member from each of the boards of the Members of the Obligated Group. The System Committees are: Governance; Finance and Investment; Compliance, Audit and Compensation; Clinical Practice; and Peer Review, Credentials and Privileges. The System Committees principally have advisory powers, but the Corporation board’s authority for certain matters, described in the bylaws, is delegated to the System Committees. For example, the Finance and Investment Committee has delegated authority to select and remove investment consultants and managers, and the Compliance, Audit and Compensation Committee has delegated authority in the areas of physician compensation, retention of financial statement auditors and certain fair market value determinations. The Compliance, Audit and Compensation Committee’s voting membership consists only of members deemed to be independent.
Corporation Board of Directors
Subject to the election of new officers in August 2017, the present members9 and officers of the Corporation board are as follows:
Name (Title) Occupation Term Expires Lia Green (Chair) Retired Radio and Television Executive 2020
John Brewer Black Hills Community Bank, Compliance 2018 Officer Glenn Fosdick Consultant, Retired Hospital CEO 2019 Steven Frost, MD Anesthesiologist, West River Anesthesiology 2018 Terry Graber, MD Family Medicine, Regional Health 2020 Ross McKie Business Owner, Granite Buick GMC and 2019 Granite Nissan Brent R. Phillips President and CEO, Regional Health Ex-Officio Dusty Pinske Vice President, Business Development, First 2018 Interstate Bank Paula Santrach, MD Vice President of Quality, Mayo Clinic 2019 Heidi Strouth, MD Internal Medicine, Regional Health Ex-Officio Richard Tysdal Real Estate Broker, Century 21 2018 Donald Warne, MD Professor, Dean of School of Public Health, 2018 North Dakota State University
Conflicts of Interest Policy
The System’s conflict of interest policy requires members of its boards, board committees and management to annually disclose financial and conflicting interests on a form approved by the System Governance Committee. Summaries of the interests and conflicts disclosed by board members are provided to all the members of the relevant board to permit all members to be aware of other members’ disclosed interests and conflicts. Each meeting of a board includes an initial agenda item where inquiry is made whether any member has an interest or conflict that should be disclosed in relation to the meeting agenda, and, when a potential conflict is disclosed, it is made a part of the minutes. Board members are
9 Board members are eligible to serve three consecutive terms of three years each.
A-10 permitted to answer questions on topics on which a conflict has been disclosed, but board members with a conflict must leave the meeting for the vote and refrain from using the member’s influence on the matter. No conflict of interest has been disclosed by any current board or administrative staff member with respect to the Bonds or the Project (as defined in the forepart of this Official Statement), except that certain current committee members are members of the Authority’s board and certain previous board members identified conflicts related to the Project. Committee members who are members of the Authority’s board complied fully with the requirements of South Dakota law with respect to actions taken relating to the Project and the Bonds, and previous Corporation board members properly recused themselves from all board actions of the System relating to the Project and the Bonds.
Executive Management of the System
Brent R. Phillips, President and Chief Executive Officer, Regional Health, Inc., President of Regional Health Network, Inc., and President of Regional Health Physicians, Inc. Mr. Phillips has been with the System since 2015 and has over 25 years of healthcare management experience. Prior to joining the System, Mr. Phillips served as President-Greater Milwaukee South Market of Aurora Health Care, Senior Vice President, Medical Group Operations of Aurora Health Care, Administrator, Mayo Clinic, and Executive Director of Sentara Healthcare. Mr. Phillips received his Bachelor of Business Administration at Idaho State University, Master of Business Administration at the University of Minnesota, Master of Healthcare Administration at the University of Minnesota, and is a Fellow, American College Medical Practice Executives.
Paulette Davidson, Chief Operating Officer, Regional Health, Inc. and President, Rapid City Regional Hospital, Inc. Ms. Davidson began her role as the Chief Operating Officer of the Corporation on November 9, 2015. She has over 30 years of experience working in hospitals and physician practice environments. Ms. Davidson previously served as the Chief Human Capital and Patient Experience Officer at Nebraska Medicine. Prior to that, she served as the CEO at Bellevue Medical Center for three years and as Executive Director at The Nebraska Medical Center overseeing Network Operations as well as Organ Transplant Services. Prior to joining Nebraska Medicine in 2008, Ms. Davidson held leadership positions at IU Health, Goshen, Indiana and Cancer Treatment Centers of America, Arlington Heights, Illinois. Ms. Davidson holds a Bachelor of Science in Business Administration from the University of Wisconsin and a Master of Business Administration from the University of Notre Dame. She is board certified by the American College of Medical Practice Executives and is a fellow of the American College of Healthcare Executives.
Mark A. Thompson, Chief Financial Officer, Regional Health, Inc. Mr. Thompson joined Rapid City Regional Hospital as its internal auditor in 1990 and became the Director of Internal Audit and Compliance in 2004. Mr. Thompson has served as the Corporation’s Chief Financial Officer/Vice President of Finance since 2006. Before joining the System, he was the accounting manager for a subsidiary of Black Hills Corporation and before that, he worked for the public accounting firm RSM McGladrey. Mr. Thompson received a Bachelor of Science degree from National American University in 1981 and is a Fellow with the Healthcare Financial Management Association and a member of the American Institute of Certified Public Accountants.
Louis Hogrefe, M.D., Vice President of Physician Services, Regional Health, Inc. Dr. Hogrefe began his role as the Vice President of Physician Services for the Corporation in May of 2015. He received his Doctor of Medicine from Brown University in Providence, Rhode Island. After completing a family medicine residency in Sioux Falls, South Dakota, he practiced medicine for ten years in Gregory, South Dakota. He then relocated to San Diego, California, where he initially was a primary care physician. He then served as the President/Medical Director of Sharp Mission Park Medical Group for 14 years and subsequently became the Chief Medical Officer of Scripps Coastal Medical Group and served
A-11 in that role over six years. Dr. Hogrefe also holds a Master of Business Administration from the University of California, Irvine.
Teresa Burroff, General Counsel, Regional Health, Inc. Ms. Burroff joined the System as its General Counsel in October, 2016. Prior to that time, Ms. Burroff was the General Counsel of Ascension Texas (previously known as Seton Family of Hospitals) from 2007 through February 2016. She served as General Counsel of Samsung Austin Semiconductor for nine years prior to being recruited to healthcare in 2007. Ms. Burroff received her MBA from the University of Texas at Austin where she also completed all but her dissertation toward a Ph.D. She holds a Juris Doctorate from Texas Tech University. Ms. Burroff is authorized to practice law in both Texas and South Dakota.
Ronald G. Amodeo, Chief Innovation and Growth Officer, Regional Health, Inc. Mr. Amodeo began his role as the Chief Innovation and Growth Officer of the Corporation in November, 2015. Mr. Amodeo has worked both nationally and internationally developing products and services across multiple industries for more than three decades. Most recently he worked at Mayo Clinic where he was responsible for the enterprise-wide evaluation and development of strategic new business opportunities. Mr. Amodeo worked on joint venture activities in remote condition management, retail health/wellness, and regenerative medicine. Prior to his Mayo Clinic service, Mr. Amodeo was a business consultant with multinational companies including 3M, Amazon, Best Buy, GM, Kodak, Lego Group, Morgan Stanley, Oracle, Proctor & Gamble, Thomasville Furniture and Weyerhaeuser. His education includes a Master of Arts in Information Design, Carnegie Mellon University (Pittsburgh, PA), and BS in Biology and English from Allegheny College (Meadville, PA). His Ph.D. (in process) is in History of Science and Technology, University of Minnesota (Minneapolis, MN).
Nicole L. Kerkenbush, Chief Performance Officer, Regional Health, Inc. Ms. Kerkenbush joined the System in August 2016 as the first Vice President of Data Analytics, and was promoted to Chief Performance Officer in May of 2017. Prior to joining the System, Ms. Kerkenbush served 24 years in the United States Army and retired at the rank of Colonel. Key positions she held during her military tenure include, among others, Military Deputy Program Executive Officer for the Defense Healthcare Systems Management Program Executive Office; Acting Deputy Director for the Solutions Delivery Division in the Defense Health Agency Health Information Technology Directorate, and Army Medical Command/Office of The Surgeon General Chief Information Officer and Chief Medical Information Officer. Ms. Kerkenbush earned her Bachelor of Science in Nursing degree from Texas Christian University, Fort Worth, TX in 1992. She received a Master’s Degree in Healthcare Administration, a Master’s Degree in Nursing Informatics, and a Certificate in Healthcare Informatics from the University of Washington in Seattle. She is a Certified Professional in Healthcare Information and Management Systems by the Healthcare Information and Management Systems Society.
HEALTH CARE DELIVERY
Overview
In fiscal year 2017, the Regional Health System served approximately 136,100 patients and residents through its hospitals, senior care centers, clinics and home care delivery services.
A-12 Hospitals
The System operates the following five acute care hospitals:
Regional Health Rapid City Hospital. The Hospital provides services in multiple locations in Rapid City, South Dakota, but its primary location is its 30-acre campus where its ten story tertiary care hospital (the “Main Unit”) is located. In total, the Hospital is licensed for 417 beds and staffs 357 beds.10 The Hospital is verified as a Level II Trauma Center. The Hospital’s emergency department is the busiest in the State of South Dakota, seeing over 54,000 patients in fiscal year 2017. The Hospital’s specialty centers include, among others, the Regional Health John T. Vucurevich Cancer Care Institute and the Regional Health Heart and Vascular Institute.
The Hospital provides a full array of tertiary care services, with the exception of burn and transplant services, and provides 32 specialty areas of medicine. The Hospital is the exclusive provider of medical and radiation oncology, cardiac catheterization, electrophysiology, cardiovascular surgery, transcatheter aortic valve replacement (TAVR) and minimally invasive robotic surgery services in the western South Dakota region (see “MARKET ENVIRONMENT” herein). The Hospital also operates a Joint Commission certified stroke program. The Cancer Care Institute performs over 43,000 diagnostic and treatment procedures and has seen approximately 47% growth in volume since 2012.
The Main Unit staffs 305 beds and, in addition, 40 nursery and Level II neonatal intensive care unit bassinets. The Hospital also operates the Regional Health Rehabilitation Center (“RHRC”) on a site separate from the Main Unit campus. The RHRC has 16 staffed beds and is the only Joint Commission accredited rehabilitation facility in the region. On the west side of Rapid City, approximately three miles from the Main Unit campus, the Hospital also operates Regional Health Behavioral Health Center (“RHBHC”), a psychiatric unit of the Hospital with 36 staffed beds offering inpatient and outpatient mental health services. A wide range of services are available at RHBHC for adult, adolescent and child patients. In connection with its Residency Program, the Hospital also operates the Regional Health Family Medicine Residency Clinic in a facility away from the Main Unit campus. The Hospital also offers outpatient professional services in several clinics in Rapid City and Wall, South Dakota. Home+, whose sole member is the Hospital, also offers inpatient hospice care in its licensed 12 bed facility adjacent to the Hospital’s Main Unit. For a more detailed description of improvements planned to be made to the Main Unit and other Hospital facilities, see “THE PROJECT” herein.
Regional Health Spearfish Hospital (f/k/a Lookout Memorial Hospital). Regional Health Spearfish Hospital, owned by Health Network, is a general acute care hospital licensed for 44 beds (34 staffed)11 located in Spearfish, South Dakota. It primarily serves the communities of the northern Black Hills region located northwest of Rapid City. It also serves bordering communities in Wyoming. It is verified as a Level IV Trauma Center. In addition to acute nursing care, the hospital provides general and orthopedic surgery, labor and delivery services, pediatric care, physical medicine rehabilitation and advanced imaging services (e.g., computer tomography and magnetic resonance imaging). Four of its licensed beds are located in the Regional Health Spearfish Surgery Center, an off-campus department of the hospital. No proceeds of the Bonds are expected to be used for improvements to the Regional Health Spearfish Hospital.
Regional Health Sturgis Hospital. Regional Health Sturgis Hospital, owned by Health Network, is a licensed and staffed 25-bed critical access hospital in Sturgis, South Dakota. It primarily serves
10 In addition to its licensed beds, the Hospital has 40 nursery and neonatal intensive care bassinets. 11 In addition to its licensed beds, Spearfish Regional Hospital also offers eight nursery bassinets.
A-13 Meade County, South Dakota, located northwest of Rapid City and other communities in the northern Black Hills region. The hospital provides lower acuity nursing care, laboratory, physical medicine rehabilitation, and imaging services such as X-ray and computer tomography. Ten of its 25 hospital beds can be utilized as swing beds. It is designated as a Trauma Receiving Hospital by the South Dakota Department of Health. The hospital also houses Regional Health Care Center – Sturgis (see “HEALTH CARE DELIVERY – Senior Care” below), and a hospice suite. For a more detailed description of improvements planned to be made to Regional Health Sturgis Hospital, see “THE PROJECT” herein.
Regional Health Lead-Deadwood Hospital (f/k/a Northern Hills General Hospital). Regional Health Lead-Deadwood Hospital, owned by Health Network, is a licensed and staffed 18-bed critical access hospital located in Deadwood, South Dakota. It primarily serves the communities of the northern Black Hills region located northwest of Rapid City. The hospital provides lower acuity nursing care, laboratory, physical medicine rehabilitation, and imaging services such as X-ray and computer tomography. Nine of its 18 beds can be utilized as swing beds. It is designated as a Trauma Receiving Hospital by the South Dakota Department of Health. No proceeds of the Bonds are expected to be used for improvements to the Regional Health Lead-Deadwood Hospital.
Regional Health Custer Hospital. Regional Health Custer Hospital is a licensed and staffed 11- bed critical access hospital in Custer, South Dakota. The hospital primarily serves the southern Black Hills region located southwest of Rapid City. The hospital provides lower acuity nursing care, laboratory, physical medicine rehabilitation, and imaging services such as X-ray and computer tomography. All of the 11 beds can be utilized as swing beds. It is designated as a Trauma Receiving Hospital by the South Dakota Department of Health. For many years, the System leased and operated the hospital from Custer Community Health Services, Inc. (“CCHSI”) and on April 1, 2016, CCHSI and Health Network merged, with Health Network as the surviving entity. CCHSI board members now serve as an advisory board for Health Network services in Custer and the surrounding area. For a more detailed description of improvements planned to be made to Regional Health Custer Hospital, see “THE PROJECT” herein.
In addition to the five acute care hospitals described above, the System is in the process of constructing a stand-alone specialty hospital in Rapid City, South Dakota, devoted to orthopedic and related surgical procedures (see “THE PROJECT” herein for additional information). The System also manages two hospitals, one in Philip, South Dakota, and one in Newcastle, Wyoming, and maintains an ownership interest in SDSC (see “NON-OBLIGATED AFFILIATES” herein).
Due to delays in processing, the South Dakota Department of Health has not yet issued all the annual licenses required for the operation of the System hospitals. Fiscal year 2018 licenses have been issued for the hospitals in Custer, Lead-Deadwood, Spearfish, and Sturgis, but a new license has not yet been issued for the Hospital. The Hospital was licensed in fiscal year 2017 and the license is expected to be renewed. Licensed bed numbers provided in this Appendix A for the Hospital are based on the previously issued license and are expected to remain the same or increase. See “BONDHOLDERS’ RISKS – Licensing, Surveys, Investigations and Audits” in the forepart of this Official Statement.
Senior Care
In addition to the hospice and other senior care services provided by the System’s hospitals and clinics, the System also offers assisted living and skilled nursing care at three regional senior care centers:
Regional Health Care Center – Sturgis (f/k/a Sturgis Community Health Care Center). Regional Health Care Center – Sturgis is a licensed 84-bed skilled nursing facility in Sturgis, South Dakota, owned by Health Network and primarily serving the Northern Hills area. The facility provides long-term care and rehabilitation services. The facility is co-located with Regional
A-14 Health Sturgis Hospital. Physical, occupational, and speech therapy professionals also offer services within the facility. All services are coordinated with Regional Health Sturgis Hospital as needed. As of the date of this Official Statement, Regional Health Care Center – Sturgis is approximately 92% occupied.
Regional Health Care Center – Custer. Regional Health Care Center – Custer is a licensed 76- bed skilled-nursing facility in Custer, South Dakota, owned by Health Network and primarily serving the communities of Custer, Hill City and Hot Springs, South Dakota. Regional Health Care Center – Custer includes a 16-bed memory-care wing, primarily for Alzheimer’s patients. Physical, occupational, and speech therapy professionals also offer services within the facility. The facility is located near Regional Heath Custer Hospital and all services are coordinated with Regional Health Custer Hospital and Regional Health Assisted Living – Custer, as needed. As of the date of this Official Statement, Regional Health Care Center – Custer is approximately 86% occupied.
Regional Health Assisted Living - Custer. Regional Health Assisted Living – Custer, also in Custer, South Dakota, is a licensed 16-private room assisted living facility. Regional Health Assisted Living – Custer offers a cost-effective housing alternative for people who need extra assistance to remain independent. Private rooms are equipped with private bathrooms and handicap accessible showers. Regional Health Assisted Living – Custer provides care for residents who are cognitively or physically impaired, dependent on supplemental oxygen, require a special diet, and/or need medication administration or management. The facility is located near the Regional Health Custer Hospital. As of the date of this Official Statement, Regional Health Assisted Living – Custer is approximately 76% occupied.
Due to processing delays, the South Dakota Department of Health has not yet issued all the annual licenses required for the operation of the System senior care facilities. A fiscal year 2018 license has been issued for Regional Health Care Center – Sturgis, but licenses have not yet been issued for the facilities in Custer. The senior care facilities were all licensed in fiscal year 2017 and all licenses are expected to be renewed. Licensed bed numbers provided in this Appendix A for Regional Health Care Center – Custer and Regional Health Assisted Living - Custer are based on previously issued licenses and are expected to remain the same. See “BONDHOLDERS’ RISKS – Licensing, Surveys, Investigations and Audits” in the forepart of this Official Statement.
Clinics
The System owns and operates 25 clinics in the cities of Buffalo, Belle Fourche, Spearfish, Sturgis, Lead-Deadwood, Rapid City, Hill City, Custer, Hot Springs, and Wall, South Dakota, as well as Newcastle and Upton, Wyoming. All the clinics are owned by Health Network or the Hospital and, with only a few exceptions, are operated by one of the System’s acute care hospitals described above. The System employs physicians and advanced practice providers (i.e., nurse practitioners and physician assistants) in primary care and several specialties. Primary care includes family medicine, pediatrics and internal medicine while the specialists supporting the System include cardio vascular/thoracic surgeons, cardiologists, dermatologists, endocrinologists, gastroenterologists, general surgeons, hematologists/medical oncologists, infectious disease specialists, neonatologists, nephrologists, neurologists, neurosurgeons, obstetricians/gynecologists, orthopedic surgeons, otolaryngologists, physiatrists, psychiatrists, pulmonologists, radiologists, rheumatologists and urologists.
A-15 Home Health and Other Services
The System recently integrated multiple business lines into Home+, a single business unit offering a comprehensive range of primarily post-acute care services. Home+ is a Non-Obligated Affiliate serving patients of the System within its primary and secondary markets as described in “MARKET ENVIRONMENT – Overview” herein.
Home Health. Home+ nurses, therapists, aides and other specialists provide in-home care to promote independent living and rehabilitation. The Home Health team offers skilled nursing services (IV therapy, surgery follow-up including wound care assessments, monitoring cancer, diabetes, heart and lung disease and other chronic illnesses), assistance with personal care, household services or exercise, palliative care, physical, occupational and speech therapy, medical social work services, case management for chronic health problems, assessment and monitoring for high-risk pregnancies, postpartum mother and baby assessments, advanced directive and living will planning and collaborative services with the Veterans Health Administration.
Home Medical Equipment. Home+ offers a full range of medical equipment and supplies to make home care easier for patients and their caregivers.
Home Infusion. Home+ specializes in providing medication and supplies for home use for children and adults. Infusion therapy is used to administer medication, nutrition and hydration.
Home Hospice. Home+ provides comfort care to terminally ill patients in their homes, nursing homes, hospitals, and other supervised living facilities. It also offers inpatient hospice care in its licensed 12 bed facility adjacent to the Hospital’s Main Unit in Rapid City. Compassionate, skilled providers work with patients and families to meet physical, emotional, social and spiritual needs for the best quality of life near the end of life. Care and support are provided by an experienced Home+ team that may include nurses, social workers, nursing aides, physical therapists, counselors, chaplains, physicians, pharmacists and volunteers.
Pharmacy Services. Home+ provides retail pharmacy services, as well as specialty pharmacy services focused on medication needs and therapy management for patients with chronic, rare or complex conditions that require specialty medications not generally available at retail pharmacies due to special handling, administration or monitoring requirements. The specialty pharmacy is URAC (formerly the Utilization Review Accreditation Commission) accredited. The Home+ pharmacy team also provides long-term care pharmacy services (unit-dose medications) for residents in nursing homes, assisted living facilities and other institutional settings. Specialty pharmacy revenues attributable to the 340B Program (as defined in the forepart of this Official Statement) remain revenues of the Obligated Group, despite the service being provided by Home+, a Non-Obligated Affiliate.
Awards and Recognition
The Hospital received the 2017 Distinguished Hospital Award for Clinical Excellence from Healthgrades, ranking in the top five percent of hospitals for risk-adjusted mortality and complication rates across at least 21 of 32 common conditions and procedures. Healthgrades measures mortality for conditions like stroke, heart attacks, and sepsis, an infection that progresses to become life threatening. The System has been widely recognized for its sepsis care pathway, a protocol implemented in 2015 that has reduced the number of readmissions.
The Hospital has also been recognized as one of the top three hospitals in South Dakota for 2016- 17 by U.S. News & World Report. South Dakota has more than 60 hospitals, with only three meeting
A-16 U.S. News ranking standards. Since only hospitals that are nationally ranked or designated high performing in a specialty are given a state ranking, no other hospitals in the System’s service area were ranked by U.S. News & World Report (see “MARKET ENVIRONMENT” herein). The Hospital maintains The Joint Commission’s Gold Seal of Approval™, a three-year accreditation, by demonstrating compliance with the Joint Commission’s national standards for health care quality and safety. The current award of accreditation remains through November 2017. The Hospital also earned a Primary Stroke Care Center Certification from The Joint Commission. The Hospital’s Stroke Program also achieved the American Heart Association/American Stroke Association’s 2017 “Get with the Guidelines” (GWTG) – Stroke Gold Plus Quality Achievement Award which recognizes the Hospital’s commitment and success in ensuring stroke patients receive the most appropriate treatment according to nationally recognized, research-based guidelines based on the latest scientific evidence.
The Hospital has also received the Mission: Lifeline® Silver Award and Acute Myocardial Infarction Platinum Performance Award, the Mission: Lifeline® Receiving Center Bronze Plus Recognition Award from the American Heart Association, and the American College of Cardiology’s National Cardiovascular Data Registry (NCDR) ACTION Registry-GWTG Platinum Performance Award for 2016 (also received the four prior years). The Hospital’s cardiovascular surgery program received a three star rating for isolated Coronary Artery Bypass Grafting for quality outcomes from the Society of Thoracic Surgery, and the Hospital was named in the top 5% of hospitals in the country for coronary intervention by Health Grades. The Hospital attained Magnet Recognition® in August of 2014, a four year designation given by the American Nurses Credentialing Center for achievement of nursing excellence and quality patient care.
All four of the System’s community-based hospitals (those other than the Hospital) have received national leadership awards for excellence in rural health care, some in multiple categories. The recognition was given by iVantage Health Analytics and the National Organization of State Offices of Rural Health (NOSORH). The national ranking reflects top quartile performance among all rural acute- care hospitals in the nation.
Electronic Health Record System (Epic EHR)
The System is nearing the final stages of its roll-out of a unified electronic health record system (“EHR”) with the goal of improving patient care and experience while reducing redundancies of the current record systems. The System expects to have fully implemented the Epic EHR system in its hospitals, physician offices, outpatient centers, urgent care centers and other locations by October 2017. The installation process began in July 2016. The Epic EHR creates interoperability and translation capabilities throughout and outside the System so every System clinician and patient can access complete information within a single, integrated EHR across the System’s entire provider network. As of June 30, 2017, the System had invested approximately $47.3 million (inclusive of internal development costs) in the Epic EHR system and it is expected that an additional $39.7 million of System cash flow, cash and investments will be spent on the roll-out and comprehensive user training before the system is fully implemented in October 2017. The System has reduced other routine capital spending and capital budgets in anticipation of the costs of the EHR system.
The Epic EHR system (1) enables a patient to manage and receive information about his or her health via the internet; (2) provides physicians and clinicians with complete medical information reducing unnecessary duplication, expediting diagnosis and treatment, allowing more effective management of patient care as the patient transfers between departments and facilities; (3) permits the exchange of patient data with other healthcare institutions and interfacing with independent physicians; (4) provides information for physicians to review and evaluate their performance in relation to accountable care organizations’ quality measure requirements and cost and utilization measures; (5) provides an extensive
A-17 amount of information for better work flow, payor management and contract modeling, registration information, clinical documentation and denial management and many other areas; and (6) allows the System to meet the regulatory requirements that have been established in the meaningful use criteria of the HITECH Act, and position the System to meet the reporting requirements of the Merit-based Incentive Payment System (MIPS) within the Medicare Access and Children’s Health Insurance Program Reauthorization Act of 2015 (MACRA). See “BONDHOLDERS’ RISKS” in the forepart of this Official Statement for a more detailed description of these regulatory and reporting requirements.
THE PROJECT
The Project (as defined in the forepart of this Official Statement and as further described herein) includes noteworthy capital developments in Custer, Rapid City, and Sturgis, South Dakota, all part of the System’s master space planning process and its commitment to transform the future of health care in the western South Dakota region. The multi-year projects will benefit patient care throughout the System’s service areas, thus improving convenience, comfort, and support.
Rapid City – Main Unit
In Rapid City, the System has engaged in the most significant renovation and expansion project in its history. Projects include the construction and equipping of an approximately 290,000 square foot, four-story patient bed tower adjacent to the Main Unit, which will include, among other things, one floor with 32 beds built-out, one floor with shelled space for 32 additional beds to accommodate future growth, a new emergency department with 32 treatment rooms and 12 vertical/results waiting positions (areas where patients remain seated rather than lying on an exam table), an on-roof helipad with elevator access to the emergency department and a new entrance/lobby with space for patient registration, pre-admissions testing, pharmacy, gift shop and café. In addition, the System is undertaking the construction and equipping of an approximately 81,000 square foot, four-story hospital office building adjacent to the Main Unit to provide physician office space, with over 64,000 square feet devoted to outpatient physician services and the balance shelled for future growth, all integrated into the new bed tower and emergency department expansion by a new entrance/lobby.
Related improvements include construction of a new three-story, approximately 760-space parking structure (Phase I) and a new two-story, approximately 738 space parking structure designed to support the new bed tower and hospital office building (Phase II), as well as utility improvements to support the expansion. Additional details regarding the Project are provided in the table below.
The additional beds created by the Project will allow the Hospital to convert its remaining semi- private rooms to private rooms, which will improve patient safety and experience. An on-campus hospital office building will provide more coordinated care for patients receiving care from physicians who provide care in both hospital and clinic settings. The new parking facilities will provide improved access to these services in close proximity to the Hospital and new office building. By constructing shelled space, the System expects to be able to expand services in the future as demand increases.
Rapid City – Orthopedic Specialty Hospital
In addition, the System has begun construction of a new state-of-the-art 115,000 square foot specialty hospital specializing in orthopedics, sports medicine and rehabilitation, to be owned and operated by the Corporation and called the System’s Advanced Orthopedic and Sports Medicine Institute. The Advanced Orthopedic and Sports Medicine Institute is being constructed on 10 acres at the Buffalo Crossing development, located at the southeast corner of Catron Boulevard and Highway 16, in Rapid City, approximately five miles from the Hospital, and will house eight inpatient beds, four operating
A-18 suites, physicians, surgeons, physical therapists, athletic trainers and other specialists dedicated to providing expert care for orthopedic and musculoskeletal issues and sports-related injuries. Additionally, it will feature a performance and athletic enhancement center, with services ranging from improving one’s ability to enjoy everyday activities, to training athletes seeking to enhance their performance. Additional details regarding the Project are provided in the table below.
The System expects construction of the specialty hospital to result in a substantial increase in its orthopedic market share. The new hospital will allow the System to provide more elective orthopedic surgery procedures. The System has hired four orthopedic surgeons and expects to hire additional surgeons and other specialists to coordinate orthopedic and musculoskeletal care throughout the System as part of its comprehensive care approach. The specialty hospital will be led by an experienced administrative and clinical team focused on superior service to providers and patients.
Sturgis
In Sturgis, Health Network recently broke ground on construction of an approximately 26,000 square foot addition to the existing hospital building to house additional physician clinic space and to expand the emergency department, as well as renovations to the patient care, support and supply areas of the existing hospital building. The project will increase the size of the existing hospital (square footage, not beds) and replace existing specialty clinic space, relocating all clinic services onto the hospital site. After completion of construction it is anticipated Health Network will sell the building that currently houses clinic services in Sturgis (the Massa Berry Clinic). Additional details regarding the Project are provided in the table below.
Custer
In Custer, Health Network has begun construction of an approximately 46,000 square foot, one- story new replacement acute care hospital and clinic across the street from the existing hospital, to include 11 licensed inpatient beds, one bed for hospice care, an emergency department, ancillary and other patient care services, physician clinic space and supply and support areas. Health Network will demolish the former hospital when the new facility is completed and transfer ownership of the then vacant lot to the City of Custer. The new hospital and clinic will allow room for future growth, assist in recruiting new physicians, nurses, and clinicians, and will enhance the System’s ability to provide coordinated, high- quality care. The new healing environment is intended to enhance the patient and family experience and improve patient flow and caregiver efficiency, all within a one-story facility. Additional details regarding the Project are provided in the table below.
Construction and Renovation Projects
Facility Planned Improvements Approximate Cost Start Date or Estimated (Construction and Estimated Start Completion Date Soft Costs) Date
Regional Health Parking Phase I $19,124,000 June 2016 Completed July Rapid City Hospital 2017
Parking Phase II, Hospital $168,601,000 August 2017 December 2019 Office Building, New Bed Tower
A-19 Expansion, renovation $4,643,000 June 2016 Completed and equipping of the August 2017 central utility plant to accommodate the new improvements.
Advanced Orthopedic, sports $58,404,000 June 2017 September 2018 Orthopedic and medicine and Sports Medicine rehabilitation specialty Institute (Rapid hospital City)
Regional Health Addition and renovations $10,400,000 November 2016 January 2018 Sturgis Hospital and to hospital building Clinic
Regional Health Replacement hospital $22,000,000 November 2016 April 2018 Custer Hospital and Clinic
Project Funding Sources
While the System expects to finance significant portions of the Project with proceeds of the Bonds, the System has funded and will continue to fund approximately $143.1 million12 of costs of the Project from cash flow, cash and investments over a three-year period in order to allow for alternative future uses of certain facilities and minimize the incurrence of debt. It is expected the costs of the Advanced Orthopedic and Sports Medicine Institute will be paid exclusively from System cash flow, cash and investments. The Regional Health Sturgis Hospital and Clinic and Regional Health Custer Hospital and Clinic improvements are expected to be financed exclusively with proceeds of the Bonds. Other Project components will be funded from both sources. See “PLAN OF FINANCE” and “ESTIMATED SOURCES AND USES OF FUNDS” in the forepart of this Official Statement. Below is an estimated sources and uses of funds to be used on the Project, not taking into account the Refunding (as defined in the forepart of this Official Statement).
Sources of Funds* Bond Proceeds for Project $177,571,465 Cash Flow from Operations (2018 – 2020) 35,000,000 Cash and Investments and Routine Capital Budget 70,600,535 Total Sources $283,172,000
Uses of Funds* Deposit to Project Fund $140,071,465 Reimbursement for Prior Expenditures 37,500,000 Additional Project Costs 105,600,535 Total Uses $283,172,000 * Preliminary; subject to change.
12 Preliminary; subject to change. Figure includes reimbursement for prior expenditures.
A-20 Project Management
For the portions of the Project located in Rapid City, the System has engaged Earl Swenson & Associates, Inc. (ESa) of Nashville, Tennessee, as architect, and Layton Gustafson, a joint venture of Layton Construction Company of Sandy, Utah, and Gustafson Builders, a division of Heavy Constructors, Inc. of Rapid City, as construction manager. Design of the orthopedic specialty hospital is completed and the project is in the construction document phase; and final design work is being completed for the parking phase II, hospital office building and bed tower. For the Rapid City portions of the Project, the System is using a contractor at risk model that incents early collaboration amongst project team members to identify cost savings and manage construction budget and timing.
For the Custer and Sturgis portions of the Project, BWBR of St. Paul, Minnesota, has been engaged as architect, with Scull Construction Services, Inc. of Rapid City, as general contractor for the work in Custer and the Journey Group Companies d.b.a Ainsworth Benning Construction of Spearfish, as general contractor for the work in Sturgis. The Custer and Sturgis construction contracts are stipulated sum contracts.
MARKET ENVIRONMENT
Overview
The Regional Health System serves a 38-county, five-state region comprised of 22 counties in western South Dakota, three counties in southeastern Montana, four counties in northeastern Wyoming, two counties in southwestern North Dakota and seven counties in northwestern Nebraska. The 38 counties, with a population of more than 400,000 people, account for more than 96.4% of the System’s admissions. The map below categorizes each county served as part of the System’s primary, secondary or tertiary service areas.
System Service Areas
A-21 Service Areas by Hospital
The Hospital defines its primary service area as Pennington County, South Dakota, which accounts for approximately 54.0% of the Hospital’s inpatient and outpatient admissions, while its secondary service area comprises several additional counties located in western South Dakota.
The table below lists the counties comprising the respective primary service areas and the percentage of admissions therefrom for each of the other acute care hospitals owned and operated by the System. Secondary and tertiary service areas for these hospitals include counties in the five-state region depicted in the map in “MARKET ENVIRONMENT – Overview.”
Percent of Admissions from Primary Service Area Primary Service Area13 Regional Health Custer Hospital: Custer County, SD 70.3% Regional Health Lead-Deadwood Hospital: Lawrence County, SD 71.1% Regional Health Spearfish Hospital: Lawrence County, SD 41.5% Regional Health Sturgis Hospital: Meade County, SD 74.6%
Population Growth
The following table presents recent population growth trends for the System’s service areas as depicted in the map in “MARKET ENVIRONMENT – Overview.” Population growth in the primary and secondary service areas from 2000 to the 2010 U.S. Census was 10.86%, and from 2010 to July 1, 2016, the population in all services areas grew an estimated 4.15%.14
13 Rapid City Regional Hospital Enterprise Resource Planning (ERP) System Data – Inpatient and Outpatient Admissions. 14 Census – U.S. Department of Commerce, Bureau of Census; July 1, 2016 population estimates.
A-22 Rapid City Regional Economy
Rapid City, South Dakota, the county seat of Pennington County, is centrally located in the System’s service area and shares the System’s geographically large market for retail sales and services. The region includes an economic base of agriculture (grasslands supporting cattle, small grain farming, and forest products) and tourism (over 3 million tourists visit the Black Hills National Forest, Mt. Rushmore National Memorial and the Badlands National Park annually), and continues to diversify into science, medical, engineering, technology, military-related and energy industry clusters, according to reports by the Rapid City Economic Development Partnership.
Based on the latest information available from the Rapid City Area Chamber of Commerce, Ellsworth Air Force Base is the area’s largest government employer with approximately 3,372 military and 1,147 civilian employees. Other large government employers in the area include the City of Rapid City, Rapid City Area Schools, the State of South Dakota, the South Dakota National Guard and the federal government. The System is the area’s largest private employer. Other private employers in the area include Walmart/Sam’s Club, Ditech Financial, LLC, Black Hills Corporation, Black Hills Works and Synchrony Financial.
The local economy continues to grow. Air service at Rapid City Regional Airport recently expanded, with American Eagle, a regional branch for American Airlines, beginning direct service to Charlotte starting in June 2017. Other nonstop connections include Atlanta, Chicago, Dallas, Denver, Houston, Las Vegas, Minneapolis and Salt Lake City. Black Hills Corporation is expected to open its new corporate headquarters, Horizon Point, in Rapid City in the fall of 2017, which will house more than 550 of its employees.15 In June 2016, Intrinsic Materials opened its 10,000 square-foot facility in Rapid City to process carbon into nanofibers, hiring a number of graduates from the South Dakota School of Mines & Technology, another large employer, to assist with research and development, and to scale up the processes for commercial production. Synchrony Financial announced in the fall of 2016 that it would add 175 job positions at its Rapid City location over the next three years, choosing South Dakota over any number of different locations. In June 2015, Advance Health, a health care technology company, announced Ellsworth Air Force Base would become home to the company’s third location, with more than 200 jobs expected in the next three to five years.
Unemployment rates in the service areas have historically been below national averages. South Dakota unemployment rates since 2010 ranged from 2.7% to 5.2%, consisting of the following economic hub counties and their respective unemployment rates16 (as of May 2017) and population17 (as of July 2016): Pennington County, which has a 3.0% unemployment rate (population 109,372); Lawrence County, which has a 3.0% unemployment rate (population 25,281); and Meade County, which has a 3.0% unemployment rate (population 27,693) in South Dakota; Scotts Bluff County, Nebraska, which has a 3.2% unemployment rate (population 36,422); and Campbell County, Wyoming, which has a 5.1% unemployment rate (population 48,803). Median household income in 2015 was $52,809 which equaled the South Dakota median and was 95% of the US median. The Pennington County tax base grew by 5.8% in 2015.
15 http://www.blackhillscorp.com/about-black-hills-corporation/corporate-headquarters/horizon-point 16 https://www.census.gov/ 17 https://www.bls.gov
A-23 Competition
The System does not face direct competition with any other tertiary care hospitals in its primary, secondary or tertiary service areas. The nearest tertiary care facilities to the Hospital are approximately 350 or more miles away from Rapid City. Selected statistics for the tertiary care facilities closest to the Hospital are as follows:
Total Inpatient Miles From Admissions for Hospital Rapid City, Comparable Hospital and Location Staffed Beds SD 12-month Periods18
Sanford University of South 478 349 23,552 Dakota Medical Center Sioux Falls, South Dakota
Avera McKennan Hospital and 400 353 20,386 University Health Center Sioux Falls, South Dakota
Billings Clinic 370 377 15,007 Billings, Montana
St. Vincent Healthcare 224 377 11,753 Billings, Montana
As the only tertiary care provider between Sioux Falls, South Dakota and Billings, Montana, the System has a market share of 97.8% in its primary service area and 91.5% in its secondary service area.
The System does, however, experience competition in primary and secondary care specialties provided by independent physicians and physician groups, particularly in Rapid City. Black Hills Surgical Hospital and its adjacent Imaging Center (operating since 1997), a physician-owned specialty hospital located in Rapid City, South Dakota, licensed for 26 beds, competes with the Hospital, primarily in some secondary care specialties, specifically in neurosurgery and orthopedics. Black Hills Orthopedics & Spine Center, a 14–16 member physician group, practices primarily in orthopedic specialties. Rapid City Medical Center is the largest multi-specialty clinic in the Rapid City area with approximately 49 private physicians practicing in a variety of locations and specialties, from family practice and obstetrics/ gynecology to general surgery and gastroenterology. Physicians employed by Black Hills Orthopedics & Spine Center and Rapid City Medical Center, as well as other independent physicians, enjoy staff privileges at the Hospital, and in some cases at other System hospitals, but such physicians also practice at Black Hills Surgical Hospital and in their own clinic sites. Black Hills Urgent Care, a division of Black Hills Surgical Hospital, and Rapid City Medical Center also compete with the System in the urgent care space. The System’s new orthopedic specialty hospital in Rapid City (see “THE PROJECT” herein) and System-employed physicians at the facility will compete with Black Hills Surgical Hospital and the independent physicians at Black Hills Orthopedics & Spine Center. SDSC, although partially owned by the Hospital, also competes with the Hospital.
Indian Health Service’s Sioux San Hospital, a small nine-bed hospital with a staff of 22 physicians providing inpatient and outpatient adult, pediatric and prenatal care recently announced the
18 2015 AHA Guide (Data collected as of May 31, 2014)
A-24 pending closure of its emergency and inpatient departments and initial plans to replace its facilities in Rapid City, in the next five years, with a health center focused primarily on outpatient and urgent care medical services. Sioux San Hospital provides health care services primarily to the members of the Great Plains Tribes.
See “BONDHOLDERS’ RISKS – Market Dynamics and Other Factors That Could Result in Increased Competition” and “– Physicians, Nurses and Other Employees” in the forepart of this Official Statement for a more detailed discussion of risks relating to future competition and certain matters relating to the System and its current competitors.
MEDICAL STAFF
Staff Descriptions
The bylaws of the medical staff for each hospital provide for different categories or status of the physicians and dentists appointed to the respective medical staff. The types of staff status for the Hospital and the four other hospitals operated by the Health Network are different, but can be generally categorized into one of the following categories: active, affiliate/courtesy, resident and other. The category or status to which the physician or dentist is eligible and assigned determines, in part, the qualifications the medical staff member must meet (e.g., active staff members must live in close enough proximity to the hospital that they are able to actively care for their patients in person); and also determines, in part, the prerogatives the medical staff is granted (e.g., only active staff members are able to vote at medical staff meetings).
Active staff members, as the label implies, are the most active staff and have admitting privileges and other clinical privileges specifying the types of procedures they are able to perform or the types of diagnoses they are able to treat. Affiliate staff is a category at the Hospital that is similar to the category of courtesy staff in the Health Network hospitals. Affiliate and courtesy staff members either do not have admitting privileges (Hospital) but wish to continue to follow their patients and may assist an active staff physician in doing so; or, in Health Network hospitals, are physicians with admitting privileges but who typically admit fewer than 50 patients per year. Affiliate staff status does not require participation in on- call coverage for the emergency department. Residents at the Hospital are licensed, post-doctoral trainees enrolled in a residency or fellowship program (such as the Residency Program) who practice under the supervision of an active staff member.
Staff Statistics
As of July 1, 2017, the System’s total medical staff included 399 active staff, 78 affiliate/courtesy staff, 18 residents and 124 other staff. Other staff includes consulting staff and locum tenens physicians. Consulting staff members typically do not actively practice at one of the System hospitals but are recognized experts in their field and are called upon by active staff members to consult on a particular patient or teach active staff members a new procedure. Locum tenens staff members are typically contracted physicians appointed to augment coverage in a particular specialty. There are also a number of honorary staff members who are typically retired physicians or dentists who wish to remain involved in the activities of the organized medical staff but no longer admit and care for patients.
As of June 30, 2017, approximately 93% of the total physicians serving the System’s hospitals were board certified and 191 (approximately 48%) were employees of the Members of the Obligated Group. Of the 345 staff practicing at the Hospital, 137 are employed by the System and 208 are independent. As of June 30, 2017, employed physicians accounted for 62.4% of inpatient admissions
A-25 across all System hospitals. Virtually all of the physicians practicing in the Health Network are employed by the System.
The System’s medical staff has remained relatively consistent for the past two fiscal years with approximately 350 physicians on active staff. The number of employed physicians of the System has grown from 85 in 2009 to 191 in 2017. As of June 30, 2016 the System employed 185 physicians with active medical staff privileges which accounted for 46% of the total System medical staff. On June 30, 2017 the System employed 191 physicians or approximately 48% of the total active medical staff. To best assure physician coverage for patients admitted through the Hospital’s emergency department or for patients whose physicians no longer have admitting privileges, the Hospital has increased the number of hospitalists it employs and has created a nocturnist program. Currently there are 43 hospitalists who care for patients during the patients’ inpatient stay if the patient’s physician does not have admitting privileges or the patient does not have a physician. The hospitalists are all internists. The nocturnists are hospitalists who provide coverage exclusively during night shifts.
