Tarrant County Cultural Education Facilities Finance Corporation Texas Health Resources System Revenue Bonds Series 2016A

This Preliminary Official Statement and the information contained herein are subject to completion or amendment. 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, qualification or filing under the securities laws of any such jurisdiction. or about______,2016. Underwriters. Series2016A Bonds inbook-entryformareexpectedtobeavailablefor credit throughthefacilitiesofDTCon of BrownPruittWambsganssFerrill&Dean,PC,counsel totheIssuer,andofNortonRoseFulbrightUSLLP,counsel Certain legalmattersaresubjecttotheapprovalofBracewell LLP,specialcounseltoTHR,oftheGeneralCounsel legal matters by the Attorney General of the State of Texas and an opinion as to legality by Bracewell LLP, Bond Counsel. the Underwriters,subjecttopriorsale,withdrawalormodification oftheofferwithoutnotice,andtoapprovalcertain B other federaltaxconsequences. discussion ofBondCounsel’sopinion,includingaalternativeminimumtaxconsequencesforcorporationsand † * The dateofthisOfficial Statementis______, 2016. 1 LIMITED REDEMPTION P DENOMINATIONS INTEREST D NE an itemoftaxpreferencethatisincludableinthealternativeminimumimposedonindividuals.See“ on theSeries2016ABondsisexcludablefromgrossincomeforfederaltaxpurposesunderexistinglawandnot to paythe C

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T : B exas noranypoliticalsubdivisionoragency,including onds. O S nly and certainwholly-controlledaffiliatesaswellfundsheldundertheBondIndenture. Finance Corporation (the “Issuer”), payable fromloan payments to be made or guaranteed by THR The Series2016ABonds are limitedobligationsof the TarrantCountyCulturalEducationFacilities Series 2016ABondsaresubjecttomandatorysinkingfundredemption,asdescribedherein. and soonerunderextraordinarycircumstancesforthesteppedcouponbonds,term The Series2016ABondsaresubjecttoredemptionattheoptionofTHRonorafterFebruary 15, 20__, issuance oftheSeries2016ABonds. (“THR”), aTexasnonprofitcorporation,andcertaintax-exemptaffiliatestofinancecostsof renovation, remodelingand/orequippingofcapitalimprovementsforTexasHealthResources issued forthebenefitofTHRand(ii)financereimbursecostsacquisition,construction, The Series2016ABondsarebeingissuedto(i)refinancecertainoftheoutstandingIssuer’sbonds The Series2016ABondsareissuableindenominationsof$5,000oranyintegralmultiple$5,000. February 15,2017,andcalculatedonthebasisofa360-dayyeartwelve30-daymonths. Interest ontheSeries2016ABondswillbepayableFebruary15andAugust15,commencing T tanley arrant T 1

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No dealer, salesman or any other person has been authorized by the Issuer, THR, or the Underwriters to give any information or to make any representation other than those contained in this Official Statement and the Appendices hereto in connection with the offering described herein and, if given or made, such other information or representation must not be relied upon. This Official Statement does not constitute an offer to sell the Series 2016A Bonds or a solicitation of an offer to buy, nor shall there be any sale of the Series 2016A Bonds by any person in any state or other jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale. The information set forth herein under the caption “THE ISSUER” and “LITIGATION – The Issuer” has been furnished by the Issuer. All other information contained in this Official Statement has been obtained from THR and other sources believed to be reliable. Such other information is not guaranteed as to accuracy or completeness by, and is not to be relied upon or construed as a promise or representation by, the Issuer. The Bank of New York Mellon Trust Company, National Association, in each of its capacities, including but not limited to Bond Trustee, Master Trustee, bond registrar and paying agent, has not participated in the preparation of this Official Statement and assumes no responsibility of any kind for its content. This Official Statement is submitted in connection with the sale of securities referred to herein and may not be used, in whole or in part, for any other purpose. The information and expressions of opinion set forth 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 the Issuer, THR or any other person since the date of the information set forth herein. This Official Statement does not constitute a contract among or between the Issuer, THR or the Underwriters and any purchaser of the Series 2016A Bonds. The Underwriters have provided the following sentence for inclusion in this Official Statement. 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 facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. References to web site addresses herein are for informational purposes only and may be in the form of a hyperlink solely for the reader’s convenience. Unless specified otherwise, such web sites and the information or links contained therein are not incorporated into, and are not a part of, this Official Statement. The Series 2016A Bonds have not been registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended. No registration, qualification or exemption of the Series 2016A Bonds in accordance with the applicable securities laws of any jurisdiction should be regarded as a recommendation thereof. No jurisdiction or agency has guaranteed or passed upon the safety of the Series 2016A Bonds as an investment, upon the probability of any earnings thereon or upon the accuracy or adequacy of this Official Statement. There are risks associated with the purchase of the Series 2016A Bonds. For a discussion of certain of these risks, see “BONDHOLDERS’ RISKS” herein. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2016A 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 UNDERWRITERS MAY OFFER AND SELL THE SERIES 2016A BONDS TO CERTAIN DEALERS AT PRICES LOWER THAN THE OFFERING PRICES RESULTING FROM THE YIELDS STATED ON THE INSIDE COVER PAGE HEREOF, AND SAID OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITERS WITHOUT NOTICE. THE COVER PAGE CONTAINS CERTAIN INFORMATION FOR GENERAL REFERENCE ONLY AND IS NOT INTENDED AS A SUMMARY OF THIS OFFERING. INVESTORS SHOULD READ THE ENTIRE OFFICIAL STATEMENT, INCLUDING ALL ATTACHED APPENDICES, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION. This Official Statement contains “forward-looking statements,” which generally can be identified with words or phrases such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “foresees,” “may,” “plan,” “predict,” “should,” “will” or other words or phrases of similar import. All statements included in this Official Statement that any person expects or anticipates will, should or may occur in the future are forward-looking statements. These statements are based on assumptions and analyses made by THR in light of its experience and perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. However, whether actual results and developments conform with expectations and predictions is subject to a number of risks and uncertainties, including, without limitation, the information discussed under “BONDHOLDERS’ RISKS” in this Official Statement as well as additional factors beyond THR’s and the Issuer’s control. The important risk factors and assumptions described under that caption and elsewhere herein could cause actual results to differ materially from those expressed in any forward-looking statement. All of the forward-looking statements made in this Official Statement are qualified by these cautionary statements. There can be no assurance that the actual results or developments anticipated will be realized or, even if substantially realized, that they will have the expected consequences to or effects on THR’s business or operations. All subsequent forward-looking statements attributable to THR or the Issuer or persons acting on their behalf are expressly qualified in their entirety by the factors and assumptions described above and in any documents containing those forward-looking statement. No person has any obligation to prepare or release any updates or revisions to any forward-looking statement.

TABLE OF CONTENTS

Page Page INTRODUCTORY STATEMENT ...... 1 The System Could Lose Accreditation or Licenses ...... 28 TEXAS HEALTH RESOURCES ...... 2 THR’s Financial Obligations Could Increase or be Accelerated PLAN OF FINANCING ...... 2 and Deplete Its Available Funds ...... 28 Series 2016A Bonds ...... 2 The Security Interests Securing the Notes are of Limited Value The Refunded Bonds ...... 2 and Are Likely Inadequate to Assure Payment of the Bonds ...... 29 ESTIMATED SOURCES AND USES OF FUNDS ...... 3 The Contractual Undertakings of the Obligated Group May Not ANNUAL DEBT SERVICE REQUIREMENTS ...... 4 Be Fully Enforceable ...... 29 THE SERIES 2016A BONDS ...... 5 The Rights of Bondholders May Be Limited by Bankruptcy and General ...... 5 Other Laws ...... 30 Redemption Provisions ...... 5 The Master Indenture, Bond Indenture and Loan Agreement Registration, Transfer and Exchange Provisions ...... 6 Could Be Amended Without Bondholder Consent ...... 31 BOOK-ENTRY-ONLY SYSTEM ...... 6 THR May Be Unable to Complete Construction Projects on General ...... 6 Time or Within Budget, Which Could Reduce or Defer Limitations ...... 8 Expected Revenue ...... 31 SOURCES OF PAYMENT AND SECURITY FOR THE LITIGATION ...... 32 BONDS ...... 8 The Issuer ...... 32 Sources of Payment ...... 8 THR ...... 32 Security for the Bonds ...... 9 TAX MATTERS ...... 32 Master Indenture ...... 9 Tax Exemption ...... 32 THE ISSUER ...... 10 Collateral Tax Consequences...... 33 BONDHOLDERS’ RISKS ...... 11 Tax Accounting Treatment of Original Issue Premium ...... 33 There Are Many Risks to THR’s Ability to Provide for Payment Tax Accounting Treatment of Original Issue Discount ...... 34 of the Series 2016A Bonds ...... 11 Stepped Coupon Bonds ...... 34 The System Could Be Adversely Affected by Recently Enacted Tax Legislative Changes...... 35 Health Care Reform Laws in Ways and To an Extent That UNDERWRITING ...... 35 Cannot Be Predicted ...... 11 Marketing Agreement(s) ...... 35 The System is Largely Dependent on, and Could Be Adversely RATINGS ...... 36 Affected by Changes in, Federal and State Funding ...... 13 LEGAL MATTERS ...... 36 If the System Improperly Provides or Claims Compensation for INDEPENDENT AUDITORS ...... 36 Services, It Could Lose its Ability to Serve Medicare or FINANCIAL ADVISOR ...... 36 Medicaid Beneficiaries or Incur Substantial Penalties ...... 18 VERIFICATION OF MATHEMATICAL COMPUTATIONS ...... 36 The System May Not Be Able to Maintain Contracts with CONTINUING DISCLOSURE ...... 36 Managed Care Providers for Adequate Payments ...... 22 Annual Reports ...... 37 The System Could Be Adversely Affected by Competition From Quarterly Reports ...... 37 Other Service Providers ...... 23 Material Event Notices ...... 37 The System May Be Adversely Affected By the Increasing Cost Availability of Information ...... 37 of Modern Technology ...... 23 Limitations and Amendments ...... 37 The System May Be Adversely Affected By Negative Reviews MISCELLANEOUS ...... 38 from Third Parties ...... 23 APPENDIX A TEXAS HEALTH RESOURCES ...... A-1 The System’s Financial Results of Operation and Condition APPENDIX B TEXAS HEALTH RESOURCES Could Be Adversely Affected By Future Acquisitions or CONSOLIDATED FINANCIAL Divestitures ...... 23 STATEMENTS, DECEMBER 31, Unanticipated Catastrophes and Conditions Could Adversely 2015 AND 2014 ...... B-1 Affect the System’s Financial Condition and Results of Operations ...... 24 APPENDIX C SUMMARY OF CERTAIN The System Could Be Limited By, or Incur Substantial Liability DOCUMENTS AND DEFINITION Under, Federal or State Laws ...... 24 OF CERTAIN TERMS ...... C-1 THR is Dependent on, and Could Incur Liability in Denying APPENDIX D FORM OF OPINION OF BOND Access to, the Medical Staffs of its Hospitals ...... 26 COUNSEL ...... D-1 THR May Not Be Able to Employ an Adequate Workforce on Affordable Terms ...... 26 THR Wholly-Controlled Affiliates or the Series 2016A Bonds Could Lose Their Tax-Exempt Status ...... 26 THR or Any of Its Tax-Exempt Affiliates Could Be Adversely Affected By Providing Too Much, or Too Little, Uncompensated Care to Indigents ...... 27

CUSIP® is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard & Poor’s Capital IQ on behalf of the American Bankers Association. The CUSIP numbers listed above are being provided solely for the convenience of bondholders only at the time of issuance of the Series 2016A Bonds and neither the Issuer, THR nor the Underwriters make any representation with respect to such numbers or undertake any responsibility for their accuracy now or at any time in the future. The CUSIP number for a specific maturity is subject to being changed after the issuance of the Series 2016A Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part of such maturity or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Series 2016A Bonds. ii [THIS PAGE INTENTIONALLY LEFT BLANK]

OFFICIAL STATEMENT

$625,000,000* Tarrant County Cultural Education Facilities Finance Corporation Texas Health Resources System Revenue Bonds Series 2016A

INTRODUCTORY STATEMENT

This Official Statement is furnished in connection with the offering by the Tarrant County Cultural Education Facilities Finance Corporation (the “Issuer”) of its Texas Health Resources System Revenue Bonds, Series 2016A (the “Series 2016A Bonds”) in the aggregate principal amount of $625,000,000. The Series 2016A Bonds will be issued under a Trust Indenture, dated as of October 1, 2008, as supplemented and amended from time to time (the “Bond Indenture”), between the Issuer and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Bond Trustee”). The Issuer has previously issued its Texas Health Resources System Revenue Bonds, Series 2008A (the “Series 2008A Bonds”), Series 2008B (the “Series 2008B Bonds”), Series 2008C (the “Series 2008C Bonds”), Series 2010 (the “Series 2010 Bonds”), Series 2012A (the “Series 2012A Bonds”), Series 2012B (the “Series 2012B Bonds”) and Series 2015A (the “Series 2015A Bonds”, together with the Series 2008A Bonds, the Series 2008B Bonds, the Series 2008C Bonds, the Series 2010 Bonds, the Series 2012A Bonds, the Series 2012B Bonds and the Series 2015A Bonds, the “Previously Issued Bonds”), under the Bond Indenture, and it may issue additional bonds under the Bond Indenture on the conditions described therein (any such additional bonds together with the Series 2016A Bonds and the Previously Issued Bonds, the “Bonds”).” See “PLAN OF FINANCING” herein.