Relationships with Physicians
Both employed and non-employed medical staff members are critical to the success of the System. Employed physicians and independent physicians all enjoy equal status on the medical staff. Medical staff leadership is provided by both employed and non-employed physicians.
In Rapid City, members of the medical staff include both employed and independent physicians. The independent physicians are primarily members of Black Hills Orthopedics or Rapid City Medical Center (see “MARKET ENVIRONMENT – Competition” herein). The System has engaged a number of independent physicians through a physician-hospital organization (see description of Western Providers, Inc. in “NON-OBLIGATED AFFILIATES – Joint Ventures” herein).
The System seeks to engage physicians in its operations and to avoid conflicts by encouraging physician participation at all levels of the organization. See “BONDHOLDERS’ RISKS – Physicians, Nurses and Other Employees” in the forepart of this Official Statement.
[THIS SPACE INTENTIONALLY LEFT BLANK]
A-26 SELECTED FINANCIAL AND UTILIZATION INFORMATION
Beds Available for Service
As of June 30, 2017, the Obligated Group had 633 beds in service and 693 licensed beds on a combined basis as shown below:
Rapid City Regional Regional Health Beds in Service: Hospital Network19 TOTAL Medical / Surgical (including 30 swing beds) 265 92 357 Behavioral Health 36 - 36 Rehabilitation20 21 16 - 16 Nursery21 12 8 20 Neonatal Intensive Care15 28 - 28 Subtotal Hospital Beds in Service 357 100 457
Long-term Care - 160 160 Assisted Living - 16 16 Subtotal Senior Care Beds in Service - 176 176 Total Beds in Service 357 276 633 Licensed Beds: Hospital22 417 100 517 Long-term Care - 160 160 Assisted Living - 16 16 Total Licensed Beds 417 276 693
Due to processing delays, the South Dakota Department of Health has not yet issued all the annual licenses required for the operation of the System hospitals and senior care facilities. The fiscal year 2018 licenses for the Hospital and the senior care facilities in Custer remain pending but are expected to be renewed. Licensed bed numbers provided in this Appendix A for the Hospital and the Custer senior care facilities are based on previously issued licenses and are expected to remain the same. See “BONDHOLDERS’ RISKS – Licensing, Surveys, Investigations and Audits” in the forepart of this Official Statement.
19 Includes Regional Health Lead-Deadwood Hospital, Regional Health Spearfish Hospital, Regional Health Sturgis Hospital and Regional Health Custer Hospital. 20 Rehabilitation moved to leased space with 16 private beds in May 2017. 21 Not included in number of licensed hospital beds. 22 Does not include 12 hospice beds owned and operated by Home+, a Non-Obligated Affiliate, or nursery or neonatal intensive care bassinets.
A-27 Utilization
The following table provides inpatient and outpatient historical utilization information on a combined basis for the Obligated Group facilities for the three most recent fiscal years:
Fiscal Year Ended June 30, (000s) 2017 2016 2015 Acute Admissions 20,555 20,304 21,021 Acute Patient Days (excluding nursery & NICU) 96,025 97,886 100,493 Average Length of Stay 4.7 4.8 4.8 Average Daily Census 263 267 275 Occupancy % (Staffed beds) 56.8% 57.8% 59.4% Births 2,478 2,634 2,700 Inpatient Surgical Procedures 4,666 4,602 4,385 Outpatient Surgical Procedures 5,865 5,135 4,951 Emergency Room Visits 72,371 74,907 75,480 Urgent Care Visits 32,563 19,992 15,846 Physician Relative Value Units (RVUs) - Work 986,789 925,241 881,630 Long-term Resident Days 52,208 54,349 55,778 Swing Bed Days 6,139 6,266 6,439 Assisted Living Resident Days23 4,469 19,541 21,420
Payors
The majority of the revenues of the Members of the Obligated Group have been derived from patient service revenue, including Medicare, South Dakota and other Medicaid programs, contracted rate payors (including health maintenance organizations (HMOs) and preferred provider organizations (PPOs), commercial insurers, self-paying patients and other sources. The following table sets forth the payor mix of consolidated gross patient charges by percentage of total for the three most recent fiscal years.
Payors Acute Care Hospitals Physician Clinics Fiscal Year Ended June 30, Fiscal Year Ended June 30,
2017 2016 2015 2017 2016 2015 Blue Cross (Wellmark) 12.1% 12.2% 12.2% 16.9% 18.2% 18.9% Other Commercial 14.0% 13.3% 12.4% 17.2% 17.4% 21.6% Tricare/VA 6.0% 6.3% 8.0% 5.0% 4.6% 5.5% Medicare 47.1% 45.7% 44.0% 48.2% 45.2% 40.2% Indian Health Service 4.5% 4.5% 4.5% 1.8% 1.7% 1.5% Uninsured 4.5% 6.0% 5.6% 3.2% 5.2% 4.0% Medicaid 11.8% 12.0% 13.3% 7.7% 7.7% 8.3% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
23 In May 2016, the System sold its Fairmont Grand Regional Senior Care (Rapid City, SD) and Golden Ridge Regional Senior Care (Lead, SD) facilities.
A-28 Consolidated Operating Results
Presented below are selected consolidated operating results for the Corporation. The revenues and expenses of the Non-Obligated Affiliates are included in the Corporation’s consolidated financial statements (see “THE REGIONAL HEALTH SYSTEM – Consolidated Financial Statements” herein). The Obligated Group accounted for approximately 95.6% of the total operating revenue of the System as of June 30, 2017. The results below exclude activity related to temporarily and permanently restricted net assets for all years presented. See “MANAGEMENT DISCUSSION AND ANALYSIS” herein for further discussion. Fiscal Year Ended June 30, (000's) Unaudited 2017 2016 2015
Operating Revenue Net patient service revenue $ 685,055 $ 663,099 $ 605,249 Provision for uncollectible accounts (42,138) (56,605) (42,500) Net patient service revenue less provision for uncollectible accounts 642,917 606,494 562,749 Other 28,404 26,904 27,077
Total operating revenue 671,321 633,398 589,826
Operating Expenses Salaries and wages 317,891 294,927 278,709 Payroll taxes and benefits 43,562 43,629 48,100 Outside services 93,474 81,726 69,908 Medical supplies 130,078 112,216 98,322 Other supplies and expenses 47,265 43,296 41,180 Nonrecurring information technology implementation costs 5,145 - - Depreciation and amortization 33,587 28,588 28,503 Interest 3,226 3,719 4,849
Total operating expenses 674,228 608,101 569,571
Operating (Loss) Income (2,907) 25,297 20,255
Nonoperating Gains (Losses) Investment gain 49,914 9,331 11,116 Gain (loss) on interest rate swap 1,599 (3,558) (2,118) Loss on early extinguishment of debt - - (496) Other - - (1,000)
Total nonoperating gains 51,513 5,773 7,502
Revenues in Excess of Expenses 48,606 31,070 27,757
Unrestricted Net Assets Adjustment to the funded status of the pension plan 4,043 (14,677) (1,517) Other changes in unrestricted net assets 579 827 555 Increase in unrestricted net assets before discontinued operations 53,228 17,220 26,795 Discontinued operations Gain (loss) from operations, including gain on sale and impairment charge - 376 (1,492)
Increase in unrestricted net assets $ 53,228 $ 17,596 $ 25,303
A-29 Consolidated Balance Sheet
Presented below are the consolidated balance sheets for the Corporation, including the assets and liabilities of the Non-Obligated Affiliates which are included in the Corporation’s consolidated financial statements (see “THE REGIONAL HEALTH SYSTEM – Consolidated Financial Statements” herein). The Obligated Group accounted for approximately 98.1% of the total assets of the System as of June 30, 2017. As of June 30, (000's) Unaudited 2017 2016 2015
Assets
Current Assets Cash and cash equivalents $ 2,933 $ 17,532 $ 18,212 Receivables Patient, net 142,046 143,271 123,137 Allowance for doubtful accounts (47,391) (44,266) (35,426) Total patient receivables, net 94,655 99,005 87,711
Other receivables 13,860 8,011 9,225 Investments limited as to use 5,669 5,457 6,606 Inventory 19,120 15,983 13,499 Prepaid expenses 9,117 11,322 8,795 Assets held for sale - 56 2,021
Total current assets 145,354 157,366 146,069
Investments Limited as to Use, Less Current Portion 523,617 540,046 548,378
Property and Equipment, Net 313,597 248,674 233,608
Goodwill and Intangibles, Net 3,636 3,581 3,581
Other Long-Term Assets 18,744 15,827 11,173
Total assets $ 1,004,948 $ 965,494 $ 942,809
(table continued)
A-30 (table continued) As of June 30, (000's) Unaudited 2017 2016 2015
Liabilities and Net Assets
Current Liabilities Current maturities of long-term debt $ 8,745 $ 8,355 $ 7,965 Accounts payable 14,961 19,213 14,703 Estimated payables to third-party payors 4,799 4,416 7,117 Accrued expenses Interest 1,124 1,215 1,944 Salaries and wages 12,747 11,765 9,555 Compensated absences 15,719 14,949 13,505 Employee health insurance liability 3,278 4,933 3,365 Other 6,930 8,752 21,281 Liabilities - discontinued operations - - 174
Total current liabilities 68,303 73,598 79,609
Other Liabilities Payable under interest rate swap 7,868 11,275 9,775 Other long-term liabilities 18,770 16,948 15,394 Accrued pension liability 25,535 27,575 12,007 Long-term debt, net 123,963 133,127 141,824
Total liabilities 244,439 262,523 258,609
Net Assets Unrestricted 736,374 683,184 665,525 Noncontrolling interest 996 958 1,021
Total unrestricted net assets 737,370 684,142 666,546
Temporarily restricted 21,376 17,066 15,891 Permanently restricted 1,763 1,763 1,763
Total net assets 760,509 702,971 684,200
Total liabilities and assets $ 1,004,948 $ 965,494 $ 942,809
A-31 Historical and Pro Forma Maximum Annual Debt Service Coverage
The following table sets forth the funds generated by the Obligated Group on a historical and pro forma basis to cover maximum annual debt service. The coverage ratios for fiscal 2015, 2016 and 2017 are based on actual revenues and expenses and pro forma maximum annual debt service. The historical coverage ratios are based in part on debt service paid in the respective years. See “DEBT SERVICE SCHEDULE” in the forepart of this Official Statement for a description of the assumptions used in calculating pro forma maximum annual debt service.
Fiscal Year Ended June 30, (000's) 2017 2016 2015
Consolidated revenues in excess of expenses $ 48,606 $ 31,070 $ 27,757 Plus non-obligated group members' expense in excess of revenue 5,805 79 225 Obligated Group members' revenues in excess of expenses $ 54,411 $ 31,149 $ 27,982
Noncash Items: Unrealized gains and losses on investments, net (16,427) 10,863 4,233 Depreciation and amortization 32,898 28,436 28,354 Change in fair value of interest rate swap (3,407) 1,500 (86) Equity in the earnings from investments in affiliates (3,471) (4,021) - Other (371) (462) - Interest (1) 3,226 3,719 4,849 Income available for debt service $ 66,859 $ 71,184 $ 65,332
Historical debt service Principal payments (2) $ 8,355 $ 7,965 $ 7,565 Interest payments (1) 4,164 4,362 4,468 Total $ 12,519 $ 12,327 $ 12,033
Historical debt service coverage ratio 5.34 5.77 5.43
Pro Forma Maximum Annual Debt Service* $ 20,612 $ 20,612 $ 20,612
Pro Forma Maximum Annual Debt Service Coverage Ratio* 3.24 3.45 3.17
*Preliminary; subject to change.
(1) Excludes amounts paid to counterparty under interest rate swap agreement, as the interest rate swap is not accounted for as an accounting hedge, as defined in Accounting Standards Codification Section 815. (2) Payments made of $66.7 million related to the redemption of the Series 2008 Bonds are excluded from 2015 amount.
A-32 Capitalization
The following table represents the Corporation’s capitalization as of June 30, 2017, and as adjusted, assuming the Bonds are issued as anticipated and the proceeds applied toward the purposes described herein. For a discussion of the use of proceeds of the Bonds, see “PLAN OF FINANCE” in the forepart of this Official Statement.
(000's) As Adjusted to Give Effect to the Series As of June 30, 2017 2017 Bonds*
Long-Term Debt Series 2010 Bonds $ 33,555 $ - Series 2011 Bonds 35,650 - Series 2015 Bonds 60,745 60,745 Series 2017 Bonds - 213,690 Unamortized premium and debt issuance costs 2,758 2,758 (1)
Total Long Term Debt 132,708 277,193 Less: Current Maturities (8,745) (8,745) Total Long-Term Debt Less Current Maturities 123,963 268,448
Total Debt 123,963 268,448
Total Unrestricted Net Assets (2) 737,370 737,370
Total Capitalization $ 861,333 $ 1,005,818
Long-Term Debt as a % of Total Capitalization 14.4% 26.7%
*Preliminary; subeject to change.
(1) No adjustment has been made for premium/discount or costs of issuance associated with Series 2017 Bonds. (2) No adjustment has been made for loss on the Refunding.
Liquidity and Investments
Consolidated Days Cash on Hand
The following table presents the Corporation’s consolidated cash and unrestricted investments as of June 30, 2017, 2016 and 2015. Excluded from these funds for this purpose are investments designated by donors for specific purposes, trustee-held debt service funds and funds held for non-qualified benefit plans. The table also presents the consolidated days cash on hand ratio for the years noted below based upon the audited and unaudited consolidated financial statements. The days cash on hand ratio is calculated by dividing the cash and unrestricted investments by the amount determined by dividing (i) the
A-33 consolidated operating expenses (excluding depreciation and amortization) by (ii) the number of days in the relevant period.
Fiscal Year Ended June 30, (000s) 2017 2016 2015 Cash and Unrestricted Investments $492,088 $528,384 $539,197
Operating Expenses 674,228 608,101 569,571 Less Depreciation & Amortization (33,587) (28,588) (28,503) Adjusted Operating Expenses $640,641 $579,513 $541,068
Days Cash on Hand 280 333 364
The Corporation expects to receive approximately $37.5 million of reimbursement from proceeds of the Bonds for construction costs incurred between December 2016 and closing of the Bonds. The System will also spend approximately $15.1 million to defease a portion of the Series 2010 Bonds (see “ESTIMATED SOURCES AND USES OF FUNDS” in the forepart of this Official Statement).
Liquidity of Investments
Approximately 76% of the Corporation’s investment portfolio has 30-day or less liquidity, which equates to approximately $379 million of liquid investments as of June 30, 2017.
Investment Policy
The System utilizes a Finance and Investment Committee of its boards for investment oversight. See “GOVERNANCE AND MANAGEMENT” herein. The Finance and Investment Committee has approved an investment policy that defines the objectives in order to develop the strategy and desired returns, while considering the amount of investment risk. The Corporation also utilizes a professional investment consultant and various investment managers for domestic and international equity investments, which has a target allocation of 45% of the overall portfolio. Dedicated fixed-income investment managers have discretionary investment authority over 40% of the portfolio. Three additional strategies, Alternative Investment Assets24, Real Estate, and Real Return Assets25 each have a 5% allocation target of the overall portfolio. The Finance & Investment Committee provides investment management oversight including, but not limited to, asset allocations, bi-monthly performance monitoring and the selection, retention and/or termination of investment managers and investment consultants.
Investment Objectives
The primary investment objectives of the board-designated funds are to provide appropriate liquidity, to produce above-market returns and to continually diversify the asset allocation mix adjusting
24The alternative investment portion of the portfolio is comprised of investments that have low correlation to the stock and bond markets. These investments are often referred to as hedge funds. 25The real return investment portion of the portfolio is comprised of investments that hedge inflation risk (such as natural resource and commodity assets). A fixed income fund holding primarily treasury inflation-protected securities (TIPS) may also be selected as a real return asset.
A-34 for changes in the market, while minimizing risk. To accomplish this and minimize losses on liquidation of securities, management supplies to the investment consultant an expected cash flow analysis which projects cash needs for the next 24 to 36 months. Currently, only one to two percent of the fund is held in cash/money market accounts, but that can fluctuate when cash needs become more short-term in nature.
Target Asset Allocation
The current target allocation is based on the investment goals, time horizons for use of funds, risk tolerance, performance expectations, and asset class preferences. The following guidelines reflect a mix of assets within the asset allocation constraints described herein:
As of Range Target June 30, 2017 Domestic Equity 20 – 40 % 30% 26% International Equity 10 – 20 % 15% 22% Total Equity 30 – 60 % 45% 48%
Fixed Income 30 – 50 % 40% 46%
Alternative Investment Assets 0 – 15 % 5% 1% Real Estate 0 – 15 % 5% 5% Real Return Assets 0 – 15 % 5% 0%
Retirement and Pension Plans
Annual Contributions
The Corporation sponsors a non-contributory cash-balance defined benefit plan that covers substantially all full-time employees to which it contributed approximately $4.1, $4.3, and $3.8 million for each of the years ended June 30, 2017, 2016 and 2015, respectively.
Funded Status of the Plan
One measure of the Corporation’s pension plan’s funded status is provided by a comparison between the fair value of the plan assets and the projected benefit obligation as of the measurement date. The fair value of the plan’s assets was $97.8 million and the projected benefit obligation was $123.4 million, both as of the June 30, 2017 measurement date.
MANAGEMENT DISCUSSION AND ANALYSIS
The following is a comparison of selected consolidated information by the System for the fiscal year ending June 30, 2017 (fiscal year 2017) with the fiscal year ending June 30, 2016 (fiscal year 2016). The System’s acute care adult admissions increased by 1.2% or 251 from 20,304 to 20,555 which contributed to the increase in consolidated total operating revenue. Consolidated total operating revenue increased by 6.0% to $671.3 million for the fiscal year 2017 from $633.4 million for the fiscal year 2016. Adult patient days decreased 1.9% during fiscal year 2017 to 96,025 from 97,886, while the average length of stay decreased modestly to 4.7 from 4.8. The factors contributing to these volume increases and the consequent increase in net patient revenue include a cross section of increased medical, surgical and interventional procedures. Inpatient surgical procedures increased a modest 1.4% during fiscal 2017 (4,666) compared to the fiscal 2016 (4,602). Outpatient surgical procedures increased 14.2% during fiscal 2017 (5,865) compared to fiscal 2016 (5,135). Increases in both inpatient and outpatient surgery are attributable in part to the expansion of the orthopedics service line. Outpatient services now account for
A-35 approximately 51.4% of gross patient charges. The decrease in the provision for uncollectible accounts during fiscal year 2017 ($42.1 million) as compared to fiscal year 2016 ($56.6 million) was due to enhanced revenue cycle collection efforts ($11.3 million) and sales of uncollectible accounts previously written-off ($3.2 million).
While the System continues to manage expenses, the System did experience an increase in total operating expenses during fiscal year 2017 ($674.2 million) compared to fiscal year 2016 ($608.1 million). The volume increases previously discussed contributed significantly to increases in salaries and wages and related payroll taxes and benefits expense during fiscal year 2017 ($361.5 million) compared to fiscal year 2016 ($338.6 million), resulting in a 6.8% increase; and medical supplies expense increased during fiscal year 2017 ($130.1 million) from fiscal year 2016 ($112.2 million), a 15.9% increase. Salaries and wages and payroll tax and benefit expense as a percentage of total operating revenue was 53.8% in fiscal year 2017 compared to 53.5% in fiscal year 2016, and medical supplies was 19.4% of total operating revenue in fiscal year 2017 compared to 17.7% in fiscal year 2016. Outside services expense increased 14.4% during fiscal year 2017 ($93.5 million) compared to fiscal 2016 ($81.7 million). Outside services expense increased as a result of higher contracted nursing and physician costs. Other supplies and expenses increased 9.2% during fiscal year 2017 ($47.3 million) from fiscal year 2016 ($43.3 million). Depreciation and amortization increased 17.5% during fiscal year 2017 ($33.6 million) from fiscal year 2016 ($28.6 million), primarily due to additional depreciation ($3.5 million) in fiscal 2017 on facilities to be replaced as part of the Project due to changes in estimated useful lives. The System incurred $5.1 million of non-recurring costs related to its electronic medical records implementation in 2017.
Regional Health’s operating loss totaled $(2.9) million or (0.4)% of total operating revenue for fiscal year 2017, which compares with operating income of $25.3 million and an operating margin of 4.0% for fiscal year 2016. Revenues in excess of expenses were $48.6 million for fiscal year 2017 and $31.1 million for fiscal year 2016, due primarily to investment gains. Total nonoperating gains included $18.0 million and $(14.4) million of net unrealized gain (loss) on investments and gain or loss on the interest rate swap for the fiscal year 2017 and 2016, respectively.
Management has undertaken a number of initiatives to further improve financial performance for fiscal year 2018 and beyond. These include a reduction in length of stay initiative designed to more efficiently provide care, additional care delivery redesign and efficiency efforts with further benchmarking, pharmaceutical and supply savings through standardization and a change from urban to rural sole community provider status, which will increase reimbursement. Management has focused efforts on reducing employee turnover and reduction in agency nurse utilization. The System has made an investment in new workforce management software. Management believes this tool can increase staffing efficiency and flexibility with a goal of reducing turnover and agency use. Management is also making market-based salary increases in selected areas and implementing supervisory training programs to further increase employee retention.
Unrestricted cash and investments totaled $492.1 million or 280 days of cash expenses as of June 30, 2017 as compared with $528.4 million or 333 days of cash expenses as of June 30, 2016. Expenditures for capital projects, including expenditures on early portions of the Project, were the primary driver of the decrease in days of cash. See “SELECTED FINANCIAL AND UTILIZATION INFORMATION – Investment Policy” herein for a description of the System’s investment objectives and asset allocation.
A-36 OTHER MATTERS
Philanthropy
The System is committed to helping patients and communities live well. The Regional Health Foundation, an operating unit of the Hospital governed by a board comprised of a committee of the Regional Health board, acquires and stewards charitable gifts for the benefit of the patients and communities the System serves. The commitment and dedication of community members, physicians and caregivers, local businesses, and sponsors throughout the System’s market area have made possible the purchase of special equipment and provision of programs and assistance that would otherwise not be available. As of June 30, 2017, the Regional Health Foundation has $22.2 million in investments and cash.
Research
The System provides research services for a wide range of clinical trials, including study coordination and operations. As of June 1, 2017, there were approximately 159 active research studies taking place.
Employees
The System employed 4,716, 4,463, and 4,319 full-time-equivalent (FTE) employees26 as of June 30, 2017, 2016, and 2015, respectively. As of June 30, 2017, the System employed 191 physicians (see “MEDICAL STAFF” herein for additional information regarding employed and independent physicians). As of June 30, 2017, the System employed 1,123 nurses and staffed, through contract, another 155 nurses. See “BONDHOLDERS’ RISKS – Physicians, Nurses and Other Employees – Physician and Staffing Shortages” in the forepart of this Official Statement. There are no unions or professional associations representing any employees of either the Members of the Obligated Group or the Non-Obligated Affiliates. The Corporation provides health, dental, long-term disability and life insurance to its employees. The System generally considers employee relations to be positive. See “BONDHOLDERS’ RISKS – Employee/Labor Relations and Collective Bargaining” in the forepart of this Official Statement.
Insurance
Professional Liability Insurance
The Corporation currently self-insures its primary professional and general liability for its facilities and non-physician facility employees in the amount of $1 million annually per occurrence and $4 million annually in the aggregate with a secondary “buffer” layer of retention in the amount of $1.5 million per occurrence with a $1.5 million annual aggregate. It carries two levels of excess insurance above the self-retained amounts from commercial carriers, $25 million is the first excess layer and $10 million is the second excess layer. It also carries commercial insurance policies that provide “first dollar” coverage (no deductible or self-retention) for its employed physicians and advanced practice providers. These policies provide coverage of $1 million annually per occurrence and $3 million annually in the aggregate and the two excess policies described above then cover losses above those amounts. The insurance described covers the Members of the Obligated Group and Home+. There can be no assurance there will be any further renewals of the insurance policies or that medical malpractice insurance will at
26 Full-time equivalent employees equal the number of employees on full-time schedules plus the number of employees on part-time schedules converted to a full-time basis. The System employed 5,131 employees as of June 30, 2017.
A-37 any time in the future be available at reasonable cost or at any cost. See “BONDHOLDERS RISKS – Other Investment Considerations” in the forepart of this Official Statement for a discussion of cost and availability of professional liability insurance.
Other Insurance
The System maintains other types of insurance with respect to its property, the operations thereof and its business against casualties and contingencies (including but not limited to all risk property and workers compensation) in amounts and types customary to similar health systems in its geographic area.
Litigation
The nature of the business of the Obligated Group generates claims and litigation against Members of the Obligated Group and/or their employees arising in the ordinary course of its activities. Lawsuits for personal injuries or wrongful death seek to recover damages without indication of the amount of damages sought. The Obligated Group believes that all material claims and litigation presently outstanding are adequately covered by liability insurance, subject to applicable retentions as to which the Obligated Group believes it has adequate reserves, or are adequately covered by the available reserves held by the Obligated Group for such purpose.
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APPENDIX B
AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
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Consolidated Financial Statements June 30, 2016 and 2015 Regional Health, Inc.
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Regional Health, Inc. Table of Contents June 30, 2016 and 2015
Independent Auditor’s Report ...... 1 Financial Statements: Consolidated Balance Sheets ...... 3 Consolidated Statements of Operations and Changes in Net Assets ...... 4 Consolidated Statements of Cash Flows ...... 6 Notes to Consolidated Financial Statements ...... 8 Independent Auditor’s Report on Supplementary Information ...... 39 Supplementary Information: Consolidating Balance Sheet - Assets ...... 40 Consolidating Balance Sheet - Liabilities ...... 41 Consolidating Statements of Operations ...... 42
Independent Auditor’s Report
The Board of Directors Regional Health, Inc. Rapid City, South Dakota
Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Regional Health, Inc. (Regional Health), which comprise the consolidated balance sheets as of June 30, 2016 and 2015, and the related consolidated statements of operations and changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s 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.
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Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Regional Health, Inc. as of June 30, 2016 and 2015, and the consolidated results of its operations, changes in net assets, and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Minneapolis, Minnesota October 25, 2016
2
2016 2015
Assets
Current Assets Cash and cash equivalents $ 17,532 $ 18,212 Receivables Patient, net 143,271 123,137 Allowance for doubtful accounts (44,266) (35,426) Total patient receivables, net 99,005 87,711
Other receivables 8,011 9,225 Investments limited as to use 5,457 6,606 Inventory 15,983 13,499 Prepaid expenses 11,322 8,795 Assets held for sale 56 2,021
Total current assets 157,366 146,069
Investments Limited as to Use, Less Current Portion 540,046 548,378
Property and Equipment, Net 248,674 233,608
Goodwill and Intangibles, Net 3,581 3,581
Other Long-Term Assets 15,827 11,173
Total assets $ 965,494 $ 942,809
See Notes to Consolidated Financial Statements
Regional Health, Inc. Consolidated Balance Sheets June 30, 2016 and 2015 (Amounts in Thousands)
2016 2015
Liabilities and Net Assets
Current Liabilities Current maturities of long-term debt $ 8,355 $ 7,965 Accounts payable 19,213 14,703 Estimated payables to third-party payors 4,416 7,117 Accrued expenses Interest 1,215 1,944 Salaries and wages 11,765 9,555 Compensated absences 14,949 13,505 Employee health insurance liability 4,933 3,365 Other 8,752 21,281 Liabilities - discontinued operations - 174
Total current liabilities 73,598 79,609
Other Liabilities Payable under interest rate swap 11,275 9,775 Other long-term liabilities 16,948 15,394 Accrued pension liability 27,575 12,007 Long-term debt, net 133,127 141,824
Total liabilities 262,523 258,609
Net Assets Unrestricted 683,184 665,525 Noncontrolling interest 958 1,021
Total unrestricted net assets 684,142 666,546
Temporarily restricted 17,066 15,891 Permanently restricted 1,763 1,763
Total net assets 702,971 684,200
$ 965,494 $ 942,809
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Regional Health, Inc. Consolidated Statements of Operations and Changes in Net Assets Years Ended June 30, 2016 and 2015 (Amounts in Thousands)
2016 2015
Operating Revenue Net patient service revenue $ 663,099 $ 605,249 Provision for uncollectible accounts (56,605) (42,500) Net patient service revenue less provision for uncollectible accounts 606,494 562,749 Other 26,904 27,077
Total operating revenue 633,398 589,826
Operating Expenses Salaries and wages 294,927 278,709 Payroll taxes and benefits 43,629 48,100 Outside services 81,726 69,908 Medical supplies 112,216 98,322 Other supplies and expenses 43,296 41,180 Depreciation and amortization 28,588 28,503 Interest 3,719 4,849
Total operating expenses 608,101 569,571
Operating Income 25,297 20,255
Nonoperating Gains (Losses) Investment gain 9,331 11,116 Loss on interest rate swap (3,558) (2,118) Loss on early extinguishment of debt - (496) Other - (1,000)
Total nonoperating gains 5,773 7,502
Revenues in Excess of Expenses 31,070 27,757
Unrestricted Net Assets Adjustment to the funded status of the pension plan (14,677) (1,517) Other changes in unrestricted net assets 827 555 Increase in unrestricted net assets before discontinued operations 17,220 26,795 Discontinued operations Gain (loss) from operations, including gain on sale and impairment charge 376 (1,492)
Increase in unrestricted net assets 17,596 25,303
See Notes to Consolidated Financial Statements 4
Regional Health, Inc. Consolidated Statements of Operations and Changes in Net Assets Years Ended June 30, 2016 and 2015 (Amounts in Thousands)
2016 2015
Temporarily Restricted Net Assets Contributions 3,741 1,406 Investment (loss) gain (208) 462 Other changes in temporarily restricted net assets 3 (3) Net assets released from restrictions (2,361) (1,017)
Increase in temporarily restricted net assets 1,175 848
Change in Net Assets 18,771 26,151
Net Assets at Beginning of Year 684,200 658,049
Net Assets at End of Year $ 702,971 $ 684,200
See Notes to Consolidated Financial Statements 5
Regional Health, Inc. Consolidated Statements of Cash Flows Years Ended June 30, 2016 and 2015 (Amounts in Thousands)
2016 2015 Operating Activities Change in net assets $ 18,771 $ 26,151 Adjustments to reconcile change in net assets to net cash provided by operating activities: Adjustment to the funded status of the pension plan 14,677 1,517 Provision for uncollectible accounts 56,605 42,500 Interest expense attributable to amortization of debt issuance costs 121 132 Depreciation and amortization 28,588 28,503 Depreciation and amortization - discontinued operations - 227 Loss on interest rate swap 3,558 2,118 Loss on extinquishment of debt - 496 Restricted contributions and investment income (3,533) (1,868) Amortization of bond premium (463) (463) Realized gain on investments (2,901) (1,389) Change in unrealized gains on investments 10,863 4,233 Other non-cash changes (7,685) (3,150) Changes in assets and liabilities Patient accounts receivable (67,899) (38,466) Inventory and other (3,797) (5,754) Estimated payables to third-party payors (2,701) 2,109 Accounts payable (338) 2,625 Accrued expenses (8,210) 4,588 Net Cash Provided by Operating Activities 35,656 64,109 Investing Activities Purchase of property and equipment, net (36,841) (24,123) Proceeds from sales and maturities of investments 202,532 182,610 Purchases of investments (201,013) (211,538) Interest rate swap settlements (2,058) (2,204) Distributions from affiliated organizations 3,656 2,961 Other (625) (6,320) Net Cash Used in Investing Activities (34,349) (58,614) Financing Activities Proceeds from issuance of bonds - 67,210 Payment for redemption of bonds - (66,960) Scheduled principal payments on long-term debt (7,965) (7,565) Payment for debt financing costs - (299) Restricted contributions and investment income 3,533 1,868 Increase in other long-term liabilities 2,445 976 Net Cash Used by Financing Activities (1,987) (4,770) Net Change in Cash and Cash Equivalents (680) 725 Cash and Cash Equivalents, Beginning of Year 18,212 17,487
Cash and Cash Equivalents, End of Year $ 17,532 $ 18,212
See Notes to Consolidated Financial Statements 6
Regional Health, Inc. Consolidated Statements of Cash Flows Years Ended June 30, 2016 and 2015 (Amounts in Thousands)
2016 2015
Supplemental Disclosure of Noncash Operating and Investing Acitivites Construction purchases included in accounts payable $ 4,848 $ -
See Notes to Consolidated Financial Statements 7
Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Note 1 - Organization
Regional Health, Inc. (Regional Health) was formed in 2003 to establish policy and perform planning on behalf of the members of the Regional Health Obligated Group (Obligated Group). The Obligated Group consists of Regional Health, Inc., Rapid City Regional Hospital, Inc., Regional Health Network, Inc., and Regional Health Physicians, Inc. Each member of the Obligated Group is a tax exempt organization.
Rapid City Regional Hospital, Inc. (Hospital) was formed from the consolidation of St. John’s McNamara Hospital and Bennett-Clarkson Memorial Hospital in 1973. The Hospital provides a wide variety of acute and tertiary care services on its main campus and through its adjacent John T. Vucurevich Regional Cancer Care Institute and Regional Rehabilitation Institute. The Hospital also provides patient care at Regional Behavioral Health Center, Rapid City Regional Hospital Family Medicine Residency Program’s clinic, Regional Heart Doctors, Rapid City Regional Hospital Auxiliary Hospice House, Regional Medical Clinics and Regional Urgent Care locations. The Hospital employs physicians through its residency, cardiology, cardiothoracic surgery, medical oncology, primary care, psychiatry, neurology, hospitalist, and other programs.
In 2005, Regional Health Network, Inc. (Health Network) was formed as a result of a corporate reorganization and owns and leases acute care hospitals, nursing homes, clinics, and assisted living facilities in Rapid City, South Dakota and throughout western South Dakota. It also provides home medical equipment services in surrounding communities under the Regional Home Medical Equipment name.
The Health Network owns the following facilities:
Custer Regional Hospital/Custer Regional Senior Care is an acute care hospital and a long-term care facility in Custer, South Dakota. Custer Regional Hospital is designated and certified as a critical access hospital.
Lead-Deadwood Regional Hospital is an acute care hospital located in Deadwood, South Dakota which is designated and certified as a critical access hospital.
Spearfish Regional Hospital/Spearfish Regional Surgery Center is an acute care hospital and a specialty hospital in Spearfish, South Dakota. Spearfish Regional Hospital is designated and certified as a prospective payment system hospital.
Sturgis Regional Hospital/Sturgis Regional Senior Care is an acute care hospital and a long-term care facility in Sturgis, South Dakota. Sturgis Regional Hospital is designated and certified as a critical access hospital.
In 2005, Regional Health Physicians, Inc. (RH Physicians) was formed as a result of a corporate reorganization and owned, leased, and operated physician clinics in the South Dakota communities of Belle Fourche, Buffalo, Custer, Hill City, Hot Springs, Lead-Deadwood, Pine Ridge, Rapid City, Spearfish, Sturgis, Wall, and the clinics in the Wyoming communities of Newcastle and Upton. On June 15, 2015, the clinics were reclassified as provider based and became departments of the respective hospitals based upon the community in which they were located. RH Physicians employs physicians, and provides support services to related Regional Health facilities.
The consolidated financial statements include the accounts and transactions of Regional Health. Significant intercompany accounts and transactions have been eliminated.
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Note 2 - Summary of Significant Accounting Policies
Income Taxes
Regional Health and subsidiaries, are organized as nonprofit corporations as described in Section 501(c)(3) of the Internal Revenue Code and are exempt from federal income taxes on related income pursuant to Section 501(a) of the Code. Regional Health and subsidiaries are annually required to file a Return of Organization Exempt from Income Tax (Form 990) with the Internal Revenue Service (IRS). In addition, Regional Health and subsidiaries may be subject to income tax on income that is derived from business activities that are unrelated to its tax- exempt purpose.
Regional Health believes that it has appropriate support for any tax positions taken affecting its annual filing requirements, and as such, does not have any uncertain tax positions that are material to the consolidated financial statements. Regional Health would recognize future accrued interest and penalties related to unrecognized tax benefits and liabilities in income tax expense if such interest and penalties are incurred. Regional Health’s federal Form 990T filings are no longer subject to federal tax examinations by tax authorities for years before 2012.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Although estimates are considered to be fairly stated at the time the estimates are made, actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include certain highly liquid investments with a maturity of three months or less when purchased, excluding amounts whose use is limited or restricted.
Regional Health’s cash balances are maintained in various bank deposit accounts. At various times during the year, the balance of these deposits may be in excess of federally insured limits.
Patient Accounts Receivable
Regional Health provides health care services through inpatient and outpatient care facilities. Regional Health generally does not require collateral or other security in extending credit to patients, substantially all of whom are local residents. However, it routinely obtains assignment of (or is otherwise entitled to receive) patients’ benefits payable under their health insurance programs, plans, or policies (e.g., Medicare, Medicaid, health maintenance organizations, and commercial insurance policies). Interest is assessed on past due patient balances.
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Patient accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectability of accounts receivable, Regional Health analyzes its past history and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for bad debts. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. For receivables associated with services provided to patients who have third party coverage, Regional Health analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for bad debts, if necessary (for example, for expected uncollectible deductibles and copayments on accounts for which the third-party payor has not yet paid, or for payors who are known to be having financial difficulties that make the realization of amounts due unlikely). For receivables associated with self-pay patients (which includes both patients without insurance and patients with deductible and copayment balances due for which third-party coverage exists for part of the bill), Regional Health records a significant provision for bad debts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of the bill for which they are financially responsible. The difference between the standard rates (or the discounted rates, if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted is recorded and written off against the allowance for doubtful accounts.
Regional Health’s process for calculating the allowance for doubtful accounts for self-pay patients has not significantly changed during the years ended June 30, 2016 and 2015. The provision for uncollectible accounts has increased during the year ended June 30, 2016 due to volume increases and reduced collections on uninsured and under-insured accounts. Regional Health has not significantly changed its charity care or uninsured discount policies during fiscal years 2016 or 2015.
Inventory
Pharmaceutical inventory is stated at average cost and medical supplies are stated at the lower of cost or market using the first-in, first-out method.
Investments Limited as to Use
Investments limited as to use primarily include investments held by trustees under indenture agreements, deferred compensation, investments designated by the Board of Directors for future capital improvements, over which the Board retains control, and by donors for specific purposes. Amounts required to meet current liabilities of Regional Health have been classified as current investments limited as to use in the consolidated statements of financial position at June 30, 2016 and 2015. All investments are classified as trading; therefore, all realized and unrealized gains and losses, as well as interest and dividends, are recognized in revenue in excess of expenses as nonoperating gains.
10
Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Fair Value Measurements
Certain assets and liabilities are reported at fair value in the consolidated financial statements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal, or most advantageous, market at the measurement date under current market conditions regardless of whether that price is directly observable or estimated using another valuation technique. Inputs used to determine fair value refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available. A three-tier hierarchy categorizes the inputs as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that Regional Health can access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and market-corroborated inputs.
Level 3 – Unobservable inputs for the asset or liability. In these situations, Regional Health develops inputs using the best information available in the circumstances.
In some cases, the inputs used to measure the fair value of an asset or a liability might be categorized within different levels of the fair value hierarchy. In those cases, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Assessing the significance of a particular input to the entire measurement requires judgment, taking into account factors specific to the asset or liability. The categorization of an asset within the hierarchy is based upon the pricing transparency of the asset and does not necessarily correspond to Regional Health’s assessment of the quality, risk or liquidity profile of the asset or liability.
Regional Health has portions of its holdings in private equity/venture capital or other similar funds. These investments have fair values that are determined using the net asset value (NAV) provided by the investment manager. NAV is a practical expedient to determine the fair value of investments that do not have readily determinable fair values and which prepare their financial statements consistent with the measurement principles of an investment company or have the attributes of an investment company.
Donated Assets
Donated marketable securities and other non-cash donations are recorded as contributions at their estimated fair values at the date of donation.
11
Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Property and Equipment
Property and equipment acquisitions in excess of $2,500 are capitalized and are stated at cost, if purchased, or at fair market value at the date of donation, if donated. Depreciation, including depreciation of property and equipment subject to capital leases, is provided using the straight-line method over the estimated useful lives of the respective assets. The following useful lives are used in computing depreciation:
Land improvements 5 - 25 years Buildings 10 - 40 years Building additions and improvements 5 - 40 years Fixed equipment 5 - 20 years Movable equipment 3 - 15 years Interest cost incurred on funds used during the construction of capital assets is capitalized as a component of the cost of acquiring those assets.
Gifts of long-lived assets such as land, buildings, or equipment are reported as additions to unrestricted net assets and are excluded from revenues in excess of expenses unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when donated or when acquired long-lived assets are placed in service.
Internal Use Software
Regional Health capitalizes expenses related to the acquisition and development of the software used for financial reporting, billing, processing, and patient care in conformity with Accounting Standards Codification (ASC) 350- 40, Internal-Use Software. As of June 30, 2016, Regional Health had capitalized approximately $10,600 related to software under development. Costs of maintenance, training, and minor upgrades are expensed as incurred in accordance with ASC 350-40.
Impairment of Long-Lived Assets
Regional Health considers whether indicators of impairment are present and performs the necessary analysis to determine if the carrying values of assets are appropriate. No impairment was identified for the year ended June 30, 2016. No impairment was identified for the year ended June 30, 2015, other than identified related to assets for certain discontinued operations.
12
Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Goodwill and Intangibles
Goodwill represents the excess of cost over the fair value of the net assets acquired through the acquisitions of various businesses. On an annual basis and at interim periods when circumstances require, Regional Health tests the recoverability of its goodwill. Regional Health has the option, when each test of recoverability is performed, to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If Regional Health determines that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then additional analysis is unnecessary. If Regional Health concludes otherwise, then a two-step impairment analysis, whereby Regional Health compares the carrying value of each identified reporting unit to its fair value, is required. The first step is to quantitatively determine if the carrying value of the reporting unit is greater than its fair value. If Regional Health determines that this is true, the second step is required, where the estimated fair value of goodwill is compared to its carrying value.
Regional Health recognizes an impairment charge for the amount by which the carrying amount of goodwill exceeds its fair value. The fair value of the reporting unit is estimated, if required under applicable accounting guidance, using the net present value of discounted cash flows, excluding any financing costs or dividends, generated by each reporting unit. The discounted cash flows are based upon reasonable and appropriate assumptions about the underlying business activities of the respective reporting unit. Regional Health performs its evaluation for recoverability for goodwill at the same time each year, unless circumstances require additional analysis. There was no impairment loss recognized for the years ended June 30, 2016 and 2015.
Intangibles include a covenant not to compete of $1,080 at both June 30, 2016 and 2015, respectively.
Investments in Affiliated Organizations
Investments in organizations in which Regional Health has the ability to exercise significant influence over operating and financial policies but does not have operational control are recorded under the equity method of accounting. Under the equity method, the initial investment is recorded at cost and adjusted annually to recognize Regional Health’s share of earnings and losses of those organizations, net of any additional investments or distributions. Regional Health’s share of net earnings or losses of the organizations is included in nonoperating gains (losses).
Investments in organizations in which Regional Health does not have the ability to exercise significant influence are recorded at cost. Distributions received from these organizations are recorded as income in the period received.
Self-Insurance Reserves
Regional Health provides for self-insurance reserves for estimated incurred but not reported claims for its employee health plan and workers’ compensation insurance programs. These reserves, which are included in current liabilities on the balance sheets, are estimated based upon historical submission and payment data, cost trends, utilization history, and other relevant factors. Adjustments to reserves are reflected in the operating results in the period in which the change in estimate is identified.
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Payable Under Interest Rate Swap
As part of its debt and risk management programs, Regional Health has entered into an interest rate swap, which is recognized as a liability in the consolidated statements of financial position at fair value. The interest rate swap derivative is not considered a hedge, and the change in fair value is recognized in nonoperating gains (losses).
Revenues in Excess of Expenses
The consolidated statements of operations and changes in net assets include revenues in excess of expenses. Changes in unrestricted net assets, which are excluded from revenues in excess of expenses, include changes in the pension liability, other changes in unrestricted net assets (primarily capital gifts and net assets released from restrictions for capital), and losses from discontinued operations.
Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets are those whose use by Regional Health has been limited by donors primarily for loans, scholarships and medical support for a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by Regional Health in perpetuity; the income from these funds is used primarily for loans and scholarships in accordance with the donor restrictions. During the years ended June 30, 2016 and 2015, net assets released from restrictions for capital purposes were $1,126 and $554, respectively, and is included within other changes in unrestricted net assets in the consolidated statements of operations and changes in net assets. During the years ended June 30, 2016 and 2015, net assets released from restrictions to support operations were $1,235 and $463, respectively, and are included within other operating revenue in the consolidated statements of operations and changes in net assets.
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Noncontrolling Interest
The changes in consolidated unrestricted net assets attributable to Regional Health’s controlling interest and noncontrolling interests for the years ended June 30, 2016 and 2015 are as follows:
Unrestricted Net Assets Controlling Noncontrolling Interest Interests Total
June 30, 2014 $ 641,243 $ - $ 641,243
Revenues in excess of expenses 27,752 5 27,757 Distributions to noncontrolling interests - (73) (73) Adjustment to the funded status of the pension plan (1,517) - (1,517) Discontinued operations (1,492) - (1,492) Other changes in unrestricted net assets (461) 1,089 628
June 30, 2015 665,525 1,021 666,546
Revenue in excess of expenses 31,074 (4) 31,070 Distributions to noncontrolling interests - (23) (23) Adjustment to the funded status of the pension plan (14,677) - (14,677) Discontinued operations 376 - 376 Other changes in unrestricted net assets 886 (36) 850
June 30, 2016 $ 683,184 $ 958 $ 684,142
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Discontinued Operations
During the year ended June 30, 2015, Regional Health made a decision to discontinue and market for sale certain senior living operations. Assets and liabilities intended to be sold were designated as assets and liabilities held for sale, and included within other current assets and liabilities, respectively, in the consolidated statements of financial position. Assets held for sale were $56 and $2,021 while liabilities – discontinued operations were $-0- and $174 at June 30, 2016 and 2015 respectively. Revenues of the entities held for sale were $1,336 and $1,554, total operating expenses were $1,981 and $2,372, and the (gain) loss from discontinued operations (including gain on sale and estimated impairment loss of certain long-lived assets of ($1,021) and $674, respectively) in the consolidated statements of operations and changes in net assets totaled $(376) and $1,492 for the years ended June 30, 2016 and 2015, respectively. The sale of certain assets held for sale were completed during the fiscal year ended June 30, 2016.
Net Patient Service Revenue
Regional Health has agreements with third-party payors that provide for payments to Regional Health at amounts different from its established charges. Payment arrangements include prospectively determined rates per discharge, reimbursed costs based on filed cost reports, discounts from normal charges, and per diem payments.
Net patient service revenue is reported at estimated net realized amounts from patients, third-party payors and others for services rendered and includes estimated retroactive revenue adjustments due to future audits, reviews and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews, and investigations. Adjustments relating to the settlement of prior years’ cost reports, adjustments associated with other regulatory reviews related to prior year estimates and other related adjustments to estimates increased revenues in excess of expenses by approximately $2,164 for the year ended June 30, 2016 and decreased revenues in excess of expenses by approximately $175 for the year ended June 30, 2015.
Regional Health records a significant provision for uncollectible accounts related to uninsured patients (and residents) in the period the services are provided. Net patient (and resident) service revenue, but before the provision for uncollectible accounts, recognized for the years ended June 30, 2016 and 2015 from these major payor sources is as follows:
2016 2015
Net patient service revenue Third-party payors $ 634,773 $ 594,592 Self-pay 28,326 10,657
Total all payors $ 663,099 $ 605,249
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Charity Care
Regional Health provides care to certain patients under its charity care policy without charge or at amounts less than its established rates. Since Regional Health does not pursue collection of amounts determined to qualify as charity care, the amounts are not reported as net patient service revenue in the accompanying consolidated financial statements. The estimated cost of providing these services was $14,139 and $16,593 for the years ended June 30, 2016 and 2015, respectively, calculated by multiplying the ratio of cost to gross charges for Regional Health by the gross uncompensated charges associated with providing charity care to its patients.
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 donor stipulated time restrictions or purpose restrictions are met or accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statement of operations as other operating revenue if used for operations, and other changes in unrestricted net assets if used for capital purposes. Donor-restricted contributions whose restrictions are met within the same year as received are reflected as other revenue in the consolidated statements of operations.
Electronic Health Record (EHR) Incentives
The American Recovery and Reinvestment Act of 2009 (“ARRA”) established incentive payments under the Medicare and Medicaid programs for certain professionals and hospitals that meaningfully use certified electronic health record (“EHR”) technology. The Medicare incentive payments are paid to qualifying hospitals over four consecutive years on a transitional schedule. To qualify for Medicare incentives, hospitals and physicians must meet EHR “meaningful use” criteria that became more stringent over three stages as determined by the Centers for Medicare & Medicaid Services (CMS).
Medicaid programs and payment schedules vary from state to state. The Medicaid program in South Dakota requires eligible hospitals to register for the program prior to 2016, to engage in efforts to adopt, implement or upgrade certified EHR technology in order to qualify for the initial year of participation, and to demonstrate meaningful use of certified EHR technology in order to qualify for additional years of payments. The payment schedule is based on a formula of the overall EHR amount times the Medicaid share and is paid 40% in the first and second years and at 20% in the last year of participation based on a Federal Fiscal Year. For South Dakota, hospitals cannot initiate payments after 2016.
For eligible professionals, EHR incentive payments are based on a standard amount per professional. Professionals that are eligible to participate in the Medicare EHR incentive program can be paid up to $44,000 over a four year period and professionals that are eligible to participate in the Medicaid program are eligible to receive up to $63,750 over a six year period. Eligible professionals are only allowed to participate in either Medicaid or Medicare programs, but not both.
17
Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Change in Accounting Policy
In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-07, Fair Value Measurement: Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The provisions of this ASU affect fair value measurement disclosures only. Investments for which fair value is measured at NAV per share (or its equivalent) using the practical expedient provisions of ASC 820, Fair Value Measurements, are no longer required to be included within the fair value hierarchy level tables. Regional Health elected to early adopt ASU 2015-07 as of July 1, 2015 and has retroactively applied the ASU for all prior periods presented. The application of this ASU resulted in revisions to 2015 information within both the Fair Value Measurements (Note 10) and Pension Plan (Note 11) notes for the years ended June 30, 2016 and 2015. The revised accounting principle is preferable because it removes the diversity in practice related to the categorization of certain investments measured at net asset value with redemption dates in the future (including period redemption dates).
Recent Accounting Pronouncements
In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement regarding Subtopic 350-40, “Intangibles - Goodwill and Other Internal-Use Software.” The amendments in ASU 2015-05 provide guidance to companies about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the company accounts for the software license element of the arrangement consistent with other licenses. If a cloud computing arrangement does not include a software license, the company accounts for the arrangement as a service contract. The amendments in ASU 2015-05 are effective for annual and interim periods beginning after December 15, 2015. The amendments in ASU 2015-05 may be applied either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. Regional Health is currently evaluating the impact the adoption of this standard will have on the consolidated financial statements.
Reclassifications
Reclassifications have been made to the June 30, 2015 financial information to make it conform to the current year presentation. The reclassifications had no effect on previously reported operating results or changes in net assets.
18
Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Note 3 - Net Patient Service Revenue
Gross patient charges by payor for the years ended June 30 were derived as follows:
2016 2015
Medicare 45% 43% Medicaid 12% 13% Blue Cross 13% 13% Commercial insurance, managed care, self-pay, and other 30% 31%
100% 100%
At June 30, the mix of receivables from patients and other third-party payors was as follows:
2016 2015
Medicare 31% 31% Medicaid 9% 9% Blue Cross 9% 10% Commercial insurance, managed care, self-pay, and other 51% 50%
100% 100%
Regional Health has agreements with third-party payors that provide for payments at amounts different from established charges.
Inpatient acute care 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. The Medicare program pays for most outpatient services at predetermined rates under a prospective payment system. Regional Health is reimbursed for other cost-reimbursable items at a tentative rate with the final settlement determined after submission of annual cost reports by Regional Health and audits thereof by the Medicare fiscal intermediary. Medicare cost reports have been audited and finalized by the Medicare fiscal intermediary through June 30, 2013. Regional Health has appealed the treatment of certain amounts in certain audited cost reports.
Payments for Medicaid inpatients are based upon three methods (DRG rates, cost, and per diem). Clinical and outpatient services rendered to Medicaid program beneficiaries are reimbursed under prospectively determined amounts per service or under a cost based reimbursement methodology depending on the applicable program. Hospital outpatient reimbursement rates, which were cost based, are now adjusted annually by the State Legislature with no final settlement process. Some other hospital services such as lab and home health are paid on prospective rates.
19
Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Regional Health also has entered into reimbursement agreements with certain commercial insurance carriers, health maintenance organizations, preferred provider organizations, and the Indian Health Service. The basis for payment under these agreements includes prospectively determined rates per discharge, discounts from established charges, prospectively determined per diem rates, and fee schedules for certain outpatient services.
Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action, including fines, penalties, and exclusion from the Medicare and Medicaid programs. In addition, governmental payors have implemented ongoing audit contractor review procedures. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term.
The Centers for Medicare and Medicaid Services (CMS) has implemented a Recovery Audit contractor (RAC) program under which claims are reviewed by contractors for validity, accuracy, and proper documentation. If selected for audit, the potential exists that Regional Health may incur a liability for a claims overpayment at a future date. Regional Health is unable to determine if it will be audited and, if so, the extent of the liability of overpayments, if any. Regional Health estimates a loss reserve recorded in estimated payables to third party payors to cover expected exposures to losses from the RAC program.
In addition, the IRS has established standards to be met to maintain Regional Health’s tax-exempt status. In general, such standards require Regional Health to meet a community benefits standard and comply with the laws and regulations governing the Medicare and Medicaid programs.
Regional Health believes that it is in compliance with all applicable laws and regulations related to billing practices and other compliance requirements and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing.
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Note 4 - Property and Equipment
A summary of property and equipment is as follows:
2016 2015
Land and improvements $ 27,860 $ 26,498 Buildings and fixed equipment 324,589 309,847 Leased buildings - 4,064 Movable equipment 263,445 287,432 615,894 627,841 Less accumulated depreciation and amortization (383,897) (401,264) 231,997 226,577 Construction in process 16,677 7,031
Total property and equipment, net $ 248,674 $ 233,608
Construction in progress as of June 30, 2016 consists of various building, software, and equipment projects. The estimated cost to complete the projects is approximately $361,000 and will be financed with investments and other potential financing. As of October 25, 2016, firm contract commitments related to and included in the estimated cost to complete the projects are $44,000, of which $7,000 has been paid.
Note 5 - Investments Limited as to Use
Investments limited as to use as of June 30 are as follows:
2016 2015
Funds held under bond indenture agreements For debt service $ 5,457 $ 6,606
Funds held under deferred compensation plan $ 9,735 $ 9,864 Designated by Board 510,852 520,985 Designated by donor for specific purposes 19,459 17,529
Total investments limited as to use classified as long-term 540,046 548,378
$ 545,503 $ 554,984
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Investments limited as to use consisted of the following as of June 30:
2016 2015
Cash and cash equivalents $ 13,215 $ 8,920 Equity securities and funds - domestic 137,328 136,154 Equity securities and funds - international 62,641 65,890 Fixed income - bond funds & corporate funds - domestic 257,429 280,460 Fixed income - bond funds & corporate funds - international 14,695 15,348 US government securities 8,823 8,704 Mortgage backed securities 157 260 Absolute return - hedge funds 10,213 11,632 Real estate funds 25,669 23,870 Private equity, debt and other funds 15,333 3,746 $ 545,503 $ 554,984
Investment gain included in revenues in excess of expenses for the years ended June 30 is as follows:
2016 2015
Interest income and dividends $ 17,293 $ 13,960 Net realized gains 2,901 1,389 Net change in unrealized gains and losses (10,863) (4,233)
$ 9,331 $ 11,116
Regional Health’s investments are exposed to various kinds and levels of risk. Common stocks, mutual funds, hedge funds, and real estate investments expose Regional Health to market risk, performance risk, and liquidity risk. Market risk is the risk associated with major movements of the equity markets. Performance risk is risk associated with a company’s operating performance. Fixed income securities expose Regional Health to interest rate risk, credit risk, and liquidity risk. As interest rates change, the value of many fixed income securities is affected, including those with fixed interest rates. Credit risk is the risk that the obligor of the security will not fulfill its obligations. Liquidity risk is affected by the willingness of market participants to buy and sell given securities. Liquidity risk tends to be higher for equities, hedge funds and real estate investments related to small capitalization companies. Regional Health’s investments are generally liquid within 30 days, with the exception of the absolute return assets - hedge funds, real estate investments, and private equity investments.
Due to the volatility of the stock market, there is a reasonable possibility of changes in fair value and additional gains and losses in the near term.
22
Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Note 6 - Investments in Affiliated Organizations
Investments in the following related health care ventures are being recorded on the equity method.
Percent Organization Name Ownership Same Day Surgery Center, LLC 40% owner The Imaging Center, LLC 50% owner
The net gain on these investments, totaling $4,021 in 2016 and $3,672 in 2015, is included in nonoperating gains. Regional Health received distributions of $3,656 and $2,961 from these investments in 2016 and 2015, respectively.
Summary financial statement information on equity method investments is as follows:
2016 2015
Assets $ 8,484 $ 7,470
Liabilities $ 808 $ 795 Net assets/equity 7,676 6,675
Total liabilities and net assets/equity $ 8,484 $ 7,470
Total revenues $ 21,213 $ 20,471 Total expenses 11,747 11,474
Net gain $ 9,466 $ 8,997
Regional Health recorded revenue of $4,344 and $4,013 related to transactions with their equity method investments for the years ending June 30, 2016 and 2015, respectively.
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Note 7 - Long-Term Debt
Long-term debt consists of the following as of June 30:
2016 2015
South Dakota Health and Educational Facilities Authority variable rate demand revenue bonds, Series 2015, with payments beginning September 2015 in varying amounts maturing through September 2027 $ 64,010 $ 67,210 Unamortized debt issuance costs (266) (289)
4.250% to 5.000% South Dakota Health and Educational Facilities Authority revenue bonds, Series 2011, with payments beginning September 1, 2012, in varying amounts maturing through September 1, 2025 38,895 41,980 Unamortized debt issuance costs (410) (461)
4.250% to 5.000% South Dakota Health and Educational Facilities Authority revenue refunding bonds, Series 2010, with payments beginning September 1, 2011, in varying amounts maturing through September 1, 2028 35,400 37,080 Unamortized debt issuance costs (571) (618) 137,058 144,902 Current maturities (8,355) (7,965) Unamortized premium 4,424 4,887
$ 133,127 $ 141,824
Unamortized debt issuance costs are deferred and amortized using the straight line method over the term of the related indebtedness, which is a reasonable approximation of the effective interest method. Amortization of deferred financing costs is included in interest expense in the financial statements.
Regional Health, Inc., Rapid City Regional Hospital, Inc., Regional Health Network, Inc., and Regional Health Physicians, Inc. currently comprise the obligated group (Obligated Group), which entered into a Master Trust Indenture dated March 1, 1998. Under this indenture and subsequent amendments, the bonds are secured by a first mortgage lien on the Obligated Group’s facilities, funds held under a bond indenture agreement, and a security interest in the Obligated Group’s gross receipts. The bond agreements include, among other things, restrictions relating to debt service coverage, further indebtedness, corporate mergers, and transactions with affiliates.
On January 27, 2015, the South Dakota Health and Educational Facilities Authority issued $67,210 of Variable Rate Demand Revenue Bonds, Series 2015. The proceeds from the sale of the Series 2015 bonds were used to redeem $66,960 of South Dakota Health and Educational Facilities Authority Variable Rate Demand Revenue Bonds, Series 2008, at a price of par plus accrued interest to the redemption date. A loss on early extinguishment of debt of $496 was recorded as of June 30, 2015. The interest rate on the Series 2015 Bonds is based on 67% of the 1 month LIBOR rate and is calculated monthly based on a 360 day year with interest paid monthly by Regional Health.
24
Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Substantially all of Regional Health’s property assets and unrestricted receivables at June 30, 2016 and 2015 are pledged as collateral for debt obligations. Various debt agreements of Regional Health contain certain restrictive covenants, including the maintenance of specific financial ratios and amounts.
The aggregate amount of principal payments required by year for the above debt obligations as of June 30, 2016, is as follows:
Years Ending June 30, Amount
2017 $ 8,355 2018 8,745 2019 9,160 2020 9,595 2021 10,060 Thereafter 92,390 138,305 Less unamortized debt issuance costs (1,247)
$ 137,058
For the years ended June 30, 2016 and 2015, Regional Health paid interest of $4,362 and $4,468, respectively.
Note 8 - Derivative Financial Instruments
Interest Rate Swap
The following is a summary of the outstanding position of the interest rate swap agreement at June 30, 2016:
Notional Expiration Amount Date Rate Paid Rate Received
Interest rate swap $ 57,040 9/1/2027 4.079% 63% of 1-month LIBOR plus 30 basis points
The interest rate swap reduces the Obligated Group’s exposure to interest rate and payment variation from the underlying 2015 Series bonds. Regional Health has previously de-designated the interest rate swap from a cash flow hedge, and accordingly, the interest rate swap is not designated as a hedging instrument.
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Financial Statement Presentation of Derivatives
The location and fair value (liability) of the derivative financial instruments in the consolidated statements of financial position is as follows at June 30:
Location 2016 2015
Interest rate swap Payable under interest rate swap $ (11,275) $ (9,775) The location and the gain (loss) on the derivative instruments recognized in revenues in excess of expenses in the consolidated statements of operations and changes in net assets for the years ended June 30 are as follows:
Location 2016 2015
Interest rate swap Loss on interest rate swap $ (3,558) $ (2,118) The gain or (loss) on interest rate swap includes a change in the fair value of the interest rate swap of $(1,500) and $86 and amounts paid to the counterparty under the terms of the agreement of $2,058 and $2,204, respectively, during the years ended June 30, 2016 and 2015.
Derivative transactions contain credit risk in the event the parties are unable to meet the terms of the contract, which is generally limited to the fair value due from counterparties on outstanding contracts. At June 30, 2016 and 2015, the interest rate swap counterparty had a Standard & Poor’s credit quality rating of A+.
Note 9 - Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets are available for the following purposes at June 30, 2016 and 2015:
2016 2015
Healthcare services $ 10,903 $ 9,859 Hospice 4,625 4,370 Scholarships for healthcare students 1,538 1,662
$ 17,066 $ 15,891
Permanently restricted net assets at June 30, 2016 and 2015 are restricted to:
2016 2015
Investments to be held in perpetuity, the income from which is expendable to support various health care services $ 1,763 $ 1,763
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Note 10 - Fair Value Measurements
The following table presents the financial instruments carried at fair value on a recurring basis as of June 30, 2016, by the fair value hierarchy defined:
2016 Level 1 Level 2 Level 3 NAV Total Assets Investments limited as to use: Cash and cash equivalents $ 13,215 $ - $ - $ - $ 13,215 Equity securities and funds - domestic 78,118 - - 59,210 137,328 Equity securities and funds - international 36,980 889 - 24,772 62,641 Fixed income - bond funds & corporate funds - domestic 18,496 121,382 - 117,551 257,429 Fixed income - bond funds & corporate funds - international 14,695 - - - 14,695 US government securities 1,370 7,453 - - 8,823 Mortgage backed securities - 157 - - 157 Absolute return - hedge funds - - - 10,213 10,213 Real estate funds - - - 25,669 25,669 Private equity, debt and other funds - - 3,960 11,373 15,333
$ 162,874 $ 129,881 $ 3,960 $ 248,788 $ 545,503
Liabilities Interest rate swap $ - $ 11,275 $ - $ - $ 11,275
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
The following table presents the financial instruments carried at fair value on a recurring basis as of June 30, 2015, by the fair value hierarchy defined above:
2015 Level 1 Level 2 Level 3 NAV Total
Assets Investments limited as to use: Cash and cash equivalents $ 8,920 $ - -$ $ - $ 8,920 Equity securities and funds - domestic 76,796 - - 59,358 136,154 Equity securities and funds - international 38,636 748 - 26,506 65,890 Fixed income - bond funds & corporate funds - domestic 23,524 122,734 - 134,202 280,460 Fixed income - bond funds & corporate funds - international 15,348 - - - 15,348 US government securities 602 8,102 - - 8,704 Mortgage backed securities - 260 - - 260 Absolute return - hedge funds - - - 11,632 11,632 Real estate funds 736 - - 23,134 23,870 Private equity - - - 3,746 3,746
$ 164,562 $ 131,844 $ - $ 258,578 $ 554,984
Liabilities Interest rate swap $ - $ 9,775 $ - $ - $ 9,775
Fair value for Level 1 is based upon quoted market prices. Fair value for Level 2 assets is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Inputs are obtained from various sources, including market participants, dealers and brokers.
Regional Health has adopted ASU 2015-07, Fair Value Measurement: Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which states investments valued at Net Asset Value (NAV) are no longer required to be included in the fair value hierarchy. Regional Health utilizes the monthly statements as their source for valuing investments which have a daily or monthly NAV for financial statement purposes, which are obtained directly from the fund or the custodian for Regional Health’s Board Designated Funds. Utilizing this information would therefore represent Regional Health’s approved policies and procedures used to value these assets for financial reporting purposes.
Fair value for Level 2 liabilities is based primarily on a discounted cash flow method based on forward interest rates. The valuations also reflect a credit spread adjustment to the LIBOR discount curve in order to reflect the credit value adjustment for “nonperformance” risk. The credit spread adjustment is derived from other comparably rated entities’ bonds priced in the market.
28
Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
The following is a reconciliation of activity for 2016 and 2015 level 3 assets measured at fair value based upon significant unobservable (non-market) information.
2016
June 30, beginning of fiscal year $ -
Purchases 3,960 Sales - Change in fair value of investments -
June 30, end of fiscal year $ 3,960
The following is a table identifying attributes related to investments measured using level 3 inputs and certain entities that report fair value using a calculated NAV or its equivalent as of June 30, 2016 and 2015.
2016 Redemption Frenquency Unfunded (If Currently Redemption Fair Value Commitments Eligible) Notice Period Level 3 Private equity, debt and other $ 3,960 $ 2,600 Discretionary N/A Total Level 3 3,960 2,600
NAV Equity securities and funds - domestic 59,210 - Daily-Monthly 3-7 days Equity securities and funds - international 24,772 - Daily-Monthly 3-7 days Fixed income - bond funds - domestic 117,551 - Monthly 1-30 days Absolute return - hedge funds 10,213 - Quarterly 90 days Real estate funds 25,669 7,407 Discretionary 5 - 8 years Private equity, debt and other 11,373 27,787 Discretionary 5 - 8 years Total NAV 248,788 35,194
Total Level 3 and NAV $ 252,748 $ 37,794
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
2015 Redemption Unfunded Frequency (If Redemption Fair Value CommitmentsCurrently EligibleNotice Period
NAV Equity securities and funds - domestic $ 59,358 $ - Daily-Monthly 3-7 days Equity securities and funds - international 26,506 - Daily-Monthly 3-7 days Fixed income - bond funds & corporate funds - domestic 134,202 - Monthly 1-30 days Absolute return - hedge funds 11,632 - Quarterly 90 days Real estate funds 23,134 8,414 Discretionary 5-8 years Private equity 3,746 22,116 Discretionary 5-8 years
Total NAV $ 258,578 $ 30,530
Equity Securities & Funds - Domestic: Regional Health holds various funds/managers for domestic equities representing 22% of the portfolio as of June 30, 2016. The funds are diversified by industry sector and have either daily or monthly liquidity. The investment strategies employed by the funds include both active and passive approaches, across large cap, mid-cap, and small cap stock funds. The inception date for Regional Health participation in the funds ranges from 1999 to 2011.
Equity Securities and Funds - International: Regional Health holds investment funds for international equities, representing 14% of the portfolio as of June 30, 2016. These investments include both active and passive approaches, across international developed and emerging market funds. The funds are diversified by industry sector and country, and have either daily or monthly liquidity. The inception date for Regional Health participation in the funds ranges from 2006 to 2013.
Fixed Income Funds - Domestic: Regional Health holds domestic fixed income funds and three (3) exchange traded notes (ETNs) designed to track the performance of Master Limited Partnership (MLP) indexes, representing 51% of the portfolio. The bond funds are diversified across government, mortgage, corporate, and municipal bond sectors, including investment grade and below investment grade (high yield) securities. These investments have either daily or weekly liquidity. The inception date for Regional Health participation in the accounts/securities ranges from 1999 to 2011.
Fixed Income Funds - Global: Regional Health holds global bond funds, representing 3% of the portfolio. The fund is diversified by country and has daily liquidity. The inception date for Regional Health participation in this fund is 2011.
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Absolute Return (Hedge Fund) Assets: Regional Health holds one structured credit hedge fund, representing 2% of the portfolio as of June 30, 2016. The fund invests in collateralized fixed income securities. This absolute return category includes investments with low correlations to the traditional stock and bond markets that are hedged to achieve low volatility across market cycles. The initial one year lock-up period for this fund has expired, and liquidity is available on a quarterly basis with 90-days’ notice. Regional Health requested a withdrawal of $5 million as of June 30, 2016, which reduced the allocation to this fund by 50%; and the proceeds were received in July.
Real Estate: Regional Health holds pooled investment vehicles for private real estate investments, representing 5% of the portfolio as of June 30, 2016. One fund invests in distressed debt and equity investments across commercial and residential property in the US and a small portion internationally. The second fund invests in distressed residential land and housing development projects, primarily in the Southwest, Texas, and Florida. Both investments have limited liquidity and the timing of capital calls is controlled by the general partners of the funds. The total unfunded commitment to these strategies is approximately $7.4 million as of June 30, 2016.
Private Equity: Regional Health has $25 million committed to two (2) separate private equity funds of funds at the end of 2015. As of June 30, 2016, $5.3 million has been called by the general partners, leaving an unfunded commitment of $19.7 million. One private equity fund invests in a diversified portfolio of secondary (previously issued) private equity funds, and the other fund invests in a diversified portfolio of private equity and venture capital funds. The investment period for the funds (the period over which capital is called) is expected to extend through 2017. Regional Health also made a direct investment in equity of a private operating company with a total commitment of approximately $6.5 million; with an unfunded commitment as of June 30, 2016 of $2.6 million. When fully invested, the private equity investments are expected to represent less than 10% of the total portfolio.
Private Debt: Regional Health established a $13.4 million commitment to a private debt limited partnership in 2016. As of June 30, 2016, $5.3 million of capital has been called by the general partner, leaving an unfunded commitment of $8.1 million. The fund primarily invests in direct senior loans to non-sponsored, privately-held companies in the US and Canada. The investment period for the fund (the period over which capital is called) is expected to extend through 2018.
Note 11 - Pension Plan
Regional Health sponsors a non-contributory defined benefit plan that covers substantially all full-time employees. The plan is a “cash balance” plan with benefits based upon a percentage of annual salary and years of service. Regional Health’s policy is to fund annually at least the amount required by the applicable laws and regulations.
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
The funded status of the defined benefit plan as of June 30 (measurement date) is as follows:
2016 2015
Change in projected benefit obligation Benefit obligation at beginning of year $ 113,280 $ 114,577 Service cost 7,621 7,926 Interest cost 4,893 4,687 Actuarial loss (gain) 4,352 (3,338) Benefits paid (8,060) (11,774) Special termination benefits - 1,202
Projected benefit obligation at end of year $ 122,086 $ 113,280
Change in plan assets Fair value of plan assets at beginning of year $ 101,273 $ 106,467 Actual return on plan assets (3,027) 2,830 Employer contributions 4,325 3,750 Benefits paid (8,060) (11,774)
Fair value of plan assets at end of year $ 94,511 $ 101,273
Funded status of the plan (underfunded) $ (2 7,575) $ (12,007)
As of June 30, 2016 and 2015, the accumulated benefit obligation was $110,958 and $103,454, respectively.
Components of net periodic benefit cost for the years ended June 30 are as follows:
2016 2015
Service cost $ 7,620 $ 7,926 Interest cost 4,893 4,687 Expected return on plan assets (7,392) (7,801) Net amortization and deferral 123 123 Special termination benefits - 1,202
$ 5,244 $ 6,137
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Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Weighted average assumptions used to determine the benefit obligation and net periodic benefit cost as of and for the years ended June 30 were as follows:
2016 2015
Weighted average discount rate at beginning of year (used to determine net periodic benefit cost) 4.50% 4.25% Weighted average discount rate at end of year (used to determine benefit obligation) 4.00% 4.50% Weighted average expected return on plan assets 7.50% 7.50% Rate of increase in future compensation levels 3.75% 3.75%
The overall weighted average return on plan assets is determined by applying management’s judgment to the results of computer modeling, historical trends, and benchmarking data.
Accumulated amounts previously not recognized in net periodic pension cost and included in other changes in unrestricted net assets at June 30, 2016 and 2015, are $22,350 and $7,702, respectively, which consist of unrecognized actuarial losses of $21,693 and $6,922, respectively, and unrecognized prior service cost of $657 and $780, respectively.
Actuarial losses are amortized as a component of net periodic pension cost, only if the losses exceed 10% of the greater of the projected benefit obligation or the market-related value of plan assets. No amortization is expected for the year ending June 30, 2017. The prior service cost and the net transition obligation included in net assets are expected to be recognized in net periodic pension cost during the year ending June 30, 2017, in the amount of $856. Unrecognized prior service costs and net transition obligation are amortized on a straight-line basis.
The plan maintains an investment policy, which covers responsibilities of the plan sponsor, investment managers, investment objectives, asset allocation targets and ranges, asset guidelines (including permissible and not permissible holdings), and manager review criteria. A committee of the Board periodically reviews and approves the investment policy and asset allocation of the pension plan. The plan sponsor is responsible for ensuring that the criteria stated within the policy are carried through. The plan sponsor’s activities are supported by an independent investment consulting firm. All assets are invested with outside managers. The Finance and Investment Committee of the Board of Directors annually reviews asset allocation to determine if the current structure is appropriate and whether any changes are necessary.
33
Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
The fair value of pension plan assets was determined using the fair value hierarchy, as defined in Note 2, and consists of the following at June 30, 2016:
Level 1 Level 2 Level 3 NAV Total Bonds Corporate $ 4,839 -$ $ - $ 4,712 $ 9,551 Collective investment fund - 18,628 - - 18,628 Common stocks U.S. companies 40,383 - - - 40,383 International companies 11,868 - - - 11,868 Commingled equity funds - - - 6,096 6,096 Absolute return assets - hedge funds - - - 7,748 7,748 Money market 237 - - - 237
$ 57,327 $ 18,628 $ - $ 18,556 $ 94,511
The fair value of pension plan assets was determined using the fair value hierarchy, as defined in Note 2, and consists of the following at June 30, 2015:
Level 1 Level 2 Level 3 NAV Total Bonds Corporate foreign $ 5,046 $ 1,411 $ - $ - 6,457$ Corporate - 8,766 - - 8,766 Government 11,843 - - 4,901 16,744 Common stocks U.S. companies 40,925 - - - 40,925 International companies 14,341 - - - 14,341 Commingled equity funds 212 - - 4,764 4,976 Absolute return assets - hedge funds - - - 7,494 7,494 Money market 1,570 - - - 1,570
$ 73,937 $ 10,177 $ - $ 17,159 $ 101,273
34
Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
The following is a table identifying attributes related to certain entities that report fair value using a calculated NAV or its equivalent of as June 30, 2016 and 2015.
2016 Redemption Unfunded Frequency (If Redemption Fair Value Commitments Currently Eligible) Notice Period NAV Bonds - corporate 4,712 - Monthly 1-30 days Commingled equity funds 6,096 2,411 Discretionary 5-8 days Absolute return assets - hedge funds 7,748 10,178 Quarterly 90 days
Total NAV $ 18,556 $ 12,589
2015 Redemption Unfunded Frequency (If Redemption Fair Value Commitments Currently Eligible) Notice Period NAV Bonds - government 4,901 - Monthly 1-30 days Commingled equity funds 4,764 - Discretionary 5-8 days Absolute return assets - hedge funds 7,494 - Quarterly 90 days
Total NAV $ 17,159 $ -
Included within the pension plan assets above are investments in certain entities that report fair value using a calculated NAV or its equivalent.
35
Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
The current target allocation and actual asset allocation as of June 30 are as follows:
Asset Allocation Actual Target 2016 2015
Equity securities 50% 61.7% 59.5% Absolute return assets 10% 8.2% 7.4% Real return assets 5% - - Real estate 10% - - Debt securities 25% 29.8% 31.5% Cash and cash equivalents 0% 0.3% 1.6%
100% 100% 100%
As of June 30, 2016 and 2015, Regional Health met its minimum pension contribution requirement. Regional Health estimates that it will contribute $4,100 to the plan during the year ending June 30, 2017.
The following benefits, which reflect expected future service, are expected to be paid:
Years Ending June 30, Amount
2017 $ 12,066 2018 10,407 2019 9,399 2020 10,140 2021 10,938 2022-2026 52,845
$ 105,795
36
Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Note 12 - Commitments and Contingencies
Regional Health has maintained general and professional liability insurance coverage on a claims-made basis for the past several years. Regional Health maintains first dollar coverage with a commercial carrier for its employed physicians and certain advanced practice licensed personnel. For its facilities and other personnel, it self-insures the first layer of losses. Regional Health has maintained a self-insured retention of $1,000 per occurrence with a $4,000 annual aggregate. In fiscal year 2014, a second layer of retention was added known as a “buffer layer” in the amount of $1,500 per occurrence with a $1,500 annual aggregate. This second layer of retention sits directly between the primary self-insured retentions of $1,000/$4,000 and the excess layers of insurance, and must be satisfied prior to a claim reaching the excess layers. Claim dollars that are in excess of the primary $1,000 per occurrence retention will go to satisfy the $1,500 buffer. Also, claim dollars in excess of the primary $4,000 annual aggregate retention will go to satisfy the $1,500 buffer as well. A claim will pass into the excess layers once the primary retention is met (either on a per occurrence basis or an aggregate basis), and the “buffer layer” has been satisfied. Regional Health has accrued for exposure on claims that have been asserted as well as for incidents that have occurred for which claims may be made in the future, based on estimates provided by consulting actuaries. Regional Health maintains excess coverage with commercial carriers above its self-insured retention and its first dollar coverage policy for the previously stated personnel.
Currently, Regional Health is self-insured for workers’ compensation, with a $750 retention per claim, subject to stop-loss and statutory limitations and provisions. From April 2000 to September 2008, Regional Health maintained an insurance policy, which fully covered workers’ compensation claims. Prior to April 2000, Regional Health was self-insured for workers’ compensation, subject to stop-loss and statutory limitations and provisions.
As of June 30, 2016 and 2015, Regional Health has accrued $11,051 and $12,858, respectively, for known and incurred but not reported claims relating to malpractice and workers’ compensation. In the opinion of management, the ultimate disposition of these claims will not have a material adverse effect on Regional Health’s consolidated financial statements.
At June 30, 2016 and 2015, Regional Health had $47 and $1,079, respectively, in capital lease obligations which are recorded in other long-term liabilities. Minimum lease payments of $47 are due next year.
37
Regional Health, Inc. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Amounts in Thousands)
Note 13 - Functional Classification of Expenses
Regional Health provides general health care services to residents within its geographic location. Expenses related to providing these services for the years ended June 30, 2016 and 2015, are as follows:
2016 2015
Health care services $ 453,469 $ 426,993 General and administrative 153,844 142,025 Fundraising 788 553
$ 608 ,101 $ 569,571
Note 14 - Electronic Health Record (EHR) Incentives
During the year ended June 30, 2016 and 2015, Regional Health recorded $805 and $2,765 in other operating revenue for meaningful use incentives. These incentives have been recognized following the accounting model, whereby revenue is recognized when management becomes reasonably assured of meeting the required criteria.
Amounts recognized represent management’s best estimates for payments ultimately expected to be received based on estimated discharges, charity care, and other input data. Subsequent changes to these estimates will be recognized in other operating revenue in the period in which additional information is available. Such estimates are subject to audit by the federal government or its designee.
Note 15 - Deferred Compensation Plan
Regional Health maintains deferred compensation plans for the benefit of certain providers and members of management. Regional Health deposits amounts annually into accounts for the benefit of these individuals based on upon their employment agreements. Balances, including earnings, cliff vest at three to five years and are thereafter payable in installments or lump sum, should certain requirements be met. Regional Health records the deposits and earnings as an asset limited as to use and the corresponding liability is recorded as an other long-term liability. The expense charged to operations for deferred compensation was $3,138 and $2,553 for the years ended June 30, 2016 and 2015, respectively.
Note 16 - Subsequent Events
Regional Health has evaluated subsequent events through October 25, 2016, the date the consolidated financial statements were issued.
38
Supplementary Information June 30, 2016 and 2015 Regional Health, Inc.
www. eidebailly.com
Independent Auditor’s Report on Supplementary Information
The Board of Directors Regional Health, Inc. Rapid City, South Dakota
We have audited the consolidated financial statements of Regional Health, Inc. as of and for the year ended June 30, 2016, and our report thereon dated October 25, 2016, which expressed an unmodified opinion on those consolidated financial statements, appears on page 1. Our audit was conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplementary consolidating information on pages 40 to 42, is presented for the purposes of additional analysis 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 consolidating information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the 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 as a whole.
Minneapolis, Minnesota October 25, 2016
www.eidebailly.com 39 800 Nicollet Mall, Ste. 1300 | Minneapolis, MN 55402-7033 | T 612.253.6500 | F 612.253.6600 | EOE
Regional Health, Inc. Consolidating Balance Sheet - Assets June 30, 2016 (Amounts in Thousands)
Obligated Group Other Eliminations Total
Assets
Current assets Cash and cash equivalents $ 17,227 $ 305 $ - $ 17,532 Receivables Patient accounts 143,271 - - 143,271 Allowance for doubtful accounts (44,266) - - (44,266) 99,005 - - 99,005
Other receivables 8,011 - - 8,011 Investments limited as to use 5,457 - - 5,457 Inventory 15,983 - - 15,983 Prepaid expenses 11,322 - - 11,322 Assets held for sale 56 - - 56
Total current assets 157,061 305 - 157,366
Investments Limited as to Use, Less Current Portion 540,046 - - 540,046
Property and Equipment 245,664 3,010 - 248,674
Goodwill and Intangibles, Net 3,581 - - 3,581 Other Long-Term Assets 58,316 - (42,489) 15,827
$ 1,004,668 $ 3,315 $ (42,489) $ 965,494
40
Regional Health, Inc. Consolidating Balance Sheet - Liabilities June 30, 2016 (Amounts in Thousands)
Obligated Group Other Eliminations Total
Liabilities and Net Assets
Current Liabilities Current maturities of long-term debt $ 8,355 $ - $ - $ 8,355 Accounts payable 19,086 127 - 19,213 Estimated payables to third-party payors 4,416 - - 4,416 Accrued expenses Interest 1,215 - - 1,215 Salaries and wages 11,765 - - 11,765 Compensated absences 14,949 - - 14,949 Employee health insurance liability 4,933 - - 4,933 Other 8,618 134 - 8,752 Intercompany (receivable) payable 42,527 (38) (42,489) -
Total current liabilities 115,864 223 (42,489) 73,598
Other Liabilities Payable under interest rate swap 11,275 - - 11,275 Other long-term liabilities 16,948 - - 16,948 Accrued pension liability 27,575 - - 27,575 Long-term debt, less current maturities 133,127 - - 133,127
Total liabilities 304,789 223 (42,489) 262,523
Net Assets Unrestricted 680,092 3,092 - 683,184 Noncontrolling interest 958 - - 958
Total unrestricted net assets 681,050 3,092 - 684,142
Temporarily restricted 17,066 - - 17,066 Permanently restricted 1,763 - - 1,763
Total net assets 699,879 3,092 - 702,971
$ 1,004,668 $ 3,315 $ (42,489) $ 965,494
41
Regional Health, Inc. Consolidating Statements of Operations Year Ended June 30, 2016 (Amounts in Thousands)
Obligated Group Other Eliminations Total
Operating Revenue Net patient service revenue $ 663,099 $ - $ - $ 663,099 Provision for uncollectible accounts (56,605) - - (56,605) Net patient service revenue less provision for uncollectible accounts 606,494 - - 606,494 Other 92,584 898 (66,578) 26,904
Total operating revenue 699,078 898 (66,578) 633,398
Operating Expenses Salaries and wages 294,927 - - 294,927 Payroll taxes and benefits 43,629 - - 43,629 Outside services 81,383 343 - 81,726 Medical supplies 112,216 - - 112,216 Other supplies and expenses 42,814 482 - 43,296 Depreciation and amortization 28,436 152 - 28,588 Interest 3,719 - - 3,719 Intercompany 66,578 - (66,578) -
Total operating expenses 673,702 977 (66,578) 608,101
Operating Income (Loss) 25,376 (79) - 25,297
Nonoperating Gains (Losses) Investment gain 9,331 - - 9,331 Loss on interest rate swap (3,558) - - (3,558)
Total nonoperating gains (losses) 5,773 - - 5,773
Revenues in Excess (Deficit) of Expenses 31,149 (79) - 31,070
Unrestricted Net Assets Adjustment to the funded status of the pension plan (14,677) - - (14,677) Other changes in unrestricted net assets 827 - - 827 Increase in unrestricted net assets before discontinued operations 17,299 (79) - 17,220 Discontinued operations Gain from operations including impairment charge 376 - - 376
Increase (Decrease) in Unrestricted Net Assets $ 17,675 $ (79) $ - $ 17,596
42
APPENDIX C
DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE, THE BOND INDENTURE, AND THE LOAN AGREEMENT [THIS PAGE INTENTIONALLY LEFT BLANK]
TABLE OF CONTENTS
PAGE
DEFINITIONS OF CERTAIN TERMS ...... C-1 SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE ...... C-27 The Obligations; Payment of the Series 2017 Obligation ...... C-28 Entrance Into the Obligated Group ...... C-29 Cessation of Status as a Member of the Obligated Group ...... C-30 Liens on Property ...... C-31 Permitted Additional Indebtedness ...... C-32 Calculation of Debt Service and Debt Service Coverage ...... C-35 Rates and Charges ...... C-39 Insurance ...... C-40 Sale, Lease or Other Disposition of Property ...... C-40 Merger, Consolidation, Sale or Conveyance ...... C-42 Financial Statements ...... C-43 Dividends and Stock Purchases ...... C-44 Additions to Excluded Property ...... C-45 Damage or Destruction ...... C-45 Condemnation ...... C-47 Other Covenants of the Members ...... C-48 Events of Defaults; Acceleration ...... C-48 Remedies; Rights of Obligation Holders ...... C-50 Direction of Proceedings...... C-51 Waiver of Events of Default ...... C-52 Supplemental Master Indentures ...... C-52 Right to Consent ...... C-54 SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE ...... C-54 Bond Indenture Funds and Disposition of Revenues ...... C-54 Investment of Funds ...... C-56 Arbitrage ...... C-57 Rights Under the Loan Agreement ...... C-57 Supplemental Bond Indentures ...... C-57 Release and Substitution of Series 2017 Obligation ...... C-59 Events of Default ...... C-60 Remedies; Rights of Bondholders ...... C-63 Direction of Proceedings...... C-63 Application of Moneys ...... C-64 Waivers of Events of Default ...... C-65 Bond Trustee as Holder of Series 2017 Obligation ...... C-66 Removal of the Bond Trustee ...... C-66 Defeasance; Bonds Deemed Paid ...... C-66 SUMMARY OF CERTAIN PROVISIONS OF THE LOAN AGREEMENT ...... C-69 Loan of Series 2017 Bond Proceeds ...... C-69 Representations ...... C-69
-i- Right of Bond Trustee to Enforce Loan Agreement and Series 2017 Obligation Pledged Under the Bond Indenture ...... C-69 Payments in Respect of Series 2017 Obligation and Under the Loan Agreement ...... C-70 Prepayment ...... C-70 Corporation’s Obligations Unconditional ...... C-70 Deposit to Optional Redemption Fund for Compliance with Maturity Limitation ...... C-70 Covenants of the Corporation Relating to the Use and Operation of Property ...... C-71 Transfer of Assets ...... C-72 Indemnification of the Authority ...... C-72 Maintenance of Corporate Existence and Status ...... C-74 Discharge of Orders ...... C-74 Licensure ...... C-74 Supplements and Amendments to the Loan Agreement ...... C-75 Defaults and Remedies ...... C-75 Exchange of Bonds ...... C-77
-ii-
APPENDIX C
DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE, THE BOND INDENTURE AND THE LOAN AGREEMENT
Brief descriptions of the Master Indenture, the Bond Indenture and the Loan Agreement are included hereafter in this Official Statement. Such descriptions do not purport to be comprehensive or definitive. All references herein to the Master Indenture, the Bond Indenture and the Loan Agreement are qualified in their entirety by reference to each such document, copies of which are available for review prior to the issuance of the Series 2017 Bonds at the offices of the Authority and thereafter at the offices of the Bond Trustee. All references to the Series 2017 Bonds are qualified in their entirety by reference to the definitive forms thereof and the information with respect thereto included in the Bond Indenture.