The proceeds of the sale of the Bonds will be loaned to Texas Health Resources, a Texas nonprofit corporation (“THR”). Through its affiliates, THR operates a primarily nonprofit health care system in north central Texas. THR’s wholly-controlled facilities include 14 acute care hospital locations with approximately 2,931 operated beds and a 10-bed long-term care hospital. THR will use proceeds of the Series 2016A Bonds to (i) currently refund a portion of the Issuer’s outstanding Texas Health Resources System Refunding Revenue Bonds, Series 2007A (the “Refunded Bonds”), which were issued in the aggregate principal amount of $597,840,000, of which $507,520,000 are currently outstanding, (ii) finance and reimburse costs of the acquisition, construction, renovation, remodeling and/or equipping of capital improvements of THR and certain tax-exempt affiliates and (iii) pay certain costs of issuance of the Series 2016A Bonds. See “PLAN OF FINANCING” herein.

Each loan to THR of proceeds of the sale of Bonds is made pursuant to a Loan Agreement, dated as of October 1, 2008, as supplemented and amended from time to time (the “Loan Agreement”), between the Issuer and THR. To evidence each such loan, THR has issued and will issue a promissory note (each, a “Note”) in the principal amount of the Bonds issued to finance the loan. The Note evidencing the loan of proceeds of the Series 2016A Bonds is referred to herein as the “Series 2016A Note.” Under the Bond Indenture, the Issuer has collaterally assigned the Notes and all of its rights under the Loan Agreement (except certain reimbursement and indemnity rights) to the Bond Trustee as security for the Bonds, equally and ratably. Under the Notes and the Loan Agreement, THR must make payments to the Bond Trustee which, together with other available money, if any, will be sufficient to provide for the timely payment of the principal of, premium, if any, and interest on the Bonds.

The Notes are issued under and entitled to the benefit and security of a Second Amended and Restated Master Trust Indenture, dated as of October 1, 2008, as supplemented and amended (the “Master Indenture”), among THR, such other persons as from time to time are members of the Obligated Group, and The Bank of New York Mellon Trust Company, N.A. (successor in trust to Texas Commerce Bank National Association), as trustee (the “Master Trustee”). Seven THR wholly-controlled affiliates have assumed the obligations of Obligated Group Members under the Master Indenture. Obligated Group Members jointly and severally agree to pay or guaranty all obligations issued under the Master Indenture, including the Notes, and agree to observe and perform Master Indenture covenants. Subject to certain limitations, the Obligated Group is permitted under the terms of the Master Indenture to incur additional debt from time to time that will be on parity with the Series 2016A Note. Assuming the issuance of the Series 2016A Bonds and refunding of the Refunded Bonds, $1,725,560,000* outstanding principal amount of Notes and other Securities will be Outstanding under the Master Indenture, of which the Series 2016A Note will represent 36.2%* of the Outstanding Securities (excluding Securities issued to secure bank

* Preliminary, subject to change.

liquidity and credit facilities). See “SOURCES OF PAYMENT AND SECURITY FOR THE BONDS – Master Indenture” herein.

THR and the Obligated Group Members are referred to herein as the “Obligated Group.” The Obligated Group Members accounted for approximately 63.1% of the net patient service revenue of THR and its consolidated affiliates for their fiscal year ended December 31, 2015. THR has designated certain other wholly-controlled affiliates as “Designated Members,” which must agree to observe and perform certain obligations under the Master Indenture. Designated Members and the Obligated Group are referred to herein as the “Combined Group.” See “SOURCES OF PAYMENT AND SECURITY FOR THE BONDS – Master Indenture” herein. The Combined Group Members accounted for approximately 67.0% of the net patient service revenue of THR and its consolidated affiliates for their fiscal year ended December 31, 2015.

The Bonds are limited obligations of the Issuer payable only from and to the extent of payments required to be made by THR under the Notes and the Loan Agreement and by the Obligated Group Members in accordance with their guaranty of the Notes under the Master Indenture and funds held under the Bond Indenture. The Series 2016A Bonds will not be obligations of the State of Texas or any political subdivision or agency, including Tarrant County, Texas.

Brief summaries of selected provisions of the Series 2016A Bonds, the Bond Indenture, the Loan Agreement, the Series 2016A Note, and the Master Indenture, as well as information concerning the Obligated Group, the Issuer, and others, follow in this Official Statement, including the Appendices. Certain terms used in this Official Statement are defined in APPENDIX C.

TEXAS HEALTH RESOURCES

Through its affiliates, THR operates an integrated, primarily nonprofit health care system with services and facilities throughout north central Texas. THR’s wholly-controlled facilities include 14 acute care hospital locations with approximately 2,931 operated beds as of June 30, 2016, and a 10-bed long-term care hospital.

THR and some of its wholly-controlled affiliates participate in joint ventures with physicians and non- physicians to operate hospitals and other health related ventures. See “SYSTEM FACILITIES AND OPERATIONS OVERVIEW – Strategic Relationships” in APPENDIX A. THR’s consolidated financial statements include the accounts of the following joint ventures: (i) Texas Institute for Surgery, L.L.P.; (ii) Physicians Medical Center, L.L.C.; (iii) Southlake Specialty Hospital, L.L.C.; (iv) Rockwall Regional Hospital, L.L.C.; (v) Flower Mound Hospital Partners, L.L.C; and (vi) AMH Cath Labs, L.L.C.; (vii) Presbyterian Cancer Center–Dallas, LLC; (viii) Women’s Specialty Surgery Center of Dallas, LLC; (ix) Texas Health MedSynergies, LLC; and (x) Health Imaging Partners, LLC (collectively, the “Consolidated Joint Ventures”). THR, its wholly-controlled affiliates and its Consolidated Joint Ventures are referred to herein as the “System.” See “Table II – THR and its Wholly-Controlled Affiliates” in APPENDIX A.

THR and seven of THR’s wholly-controlled affiliates have assumed the obligations of the Obligated Group Members under the Master Indenture.

For additional information concerning THR, the System, and the Obligated Group, see APPENDIX A. For THR’s consolidated financial statements for its fiscal years ended December 31, 2015 and 2014, see APPENDIX B.

PLAN OF FINANCING

Series 2016A Bonds

The proceeds of the Series 2016A Bonds, together with other available funds, will be used to (i) currently refund a portion of the outstanding Refunded Bonds, (ii) finance and reimburse costs of the acquisition, construction, renovation, remodeling and/or equipping of capital improvements of THR and certain tax-exempt affiliates (the “Project”), and (iii) pay certain costs incurred in connection with the issuance of the Series 2016A Bonds. See “ESTIMATED SOURCES AND USES OF FUNDS.”

The Refunded Bonds

In May 2007, the Issuer issued the Refunded Bonds in the aggregate principal amount of $597,840,000, of which $507,520,000 are currently outstanding.

A portion of the proceeds of the Series 2016A Bonds, together with other available funds, will be irrevocably deposited in an escrow deposit fund established pursuant to an Escrow Agreement, dated as of the date of issuance of the Series 2016A Bonds, between THR and the bond trustee for the Refunded Bonds, as escrow agent. The funds deposited in the escrow deposit fund will be sufficient (i) to pay the principal of and interest on the Refunded Bonds on and prior to their redemption, and (ii) to redeem the Refunded Bonds at a redemption price of 100% of the principal amount thereof on February 15, 2017. Upon such irrevocable deposit, the Refunded Bonds will be deemed paid and no longer outstanding. The funds deposited in the escrow deposit fund will not be available to make payments on the Series 2016A Bonds. The deposit of moneys into the escrow deposit fund will constitute an irrevocable deposit for the benefit of the holders of the Refunded Bonds.

ESTIMATED SOURCES AND USES OF FUNDS

The following table sets forth the estimated sources and uses of funds for the plan of financing to be funded by the Series 2016A Bonds, excluding interest earnings and expenses:

Sources of Funds: Par Amount $625,000,000* Net Original Issue Premium ______Funds held under Trust Agreement for Refunded Bonds/ Equity Contribution ______TOTAL $______

Uses of Funds: Construction Fund $______Refunding of Refunded Bonds ______Costs of Issuance(1) ______TOTAL $______* Preliminary, subject to change. (1) Includes underwriting discount.

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ANNUAL DEBT SERVICE REQUIREMENTS The following table sets forth the principal and interest due on all long-term indebtedness of the System in each year, assuming interest on variable rate indebtedness as described below and continual remarketing of variable rate demand bonds. Series 2016A Bonds Aggregate Other Non- Year Ending Other Obligated Obligated Obligated Aggregate THR Dec. 31 Principal Interest Group Debt(1) Group Debt(1)(4) Group Debt(2)(3) System Debt 2016 2017 $63,177,440 $44,554,000 2018 40,444,966 41,642,000 2019 40,518,805 36,119,000 2020 40,609,371 31,810,000 2021 40,713,006 29,783,000 2022 40,854,225 29,507,000 2023 41,024,083 26,302,000 2024 41,243,518 26,569,000 2025 41,503,278 25,796,000 2026 48,586,922 25,569,000 2027 71,535,185 25,334,000 2028 72,202,798 25,060,000 2029 73,085,619 24,640,000 2030 74,110,521 23,847,000 2031 75,378,294 23,607,000 2032 76,927,605 50,368,000 2033 78,775,753 6,400,000 2034 52,309,576 6,183,000 2035 54,674,889 5,963,000 2036 33,933,964 - 2037 77,528,036 - 2038 77,523,750 - 2039 77,525,250 - 2040 77,527,714 - 2041 52,127,810 - 2042 52,193,080 - 2043 52,258,684 - 2044 52,333,225 - 2045 52,403,002 - 2046 52,477,382 - 2047 52,552,755 - 2048 15,690,000 - 2049 15,690,000 - 2050 15,690,000 - 2051 15,690,000 - 2052 75,690,000 - 2053 112,990,000 - 2054 108,660,000 - 2055 104,330,000 - Totals $2,242,490,503 $509,053,000 ______(1) Other Obligated Group debt includes Securities securing the Issuer’s currently outstanding fixed rate unrefunded portion of the Series 2007A Bonds and the Series 2007B Bonds, variable rate demand Series 2008A Bonds, Series 2008B Bonds and Series 2008C Bonds (collectively, the “Series 2008 Bonds”), the currently outstanding fixed rate Series 2010 Bonds, the currently outstanding taxable fixed rate Series 2012A Bonds (the “Series 2012A Taxable Bonds”), the currently outstanding variable rate demand Series 2012B Bonds, the currently outstanding fixed rate Series 2015A Bonds, THR’s currently outstanding taxable fixed rate Series 2015 Bonds (the “Series 2015 Taxable Bonds”), the outstanding amounts under a variable rate loan agreement among the Issuer, THR and The Northern Trust Company (the “Northern Trust Loan Agreement”), and the outstanding amounts under a variable rate loan agreement among the Issuer, THR and Kansas City Financial Corporation (the “KCFC Loan Agreement” and, together with the Northern Trust Loan Agreement, the “Bank Loan Agreements”). See “OPERATING AND FINANCIAL DATA – Historical Capitalization – Debt to Capitalization Ratio” in APPENDIX A. Assumes an interest rate of 2% on the Bank Loan Agreements and other variable rate indebtedness. The unpaid principal of the KCFC Loan Agreement may come due at the option of the KCFC on July 31, 2030, whereas the unpaid principal of the Northern Trust Loan Agreement is subject to mandatory tender on July 31, 2025. The principal amount subject to mandatory tender on July 31, 2025 under the Northern Trust Loan Agreement has been smoothed and shown as level principal payments from December 2026 through December 2035. See “BONDHOLDERS’ RISK – THR’s Financial Obligations Could Increase or Be Accelerated and Deplete Its Available Funds” herein. If variable interest rates on the bank loans increase above assumed rates or either bank exercises its early payment option, maximum annual debt service would increase and the extent of the increase could be substantial. See “BONDHOLDERS’ RISK – The System Financial Obligations Could Increase or Be Accelerated and Deplete Its Available Funds” herein and “OPERATING AND FINANCIAL DATA – Historical and Pro Forma Debt Service Coverage” in APPENDIX A. These assumptions may or may not be calculated in a manner consistent with the Master Indenture. There can be no assurance that assumed rates will closely approximate the actual interest rates on the Obligated Group debt in the future. (2) Other Non-Obligated Group Debt primarily represents debt of the Consolidated Joint Ventures; it also includes bank loans for construction, equipment, and working capital, as well as capitalized leases. THR does guarantee a portion of the debt of Non-Obligated Group Debt. This debt, except for the capitalized leases, is variable and a portion has been swapped to fixed; the interest rate on other variable rate debt is calculated at rates that range from 1.09% to 6.10%. (3) Debt for two of the Consolidating Joint Ventures have balloon maturities of $19,358,000 and $43,515,000 in 2022. Additional Consolidated Joint Venture debt has balloon maturities of $4,864,000 in 2019 and $9,792,000 in 2022. THR management believes the debt will be refinanced and, therefore, has amortized the principal payments through 2035. The interest rates used to calculate this amortization for each of the applicable Consolidating Joint Ventures are 3.52%, 3.41%, and 3.05%, respectively. (4) Excludes any applicable credit, liquidity, remarketing and other fees associated with variable rate bonds supported by the indebtedness and the THR guaranteed indebtedness.