DEFINITIONS OF CERTAIN TERMS
The following are definitions of certain terms used in the Master Indenture, the Bond Indenture, the Loan Agreement and this Official Statement.
“Accelerable Instrument” means any Obligation or any mortgage, indenture, loan agreement or other instrument under which there has been issued or incurred, or by which there is secured, any Indebtedness evidenced by an Obligation, which Obligation or instrument provides that, upon the occurrence of an event of default under such Obligation or instrument, the holder thereof may request that the Master Trustee declare such Obligation or Indebtedness due and payable prior to the date on which it would otherwise become due and payable.
“Accreted Value” means with respect to any Capital Appreciation Indebtedness (a) as of any Valuation Date, the amount set forth for such date as the Accreted Value in the Supplemental Master Indenture authorizing such Capital Appreciation Indebtedness and (b) as of any date other than a Valuation Date the sum of (i) the Accreted Value on the next preceding Valuation Date and (ii) the product of (A) a fraction, the numerator of which is the number of days having elapsed from the preceding Valuation Date and the denominator of which is the number of days from such preceding Valuation Date to the next succeeding Valuation Date and (B) the difference between the Accreted Values for such Valuation Dates.
“Act” means the South Dakota Health and Educational Facilities Authority Act, as from time to time amended.
“Additional Indebtedness” means Indebtedness incurred by any Member subsequent to the issuance of an Obligation pursuant to the Master Indenture.
“Additional Obligation” means any evidence of Indebtedness or evidence of any repayment obligation under any Interest Rate Agreement, which is authorized to be issued by a Member pursuant to the Master Indenture and which has been authenticated by the Master Trustee pursuant to the Master Indenture.
C-1 “Affiliate” means a corporation, limited liability company, partnership, joint venture, association, business trust or similar entity (a) which controls, is controlled by or is under common control with, directly or indirectly, a Member; or (b) a majority of the members of the Directing Body of which are members of the Directing Body of a Member. 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 Directing Body of such corporation; (b) a non-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 non-profit corporation not having stock, such corporation’s members if the members have complete discretion to elect the corporation’s directors, or the corporation’s directors if the corporation’s members do not have such discretion or if such corporation has no members; and (c) any other entity, its governing board, body, member or members. 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.
“Authority” means the South Dakota Health and Educational Facilities Authority, a public instrumentality and agency of the State of South Dakota, and its successors and assigns.
“Balloon Indebtedness” means Long-Term Indebtedness, 25% or more of the original principal of which matures during any consecutive 12 month period, if such maturing principal amount is not required to be amortized below such percentage by mandatory redemption or prepayment prior to such 12 month period. Balloon Indebtedness does not include Indebtedness which otherwise would be classified under the Master Indenture as Put Indebtedness.
“Bond Counsel” means a firm of attorneys of national reputation, experienced in the field of municipal bonds, whose opinions are generally accepted by purchasers of municipal bonds, approved by the Authority and acceptable to the Corporation and the Bond Trustee.
“Bond Financed Property” means all real and personal property to be financed or refinanced, in whole or in part, and whether directly or indirectly, out of the proceeds of the Series 2017 Bonds, including earnings thereon.
“Bond Indenture” means the Bond Trust Indenture dated as of September 1, 2017 from the Authority to the Bond Trustee, as it may from time to time be amended or supplemented.
C-2 “Bond Register” means the registration books of the Authority kept by the Bond Trustee to evidence the registration and transfer of Series 2017 Bonds.
“Bond Trustee” means The First National Bank in Sioux Falls, as bond trustee, or any successor trustee under the Bond Indenture.
“Bond Year” means any 12-month period beginning September 1 of a calendar year and ending August 31 of the next succeeding year. For the purpose of calculating debt service on the Series 2017 Bonds payable in any Bond Year, principal and interest payable on the Series 2017 Bonds on September 1 of any Bond Year shall be deemed to be payable during the preceding Bond Year.
“Bondholder,” “holder” or “owner of the Bonds” means the registered owner of any Series 2017 Bond.
“Bonds” means the Series 2017 Bonds.
“Book Value” when used with respect to Property of a Member, means the value of such Property, net of accumulated depreciation and amortization, as reflected in the most recent audited financial statements of such Member which have been prepared in accordance with GAAP, and, when used with respect to Property of all Members, means the aggregate of the values of such Property, net of accumulated depreciation and amortization, as reflected in the most recent audited consolidated financial statements of the Obligated Group prepared in accordance with GAAP, provided that such aggregate shall be calculated in such a manner that no portion of the value of any Property of any Member is included more than once.
“Business Day” means, with respect to the Master Indenture, a day which is not (a) a Saturday, Sunday or legal holiday on which banking institutions in the State of South Dakota or the State of New York are authorized by law to close or (b) a day on which the New York Stock Exchange is closed; and with respect to the Bond Indenture, a day which is not (a) a Saturday, Sunday or legal holiday on which banking institutions in the State are authorized by law to close or (b) a day on which the New York Stock Exchange is closed.
“Capital Appreciation Indebtedness” means any Indebtedness as to which interest is payable only at the maturity of such Indebtedness, upon the prior redemption of such Indebtedness or upon the conversion of such Indebtedness to Indebtedness with interest payable prior to maturity or prior redemption. In the case of Capital Appreciation Indebtedness that is convertible to Indebtedness with interest payable prior to maturity or prior to redemption of such Indebtedness the term “Capital Appreciation Indebtedness” shall be limited to the period prior to such conversion, and after such conversion, such Indebtedness shall be treated for purposes of the Master Indenture in the same fashion as other Indebtedness having the same terms. For the purpose of computing the principal amount of Indebtedness held by the holder of Capital Appreciation Indebtedness in giving to the Obligated Group or the Master Trustee any notice, consent, request, or demand pursuant to the Master Indenture for any purpose whatsoever, the principal amount of Capital Appreciation Indebtedness shall be deemed to be its Accreted Value.
C-3 “Capitalized Lease” means any lease of real or personal property which, in accordance with GAAP (subject to the provisions of the Master Indenture summarized in the final paragraph under this heading), is required to be capitalized on the balance sheet of the lessee.
“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 (subject to the provisions of the Master Indenture summarized in the final paragraph under this heading).
“Closing Date” means the date of the initial issuance and delivery of the Series 2017 Bonds.
“Code” means the Internal Revenue Code of 1986, as amended from time to time.
“Commitment Indebtedness” means the obligations of any Person to repay amounts disbursed pursuant to a commitment from a financial institution, insurer, surety or similar entity to pay, refinance or purchase when due, when tendered or when required to be purchased or tendered, or to extend funds for such purpose, other Indebtedness of such Person or any other obligation of any other Person, and the obligation of any Person to pay interest payable on amounts disbursed for such purposes, plus any fees, costs or expenses payable to such financial institution, insurer, surety or similar entity for, under or in connection with enforcement thereof, including without limitation any penalties payable in the event of such enforcement and any indemnification or contribution related thereto.
“Completion Funded Indebtedness” means any Funded Indebtedness for borrowed money: (a) incurred for the purpose of financing the completion of the acquisition, construction, remodeling, renovation or equipping of Facilities with respect to which Funded Indebtedness for borrowed money has been incurred in accordance with the provisions of the Master Indenture; and (b) with a principal amount not in excess of the amount required to provide a completed and equipped Facility of substantially the same type and scope contemplated at the time such prior Funded Indebtedness was originally incurred, to provide for Funded Interest during the period of construction, to provide any reserve fund relating to such Completion Funded Indebtedness and to pay the costs and expenses of issuing such Completion Funded Indebtedness.
“Construction Index” means the most recent issue of the “Dodge Construction Index for U.S. and Canadian Cities” with reference to the city in which the subject property is located (or, if such Index is not available for such city, with reference to the city located closest geographically to the city in which the subject property is located), or, if such Index is no longer published or used by the federal government in measuring costs under Medicare or Medicaid programs, such other index which is certified to be comparable and appropriate by the Obligated Group Agent in an Officer’s Certificate delivered to the Master Trustee and which other index is acceptable to the Master Trustee.
“Consultant” means a professional consulting, accounting or banking firm or individual selected by the Obligated Group Agent and acceptable to the Master Trustee, having the skill and experience necessary to render the particular report required and having a favorable and
C-4 nationally recognized reputation for such skill and experience, which individual or firm does not control any Member of the Obligated Group or any Affiliate thereof and is not controlled by or under common control with any Member of the Obligated Group or an Affiliate thereof.
“Continuing Disclosure Agreement” means the Continuing Disclosure Agreement dated as of September 1, 2017 between the Corporation, as Obligated Group Agent, and the Bond Trustee, as dissemination agent.
“Contributions” means the aggregate amount of all contributions, grants, gifts, bequests and devises actually received in cash or marketable securities by any Person in the applicable fiscal year of such Person and any such contributions, grants, gifts, bequests and devises originally received in a form other than cash or marketable securities by any Person which are converted in such fiscal year to cash or marketable securities.
“Corporation” means Regional Health, Inc., a South Dakota 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 independent or in-house legal counsel for the Obligated Group or the Bond Trustee.
“Covered Indebtedness” means all or that portion of any Indebtedness, including interest and any redemption premium thereon, of a Person to the extent that a Pass-Through Obligation provides for payment of such Indebtedness.
“Cross-over Date” means, with respect to Cross-over Refunding Indebtedness, the date on which the principal portion of the Cross-over Refunded Indebtedness is paid or redeemed, or on which it is anticipated that such principal portion will be paid or redeemed, from the proceeds of such Cross-over Refunding Indebtedness.
“Cross-over Refunded Indebtedness” means Indebtedness of a Person refunded by Cross-over Refunding Indebtedness.
“Cross-over Refunding Indebtedness” means Indebtedness of a Person issued for the purpose of refunding other Indebtedness of such Person if the proceeds of such Cross-over Refunding Indebtedness are irrevocably deposited in escrow to secure the payment on the applicable Cross-over Date of the Cross-over Refunded Indebtedness and earnings on such escrow deposit are required to be applied to pay interest or principal on either or both of such Cross-over Refunding Indebtedness or such Cross-over Refunded Indebtedness until the Cross-over Date.
“Cumulative Net Income Available for Dividends” means for any Person the amount equal to the sum of the Income Available for Debt Service of such Person for each Fiscal Year during which such Person is a Member of the Obligated Group subsequent to the initial date of the Master Indenture, less, in each Fiscal Year, interest on Funded Indebtedness, depreciation and amortization.
C-5 “Current Interest Commencement Date” means the date on which Capital Appreciation Indebtedness is converted to Indebtedness with interest payable prior to maturity or prior to redemption of such Indebtedness.
“Current Value” means (i) with respect to Property, Plant and Equipment: (a) the aggregate fair market value of such Property, Plant and Equipment as reflected in the most recent written report of an appraiser selected by the Obligated Group Agent and acceptable to the Master Trustee and, in the case of real property, who is a member of the American Institute of Real Estate Appraisers (MAI), delivered to the Master Trustee (which report shall be dated not more than three years prior to the date as of which Current Value is to be calculated) increased or decreased by a percentage equal to the aggregate percentage increase or decrease in the Construction Index from the date of such report to the date as of which Current Value is to be calculated; plus (b) the Book Value of any Property, Plant and Equipment acquired since the last such report, increased or decreased by a percentage equal to the aggregate percentage increase or decrease in the Construction Index from the date of such acquisition to the date as of which Current Value is to be calculated; minus (c) the greater of the Book Value or the fair market value (as reflected in the most recent appraiser’s report) of any Property, Plant and Equipment disposed of since the last such report, increased or decreased by a percentage equal to the aggregate percentage increase or decrease in the Construction Index from the date of such report to the date as of which Current Value is to be calculated, and (ii) with respect to any other Property, the fair-market value of such Property which fair market value shall be evidenced in a manner satisfactory to the Master Trustee.
“Days of Unrestricted Cash on Hand” means, for any Fiscal Year, the ratio of (1) Unrestricted Cash and Investments of the Obligated Group, as shown in the most recent audited consolidated financial statements of the Obligated Group prepared in accordance with GAAP, to (2) the quotient of total expenses of the Obligated Group (excluding depreciation and amortization and other non-cash charges), as shown in the most recent audited consolidated financial statements of the Obligated Group prepared in accordance with GAAP, divided by 365.
“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, mandatory prepayment or otherwise) and interest on outstanding Funded Indebtedness of each Person or a group of Persons with respect to which calculated; provided that: (a) the amount of such payments for a future period shall be calculated in accordance with the assumptions contained in the Master Indenture; (b) interest shall be excluded from the determination of the Debt Service Requirements to the extent that Funded Interest is available to pay such interest; (c) principal of Indebtedness shall be excluded from the determination of 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 such amounts so required to be applied are sufficient to pay such principal; and (d) with respect to any Funded Indebtedness for which the number of actual payments of principal in any Fiscal Year is greater than those in the immediately preceding and/or succeeding Fiscal Years solely by reason of the fact that such principal payments are scheduled to occur other than on a specified date or dates or by reasons of this clause (d), the first or last principal
C-6 payment in such Fiscal Year, as the case may be, for which the number of payments is higher shall be deemed to be required to be made in the next preceding or succeeding Fiscal Year, as appropriate, so as to have an equal number of principal payments in each Fiscal Year.
“Defaulted Interest” means interest on any Series 2017 Bond which is payable but not duly paid on the date due.
“DTC” means The Depository Trust Company, New York, New York, and any successor corporation.
“DTC Participants” means those brokers, dealers, banks and other financial institutions reflected on the books of DTC.
“Electronic Means” means facsimile transmission, email transmission or other similar electronic means of communication customary within the securities industry providing evidence of transmission, including a telephone communication confirmed by any other method set forth in this definition.
“Enabling Statute” means the Act and any other legislation pursuant to which any series of Related Bonds is issued.
“Encumbered” means, with respect to Property, subject to a Lien described in the following subsections of the definition of Permitted Encumbrances: (b), (d) other than a Lien securing Non-Recourse Indebtedness, (f) (including only Capitalized Leases), (n)(ii) and (w)(ii), and all other Liens not described in the definition of Permitted Encumbrances; provided that any amounts on deposit in a construction fund created in connection with the issuance of an Obligation which are held as security for the payment of such Obligation or any Indebtedness incurred to purchase such Obligation or the proceeds of which are advanced or otherwise made available in connection with the issuance of such Obligation, shall not be deemed to be Encumbered if the amounts are to be applied to construct or otherwise acquire Property which is not subject to a Lien.
“Escrow Obligations” means, (i) with respect to any Obligation which secures a series of Related Bonds, the obligations permitted to be used to refund or advance refund such series of Related Bonds under the Related Bond Indenture, or (ii) in all other cases (a) United States Government Obligations, (b) obligations of any agency or instrumentality of the United States Government, (c) certificates of deposit issued by a bank or trust company which are (1) fully insured by the Federal Deposit Insurance Corporation or any similar corporation chartered by the United States or (2) secured by a pledge of any United States Government Obligations which have an aggregate market value, exclusive of accrued interest, equal at least to the principal amount of the certificates so secured, which security is held in a custody account by a custodian satisfactory to the Master Trustee, (d)(1) evidences of a direct ownership in future interest or principal payments on obligations of the type described in (a) above, which obligations are held in a custody account by a custodian satisfactory to the Master Trustee pursuant to the terms of a custody agreement and (2) obligations issued by any state of the United States or any political subdivision, public instrumentality or public authority of any state, which obligations are not
C-7 callable before the date the principal thereof will be required to be paid and which obligations are fully secured by and payable solely from obligations of the type described in (a) above, which securities are held pursuant to an agreement in form and substance acceptable to the Master Trustee, or (e) after 30 days’ prior written notice to each Rating Agency then maintaining a rating on any Obligations or Related Bonds, shares or certificates in any short-term investment fund which is maintained by the Master Trustee or a Related Bond Trustee.
“Excluded Property” means any assets of “employee pension benefit plans” as defined in the Employee Retirement Income Security Act of 1974, as amended, all rights, titles and interests in and to the property described in the Master Indenture, as amended as provided therein from time to time, and all improvements, fixtures, tangible personal property and equipment located thereon and used in connection therewith.
“Expenses” means, for any period, the aggregate of all expenses calculated under GAAP, including without limitation any taxes, incurred by the Obligated Group during the same period, minus (i) interest on Funded Indebtedness, (ii) depreciation and amortization, (iii) unusual or extraordinary expenses, (iv) any expenses resulting from (a) the loss on extinguishment of debt, (b) any loss on disposition of assets not made in the ordinary course of business, (c) any discontinued operations or (d) noncash adjustments to the book value of assets or liabilities resulting from changes in GAAP, (v) any expenses or loss resulting from a forgiveness of or the establishment of reserves against Indebtedness of an Affiliate which does not constitute an unusual or extraordinary expense, (vi) losses resulting from any reappraisal, revaluation or write-down of assets (including without limitation intangibles), (vii) any unrealized loss or change in the value of an Interest Rate Agreement (including any change in the value of the termination value thereof) which loss or change in value is not the result of the expiration or termination (including early termination) of such Interest Rate Agreement, (viii) any unrealized loss or change in value of investment securities which is not the result of the sale, transfer or disposition of such investment securities, (ix) any nonrecurring items which do not involve the expenditure or transfer of assets, (x) asset retirement obligations (except in the year paid), (xi) any other non-cash expenses, including, but not limited to, pension adjustments related to market value fluctuations and discount rates, (xii) any decrease in equity from investments in affiliates and (xiii) any expenses attributable to transactions between any Member and another Member, provided, however, that the provisions of (i) through (xiii) notwithstanding, no amount shall be subtracted from expenses more than once.
“Facilities” means all land, leasehold interests and buildings and all fixtures and equipment (as defined in the Uniform Commercial Code or equivalent statute in effect in the state where such fixtures or equipment are located) of a Person. Facilities shall not include the land, leasehold interests, buildings, fixtures or equipment constituting Excluded Property.
“Favorable Opinion of Bond Counsel” means an unqualified Opinion of Bond Counsel to the effect that such action proposed to be taken (or failure to take such action) is permitted under the Bond Indenture and will not, in and of itself, adversely affect the validity or enforceability of the Series 2017 Bonds or result in the inclusion of interest on the Series 2017 Bonds in gross income for federal income tax purposes, to the extent not already so included.
C-8 “First Supplemental Master Indenture” means the First Supplemental Master Trust Indenture dated as of September 1, 2017, between the Corporation, as Obligated Group Agent, and the Master Trustee, supplementing and amending the Original Master Indenture and pursuant to which the Series 2017 Obligation is issued.
“Fiscal Year” means any twelve-month period beginning on July 1 of any calendar year and ending on June 30 of the following calendar year or such other consecutive twelve-month period selected by the Obligated Group Agent as the fiscal year for the Members.
“Fitch” means Fitch Ratings, Inc., a corporation organized and existing under the laws of the State of New York, its successors and assigns.
“Funded Indebtedness” means, with respect to any Person, (i) all Indebtedness of such Person for money borrowed or credit extended which is not Short-Term; (ii) all Indebtedness of such Person incurred or assumed in connection with the acquisition or construction of Property which is not Short-Term; (iii) all Short-Term Indebtedness incurred by the Person which is of the type described in subparagraph (E) under the caption “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE—Permitted Additional Indebtedness” below; (iv) the Person’s Guaranties of Indebtedness which are not Short-Term; and (v) 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 the Master Indenture.
“Funded Indebtedness Ratio” means the ratio consisting of (i) a numerator equal to the amount determined by dividing the Obligated Group’s total Funded Indebtedness by the sum of (a) such Funded Indebtedness and (b) the Obligated Group’s total unrestricted net assets (as reflected in or derived from the most recent audited consolidated financial statements of the Obligated Group prepared in accordance with GAAP) and (ii) a denominator of one.
“Funded Interest” means amounts irrevocably deposited in escrow to pay interest on Funded 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 Funded Indebtedness or Related Bonds.
“GAAP” means accounting principles generally accepted in the United States of America as of the date of any calculation under the Master Indenture, subject, however, to the provisions of the Master Indenture summarized in the final paragraph under this heading.
“Governing Body” means, with respect to a Member, the board of directors, board of trustees or similar group or person or persons in which the right to exercise the powers of corporate directors or trustees is vested.
“Government Obligations” means (a) United States Government Obligations or (b) evidences of a direct ownership in future interest or principal payments on United States Government Obligations, which United States Government Obligations are held in a custodial
C-9 account by a custodian satisfactory to the Master Trustee or the Bond Trustee, as applicable, pursuant to the terms of a custody agreement.
“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: (1) to purchase such Indebtedness or obligation or any Property constituting security therefor; (2) to advance or supply funds: (i) for the purchase or payment of such Indebtedness or obligation, or (ii) to maintain working capital or other balance sheet condition; (3) to purchase securities or other Property or services primarily for the purpose of assuring the owner of such 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.
“Hazardous Materials” means any substance, material, or waste which is (a) petroleum; (b) asbestos; (c) polychlorinated biphenyls; (d) designated as a “hazardous substance” pursuant to Section 311 of the Clean Water Act, 33 U.S.C. § 1251 et seq. (33 U.S.C. § 1321) or listed pursuant to Section 307 of the Clean Water Act (33 U.S.C. § 1371); (e) defined as a “hazardous waste” pursuant to Section 1004 of the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq. (42 U.S.C. § 6903); (f) defined as a “hazardous substance” pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq. (42 U.S.C. § 9601); or (g) subject to regulation as a hazardous chemical substance pursuant to Section 6 of the Toxic Substances Control Act, 15 U.S.C. § 2601 et seq. (15 U.S.C. § 2605).
“Health Network” means Regional Health Network, Inc., a South Dakota non-profit corporation, and its successors and assigns and any surviving, resulting or transferee corporation.
“Historical Debt Service Coverage Ratio” means, for any period of time, the ratio consisting of a numerator equal to the amount determined by dividing Income Available for Debt Service for that period by the Debt Service Requirements for such period and a denominator of one; provided, however, that in calculating the Debt Service Requirements for any completed period, the principal amount of any Indebtedness included in such calculation which is paid during such period shall be excluded to the extent such principal amount is paid from the proceeds of other Indebtedness incurred in accordance with the provisions of the Master Indenture.
“Historical Maximum Annual Debt Service Coverage Ratio” means, for any period of time, the ratio consisting of a numerator equal to the amount determined by dividing Income Available for Debt Service for that period by the Historical Maximum Annual Debt Service Requirements on the Indebtedness of the Person or Persons involved during any completed period and a denominator of one; provided, however, that in calculating the Debt Service Requirements for any completed period, the principal amount of any Indebtedness included in such calculation which is paid during such period shall be excluded to the extent such principal amount is paid from the proceeds of other Indebtedness incurred in accordance with the provisions of the Master Indenture.
C-10 “Historical Maximum Annual Debt Service Requirements” means the largest total Debt Service Requirements for the Fiscal Year with respect to which a Historical Maximum Annual Debt Service Coverage Ratio is being calculated or any subsequent Fiscal Year on the Indebtedness of the Person or Persons involved which was simultaneously outstanding during the Fiscal Year with respect to which a Historical Maximum Annual Debt Service Coverage Ratio is being calculated.
“Historical Pro Forma Debt Service Coverage Ratio” means, for any period of time, the ratio consisting of a numerator equal to the amount determined by dividing Income Available for Debt Service for that period by the Maximum Annual Debt Service Requirement for the Funded Indebtedness then outstanding (other than any Funded Indebtedness being refunded with the Funded Indebtedness then proposed to be issued) and the Funded Indebtedness then proposed to be issued and a denominator of one.
“Hospital” means Rapid City Regional Hospital, Inc., a South Dakota nonprofit corporation, and its successors, and assigns and any surviving, resulting or transferee corporation.
“Income Available for Debt Service” means, for any period, the excess of Revenues over Expenses of the Person or group of Persons involved.
“Indebtedness” means, for any Person, (a) all Guaranties by such Person, (b) all liabilities (exclusive of reserves such as those established for deferred taxes or litigation) recorded or required to be recorded as such on the audited financial statements of such Person in accordance with GAAP, and (c) all obligations for the payment of money incurred or assumed by such Person (i) due and payable in all events or (ii) primarily to assure the repayment of money borrowed or credit extended; provided that Indebtedness shall not include Indebtedness of one Member to another Member, any Guaranty by any Member of Indebtedness of any other Member, the joint and several liability of any Member on Indebtedness issued by another Member, Interest Rate Agreements or any obligation to repay moneys deposited by patients or others with a Member 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.
“Independent Architect” means an architect, engineer or firm of architects or engineers selected by a Member, acceptable to the Master Trustee and licensed by, or permitted to practice in, the state where the construction involved is located, which architect, engineer or firm of architects or engineers, in the case of an individual, is not a member, director, officer or employee of any Member of the Obligated Group or any Affiliate thereof and, in the case of a firm, does not control any Member of the Obligated Group or any Affiliate thereof and is not controlled by or under common control with any Member of the Obligated Group or any Affiliate thereof.
“Independent Counsel” means an attorney duly admitted to practice law before the highest court of any state and, without limitation, may include independent legal counsel for the
C-11 Corporation, any other Member of the Obligated Group, the Authority, the Master Trustee or the Bond Trustee.
“Insurance Consultant” means a person or firm who in the case of an individual is not an employee or officer of any Member or any Related Issuer and which, in the case of a firm, does not control any Member of the Obligated Group or any Affiliate thereof and is not controlled by or under common control with any Member of the Obligated Group or any Affiliate thereof, appointed by the Obligated Group Agent and satisfactory to the Master Trustee, qualified to survey risks and to recommend insurance coverage for health care or social service facilities and services of the type involved, and having a favorable reputation for skill and experience in such surveys and such recommendations, and which may include a broker or agent with whom any Member transacts business.
“Interest Payment Date” means March 1 and September 1 of each Bond Year, commencing March 1, 2018.
“Interest Rate Agreement” means an interest rate exchange, hedge or similar agreement, expressly identified in an Officer’s Certificate of the Obligated Group Agent 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 forward or futures contract or an option (e.g., a call, put, cap, floor or collar) and which agreement does not constitute an obligation to repay money borrowed, credit extended or the equivalent thereof.
“Land” means the real Property owned by the Obligated Group upon which the primary operations of the Members are conducted as described in the Master Indenture, Exhibit A, as amended as provided therein from time to time, together with all buildings, improvements and fixtures located thereon, but excluding therefrom the Excluded Property
“Lien” means any mortgage, pledge or lease of, security interest in or lien, charge, restriction or encumbrance on any Property of the Person involved in favor of, or which secures any obligation to, any Person other than any Member, and any Capitalized Lease under which any Member is lessee and the lessor is not another Member.
“Loan Agreement” means the Loan Agreement dated as of September 1, 2017 between the Corporation and the Authority, as it may from time to time be amended or supplemented.
“Long-Term Indebtedness” means Indebtedness (which also may constitute Balloon Indebtedness or Put Indebtedness) having an original stated maturity or term greater than one year or renewable at the option of the debtor for a period greater than one year from the date of original issuance.
“Mail,” “mail,” “mailed” or “mailing” means (1) registered, certified or first-class mail, (2) delivery by any means provided a written receipt is obtained, (3) sending by overnight courier, or (4) Electronic Means.
C-12 “Master Indenture” means the Original Master Indenture, as supplemented and amended by the First Supplemental Master Indenture, and as it may from time to time be further amended or supplemented in accordance with the terms thereof.
“Master Trustee” means The First National Bank in Sioux Falls, as master trustee, or any successor trustee under the Master Indenture.
“Maximum Annual Debt Service Requirement” means the largest total Debt Service Requirements for all Indebtedness outstanding for the current or any succeeding Fiscal Year; provided that in applying the provisions of the Master Indenture summarized under the caption “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE—Rates and Charges” the current year shall be deemed to include the Fiscal Year with respect to which historical debt service coverage is being calculated and provided further that in calculating Maximum Annual Debt Service Requirement for the purposes of applying such provisions, the principal amount of any Indebtedness included in such calculation which is paid during the year with respect to which historical debt service coverage is being calculated shall be excluded to the extent such principal amount is paid from the proceeds of other Indebtedness incurred in accordance with the provisions of the Master Indenture; provided further that principal and interest payments on Indebtedness due on the first day or first Business Day of a month shall be deemed payable during the preceding month if they are required to be fully deposited with a trustee for such Indebtedness during such preceding month.
“Members” or “Members of the Obligated Group” means any Person who is listed on Exhibit D to the Master Indenture after designation as a Member of the Obligated Group pursuant to the terms of the Master Indenture. As of the date of issuance of the Series 2017 Bonds, the “Members of the Obligated Group” will mean the Corporation, the Hospital, Health Network and RH Physicians.
“Moody’s” means Moody’s Investors Service, 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 Authority by notice to the Bond Trustee.
“Net Proceeds” means, when used with respect to any insurance or condemnation award or sale consummated under threat of condemnation, the gross proceeds from the insurance or condemnation award or sale with respect to which that term is used less all expenses (including attorney’s fees, 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 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, insurance, taxes and similar charges. Net Rentals for any future period under any so-called “percentage lease” shall
C-13 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 (other than the Land) and the income therefrom, not less than 80% of 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.
“Obligated Group” means any Person which has fulfilled the requirements for entry into the Obligated Group set forth in the Master Indenture and which has not ceased such status pursuant to the Master Indenture. As of the date of Closing, Obligated Group shall mean the Hospital, the Corporation, Health Network and RH Physicians.
“Obligated Group Agent” means the Corporation or such other Member as may be designated from time to time pursuant to written notice to the Master Trustee and each Related Issuer executed by the President or Chairman of the Governing Body of the Corporation or, if the Corporation is no longer a Member of the Obligated Group, of each Member of the Obligated Group. As of the date of Closing, the Obligated Group Agent shall be the Corporation.
“Obligation holder,” “holder” or “owner of the Obligation” means the registered owner of any fully registered or book entry Obligation unless alternative provision is made in the Supplemental Master Indenture pursuant to which such Obligation is issued for establishing ownership of such Obligation, in which case such alternative provision shall control.
“Obligations” means Obligations issued, authenticated and delivered under the Prior Master Indenture and outstanding upon the execution and delivery of the Master Indenture (including the Prior Obligations), and Obligations issued, authenticated and delivered under the Master Indenture concurrently with or after the date on which the Master Indenture becomes effective, including, without limitation, (a) any Obligations issued in connection with the issuance of Related Bonds pursuant to a Related Bond Indenture and an indenture supplemental to the Master Indenture entered into concurrently with the execution and delivery of the Master Indenture and (b) any Obligations issued after the date the Master Indenture becomes effective in accordance with the provisions of the Master Indenture, including any Obligations issued after the date of execution of the Master Indenture in replacement and exchange for Obligations issued under the Master Indenture.
“Officer’s Certificate” means, with respect to the Master Indenture, a certificate signed, in the case of a certificate delivered by a corporation, by the Chief Executive Officer, the Chief Financial Officer, the President, any Vice President or any other officer authorized to sign by resolution or approved policy of the Governing Body of such corporation or, in the case of a certificate delivered by any other Person, the chief executive or chief financial officer of such other Person, in either case whose authority to execute such certificate shall be evidenced to the
C-14 satisfaction of the Master Trustee; and, with respect to the Bond Indenture, a certificate signed, in the case of a certificate delivered by a corporation, by the president, any vice president or any other officer authorized to sign by resolution or approved policy of the Governing Body of such corporation or, in the case of a certificate delivered by any other Person, the chief executive or chief financial officer of such other Person, in either case whose authority to execute such certificate shall be evidenced to the satisfaction of the Bond Trustee.
“Official Statement” means, collectively, the Preliminary Official Statement and the Official Statement prepared in connection with the issuance and sale of the Series 2017 Bonds to which this Appendix C is attached.
“Opinion of Bond Counsel” means a written opinion of Bond Counsel, which opinion may be based upon a ruling or rulings of the Internal Revenue Service, which counsel and opinion, including the scope, form, substance and other aspects thereof, are acceptable to the Master Trustee or the Bond Trustee and the Authority, as applicable.
“Opinion of Counsel” means a written opinion of Independent Counsel who is not objected to by the Authority, in form and substance not objected to by the Authority or the Bond Trustee.
“Original Master Indenture” means the Master Trust Indenture dated as of September 1, 2017 among the Members of the Obligated Group named therein and the Master Trustee.
“Outstanding” means, under the Master Indenture, in the case of Indebtedness of a Person other than Related Bonds or Obligations, all such Indebtedness of such Person which has been issued except any such portion thereof canceled after purchase on the open market or surrendered for cancellation or because of payment at or redemption prior to maturity, any such Indebtedness in lieu of which other Indebtedness has been duly issued and any such Indebtedness which is no longer deemed outstanding under its terms and with respect to which such Person is no longer liable under the terms of such Indebtedness.
“Outstanding Bonds,” or “Bonds outstanding” means all Series 2017 Bonds which have been duly authenticated and delivered by the Bond Trustee under the Bond Indenture, except:
(a) Series 2017 Bonds canceled after purchase in the open market or because of payment at or redemption prior to maturity;
(b) Series 2017 Bonds for the payment or redemption of which cash or Government Obligations shall have been theretofore deposited with the Bond Trustee (whether upon or prior to the maturity or redemption date of any such Series 2017 Bonds) in accordance with the Bond Indenture; provided that if such Series 2017 Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given or arrangements satisfactory to the Bond Trustee shall have been made therefor, or waiver of such notice satisfactory in form to the Bond Trustee shall have been filed with the Bond Trustee;
C-15 (c) Series 2017 Bonds in lieu of which others have been authenticated under the Bond Indenture; and
(d) For the purposes of all consents, approvals, waivers and notices required to be obtained or given under the Bond Indenture, Series 2017 Bonds owned by any Member of the Obligated Group.
“Outstanding Obligations” or “Obligations outstanding” means all Obligations which have been duly authenticated and delivered by the Master Trustee under the Master Indenture, except:
(a) Obligations canceled after purchase in the open market or because of payment at or prepayment or redemption prior to maturity;
(b) (i) Obligations for the payment or redemption of which cash or Escrow Obligations shall have been theretofore irrevocably deposited with the Master Trustee (whether upon or prior to the maturity or redemption date of any such Obligations); provided that if such Obligations are to be prepaid or redeemed prior to the maturity thereof, notice of such prepayment or redemption shall have been given or irrevocable arrangements satisfactory to the Master Trustee shall have been made therefor, or waiver of such notice satisfactory in form to the Master Trustee shall have been filed with the Master Trustee and (ii) Obligations securing Related Bonds for the payment or redemption of which cash or Escrow Obligations shall have been theretofore irrevocably deposited with the Related Bond Trustee (whether upon or prior to the maturity or redemption date of any such Obligations); provided that if such Related Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given or arrangements satisfactory to the Related Bond Trustee shall have been made therefor, or waiver of notice satisfactory in form to the Related Bond Trustee shall have been filed with the Related Bond Trustee;
(c) Obligations in lieu of which others have been authenticated under the Master Indenture; and
(d) For the purpose of all consents, approvals, waivers and notices required to be obtained or given under the Master Indenture, Obligations held or owned by a Member of the Obligated Group.
Notwithstanding the foregoing, any Obligation securing Related Bonds shall be deemed outstanding if such Related Bonds are Outstanding.
“Pass-Through Obligation” means any unconditional obligation of a third party to make payments to a Person under a lease, loan, installment sale or similar agreement, provided that (i) the amount lent to such third party was derived from, or the property subject to such lease, installment sale or similar agreement was financed or refinanced with, the proceeds of Indebtedness incurred by such Person, (ii) the payments to be made by the third party under such agreement (to the extent that such payments relate to debt service on such Indebtedness) are at
C-16 least equal in amount to the required debt service payments on such Indebtedness and are payable at or before the time required debt service payments are required to be made on such Indebtedness, and (iii) with the consent of such third party, such agreement has been assigned and pledged by the Person to the holder of such Covered Indebtedness and such agreement provides that payments (or portions thereof relating to debt service on such Indebtedness) thereunder, either unconditionally or if there is an event of default under the related Covered Indebtedness, are to be made directly to such holder.
“Paying Agent” means, with respect to the Master Indenture, the bank or banks, if any, designated pursuant to a Related Bond Indenture to receive and disburse the principal of and interest on any Related Bonds or designated pursuant to the Master Indenture to receive and disburse the principal of and interest on any Obligations; and with respect to the Bond Indenture, the bank or banks, if any, designated pursuant to the Bond Indenture to receive and disburse the principal of and interest on the Series 2017 Bonds or designated pursuant to the Master Indenture to receive and disburse the principal of and interest on any Obligation.
“Permitted Encumbrances” means the Master Indenture, any Related Loan Document, any Related Bond Indenture and, as of any particular time:
(a) Liens arising by reason of good faith deposits by or with a Member in connection with tenders, leases of real estate, bids or contracts (other than contracts for the payment of money), deposits by any Member to secure public or statutory obligations, or to secure, or in lieu of, surety, stay or appeal bonds, and deposits as security for the payment of taxes or assessments or other similar charges; any Lien arising by reason of deposits with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulation for any purpose at any time as required by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege or license, or to enable any Member to maintain self-insurance or to participate in any funds established to cover any insurance risks or in connection with worker’s compensation, unemployment insurance, pensions or profit sharing plans or other social security plans or programs, or to share in the privileges or benefits required for corporations participating in such arrangements;
(b) any Lien on Property acquired by a Member other than Property which will be classified as Land, which Lien secures Indebtedness issued, incurred or assumed by any Member in connection with and to effect such acquisition or existing Indebtedness which will remain outstanding after such acquisition, if in any such case the aggregate principal amount of such Indebtedness does not exceed the fair market value of the Property subject to such Lien as determined in good faith by the Governing Body of the Member or by an appropriately acting committee or officer thereof;
(c) any Lien on the Property of any Member granted in favor of or securing Indebtedness to any other Member;
C-17 (d) any Lien on the Property of any Member permitted under the provisions of the Master Indenture summarized under the caption “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE—Liens on Property” below;
(e) any Lien on Property if such Lien equally and ratably secures all of the Obligations and only the Obligations;
(f) leases which relate to Property of the Obligated Group which is of a type that is customarily the subject of such leases, including, but not limited to, as office space for physicians and educational institutions, food service facilities, gift shops and radiology or other hospital-based or health care or social service related specialty services, pharmacy and similar departments; leases entered into in accordance with the disposition of Property provisions of the Master Indenture; leases, licenses or similar rights to use Property to which the Hospital is a party existing as of September 1, 2017 and any renewals and extensions thereof; and any leases, licenses or similar rights to use Property whereunder a Member is lessee, licensee or the equivalent thereof upon fair and reasonable terms no less favorable to the lessee or licensee than would obtain in a comparable arm’s-length transaction;
(g) Liens for taxes and special assessments which are not then delinquent, or if then delinquent are being contested in accordance with the Master Indenture;
(h) utility, access and other easements and rights-of-way, restrictions, encumbrances and exceptions which do not materially interfere with or materially impair the operation of the Property affected thereby (or, if such Property is not being then operated, the operation for which it was designed or last modified);
(i) any mechanic’s, laborer’s, materialman’s, supplier’s or vendor’s Lien or right in respect thereof if payment is not yet due under the contract in question or if such Lien is being contested in accordance with the provisions of the Master Indenture;
(j) such Liens, defects, irregularities of title and encroachments on adjoining property as normally exist with respect to property similar in character to the Property involved and which do not materially adversely affect the value of, or materially impair, the Property affected thereby for the purpose for which it was acquired or is held by the owner thereof, including without limitation statutory liens granted to banks or other financial institutions, which liens have not been specifically granted to secure Indebtedness and which do not apply to Property which has been deposited as part of a plan to secure Indebtedness;
(k) zoning laws and similar restrictions which are not violated by the Property affected thereby;
(l) statutory rights under Section 291, Title 42 of the United States Code, as a result of what are commonly known as Hill-Burton grants, and similar rights under other federal statutes or statutes of the state in which the Property involved is located;
C-18 (m) all right, title and interest of the state where the Property involved is located, municipalities and the public in and to tunnels, bridges and passageways over, under or upon a public way;
(n) 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 (i) such Liens consist solely of restrictions on the use thereof or the income therefrom, or (ii) such Liens secure Indebtedness which is not assumed by any Member and such Liens attach solely to the Property (including the income therefrom) which is the subject of such gift, grant, bequest or devise;
(o) Liens of or resulting from any judgment or award, the time for the appeal or petition for rehearing of which shall not have expired, or in respect of which any Member shall at any time in good faith be prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review shall be in existence;
(p) Liens on moneys deposited by patients or others with a Member 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;
(q) Liens securing Non-Recourse Indebtedness;
(r) Liens on Property due to rights of third-party payors for recoupment of excess reimbursement paid;
(s) any security interest in a rebate fund, any depreciation reserve, debt service or interest reserve, debt service fund or any similar fund established pursuant to the terms of any Supplemental Master 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 Master Indenture, Related Bond Indenture or Related Loan Document or the holder of any related Commitment Indebtedness;
(t) any Lien on any Related Bond or any evidence of Indebtedness of any Member acquired by or on behalf of any Member which secures Commitment Indebtedness and only Commitment Indebtedness;
(u) Liens on accounts receivable arising as a result of the sale of such accounts receivable with or without recourse, provided that the principal amount of Indebtedness secured by any such Lien does not exceed the aggregate face amount of such accounts receivable so sold and, in the case of Liens on accounts receivable sold with recourse, such Liens do not exceed 35% of such accounts receivable so sold;
C-19 (v) any Lien on Property leased by a Member, which Lien secures Indebtedness which is not issued, incurred or assumed by such Member but pursuant to which lease the Member has incurred a subordinate obligation to pay such Indebtedness and which Indebtedness will remain outstanding during the term of such lease, if in any event the aggregate principal amount of such Indebtedness does not exceed the fair market value of the Property subject to such Lien as determined in good faith by the Governing Body of the Member or by an appropriately acting committee or officer thereof; and
(w) such Liens, covenants, conditions and restrictions, if any, which do not secure Indebtedness and which are other than those of the type referred to above, as are set forth in Exhibit A to the Master Indenture, and which (i) in the case of Property owned by the Members of the Obligated Group on the date of execution of the Master Indenture, do not and will not, so far as can reasonably be foreseen, materially adversely affect the value of the Property currently affected thereby or materially impair the same, and (ii) in the case of any other Property, do not materially impair or materially interfere with the operation or usefulness thereof for the purpose for which such Property was acquired or is held by a Member.