THE SERIES 2016A BONDS

General

The Series 2016A Bonds will mature on the dates and in the aggregate principal amounts and will bear interest from the date of initial delivery at the rates set forth on the cover page of this Official Statement. Interest on the Series 2016A Bonds will be payable semiannually on February 15 and August 15 of each year, commencing February 15, 2017, and be calculated on the basis of a 360-day year of twelve 30-day months.

The Series 2016A Bonds will be issued to and registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”). DTC will act as securities depository for the Series 2016A Bonds. Ownership interests in the Series 2016A Bonds may be purchased in book-entry form only in denominations of $5,000 or any integral multiple of $5,000. See “BOOK-ENTRY-ONLY SYSTEM.” Except as described under such title below, Beneficial Owners (as herein defined) of the Series 2016A Bonds will have no right to receive physical delivery of Series 2016A Bonds and will not be or be considered to be registered owners of Series 2016A Bonds. So long as DTC or its nominee is the registered owner of the Series 2016A Bonds, references in this Official Statement to Bondholders or registered owners or owners of the Series 2016A Bonds will refer to DTC or its nominee and not to the Beneficial Owners of the Series 2016A Bonds, and payment of principal of, premium, if any, and interest on Series 2016A Bonds will be paid through the facilities of DTC. See “BOOK- ENTRY-ONLY SYSTEM” herein.

Redemption Provisions

Optional Redemption. Except upon mandatory sinking fund redemption and extraordinary redemption described below, the Series 2016A Bonds initially bearing interest at ___% (the “Stepped Coupon Bonds”) are not subject to redemption prior to February 15, 20__. The Stepped Coupon Bonds are subject to redemption prior to maturity on February 15, 20__ and any date thereafter, at the option of the Issuer at THR’s request, in whole or from time to time in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued interest, if any, to the redemption date.

Except upon mandatory sinking fund redemption and extraordinary redemption described below, the Series 2016A Bonds (other than the Stepped Coupon Bonds) are not subject to redemption prior to February 15, 20__. The Series 2016A Bonds are subject to redemption prior to maturity on February 15, 20__ and any date thereafter, at the option of the Issuer at THR’s request, in whole or from time to time in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued interest, if any, to the redemption date.

Mandatory Sinking Fund Redemption. The Series 2016A Bonds maturing on February 15, 20__ and 20__, are subject to mandatory sinking fund redemption, on February 15 of each of the years and in the aggregate principal amounts set forth below, at a redemption price equal to the principal amount thereof plus accrued interest from the most recent Interest Payment Date to which interest has been paid provided to the redemption date:

Series 2016A Term Bonds maturing 20__ Series 2016A Term Bonds maturing 20__

Year Principal Amount Year Principal Amount 20__ $______20__ $______20______20______20______20______20______(1) 20______(1) ______(1) Remaining due at stated maturity.

The aggregate principal amount of Series 2016A Bonds required to be redeemed on or before each such February 15 will be reduced by the principal amount of Series 2016A Bonds of applicable maturity purchased by or on behalf of THR and delivered to the Bond Trustee for cancellation, or redeemed as described under “Optional Redemption” above, if THR requests a reduction at least 45 days before the redemption date and such Series 2016A Bonds have not previously been credited.

Extraordinary Optional Redemption. The Series 2016A Bonds will be subject to redemption prior to maturity at the option of the Issuer at THR’s request, in whole or in part, at a redemption price equal to 100% of the principal amount thereof plus accrued interest to the redemption date, on any date within 365 days after any property

is damaged, destroyed or condemned (or sold under the threat of condemnation) to such an extent that, as determined by the board of trustees of THR (taking into account any business interruption insurance), the revenue- producing capability of the Combined Group as a whole will be materially impaired for a period of not less than six consecutive months and, in the absence of the redemption of the Series 2016A Bonds, the interest of the owners of the Series 2016A Bonds would be materially, adversely affected, THR may also exercise this option within 60 days following receipt of any proceeds relating to such event.

Purchase in Lieu of Redemption. THR may purchase, rather than cancel, any Series 2016A Bonds that have been called for redemption pursuant to the provisions of the Bond Indenture described under the caption “Optional Redemption” above, at a purchase price equal to the redemption price therefor. No such purchase may be made unless THR has delivered to the Bond Trustee and the Issuer an opinion of Bond Counsel to the effect that the purchase will not adversely affect the exclusion of interest on the Series 2016A Bonds from gross income for federal income tax purposes. If Series 2016A Bonds are purchased rather than cancelled on redemption, they will remain Outstanding and be entitled to the benefit and security of the Bond Indenture equally and ratably with all other Outstanding Bonds.

Selection of Series 2016A Bonds for Redemption. If less than all the Series 2016A Bonds are to be redeemed at the option of the Issuer, THR may select the principal amount of each Series 2016A Bonds maturity bearing interest at the same rate to be redeemed. For selection of Series 2016A Bonds within maturities, see “BOOK-ENTRY-ONLY SYSTEM” herein.

Notice of Redemption. Notice of any redemption of Series 2016A Bonds will be given not less than 20 nor more than 60 days before the redemption date by first-class mail, postage prepaid, to DTC or any substitute Securities Depository. Notice of any optional redemption may be conditioned upon the deposit of money with the Bond Trustee not later than the redemption date, in which case the notice will be of no effect unless the money is deposited. All Series 2016A Bonds or portions called for redemption will cease to bear interest on the specified redemption date if funds for their redemption are on deposit with the Bond Trustee at that time.

Registration, Transfer and Exchange Provisions

The Issuer will cause books for the registration and transfer of the Series 2016A Bonds to be kept with the Bond Trustee, which is appointed the bond registrar of the Issuer for the Series 2016A Bonds. The person in whose name a Series 2016A Bond is registered in the bond register will be deemed the absolute owner thereof for all purposes. The Series 2016A Bonds will be initially registered in the name of Cede & Co., as nominee of DTC. For a description of the transfer procedures while the Series 2016A Bonds are registered in the name of Cede & Co., see “BOOK-ENTRY-ONLY SYSTEM.”

BOOK-ENTRY-ONLY SYSTEM

General

This section describes how ownership of the Series 2016A Bonds are to be transferred and how the principal of, premium, if any, and interest on the Series 2016A Bonds are to be paid to and credited by DTC while the Series 2016A Bonds are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. Neither the Issuer nor THR takes any responsibility for the accuracy or completeness thereof.

DTC will act as securities depository for the Series 2016A Bonds. The Series 2016A Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Series 2016A Bond certificate will be issued for each maturity bearing interest at the same rate of the Series 2016A Bonds, in the aggregate principal amount of such maturity and interest rate, and will be deposited with DTC.

DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct

Participants of sales and other securities transactions in deposited securities, through electronic computerized book- entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and 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 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.

Purchases of Series 2016A Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2016A Bonds on DTC’s records. The ownership interest of each actual purchaser of a Series 2016A Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2016A 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 2016A Bonds, except in the event that use of the book-entry system for the Series 2016A Bonds is discontinued.

To facilitate subsequent transfers, all Series 2016A 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 2016A Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2016A 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 2016A Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Series 2016A Bonds, such as redemptions, defaults, and proposed amendments to the bond documents. For example, Beneficial Owners of Series 2016A Bonds may wish to ascertain that the nominee holding the Series 2016A Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Bond Trustee and request that copies of notices be provided directly to them.

Redemption notices will be sent to DTC. If less than all of the Series 2016A Bonds within a maturity bearing interest at the same rate are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such Series 2016A Bond to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Series 2016A Bonds unless authorized by a Direct Participant in accordance with DTC’s procedures. Under its usual procedures, DTC mails an “Omnibus Proxy” to the Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts Series 2016A Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Redemption proceeds and principal and interest payments on the Series 2016A 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 Issuer or the Bond Trustee, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC nor its nominee, the Bond Trustee, or the Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption 7

proceeds and principal and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Issuer 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.

DTC may discontinue providing its services as depository with respect to the Series 2016A Bonds at any time by giving reasonable notice to the Issuer or the Bond Trustee. THR may decide to discontinue use of the system of book-entry transfers through DTC. In that event, upon surrender by DTC of its bond certificates to the Bond Trustee for transfer, bond certificates will be printed and delivered to a successor securities depository or, if none, to the DTC Participants or such other persons as such DTC Participants may specify (which may be the Indirect DTC Participants or Beneficial Owners), in authorized denominations or integral multiples thereof.

Limitations

For so long as the Series 2016A Bonds are registered in the name of DTC or its nominee, Cede & Co., the Issuer and the Bond Trustee will recognize only DTC or its nominee, Cede & Co., as the registered owner of the Series 2016A Bonds for all purposes, including payments, notices and voting.

Because DTC is treated as the registered owner of the Series 2016A Bonds for substantially all purposes under the Bond Indenture, Beneficial Owners may have a restricted ability to influence in a timely fashion remedial action or the giving or withholding of requested consents or other directions. In addition, because the identity of Beneficial Owners is unknown to the Issuer, to DTC or to the Bond Trustee, it may be difficult to transmit information of potential interest to Beneficial Owners in an effective and timely manner. Beneficial Owners should make appropriate arrangements with their broker or dealer regarding distribution of information regarding the Series 2016A Bonds that may be transmitted by or through DTC.

Payments made by the Bond Trustee to DTC or its nominee will satisfy the Issuer’s and THR’s obligations, whether or not such payments are credited to Beneficial Owners.

Neither the Issuer nor THR nor the Bond Trustee will have any responsibility or obligation with respect to, or makes any representation or prediction of DTC’s performance with respect to: (i) the accuracy of the records of DTC, its nominee or any DTC Participant or Indirect Participant with respect to any beneficial ownership interest in any Series 2016A Bonds; (ii) the delivery to any DTC Participant or Indirect Participant or any other Person, other than a registered owner, of any notice or other document, including, without limitation, any notice of redemption with respect to any Series 2016A Bond; (iii) the payment to any DTC Participant or Indirect Participant or any other Person, other than a registered owner, of any amount with respect to the principal of, premium, if any, interest on, or redemption price of, any Series 2016A Bond; (iv) the selection of the Beneficial Owners to receive payment in the event of any partial redemption of the Series 2016A Bonds; or (v) any consent given or other action taken by DTC as registered owner.

SOURCES OF PAYMENT AND SECURITY FOR THE BONDS

Sources of Payment

The Bonds are limited obligations of the Issuer payable solely from and to the extent of payments required to be made by THR to the Issuer under the Loan Agreement and on the Notes (or from payments made by any other Obligated Group Member in accordance with its guaranty of the Notes under the Master Indenture) and funds held under the Bond Indenture.

Under the Loan Agreement, the Issuer is required to loan all proceeds from the sale of the Bonds to THR, and THR is required to make loan payments, evidenced by the Notes, in the same amounts as and on the dates for required payments of principal of and interest and redemption premium, if any, on the Bonds. The loans are not permitted to be prepaid except to the extent of the redemption of the Bonds. All loan payments are required to be made directly to the Bond Trustee for the account of the Issuer. The Bond Indenture requires that the loan payments be deposited directly to the Debt Service Fund. THR has also agreed under the Loan Agreement to pay certain fees and expenses (consisting generally of fees, charges and expenses of the Bond Trustee, other agents and the Issuer) associated with the Bonds. THR has agreed to waive all rights of set-off, recoupment, counterclaim and abatement against the Issuer, the Bond Trustee and each separate or co-trustee, bond registrar, authenticating agent and paying agent.

NEITHER THE STATE OF TEXAS NOR ANY POLITICAL SUBDIVISION OR AGENCY OF THE STATE OF TEXAS, INCLUDING TARRANT COUNTY, TEXAS, IS OBLIGATED TO PAY THE BONDS. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF TEXAS, TARRANT COUNTY, TEXAS, OR ANY OTHER POLITICAL SUBDIVISION OR AGENCY IS PLEDGED TO THE PAYMENT OF THE BONDS. THE ISSUER HAS NO TAXING POWER.