“Permitted Investments” shall mean and include any of the following:
(a) Qualified Investments;
(b) Interest-bearing time or demand deposits, certificates of deposit, repurchase agreements or other similar banking arrangements with any bank, trust company, national banking association or other savings institution (including any Related Bond Trustee or the Master Trustee), provided that such deposits, certificates, repurchase agreements and other arrangements are (i) fully insured by the Federal Deposit Insurance Corporation or (ii) fully collateralized by investments of the type described in subparagraph (a) above, or (iii) in or with a government securities dealer, bank, trust company, national banking association or other savings institution whose unsecured debt obligations are rated in any of the three highest rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) by each Rating Agency then maintaining a rating on any Obligations or Related Bonds; provided that in the case of any Permitted Investments which are repurchase agreements, the investments which are the subject thereof shall be in the possession of the Master Trustee, a Related Bond Trustee or an agent thereof and subject to no prior claims or liens;
(c) Obligations issued by any state of the United States or any political subdivision, public instrumentality or public authority of any state, which obligations are fully secured by and payable solely from United States Government Obligations which United States Government Obligations are held pursuant to an agreement in form and substance acceptable to the Master Trustee;
C-20 (d) Shares or certificates in any short-term investment fund which is maintained by the Master Trustee or a Related Bond Trustee and which is rated in any of the three highest rating categories (without regard to any refinement or gradation of rating category by numerical modifier or otherwise) by each Rating Agency then maintaining a rating on any Obligations or Related Bonds; and
(e) Upon 30 days’ prior written notice to each Rating Agency then maintaining a rating on any Obligations or Related Bonds, such other investments which at the time of the acquisition thereof shall be listed as permissible investments for trustee funds in an indenture, resolution, official statement, offering circular or prospectus prepared in connection with the issuance of any particular Series of Obligations issued under the Master Indenture and which other investments are made with respect to or in connection with such Obligations.
“Person” means any natural person, firm, joint venture, 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 Indebtedness which is guaranteed by another Person.
“Prior Master Indenture” means the First Amended and Restated Master Trust Indenture dated as of March 1, 1998, as supplemented and amended, between the Master Trustee and the Members of the Obligated Group.
“Principal Office” means, when used with respect to the Bond Trustee, the corporate trust office of the Bond Trustee identified as such for the performance of the functions in question, and, when used with respect to any other entity, means the principal office of such entity or such other office of such entity as may be designated by that entity in writing to the Bond Trustee.
“Prior Obligations” means the Series 2003 Swap Obligation, the Series 2015 Bond Obligation and the Series 2015 Purchaser Obligation.
“Private User” means any Person, other than a governmental unit within the meaning of Sections 141 and 150 of the Code or a Tax-Exempt Organization engaged solely and exclusively, in an activity with respect to the Bond Financed Property that does not constitute an Unrelated Trade or Business of such Tax-Exempt Organization and would not constitute an Unrelated Trade or Business if carried on by the Members of the Obligated Group.
“Project” means the acquisition, construction, renovation, remodeling and equipping of the Members’ health facilities financed or refinanced or for which the Members are or will be reimbursed, in whole or in part, from the proceeds of the Series 2017 Bonds.
“Project Certificate” means the Project Certificate dated the Closing Date and delivered by the Corporation in connection with the issuance of the Series 2017 Bonds.
C-21 “Project Documents” all material licenses and permits to operate the existing health care Facilities of the Members of the Obligated Group, together with certain contracts and other materials described in the Loan Agreement.
“Projected Debt Service Coverage Ratio” means, for any future period, the ratio consisting of a numerator equal to the amount determined by dividing the projected Income Available for Debt Service for that period by the Maximum Annual Debt Service Requirement for the Funded Indebtedness expected to be outstanding during such period and a denominator of one.
“Projected Rate” means the projected yield of an obligation as set forth in the report of a Consultant (which Consultant and report including, without limitation, the scope, form, substance and other aspects thereof, are acceptable to the Master Trustee and each Related Issuer). Such report shall state that in determining the Projected Rate such Consultant reviewed the yield evaluations of not less than three obligations (or such lesser number as the Consultant shall deem appropriate, but in no event less than one) selected by such Consultant, the interest on which is entitled to the exemption from federal income tax afforded by Section 103(a) of the Code or any successor thereto (or, if it is not expected that it will be reasonably possible to issue such tax-exempt obligations, or if the interest on the Indebtedness for which the Projected Rate is being calculated is not entitled to such exemption, then obligations the interest on which is subject to federal income taxation) which obligations such Consultant states in its report are reasonable comparators to utilize in developing such Projected Rate and which obligations: (i) were outstanding on a date selected by the Consultant which date so selected occurred during the 90-day period preceding the date of the calculation utilizing the Projected Rate in question, (ii) to the extent practicable, are obligations of Persons engaged in operations similar to those of the Obligated Group and having a credit rating similar to that of the Obligated Group, (iii) are not entitled to the benefits of any credit enhancement, including without limitation any letter or line of credit, guaranty or insurance policy, and (iv) to the extent practicable, have a remaining term substantially the same as the obligation with respect to which such Projected Rate is being developed.
“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, other than Excluded Property.
“Property, Plant and Equipment” means all Property of each Member which is classified as property, plant and equipment under GAAP.
“Purchase Contract” means the Bond Purchase Agreement for the Series 2017 Bonds among the Authority, the Corporation, as Obligated Group Agent, and the purchasers named therein providing for the sale of the Series 2017 Bonds.
“Put Date” means (i) any date on which an owner of Put Indebtedness may elect to have such Put Indebtedness paid, purchased or redeemed by or on behalf of the underlying obligor prior to its stated maturity date or (ii) any date on which Put Indebtedness is required to be paid, purchased or redeemed from the owner by or on behalf of the underlying obligor (other than at
C-22 the option of the owner) prior to its stated maturity date, other than pursuant to any mandatory sinking fund or other similar fund or other than by reason of acceleration upon the occurrence of an event of default.
“Put Indebtedness” means Indebtedness which is (i) payable or required to be purchased or redeemed by or on behalf of the underlying obligor, at the option of the owner thereof, prior to its stated maturity date or (ii) payable or required to be purchased or redeemed from the owner by or on behalf of the underlying obligor (other than at the option of the owner) prior to its stated maturity date, other than pursuant to any mandatory sinking fund or other similar fund or other than by reason of acceleration upon the occurrence of an event of default.
“Qualified Investments” means investments in (i) United States Government Obligations; (ii) bonds, debentures, notes or other evidences of indebtedness issued by any of the following: Federal Home Loan Banks; Federal Home Loan Mortgage Corporation (including participation certificates); and Federal Financing Bank; (iii) certificates of deposit or time deposits constituting direct obligations of any bank which is a “qualified public depository” or any savings and loan association which is a “savings and loan depository” under the Public Deposit Insurance Act pursuant to Chapter 4-6A of the South Dakota Codified Laws and which obligations are fully insured as to principal by the Federal Deposit Insurance Corporation (“FDIC”), or, if not so insured, which obligations are fully collateralized with United States Government Obligations equal to 104% of the amount so invested; (iv) short-term discount obligations of the Federal National Mortgage Association; (v) obligations issued by any state of the United States or any political subdivision, public instrumentality, or public authority of any state of the United States, which obligations are not callable before the date the principal thereof will be required to be paid and which obligations are fully secured as to both sufficiency and timely payment by, and payable solely from United States Government Obligations and which obligations are rated in the highest investment classification by any two of Moody’s, Standard & Poor’s or Fitch; or (vi) in obligations of any solvent insurance company or other corporation or business entity existing under the laws of the United States or any state thereof, provided the long-term debt obligations of such insurance company or other corporation or business entity (or of any affiliate thereof which guarantees timely payment of the obligations to be invested in) shall be rated in one of the two highest rating classifications established by a standard rating service of insurance companies or by a nationally recognized rating agency. Investments in any Qualified Investment listed above may be made either directly or in the form of securities of, or other interests in, an investment company registered under the federal Investment Company Act of 1940, whose shares are registered under the federal Securities Act of 1933 and whose investments are limited solely to any or all of the Qualified Investments enumerated above and whose rating is AAAm-G, AAA-m, or AA-m if rated by Standard & Poor’s or Fitch or whose rating is Aaa, Aa1 or Aa2 if rated by Moody’s. Any United States Government Obligations collateralizing investments made pursuant to (iii) above must be held by a trustee (who shall not be the provider of the collateral), or any Federal Reserve Bank or Depositary as custodian for the institution issuing such deposits and such trustee shall have a perfected first lien in the United States Government Obligations serving as collateral, and which collateral is free from all third party liens.
C-23 “Qualifying Obligation Holder” means any Related Issuer, any Related Bond Trustee or the holder or holders of 10% or more in aggregate principal amount of the outstanding Obligations of any series.
“Rating Agency” means Moody’s, Standard & Poor’s or Fitch, or their respective successors and assigns.
“Rebate Fund” means the Rebate Fund created by the Tax Exemption Agreement.
“Record Date” means each February 15 or August 15 (whether or not a Business Day) next preceding an Interest Payment Date.
“Related Bond Indenture” means any indenture, bond resolution or similar instrument pursuant to which any series of Related Bonds is issued.
“Related Bond Trustee” means any bond and any other 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 Bonds” means 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 in consideration, whether in whole or in part, of the execution, authentication and delivery of an Obligation or Obligations to such governmental 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 advanced to any Member (or any Property financed or refinanced with such proceeds is leased, sublet or sold to a Member).
“Revenues” means, for any period, (i) in the case of any Person providing health care services, the sum of (a) net patient service revenues, plus (b) other operating revenues, plus (c) non-operating revenues (other than income derived from the sale of assets not in the ordinary course of business or any gain from the extinguishment of debt or any unusual or extraordinary item or earnings which constitute Funded Interest or earnings on amounts which are irrevocably deposited in escrow to pay the principal of or interest on Indebtedness), all as determined in accordance with GAAP (for the avoidance of doubt, any realized gains on the sale or disposition of investments as the result of the sale, transfer or other disposition of such investment security shall be included in Revenues); and (ii) in the case of any other Person, gross revenues less sale discounts and sale returns and allowances, as determined in accordance with GAAP; but excluding for purposes of both clause (i) and (ii) above (A) any gains on the sale or other disposition of fixed or capital assets not in the ordinary course and any gains on the
C-24 extinguishment of debt, (B) earnings resulting from any reappraisal, revaluation or write-up of assets, (C) unrealized gains or changes in the valuation of Interest Rate Agreements which gain or change in value is not the result of the expiration or termination (including early termination) of such Interest Rate Agreement, (D) unrealized gains or changes in the valuation of investment securities other than as the result of the sale, transfer or other disposition of such investment security, (E) any nonrecurring items of an extraordinary nature which do not involve the receipt of assets, (F) the equity in the earnings from investments in affiliates and (G) insurance (other than business interruption) and condemnation proceeds; provided, however, that if such calculation is being made with respect to the Obligated Group, such calculation shall be made in such a manner so as to exclude any revenues attributable to transactions between any Member and any other Member; provided, further, that the provisions of (A) through (G) notwithstanding, no amount shall be added to revenues more than once.
“RH Physicians” means Regional Health Physicians, Inc., a South Dakota nonprofit corporation, and its successors and assigns and any surviving, resulting or transferee corporation.
“Series 2003 Swap Obligation” means that certain Direct Obligation, Series 2003A (U.S. Bank National Association) issued pursuant to the Prior Master Indenture.
“Series 2015 Bond Obligation” means that certain Direct Note Obligation, Series 2015 (South Dakota Health and Educational Facilities Authority) issued pursuant to the Prior Master Indenture securing the $67,210,000 South Dakota Health and Educational Facilities Authority Variable Rate Demand Revenue Bonds, Series 2015 (Regional Health).
“Series 2015 Purchaser Obligation” means that certain Direct Note Obligation, Series 2015 (U.S. Bank National Association) issued pursuant to the Prior Master Indenture.
“Series 2017 Bonds” means the $______South Dakota Health and Educational Facilities Authority Revenue Bonds, Series 2017 (Regional Health).
“Series 2017 Obligation” means the $______original principal amount Direct Note Obligation, Series 2017 (South Dakota Health and Educational Facilities Authority) of the Corporation issued pursuant to the Master Indenture as security for the Series 2017 Bonds.
“Short-Term,” when used in connection with Indebtedness, means having an original maturity less than or equal to one year and not renewable at the option of the debtor for a term greater than one year beyond the date of original issuance.
“Special Record Date” means the date fixed by the Bond Trustee pursuant to the provisions of the Bond Indenture for the payment of Defaulted Interest.
“Standard & Poor’s” means S&P Global Ratings, a corporation organized and existing under the laws of the State of New York, its successors and assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, “Standard & Poor’s” shall be deemed to refer to any other nationally recognized securities rating agency designated by the Authority by notice to the Bond Trustee.
C-25 “State” means the State of South Dakota.
“Subordinated Indebtedness” means Indebtedness which meets the requirements set forth in the Master Indenture which generally provide that no payment of principal, premium, if any, sinking fund amounts or interest may be made on such Indebtedness and no property or assets may be applied to the acquisition or retirement thereof unless all payments of amounts then due and payable for principal, premium, if any, sinking funds and interest on all Outstanding Obligations, have been made or duly provided for.
“Supplemental Master Indenture” means an indenture amending or supplementing the Master Indenture entered into pursuant to the Master Indenture.
“Tax Exemption Agreement” means the Tax Exemption Certificate and Agreement dated the Closing Date among the Corporation, on behalf of itself and as Obligated Group Agent on behalf of the other Members of the Obligated Group, the Authority and the Bond Trustee, as it may from time to time be amended or supplemented.
“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.
“Unassigned Rights” means the right of the Authority to receive payment of its fees and expenses, the Authority’s rights to indemnification under the Loan Agreement, the Authority’s right to execute and deliver supplements and amendments to the Loan Agreement and the Authority’s right to exercise the same rights of discretion as are granted to the Master Trustee under the Master Indenture.
“United States Government Obligations” means noncallable direct obligations of, or obligations the timely payment of the principal of and interest on which are fully guaranteed by, the United States of America, including obligations issued or held in book entry form on the books of the Department of the Treasury of the United States of America.
“Unrelated Trade or Business” means an activity which constitutes an “unrelated trade or business” within the meaning of Section 513(a) of the Code without regard to whether such activity results in unrelated trade or business income subject to taxation under Section 512(a) of the Code.
“Unrestricted Contributions” means Contributions which are not restricted in any way that would prevent their application to the payment of debt service on Indebtedness of the Person receiving such Contributions.
“Unrestricted Receivables” means all accounts and assignable general intangibles owned or acquired by the Person involved regardless of where generated; all proceeds therefrom whether cash or noncash, all as defined in Article 9 of the Uniform Commercial Code, as
C-26 amended, of the state in which such Person has its primary place of business; excluding, however, gifts, grants, bequests, donations and contributions to such Person 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 their use for payments required under the Master Indenture.
“Valuation Date” means with respect to any Capital Appreciation Indebtedness the date or dates set forth in the Supplemental Master Indenture relating to such Indebtedness on which specific Accreted Values are assigned to the Capital Appreciation Indebtedness.
“Written Request” means, with respect to the Master Indenture, with reference to a Related Issuer, a request in writing signed by the Chairman, Vice Chairman, Mayor, Chief Elected Representative, Clerk, President, Vice President, Executive Director, Associate Executive Director, Secretary or Assistant Secretary of the Related Issuer and with reference to any Member means a request in writing signed by the President or any Vice President of such Member, or any other officers designated by the Related Issuer or such Member, as the case may be; and, with respect to the Bond Indenture, with reference to the Authority, a request in writing signed by the Chairman, Vice Chairman, Executive Director or Associate Director of the Authority and with reference to the Corporation means a request in writing signed by the President or a Vice President or Treasurer of the Corporation, or any other officers designated in writing by the Authority or the Corporation, as the case may be.
Unless stated otherwise, where the character or amount of any asset or liability or item of revenue or expense is required to be determined or any consolidation, combination or other accounting computation is required to be made for the purposes of the Master Indenture or any agreement, document or certificate executed and delivered in connection with or pursuant to the Master Indenture (including, without limitation, any Related Bond Indenture and any Related Loan Agreement), such determination or computation shall be done in accordance with GAAP in effect on, at the sole option of the Obligated Group Agent, (i) the date such determination or computation is made for any purpose of the Master Indenture or (ii) the date of execution and delivery of the Master Indenture if the Obligated Group Agent delivers an Officer’s Certificate to the Master Trustee describing why then-current GAAP is inconsistent with the intent of the parties on the date of execution and delivery of the Master Indenture. For avoidance of doubt, it is the intent of the parties on the date of execution and delivery of the Master Indenture that any operating lease, as defined by the Financial Accounting Standards Board on the date of execution and delivery of the Master Indenture, and any renewal of any such operating lease, shall be governed in accordance with GAAP in effect on the date of execution and delivery of the Master Indenture and shall not be treated as Funded Indebtedness for the purpose of any calculation under the Master Indenture, including the incurrence of Funded Indebtedness, or the disposition of Property, unless otherwise elected by the Obligated Group Agent.
SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE
The following is a summary of certain provisions of the Master Indenture to which reference is made for a full and complete statement of its provisions.
C-27 THE OBLIGATIONS; PAYMENT OF THE SERIES 2017 OBLIGATION
The total principal amount of Obligations, the number of Obligations and the series of Obligations that may be created under the Master Indenture are not limited except as set forth with respect to any series of Obligations in the Supplemental Master Indenture providing for the issuance of such Obligations and as described herein under the caption “Permitted Additional Indebtedness.” Subject to certain conditions set forth in the Master Indenture, a Member may incur Additional Indebtedness (which may include Additional Obligations). Such Additional Indebtedness may be secured by security in addition to any security provided for Obligations previously issued under the Master Indenture or any other indebtedness (including without limitation, letters or lines of credit, insurance or Liens on the Property, including health care Facilities of the Obligated Group, or security interests in a depreciation reserve, debt service or interest reserve or debt service or similar funds). Such security need not be extended to any other Indebtedness (including any other Obligations or series of Obligations). See “Liens on Property” and “DEFINITIONS OF CERTAIN TERMS—Permitted Encumbrances” herein. The Master Indenture provides that Supplemental Master Indentures pursuant to which one or more series of Obligations entitled to additional security is issued may provide for such supplements or amendments to the provisions of the Master Indenture, including the provisions thereof relating to the exercise of remedies upon the occurrence of an event of default, as are necessary to provide such security and to permit realization upon such security solely for the benefit of the Obligations entitled thereto.
Each Member unconditionally and irrevocably (subject to the right of such Member to cease its status as a Member of the Obligated Group pursuant to the terms and conditions of the Master Indenture summarized under “Cessation of Status as a Member of the Obligated Group” below), jointly and severally covenants that it will promptly pay the principal of, premium, if any, and interest on every Obligation issued under the Master Indenture at the place, on the dates and in the manner provided in the Master Indenture and in said Obligations according to the true intent and meaning thereof. Notwithstanding any schedule of payments upon the Obligations set forth in the Master Indenture or in the Obligations, each Member unconditionally and irrevocably (subject to the right of such Member to cease its status as a Member of the Obligated Group pursuant to the terms and conditions of the Master Indenture summarized under “Cessation of Status as a Member of the Obligated Group” below), 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) 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.
To the extent that any Indebtedness which is permitted or required to be issued pursuant to the Master Indenture is not in the form of a promissory note, an Obligation in the form of a promissory note may be issued under the Master Indenture and pledged as security for the payment of such Indebtedness in lieu of directly issuing such Indebtedness as an Obligation under the Master Indenture. Nevertheless, the parties to the Master Indenture agree that Obligations may be issued under the Master Indenture to evidence any type of Indebtedness (other than Non-Recourse Indebtedness), including without limitation any Indebtedness in a form other than a promissory note. In addition, any Interest Rate Agreement may be authenticated as
C-28 an Obligation. Consequently, the Supplemental Master Indenture pursuant to which any Obligation is issued may provide for such supplements or amendments to the provisions of the Master Indenture as are necessary to permit the issuance of such Obligation under the Master Indenture and as are not inconsistent with the intent of the Master Indenture that, except as otherwise expressly provided in the Master Indenture, all Obligations issued under the Master Indenture be equally and ratably secured by any lien created under the Master Indenture. Any Interest Rate Agreement which is authenticated as an Obligation under the Master Indenture shall be equally and ratably secured by any lien created under the Master Indenture with all other Obligations issued under the Master Indenture, except as otherwise expressly provided in the Master Indenture; provided, however, that any such Obligation shall be deemed to be Outstanding under the Master Indenture solely for the purpose of receiving payment under the Master Indenture and shall not be entitled to exercise any rights under the Master Indenture.
ENTRANCE INTO THE OBLIGATED GROUP
Any Person may become a Member of the Obligated Group if:
(a) Such Person shall execute and deliver to the Master Trustee a supplemental master indenture acceptable to the Master Trustee which shall be executed by the Master Trustee and the Obligated Group Agent, containing (i) the agreement of such Person (A) to become a Member of the Obligated Group and thereby to become subject to compliance with all provisions of the Master Indenture and (B) 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 the Master Indenture) to jointly and severally make payments upon each Obligation at the times and in the amounts provided in each such Obligation and (ii) representations and warranties by such Person substantially similar to those set forth in the Master Indenture (other than those relating to being a corporation duly incorporated if such person is not a corporation (but delivered with appropriate revisions thereto based on the type of entity such Person is) or relating to the tax-exempt status of such Person if such Person is not a Tax-Exempt Organization) but with such deviations as are acceptable to the Master Trustee;
(b) The Obligated Group Agent shall, by appropriate action of its Governing Body, have approved the admission of such Person to the Obligated Group;
(c) The Master Trustee shall have received (1) a certificate of the Obligated Group Agent which demonstrates that, immediately upon such Person becoming a Member of the Obligated Group (A) the Members 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 the Master Indenture, and (B) the Obligated Group could meet the conditions of the Master Indenture described in subparagraph (A) under the caption, “Permitted Additional Indebtedness,” below for the incurrence of one dollar of additional Funded Indebtedness, (2) an Opinion of Counsel to the effect that (x) the instrument described in paragraph (a) above has been duly authorized, executed and delivered and constitutes a legal, valid and binding agreement of such Person, enforceable in accordance with its terms, subject to customary exceptions for bankruptcy,
C-29 insolvency, fraudulent conveyance and other laws generally affecting enforcement of creditors’ rights and application of general principles of equity and to the exceptions set forth under the caption “BONDHOLDERS’ RISKS—Certain Matters Relating to Enforceability of Master Indenture” in the forepart of this Official Statement 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 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 Bond Counsel, to the effect that under then existing law the consummation of such transaction would 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 otherwise entitled to such exemption; and
(d) (i) Exhibit A to the Master Indenture is amended to include a description of the real property of the Person becoming a Member upon which the primary operations of such Person are conducted and a description of any Permitted Encumbrances of the type described in paragraph (v)(ii) of the definition thereof, (ii) Exhibit B to the Master Indenture is amended to include a description of the Property of the Person becoming a Member which is to be considered Excluded Property (provided that such Property may be treated as Excluded Property only if such Property is real or tangible personal property and the primary operations of such Person are not conducted upon such real property), and (iii) Exhibit D to the Master Indenture is amended to add such Person as a Member.
Each successor, assignee, surviving, resulting or transferee corporation of a Member 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’s corporate status.
CESSATION OF STATUS AS A MEMBER OF THE OBLIGATED GROUP
Each Member covenants that it will not take any action, corporate or otherwise, which would cause it or any successor thereto into which it is merged or consolidated under the terms of the Master Indenture to cease to be a Member of the Obligated Group unless:
(a) prior to cessation of such status, there is delivered to the Master Trustee an Opinion of Bond Counsel to the effect that, under then existing law, the cessation by the Member of its status as a Member 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 Bond would otherwise be entitled;
(b) when it is assumed that such cessation results in a transfer of Property owned by the Member proposing to cease such status to a Person who is not a Member of the Obligated Group the conditions precedent to such a transfer to an unrelated entity described in subparagraph (G) under the caption “Sale, Lease or Other Disposition of Property” below have been complied with;
C-30 (c) prior to and immediately after such cessation, no event of default exists under the Master Indenture and no event shall have occurred which with the passage of time or the giving of notice, or both, would become such an event of default;
(d) prior to such cessation there is delivered to the Master Trustee an Opinion of Counsel (which Opinion of Counsel, including without limitation the scope, form, substance and other aspects thereof, is acceptable to the Master Trustee) to the effect that the cessation by such Member of its status as a Member will not adversely affect the status as a Tax-Exempt Organization of any Member which otherwise has such status; and
(e) prior to cessation of such status, the Obligated Group Agent consents in writing to the withdrawal by such Member.
Upon such cessation in accordance with the foregoing described provisions, (i) Exhibit A to the Master Indenture shall be amended to delete therefrom the description of any real property and of any Permitted Encumbrances of the type described in subparagraph (w)(ii) of the definition of Permitted Encumbrances of the Member which has ceased being a Member of the Obligated Group, (ii) Exhibit B to the Master Indenture shall be amended to delete therefrom any Property of the Member which has ceased being a Member, and (iii) Exhibit D to the Master Indenture shall be amended to delete therefrom the name of such Person.
LIENS ON PROPERTY
Each Member agrees that it will keep its Property free and clear of all Liens which are not Permitted Encumbrances. The Master Indenture provides that a Lien on Property of any Member securing Indebtedness shall be classified as a Permitted Encumbrance (as defined in clause (d) of the definition thereof) and therefore be permitted if (a) after giving effect to such Lien and all other Liens classified as Permitted Encumbrances under this clause (a), the Book Value or, at the option of the Obligated Group Agent, the Current Value of the Property of the Obligated Group which is Encumbered is not more than 20% of the value of all of the net property, plant and equipment of the Obligated Group (calculated on the same basis as the value of the Encumbered Property) and (b) the conditions of the Master Indenture summarized in subparagraph (A) under the caption “Permitted Additional Indebtedness” below are met for allowing the incurrence of one dollar of additional Funded Indebtedness. Notwithstanding anything in the Master Indenture to the contrary (including, without limitation, the definition of Permitted Encumbrances and the other provisions of the Master Indenture summarized under this caption), no Member of the Obligated Group shall enter into any mortgage with respect to its real property (other than Excluded Property, but including, without limitation, any mortgage on land or buildings which are not Excluded Property), unless such mortgage also equally and ratably secures all Obligations issued and to be issued under the Master Indenture.
C-31 PERMITTED ADDITIONAL INDEBTEDNESS
So long as any Obligations are outstanding, the Obligated Group will not incur any Additional Indebtedness (whether or not incurred through the issuance of Additional Obligations) other than:
(A) Funded Indebtedness, if prior to incurrence thereof or, if such Funded Indebtedness was incurred in accordance with another subsection of the Master Indenture described below under this caption and any Member wishes to have such Indebtedness classified as having been issued under the provisions of the Master Indenture described in this subparagraph (A), prior to such classification, there is delivered to the Master Trustee:
(i) an Officer’s Certificate of the Obligated Group Agent stating that the Funded Indebtedness Ratio of the Obligated Group, after giving effect to the incurrence of such Indebtedness and to the application of the proceeds thereof, does not exceed 0.67:1; or
(ii) an Officer’s Certificate of the Obligated Group Agent stating that the Historical Pro Forma Debt Service Coverage Ratio of the Obligated Group for the Fiscal Year preceding the date of delivery of the report for which consolidated financial statements reported upon by independent certified public accountants are available was not less than 1.25:1, and attaching such consolidated financial statements; or
(iii) (a) An Officer’s Certificate of the Obligated Group Agent stating that the Historical Debt Service Coverage Ratio of the Obligated Group for the Fiscal Year next preceding the incurrence of such Funded Indebtedness for which consolidated financial statements reported upon by independent certified public accountants are available was not less than 1.10:1, and attaching such consolidated financial statements; and (b)(1) an Officer’s Certificate of the Obligated Group Agent to the effect that the Projected Debt Service Coverage Ratio of the Obligated Group for the next succeeding Fiscal Year or, if such Indebtedness is being incurred in connection with the financing of Facilities, the Fiscal Year succeeding the projected completion date of such Facilities, is not less than 1.20:1, provided that the requirements of the Master Indenture described in the foregoing subparagraphs (iii)(a) or (b), as the case may be, shall be deemed satisfied if (x) there is delivered to the Master Trustee the report of a Consultant which contains an opinion of such Consultant that applicable laws or regulations have prevented or will prevent the Obligated Group from generating the amount of Income Available for Debt Service required to be generated by subparagraph (iii)(a) or (b), as the case may be, as a prerequisite to the issuance of Funded Indebtedness, and, if requested by the Master Trustee, such report is accompanied by a concurring Opinion of Counsel as to any conclusions of law supporting the opinion of such Consultant, (y) the report of the Consultant indicates that the rates charged or to be charged by the Obligated Group are or
C-32 will be such that, in the opinion of such Consultant, the Obligated Group has generated or will generate the maximum amount of Revenues reasonably practicable given such laws or regulations, and (z) the Historical Debt Service Coverage Ratio of the Obligated Group and the Projected Debt Service Coverage Ratio of the Obligated Group referred to in the applicable subsection are at least 1.00:1.
(B) Completion Funded Indebtedness without limitation.
(C) Funded Indebtedness for the purpose of refunding (whether in advance or otherwise, including without limitation refunding through the issuance of Cross-over Refunding Indebtedness) any outstanding Funded Indebtedness without limitation.
(D) Short-Term Indebtedness (other than Short-Term Indebtedness incurred in accordance with the provisions of the Master Indenture described in subparagraph (E) of this caption) in a total principal amount which at the time incurred does not, together with the principal amount of all other such Short-Term Indebtedness of the Obligated Group then outstanding under the provisions of the Master Indenture described in this subparagraph (D) and the principal payable on all Funded Indebtedness during the next succeeding 12 months, excluding such principal to the extent that amounts are on deposit in an irrevocable escrow and such amounts (including, where appropriate, the earnings or other increments to accrue thereon) are required to be applied to pay such principal and such amounts so required to be applied are sufficient to pay such principal, exceed 30% of the Revenues of the Obligated Group for the most recent Fiscal Year for which consolidated financial statements reported upon by independent certified public accountants are available; provided, however, that for a period of 20 consecutive calendar days in each Fiscal Year the total amount of such Short-Term Indebtedness of the Obligated Group outstanding under the provisions of the Master Indenture described under this subparagraph (D) shall be not more than 5% of the Revenues of the Obligated Group during such Fiscal Year plus such additional amount as the Obligated Group Agent certifies in an Officer’s Certificate is (a) attributable to Short-Term Indebtedness incurred to offset a temporary delay in the receipt of funds due from third party payors beyond the control of the Obligated Group and (b) in the minimum amount reasonably practicable taking into account such delay. For the purposes of the provisions of the Master Indenture described in this subparagraph, Short-Term Indebtedness shall not include overdrafts to banks to the extent there are immediately available funds of the Obligated Group sufficient to pay such overdrafts and such overdrafts are incurred and corrected in the normal course of business.
(E) Short-Term Indebtedness if:
(i) There is in effect at the time the Short-Term Indebtedness provided for by the provisions of the Master Indenture described in this subparagraph (E) is incurred a binding commitment (including without limitation letters or lines of credit or insurance) which may be subject only to commercially reasonable contingencies, by a financial institution generally regarded as responsible, which
C-33 commitment and institution are acceptable to the Master Trustee and each Related Issuer, to provide financing sufficient to pay such Short-Term Indebtedness at its maturity; and
(ii) The conditions of the Master Indenture described in subparagraph (A) are met with respect to such Short-Term Indebtedness when it is assumed that such Short-Term Indebtedness is Funded Indebtedness maturing over 30 years from the date of issuance of the Short-Term Indebtedness, bears interest on the unpaid principal balance at the Projected Rate and is payable on a level annual debt service basis over a 30-year period.
(F) Non-Recourse Indebtedness without limitation.
(G) Balloon Indebtedness if the conditions of the Master Indenture described in subparagraph (A) are met with respect to such Balloon Indebtedness when the assumptions of the Master Indenture described in subparagraph (E)(ii) above are made with respect to the portion of such Balloon Indebtedness becoming due during each such 12 month period.
(H) Put Indebtedness if the conditions of the Master Indenture described in subparagraph (A) above are met with respect to such Put Indebtedness when it is assumed that such Put Indebtedness bears interest at the Projected Rate and is payable on a level annual debt service basis over a 30-year period commencing with the next succeeding Put Date.
(I) Guaranties by any Member of the payment by another Person of a sum certain; provided that the conditions of the Master Indenture summarized under this caption are satisfied if it is assumed that the Indebtedness guaranteed is Funded Indebtedness of such Member. In making the calculation required by the provisions of the Master Indenture described in this subparagraph (I) the Obligated Group’s Income Available for Debt Service shall not be deemed to include any Revenues of the Primary Obligor and the debt service payable with respect to the Indebtedness guaranteed shall be calculated in accordance with the assumptions contained in the Master Indenture.
(J) Liabilities for contributions to self-insurance or shared or pooled-risk insurance programs required or permitted to be maintained under the Master Indenture.
(K) Commitment Indebtedness without limitation.
(L) Indebtedness consisting of accounts payable incurred in the ordinary course of business or other Indebtedness not incurred or assumed primarily to assure the repayment of money borrowed or credit extended which Indebtedness is incurred in the ordinary course of business.
(M) Indebtedness the principal amount of which at the time incurred, together with the aggregate principal amount of all other Indebtedness then outstanding which was
C-34 issued pursuant to the provisions of the Master Indenture described in this subparagraph (M) and which has not been subsequently reclassified as having been issued under this caption “Permitted Additional Indebtedness” does not exceed 30% of the Revenues of the Obligated Group for the latest preceding Fiscal Year for which consolidated financial statements reported upon by independent certified public accountants are available.
(N) Indebtedness incurred in connection with a sale of accounts receivable with or without recourse by any Member, provided that the principal amount of such Indebtedness permitted by the Master Indenture shall not exceed the aggregate amount of such accounts receivable so sold by such Member.
(O) Subordinated Indebtedness without limitation.
Each Member covenants that prior to, or as soon as reasonably practicable after, the incurrence of Indebtedness by such Member for money borrowed or credit extended, or the equivalent thereof, after the date of the Master Indenture, it will deliver to the Master Trustee an Officer’s Certificate which identifies the Indebtedness incurred, identifies the subparagraph of the Master Indenture pursuant to which such Indebtedness was incurred, demonstrates compliance with the provisions of such subsection and attaches a copy of the instrument evidencing such Indebtedness; provided, however, that this requirement shall not apply to Indebtedness incurred pursuant to the provisions of the Master Indenture described in subparagraphs (J) or (L) summarized above.
Each Member agrees that, prior to incurring Additional Indebtedness for money borrowed or credit extended, or the equivalent thereof, to entities other than Related Issuers, sellers of real or personal property for purchase money debt, lessors of such property or banks or other institutional lenders, it will provide the Master Trustee with an Opinion of Counsel acceptable to the Master Trustee to the effect that, to such Counsel’s knowledge, such Member has complied in all material respects with all applicable state and federal laws regarding the issuance of securities in connection with the incurrence of such Additional Indebtedness (including the issuance of any securities or other evidences of indebtedness in connection therewith) and such Counsel has no reason to believe that a right of rescission under such laws exists on the part of the entities to which such Additional Indebtedness is to be incurred.
CALCULATION OF DEBT SERVICE AND DEBT SERVICE COVERAGE
The various calculations of the amount of Indebtedness of a Person, the amortization schedule of such Indebtedness and the debt service payable with respect to such Indebtedness required under certain provisions of the Master Indenture shall be made in a manner consistent with that adopted in the provisions of the Master Indenture summarized under the caption “Permitted Additional Indebtedness” and under this caption. In the case of Balloon or Put Indebtedness issued pursuant to the provisions of the Master Indenture described in subparagraphs (B), (G), (H) or (M) under the caption “Permitted Additional Indebtedness” above, unless such Indebtedness is reclassified pursuant to the provisions of the Master Indenture summarized under this caption as having been issued pursuant to another subparagraph under the
C-35 caption “Permitted Additional Indebtedness” above, the amortization schedule of such Indebtedness and the debt service payable with respect to such Indebtedness for future periods shall be calculated on the assumption that such Indebtedness is being issued simultaneously with such calculation. With respect to Put Indebtedness, if the option of the holder to require that such Indebtedness be paid, purchased or redeemed prior to its stated maturity date, or if the requirement that such Indebtedness be paid, purchased or redeemed prior to its stated maturity date (other than at the option of such holder and other than pursuant to any mandatory sinking fund or any similar fund), has expired or lapsed as of the date of calculation, such Put Indebtedness shall be deemed payable in accordance with its terms.
In determining the amount of debt service payable on Indebtedness in the course of the various calculations required under certain provisions of the Master Indenture, if the terms of the Indebtedness being considered are such that interest thereon for any future period of time is expressed to be calculated at a varying rate per annum, a formula rate or a fixed rate per annum based on a varying index, then for the purpose of making such determination of debt service, interest on such Indebtedness for such period (the “Determination Period”) shall be computed by assuming that the rate of interest applicable to the Determination Period is equal to the average of the rate of interest (calculated in the manner in which the rate of interest for the Determination Period is expressed to be calculated) which was in effect during the 12-month period ending on the last date of the calendar month immediately preceding the month in which such calculation is made; provided that if the index or other basis for calculating such interest was not in existence for at least 12 full calendar months next preceding the date of calculation, the rate of interest for such portion of such period shall be deemed to be the rate of interest borne by such Indebtedness when issued.
Obligations issued to secure Indebtedness permitted to be incurred under the provisions of the Master Indenture summarized under the caption “Permitted Additional Indebtedness” shall not be treated as Additional Indebtedness.
No debt service shall be deemed payable with respect to Commitment Indebtedness until such time as funding occurs under the commitment which gave rise to such Commitment Indebtedness. From and after such funding, the amount of such debt service shall be calculated in accordance with the actual amount required to be repaid on such Commitment Indebtedness and the actual interest rate and amortization schedule applicable thereto. No Additional Indebtedness shall be deemed to arise when any funding occurs under any such commitment or any such commitment is renewed upon terms which provide for substantially the same terms of repayment of amounts disbursed pursuant to such commitment as obtained prior to such renewal. In addition, no Additional Indebtedness shall be deemed to arise when Indebtedness which bears interest at a variable rate of interest is converted to Indebtedness which bears interest at a fixed rate or the method of computing the variable rate on such Indebtedness is changed or the terms upon which Indebtedness, if Put Indebtedness, may be or is required to be tendered for purchase are changed, if such conversion or change is in accordance with the provisions applicable to such variable rate Indebtedness or Put Indebtedness in effect immediately prior to such conversion or change. Obligations issued under the Master Indenture securing Commitment Indebtedness shall be deemed outstanding for purposes of exercising voting rights under the Master Indenture only in the amount of any advances or funding amounts then unpaid and outstanding under such
C-36 Obligation. In addition, with respect to any Commitment Indebtedness, to the extent that amounts are not then due and owing for advances made by the creditor with respect thereto, the principal, interest and other payments relating to such Commitment Indebtedness shall not be included in any computations with respect to Income Available for Debt Service and similar calculations under the Master Indenture.
Balloon Indebtedness incurred as described under subparagraphs (B) or (M) summarized under the caption “Permitted Additional Indebtedness” above, unless reclassified pursuant to the provisions of the Master Indenture summarized under this caption, shall be deemed to be payable in accordance with the assumptions of the Master Indenture described in subparagraph (G) summarized under the caption “Permitted Additional Indebtedness” above. Put Indebtedness incurred as described under subparagraph (B) or (M) under the caption “Permitted Additional Indebtedness” above, unless reclassified pursuant to the provisions of the Master Indenture summarized under this caption, shall be deemed to be payable in accordance with the assumptions set forth in subparagraph (H)(ii) summarized under the caption “Permitted Additional Indebtedness” above.
Except for the purpose of determining whether any particular Guaranty may be incurred in which case it shall be assumed that 100% of the Indebtedness guaranteed is Funded Indebtedness of the guarantor under such Guaranty and except for the purpose of calculating any historical Debt Service Requirements in which case the guarantor’s Debt Service Requirements under a Guaranty shall be deemed to be the actual amount paid on such Guaranty by the guarantor, a guarantor shall be considered liable only for 20% of the annual debt service requirement on the Indebtedness guaranteed; provided, however, if the guarantor has been required by reason of its guaranty to make a payment in respect of such Indebtedness within the immediately preceding 24 months, the guarantor shall be considered liable for 100% of the annual debt service requirement on the Indebtedness guaranteed. For the purposes of the various calculations required under the Master Indenture, the Capitalized Rentals under a Capitalized Lease at the time of such calculation shall be deemed to be the principal payable thereon.
Each Member may elect to have Indebtedness issued pursuant to one provision of the Master Indenture summarized under the caption “Permitted Additional Indebtedness,” including without limitation subparagraph (M), reclassified as having been incurred under another provision thereof, by demonstrating compliance with such other provision on the assumption that such Indebtedness is being reissued on the date of delivery of the materials required to be delivered under such other provision including the certification of any applicable Projected Rate. From and after such demonstration, such Indebtedness shall be deemed to have been incurred under the provision with respect to which such compliance has been demonstrated until any subsequent reclassification of such Indebtedness.
Anything in the Master Indenture to the contrary notwithstanding, any portion of any Indebtedness of any Member for which an Interest Rate Agreement has been obtained by such Member shall be deemed to bear interest for the period of time that such Interest Rate Agreement is in effect at a net rate which takes into account the interest payments made by such Member on such Indebtedness and the payments made or received by such Member on such Interest Rate Agreement; provided that the long-term credit rating of the provider of such Interest Rate
C-37 Agreement (or any guarantor thereof) is in one of the three highest rating categories of any Rating Agency (without regard to any refinements of gradation of rating category by numerical modifier or otherwise) or is at least as high as that of the Obligated Group. In addition, so long as any Indebtedness is deemed to bear interest at a rate taking into account an Interest Rate Agreement, any payments made by a Member on such Interest Rate Agreement shall be excluded from Expenses and any payments received by a Member on such Interest Rate Agreement shall be excluded from Revenues, in each case, for all purposes of the Master Indenture.