Security for the Bonds

The Bonds (including the Series 2016A Bonds, the Previously Issued Bonds, and Bonds of other series issued from time to time) are secured by the Bond Indenture. Under the Bond Indenture, the Issuer has granted a security interest in and pledged to the Bond Trustee, for the equal and ratable benefit of the owners of the Outstanding Bonds, all right, title, and interest of the Issuer in (1) the Loan Agreement, including the loan payments, the Notes by which the loan payments are evidenced, and the rights of holders of the Notes under the Master Indenture, but excluding certain indemnity and reimbursement rights, and (2) all money and investments held for the credit of the funds held by the Bond Trustee under the Bond Indenture (other than the Rebate Fund). Each Note, including the Series 2016A Note, will be issued under and secured by the Master Indenture equally and ratably with other Securities issued and to be issued thereunder. Neither the Bonds nor the Notes are secured by any interest in any tangible property of any kind or any other assets or revenues except those described herein.

Master Indenture

General. The Master Indenture authorizes the Series 2016A Note and other obligations to be issued thereunder from time to time. Obligations issued under the Master Indenture are referred to herein as “Securities.” Following the issuance of the Series 2016A Note and the refund of the Refunded Bonds, $1,725,560,000* principal amount of Securities will be outstanding under the Master Indenture. See “OPERATING AND FINANCIAL DATA – Historical Capitalization – Debt to Capitalization Ratio” in APPENDIX A. The Master Indenture provides for the payment of Securities by (1) committing the Obligated Group to pay or guarantee the Securities, (2) granting a security interest in the Obligated Group’s accounts receivable, receipts, rentals, insurance proceeds, and condemnation awards (other than Medicare receivables), (3) imposing certain restrictions and obligations on the Obligated Group in their operations and financial affairs, and (4) authorizing the Master Trustee to declare defaults, accelerate the maturity of Securities and exercise other remedies. The Master Indenture provides limited assurance of the payment of Securities. See “BONDHOLDERS’ RISKS” herein. The duties and responsibilities of the Master Trustee to act under the Master Indenture are limited. See “THE MASTER INDENTURE – Concerning the Master Trustee” in APPENDIX C.

Obligated Group. THR and seven wholly-controlled affiliates are members of the Obligated Group. THR may designate additional entities as “Obligated Group Members” under the Master Indenture, and affiliates may withdraw from their status as Obligated Group Members, from time to time as described in APPENDIX C under “THE MASTER INDENTURE – Membership in the Combined Group.” Obligated Group Members must assume or guaranty the obligations of THR under the Master Indenture, including the obligation to pay or guarantee all Securities jointly and severally with THR.

Combined Group. THR is also permitted to designate certain wholly-controlled affiliates as “Designated Members,” and to release Designated Members from such status, on the conditions described in APPENDIX C under “THE MASTER INDENTURE – Membership in the Combined Group.” A Designated Member is not directly obligated to pay any Securities, but THR or any other Obligated Group Member is obligated to cause a Designated Member to advance funds necessary to pay the Securities and to comply with the Master Indenture covenants, and each Designated Member must undertake to comply with such obligations to be admitted to the Combined Group. THR has designated certain wholly-controlled affiliates as Designated Members. See “THE SYSTEM, OBLIGATED GROUP, DESIGNATED MEMBERS, COMBINED GROUP, AND CONSOLIDATED JOINT VENTURES” in APPENDIX A. THR, the other Obligated Group Members, and the Designated Members are collectively referred to in this Official Statement as the “Combined Group.”

Issuance of Securities. Certain obligations of THR and Obligated Group Members may be made Securities under the Master Indenture at the request of THR. Neither the number nor the principal amount of obligations that may become Securities under the Master Indenture is limited. THR and its wholly-controlled affiliates may also incur debt and other obligations that are not secured under the Master Indenture.

* Preliminary, subject to change.

Revenue Pledge. To secure payment of the Securities (including the Series 2016A Note) under the Master Indenture each Obligated Group Member grants a security interest to the Master Trustee in all of its Revenues and accounts receivable, but excluding those that would be voidable if assigned or that require consent to be assigned or otherwise cannot be lawfully assigned (e.g., rights to Medicare receivables). The security interest granted under the Master Indenture is subordinate to other security interests granted in accordance with the Master Indenture, such as security interests in factored accounts receivable, rentals assigned or security interests granted to secure purchase money or construction debt, and limited amounts of other security interests. See “THE MASTER INDENTURE – Covenants of the Obligated Group – Limitation on Liens” in APPENDIX C. The security interest granted by an Obligated Group Member will be released if it withdraws from the Obligated Group. The security interests granted under the Master Indenture provide only limited security for payment of the Series 2016A Note. See “BONDHOLDERS’ RISKS – The Security Interests Securing the Notes are of Limited Value and Are Likely Inadequate to Assure Payment of the Bonds” herein.

Covenants. The Master Indenture contains covenants of THR and the Obligated Group Members, including covenants controlling membership in the Combined Group, the maintenance of minimum amounts of insurance and annual revenues, the disposition of assets, the incurrence of debt, and the granting of security interests. The covenants generally apply to the Combined Group on a combined basis and not to any individual member of the Combined Group. The covenants permit liens, transfers of assets, and the incurrence of additional indebtedness between members of the Combined Group without limitation. However, the covenants may not be effective in assuring the future financial ability of THR and the Obligated Group Members to pay the Series 2016A Note if members of the Combined Group are not fully and legally obligated by the covenants, or may not legally advance funds necessary to pay Securities, among other reasons. For a description of possible legal limitations on these matters, see “BONDHOLDERS’ RISKS – The Contractual Undertakings of the Obligated Group May Not Be Fully Enforceable” herein.

Members of the Combined Group may also enter into other covenants with third parties from time to time that may not be enforced by the Master Trustee, but which may affect the operations of the Combined Group.

THE ISSUER

The Issuer is a Texas nonstock, nonprofit cultural education facilities finance corporation established for the purposes set forth in the Cultural Education Facilities Finance Corporation Act, Article 1528m, V.A.T.C.S. (the “Act”). The Issuer was incorporated pursuant to the Act in March, 2003. The Act grants to the Issuer the same powers, authority and rights with respect to health facilities that a health facilities development corporation has with respect to health facilities described in the Health Facilities Development Act, Chapter 221, Texas Health and Safety Code (the “Health Act”). The Issuer is authorized to provide, expand and improve health facilities (as defined in the Health Act) determined by the Issuer to be needed for the purpose of improving the adequacy, cost and accessibility of health care, research and education within the State of Texas.

The Issuer is governed by a board of directors, consisting of five members appointed by the Commissioners Court of Tarrant County, Texas (the “County”). The Issuer adopted a bond resolution on August 16, 2016, authorizing the issuance of the Series 2016A Bonds.

The Issuer, under the terms of the Act and the Health Act, has, among other powers, the power to make contracts and incur liabilities; to borrow money at such rates of interest as it may determine; to issue its bonds in accordance with the provisions of the Act and the Health Act; and to secure any of its bonds or obligations by mortgage or pledge of all or any of its property, franchises and income for the purpose of financing or refinancing all or a portion of the cost of any health facility (as defined in the Health Act).

The responsibility for the operation and use of the Project, including any additions or improvements thereto, rests entirely with THR and its tax-exempt affiliates and not with the directors of the Issuer. The directors of the Issuer are not personally liable in any way for any act or omission committed or suffered in the performance of the functions of the Issuer.

Neither the Issuer nor the County has undertaken to review this Official Statement or has assumed any responsibility for the matters contained herein except solely as to matters relating to the Issuer. All findings and determinations by the Issuer and the County, respectively, are and have been made by each for its own internal uses and purposes in performing its duties under the Articles of Incorporation and Bylaws of the Issuer. Notwithstanding its approval of the Series 2016A Bonds for purposes of Section 147(f) of the Internal Revenue Code of 1986, as amended (the “Code”), the County does not endorse or in any manner, directly or indirectly, guarantee or promise to

pay the Series 2016A Bonds from any source of funds of the County or guarantee, warrant or endorse the creditworthiness or credit standing of THR, the Obligated Group, or the Combined Group, or in any manner guarantee, warrant or endorse the investment quality or value of the Series 2016A Bonds. The Series 2016A Bonds are payable solely as described in this Official Statement and are not in any manner payable wholly or partially from any funds or properties otherwise belonging to the Issuer. By its issuance of the Series 2016A Bonds, the Issuer does not in any manner, directly or indirectly, guarantee, warrant or endorse the creditworthiness of or the investment quality or value of the Series 2016A Bonds. The Issuer has no taxing power.

BONDHOLDERS’ RISKS

A purchase of Series 2016A Bonds involves certain investment risks that are discussed throughout this Official Statement, including the Appendices. Each prospective purchaser of Series 2016A Bonds should make an independent evaluation of all the information presented in this Official Statement, including the Appendices, in order to make an informed investment decision.

There Are Many Risks to THR’s Ability to Provide for Payment of the Series 2016A Bonds

The Series 2016A Bonds are limited obligations of the Issuer. They are payable by the Issuer only from and to the extent of (i) payments by THR on the Series 2016A Note pledged under the Bond Indenture, (ii) payments by other Obligated Group Members on their guaranty of the Notes under the Master Indenture, and (iii) any other funds held by the Bond Trustee under the Bond Indenture, other than the rebate fund.

THR’s ability to make payments on the Notes depends on the financial condition and operating performance of the Obligated Group and other affiliates, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond its control. There can be no assurance that the Obligated Group will maintain a level of cash flows from operating activities sufficient to permit it to pay the principal, premium, if any, and interest on the Notes.

Certain risks that could affect the Obligated Group’s ability to pay the Notes and to preserve the tax-exempt status of the Series 2016A Bonds for federal income tax purposes are discussed below. Prospective investors should carefully consider these risks as well as the other information contained in this Official Statement before deciding to purchase Series 2016A Bonds. In addition, other risks and uncertainties not currently known to THR or those it currently views to be immaterial also may materially and adversely affect the business, financial condition or results of operations of the Obligated Group.

The System Could Be Adversely Affected by Recently Enacted Health Care Reform Laws in Ways and To an Extent That Cannot Be Predicted

In February of 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”). ARRA includes several provisions that were intended to provide financial relief to the health care sector, including a requirement that states promptly reimburse healthcare providers. ARRA also established a framework for the implementation of a nationally-based health information technology program, including incentive payments that commenced in 2011 to eligible healthcare providers to encourage the implementation of health information technology and the “meaningful use” of certified electronic health record technology (“CEHRT”). The incentive payments have been payable annually for a period of up to four years to eligible providers that demonstrate such “meaningful use.” Since the beginning of 2016, Medicare eligible providers that do not demonstrate “meaningful use” will receive a downward adjustment in their Medicare reimbursement.

In March of 2010, Congress enacted the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively, the “Reform Acts”). The Reform Acts mandate substantial changes in how and to whom government and private health insurance is provided and how much providers of health care services to government insured patients are paid. One of the primary drivers of this health care reform legislation is to provide or make available, or subsidize, the premium costs of health care insurance for uninsured, or underinsured, consumers who fall below certain income levels to substantially expand health insurance coverage, including by:

• Insurance Premiums Subsidies: providing subsidies for insurance premium costs to individuals and families based upon their income relative to federal poverty levels.

• Voluntary Medicaid Expansion: substantially increasing the federally and state-funded Medicaid insurance program to all individuals under age 65 with incomes up to 133% of the Federal Poverty Level (although the U.S. Supreme Court has ruled that the expansion is optional for the states), and authorizing states to establish federally subsidized non-Medicaid health plans for low-income residents not eligible for Medicaid;

• Individual Insurance Mandate: requiring consumers to obtain, and for certain employers to provide, a minimum level of health care insurance, enforced through penalties (i.e., taxes) on consumers and employers that do not comply with these mandates;

• Employer Insurance Expansion: requiring most employers with more than 50 employees to provide health insurance to employees or pay a federal penalty; and

• Regulating Coverage: mandating private health insurance benefits and expansion of coverage for dependents, and preventing private health insurers from limiting annual benefits, denying coverage due to pre-existing conditions (effective immediately for children), or rescinding coverage, among other provisions

The Reform Acts also seek to control costs for health care services provided under federally-funded health insurance programs by:

• Reducing Payments: reducing increases in Medicare “market baskets” used to determine compensation rates by amounts estimated to total $150 billion over 10 years; reducing Medicaid disproportionate share (“DSH”) funding by $4 billion over 10 years; denying payment for services after certain readmissions; reducing payments under the Medicare Advantage program, which has been delayed to date but, if implemented, may result in increased premiums or out-of-pocket costs to Medicare beneficiaries enrolled in Medicare Advantage; further decreasing Diagnosis-Related Group (“DRG”) payments generally and adjusting payments to incentivize the delivery of quality care (and the achievement of positive outcomes for patients), and requiring that Medicare’s contingent fee third-party audit program be extended to Medicaid payments; and

• Innovation: establishing a Center for Medicare and Medicaid Innovation to develop incentive- based Medicare reimbursement payments to hospitals under the value-based purchasing program centered on quality and efficiency measures that are expected to further reduce payments for services to Medicare-insured patients, increasingly linking payments to patient outcomes, and establishing an Independent Payment Advisory Board to propose further reductions in Medicare payments.