In calculating the amount of debt service payable with respect to Covered Indebtedness of a Member, only the following percentages of annual debt service of the Covered Indebtedness are required to be included in the computation of debt service (and shall only be included if and to the extent that the Indebtedness so covered would be so included), unless the Obligated Group Agent determines to include 100% of the annual debt service of the Covered Indebtedness:
(A) 25% of the annual debt service of the Covered Indebtedness must be included if the Historical Debt Service Coverage Ratio of the Person which is the obligor with respect to the related Pass-Through Obligation, determined on the basis of the last consecutive twelve month period for which audited financial statements of such Person have been prepared immediately preceding the date the calculation is made, is 1.75:1 or better; or
(B) 50% of the annual debt service of the Covered Indebtedness must be included if the Historical Debt Service Coverage Ratio of the Person which is the obligor with respect to the related Pass-Through Obligation, determined on the basis of the last consecutive twelve month period for which audited financial statements of such person have been prepared immediately preceding the date the calculation is made, is 1.50:1 or better but less than 1.75:1; or
(C) 10% of the annual debt service of the Covered Indebtedness must be included if the Historical Debt Service Coverage Ratio of the Person which is the obligor with respect to the related Pass-Through Obligation, determined on the basis of the last consecutive twelve month period for which audited financial statements of such Person have been prepared immediately preceding the date the calculation is made, is 1.25:1 or better but less than 1.50:1; or
(D) 100% of the annual debt service of the Covered Indebtedness must be included if (a) the Historical Debt Service Coverage Ratio of the Person which is the obligor with respect to the related Pass-Through Obligation, determined on the basis of the last consecutive twelve month period for which audited financial statements of such Person have been prepared immediately preceding the date the calculation is made, is less than 1.25:1, or (b) all payments under such Pass-Through Obligation have not been made when due by such Person during the consecutive twelve month period immediately preceding the date the calculation is made or (c) no audited financial statements have been prepared for such Person during the 18-months preceding the date the calculation is made.
C-38 For purposes of the foregoing clauses (A) through (D) of the forgoing, the Historical Debt Service Coverage Ratio of a Person who is not a Member of the Obligated Group shall be calculated in the same manner as though such Person was a Member of the Obligated Group under the Master Indenture.
RATES AND CHARGES
Each Member covenants and agrees to operate all of its Facilities on a revenue producing basis and to charge such fees and rates for its Facilities and services 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 under the Master Indenture to the extent permitted by law. Each Member further covenants and agrees that it will 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 the Master Indenture summarized under this caption.
If in any Fiscal Year the Historical Debt Service Coverage Ratio of the Obligated Group is less than 1.10:1, the Master Trustee shall require the Obligated Group at its expense to retain a Consultant within 60 days of the delivery of the calculation of Historical Debt Service Coverage Ratio to make recommendations with respect to the rates, fees and charges of the Members and the Obligated Group’s methods of operation and other factors affecting its financial condition in order to increase the Historical Debt Service Coverage Ratio to at least 1.10:1 for the next succeeding Fiscal Year.
The foregoing provisions notwithstanding, if in any Fiscal Year the Historical Debt Service Coverage Ratio of the Obligated Group is less than 1.10:1, the Master Trustee shall not be obligated to require the Obligated Group to retain a Consultant to make such recommendations if: (a)(1) there is filed with the Master Trustee (who shall provide a copy to each Qualifying Obligation holder, Related Bond Trustee and Related Issuer) a written report addressed to them of a Consultant (which Consultant and report, including without limitation the scope, form, substance and other aspects of such report, are acceptable to the Master Trustee) which contains an opinion of such Consultant that applicable laws or regulations have prevented the Obligated Group from generating Income Available for Debt Service in an amount sufficient to produce a Historical Debt Service Coverage Ratio during such Fiscal Year of 1.10:1 and, if requested by the Master Trustee, such report is accompanied by a concurring Opinion of Counsel (which Opinion of Counsel, including without limitation the scope, form, substance and other aspects thereof, is acceptable to the Master Trustee) as to any conclusions of law supporting the opinion of such Consultant; and (2) the report of such Consultant indicates that the rates charged by the Obligated Group are such that, in the opinion of the Consultant, the Obligated Group has generated the maximum amount of Revenues reasonably practicable given such laws or regulations; or (b) there is filed with the Master Trustee a certificate of the Obligated Group Agent which indicates that the Days of Unrestricted Cash on Hand as of the last day of such Fiscal Year was not less than 75. The Obligated Group 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 Obligated
C-39 Group provides to the Master Trustee (who shall provide a copy to each Qualifying Obligation holder, Related Bond Trustee and Related Issuer) an Opinion of Counsel (which Opinion of Counsel, including without limitation the scope, form, substance and other aspects thereof, is acceptable to the Master Trustee) 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.
The foregoing notwithstanding, if the Historical Debt Service Coverage Ratio of the Obligated Group is less than 1.00:1 for two consecutive Fiscal Years, an event of default shall exist under the Master Indenture as of the end of such second Fiscal Year.
INSURANCE
Each Member shall maintain, or cause to be maintained at its sole cost and expense, insurance (which may be self insurance) with respect to its Property, the operation thereof and its business against such casualties, contingencies and risks (including but not limited to public liability and employee dishonesty) and in amounts not less than is customary in the case of corporations engaged in the same or similar activities and similarly situated or as is adequate to protect its Property and operations. For purposes of the provisions of the Master Indenture summarized under this caption, the term Property shall be deemed to include Excluded Property.
SALE, LEASE OR OTHER DISPOSITION OF PROPERTY
Each Member agrees that it will not, in any consecutive 12-month period, sell, lease or otherwise dispose (including without limitation any involuntary disposition) of Property which, together with all other Property transferred by Members in transactions other than those described in subparagraphs (A) through (G) below, totals for such 12-month period in excess of 10% of the total value of the Property of the Obligated Group (calculated on the basis of the Book Value of the assets shown on the assets side of the balance sheet in the consolidated financial statements of the Obligated Group for the Fiscal Year next preceding the date of such sale, lease or other disposition for which consolidated financial statements of the Obligated Group reported on by independent certified public accountants are available or, if the Obligated Group Agent so elects, on the basis of Current Value), except for transfers or other dispositions in the ordinary course of business and except for transfers or other dispositions of Property:
(A) In return for other Property (specifically including cash) of equal or greater value and usefulness;
(B) To any Person, if prior to such sale, lease or other disposition there is delivered to the Master Trustee an Officer’s Certificate of a Member stating that, in the judgment of the signer, such Property has, or within the next succeeding 24 calendar months is reasonably expected to, become inadequate, obsolete, worn out, unsuitable, unprofitable, undesirable or unnecessary and the sale, lease or other disposition thereof will not impair the structural soundness, efficiency or economic value of the remaining Property;
C-40 (C) To another Member;
(D) Upon fair and reasonable terms no less favorable to the Member than the Member would obtain in a comparable arm’s-length transaction;
(E) To any Person, if such Property consists solely of assets which are specifically restricted by the donor or grantor to a particular purpose which is inconsistent with their use for payment on the Obligations;
(F) Pursuant to the provisions of the Master Indenture summarized under the caption “Dividends and Stock Purchases,” where the Property subject to such transfer consists solely of cash; or
(G) To any Person, upon delivery to the Master Trustee of an Officer’s Certificate of a Member demonstrating that during the Fiscal Year immediately preceding the proposed disposition for which financial statements have been reported upon by independent certified public accountants, after taking into account such disposition, the Obligated Group could satisfy the requirements in subparagraph (A) of the provisions of the Master Indenture summarized under the caption “Permitted Additional Indebtedness” for the incurrence of one dollar of additional Funded Indebtedness.
In connection with any sale, lease or other disposition of Property, the parties to the Master Indenture agree that to the extent the Member of the Obligated Group receives Property in return for such sale, lease or disposition, the Property which is sold, leased or disposed of shall be treated, for purposes of the provisions of the Master Indenture summarized under this caption, as having been transferred in satisfaction of the provisions of the Master Indenture described in subparagraph (A) above to the extent of the fair market value of the Property received by the Member of the Obligated Group. The Member shall be required, however, to satisfy the conditions contained in one of the other provisions of the Master Indenture summarized under this caption with respect to any remaining value of such Property in excess of the fair market value of the Property received by the Member in return therefor prior to any such sale, lease or other disposition.
The foregoing provisions notwithstanding, (i) a Member may transfer Property to any Person, if such Property consists solely of assets which are specifically restricted by the donor or grantor to a particular purpose which is inconsistent with their use for payment on the Obligations and with their use for the payment of general operating expenses and (ii) each Member further agrees that it will not sell, lease, donate or otherwise dispose of Property (a) which could reasonably be expected at the time of such sale, lease, donation or disposition to result in a reduction of the Historical Debt Service Coverage Ratio for the Obligated Group such that the Master Trustee would be obligated to require the Obligated Group to retain a Consultant pursuant to the provisions of the Master Indenture summarized under the caption “Rates and Charges” above, or (b) if a Consultant has been retained in the circumstances described in the Master Indenture, such action, in the opinion of such Consultant, will have an adverse effect on the Income Available for Debt Service of the Obligated Group. The parties to the Master Indenture agree that the rendering of any service, the making of any loan, the extension of any
C-41 credit or any other transaction with any Affiliate except pursuant to the reasonable requirements of such Member’s activities and upon fair and reasonable terms no less favorable to it than would obtain in a comparable arm’s-length transaction with a person not an Affiliate is and shall be subject to, and shall be permitted only if there is compliance with, these provisions.
MERGER, CONSOLIDATION, SALE OR CONVEYANCE
(a) Each Member agrees that it will not merge into, or consolidate with, one or more Persons which are not Members, or allow one or more of such Persons to merge into it, or sell or convey all or substantially all of its Property to any Person who is not a Member, unless:
(i) Any successor to such Member (including without limitation any purchaser of all or substantially all the Property of such Member) is a Person 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 to assume, jointly and severally, the due and punctual payment of the principal of, premium, if any, and interest on all Obligations according to their tenor and the due and punctual performance and observance of all the covenants and conditions of the Master Indenture to be kept and performed by such Member;
(ii) Immediately after such merger or consolidation, or such sale or conveyance, no Member would be in default in the performance or observance of any covenant or condition of any Related Loan Document or the Master Indenture;
(iii) Immediately after such merger or consolidation, or such sale or conveyance, (A) the conditions of the Master Indenture described under the caption “Liens on Property” would be met for the creation of a Lien on Property and (B) either (1) the condition of the Master Indenture described in subparagraph (A) under the caption “Permitted Additional Indebtedness” would be met for the incurrence of one dollar of additional Funded Indebtedness, assuming that any Indebtedness of any successor or acquiring Person is Indebtedness of such Member and that the Revenues and Expenses of the Member for the most recent Fiscal Year include the Revenues and Expenses of such other Person or (2) the Historical Maximum Annual Debt Service Coverage Ratio of the Obligated Group for the most recent Fiscal Year for which consolidated financial statements reported upon by independent certified public accountants are available, assuming that any Indebtedness of any successor or acquiring Person is Indebtedness of such Member and that the Revenues and Expenses of the Member for the most recent Fiscal Year include the Revenues and Expenses of such other Person, would be no less than the Historical Maximum Annual Debt Service Coverage Ratio for the Obligated Group for such Fiscal Year; and
(iv) 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 an Opinion of Bond Counsel to the effect that under then existing law the consummation of such merger, consolidation, sale or conveyance, whether or not
C-42 contemplated on the original date of delivery of such Related Bonds, 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.
(b) In case of any such consolidation, merger, sale or conveyance and upon any such assumption by the successor Person, such successor Person shall succeed to and be substituted for its predecessor, with the same effect as if it had been named in the Master Indenture as such Member. Any successor to such Member thereupon may cause to be signed and may issue in its own name Obligations under the Master Indenture and the predecessor shall be released from its obligations under the Master Indenture and under any Obligations, if such predecessor shall have conveyed all Property owned by it (or all such Property shall be deemed conveyed by operation of law) to such successor. All Obligations so issued by such successor corporation under the Master Indenture shall in all respects have the same legal rank and benefit under the Master Indenture as Obligations theretofore or thereafter issued in accordance with the terms of the Master Indenture as though all of such Obligations had been issued under the Master Indenture by such prior Member 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.
(d) The Master Trustee may rely upon an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale or conveyance, and any such assumption, complies with the provisions of the Master Indenture summarized under this caption and that it is proper for the Master Trustee under the provisions of the Master Indenture to join in the execution of any instrument required to be executed and delivered by these provisions.
FINANCIAL STATEMENTS
The Members covenant that they will 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 the Obligated Group in accordance with GAAP consistently applied (except to the extent that GAAP would require consolidation of certain financial information of entities which are not Members of the Obligated Group with financial information of one or more Members) except as may be disclosed in the notes to the audited financial statements referred to in subparagraph (B) below. To the extent that GAAP would require consolidation of certain financial information of entities which are not Members of the Obligated Group with financial information of one or more Members, consolidated financial statements prepared in accordance with GAAP which include information with respect to entities which are not Members of the Obligated Group may be delivered in satisfaction of the requirements of the Master Indenture described under this caption so long as: (a) supplemental information in sufficient detail to separately identify the information with respect to the Members of the Obligated Group is delivered to the Maser Trustee with the audited financial statements; (b) such supplemental information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements delivered to the Master Trustee and,
C-43 in the opinion of the accountant, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole; and (c) such supplemental information is used for the purposes of the Master Indenture or for any agreement, document or certificate executed and delivered in connection or pursuant to the Master Indenture. The Members further covenant that they will furnish to the Master Trustee, any Related Issuers, any Related Bond Trustees, and any other requesting Qualifying Obligation holder:
(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 for such Fiscal Year certified by a firm of independent certified public accountants selected by the Obligated Group Agent and satisfactory to the Master Trustee and each Related Issuer containing a consolidated balance sheet as of the end of such Fiscal Year and a consolidated statement of changes in net assets and changes in financial position for such Fiscal Year and a consolidated statement of revenues and expenses for such Fiscal Year, showing in each case in comparative form the financial figures for the preceding Fiscal Year.
(B) At the time of delivery of the financial report referred to in subparagraph (A) above, a certificate of the Obligated Group Agent signed by its President, Treasurer, Chief Executive Officer, Chief Financial Officer or Chief Operating Officer, stating that the Obligated Group Agent has made a review of the activities of each Member during the preceding Fiscal Year for the purpose of determining whether or not the Members have complied with all of the terms, provisions and conditions of the Master Indenture and that each Member has kept, observed, performed and fulfilled each and every covenant, provision and condition of the Master 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 of the Master Indenture, or if any Member shall be in default such certificate shall specify all such defaults and the nature thereof.
(C) Such additional information as the Master Trustee, any requesting Qualifying Obligation holder, any Related Issuer or any Related Bond Trustee may reasonably request concerning any Member in order to enable the Master Trustee, such Qualifying Obligation holder, such Related Issuer or such Related Bond Trustee to determine whether the covenants, terms and provisions of the Master Indenture have been complied with by the Members and for that purpose all pertinent books, documents and vouchers relating to the business, affairs and Property (other than patient, donor and personnel records) of the Members shall, to the extent permitted by law, at all times during regular business hours be open to the inspection of such accountant or other agent (who may make copies of all or any part thereof) as shall from time to time be designated and compensated by the Master Trustee, such Qualifying Obligation holder, such Related Issuer or such Related Bond Trustee.
DIVIDENDS AND STOCK PURCHASES
If at any time any Member shall have outstanding any capital stock, such Member will not (i) declare or pay any dividends, either in cash or Property, on any shares of such stock (except dividends or other distributions payable solely in shares of such stock), (ii) directly or
C-44 indirectly purchase, redeem or retire any shares of such stock or any warrants, rights or options to purchase or acquire any shares of such stock, or (iii) make any other payment or distribution, either directly or indirectly, in respect of such stock, which dividend, purchase, redemption, retirement, payment or other distribution, when aggregated with all other such dividends, purchases, redemptions, retirements, payments or distributions made by all Members of the Obligated Group after the date of execution of the Original Master Indenture, would exceed 50% of Cumulative Net Income Available for Dividends of the Obligated Group.
A Member will not declare any dividend payable more than 60 days after the date of declaration thereof.
For the purposes of the provisions summarized under this caption, the amount of any dividend or distribution declared, paid or distributed in Property shall be deemed to be the greater of the Book Value or the Current Value of such Property at the time of the making of such dividend or distribution.
The foregoing notwithstanding, any dividend or distribution paid by one Member to any other Member shall not be subject to the restrictions of the Master Indenture summarized under this caption.
ADDITIONS TO EXCLUDED PROPERTY
Exhibit B attached to the Master Indenture (describing the Excluded Property) may be amended to include additional real property acquired by a Member subsequent to September 1, 2017 and all improvements, fixtures, tangible personal property and equipment located thereon and used in connection therewith upon the receipt by the Master Trustee of an Officer’s Certificate of such Member stating that (1) such Property does not constitute a portion of the Land and (2) the total value of such Property does not exceed 10% of the total value of Property of the Obligated Group (calculated on the basis of the Book Value of the assets shown on the asset side of the balance sheet in the consolidated financial statements of the Obligated Group for the most recent Fiscal Year next preceding the date of such amendment to Exhibit B attached to the Master Indenture for which consolidated financial statements reported on by independent certified public accountants are available or, if the Obligated Group Agent so elects, on the basis of Current Value).
DAMAGE OR DESTRUCTION
Each Member agrees to notify the Master Trustee immediately in the case of the destruction of its Facilities or any portion thereof as a result of fire or other casualty, or any damage to such Facilities or portion thereof as a result of fire or other casualty, the Net Proceeds of insurance of which are estimated to exceed 5% of the value of all of the net Property, Plant and Equipment of the Obligated Group.
If the Net Proceeds of insurance do not exceed 5% of the value of all of the net Property, Plant and Equipment of the Obligated Group, the Member suffering such casualty or loss may use such Net Proceeds in any manner it deems prudent and as is consistent with the provisions of
C-45 the Master Indenture summarized herein and with the Tax Exemption Agreement. In the event such Net Proceeds exceed 5% of the value of all of the net Property, Plant and Equipment of the Obligated Group, the Member suffering such casualty or loss shall within six months after the date on which the Net Proceeds are finally determined elect by written notice of such election to the Master Trustee one of the following three options, subject to the approval of the Master Trustee (which approval may not be unreasonably withheld):
(a) Option A—Repair and Restoration. Such Member may elect to replace, repair, reconstruct, restore or improve any of the Facilities of the Obligated Group or acquire additional Facilities for the Obligated Group or repay Indebtedness incurred for any such purpose pending the receipt of such Net Proceeds. In such event, such Member shall proceed forthwith to replace, repair, reconstruct, restore or improve Facilities of the Obligated Group or to acquire additional Facilities and will apply the Net Proceeds of any insurance relating to such damage or destruction received to the payment or reimbursement of the costs of such replacement, repair, reconstruction, restoration, improvement or acquisition or to the repayment of such Indebtedness.
It is further understood and agreed that in the event such Member shall elect this Option A, such Member shall complete the replacement, repair, reconstruction, restoration, improvement and acquisition of the Facilities, whether or not the Net Proceeds of insurance received for such purposes are sufficient to pay for the same.
(b) Option B—Prepayment of Obligations. Subject to the obligations of the Members under the Master Indenture, such Member may elect to have all of the Net Proceeds payable as a result of such damage or destruction applied to the prepayment of the Obligations. In such event such Member shall, in its notice of election to the Master Trustee, agree to apply such Net Proceeds, when and as received, to the prepayment of Obligations.
(c) Option C—Partial Restoration and Partial Prepayment of Obligations. Such Member may elect to have a portion of such Net Proceeds applied to the replacement, repair, reconstruction, restoration and improvement of the Facilities of the Obligated Group or the acquisition of additional Facilities for the Obligated Group or the repayment of Indebtedness incurred for any such purpose pending the receipt of such Net Proceeds with the remainder of such Net Proceeds to be applied to prepay Obligations, in which event such Net Proceeds to be used for replacement, repair, reconstruction, restoration, improvement and acquisition shall be applied as set forth in subparagraph (a) above such Net Proceeds to be used for prepayment of Obligations shall be applied as set forth in subparagraph (b) above.
The foregoing notwithstanding, no Member will be required to comply with these provisions to the extent that the Facilities damaged or destroyed were pledged as security for Non-Recourse Indebtedness incurred in accordance with the Master Indenture or Indebtedness secured by Liens which comply with the Master Indenture and the documents pursuant to which such Indebtedness was incurred require Net Proceeds to be applied in a manner inconsistent with the provisions summarized under this caption.
C-46 CONDEMNATION
The Master Trustee shall cooperate fully with the Members in the handling and conduct of any prospective or pending condemnation proceedings with respect to their Facilities or any part of the Master Indenture. Each Member agrees in the Master Indenture to apply any Net Proceeds of any award, compensation or damages payable in connection with any condemnation or taking, or payment received in a sale transaction consummated under threat of condemnation (any such award, compensation, damages or payment being hereinafter referred to as an “award”), in the manner provided by the provisions of the Master Indenture summarized under this caption.
In the event such Net Proceeds do not exceed 5% of the value of all of the net Property, Plant and Equipment of the Obligated Group, the Member suffering such taking may use such Net Proceeds in any manner it deems prudent, and as is consistent with the provisions of the Master Indenture summarized herein and with the Tax Exemption Agreement. In the event such Net Proceeds exceed 5% of the value of all of the net Property, Plant and Equipment of the Obligated Group, the Member in question shall within six months after the date on which the Net Proceeds are finally determined elect by written notice of such election to the Master Trustee one of the following three options, subject to the approval of the Master Trustee (which approval may not be unreasonably withheld):
(a) Option A—Repairs and Improvements. The Member may elect to use the Net Proceeds of the award for restoration or replacement of or repairs and improvements to the Facilities of the Obligated Group or the acquisition of additional Facilities for the Obligated Group or the repayment of Indebtedness incurred for any such purpose pending the receipt of such Net Proceeds.
(b) Option B—Prepayment of Obligations. Subject to the obligation of such Member under the Master Indenture, such Member may elect to have such Net Proceeds of the award applied to the prepayment of the Obligations. In such event such Member shall, in its notice of election to the Master Trustee, agree to apply such Net Proceeds, when and as received, to the prepayment of Obligations.
(c) Option C—Partial Restoration and Partial Prepayment of Obligations. Such Member may elect to have a portion of such Net Proceeds of the award applied to the repair, replacement, restoration and improvement of the Facilities of the Obligated Group or the acquisition of additional Facilities for the Obligated Group or the repayment of Indebtedness incurred for any such purpose pending the receipt of such Net Proceeds, with the remainder of such Net Proceeds to be applied to the prepayment of Obligations, in which event such Net Proceeds to be used for repair, replacement, restoration, improvement and acquisition shall be applied as set forth in subparagraph (a) above and such Net Proceeds to be used for prepayment of Obligations shall be applied as set forth in subparagraph (b) above.
The foregoing notwithstanding, no Member will be required to comply with these provisions to the extent that the Facilities condemned were pledged as security for Non-Recourse
C-47 Indebtedness incurred in accordance with the Master Indenture or Indebtedness secured by Liens in accordance with the Master Indenture and the documents pursuant to which such Indebtedness was issued require Net Proceeds to be applied in a manner inconsistent with these provisions.
OTHER COVENANTS OF THE MEMBERS
Each Member covenants to, among other things, (a) pay all taxes, levies, assessments and charges on account of the use, occupancy or operation of its Property and 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; provided that such Member has the right to contest any of the foregoing provided that no such contest shall subject the Master Trustee, any Obligation holder or any Related Issuer to the risk of any liability, and that the Member will save the Master Trustee, all Obligation holders, all Related Bond Trustees, and all Related Issuers harmless from and against all losses, judgments, decrees and costs as a result of such contest; (b) maintain, preserve and keep all of its Property and each part thereof in good condition, repair and working order, and make all necessary and proper repairs and replacements thereto; (c) procure and maintain all necessary licenses and permits and maintain the status of its health care Facilities (other than those not currently having such status or not having such status on the date a Person becomes a Member) as providers of health care services eligible for payment under those third-party programs which it determines are appropriate.
EVENTS OF DEFAULTS; ACCELERATION
The following events are “events of default” under the Master Indenture:
(a) failure of the Obligated Group to pay any installment of interest or principal, or any premium, on any Obligation when the same shall become due and payable, whether at maturity, upon any date fixed for prepayment or by acceleration or otherwise and the continuance of such failure for five days; or
(b) failure of any Member to comply with, observe or perform any of the covenants, conditions, agreements or provisions of the Master Indenture and to remedy such default within 30 days after written notice thereof to such Member and the Obligated Group Agent from the Master Trustee or the holders of at least 25% in aggregate principal amount of the outstanding Obligations (for this purpose, the principal amount of Capital Appreciation Indebtedness shall be deemed to be the Accreted Value thereof at the time of determination); provided, that if such default cannot with due diligence and dispatch be wholly cured within 30 days but can be wholly cured, the failure of the Member to remedy such default within such 30-day period shall not constitute a default under the Master Indenture if the Member 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-48 (c) any representation or warranty made by any Member in the Master Indenture or in any statement or certificate furnished to the Master Trustee or the purchaser of any Obligation in connection with the sale of any Obligation or furnished by any Member pursuant to the Master Indenture proves untrue in any material respect as of the date of the issuance or making thereof and shall not be corrected or brought into compliance within 30 days after written notice thereof to the Obligated Group Agent by the Master Trustee or the holders of at least 25% in aggregate principal amount of the outstanding Obligations (for this purpose, the principal amount of Capital Appreciation Indebtedness shall be deemed to be the Accreted Value thereof at the time of determination); or
(d) default in the payment of the principal of, premium, if any, or interest on any Indebtedness for borrowed money (other than Non-Recourse Indebtedness) of any Member, 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, and which default in payment or event of default entitles the holder thereof to declare or, in the case of any Obligation, to request that the Master Trustee declare, such Indebtedness due and payable 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 under the Master Indenture shall not constitute an “event of default” under the Master Indenture unless the unpaid principal amount of such Indebtedness, together with the unpaid principal amount of all other Indebtedness so in default, exceeds 2% of the unrestricted net assets of the Obligated Group as shown on or derived from the then latest available audited consolidated financial statements of the Obligated Group; or
(e) any judgment, writ or warrant of attachment or of any similar process shall be entered or filed against any Member or against any Property of any Member and remains unvacated, unpaid, unbonded, unstayed or uncontested in good faith for a period of 30 days; provided, however, that none of the foregoing shall constitute an event of default 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 2% of the unrestricted net assets of the Obligated Group as shown on or derived from the then latest available audited consolidated financial statements of the Obligated Group; or
(f) any 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, or for the major part of its Property; or
C-49 (g) a trustee, custodian or receiver is appointed for any Member or for the major part of its Property and is not discharged within 30 days after such appointment; or
(h) 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 Member (other than bankruptcy proceedings instituted by any Member against third parties), and if instituted against any Member are allowed against such Member or are consented to or are not dismissed, stayed or otherwise nullified within 60 days after such institution; or
(i) payment of any installment of interest or principal, or any premium, on any Related Bond shall not be made when the same shall become due and payable under the provisions of any Related Bond Indenture.
If an event of default has occurred and is continuing, the Master Trustee may, and if requested by either the holders of not less than 25% in aggregate principal amount of outstanding Obligations (for this purpose, the principal amount of Capital Appreciation Indebtedness shall be deemed to be the Accreted Value thereof at the time of determination) or the holder of any Accelerable Instrument under which Accelerable Instrument an event of default exists (which event of default permits the holder thereof to request that the Master Trustee declare such Indebtedness evidenced by an Obligation due and payable prior to the date on which it would otherwise become due and payable), shall, by notice in writing delivered to the Obligated Group Agent, declare the entire principal amount of all Obligations then outstanding under the Master Indenture and the interest accrued thereon immediately due and payable, and the entire principal and such interest shall thereupon become immediately due and payable, subject, however, to the provisions of the Master Indenture with respect to waivers of events of default which are summarized under the caption “Waiver of Events of Default” below.
REMEDIES; RIGHTS OF OBLIGATION HOLDERS
Upon the occurrence of any event of default under the Master Indenture, 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 of, premium, if any, and interest on the Obligations outstanding under the Master Indenture and any other sums due under the Master Indenture and may collect such sums in the manner provided by law out of the Property or the Excluded Property of any Member wherever situated.
If an event of default shall have occurred, and if it shall have been requested so to do by either the holders of 25% or more in aggregate principal amount of Obligations outstanding or the holder of an Accelerable Instrument upon whose request pursuant to the Master Indenture (for this purpose, the principal amount of Capital Appreciation Indebtedness shall be deemed to be the Accreted Value thereof at the time of determination) of the Master Indenture the Master Trustee has accelerated the Obligations and if it shall have been indemnified as provided in the Master Indenture, the Master Trustee shall be obligated to exercise such one or more of the rights and powers conferred by the Master Indenture as the Master Trustee shall deem most expedient
C-50 in the interests of the holders of 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 the Master Indenture conferred upon or reserved to the Master Trustee (or to the holders of 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 Obligations under the Master Indenture now or hereafter existing at law or in equity or by statute.
No delay or omission to exercise any right or power accruing upon any default or event of default shall impair any such right or power or shall be construed to be a waiver of any such default or event of default, or acquiescence therein; and every such right and power may be exercised from time to time and as often as may be deemed expedient.
No waiver of any default or event of default under the Master Indenture, whether by the Master Trustee or by the holders of Obligations, shall extend to or shall affect any subsequent default or event of default or shall impair any rights or remedies consequent thereon.
DIRECTION OF PROCEEDINGS
The holders of (i) a majority in aggregate principal amount of the Obligations then outstanding which have become due and payable in accordance with their terms or have been declared due and payable pursuant to the provisions of the Master Indenture described in the second full paragraph under the heading “Events of Default; Acceleration” above, and have not been paid in full in the case of remedies exercised to enforce such payment, or (ii) the holders of a majority in aggregate principal amount of the Obligations then outstanding (for this purpose, the principal amount of Capital Appreciation Indebtedness shall be deemed to be the Accreted Value thereof at the time of determination) 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 the Master Indenture or for the appointment of a receiver or any other proceedings under the Master Indenture; provided, that such direction shall not be otherwise than in accordance with the provisions of law and of the Master 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. Pending such direction from the holders of a majority in aggregate principal amount of the Obligations outstanding, such direction may be given in the same manner and with the same effect by the holder of an Accelerable Instrument upon whose request pursuant to the provisions of the Master Indenture described in the second full paragraph under the heading “Events of Default; Acceleration” above, the Master Trustee has accelerated the Obligations.
C-51 The foregoing notwithstanding, the holders of a majority in aggregate principal amount of the Obligations then outstanding which are entitled to the exclusive benefit of certain 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 the Master Indenture, the Supplemental Master Indenture or Indentures pursuant to which such Obligations were issued or so secured or any separate security document in order to realize on such security; provided, however, that such direction shall not be otherwise than in accordance with the provisions of law and of the Master Indenture.
WAIVER OF EVENTS OF DEFAULT
If, at any time after the principal of 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 provided in the Master Indenture and before the acceleration of any Related Bond, any Member shall pay or shall deposit with the Master Trustee a sum sufficient to pay all matured installments of interest upon all such Obligations and the principal and premium, if any, of 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 the Master Indenture, other than the nonpayment of principal of and accrued interest on 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 Obligations then outstanding and the holder of each Accelerable Instrument who requested the giving of notice of acceleration, by written notice to the Obligated 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.
SUPPLEMENTAL MASTER INDENTURES
Subject to the limitations set forth in the next paragraph, the Members and the Master Trustee may, without the consent of or notice to any of the Obligation holders, amend or supplement the Master Indenture for any one or more of the following purposes: (a) to cure any ambiguity or defective provision in or omission from the Master Indenture in such manner as is not inconsistent with and does not impair the security of the Master 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 for the benefit of the Obligation holders or to surrender any right or power conferred under the Master Indenture upon any Member; (c) to assign and pledge under the Master Indenture any additional revenues, properties or collateral; (d) to evidence the succession of another corporation to the agreements of a Member or the Master Trustee, or the successor of any thereof under the Master Indenture; (e) to permit the qualification of the Master
C-52 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; (g) to provide for the issuance of Additional Obligations; (h) to reflect the addition to or withdrawal of a Member from the Obligated Group; (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 which is not extended to all Obligation holders subject to compliance with the terms of the Master Indenture; (k) to permit the issuance of Obligations which are not in the form of a promissory note; (l) to make any other change which, in the opinion of the Master Trustee, does not materially adversely affect the holders of any of the Obligations and, in the opinion of each Related Bond Trustee, does not materially adversely affect the holders of the Related Bonds with respect to which it acts as trustee, including without limitation any modification, amendment or supplement to the Master Indenture or any indenture supplemental thereto in such a manner as to establish or maintain exemption of interest on any Related Bonds under a Related Bond Indenture from federal income taxation under applicable provisions of the Code; and (m) to add to the description of real Property contained in Exhibit A to the Master Indenture or the description of Excluded Property contained in Exhibit B to the Master Indenture or to delete from the description of real Property contained in Exhibit A to the Master Indenture or the description of Excluded Property contained in Exhibit B to the Master Indenture, but solely as permitted under the terms of the Master Indenture.
In addition to supplemental master indentures described above and subject to the terms and provisions contained in the provisions of the Master Indenture summarized under this caption, and not otherwise, the holders of not less than 51% in aggregate principal amount of the Obligations which are outstanding under the Master Indenture at the time of the execution of such Supplemental Master Indenture or, in the case less than all of the several series of Obligations are affected thereby, the holders of not less than 51% in aggregate principal amount of the Obligations of each series affected thereby which are outstanding under the Master Indenture at the time of the execution of such supplemental master indenture (for this purpose, the principal amount of Capital Appreciation Indebtedness shall be deemed to be the Accreted Value thereof at the time of determination), shall have the right, from time to time, anything contained in the Master Indenture to the contrary notwithstanding, to consent to and approve the execution by the Members and the Master Trustee of such Supplemental Master Indentures as shall be deemed necessary and desirable by the Members for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in the Master Indenture or in any other Supplemental Master Indenture; provided, however, that nothing contained in the Master Indenture shall permit, or be construed as permitting, (a) an extension of the stated maturity or reduction in the principal 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 amount of Obligations the holders of which are required to consent to any such Supplemental Master Indenture, without the consent of the holders of all the Obligations at the time outstanding which would be affected by the action to be taken, or (c) modification of the rights, duties or immunities of the Master Trustee, without the written consent of the Master Trustee.
C-53 RIGHT TO CONSENT
Each Member shall have the right to agree in any Related Bond Indenture, Related Loan Document or Supplemental Master 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 the Master Indenture which provide for approval, consent direction or appointment by the Master Trustee, provide that anything must be satisfactory or acceptable to the Master Trustee, allow the Master Trustee to request anything or contain similar provisions granting discretion to the Master Trustee shall be deemed to 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 or the Related Bond Trustee, or any one thereof, and that all items required to be delivered or addressed to the Master Trustee under the Master Indenture shall also be delivered or addressed to the Related Issuer, such Related Bond Trustee, or any one thereof, unless waived thereby. If a Member enters into any such agreements in a Related Bond Indenture, Related Loan Document or Supplemental Master Indenture, such agreements shall be deemed to be included in the Master Indenture as if set forth in the Master Indenture.
SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE
The Bond Indenture contains various covenants, security provisions, terms and conditions, certain of which are summarized below. Reference is made to the Bond Indenture for a full and complete statement of its provisions.
BOND INDENTURE FUNDS AND DISPOSITION OF REVENUES
1. Revenue Fund. The Authority shall establish with the Bond Trustee and maintain so long as any of the Series 2017 Bonds are outstanding a separate account to be known as the “REVENUE FUND—Regional Health” (the “Revenue Fund”). All payments upon the Series 2017 Obligation pledged under the Bond Indenture and all payments under the Loan Agreement (other than payments made in connection with Unassigned Rights), and all transfers from the Rebate Fund, as and when received by the Bond Trustee, shall be deposited in the Revenue Fund and shall be held therein until disbursed as provided below.
2. Interest Fund. The Authority shall establish with the Bond Trustee and maintain so long as any of the Series 2017 Bonds are outstanding a separate account to be known as the “INTEREST FUND—Regional Health” (the “Interest Fund”). On or before the Business Day prior to each Interest Payment Date, the Bond Trustee shall deposit in the Interest Fund from moneys on deposit in the Revenue Fund an amount which is equal to the amount of the interest to become due on the next succeeding Interest Payment Date for the Series 2017 Bonds.
Moneys on deposit in the Interest Fund, other than income earned thereon which is to be transferred to other funds created under the Bond Indenture or to the Rebate Fund, must be used to pay interest on the Series 2017 Bonds as it becomes due.
C-54 3. Bond Sinking Fund. The Authority shall establish with the Bond Trustee and maintain so long as any of the Series 2017 Bonds are outstanding a separate account to be known as the “BOND SINKING FUND—Regional Health” (the “Bond Sinking Fund”). On or before the Business Day prior to each September 1, commencing September 1, 20__, after making the deposits required by the Bond Indenture described in the provisions of the Bond Indenture summarized under the caption “SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE— Bond Indenture Funds and Disposition of Revenues—2. Interest Fund” above, the Bond Trustee shall deposit in the Bond Sinking Fund from moneys in the Revenue Fund an amount which is not less than principal of the Series 2017 Bonds next becoming due by maturity.
Moneys on deposit in the Bond Sinking Fund, other than income earned thereon which is to be transferred to other funds created under the Bond Indenture or to the Rebate Fund, shall be applied by the Bond Trustee to pay principal on the Series 2017 Bonds as it becomes due.
4. Optional Redemption Fund. The Authority shall establish with the Bond Trustee and maintain so long as any of the Series 2017 Bonds are outstanding a separate account to be known as the “OPTIONAL REDEMPTION FUND—Regional Health” (the “Optional Redemption Fund”). In the event of (a) prepayment by or on behalf of the Corporation of amounts payable on the Series 2017 Obligation pledged under the Bond Indenture, including prepayment with condemnation, sale or insurance proceeds, or (b) deposit with the Bond Trustee by the Corporation or the Authority of moneys from any other source for redeeming Series 2017 Bonds, except as otherwise provided in the Bond Indenture, such moneys shall be deposited in the Optional Redemption Fund.
Moneys on deposit in the Optional Redemption Fund shall be used first, to make up any deficiencies existing in the Interest Fund and the Bond Sinking Fund (in the order listed) and second for the redemption or purchase of the Series 2017 Bonds in accordance with the provisions of the Bond Indenture.
5. Expense Fund. The Authority shall establish with the Bond Trustee a separate account to be known as the “EXPENSE FUND—Regional Health” (the “Expense Fund”). A deposit to the credit of the Expense Fund will be made under the provisions of the Bond Indenture. Amounts on deposit in the Expense Fund shall be disbursed upon the Written Request of the Corporation for the payment of expense for any recording, Bond Trustee’s, Master Trustee’s and depository’s fees and expenses, accounting and legal fees, financing costs (including costs of acquiring investments for the funds and escrows), and other fees and expenses incurred or to be incurred by or on behalf of the Authority or the Corporation in connection with or incident to the issuance and sale of the Series 2017 Bonds. At such time as the Bond Trustee is furnished with a Written Request stating that all such fees and expenses have been paid, and in no event later than September __, 2017, the Bond Trustee shall transfer any moneys remaining in the Expense Fund to the Project Fund.
6. Project Fund. The Authority shall establish with the Bond Trustee a separate account to be known as the “PROJECT FUND—Regional Health” (the “Project Fund”). An initial deposit to the credit of the Project Fund shall be made from the proceeds of the Series 2017 Bonds. Any moneys received by the Bond Trustee from any source for the Project shall be
C-55 deposited in the Project Fund unless otherwise specifically excepted under the Bond Indenture or unless contrary provisions are made in the Loan Agreement. The moneys in the Project Fund shall be held in trust by the Bond Trustee, shall be applied to the payment of the costs of the Project, and pending such application, shall be held as trust funds under the Bond Indenture in favor of the holders of the outstanding Series 2017 Bonds and for the further security of such holders until paid out or transferred as provided in the Bond Indenture.
If after payment by the Bond Trustee of all orders theretofore tendered to the Bond Trustee under the provisions of the Bond Indenture and after receipt by the Bond Trustee of the certificates and other documents mentioned in the Bond Indenture there shall remain any moneys in the Project Fund, the Corporation may elect (i) to retain all or a portion of such moneys in the Project Fund until September __, 2020 and withdraw such moneys in accordance with the provisions of the Bond Indenture to pay or reimburse the Corporation for payment of the “cost” of an additional “project” or “projects” (as such terms are defined in the Act) if the Corporation complies with the provisions of the Loan Agreement relating to changes in or amendments to the Project Documents, or (ii) to instruct the Bond Trustee to deposit such moneys in the Interest Fund to the extent necessary to make the next interest payment therefrom, then in the Bond Sinking Fund to the extent necessary to make the next payment therefrom so long as the next principal payment is required to be made within 13 months from the date of deposit therein and then to the Optional Redemption Fund. The foregoing notwithstanding, amounts remaining in the Project Fund after completion of the Project as described above which are attributable to investment earnings may be transferred to the Rebate Fund (as defined in the Tax Exemption Agreement) upon the written request of the Corporation.
INVESTMENT OF FUNDS
Upon telephonic instructions promptly followed by a Written Request of the Corporation filed with the Bond Trustee, moneys in the Revenue Fund, Interest Fund, Bond Sinking Fund, Project Fund, Expense Fund and Optional Redemption Fund shall be invested in Qualified Investments. If the Corporation fails to file such a Written Request with the Bond Trustee, moneys in such funds shall be invested in Government Obligations maturing not more than 14 days after the date such investment is made. Such investments shall be made so as to mature on or prior to the date or dates that moneys therefrom are anticipated to be required. The Bond Trustee, when authorized by the Corporation, may trade with itself in the purchase and sale of securities for such investment; provided, however, that in no case shall investments be otherwise than in accordance with the investment limitations contained in the Bond Indenture and in the Tax Exemption Agreement. The Bond Trustee shall not be liable or responsible for any loss resulting from any such investments.
During the period that the Project or any other project being constructed, remodeled, renovated, equipped or acquired from Series 2017 Obligation or Series 2017 Bond proceeds is in progress and until the Project or such other project is substantially completed as evidenced as provided in the Bond Indenture, investment income from the funds specified above in excess of the requirements of such funds which was derived from the proceeds of the Series 2017 Bonds or such project or from moneys otherwise deposited in such funds in connection with the issuance
C-56 of such Series 2017 Bonds shall be deposited into the Project Fund or any other project or acquisition fund established for such project.
Except as provided in the provisions of the Bond Indenture summarized in the previous paragraph, all income in excess of the requirements of the funds specified in the provisions of the Bond Indenture summarized in the first paragraph of this caption derived from the investment of moneys on deposit in any such funds shall be deposited in the following funds, in the order listed:
(i) the Interest Fund and the Bond Sinking Fund (in that order) to the extent, with respect to the Bond Sinking Fund, of the amount required to be deposited in the Bond Sinking Fund to make the next required principal payment on the Series 2017 Bonds occurring within one year of the date of deposit, and to the extent, with respect to the Interest Fund, of the amount required to be deposited in the Interest Fund necessary to make the next two interest payments on the Series 2017 Bonds; and
(ii) the balance, if any, in the Optional Redemption Fund.
ARBITRAGE
The Authority covenants and agrees that it will not take any action or fail to take any action with respect to the investment of the proceeds of any Series 2017 Bonds issued under the Bond Indenture or with respect to the payments derived from the Series 2017 Obligation pledged under the Bond Indenture and under the Loan Agreement or any other moneys regardless of source or where held which may, notwithstanding compliance with the other provisions of the Bond Indenture, the Loan Agreement and the Tax Exemption Agreement, result in constituting the Series 2017 Bonds “arbitrage bonds” within the meaning of such term as used in Section 148 of the Code. The Authority further covenants and agrees that it will comply with and take all actions required by the Tax Exemption Agreement.
RIGHTS UNDER THE LOAN AGREEMENT
The Authority agrees that the Bond Trustee in its own name or in the name of the Authority may enforce all rights of the Authority and all obligations of the Corporation under and pursuant to the Loan Agreement and all obligations of the Corporation under the Series 2017 Obligation pledged under the Bond Indenture for and on behalf of the Bondholders (except for Unassigned Rights), whether or not the Authority is in default thereunder.
SUPPLEMENTAL BOND INDENTURES
Subject to the limitation set forth in the Bond Indenture and summarized below in the third paragraph of this caption, the Authority and the Bond Trustee may, but without the consent of, or notice to, any of the Bondholders, enter into an indenture or indentures supplemental to the Bond Indenture, as shall not be inconsistent with the terms and provisions of the Bond Indenture, for any one or more of the following purposes: (a) to cure any ambiguity or formal defect or
C-57 omission in the Bond Indenture; (b) to grant to or confer upon the Bond Trustee for the benefit of the Bondholders any additional rights, remedies, powers or authority that may lawfully be granted to or conferred upon the Bondholders and the Bond Trustee, or either of them; (c) to assign and pledge under the Bond Indenture additional revenues, properties or collateral; (d) to evidence the appointment of a separate trustee or the succession of a new trustee under the Bond Indenture; (e) to permit the qualification of the Bond Indenture under the Trust Indenture Act of 1939, as then amended, or any similar federal statute hereafter in effect or to permit the qualification of the Series 2017 Bonds for sale under the securities laws of any state of the United States of America; (f) to permit the issuance of coupon bonds under the Bond Indenture and to permit the exchange of Series 2017 Bonds from registered form to coupon form and vice versa; (g) to provide for the refunding or advance refunding of any Series 2017 Bonds; (h) to permit continued compliance with the Tax Exemption Agreement; (i) to make any amendments to the definition of “Qualified Investments” in the Bond Indenture to reflect amendments to the Act; and (j) to make any other change that, in the judgment of the Bond Trustee, does not materially adversely affect the rights of any Bondholders or the Bond Trustee.
The Authority and the Bond Trustee may not enter into an indenture supplemental to the Bond Indenture pursuant to the provisions of the Bond Indenture summarized under (f) of the previous paragraph unless they shall have received an Opinion of Bond Counsel to the effect that the issuance of coupon Series 2017 Bonds will not adversely affect the validity of such Series 2017 Bonds or any exemption from federal income tax of the interest paid on any Series 2017 Bonds to which such Series 2017 Bonds would otherwise be entitled.
In addition to supplemental indentures covered above and subject to the terms and provisions described below, and not otherwise, the owners of not less than 51% in aggregate principal amount of the Series 2017 Bonds which are outstanding under the Bond Indenture at the time of the execution of such indenture or supplemental indenture, shall have the right, from time to time, anything contained in the Bond Indenture to the contrary notwithstanding, to consent to and approve the execution by the Authority and the Bond Trustee of such indenture or indentures supplemental to the Bond Indenture as shall be deemed necessary and desirable by the Authority for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in the Bond Indenture or in any supplemental indenture; provided, however, that nothing in the provisions of the Bond Indenture summarized under this caption shall permit, or be construed as permitting, a supplemental indenture to effect: (a) an extension of the stated maturity or reduction in the principal 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 Series 2017 Bonds, without the consent of the holders of such Series 2017 Bonds; (b) a reduction in the amount or extension of the time of any payment required to be made to or from the Interest Fund or the Bond Sinking Fund; (c) the creation of any lien prior to or on a parity with the lien of the Bond Indenture without the consent of the holders of all the Series 2017 Bonds at the time outstanding; (d) a reduction in the aforesaid aggregate principal amount of Series 2017 Bonds the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of all the Series 2017 Bonds at the time outstanding which would be affected by the action to be taken; or (e) a modification of the rights, duties or immunities of the Bond Trustee, without the written consent of the Bond Trustee.
C-58 If at any time the Authority shall request the Bond Trustee to enter into any such supplemental indenture for any of the purposes summarized in the previous paragraph, the Bond Trustee shall, upon being satisfactorily indemnified with respect to expenses, cause notice of the proposed execution of such supplemental indenture to be mailed to each holder of Series 2017 Bonds as shown on the Bond Register. Such notice shall briefly set forth the nature of the proposed supplemental indenture and shall state that copies thereof are on file at the principal corporate trust office of the Bond Trustee for inspection by all Bondholders. The Bond Trustee shall not, however, be subject to any liability to any Bondholder 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 the provisions of the Bond Indenture summarized under this caption. If the owners of the requisite principal amount of Series 2017 Bonds which are outstanding under the Bond Indenture at the time of the execution of any such supplemental indenture shall have consented to and approved the execution thereof as provided under the Bond Indenture, no holder of any Series 2017 Bond 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 Bond Trustee or the Authority from executing the same or from taking any action pursuant to the provisions thereof. Upon the execution of any such supplemental indenture as permitted and provided in the provisions of the Bond Indenture summarized under this caption, the Bond Indenture will be and be deemed to be modified and amended in accordance therewith.
RELEASE AND SUBSTITUTION OF SERIES 2017 OBLIGATION
The Bond Trustee will surrender the Series 2017 Obligation upon presentation to the Bond Trustee prior to such surrender of the following:
(A) a copy of an original executed counterpart of a master indenture (the “Replacement Master Indenture”) executed by or on behalf of a different credit group (collectively, the “New Group”) and an independent corporate trustee (the “Replacement Trustee”);
(B) an original replacement note or similar obligation issued by or on behalf of the New Group (the “Substitute Note”) under and pursuant to and secured by the Replacement Master Indenture, which Substitute Note has been duly authenticated by the Replacement Trustee;
(C) an opinion of counsel addressed to the Bond Trustee to the effect that: (1) the Replacement Master Indenture has been duly authorized, executed and delivered by or on behalf of the New Group, the Substitute Note has been duly authorized, executed and delivered by or on behalf of the New Group and the Replacement Master Indenture and the Substitute Note are each a legal, valid and binding obligation of the New Group, subject in each case to customary exceptions for bankruptcy, insolvency and other laws generally affecting enforcement of creditors’ rights and application of general principles of equity and to customary qualifications with respect to the joint and several obligations of the members of the New Group to make payments of debt service on the Substitute Note; (2) all requirements and conditions to the issuance of the Substitute Note
C-59 set forth in the Replacement Master Indenture have been complied with and satisfied; and (3) registration of the Substitute Note under the Securities Act of 1933, as amended, is not required or, if registration is required, the Substitute Note has been so registered;
(D) an opinion of Bond Counsel that the surrender of the existing Series 2017 Obligation and the delivery of the Substitute Note will not adversely affect the validity of any Series 2017 Bonds or any exemption for the purposes of federal income taxation to which interest on any Series 2017 Bonds would otherwise be entitled; and
(E) written notice from each Rating Agency then maintaining a rating on any Series 2017 Bonds confirming that the rating on such Series 2017 Bonds will not be lowered or withdrawn from the rating (without taking into account any refinement or gradation of rating category by numerical modifier or otherwise, and without regard to any rating outlooks) in effect prior to the substitution; provided that in connection with the request for a review of the ratings on such Series 2017 Bonds, each Rating Agency is provided a copy of the Replacement Master Indenture and such information as such Rating Agency may request with respect to the operations and financial condition of the New Group.
In connection with the delivery of a Replacement Master Indenture and the substitution of the outstanding Series 2017 Obligation with the Substitute Note, the provisions of the Bond Indenture summarized under this caption shall not permit, or be construed as permitting, (i) a change in the times, amounts or currency of payment of the principal of, premium, if any, and interest on any obligation or the Series 2017 Bonds, (ii) a reduction in the principal amount of any obligation or the Series 2017 Bonds, (iii) a change in the redemption premiums or rates of interest on any obligation or the Series 2017 Bonds, or (iv) a preference or priority of any Obligation over any other Obligation, unless the Bond Trustee receives the prior written consent of the Holders of each Series 2017 Bond so affected.
EVENTS OF DEFAULT
An “event of default” exists under the Bond Indenture in the event that:
(a) payment of any installment of interest payable on any of the Series 2017 Bonds shall not be made by the Authority when the same shall become due and payable; or
(b) payment of the principal of or the premium, if any, payable on any of the Series 2017 Bonds shall not be made by the Authority when the same shall become due and payable, either at maturity, by proceedings for redemption, upon acceleration, through failure to make any payment to any fund under the Bond Indenture or otherwise; or
(c) the Authority shall for any reason be rendered incapable of fulfilling its obligations under the Bond Indenture; or
C-60 (d) an order or decree shall be entered, appointing a receiver, receivers, custodian or custodians for any of the revenues of the Authority, or approving a petition filed against the Authority seeking reorganization of the Authority under the federal bankruptcy laws or any other similar law or statute of the United States of America or any state thereof, or if any such order or decree, having been entered without the consent or acquiescence of the Authority, shall not be vacated or discharged or stayed on appeal within 60 days after the entry thereof; or
(e) any proceeding shall be instituted, with the consent or acquiescence of the Authority, or any plan shall be entered into by the Authority, for the purpose of effecting a composition between the Authority and its creditors or for the purpose of adjusting the claims of such creditors pursuant to any federal or state statute now or hereafter enacted, if the claims of such creditors are under any circumstances payable from any part or all of the trust estate, including the revenues and other moneys derived by the Authority under the Series 2017 Obligation pledged under the Bond Indenture or the Loan Agreement; or
(f) the Authority (1) files a petition in bankruptcy or under Title 11 of the United States Code, as amended, (2) makes an assignment for the benefit of its creditors, (3) consents to the appointment of a receiver, custodian or trustee for itself or for the whole or any part of the trust estate, including the revenues and other moneys derived by the Authority under the Series 2017 Obligation pledged under the Bond Indenture or the Loan Agreement, or (4) is generally not paying its debts as such debts become due; or
(g) (1) the Authority is adjudged insolvent by a court of competent jurisdiction, (2) on a petition in bankruptcy filed against the Authority it is adjudged as bankrupt, or (3) an order, judgment or decree is entered by any court of competent jurisdiction appointing, without the consent of the Authority, a receiver, custodian or trustee of the Authority or of the whole or any part of its property and any of the aforesaid adjudications, orders, judgments or decrees shall not be vacated or set aside or stayed within 60 days from the date of entry thereof; or
(h) the Authority shall file a petition or answer seeking reorganization or any arrangement under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any state thereof; or
(i) under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of the Authority or of the whole or any substantial part of its property, and such custody or control shall not be terminated within 30 days from the date of assumption of such custody or control; or
(j) any event of default as set forth in the Loan Agreement as summarized herein under the caption “SUMMARY OF CERTAIN PROVISIONS OF THE LOAN AGREEMENT—Defaults and Remedies” below or in the Master Indenture as summarized herein under the caption “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE—Defaults and Remedies” above shall occur and be continuing from and after the date the Authority is entitled to request that the Master Trustee declare the Series
C-61 2017 Obligation pledged under the Bond Indenture to be immediately due and payable or the date on which the Master Trustee is entitled under the Master Indenture to declare any Obligation immediately due and payable, or the Master Trustee shall declare any Obligation immediately due and payable; or
(k) the Authority shall default in the due and punctual performance of any other of the covenants, conditions, agreements and provisions contained in the Series 2017 Bonds or in the Bond Indenture or any indenture supplemental thereto to be performed on the part of the Authority, and such default shall continue for the period of 30 days after written notice specifying such default and requiring the same to be remedied shall have been given to the Authority and the Corporation by the Bond Trustee; or
(l) the Authority, the Corporation or the Bond Trustee shall default in the performance of any covenant, condition, agreement or provision of the Tax Exemption Agreement, and such default shall continue for the period of 30 days after written notice specifying such default and requiring the same to be remedied shall have been given to the party in default and the Corporation by the other party; or
(m) the default by the Corporation in the performance of its covenant in the Loan Agreement relating to the discharge, vacation, bonding or stay of any order, writ or warrant of attachment, garnishment, execution, replevin or similar process filed against any part of the funds or accounts held by the Bond Trustee under the Bond Indenture, such default being an “event of default” specified in the Loan Agreement as summarized in subsection (f) under the caption “SUMMARY OF CERTAIN PROVISIONS OF THE LOAN AGREEMENT—Default and Remedies” below.
Upon the happening of any event of default specified in paragraphs (c) through (m) above and the continuance of the same for the period, if any, specified in said paragraphs, the Bond Trustee may, without any action on the part of the Bondholders, and upon the happening and continuance of any such event of default and the receipt of the written request of the owners of not less than 25% in aggregate principal amount of the Series 2017 Bonds then outstanding under the Bond Indenture (exclusive of Series 2017 Bonds then owned by the Authority or the Corporation), and upon being indemnified to its satisfaction, or upon the happening of an event of default specified in paragraphs (a) or (b) above, the Bond Trustee shall, by notice in writing delivered to the Authority, declare the entire principal amount of the Series 2017 Bonds then outstanding under the Bond Indenture and the interest accrued thereon, immediately due and payable, and the entire principal and interest shall thereupon become and be immediately due and payable, subject, however, to the provisions of the Bond Indenture with respect to waivers of events of default summarized below under the caption “SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE—Waivers of Events of Default” below.
C-62 REMEDIES; RIGHTS OF BONDHOLDERS
Upon the occurrence of any event of default, the Bond Trustee may pursue any available remedy, including a suit at law or in equity to enforce the payment of the principal of, premium, if any, and interest on the Series 2017 Bonds outstanding under the Bond Indenture.
If an event of default shall have occurred, and if the Bond Trustee shall have been requested in writing to do so by the owners of not less than 25% in aggregate principal amount of Series 2017 Bonds then outstanding and the Bond Trustee shall have been indemnified as provided under the Bond Indenture, the Bond Trustee shall be obligated to exercise such one or more of the rights and powers conferred by the provisions of the Bond Indenture summarized under this caption as the Bond Trustee shall deem most expedient in the interests of the owners of Series 2017 Bonds; provided, however, that the Bond Trustee shall have the right to decline to comply with any such request or direction if the Bond Trustee shall be advised by counsel (who may be its own counsel) that the action so requested may not lawfully be taken or the Bond Trustee in good faith shall determine that such action may be unjustly prejudicial to the holders of Series 2017 Bonds not parties to such request.
No remedy by the terms of the Bond Indenture conferred upon or reserved to the Bond Trustee (or to the owners of Series 2017 Bonds) 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 Bond Trustee or to the owners of the Series 2017 Bonds under the Bond Indenture now or hereafter existing at law or in equity or by statute.
No delay or omission to exercise any right or power accruing upon any default or event of default shall impair any such right or power or shall be construed to be a waiver of any such default or event of default, or acquiescence therein; and every such right and power may be exercised from time to time and as often as may be deemed expedient.
No waiver of any default or event of default under the Bond Indenture, whether by the Bond Trustee or by the owners of Series 2017 Bonds, shall extend to or shall affect any subsequent default or event of default or shall impair any rights or remedies consequent thereon.
DIRECTION OF PROCEEDINGS
The owners of a majority in aggregate principal amount of Series 2017 Bonds then outstanding shall have the right, at any time, by an instrument or instruments in writing executed and delivered to the Bond Trustee, to direct the method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of the Bond Indenture, including the enforcement of the rights of the Authority under the Loan Agreement or the appointment of a receiver or any other proceedings under the Bond Indenture; provided, that such direction shall not be otherwise than in accordance with the provisions of law and of the Bond Indenture.
C-63 APPLICATION OF MONEYS
All moneys received by the Bond Trustee pursuant to any right given or action taken under the provisions of the Bond Indenture relating to events of default shall be deposited in the Revenue Fund and, together with all other moneys in the funds maintained by the Bond Trustee under the Bond Indenture shall, after payment of the cost and expenses of the proceedings resulting in the collection of such moneys and of the fees of, and the expenses, liabilities and advances incurred or made by, the Bond Trustee and the Master Trustee, including those of its counsel, whether regularly employed or specially retained, to the extent related thereto, be applied as follows:
Unless the principal of all the Series 2017 Bonds shall have become or shall have been declared due and payable, all such moneys shall be applied in the following order: (i) first, to the payment of amounts, if any, payable pursuant to the Tax Exemption Agreement; (ii) second, to the payment to the Persons entitled thereto of all installments of interest then due on the Series 2017 Bonds, 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 privilege; (iii) third, to the payment to the Persons entitled thereto of the unpaid principal of any of the Series 2017 Bonds which shall have become due (other than Series 2017 Bonds called for redemption for the payment of which moneys are held pursuant to the provisions of the Bond Indenture), in the order of their due dates, and, if the amount available shall not be sufficient to pay in full Series 2017 Bonds due on any particular date, then to the payment ratably, according to the amount of principal due on such date, to the Persons entitled thereto without any discrimination or privilege; and (iv) fourth, to the payment to the Persons entitled thereto of unpaid principal and interest due and owing on any Series 2017 Bonds, the payment of principal and interest of which has been extended in the manner described in the Bond Indenture.
If the principal of all the Series 2017 Bonds shall have become due or shall have been declared due and payable, all such moneys shall be applied in the following order: (i) first, to the payment of amounts, if any, payable pursuant to the Tax Exemption Agreement; (ii) second, to the payment of the principal and interest then due and unpaid upon the Series 2017 Bonds, without preference or priority of principal or interest over the other, or of any installment of interest over any other installment of interest, or of any Series 2017 Bond over any other Series 2017 Bond, ratably, according to the amounts due respectively for principal and interest, to the Persons entitled thereto without any discrimination or privilege; and (iii) third, to the payment of the principal and interest then due and unpaid upon Series 2017 Bonds with respect to which the payment of principal and interest has been extended as described in the Bond Indenture.
If the principal of all the Series 2017 Bonds shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled under the provisions of the Bond Indenture relating to events of default, then, subject to the provisions of the above paragraph in the event that the principal of all the Series 2017 Bonds shall later become due or be declared due and payable, the moneys shall be applied in accordance with the provisions of the first paragraph of the provisions of the Bond Indenture summarized under this caption.
C-64 Whenever moneys are to be applied by the Bond Trustee pursuant to the provisions of the Bond Indenture summarized under this caption, such moneys shall be applied by it at such times, and from time to time, as the Bond Trustee shall determine, having due regard for the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Bond Trustee shall apply such moneys, it shall fix the date (which shall be an Interest Payment Date unless it shall deem another date more suitable, or, with respect to payments of Defaulted Interest, shall be such date as is required by the Bond Indenture) upon which such application is to be made and upon such date interest on the amounts of principal to be paid on such dates shall cease to accrue. The Bond Trustee shall give such notice as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date and of the Special Record Date by mailing a copy of such notice by first class mail to the registered owners of the Series 2017 Bonds, at least 15 days prior to the Special Record Date. The Bond Trustee shall not be required to make payment to the owner of any Series 2017 Bond until such Series 2017 Bond shall be presented to the Bond Trustee for appropriate endorsement or for cancellation if fully paid.
WAIVERS OF EVENTS OF DEFAULT
The Bond Trustee may in its discretion waive any event of default under the Bond Indenture and its consequences and rescind any declaration of maturity of principal, and shall do so upon being indemnified to its satisfaction and upon receipt of the written consent of the owners of (1) at least 51% in aggregate principal amount of all the Series 2017 Bonds outstanding in respect of which default in the payment of principal and/or interest exists, or (2) at least 51% in aggregate principal amount of all the Series 2017 Bonds outstanding in the case of any other event of default; provided, however, that there shall not be waived (a) any event of default in the payment of the principal of any outstanding Series 2017 Bonds when due at the dates of maturity specified therein other than principal due upon an acceleration of the Series 2017 Bonds or (b) any default in the payment, other than accrued interest due solely as a result of an acceleration of the Series 2017 Bonds, when due of the interest on any such Series 2017 Bonds, unless prior to such waiver or rescission all arrears of interest, with interest thereon (to the extent permitted by law) at the rate borne by the Series 2017 Bonds in respect of which such default shall have occurred on overdue installments of interest or all arrears of payments of principal when due, as the case may be, and all fees and expenses of the Bond Trustee and any Paying Agent in connection with such default, including without limitation fees of their counsel, shall have been paid or provided for. In case of any such waiver or rescission or in case any proceeding taken by the Bond Trustee on account of any such default shall have been discontinued or abandoned or determined adversely, then and in every such case the Authority, the Bond Trustee and the Bondholders shall, subject to any determination in such proceeding, be restored to their former positions and rights under the Bond Indenture respectively, but no such waiver or rescission shall extend to any subsequent or other default, or impair any right consequent thereon.
C-65 BOND TRUSTEE AS HOLDER OF SERIES 2017 OBLIGATION
The Bond Trustee, unless it elects to the contrary by a notice in writing delivered to the Master Trustee, shall be considered the holder of the Series 2017 Obligation for the purpose of giving certain consents and approvals under the Master Indenture.
REMOVAL OF THE BOND TRUSTEE
The Bond Trustee may be removed at any time by an instrument or concurrent instruments in writing delivered to the Bond Trustee and to the Authority, and signed by the owners of a majority in aggregate principal amount of Series 2017 Bonds then outstanding. So long as no event of default has occurred and is continuing under the Bond Indenture or the Loan Agreement, the Bond Trustee may be removed for cause at any time by an instrument or concurrent instruments in writing signed by the Authority, consented to by the Corporation and delivered to the Bond Trustee. The Bond Trustee shall continue to act as Bond Trustee under the Bond Indenture and have the right to proceed to cure any gross negligence, willful misconduct or failure or unwillingness to perform its duties (any of which shall be deemed to constitute “cause” as such term is used in this paragraph), for a period of two (2) weeks. If such cure is not effected within such period, the Bond Trustee’s functions under the Bond Indenture will be terminated immediately upon the appointment of a successor Bond Trustee in accordance with the provisions of the Bond Indenture. Notice of any such removal shall be mailed to the owners of all such Series 2017 Bonds then outstanding at the address of such owners then shown on the Bond Register.
DEFEASANCE; BONDS DEEMED PAID
If the Authority shall pay or provide for the payment of the entire indebtedness on all Series 2017 Bonds 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 all Series 2017 Bonds outstanding, as and when the same become due and payable;
(b) by depositing with the Bond Trustee, in trust, at or before maturity, moneys in an amount which the Bond Trustee shall determine (which determination may be based upon a verification report delivered by a nationally recognized independent certified public accountant or firm of nationally recognized independent certified public accountants) is sufficient to pay or redeem (when redeemable) all Series 2017 Bonds outstanding, including the payment of premium, if any, and interest payable on such Series 2017 Bonds to the maturity or redemption date thereof, provided that such moneys, if invested, shall be invested in Government Obligations 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 Series 2017 Bonds outstanding at or before their respective maturity dates; it being understood that the investment income on such Government Obligations may be used for any other purpose under the Act;
C-66 (c) by delivering to the Bond Trustee, for cancellation by it, all Series 2017 Bonds outstanding; or
(d) by depositing with the Bond Trustee, in trust, cash or Government Obligations in an amount which the Bond Trustee shall determine (which determination may be based upon a verification report delivered by a nationally recognized independent certified public accountant or firm of nationally recognized independent certified public accountants) will be sufficient, together with the income or increment to accrue thereon, without consideration of any reinvestment thereof, and any uninvested cash, to pay or redeem (when redeemable) and discharge the indebtedness on all Series 2017 Bonds outstanding at or before their respective maturity dates;
and if the Authority shall pay or cause to be paid all other sums payable under the Bond Indenture by the Authority, the Bond Indenture and the estate and rights granted thereunder shall cease, determine, and become null and void, and thereupon the Bond Trustee shall, upon Written Request of the Authority, and upon receipt by the Bond Trustee of an Officer’s Certificate and an opinion of Counsel, each stating that in the opinion of the signers all conditions precedent to the satisfaction and discharge of the Bond Indenture have been complied with, forthwith execute proper instruments acknowledging satisfaction of and discharging the Bond Indenture and the lien thereof and cancel the Obligations pledged under the Bond Indenture and return the same to the Master Trustee. The satisfaction and discharge of the Bond Indenture shall be without prejudice to the rights of the Bond Trustee to charge and be reimbursed by the Authority and the Corporation for any fees and expenditures which it may thereafter incur in connection therewith.
Any moneys, funds, securities, or other property remaining on deposit in the Expense Fund, Project Fund, Revenue Fund, Interest Fund, Bond Sinking Fund, Optional Redemption Fund or in any other fund or investment under the Bond Indenture (other than said Government Obligations or other moneys deposited in trust as above provided and other than amounts on deposit in the Rebate Fund) shall, upon the full satisfaction of the Bond Indenture, forthwith be transferred, paid over and distributed to the Authority and the Corporation, as their respective interests may appear.
The Authority or the Corporation may at any time surrender to the Bond Trustee for cancellation by it any Series 2017 Bonds previously authenticated and delivered, which the Authority or the Corporation may have acquired in any manner whatsoever, and such Series 2017 Bonds, upon such surrender and cancellation, shall be deemed to be paid and retired.
Upon the deposit with the Bond Trustee, in trust, at or before maturity, of money or Government Obligations in the necessary amount to pay or redeem all outstanding Series 2017 Bonds (whether upon or prior to their maturity or the redemption date of such Series 2017 Bonds) and compliance with the other payment requirements of the Bond Indenture summarized under the previous three paragraphs, provided that if such Series 2017 Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in the Bond Indenture, or provisions satisfactory to the Bond Trustee shall have been made for the giving of such notice, and subject to the provisions of the Bond Indenture summarized in the sixth paragraph of this caption, the Bond Indenture may be discharged in accordance with the
C-67 provisions of the Bond Indenture but the liability of the Authority in respect of the Series 2017 Bonds shall continue provided that the owners thereof shall thereafter be entitled to payment only out of the moneys or the Government Obligations deposited with the Bond Trustee as aforesaid.
If the Authority shall pay or provide for the payment of any portion of the Series 2017 Bonds, in one or more of the ways described in subsections (a)-(d) of the first paragraph of this caption, such Series 2017 Bonds shall cease to be entitled to any lien, benefit or security under the Bond Indenture. The liability of the Authority in respect of such Series 2017 Bonds, shall continue but the owners thereof shall thereafter be entitled to payment (to the exclusion of all other Bondholders) only out of the moneys or Government Obligations deposited with the Bond Trustee.
None of the Series 2017 Bonds outstanding under the Bond Indenture may be refunded as aforesaid nor may the Bond Indenture be discharged thereby if under any circumstances such refunding or discharge would result in the loss of any exemption for purposes of federal income taxation to which interest on the Series 2017 Bonds would otherwise be entitled. As a condition precedent to the advance refunding of any Series 2017 Bonds outstanding under the Bond Indenture, the Bond Trustee shall receive an Opinion of Bond Counsel to the effect that such advance refunding will not result in the loss of any exemption for the purposes of federal income taxation to which such interest on the Series 2017 Bonds would otherwise be entitled.
Notwithstanding anything to the contrary in the Bond Indenture, upon the provision for payment of the Series 2017 Bonds or portion thereof as specified in (b) or (d) of the provisions of the Bond Indenture summarized in the first paragraph under this caption, the optional redemption provisions of the Bond Indenture allowing such Series 2017 Bonds to be called prior to maturity upon proper notice (notwithstanding provision for the payment of such Series 2017 Bonds having been made through a date after the first optional redemption date provided in the Bond Indenture) shall remain available to the Authority, upon direction of the Corporation, unless, in connection with making the deposits referred to in (b) or (d) of the provisions of the Bond Indenture summarized in the first paragraph under this caption, the Authority, at the direction of the Corporation, shall have irrevocably elected to waive any future right to call the Series 2017 Bonds or portions thereof for redemption prior to maturity. No such redemption shall occur, however, unless the Corporation shall deliver on behalf of the Authority to the Bond Trustee (a) Government Obligations and/or cash sufficient to discharge such Series 2017 Bonds (or portion thereof) on the redemption date or dates selected, (b) an opinion of an independent certified public accountant verifying that such Government Obligations, together with the expected earnings thereon, and/or cash will be sufficient to provide for the payment of such Series 2017 Bonds to the redemption dates, and (c) an Opinion of Bond Counsel (which opinion may be based upon a ruling or rulings of the Internal Revenue Service) to the effect that such earlier redemption will not result in the loss of any exemption for purposes of federal income taxation to which interest on the Series 2017 Bonds would otherwise be entitled. The Bond Trustee will give written notice of any such redemption to the owners of the Series 2017 Bonds affected thereby.
C-68 SUMMARY OF CERTAIN PROVISIONS OF THE LOAN AGREEMENT
The following is a summary of certain provisions of the Loan Agreement between the Corporation and the Authority, to which reference is made for a full and complete statement of its provisions.
LOAN OF SERIES 2017 BOND PROCEEDS
The Corporation will enter into a Loan Agreement with the Authority pursuant to which the Authority will lend the proceeds from the sale of the Series 2017 Bonds to the Corporation. The Series 2017 Obligation will be delivered to the Authority to evidence such loan and the obligation of the Corporation to repay the same. Such Series 2017 Obligation will be issued in a principal amount equal to the aggregate principal amount of the Series 2017 Bonds loaned to the Corporation, and will provide for payments of principal of, premium, if any, and interest thereon sufficient to permit the Authority to make payments of principal of, premium, if any, and interest on the Series 2017 Bonds.
REPRESENTATIONS
The Corporation represents that it is a nonprofit corporation duly incorporated under the laws of the State and is in good standing and duly authorized to conduct its business in the State. The Corporation, and each of the Members of the Obligated Group, as applicable, is duly authorized and has full power under the laws of the State and all other applicable provisions of law and its articles of incorporation and bylaws (which articles and bylaws, in the case of the Members of the Obligated Group other than the Corporation, require the consent of the Corporation, which consent has been heretofore obtained and is in full force and effect) to create, issue, enter into, execute and deliver the Loan Agreement, the Series 2017 Obligation, the Original Master Indenture, the First Supplemental Master Indenture, the Purchase Contract, the Continuing Disclosure Agreement, the Official Statement, the Project Certificate and the Tax Exemption Agreement, and all action on the Corporation’s part necessary for the valid execution and delivery of the Loan Agreement, the Series 2017 Obligation, the Purchase Contract, the Official Statement, the Original Master Indenture, the First Supplemental Master Indenture, the Continuing Disclosure Agreement, the Project Certificate and the Tax Exemption Agreement has been duly and effectively taken and such agreements are enforceable obligations of the Corporation and the other Members of the Obligated Group, where applicable, in accordance with their terms; and the Series 2017 Obligation in the hands of the holder thereof will be the legal and valid obligation of the Corporation and the other Members of the Obligated Group.
RIGHT OF BOND TRUSTEE TO ENFORCE LOAN AGREEMENT AND SERIES 2017 OBLIGATION PLEDGED UNDER THE BOND INDENTURE
The Corporation agrees that the Series 2017 Obligation pledged under the Bond Indenture and the Loan Agreement and all of the rights, interests, powers, privileges and benefits accruing to or vested in the Authority under the Series 2017 Obligation pledged under the Bond Indenture and the Loan Agreement may be protected and enforced in conformity with the Bond
C-69 Indenture and, except for Unassigned Rights, may be thereby assigned by the Authority to the Bond Trustee as additional security for the Series 2017 Bonds and may be exercised, protected and enforced for or on behalf of the Bondholders in conformity with the provisions of the Loan Agreement, the Master Indenture and the Bond Indenture.
PAYMENTS IN RESPECT OF SERIES 2017 OBLIGATION AND UNDER THE LOAN AGREEMENT
Under the terms of the Loan Agreement, the Corporation agrees to pay the Bond Trustee such amounts at such times as shall provide for payment of interest, premium, if any, and principal, whether upon regularly scheduled interest or principal payment dates, at maturity, upon any date fixed for prepayment or purchase, by optional redemption, acceleration or otherwise, on the Series 2017 Bonds outstanding under the Bond Indenture. The Loan Agreement also requires that the Corporation pay certain other charges which may be incurred for such items as the Bond Trustee’s fees, the Authority’s fees and expenses, taxes and assessments, if any. All payments due on the Series 2017 Obligation and under the Loan Agreement, except for certain enumerated payments described in the Loan Agreement, shall be paid directly to the Bond Trustee and applied in the manner provided in the Bond Indenture.
PREPAYMENT
The Corporation shall be permitted to prepay the Series 2017 Obligation pledged under the Bond Indenture so as to provide for any prepayment of the Series 2017 Bonds permitted by the Bond Indenture. No other payment of the Series 2017 Obligation pledged under the Bond Indenture shall be permitted.
CORPORATION’S OBLIGATIONS UNCONDITIONAL
The Authority and the Corporation agree that the Corporation shall bear all risk of damage or destruction in whole or in part to its Property, or the Property of the other Members of the Obligated Group, or any part thereof, including without limitation any loss, complete or partial, or interruption in the use, occupancy or operation of such Property, or any manner or thing which for any reason interferes with, prevents or renders burdensome, the use or occupancy of such Property or the compliance by the Corporation with any of the terms of the Loan Agreement. In furtherance of the foregoing, but without limiting any of the other provisions of the Loan Agreement, the Corporation agrees that its obligations to pay the principal, premium, if any, and interest on the Series 2017 Obligation pledged under the Bond Indenture, to pay the other sums provided for in the Loan Agreement and to perform and observe its other agreements contained in the Loan Agreement shall be absolute and unconditional and that the Corporation shall not be entitled to any abatement or diminution thereof nor to any termination of the Loan Agreement for any reason whatsoever.
DEPOSIT TO OPTIONAL REDEMPTION FUND FOR COMPLIANCE WITH MATURITY LIMITATION
If any recalculation of the average reasonably expected economic life of the Project pursuant to the Bond Indenture demonstrates that the average maturity of the Series 2017 Bonds
C-70 exceeds 120% of the average reasonably expected economic life of the Project, the Corporation covenants and agrees to deposit in the Optional Redemption Fund established in the Bond Indenture as a prepayment of the Series 2017 Obligation an amount which when applied by the Bond Trustee, to redeem Series 2017 Bonds is sufficient, in the Opinion of Bond Counsel, to cause the average maturity of the Series 2017 Bonds to be no more than 120% of the average reasonably expected economic life of the Project. Such deposit to the Optional Redemption Fund shall be made at such time as will permit the Bond Trustee to give proper notice of redemption pursuant to the Bond Indenture.
COVENANTS OF THE CORPORATION RELATING TO THE USE AND OPERATION OF PROPERTY
The Corporation will use and will cause the other Members of the Obligated Group to use, their respective health care Facilities primarily as revenue producing health facilities (as such terms are defined in the Act) and for related activities and only in furtherance of its lawful corporate purposes. The Corporation further covenants and agrees to operate, and cause the other Members of the Obligated Group to operate, so as not to discriminate on a legally impermissible basis.
The Corporation agrees that it will not use or permit to be used, and that it will cause the other Members of the Obligated Group not to use or permit to be used, any of the Bond Financed Property (i) by any Person in an Unrelated Trade or Business of the Corporation, or (ii) by any Person who is not a Tax-Exempt Organization, in either case in such manner or to such extent as would result in the loss of any exemption for purposes of federal income taxation to which the interest on the Series 2017 Bonds would otherwise be entitled or as would affect the validity of the Series 2017 Bonds.
The Corporation further agrees that it will not use or suffer or permit to be used, and that it will cause the other Members of the Obligated Group not to use or suffer or permit to be used, any of the Bond Financed Property (i) primarily for sectarian instruction or study or as a place of devotional activities or religious worship or as a facility used primarily in connection with any part of the program of a school or department of divinity for any religious denomination or the training of ministers, priests, nuns, rabbis or other similar persons in the field of religion, or (ii) in a manner which is prohibited by the Establishment of Religion Clause of the First Amendment to the Constitution of the United States of America and the decisions of the United States Supreme Court interpreting the same or by any comparable provisions of the Constitution of the State and the decisions in the Supreme Court of the State interpreting the same.
The Corporation will permit, and will cause the other Members of the Obligated Group to permit, the Authority to make inspections of any of their Property to determine compliance with the two preceding paragraphs. The provisions of this paragraph and the immediately preceding paragraph shall remain in full force and effect notwithstanding the payment of the Series 2017 Bonds and the Series 2017 Obligation pledged under the Bond Indenture and the termination of the Bond Indenture and the Loan Agreement.
C-71 TRANSFER OF ASSETS
The Corporation covenants and agrees that it and the other Members of the Obligated Group will not sell, lease or otherwise dispose of any of their Property except as permitted by the provisions of the Master Indenture summarized under the caption “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE—Sale, Lease or other Disposition of Property” above. The provisions of the Master Indenture notwithstanding, the Corporation further covenants and agrees that it and the other Members of the Obligated Group will not sell, lease or otherwise dispose (including without limitation any involuntary disposition) of in excess of the percentages set forth in the Project Certificate of the Bond Financed Property financed or refinanced with the proceeds of the Series 2017 Bonds (which percentages shall be reduced to the extent Bond Financed Property is being used in an Unrelated Trade or Business of the Corporation or other Member of the Obligated Group or by a Private User (as defined in the Project Certificate)) unless the conditions set forth in the Tax Exemption Agreement are satisfied.
INDEMNIFICATION OF THE AUTHORITY
The Corporation will pay, protect, indemnify and save the Authority and the Bond Trustee harmless from and against any and all fees and expenses, liabilities, losses, damages and costs (including attorneys’ fees and expenses of the Authority and the Bond 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 Corporation’s or the Obligated Group’s Property, 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 Authority or the Bond Trustee;
(2) any loss, liability or expense of the Bond Trustee (other than income tax attributable to the compensation payable to the Bond Trustee) incurred without negligence or willful misconduct on the part of the Bond Trustee arising out of or in connection with the administration of the Bond Indenture or the Bond Trustee’s duties thereunder;
(3) violation of any agreement, warranty, covenant or condition of the Loan Agreement, except respectively by the Authority or the Bond Trustee;
(4) violation of any contract, agreement or restriction by the Corporation or any other Member of the Obligated Group relating to its Property;
(5) violation of any law, ordinance, regulation or court order affecting any of the Obligated Group’s Property or the ownership, occupancy or use thereof including
C-72 without limitation any present or future federal, State or local law, statute, ordinance, rule or regulation relating to the protection of the environment or hazardous substances; and
(6) any statement or information concerning the Corporation, any other Member of the Obligated Group, or any of their officers and members or their respective Property, contained in the Official Statement furnished to the Authority or the purchaser of any Series 2017 Bonds, that is untrue or incorrect in any material respect, and any omission from such Official Statement 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 the Corporation, any other Member of the Obligated Group, or any of their officers and members or their respective Property not misleading in any material respect, provided that the indemnified party did not have knowledge of the omission or misstatement or did not use such Official Statement with reckless disregard of or gross negligence in regard to the accuracy or completeness of such Official Statement.
For purposes of the provisions summarized under this caption, Property shall be deemed to include Excluded Property.
Such indemnity shall extend to each person, if any, who “controls” the Authority or the Bond Trustee, as the case may be, as that term is defined in Section 15 of the Securities Act of 1933, as amended.
In the event of settlement of any litigation commenced or threatened against the Authority or the Bond Trustee, such indemnity shall be limited to the aggregate amount paid by the Authority or the Bond Trustee under a settlement effected with the written consent of the Corporation.
The Authority and the Bond Trustee shall promptly notify the Corporation in writing of any claim or action brought against the Authority, the Bond Trustee, or any controlling person, as the case may be, in respect of which indemnity may be sought against the Corporation, setting forth the particulars of such claim or action, and the Corporation will assume the defense thereof, including the employment of counsel satisfactory to the Authority or the Bond Trustee or such controlling person, as the case may be, and the payment of all expenses. The Authority, the Bond 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, but the fees and expenses of such counsel shall not be payable by the Corporation unless such employment has been specifically authorized in writing by the Corporation. The foregoing notwithstanding, if the Authority, the Bond Trustee or any such controlling person is advised in an opinion of Counsel that there may be legal defenses available to it which are different from or in addition to those available to the Corporation, the Corporation shall not be entitled to assume the defense of the proceeding on behalf of the Authority, the Bond Trustee or such controlling person, as the case may be, but the Corporation shall be responsible for the reasonable fees, costs and expenses (including without limitation all reasonable fees and expenses of counsel) of the Authority, the Bond Trustee or such controlling person in conducting its defense.
C-73 All amounts payable to or with respect to the Authority pursuant to the provisions of the Loan Agreement summarized under this caption shall be deemed to be fees and expenses of the Authority for the purposes of the provisions of the Loan Agreement and of the Bond Indenture dealing with assignment of the Authority’s rights under the Loan Agreement. The obligations of the Corporation set forth in the provisions of the Loan Agreement summarized under this caption shall survive the termination of the Loan Agreement and shall remain in effect with respect to any event occurring prior to the time when all Series 2017 Bonds have been paid in full.
MAINTENANCE OF CORPORATE EXISTENCE AND STATUS
The Corporation agrees that it, or any successor to the Corporation following a merger or consolidation permitted by the Master Indenture pursuant to the provisions of the Master Indenture summarized under the caption “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE—Merger, Consolidation, Sale or Conveyance” above, will at all times maintain its existence as a South Dakota non-profit Person, entity or organization authorized to conduct its business under the laws of the State and will neither take any action nor suffer any action to be taken by others which will alter, change or destroy its status as a non-profit Person, entity or organization or its status as a Tax-Exempt Organization and in all cases will operate in a manner consistent with its status as a non-profit Person, entity or organization under the laws of the State.
The Corporation further agrees that it will not act or fail to act in any other manner which would adversely affect any exemption from federal income tax of the interest earned by the owners of the Series 2017 Bonds to which any of such Series 2017 Bonds would otherwise be entitled.
DISCHARGE OF ORDERS
The Corporation covenants to cause any order, writ or warrant of attachment, garnishment, execution, replevin or similar process filed against any part of the funds or accounts held by the Bond Trustee under the Bond Indenture to be discharged, vacated, bonded or stayed within 90 days after such filing (which 90-day period shall be extended for so long as the Corporation is contesting such process in good faith), but, notwithstanding the foregoing, in any event not later than five days prior to any proposed execution or enforcement with respect to such filing or any transfer of moneys or investments pursuant to such filing.
LICENSURE
The Corporation warrants that its health facilities and the health facilities of the other Members of the Obligated Group have all state and local licenses and permits required for the operation thereof. The Corporation and the other Members of the Obligated Group will obtain and maintain or cause to be obtained and maintained all such licenses and permits then required for their operations and the operation of their health facilities.
C-74 SUPPLEMENTS AND AMENDMENTS TO THE LOAN AGREEMENT
Under the terms of the Bond Indenture, the Authority, the Corporation and the Bond Trustee may, without the consent of or notice to the owners of the Series 2017 Bonds, enter into any amendment, change or modification of the Loan Agreement as may be required (i) by the provisions of the Bond Indenture or the Loan Agreement, (ii) for the purpose of curing any ambiguity or formal defect or omission, (iii) in connection with any other change therein which, in the judgment of the Bond Trustee, does not materially adversely affect the rights of the Bond Trustee or the holders of the Series 2017 Bonds, or (iv) for the purpose of complying with the provisions of the Tax Exemption Agreement; provided, however, that nothing stated in this paragraph shall permit or be construed as permitting, any amendment, change or modification of the Loan Agreement that may result in anything described in the lettered clauses outlined in the second paragraph of the provisions of the Bond Indenture summarized under the caption “SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE—Supplemental Bond Indentures” above, without the consent of each Bondholder affected. Except for the amendments, changes or modifications referred to in the preceding sentence, neither the Authority nor the Bond Trustee shall consent to any other amendment, change or modification of the Loan Agreement without the written approval or consent of the owners of not less than 51% in aggregate principal amount of the Series 2017 Bonds at the time outstanding under the Bond Indenture at the time of execution of any such amendment, change or modification. The foregoing notwithstanding, under no circumstances may any amendment to the Loan Agreement alter the Series 2017 Obligation pledged to the payment of the Series 2017 Bonds of the payments of principal, premium, if any, and interest thereon, in a manner materially adverse to the holder of any Series 2017 Bond without the consent of the holders of all the Series 2017 Bonds outstanding.