• Independent Payment Advisory Board: establishing an Independent Payment Advisory Board (“IPAB”) to propose further reductions in Medicare payments, which become effective unless overridden by Congress.

THR expects these provisions to materially reduce or limit future increases in the payments that the System receives for providing services to government-insured patients. The Reform Acts reduce payments for services to federally-insured patients because Congress expected that providers will realize savings in bad debt and charity care expenses by providing care to fewer uninsured patients as a result of mandated increases in insurance coverage. However, if the revenue received by the System for providing services to Medicare-insured patients is insufficient to cover the costs of furnishing the services, and if the System does not realize offsetting reductions in bad debt and charity care expenses, the Reform Acts may have a substantial adverse effect on the System.

The Reform Acts also attempt to increase competition among private health insurers by providing for transparent state insurance exchanges. While the health insurance exchanges and federal subsidies have increased the availability of health insurance to individuals who were previously uninsured, they may induce employers or individuals to shift their purchase of health insurance to new plans offered through exchanges, which may or may not compensate the System at rates equivalent to current rates or may require increased deductibles or co-payments that may be more difficult to collect. The Reform Acts also prevent private insurers from adjusting insurance premiums based on health status, gender, or other specified factors. The System expects that these provisions are likely to impact its expenses and/or revenues to an extent that cannot yet be accurately predicted. It is also expected that these provisions could adversely affect the ability of private insurers to pay the System for services provided to insured patients. 12

The constitutionality of the Reform Acts has been challenged in courts around the country. While the U.S. Supreme Court has held that the penalty for noncompliance with the individual mandate is constitutional as a valid exercise of Congress’ taxing power, the Supreme Court has also ruled that eliminating federal Medicaid funding for those states that do not elect to expand Medicaid coverage is an unconstitutional coercion of the states by the federal government. Therefore, states may choose to accept or not to accept the new federal Medicaid funds with the attached conditions without risking the loss of all federal Medicaid funding. In a separate case, King v. Burwell, the Supreme Court confirmed that the language in the Reform Acts permit consumers to receive premium tax credits for obtaining health insurance through insurance exchanges that are not run by the state but instead are federal facilities (including the one in Texas).

Congressional and other initiatives to repeal the Reform Acts, in whole or in part, to delay elements of implementation or funding, and to offer amendments or supplements to modify its provisions have been persistent. The ultimate outcome of these initiatives is still unknown. Results of Congressional elections and of the Presidential election in 2016 could affect the outcome of those efforts as well.

Moreover, the Reform Acts could result in reductions in employer-sponsored medical plans if employers choose to pay a fee rather than provide medical insurance, and individuals could elect to be uninsured if they deem the tax penalty under the Reform Acts more financially feasible, in particular given the Reform Acts’ prohibition against excluding coverage for prior existing conditions. Moreover, high deductible health insurance plans have become more common in recent years, and the Reform Acts are expected to encourage the increase in high deductible health insurance plans as the exchanges offer a variety of plans, several of which include lower monthly premiums in return for high deductibles. High deductible health plans may contribute to lower inpatient volumes as patients may forgo or choose less expensive medical treatment to avoid having to pay the costs of the high deductibles. High deductibles may also lead to an increase in bad debt expenses, because some patients may not be able to pay the high deductibles.

It is difficult to predict the full impact of the Reform Acts due to the law’s complexity, lack of implementing regulations or interpretive guidance, gradual implementation, and possible future amendment or judicial invalidation, as well as an inability to foresee how individuals and businesses will respond to the choices afforded them by the law. THR is therefore unable to predict the full impact of the Reform Acts on the System at this time.

The financial and other results of operation included in Appendix A and Appendix B were realized prior to full implementation of the Reform Acts. No assurance can be given that they are indicative of results of operations that the System will be able to achieve after full implementation.

The System is Largely Dependent on, and Could Be Adversely Affected by Changes in, Federal and State Funding

General. Approximately 29.5%, of the System’s gross patient service and premium revenues were derived from the federally funded Medicare program and the federal and state funded Medicaid program in their most recent fiscal year. As a result, the System is dependent on funding of these programs. The Reform Acts are intended to substantially reduce or slow the growth in federal Medicare spending, as described above, and further payment and similar restrictions could be enacted in the future. These and future changes could negatively affect the System in a manner and to an extent that cannot be fully predicted.

Medicare. Medicare is a federal health insurance system established in 1965. Under Medicare, the federal government pays physicians, hospitals and other providers for services provided to eligible elderly and disabled persons. Medicare consists of four parts: Part A, which covers inpatient hospital, skilled nursing, hospice and certain home health agency services; Part B, which covers hospital outpatient, physician, diagnostic, certain home health and other services furnished by non-hospital providers and hospital outpatient departments; Part C, also known as “Medicare Advantage,” which provides Medicare coverage through a managed care model; and Part D, which makes certain prescription drug plans available to Medicare beneficiaries.

Medicare is administered by the Centers for Medicare & Medicaid Services (“CMS”) of the United States Department of Health and Human Services (“DHHS”). CMS delegates to the states the responsibility for certifying those organizations to which CMS may make payment. In order to maintain certification, health care providers must meet CMS’s conditions of participation on an ongoing basis. Whether the conditions are met is determined by the state survey agency (the Texas Department of State Health Services) and/or The Joint Commission. The conditions

of participation may change. To remain qualified, the System may need to change its operations, policies and services from time to time.

The System’s hospitals provide health care services to Medicare beneficiaries and are certified to participate in the Medicare program where applicable. The System received approximately 27.3% of its gross patient service revenues from Medicare in fiscal year 2015. Medicare pays providers for most hospital, outpatient and physician services on the basis of fixed fee schedules, regardless of the actual costs of providing the services, as described below. Therefore, if Medicare funding does not keep pace with costs of services, or if costs of participation increase, the System’s finances could be adversely affected, and the effect could be substantial.

Additionally, 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. CMS adopted the policy due to growing concern with the overuse of the “observation” status at hospitals; CMS found that Medicare beneficiaries were spending extended period of times in observation units without being admitted as inpatients. Congress voted to extend the enforcement moratorium on the “Two-Midnight” rule through December 31, 2015. During the delay, CMS did not allow Medicare Recovery Audit Contractors (“RACs”) to audit inpatient hospital claims from October 1, 2013 through December 31, 2015. However, during this period, CMS conducted prepayment “Probe and Educate” audits for inpatient admission claims. The implementation of the “Two-Midnight” rule may have an adverse financial impact for hospitals. On October 30, 2015, CMS finalized updates to the “Two- Midnight” rule, which were also included in the Medicare Outpatient Prospective Payment System (“OPPS”) final rule for calendar year 2016.

As part of the “Two-Midnight” rule published in the OPPS final rule for calendar year 2016, CMS requires a physician certification, including an admission order and certain additional elements, for all inpatient admissions. The 2016 OPPS final rule implemented a change to the requirement that certifications must be provided for all inpatient admissions. Going forward, CMS will require physician certification only for outlier cases and long-stay cases of 20 days or more. An admission order will continue to be required for all inpatients when that patient has been formally admitted to the hospital. The effect of the “Two Midnight” rule on the Members of the Obligated Group’s operations is still unclear.

Moreover, as part of 2011 legislation raising the federal government’s borrowing capacity, as modified by the Taxpayer Relief Act of 2012, Congress agreed to automatic federal program spending cuts, known as sequestration, over the next decade totaling $1.2 trillion, unless alternate budgetary reduction legislation was enacted. In December of 2013, Congress partially replaced the mandatory budget cuts but only for two years as part of the Bipartisan Budget Act of 2013 (“2013 Budget Act”). While the 2013 Budget Act lifted certain sequestration cuts for defense and non-defense spending for fiscal years 2014 and 2015, it did not reduce the sequestration reductions impacting mandatory programs including Medicare. Thus, the 2% reduction to Medicare payments will continue for Medicare fee-for-service program claims with dates of service on or after April 1, 2013 until further notice, unless additional Congressional action is taken. The 2013 Budget Act further provided for a restructuring of Medicaid DSH payment reductions by delaying the fiscal year 2014 DSH payment cuts until fiscal year 2016, but that legislation also increased the overall level of reductions and extended cuts through fiscal year 2023. The Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) again delayed the DSH payment cuts through federal fiscal year 2018, but increased the scope of the reductions and extended the cuts through federal fiscal year 2024. As indicated above, with no long-term resolution in place for federal deficit reduction, hospital and physician reimbursement levels are likely to continue to be targets for reduction with respect to any interim and long-term federal deficit reduction efforts.

Members of the Obligated Group depend significantly on Medicare as a source of revenue. Because of this dependence, changes in the Medicare program may have a material effect on the Obligated Group. Future reductions in Medicare reimbursement, changes in Medicare requirements, or increases in Medicare reimbursement in amounts less than increases in the costs of providing care, may have a material adverse financial effect on Members of the Obligated Group.

Inpatient Costs. Short-term, acute care hospitals are paid for services to Medicare inpatients under a prospective payment system (“PPS”). Medicare pays a predetermined rate for each covered hospitalization. The rate depends on the category of treatment or condition for which a patient is admitted. Under the hospital inpatient PPS, the categories are known as DRGs. Each of the DRGs has its own predetermined rate, which, in the case of the service component, is based upon the national average costs to care for patients for the specific DRG, adjusted for 14

geographic wage differences and, in the case of the capital component, at a per-case federal rate, adjusted for limited hospital-specific characteristics. With limited exceptions, a hospital’s payment for a Medicare inpatient is limited to the DRG-related rate, regardless of the number of services provided to the patient, the length of the patient’s hospital stay, or the hospital’s cost of providing care to the patient, including capital costs. DRG payment rates are adjusted annually based on the hospital “market basket” index, or the cost of providing health care services, as well as federal budget considerations and, thus, DRG payments are vulnerable to deficit reduction efforts. The market basket adjustment has averaged approximately 2-4% annually in recent years. The Reform Acts call for reductions in the market basket ranging from 0.10% to 0.75% each year through federal fiscal year 2019. The Reform Acts provide for market basket adjustments to inpatient payments based on national economic productivity statistics, which is anticipated to result in an additional 1% annual reduction to the market basket update. The reduction in market basket updates and the productivity adjustments will have a disproportionately negative effect upon those providers that are relatively more dependent upon Medicare than other providers.

Outpatient Costs. CMS pays hospitals for Medicare outpatient hospital services under the outpatient PPS. The outpatient PPS covers most Medicare-participating hospitals and includes most outpatient hospital services as well as certain inpatient ancillary services provided to Medicare hospital inpatients who have exhausted their Part A benefit. Similar to the DRG classification system used for the inpatient PPS, the outpatient PPS uses an ambulatory payment classification (“APC”) system. The APC system divides outpatient services covered by Medicare into groups of services, or “APCs.” Relative payment weights are assigned to each APC, and APC payment rates are adjusted for cost inflation (subject to budget reconciliation) and failure to report adequate performance under specified quality of service measures, but not for geographic wage differences.

Beginning January 1 2017, off-campus hospital outpatient departments established on or after November 2, 2015 will not be eligible for payment under the OPPS for non-emergency services. Instead, CMS has proposed that non-emergency services performed at these facilities will be paid under the physician fee schedule in fiscal year 2017, and at a to-be-determined rate in subsequent years, which could result in lower payments than in previous years for providing the same services. A hospital outpatient department is considered to be “off-campus” if it is located more than 250 yards from a main provider hospital or a remote location of a hospital. Administrative and judicial review are unavailable for determinations relating to applicable payment systems or determinations whether a provider department is considered an off-campus hospital outpatient department.

Inpatient Rehabilitation Services. Qualifying inpatient rehabilitation hospitals and units are paid under a separate Inpatient Rehabilitation Facility PPS (“IRF PPS”). The IRF PPS utilizes information from a patient assessment instrument to classify patients into distinct groups based on clinical characteristics and expected resource needs called case-mix groups (“CMGs”). CMGs are given relative weights in a similar manner as inpatient DRGs and are multiplied by a base “standardized payment amount.” In order to be excluded from the inpatient PPS and instead be paid the generally higher rates for providing rehabilitation services under the IRF PPS, certain classification criteria must be met by hospitals (or hospital-based units).

Recent Medicare Payment Advisory Commission (“MedPAC”) guidance has recommended site-neutral payment policies for certain services provided in the IRF setting. These policies reflect MedPAC’s position that Medicare should not pay more for care in one setting than in another if the care can safely and effectively be provided in a lower cost setting. Accordingly, MedPAC has proposed to reimburse certain IRF services at rates commensurate with payments made to skilled nursing facilities. To the extent adopted by CMS, these policies would have the potential to decrease Medicare revenues available to IRFs.

Medicare Managed Care. Under the Medicare Advantage program, Medicare beneficiaries may enroll in a variety of risk-based plans, including Medicare health maintenance organizations (“HMOs”). Medicare HMOs contract with CMS to provide services to enrolled Medicare patients. They contract with hospitals to obtain services for enrollees at negotiated rates. The rates may be less than standard Medicare DRG rates. Medicare HMOs may pay providers on a “capitated” basis, that is, at a predetermined amount per enrollee regardless of the amount of services provided to enrollees. Effective February 1, 2015, the System became party to one capitated contract with a Medicare HMO, and System hospitals could enter into capitated contracts in the future. The System received approximately 16.4% of its gross patient service revenues from Medicare Advantage in fiscal year 2015, which is in addition to the 27.3% of gross patient service revenues from Medicare. To the extent that costs incurred for the provision of treatment to patients reimbursed by capitated payments exceed those payments, the System finances could be adversely affected.

Medicare Physician Fees. Medicare pays for physician services to Medicare patients based on a national fee schedule called the “resource based-relative value scale” (“RBRVS”). The RBRVS fee schedule establishes 15

payment amounts for all physician services, including services of provider-based physicians and is subject to annual updates. CMS had previously relied on a formula known as the Sustainable Growth Rate (“SGR”), which imposed a limit on the growth of Medicare payments for physician services based on changes to the U.S. Gross Domestic Product over a ten-year period. Since 2003, Congress has passed legislation to delay application of the SGR. However, in April 2015, Congress adopted legislation to permanently repeal the SGR formula. This legislation, known as MACRA, replaced the SGR formula with statutorily prescribed physician payment updates and incentives.

MACRA moved the SGR program from a fee-for-service to a pay-for-performance model that would control the growth of physician payments based on clinical outcomes. This legislation will increase physician Medicare reimbursement by 0.5% annually until 2019 and then provide for no additional increases to base physician reimbursement through 2025. Beginning January 1, 2026, and effective January 1 of each subsequent calendar year, physician payments will be updated by 0.75% for physicians who adequately participate in qualified alternative payment models, but only 0.25% for those who do not. In addition to the base payment methodology, physicians could earn merit-based payments based on factors including compliance with meaningful use of electronic health records requirements and demonstration of quality-based medicine. Ultimately, it remains unclear what effect this legislation will have on the Obligated Group, including whether MACRA reimbursement will cover the actual costs of providing physician services

Mandated Use of Technology. ARRA has imposed substantial penalties on hospitals that do not demonstrate “meaningful use” of CEHRT, as described above. Health care providers demonstrate their meaningful use of CEHRT by meeting objectives specified by CMS for using health information technology and by reporting on specified clinical quality measures. Pursuant to ARRA, and commencing in 2016, hospitals and physicians who have not satisfied the performance and reporting criteria for demonstrating meaningful use will have their Medicare payments significantly reduced. The payment reduction starts at 1% and increases each year that an eligible professional does not demonstrate meaningful use, to a maximum 5% payment reduction. CMS has commenced audits of providers that have received meaningful use 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 that they received through these programs

Increasing Dependence on Outcomes. The Reform Acts contain a number of provisions intended to promote value-based purchasing. Beginning in federal fiscal year 2013, hospitals that satisfy certain performance and efficiency standards receive increased payments for discharges during the following fiscal year. The program is funded through decreases in payments to all hospitals for inpatient services, which reduction is set at 1.75% for federal fiscal year 2016, progressing to 2% by federal fiscal year 2017. This reduction may be offset by incentive payments that commenced in federal fiscal year 2013 for hospitals that meet or exceed quality standards.

In addition, the Reform Acts provide for reduced payments based on a hospital’s rate of hospital-acquired conditions (“HAC”) and readmission rate and requires HAC rates and readmission rates to be made public. Effective July 1, 2011, the Reform Acts have prohibited the use of federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat HACs. Beginning in federal fiscal year 2015, hospitals that fall into the top 25% of national risk-adjusted HAC rates for all hospitals in the previous year receive a 1% reduction in Medicare payment rates. For discharges occurring effective October 1, 2012, hospitals with excessive readmissions for certain conditions (i.e., acute myocardial infarction, pneumonia, and heart failure) receive reduced Medicare payments on inpatient admissions proportional to their excess readmission ratios. CMS continues to expand the readmission measures through final rulemaking. Further quality-based compensation efforts are included in the Reform Acts. Consequently, if the System fails to compare favorably with national averages for HACs and readmissions, its revenue could be adversely affected.

On January 26, 2015, DHHS announced a timetable for transitioning Medicare payments from the traditional fee-for-service model to a value-based payment system. This schedule calls for tying 30% of traditional Medicare fee-for-service payments to quality or value through alternative payment models, such as accountable care organizations (“ACOs”) or bundled payment arrangements, by the end of 2016, increasing to 50% by 2018. In addition, DHHS has proposed that by 2016, 85% of all Medicare fee-for service payments have a component based on quality or efficiency of care, such as value-based purchasing or readmission reductions, increasing to 95% by 2018. This transition from volume to quality and value in the context of Medicare payments will place increasing risk on providers and could have a significant negative impact upon the economic performance of the Obligated Group. Moreover, such integrated delivery and alternative payment models (e.g., ACOs) carry with them the potential for legal and regulatory risks in varying degrees. Such developments may call into question compliance with the health care laws and regulations, antitrust laws and federal or state tax exemption. Hospital participants in ACOs, for example, will likely have to marshal a large upfront financial investment to form a unique and untested 16

ACO structure to gain qualification. It remains uncertain, for those ACOs that do qualify, whether the savings will be adequate to recoup the initial upfront investment.

Medicaid. Medicaid is a cooperative medical assistance program funded by the federal government (approximately 60%) and the state (approximately 40%). The primary beneficiaries of the Medicaid program are children, pregnant women, and low income elderly or disabled persons. In their most recent fiscal year, the System received less than 2.5% of its gross patient service and premium revenues through the Medicaid program.

Standard Medicaid Program. Under Medicaid, the federal government provides grants to states that have medical assistance programs that are consistent with (or have secured waivers from) federal standards. Absent a waiver of program requirements, Medicaid compensates hospitals on a DRG-based PPS. Hospitals are grouped into one of multiple payment divisions based on their own costs in a base year. A relative weight is calculated for each DRG, and standard dollar amounts are established for each payment division. With certain limited exceptions, the Medicaid payment per patient discharge is determined by multiplying the applicable DRG weight by the standard dollar amount of the hospital’s payment division. Because the State is required to contribute funding prior to federal investment, most states’ Medicaid programs do not reimburse providers anywhere near the amount that would cover costs for treating this population. Fiscal considerations of the state government in establishing its budget will directly affect the funds available to the providers for payment of services rendered to Medicare beneficiaries. Delays in appropriations and state budget deficits which may occur from time to time create a risk that payment for services to Medicaid patients will be withheld or delayed.

Medicaid Managed Care. There are three main Medicaid managed care programs in Texas: STAR, STAR+PLUS, and STAR Health. The 2013 Texas Legislature approved several expansions of Medicaid managed care and directed HHSC to develop a performance-based payment system that rewards outcomes and enhances efficiencies. The Dallas and Tarrant service areas include Collin, Dallas, Denton, Ellis, Hood, Hunt, Jackson, Kaufman, Navarro, Parker, Rockwall, Tarrant and Wise Counties, which is in the System’s service areas. Under the programs, the Texas Health and Human Services Commission (“THHSC”) contracts with HMOs in a particular geographic service area to arrange for covered services to Medicaid beneficiaries. The HMOs contract with hospitals to obtain services for Medicaid beneficiaries at negotiated rates. The risks to HMOs that participate in these programs and similar ones, and/or hospitals that contract with them, are the same as those discussed for Medicare HMOs above and contracts with managed care providers below.

State Funding Risks. The State of Texas, like most states, must operate with a balanced budget, and expenditures for the Medicaid program are among the State’s largest budgeted expenses. The current economic downturn has increased budgetary pressures on the State, and these budgetary pressures have resulted, and likely will continue to result, in decreased spending for Medicaid. These reductions apply to both Medicaid fee-for-service and Medicaid managed care services. At the same time, Medicare enrollment is growing in Texas. Additional legislation or regulations may be introduced to reduce coverage, enroll more Medicaid recipients in managed care programs, and/or impose additional taxes on hospitals to help finance or expand the State’s Medicaid system. All of this could result in lower reimbursement rates to the System.

The Governor of Texas has opposed Texas’s implementation of the Medicaid expansion contemplated by the Reform Acts and the Texas Legislature has not taken any action to expand the current Medicaid program. If Texas continues to choose not to participate in expansion of the Medicaid program, reductions in bad debt and charity care expenses may not be realized by the Obligated Group or such expenses may increase, as it is likely that a significant number of indigents in THR’s service areas would remain uninsured. In addition, healthcare insurance premium assistance will not be available for undocumented patients, so the Reform Acts are not expected to reduce the number of uninsured undocumented THR patients.

Texas Health Care Transformation and Quality Improvement Program (Medicaid Section 1115 Waiver). In December 2011, the State of Texas received approval from the federal government for and implemented a waiver from certain federal Medicaid requirements for the five-year period ending September 30, 2016, which has been calculated as discussed below. The Waiver Program generally preserves Upper Payment Limit (“UPL”) funding under a new methodology, but allows for managed care expansion to additional areas of the State. Under the Waiver Program, in lieu of making UPL payments to hospitals, the State funds two payment pools – the Uncompensated Care Pool (“UC”) and the Delivery System Reform Incentive Payment (“DSRIP”) Pool – from which payment pools supplemental payments may be made to providers. The UC program is intended to provide funding for hospitals and other providers to help offset the uncompensated care they provide to Medicaid and uninsured patients. The DSRIP program is intended to provide funding incentives to hospitals and other providers to enhance access to care for and the health of patients. Under the Waiver Program, hospitals make proposals to receive payments to 17

defray costs of innovations in their delivery systems to achieve these goals. The State created 20 Regional Healthcare Partnership (“RHP”) regions as part of the Waiver Program.

In a letter dated September 30, 2014, to THHSC, CMS announced that it was deferring the federal share of Waiver Program UC payments totaling between $63 million and $75 million for the third quarter of federal fiscal year 2014 to certain hospitals in Dallas, Tarrant, and Nueces Counties, including some System hospitals. In the deferral letter CMS explained that it needed to review certain funding arrangements and their compliance with federal provider-related donation prohibitions, including as interpreted by CMS in State Medicaid Director Letter #14-004 (May 9, 2014). In a subsequent letter dated January 7, 2015, to THHSC, CMS described that it would release the deferral but continue to review information provided by THHSC in support of the funding arrangements and if it would determine that any financing structure within the State Medicaid program violates federal law, CMS would expect the State to make necessary adjustments by December 2015. On March 9, 2016, CMS responded to information provided by THHSC in support of the funding arrangements, indicating that the indigent care funding arrangements in Dallas and Tarrant Counties, which include some System hospitals, appear to violate the provider- based donation prohibition against a private hospital assuming a statutory obligation of a governmental entity, citing Texas Health and Safety Code Section 61.033, payment for services. THHSC is to work with potentially affected stakeholders and respond to these latest assertions by CMS. If informal resolution is unsuccessful and CMS would issue a disallowance notice, THHSC could appeal to the DHHS Departmental Appeals Board. If CMS would prevail and recoup federal financial participation from the state related to a private hospital’s receipt of supplemental Medicaid payments received under the waiver, THHSC may recoup from the private hospital an amount equal to the amount of supplemental payments recouped by CMS. In addition, under the Reform Acts, Medicaid DSH payments to states, and consequently to Medicaid-participating providers including the System acute care hospitals, will be reduced in the coming years.

In May, 2016, CMS issued a temporary extension of current Waiver Program funding levels; the Waiver Program will now expire on December 31, 2017. In granting the extension, CMS stated that no further extension of the state’s UC program should pay for costs that would be paid by an expansion of Medicaid in Texas, so any extension should be limited to low-income individuals who are not eligible for Medicaid or other insurance programs, and that absent agreeable revisions, funding would be reduced by 25% per year beginning in 2018. Given the conditions of the CMS extension and the State’s opposition to expanding Medicaid, there can be no assurance that the System will continue to receive Medicaid supplemental payments beyond the extension period.