DEFAULTS AND REMEDIES
The occurrence and continuance of any of the following events shall constitute an “event of default” under the Loan Agreement:
(a) failure of the Corporation to pay any installment of interest, principal or premium on the Series 2017 Obligation pledged under the Bond Indenture or any other payment required by the Loan Agreement when the same shall become due and payable, whether upon a scheduled interest payment date, at maturity, upon any date fixed for prepayment or purchase, by acceleration or otherwise, and the continuance of such failure for five days; or
(b) failure of the Corporation to comply with or perform any of the covenants, conditions or provisions of the Loan Agreement or failure of the Corporation to comply with or perform any covenants, conditions or provisions of the Tax Exemption Agreement and to remedy such default within 60 days after written notice thereof from the Authority to the Corporation, provided that, if such default cannot, in the reasonable judgment of the Bond Trustee, with due diligence and dispatch be wholly cured within 60 days but can be wholly cured, the failure of the Corporation to remedy such default within such 60 day period shall not constitute a default under the Loan Agreement if the Corporation shall immediately upon receipt of such notice commence with due diligence
C-75 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) any representation or warranty made by the Corporation or any Member of the Obligated Group in the Loan Agreement or in any statement or certificate, furnished to the Authority or the Bond Trustee or the purchaser of any Series 2017 Bonds in connection with the sale of the Series 2017 Bonds or furnished by the Corporation pursuant to the Loan Agreement proves untrue in any material respect as of the date of the issuance or making thereof and shall not be made good within 60 days after notice thereof to the Corporation by the Authority, provided that, if such default cannot, in the reasonable judgment of the Bond Trustee, with due diligence and dispatch be wholly cured within 60 days but can be wholly cured, the failure of the Corporation to remedy such default within such 60 day period shall not constitute a default under the Loan Agreement if the Corporation 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
(d) any event of default shall occur and be continuing under the Master Indenture; or
(e) payment of any installment of interest, principal or premium on any Series 2017 Bond shall not be made when the same shall become due and payable under the provisions of the Bond Indenture; or
(f) failure of the Corporation to comply with or perform its obligations related to the discharge, vacation, bonding or stay of any order, writ or warrant of attachment, garnishment, execution, replevin or similar process filed against any part of the funds or accounts held by the Bond Trustee.
Upon the occurrence and during the continuance of any event of default under the Loan Agreement, the Authority or the Bond Trustee as assignee of the Authority shall have the following rights and remedies, in addition to any other remedies in the Loan Agreement or by law provided: (i) the Authority or the Bond Trustee, as assignee of the Authority, may, by written notice to the Master Trustee, request that it declare the Series 2017 Obligation pledged under the Bond Indenture (if not then due and payable) to be due and payable immediately, subject to the provisions of the Master Indenture regarding waiver of events of default summarized under the caption “SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE—Waiver of Events of Default” above, anything in the Series 2017 Obligation or in the Loan Agreement contained to the contrary notwithstanding; and (ii) the Authority or the Bond Trustee as assignee of the Authority, personally or by attorney, may in its discretion, proceed to protect and enforce its rights by pursuing any available remedy including a suit or suits in equity or at law, whether for damages or for the specific performance of any obligation, covenant or agreement contained in the Series 2017 Obligation pledged under the Bond Indenture, in the Loan Agreement or in the Master Indenture, or in aid of the execution of any
C-76 power granted in the Loan Agreement, or for the enforcement of any other appropriate legal or equitable remedy, as the Bond Trustee or the Authority, as the case may be, shall deem most effectual to collect the payments then due and thereafter to become due on the Series 2017 Obligation pledged under the Bond Indenture, or to enforce performance and observance of any obligation, agreement or covenant of the Corporation under the Loan Agreement, under such Series 2017 Obligation or the Master Indenture or to protect and enforce any of the Authority’s rights under the Loan Agreement.
EXCHANGE OF BONDS
The Loan Agreement provides that in the event the Act or the Authority is determined to be unconstitutional under the laws of the State of South Dakota or under the laws of the United States of America, and as a result thereof, the Series 2017 Bonds issued by the Authority are declared to be invalid and unenforceable, and if as a result thereof the obligations of the Corporation to make payments on the Series 2017 Obligation pledged under the Bond Indenture are determined to be unenforceable, then the Corporation agrees that it will issue its own bonds (the interest on which may not be exempt from federal income tax) in exchange for the Series 2017 Bonds, principal amount for principal amount, having the same rates of interest, maturities, redemption provisions and prepayment provisions as are then applicable to the Series 2017 Bonds being exchanged. The bonds to be issued by the Corporation will be issued under an indenture having substantially the same terms and provisions as the Bond Indenture, the Loan Agreement and the Master Indenture and such bonds of the Corporation will be issued thereunder in exchange for the Series 2017 Bonds surrendered by the owners thereof. Notice of any such exchange shall be given as provided for redemption of the Series 2017 Bonds under the Bond Indenture and the expenses of such exchange, including the printing of the bonds and other reasonable expenses in connection therewith, shall be borne by the Corporation.
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APPENDIX D
FORM OF BOND COUNSEL OPINION
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September __, 2017
South Dakota Health and Educational Piper Jaffray & Co. Facilities Authority Minneapolis, Minnesota Pierre, South Dakota
The First National Bank in Sioux Falls, Merrill Lynch, Pierce, Fenner & Smith as Bond Trustee Incorporated Sioux Falls, South Dakota New York, New York
Re: $______South Dakota Health and Educational Facilities Authority Revenue Bonds, Series 2017 (Regional Health)
Ladies and Gentlemen:
We have acted as bond counsel in connection with the issuance on the date hereof by the South Dakota Health and Educational Facilities Authority (the “Authority”) of $______in aggregate principal amount of South Dakota Health and Educational Facilities Authority Revenue Bonds, Series 2017 (Regional Health) (the “Series 2017 Bonds”). The Series 2017 Bonds are being issued under the provisions of the South Dakota Health and Educational Facilities Authority Act, as amended (the “Act”), and under and pursuant to the Bond Trust Indenture dated as of September 1, 2017 (the “Bond Indenture”), between the Authority and The First National Bank in Sioux Falls, as bond trustee (the “Bond Trustee”), relating to the Series 2017 Bonds.
The proceeds of the Series 2017 Bonds are being loaned by the Authority to Regional Health, Inc., a South Dakota nonprofit corporation (the “Corporation”), pursuant to the Loan Agreement dated as of September 1, 2017 (the “Loan Agreement”), between the Corporation and the Authority, for the purpose of providing funds to be used to (i) pay the cost of acquiring, constructing, remodeling, renovating and equipping certain health care facilities of the Corporation and certain other Members of the Obligated Group (hereinafter defined) (collectively, the “Project”); (ii) advance refund a portion of the outstanding $54,390,000 original principal amount South Dakota Health and Educational Facilities Authority Revenue Bonds, Series 2010 (Regional Health) (the “Series 2010 Bonds”); (iii) advance refund all of the outstanding $50,460,000 original principal amount South Dakota Health and Educational Facilities Authority Revenue Bonds, Series 2011 (Regional Health) (the “Series 2011 Bonds” and, together with the Series 2010 Bonds, the “Prior Bonds”); and (iv) pay certain expenses incurred in connection with the issuance of the Series 2017 Bonds and the refunding of the Prior Bonds, all as permitted under the Act. In order to secure the payment of the Series 2017 Bonds,
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the Corporation, concurrently with the issuance and delivery of the Series 2017 Bonds, is issuing and delivering to the Authority, and the Authority is assigning to the Bond Trustee, all of its right, title and interest in and to the $______Direct Note Obligation, Series 2017 (South Dakota Health and Educational Facilities Authority) (the “Series 2017 Bond Obligation”). The Series 2017 Bond Obligation is being issued by the Corporation pursuant to the Master Trust Indenture dated as of September 1, 2017 (the “Original Master Indenture”), as supplemented and amended through and including that certain First Supplemental Master Trust Indenture dated as of September 1, 2017 (the Original Master Indenture, as so supplemented and amended, and as hereinafter from time to time amended, being hereinafter collectively referred to as the “Master Indenture”) among the Corporation, Rapid City Regional Hospital, Inc. (the “Hospital”), Regional Health Network, Inc. (“Health Network”), and Regional Health Physicians, Inc. (“RH Physicians” and, together with the Corporation, the Hospital and Health Network, the “Members of the Obligated Group”) and The First National Bank in Sioux Falls, as master trustee (the “Master Trustee”).
The Series 2017 Bonds have been sold to Piper Jaffray & Co. (“Piper”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (together with Piper, the “Underwriters”), pursuant to the Bond Purchase Agreement dated August __, 2017 (the “Purchase Contract”), among Piper, on behalf of itself and as representative of the Underwriters, the Authority and the Corporation, on behalf of itself and the other Members of the Obligated Group.
In connection with the sale of the Series 2017 Bonds, the Corporation has executed and delivered an Official Statement dated August __, 2017 (the “Official Statement”), relating to the Series 2017 Bonds.
In connection with the issuance of the Series 2017 Bonds, the Corporation, on behalf of itself and as Obligated Group Agent (as defined in the Master Indenture) on behalf of the other Members of the Obligated Group, the Authority and the Bond Trustee have executed a Tax Exemption Certificate and Agreement dated the date hereof (the “Tax Agreement”), which places certain restrictions on the investment of moneys held in the funds established by the Bond Indenture and which, under certain circumstances, would require the transfer of certain moneys held in such funds to a Rebate Fund created under the Tax Agreement.
As bond counsel, we have examined the following:
(a) certified copies of the proceedings of the Authority authorizing or approving, among other things, the execution and delivery of the Bond Indenture, the Loan Agreement, the Purchase Contract, the Master Indenture, the Series 2017 Bond Obligation and the Tax Agreement, the use and distribution of the Official Statement and the issuance and sale of the Series 2017 Bonds;
(b) the executed Series 2017 Bond Obligation, an executed Official Statement and executed counterparts of the Bond Indenture, the Loan Agreement, the Purchase Contract, the Master Indenture and the Tax Agreement;
(c) a specimen Series 2017 Bond;
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(d) executed opinions, each dated the date hereof, of Redstone Law Firm LLP, counsel to the Authority; Teresa Burroff, Esq., General Counsel of the Corporation, and counsel to the other Members of the Obligated Group; and Dorsey & Whitney LLP, counsel to Piper, as representative of the Underwriters;
(e) a report of Causey Demgen & Moore P.C., independent certified public accountants, verifying the accuracy of certain mathematical computations relating to the Series 2017 Bonds and the Prior Bonds (the “Verification Report”); and
(f) such other documents and showings and related matters of law as we have deemed necessary in order to enable us to render this opinion.
Based upon the foregoing and in reliance upon the matters hereinafter referred to, we are of the opinion that:
1. The Bond Indenture, the Loan Agreement, the Purchase Contract and the Tax Agreement have been duly authorized by all necessary action on the part of the Authority, have been duly executed and delivered by authorized officers of the Authority and, assuming the due authorization, execution and delivery thereof by the other parties thereto, constitute the legal, valid and binding obligations of the Authority, enforceable against the Authority in accordance with their respective terms, except to the extent limited by bankruptcy, reorganization or other similar laws affecting creditors’ rights generally and by the availability of equitable remedies, and except to the extent that the enforcement of the indemnification provisions of the Loan Agreement and the Purchase Contract may be limited by federal or state securities laws.
2. The Series 2017 Bonds have been duly authorized by all necessary action on the part of the Authority, have been duly executed by authorized officers of the Authority, authenticated by the Bond Trustee and issued by the Authority and constitute the legal, valid and binding limited obligations of the Authority enforceable in accordance with their terms, except to the extent limited by bankruptcy, reorganization or other similar laws affecting the enforcement of creditors’ rights generally and by the availability of equitable remedies, and are entitled to the benefits and security of the Bond Indenture.
3. Subject to compliance by the Authority and the Members of the Obligated Group with certain covenants, under present law, interest on the Series 2017 Bonds is excludable from gross income of the owners thereof for federal income tax purposes and is not included as an item of tax preference in computing the alternative minimum tax for individuals and corporations under the Internal Revenue Code of 1986, as amended (the “Code”), but we express no opinion as to whether interest on the Series 2017 Bonds is taken into account in computing adjusted current earnings, which is used in determining the federal alternative minimum tax for certain corporations. Failure to comply with certain of such covenants of the Authority and the Members of the Obligated Group could cause the interest on the Series 2017 Bonds to be includible in gross income for federal income tax purposes retroactively to the date of issuance of the Series 2017
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Bonds. Ownership of the Series 2017 Bonds may result in other federal tax consequences to certain taxpayers, and we express no opinion regarding any such collateral consequences arising with respect to the Series 2017 Bonds.
4. The Bond Indenture creates a valid assignment to the Bond Trustee of the rights of the Authority in and to the Loan Agreement (with certain limited exceptions referred to in the Bond Indenture), and a valid pledge and assignment to the Bond Trustee of the Series 2017 Bond Obligation, as security for the Series 2017 Bonds.
We express no opinion herein as to the accuracy, adequacy or completeness of the Official Statement relating to the Series 2017 Bonds.
In rendering this opinion, we have relied upon the opinion of Teresa Burroff, Esq., General Counsel of the Corporation, and counsel to the other Members of the Obligated Group, referred to in paragraph (d) above, with respect to, among other things, (i) the status of each Member of the Obligated Group as an organization described in Section 501(c)(3) of the Code that is exempt from federal income taxation under Section 501(a) of the Code, and (ii) the validity and binding effect upon and enforceability against each Member of the Obligated Group of the Loan Agreement, the Series 2017 Bond Obligation, the Master Indenture, the Tax Agreement and the Purchase Contract, subject to the exceptions set forth in said opinion.
In rendering the opinions in paragraph 3 hereof, we have relied upon (i) certificates of even date herewith of the Members of the Obligated Group with respect to certain material facts within the knowledge of the Members of the Obligated Group relating to the property financed or refinanced with the proceeds of the Series 2017 Bonds and the Prior Bonds and the application of the proceeds of the Series 2017 Bonds and the Prior Bonds, and (ii) the Verification Report. In rendering this opinion, we have also relied upon certifications of the Authority with respect to certain material facts within the knowledge of the Authority.
Our opinion represents our legal judgment based upon our review of the law and the facts that we deem relevant to render such opinion and is not a guarantee of a result. This opinion is given as of the date hereof, and we assume no obligation to revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention or any changes in law that may hereafter occur.
Respectfully submitted,
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APPENDIX E
FORM OF CONTINUING DISCLOSURE AGREEMENT
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CONTINUING DISCLOSURE AGREEMENT
between
REGIONAL HEALTH, INC.
and
THE FIRST NATIONAL BANK IN SIOUX FALLS, as Dissemination Agent
Dated as of September 7, 2017
Relating to
$[______]
South Dakota Health and Educational Facilities Authority Revenue Bonds, Series 2017 (Regional Health)
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CONTINUING DISCLOSURE AGREEMENT
This CONTINUING DISCLOSURE AGREEMENT, dated as of September 7, 2017 (this “Agreement”), is executed and delivered by REGIONAL HEALTH, INC., a South Dakota nonprofit corporation (the “Corporation”), on its own behalf and on behalf of the Obligated Group (as defined herein), and THE FIRST NATIONAL BANK IN SIOUX FALLS, a South Dakota banking association, in its capacity as dissemination agent (the “Dissemination Agent”), in connection with the issuance by the South Dakota Health and Educational Facilities Authority (the “Authority”) of its Revenue Bonds, Series 2017 (Regional Health) (the “Bonds”), in the aggregate principal amount of $[______]. The Bonds are issued pursuant to a Bond Trust Indenture (the “Bond Indenture”), dated as of September 1, 2017, between the Authority and The First National Bank in Sioux Falls, as trustee (the “Bond Trustee”).
The proceeds of the Bonds have been loaned to the Corporation pursuant to a Loan Agreement, dated as of September 1, 2017 (the “Loan Agreement”), between the Corporation and the Authority. Such loan is secured by a Direct Note Obligation, Series 2017, issued by the Corporation and delivered to the Authority in the principal amount of the Bonds (the “Series 2017 Obligation”) pursuant to that certain Master Trust Indenture dated as of September 1, 2017 (as it may from time to time be amended or supplemented in accordance with the terms thereof, the “Master Indenture”), among the Corporation, Rapid City Regional Hospital, Inc. (the “Hospital”), Regional Health Network, Inc. (“Health Network”), Regional Health Physicians, Inc. (“RH Physicians,” and subject to amendment as provided in the Master Indenture, together with the Corporation, the Hospital and Health Network and other entities which become a member of the Obligated Group pursuant to the terms of the Master Indenture, the “Obligated Group”) and The First National Bank in Sioux Falls, as master trustee. The terms of the Series 2017 Obligation require payments by the Corporation, which, together with other moneys available therefor (and interest earned thereon), will be sufficient to provide for the payment of the principal, premium, if any, and interest on the Bonds. The Master Indenture provides that the Obligated Group is jointly and severally liable for Obligations (as defined therein) issued thereunder.
Section 1. Purpose of Disclosure Agreement. This Agreement is being executed and delivered by the Corporation and the Dissemination Agent for the benefit of the registered owners of the Bonds (for such purpose beneficial owners of the Bonds shall also be considered registered owners of the Bonds) (the “Registered Owners”) and to assist the Underwriters (as defined herein), in complying with the Rule (as defined herein).
Section 2. Definitions and Exhibits. Terms used with initial capital letters but not defined herein shall have the meanings given such terms in the Bond Indenture or the Loan Agreement, unless the context hereof clearly requires otherwise. In addition, the following terms, when used herein, have the following respective meanings:
Bondowner or Owner: in respect of a Bond, the registered owner or owners thereof appearing in the bond register maintained by the Dissemination Agent or any beneficial owner thereof, if such owner provides to the Dissemination Agent evidence of such beneficial ownership in form and substance reasonably satisfactory to the Dissemination Agent.
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Corporation Certificate: a certificate signed by the President of the Corporation or the Chief Financial Officer of the Corporation (or other officer as delegated by any one of the above officers) and delivered to the Dissemination Agent.
Disclosure Information: the information defined in Section 5 hereof.
EMMA: the Electronic Municipal Market Access system operated by the MSRB and the primary portal for complying with the continuing disclosure requirements of the Rule.
Fiscal Year: the twelve month fiscal period of the Corporation which commences on July 1 every year and ends on the following June 30.
GAAP: accounting principles generally accepted in the United States of America as of the date of any calculation or as of September 1, 2017, at the sole option of the Corportation.
Material Fact: a fact as to which a substantial likelihood exists that a reasonably prudent investor would attach importance thereto in deciding to buy or sell a Bond or, if not disclosed, would significantly alter the total information otherwise available to an investor from the Official Statement, information disclosed hereunder or information generally available to the public. Notwithstanding the foregoing, a “Material Fact” is also an event or condition that would be deemed “material” for purposes of the purchase or sale of a Bond within the meaning of applicable federal securities laws, as interpreted at the time of discovery of the occurrence of the event or condition.
Member: each of the Corportaion, the Hospital, Health Network and RH Physicians, as the members of the Obligated Group as of the date hereof, and each other member of the Obligated Group under the terms of the Master Indenture, subject at all times to the release of any Member from the Obligated Group pursuant to the terms of the Master Indenture.
MSRB: the Municipal Securities Rulemaking Board or any successor to its functions.
Official Statement: the Official Statement, dated August [__], 2017, relating to the Bonds, as amended or supplemented to the date of issuance of the Bonds.
Person: any individual, corporation, partnership, limited liability company, limited liability partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.
Rating Agency: Moody’s Investors Service, Inc. or Fitch Ratings, Inc., or any of their successors, or any other nationally-recognized rating agency.
Repository: EMMA, or any other filing system approved by the SEC.
Rule: Rule 15c2-12, promulgated by the SEC under the Securities Exchange Act of 1934 (17 C.F.R. § 240.15c2-12), as in effect and interpreted from time to time.
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SEC: the Securities and Exchange Commission or any successor to its functions governing state and municipal securities disclosure.
Underwriters: Piper Jaffray & Co., Minneapolis, Minnesota; Merrill Lynch, Pierce, Fenner & Smith Incorporated; and any other original underwriter of the Bonds required to comply with the Rule in connection with the primary offering of the Bonds for sale.
Section 3. Representations. Each of the parties hereto represents and warrants to each other party that (i) it has all requisite power and authority to execute, deliver and perform this Agreement under applicable law and any resolutions or other actions of such party now in effect, (ii) it has duly authorized the execution and delivery of this Agreement, (iii) the execution and delivery of this Agreement and performance of the terms hereof by such party do not and will not violate any law, regulation, ruling, decision, order, indenture, decree, agreement or instrument to which it is a party or by which it is bound, and (iv) to its best knowledge, no litigation, proceeding or administrative matter is pending to which it is a party, or overtly threatened, contesting or questioning the legal existence of such party, its power and authority to enter into and perform this Agreement or its due authorization, execution and delivery of this Agreement.
The Corporation represents and warrants that the Members are the only “obligated persons” in respect of the Bonds within the meaning of the Rule.
Section 4. Appointment of Dissemination Agent as Agent. The Corporation hereby appoints the Dissemination Agent as its agent for the purpose of disclosing the information described in this Agreement in the manner set forth herein.
The Dissemination Agent hereby accepts such appointment, subject to the terms and conditions of this Agreement. In the event that the Dissemination Agent, in its reasonable opinion, determines that during the continuation of an event of default under the Bond Indenture the activities of the Dissemination Agent hereunder conflict with any of its duties and responsibilities under the Bond Indenture, the Dissemination Agent need not undertake such activities hereunder. The Dissemination Agent will promptly inform the Corporation and the Underwriters in writing of any such determination.
The inability of the Dissemination Agent to undertake certain activities under this Agreement as provided in the immediately preceding paragraph shall not relieve or otherwise affect the responsibilities of the Corporation to furnish the information required to be provided by it pursuant to this Agreement directly to the Repository without the agency of the Dissemination Agent.
The rights and immunities granted the Bond Trustee in the Bond Indenture shall apply as well to the activities of the Dissemination Agent hereunder.
Section 5. Annual Financial Information and Reports of the Corporation. (a) The Corporation shall on or before 150 days after the last day of the Corporation’s Fiscal Year, commencing with the Fiscal Year ending June 30, 2017 (each an “Annual Submission Date”), deliver to the Dissemination Agent certain financial information and operating data relating to
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the Corporation and the Obligated Group for the preceding Fiscal Year as hereinafter specified (the “Annual Disclosure Information”), accompanied by a Corporation Certificate stating in effect that such information is the Annual Disclosure Information required to be submitted under this Section 5. The Corporation may change the Annual Submission Date if it changes its Fiscal Year; provided, however, that the new Annual Submission Date shall be not later than 150 days after the end of each new Fiscal Year of the Corporation and the first such new Annual Submission Date shall not be more than one year after the last preceding Annual Submission Date.
The Annual Disclosure Information shall comprise the following (subject to modification as provided in Sections 10 and 12 hereof):
(1) Audited consolidated financial statements by an independent auditor of the Corporation and subsidiaries for such Fiscal Year, containing a balance sheet as of the end of such Fiscal Year and a statement of operations and changes in net assets, and cash flows, including consolidating schedules, for the Fiscal Year then ended, and showing in comparative form such figures for the preceding Fiscal Year of the Corporation, prepared in accordance with GAAP applicable to entities such as the Corporation, as in effect from time to time, or, if and to the extent such financial statements have not been prepared in accordance with generally accepted accounting principles in the United States, noting the discrepancies therefrom and the effect thereof.
(2) To the extent a Member’s financial information is not included in the consolidated financial statements referred to in paragraph (1) hereof, a complete audit report and opinion of an accountant and the financial statements of the Member for such Fiscal Year, containing balance sheets as of the end of such Fiscal Year and a statement of operations and changes in net assets, and cash flows for the Fiscal Year then ended, and showing in comparative form such figures for the preceding Fiscal Year of such Member, prepared in accordance with GAAP applicable to entities such as the Member as in effect from time to time, or, if and to the extent such financial statements have not been prepared in accordance with such generally accepted accounting principles in the United States, noting the discrepancies therefrom and the effect thereof.
(3) To the extent not included in the financial statements referred to in paragraphs (1) and (2) hereof, the information for such Fiscal Year or the period most recently available of the type contained in the Official Statement and described by Exhibit A hereto, provided that the information in the tables may be presented on a combined or consolidated basis, which information may be unaudited, but shall be certified as to accuracy and completeness in all material respects by the Corporation, which certification may be based on the reliability of information obtained from governmental or other third-party sources.
Commencing with the quarter ending September 30, 2017, on or before 45 days after the last day of each fiscal quarter of each Fiscal Year (each a “Quarterly Submission Date”), the Corporation is to deliver to the Dissemination Agent certain financial information relating to the
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Corporation and the Obligated Group as hereinafter specified (the “Quarterly Disclosure Information,” and together with the Annual Disclosure Information, the “Disclosure Information”). The Quarterly Disclosure Information shall comprise the following (subject to modification as provided in this Agreement):
(1) Unaudited consolidated financial statements of the Corporation and subsidiaries as of the end of such fiscal quarter, consisting of a balance sheet and year- to-date statements of operations and changes in net assets, each prepared in accordance with GAAP, as in effect from time to time (subject to year-end adjustments and except that such financial statements may omit footnotes that would be required by generally accepted accounting principles), consistently applied, or, if and to the extent such financial statements have not been prepared in accordance with generally accepted accounting principles in the United States, noting the discrepancies therefrom and the effect thereof. Such financial statements shall be certified as true, correct and complete by the Corporation.
(2) To the extent a Member’s financial information is not included in (1) above, unaudited financial statements of such Member as of the end of such fiscal quarter, consisting of balance sheets and year-to-date statements of operations and changes in net assets, each prepared in accordance with GAAP, as in effect from time to time (subject to year-end adjustments and except that such financial statements may omit footnotes that would be required by generally accepted accounting principles), consistently applied, or, if and to the extent such financial statements have not been prepared in accordance with generally accepted accounting principles in the United States, noting the discrepancies therefrom and the effect thereof. Such financial statements shall be certified as true, correct and complete by such Member.
Any or all of the Disclosure Information may be incorporated, if it is updated as required hereby, by reference to other documents, including official statements, which have been submitted to the MSRB. If the document incorporated by reference is a final official statement, it must be available from EMMA. The Corporation shall clearly identify in the Disclosure Information each document so incorporated by reference.
If any part of the Disclosure Information can no longer be generated because the operations of the Corporation or Members have changed or been discontinued, such Disclosure Information need no longer be provided if the Corporation includes in the Disclosure Information a statement to such effect; provided, however, that if such operations have been replaced by other operations of the Corporation or Members in respect of which data is not included in the Disclosure Information and the Corporation determines that certain specified data regarding such replacement operations would be a Material Fact, then, from and after such determination, the Disclosure Information shall include such additional specified data regarding the replacement operations.
If the Disclosure Information is changed or this Agreement is amended as permitted by this Section 5(a) or Section 12 hereof, then the Corporation shall include in the next Disclosure Information to be delivered hereunder, to the extent necessary, an explanation of the reasons for
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the amendment and the effect of any change in the type of financial information or operating data provided.
(b) The Corporation shall also provide to the Dissemination Agent in a timely manner not in excess of seven (7) business days after the occurrence of any of the following events (as used herein, the “Material Events”), notice of such Material Event, and the Dissemination Agent shall provide such notice to MSRB via EMMA within ten (10) business days of the occurrence of the Material Event:
1. Principal and interest payment delinquencies;
2. Non-payment related defaults, if material;
3. Unscheduled draws on debt service reserves reflecting financial difficulties;
4. Unscheduled draws on credit enhancements reflecting financial difficulties;
5. Substitution of credit or liquidity providers, or their failure to perform;
6. Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701–TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security;
7. Modifications to rights of security holders, if material;
8. Bond calls, if material, and tender offers;
9. Defeasances;
10. Release, substitution, or sale of property securing repayment of the securities, if material;
11. Rating changes;
12. Bankruptcy, insolvency, receivership or similar event of the obligated person;
13. The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and
14. Appointment of a successor or additional trustee or the change of name of a trustee, if material.
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(c) The Corporation agrees to notify the Dissemination Agent promptly of: (1) any change in the accounting principles pursuant to which the financial statements constituting a portion of the Disclosure Information are prepared; and (2) any change in the Fiscal Year of the Corporation or any other Member.
Section 6. Disclosure to Public. The SEC has designated the EMMA system operated by the MSRB as the nationally recognized municipal securities information repository and the exclusive portal for complying with continuing disclosure requirements of the Rule. Until the EMMA system is amended or altered by the MSRB or the SEC, the Dissemination Agent shall make all filings required under this Disclosure Agreement solely with EMMA. The Dissemination Agent is authorized and directed to disseminate the following information to the EMMA system:
(a) the Disclosure Information provided pursuant to Section 5(a) hereof;
(b) any Material Event reported to the Dissemination Agent by the Corporation under Section 5(b) hereof in the form provided by the Corporation;
(c) notice of any of the following events of which the Dissemination Agent has actual knowledge:
(i) default in the payment of principal of or interest on any Bonds;
(ii) the giving of the notice of redemption of any Bonds (other than mandatory sinking fund redemption) or the receipt by the Dissemination Agent of irrevocable instructions to give any such notice, together with a copy of such notice of redemption;
(iii) the discharge of the Bond Indenture or the defeasance of any Bonds under the Bond Indenture; and
(iv) any change in, or the withdrawal of, any rating of the Bonds by a Rating Agency;
(d) the failure of the Corporation to provide the Disclosure Information required to be provided to the Dissemination Agent hereunder, after notice and the cure period provided in Section 9 hereof; and
(e) any amendment of or supplement to this Agreement entered into in accordance with Section 12 hereof, together with a copy of such amendment or supplement and any explanation provided by the Corporation pursuant to Section 12 hereof; and
(f) the termination of the obligations of the Corporation under this Agreement in respect of the Bonds pursuant to Sections 10 or 15 hereof; and
(g) a change in accounting principles or a change in Fiscal Year reported to the Dissemination Agent by the Corporation under Section 5(c) hereof.
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At the written request of the Corporation, the Dissemination Agent shall also furnish promptly to the Repository a copy of any other information provided by the Corporation for such dissemination.
Section 7. Disclosure to Bondowners and Rating Agencies. The Dissemination Agent is further authorized and directed to forward in an appropriate manner to any Rating Agency then maintaining a rating of the Bonds and, at the expense of such Bondowner, to any Bondowner who requests in writing such information, any information transmitted to the Repository under Section 6 hereof, at the time of such transmission or, if such information is transmitted with a subsequent time of release, at the time such information is to be released.
The Corporation will mail, at the expense of the Corporation, to any Owner (verified by the Dissemination Agent) who requests in writing such information, any information transmitted to the Repository under Section 6 hereof, at the time of such transmission or, if such information is transmitted with a subsequent time of release, at the time such information is to be released.
Nothing in this Agreement is intended to limit the ability of the Dissemination Agent in its role as Bond Trustee to communicate with the Bondholders in such manner and at such times as it shall deem appropriate in executing the trusts under the Bond Indenture. The Dissemination Agent shall not be required to forward any such communication to the Repository (or to any Rating Agency under this Section 7), unless and only to the extent it is specifically described in Section 6 hereof. The Corporation acknowledges and agrees that the Dissemination Agent may, in its discretion, however, make any communication with Bondholders available to the Repository and the Rating Agencies, unless the Dissemination Agent determines that such disclosure would adversely affect the security or interests of the Owners of the Bonds.
Section 8. Costs, Expenses and Indemnification of Dissemination Agent. (a) The Corporation hereby agrees to pay reasonable compensation of the Dissemination Agent for, and all costs and expenses of the Dissemination Agent incurred in, performing the services required of it under this Agreement, whether as agent for the Corporation or otherwise. The Corporation hereby acknowledges and agrees that such compensation, costs and expenses constitute payments due under the Loan Agreement, and all parties hereto acknowledge and agree that for the payment of such amounts and the indemnity granted in Subsection (b) of this Section 8 the Dissemination Agent shall have the right to use and apply funds held by the Dissemination Agent to the extent provided in the Bond Indenture.
(b) In addition to any and all rights of the Dissemination Agent to reimbursement or indemnification or other rights pursuant to the Loan Agreement, the Bond Indenture or at law or in equity, the Corporation hereby agrees to indemnify and hold harmless the Dissemination Agent and its officers, directors and agents from and against any and all claims, damages, losses, liabilities, reasonable costs and expenses whatsoever (including reasonable attorneys’ fees and expenses) which such indemnified party may incur by reason of or in connection with the Dissemination Agent’s disclosure of information pursuant to this Agreement; provided that the Corporation shall not be required to indemnify the Dissemination Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by the willful misconduct or negligence of the Dissemination Agent in such disclosure of information hereunder. The provisions contained in this Section 8(b) shall survive termination of the other
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provisions of this Agreement and the Bond Indenture or the resignation or removal of the Dissemination Agent.
Section 9. Defaults and Remedies. Subject to Section 4 hereof, failure of the Corporation or the Dissemination Agent to comply with any provisions of this Agreement on its part to be observed shall constitute a default hereunder and any party hereto aggrieved thereby, including the Owners of any Outstanding Bonds as third-party beneficiaries hereof, may take whatever action at law or in equity may appear necessary or appropriate to enforce performance and observance of any agreement or covenant contained herein, including a proceeding for a writ of mandamus or specific performance. Direct, indirect, consequential and punitive damages shall not be recoverable by any Person for any default hereunder and are hereby waived to the extent permitted by law. Notwithstanding anything to the contrary contained herein, in no event shall a default under this Agreement constitute a default or an Event of Default under the Bonds, the Bond Indenture, the Loan Agreement, the Master Indenture, or the Series 2017 Obligation.
In addition to the foregoing remedies, in the event the Corporation breaches its covenant to provide the Disclosure Information to the Dissemination Agent under Section 5 hereof by the Annual Submission Date or the Quarterly Submission Date, and such breach continues for a period of thirty (30) days after there has been given, by certified mail, to the Corporation by the Dissemination Agent, or to the Corporation and the Dissemination Agent by any Owner of an Outstanding Bond, a written notice stating that it is a “Notice of Default” hereunder specifying such breach and requiring it to be remedied, then the Dissemination Agent shall promptly make available to the Repository notice of the failure of the Corporation to provide the Disclosure Information.
Section 10. Binding Effect; Bondowners as Third-Party Beneficiaries. This Agreement shall inure to the benefit of and shall be binding upon the Corporation and the Dissemination Agent and their respective successors and permitted assigns; provided, however, that in the event another Person succeeds to the obligations and agreements of the Corporation under this Agreement and the Corporation is released from its obligations under the Master Indenture, and the Series 2017 Obligation, (i) the Corporation shall be released from all further covenants and agreements contained herein, and (ii) the Disclosure Information may be modified to the extent permitted by Section 12 hereof. In addition, this Agreement shall constitute a third-party beneficiary contract for the benefit of the Owners from time to time of the Outstanding Bonds. Said third-party beneficiaries shall be entitled to enforce performance and observance by the parties of the respective agreements and covenants herein contained as fully and completely as if said third-party beneficiaries were parties hereto; provided that this Agreement (other than this Section 10) may be amended or supplemented from time to time without notice to or the consent of such third-party beneficiaries. Nothing in this Agreement, express or implied, shall give to any Person, other than the parties hereto and their respective successors and permitted assigns as provided herein, and the Owners of the Outstanding Bonds, any benefit or other legal or equitable right, remedy or claim under this Agreement.
Section 11. Effect of Headings. The Section headings herein are for convenience only and shall not affect the construction hereof.
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Section 12. Amendments. This Agreement (and the form and requirements of the Disclosure Information) may not be effectively amended or supplemented except in a writing executed by the parties hereto (and the consent of the Dissemination Agent to such an amendment shall not be unreasonably withheld or delayed) accompanied by an Opinion of Bond Counsel, who may rely on certificates of the Corporation and others and the opinion may be subject to customary qualifications, to the effect that: (i) this Agreement as so amended or supplemented would have complied with the requirements of paragraph (b)(5) of the Rule at the time of the primary offering of the Bonds, giving effect to any change in circumstances applicable under clause (i)(a) and assuming that the Rule as in effect and interpreted at the time of the amendment or supplement was in effect at the time of the primary offering; and (ii) such amendment or supplement does not materially impair the interests of the Bondowners under the Rule. This Agreement may be amended or supplemented from time to time without notice to or the consent of the Owners of any Bonds (except as provided in Section 10 hereof).
If the Disclosure Information is amended pursuant to this Section 12, the Corporation shall provide to the Dissemination Agent, contemporaneously with the effectiveness of such amendment, an explanation of the reasons for the amendment and the effect, if any, of the change in the type of financial information or operating data being provided hereunder.
Section 13. Execution Counterparts. This Agreement 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.
Section 14. Governing Law; Construction. This Agreement shall be construed in accordance with the laws of the State of South Dakota without giving effect to the conflicts-of- law principles thereof. This Agreement is entered into to comply with the continuing disclosure provisions of the Rule and should be construed so as to satisfy the requirements of paragraph (b)(5) of the Rule.
Section 15. Term. This Agreement shall remain in effect so long as any Bonds are Outstanding.
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IN WITNESS WHEREOF, REGIONAL HEALTH, INC. and THE FIRST NATIONAL BANK IN SIOUX FALLS, have caused this CONTINUING DISCLOSURE AGREEMENT to be executed in their respective names, all as of the date first written above.
REGIONAL HEALTH, INC., on behalf of itself and the other Members
By Its President and Chief Executive Officer
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THE FIRST NATIONAL BANK IN SIOUX FALLS, as Dissemination Agent
By Its Vice President and Trust OFficer
(Signature of Dissemination Agent to Continuing Disclosure Agreement)
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EXHIBIT A
Certain Annual Disclosure Information
1. Information, for the most recent Fiscal Year, of the type presented in the forepart of the Official Statement under the heading “ANNUAL DEBT SERVICE REQUIREMENTS,” which information shall set forth debt service on the Bonds and all other long-term debt, including outstanding bonded indebtedness.
2. Information, for the most recent Fiscal Year, of the type presented in Appendix A of the Official Statement in the tables under the following headings in the section titled “SELECTED FINANCIAL AND UTILIZATION INFORMATION”:
a. Beds Available for Service;
b. Utilization;
c. Payors;
d. Historical and Pro Forma Maximum Annual Debt Service Coverage; provided that the information to be disclosed annually pursuant hereto shall set forth only debt service coverage ratios on a historical basis, and not on a pro forma basis;
e. Capitalization; and
f. Liquidity and Investments.
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APPENDIX F
BOOK-ENTRY ONLY SYSTEM
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APPENDIX F
BOOK-ENTRY ONLY SYSTEM
Information concerning The Depository Trust Company (“DTC”), New York, New York, and the Book- Entry System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by, the Authority, the Underwriter, the Bond Trustee or the Members of the Obligated Group.
Bonds in Book-Entry Form
Beneficial ownership in the Series 2017 Bonds will be available to Beneficial Owners (as described below) only by or through DTC Participants via a book-entry system (the “Book-Entry System”) maintained by DTC. If the Series 2017 Bonds are taken out of the Book-Entry System and delivered to owners in physical form, as contemplated hereinafter under “Discontinuance of DTC Services,” the following discussion will not apply.
DTC and Its Participants
DTC will act as securities depository for the Series 2017 Bonds. The Series 2017 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 each maturity of the Series 2017 Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC.
DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book- entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s highest rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org.
Purchases of Series 2017 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2017 Bonds on DTC’s records. The ownership interest of each actual purchaser of each Series 2017 Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmation providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2017 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Series 2017 Bonds, except in the event that use of the book-entry system for the Series 2017 Bonds is discontinued.
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To facilitate subsequent transfers, all Series 2017 Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of Series 2017 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2017 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Series 2017 Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Series 2017 Bonds, such as redemptions, defaults, and proposed amendments to the security documents. For example, Beneficial Owners of Series 2017 Bonds may wish to ascertain that the nominee holding the Series 2017 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.
Redemption notices shall be sent to DTC. If less than all of the Series 2017 Bonds within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Series 2017 Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Series 2017 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).
Redemption proceeds and payments of principal of and interest and premium, if any, on the Series 2017 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 Authority or the Bond Trustee, on the payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Bond Trustee, the Members of the Obligated Group or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, principal of and interest and any premium on the Series 2017 Bonds to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or the Bond Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.
Discontinuance of DTC Services
DTC may discontinue providing its services as depository with respect to the Series 2017 Bonds at any time by giving reasonable notice to the Authority or the Bond Trustee. Under such circumstances, in the event that a successor depository is not obtained, bond certificates are required to be printed and delivered.
The Authority may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, bond certificates will be printed and delivered to DTC.
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Disclaimer
The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the Authority believes to be reliable, but the Authority takes no responsibility for the accuracy thereof.
None of the Authority, the Underwriter, the Members of the Obligated Group or the Bond Trustee has any responsibility or obligation with respect to (i) the accuracy of any records maintained by DTC, its nominee or any Direct Participant or Indirect Participant with respect to any beneficial ownership interest in any Series 2017 Bond, (ii) the delivery to any Direct Participant or Indirect Participant or any other Person, other than an owner, as shown in the Bond Register, of any notice with respect to any Series 2017 Bond including, without limitation, any notice of prepayment, tender, purchase or any event which would or could give rise to a tender or purchase right or option with respect to any Series 2017 Bond, (iii) the payment to any Direct Participant or Indirect Participant or any other Person, other than an owner, as shown in the Bond Register, of any amount with respect to the principal of, premium, if any, or interest on, or the purchase price of, any Series 2017 Bond, (iv) the selection of the Beneficial Owners to receive payment in the event of any partial prepayment of the Series 2017 Bonds or (v) any other action taken by DTC as registered owner.
The Authority, the Members of the Obligated Group and the Bond Trustee cannot and do not give any assurances that DTC or the Direct or Indirect Participants will distribute to the Beneficial Owners of the Series 2017 Bonds (i) payments of principal or prepayment price of or interest on the Series 2017 Bonds; (ii) certificates representing an ownership interest or other confirmation of Beneficial Ownership interests in the Series 2017 Bonds; or (iii) prepayment or other notices sent to DTC or Cede & Co., its nominee, as the Registered Owner of the Series 2017 Bonds, or that they will do so on a timely basis or that Direct or Indirect Participants will serve and act in the manner described in this Official Statement. The current “Rules” applicable to DTC are on file with the Securities and Exchange Commission, and the current “Procedures” of DTC to be followed in dealing with Participants are on file with DTC.
Use of Certain Terms in Other Sections of the Official Statement
In reviewing this Official Statement it should be understood that while the Series 2017 Bonds are in the Book-Entry System, reference in other sections of this Official Statement to owners of such Bonds should be read to include any person for whom a Participant acquires an interest in Series 2017 Bonds, but (i) all rights of ownership, as described herein, must be exercised through DTC and the Book-Entry System and (ii) notices that are to be given to registered owners by the Bond Trustee will be given only to DTC. DTC is required to forward (or cause to be forwarded) the notices to the Participants by its usual procedures so that such Participants may forward (or cause to be forwarded) such notices to the Beneficial Owners.
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SOUTH DAKOTA HEALTH AND EDUCATIONAL FACILITIES AUTHORITY • Revenue Bonds, Series 2017 (Regional Health)