Consequently, the continued receipt by System hospitals of supplemental payments under the Medicaid program will depend upon adequate State appropriations and federal DSH payments, the hospitals’ ability to compete for DSRIP payments and to achieve any patient access or health objectives on which they may be conditioned, and CMS not deferring or recouping UC payments and even DSRIP payments, Given these contingencies, there can be no assurance that System hospitals will continue to receive Medicaid supplemental payments.

Audits. Most hospitals, including those operated by the System, are audited for compliance with the requirements for participation in the Medicare and Medicaid programs. If audits discover alleged overpayments, the System could be required to pay a substantial rebate of prior years’ payments. The federal government contracts with third-party RACs, on a contingent fee basis, to audit the propriety of payments to Medicare and Medicaid providers. CMS employs Medicaid Integrity Contractors to audit payments of Medicaid claims and Zone Program Integrity Contractors to identify Medicare fraud and abuse. THR has received claims and been a party to settlement negotiations, but believes that the System has reserved sufficiently for these actions and future audit adjustments. Nevertheless, ultimate liability could exceed reserves, and any excess could be substantial. Medicare and Medicaid regulations also provide for withholding Medicare and Medicaid payment in certain circumstances, which could adversely affect the System’s cash flow.

If the System Improperly Provides or Claims Compensation for Services, It Could Lose its Ability to Serve Medicare or Medicaid Beneficiaries or Incur Substantial Penalties

Federal and State Fraud and Abuse Laws. Federal and state health care fraud and abuse laws generally regulate services furnished to beneficiaries of federal and state (including Medicare and Medicaid) and private health insurance plans, and they impose penalties for improper billing and other abuses. Under these laws, health care providers may be punished for billing for services that were not provided, not medically necessary, provided by an improper person, accompanied by an illegal inducement to use or not use another service or product, or billed in a manner that does not comply with applicable government requirements. Violations of these laws are punishable by a range of criminal, civil and administrative sanctions. If the System violates one of the fraud and abuse laws, 18

among other possible sanctions, federal or state authorities could recover amounts paid to the hospital, exclude the hospital from participation in the Medicare/Medicaid programs, impose civil monetary penalties, and suspend Medicare/Medicaid payments. The federal government (and individuals acting on its behalf) have brought many investigations, prosecutions and civil enforcement actions under the fraud and abuse laws in recent years. In some cases, the scope of the fraud and abuse laws are so broad that they may result in liability for business transactions that are traditional or commonplace in the health care industry.

False Claims Acts. The federal civil False Claims Act (“Civil FCA”) prohibits anyone from knowingly submitting a false, fictitious or fraudulent claim to the federal government. Violations of the Civil FCA can result in civil money penalties and fines, including treble damages. Private individuals may initiate actions on behalf of the federal government in lawsuits called qui tam actions. The plaintiffs, or “whistleblowers,” can recover significant amounts from the damages awarded to the government. In several cases, Civil FCA violations have been alleged solely on the existence of alleged kickback arrangements or Stark law violations, even in the absence of evidence that false claims had been submitted as a result of those arrangements. In the Reform Acts, Congress creates Civil FCA liability for knowingly failing to report and return an overpayment within a specified time. The criminal False Claims Act (“Criminal FCA”) prohibits the knowing and willful making of a false statement or misrepresentation of a material fact in submitting a claim to the government. Sanctions for violations of the Criminal FCA include imprisonment, fines, and exclusions.

Amendments to the FCA in the Fraud Enhancement and Recovery Act of 2009 (“FERA”) and the Reform Acts amend and expand the reach of the FCA. FERA expanded the FCA’s reverse false claims provision, imposing liability on any person who “knowingly conceals” or “knowingly and improperly avoids or decreases” an “obligation to pay or transmit money or property to the Government,” whether the person uses a false record or statement to do so or not. FERA also clarified that an “obligation” can arise from the retention of an overpayment. Section 6402 of the Reform Acts further addresses the retention of overpayments by defining the term overpayment and the circumstances and timing under which an overpayment need be returned to the government before it becomes an “obligation” under the FCA. FERA and the Reform Acts also amend certain jurisdictional bars to the Reform Acts, effectively narrowing the public disclosure bar and expanding the definition of “original source,” thus potentially broadening the field of potential whistleblowers.

On February 12, 2016, CMS released a final rule imposing a new “reasonable diligence” standard for identifying overpayments that must be reported and returned within 60 days under Section 6402 of the Reform Acts. CMS clarified that the 60-day timeframe for report and return 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). Failure to report and return overpayments as described herein may result in false claims liability

Federal Anti-Kickback Law. It is illegal to offer, pay, solicit or receive a payment in return for referring, ordering, recommending or arranging for the referral of any product or service covered by Medicare, Medicaid or other government health care programs. This prohibition has been broadly applied by the courts. Violations may result in civil and criminal penalties. Criminal penalties include imprisonment and fines. Civil penalties include temporary or permanent exclusion from government health care programs and civil money penalties. The broad prohibitions of the anti-kickback law may be implicated when hospitals and physicians conduct joint business activities, such as physician recruiting programs, physician referral services, hospital-physician service or management contracts, space or equipment rentals between hospitals and physicians, and other service and vendor relationships. In the Reform Acts, Congress revised the intent requirement of the anti-kickback law to provide that a person is not required to “have actual knowledge or specific intent to commit a violation of” the anti-kickback law in order to be found guilty of violating such law. The Reform Acts also provide that any claims for items or services that violate the anti-kickback law are also considered false claims for purposes of the federal civil False Claims Act. Federal regulations describe certain arrangements (i.e., safe harbors) that are exempt from prosecution under the anti-kickback law. Because the law is broadly applied and safe harbors are narrowly drawn, there can be no assurance that the Obligated Group will not be found in violation of the anti-kickback law.

“Self-Referral” Prohibitions. Current federal law (known as the “Stark” law) prohibits any physician from referring certain Medicare or Medicaid covered designated health services to a provider of such services with which the physician (or his/her immediate family member) has a financial relationship, unless excepted by statute or regulation. Penalties for violating the Stark law include denial of payment, refund of payments received, civil monetary penalties, and exclusion from the Medicare and Medicaid programs. However, there are numerous ambiguities and questions of interpretation in analyzing whether an arrangement violates the Stark law. As a result of the scarcity of case law interpreting the Stark law, there can be no assurance that System hospitals will not be 19

found in violation of the Stark law. The precise impact on System hospitals of any such violation and corresponding sanction cannot be predicted at this time, but would be negative if any such sanction is imposed.

Civil Monetary Penalties Law. The Civil Monetary Penalties Law in part authorizes the government to impose money penalties against individuals and entities committing a variety of acts. For example, penalties may be imposed for the knowing presentation of claims that are (i) incorrectly coded for payment, (ii) for services that are known to be medically unnecessary, (iii) for services furnished by an excluded party, or (iv) otherwise false. An entity that offers remuneration to an individual that the entity knows is likely to induce the individual to receive care from a particular provider may also be fined. Moreover, a hospital may not knowingly make a payment, directly or indirectly, to a physician as an inducement to reduce or limit services to Medicare or Medicaid patients under the physician’s direct care. In the Reform Acts, Congress amended the Civil Monetary Penalties Law to authorize civil monetary penalties for a number of additional activities, including (i) knowingly making or using a false record or statement material to a false or fraudulent claim for payment; (ii) failing to grant the Office of Inspector General timely access for audits, investigations, or evaluations; and (iii) failing to report and return a known overpayment within statutory time limits. Violations of the Civil Monetary Penalties Law can result in substantial civil money penalties plus three times the amount claimed.

Possible Consequences. Any violations of the foregoing laws by the System or a System employed physician or other employee could result in substantial monetary fines and damages as well as its possible disqualification from participation in the Medicare and Medicaid programs. Regardless of the merits of a particular case or cases, the System could incur significant legal and settlement costs. Prolonged and publicized investigations could be damaging to reputation, business and credit, regardless of the outcome, and could have material adverse consequences on the financial results of operations of the System.

Other Federal Statutes. Like other health care providers, the System is also subject to criminal prosecution and civil penalties under a variety of federal laws in addition to those discussed in the previous paragraphs, notably the following:

EMTALA. The Emergency Medical Treatment and Active Labor Act (“EMTALA”) is a federal civil statute that requires a hospital with an emergency department to provide an appropriate medical screening examination within the capability of the hospital’s emergency department to any individual that comes to the hospital seeking treatment or examination for an emergency medical condition or active labor, notwithstanding the individual’s ability to pay. A hospital may not delay the provision of a medical examination in order to inquire about the patient’s ability to pay or method of payment. Moreover, if the medical screening examination indicates an emergency medical condition, the hospital must provide appropriate care or stabilize the patient and provide an appropriate transfer to another qualified facility. Over the last few years, the federal government has increased its enforcement of EMTALA. A hospital that violates EMTALA is subject to substantial civil penalties and exclusion from the Medicare and Medicaid programs.

Privacy and Security Regulations. The privacy and security of patient medical records and other health information is subject to considerable regulation by the federal government. For example, the administrative simplification provisions of the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) mandate that health care providers transmit certain patient health information in accordance with DHHS standards and requirements. HIPAA mandates the adoption of federal privacy and security standards to protect the confidentiality of protected health information.

Regulations designed to protect health information impose very complex procedures and operational requirements with which the System is obligated to comply. Penalties for HIPAA noncompliance include civil monetary penalties ranging from $50,000 to $1.5 million for all identical violations in a calendar year and/or imprisonment if the information was disclosed under false pretenses, or obtained or used with the intent to sell, transfer or use the information for commercial advantage, personal gain or malicious harm. In addition, violations may increase operating expenses as necessary to notify affected individuals of privacy or security breaches, correct problems, comply with federal and state regulations, defend against potential claims and implement and maintain any additional requirements imposed by government action.

The Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), which is part of ARRA, significantly changed the landscape of federal privacy and security law with regard to individually identifiable health information. The HITECH Act (i) extends the reach of HIPAA beyond “covered entities,” (ii) imposes a breach notification requirement on HIPAA covered entities, (iii) limits certain uses and disclosures of individually identifiable health information, (iv) increases individuals’ rights with respect to 20

individually identifiable health information; (v) restricts covered entities’ marketing communications, and (vi) increases enforcement of, and penalties for, violations of privacy and security of individually identifiable health information.

The HITECH Act breach notification requirement created a federal breach notification law that mirrors protections that many states have passed in recent years. This requirement requires the System to notify patients of any unauthorized access, acquisition, or disclosure of their unsecured individually identifiable health information that poses significant risk of financial, reputational or other harm to a patient. In addition, the breach notification requirement requires reporting all breaches to the Secretary of DHHS and, in some cases, local media outlets, of certain unauthorized access, acquisition, or disclosure of unsecured individually identifiable health information that poses significant risk of financial, reputational or other harm to a patient.

Any violation of the HITECH Act is subject to HIPAA civil and criminal penalties. The HITECH Act broadened the applicability of the criminal penalty provisions under HIPAA to employees of covered entities and required penalties for violations resulting from willful neglect. The HITECH Act also significantly increased the amount of civil penalties to up to $1.5 million for violations during a calendar year under HIPAA. In addition, the HITECH Act authorized state attorneys general to bring civil actions seeking either injunction or damages in response to violations of HIPAA privacy and security regulations that threaten state residents. The Members of the Obligated Group believe they are in substantial compliance with all applicable current requirements of HIPAA.

340B Drug Pricing Program. On August 28, 2015, the federal Health Resources and Services Administration (“HRSA”) published proposed omnibus guidance for the 340B Drug Pricing Program. Under the program, drug manufacturers are required to provide outpatient drugs to eligible health care organizations at significantly reduced prices. The guidance includes proposals to, among other things, (i) narrow the definition of patients who are eligible to receive 340B discounted drugs; (ii) exclude patients receiving infusion services from 340B eligibility if the only health care services received by the patient are infusion services, and (iii) change the definition of “covered outpatient drug” such that outpatient drugs that are part of a bundled payment for Medicaid reimbursement would not quality for 340B drug discounted pricing. The American Hospital Association and other trade groups have issued public comments stating that the proposed guidance could reduce the volume of drugs eligible for 340B drug discounted pricing and increase the cost of drugs to hospitals and other health care organizations. HRSA collected comments on the proposed omnibus guidance from the general public through October 27, 2015. The agency has not announced when it expects to issue its final guidance.

International Classification of Disease, 10th Revision Coding System. In 2014, CMS published the final rule adopting the International Classification of Disease, 10th Revision coding system (“ICD-10”), requiring health care organizations to implement ICD-10 by October 1, 2015. ICD-10 provides a common approach to the classification of diseases and other health problems, allowing the United States to align with other nations to better share medical information, diagnosis and treatment codes. ICD-10 is not without risk, in the form of costs associated with implementation and potentially rejected claims. There is a potential for revenue stream disruption for health care organizations, and the magnitude of the transition within the industry may add pressure to the cash flows of health care organizations. Health care organizations are dependent on outside software vendors, clearinghouses and third-party billing services to help develop products and services to allow timely, full and successful implementation of ICD-10. At this time, it is not possible to predict the effects of full ICD-10 implementation. With the recent implementation deadline, the full impact of the implementation of ICD-10 is evolving.

Increased Enforcement Affecting Clinical Research. In addition to increasing enforcement of laws governing payment and reimbursement, the federal government has also stepped up enforcement of laws and regulations governing the conduct of clinical trials at hospitals. HHS elevated and strengthened its Office of Human Research Protection, one of the agencies with responsibilities for monitoring federally funded research. In addition, the National Institutes of Health (“NIH”) significantly increased the number of facility inspections that these agencies perform. The U.S. 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 FDA’s inspection of facilities has increased significantly in recent years. These agencies’ enforcement powers range from substantial fines and penalties to exclusions of researchers and suspension or termination of entire research programs. Management believes that clinical research being conducted at its hospitals is in substantial compliance with material applicable requirements, but no assurance can be made that the FDA will not take a contrary position or that such position will not have a material adverse effect on the future operations or financial condition of the Obligated Group and its Members.

Other Texas Statutes. Health care providers in Texas also are subject to prosecution and civil penalties under state statutes, including the following:

Texas Non-Solicitation of Patients Act. The Texas Non-Solicitation of Patients Act (“TSPA”) is similar to the federal anti-kickback law. TSPA prohibits any person, including hospitals and physicians, from knowingly offering to pay or agreeing to accept any remuneration directly or indirectly, overtly or covertly, in cash or in kind, to or from another person or entity, for securing or soliciting patients or patronage for or from a person licensed, certified or registered by a state health care regulatory agency. TSPA is extremely broad and applies to services covered by any payer, including private insurance and self-pay, while the federal anti-kickback law is limited to services covered under a government-funded health care program. A violation of TSPA is a criminal offense.

Workers’ Compensation Fraud. Additional laws place administrative penalties on worker’s compensation fraud, including improper inducements for referring injured employees for services or arranging for the provision of services payable under the workers’ compensation program. Sanctions for violations include exclusion from participation in the program and monetary fines.

Texas Medicaid Fraud Prevention Act. The Texas Medicaid Fraud Prevention Act imposes civil penalties for various fraudulent acts performed with knowledge that relate to the application for or receipt of a benefit, contract or payment under the Medicaid program. Civil remedies for a violation of the Act include suspension or revocation of a Medicaid provider agreement, restitution, and penalties that may include twice the value of the unauthorized payment or benefit. A person found liable for violating this statute in a lawsuit for civil penalties brought by the Texas Attorney General will be barred from participating in the Medicaid program for at least 10 years. In addition, the relevant regulatory agency may suspend or revoke a provider agreement or a license issued to a liable defendant. A person who commits an unlawful act under the Texas Medicaid Fraud Prevention Act may also commit a crime under the Medicaid Fraud provisions in the Penal Code. The Act also authorizes a private person to bring an action for violation of the Act.

Texas Insurance Claim Fraud Act. The Texas Insurance Claim Fraud Act makes it illegal to, with the intent to defraud the insurer, (a) present a claim for payment to a health insurer that is known to be materially false or misleading and affects the right to or amount of payment or (b) solicit or offer a benefit in connection with goods or services for which payment is sought under a health insurance policy.

Corporate Practice of Medicine. Texas prohibits general business corporations from practicing medicine, employing physicians, splitting professional fees with physicians, or even providing professional services under the supervision of a licensed practitioner. These laws are commonly referred to as “corporate practice of medicine” laws. THR believes it is in material compliance with current Texas law on this subject.

The System May Not Be Able to Maintain Contracts with Managed Care Providers for Adequate Payments

Health care, including hospital services, increasingly is being provided through “managed care” plans that use discounts and other economic mechanisms to reduce or limit the cost and utilization of health care services. In the System’s market, managed care plans and preferred provider plans have replaced indemnity insurance as the prime source of nongovernmental payment for hospital services. Payments to System hospitals from managed care plans typically are lower than those received from indemnity/commercial insurers. Failure to maintain contracts with managed care organizations could reduce the System’s market share and gross patient services revenues. Conversely, participation in managed care plans could result in lower net income if System hospitals are unable to adequately contain their costs under fixed rate “DRG-like” managed care contracts. Many of the System’s managed care contracts will expire and must be renegotiated within the next year. Thus, managed care poses a significant business risk to the System.

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 from a particular hospital. In a capitation payment system, the hospital assumes a financial risk for the cost and scope of care given to the HMO’s enrollees. If payment under an HMO or PPO contract is insufficient to meet the hospital’s costs of care, or if utilization by enrollees materially exceeds projections, the financial condition of the hospital could erode rapidly and significantly. Effective February 1, 2015, the System became party to one capitated contract, and System hospitals could agree to fixed rate, risk-based or capitated contracts in the future. If, following implementation of the Reform Acts, substantial numbers of employers elect to discontinue employer-funded medical care for employees eligible for federal assistance in securing private insurance, and the employees’ health services

are insured and paid for by HMOs, then the System’s revenue could become more dependent on the results of service contract negotiations with HMOs, and the negotiations could become more difficult than those with managed care companies that are not at risk for employer-funded health care expense.

The System Could Be Adversely Affected by Competition From Other Service Providers

The System hospitals face continued competition from other hospitals and other forms of health care delivery systems that offer health care services to the population they serve. Construction of or renovation of hospitals, HMO or PPO facilities, ambulatory surgical centers and other ambulatory care facilities, free-standing emergency facilities, and private laboratory and radiological services could have an adverse impact on the market shares of System hospitals. In Texas, no certificates of need or other state approvals are required to construct or expand health care facilities. Services such as home care, intermediate nursing home care, preventive care, ambulatory care and drug and alcohol treatment programs are increasingly being provided by alternative delivery systems. Alternative delivery systems have been encouraged by the changing policies of third party payers, both governmental and private. Third party payers have limited the payment rates for hospital stays and procedures, creating incentives that reduce hospital inpatient utilization and increase the use of outpatient services and out-of- hospital care.

Additionally, mergers or affiliations of existing competitors may create more formidable competitors than the merging competitors and adversely affect the System.

Non-invasive interventions, including pharmacological treatments and gene therapy, are being developed at an increasing pace and could substantially reduce the demand for hospital services before the Series 2016A Bonds are retired. Unless population growth offsets this trend, or System hospitals are able to compensate by developing other services or reducing expenses, the financial condition of the System could be materially adversely affected by such medical advances.

The System May Be Adversely Affected By the Increasing Cost of Modern Technology

Technological advances in recent years have forced hospitals to acquire sophisticated and costly equipment to remain competitive. Moreover, the growth of e-commerce also may result in a shift in the way that health care is delivered, i.e. from remote locations. For example, physicians will be able to provide certain services over the internet and pharmaceuticals and other health services may now be purchased online. If, due to financial constraints, the System were less able to acquire new equipment required to remain competitive, they could lose market share, and their financial condition could be effected.

The System May Be Adversely Affected By Negative Reviews from Third Parties

Health plans, Medicare, Medicaid, employers, trade groups and other purchasers of health services, private standard-setting organizations and accrediting agencies use 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 physicians. For example, the Reform Acts created the Patient-Centered Outcomes Research Institute (“PCORI”) to review the effectiveness of treatments and medications in federally-funded health care programs. The PCORI publishes the results of its studies. An adverse finding result may result in a treatment or product being removed from Medicare or Medicare coverage. Published rankings such as “score cards,” “P4P” and other financial and non- financial incentive programs are being introduced to affect the reputation and revenue of hospitals and the members of their medical staffs and to influence the behavior of consumers and providers such as the Members of the Obligated Group. Currently prevalent are measures of quality based on clinical outcomes of patient care, reduction in costs, patient satisfaction, and investment in health information technology. Measures of performance set by others that characterize a hospital negatively may adversely affect its reputation and financial condition.

The System’s Financial Results of Operation and Condition Could Be Adversely Affected By Future Acquisitions or Divestitures

As with many other healthcare systems, THR selectively evaluates potential merger and affiliation opportunities on a continuing basis as part of its overall strategic planning and development process. Discussions with respect to affiliation, merger, acquisition, disposition, or change of use are held on an intermittent and confidential basis with other parties. As a result, the corporate structure and assets of the System could change from time to time. There is no assurance that completed affiliations will be permanent, even when they are originally intended to be. Certain changes to the corporate structure or membership of the Combined Group will be subject to

the provisions of the Master Indenture. See “MASTER INDENTURE – Consolidation, Merger, Conveyance and Transfer” and “– Membership in the Combined Group” in APPENDIX C.

As part of its ongoing planning and property management functions, THR also reviews the use, compatibility and business viability of many of the operations and facilities of the System, and, from time to time, THR may pursue changes in the use or disposition of such facilities. Dispositions of facilities are not limited by the Master Indenture. Likewise, THR occasionally receives offers from or conducts discussions with third parties about the potential acquisition of operations or properties or the potential sale of some of their operations and properties.

If a proceeding were brought to dissolve THR or a nonprofit THR affiliate or to distribute its assets to other charitable donees, the Texas Attorney General may intervene and enter into a compromise, settlement, contract or judgment relating to the proceeding. The Attorney General is also authorized to bring suit against a nonprofit hospital for a breach of certain of its duties. If THR or an affiliate proposed to merge or affiliate with a for-profit or out-of-state health care entity or take some other action which might have an adverse effect on the distribution of its charitable assets, the Attorney General might bring an action to prevent the merger or affiliation. This power could interfere with possible workout or liquidation proceedings.

Unanticipated Catastrophes and Conditions Could Adversely Affect the System’s Financial Condition and Results of Operations

Concentration Risks. The System’s operations are limited to North Texas, and a substantial amount of its revenue is realized from facilities in close proximity in the Dallas-Fort Worth-Arlington Metropolitan Statistical Area. This concentration makes it particularly sensitive to regulatory, economic, environmental and competitive conditions and changes in the State of Texas. Any material change in the current payment programs or regulatory, economic, environmental or competitive conditions in that state could have a substantial effect on its overall business results. In addition, System facilities are located in areas prone to tornadoes. A hurricane, tornado, fire, earthquake, or other natural disaster could adversely affect the System, especially if insurance is inadequate to cover resulting property and business losses.

IT System Vulnerability. THR’s operations are heavily dependent on the performance of its information technology (“IT”) system. Its IT system is essential to financial accounting and reporting, proper billing and collecting, managing inventory, managing patient records, and complying with regulatory requirements, among other functions. In addition, recent legislation creates future financial incentives for health care providers to make more extensive use of electronic health records. Any IT system failure could adversely affect operations or delay the collection of revenues. Even though THR has implemented network security measures, its servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering. The occurrence of any of these events could result in interruptions, delays, the loss or corruption of data, or cessations in the availability of systems, all of which could have a material adverse effect on THR’s financial position and results of operations and harm its business reputation. In addition, a breach of THR’s IT system that results in a violation of the HIPAA security and privacy rules discussed above could result in damages or civil or criminal penalties, or increase operating expenses as necessary to notify affected individuals, correct problems, comply with federal and state regulations, defend against potential claims and implement and maintain any additional requirements imposed by government action.

The System Could Be Limited By, or Incur Substantial Liability Under, Federal or State Laws

Environmental Laws and Regulations. Health care providers are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations that address, among other things, provider operations and facilities owned or operated by providers. The types of regulatory requirements faced by health care providers include: 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 System facilities; and requirements for training employees in the proper handling and management of hazardous materials and wastes.

In their roles as owner and/or operator, THR and its affiliates may be subject to liability for hazardous substances that are located on their property, including any such substances that may have migrated off their property. Typical health care provider operations include, but are not limited to, the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants and contaminants. As such, health care provider operations are particularly susceptible

to the practical, financial and legal risks associated with the obligations imposed by applicable environmental laws and regulations. Such risks may result in damage to individuals, property or the environment; interrupt operations and/or increase their cost; result in legal liability, damages, injunctions or fines; and result in investigations, administrative proceedings, civil litigation, criminal prosecution, penalties or other governmental agency actions; and may not be covered by insurance. There can be no assurance that THR and its affiliates will not encounter such risks in the future, and such risks may result in material adverse consequences to the operations or financial condition of the System.

Antitrust Laws. Antitrust liability may arise in a wide variety of circumstances, including medical staff privilege disputes, third party contracting, physician relations, joint ventures, mergers, affiliations, acquisitions, and pricing and salary-setting activities. In some respects, the application of federal and state antitrust laws to health care is still evolving, and enforcement activity by federal and state agencies appears to be increasing. Violation of the antitrust laws could subject the System to criminal and civil enforcement by federal and state agencies, as well as by private litigants. In certain actions, private litigants may be entitled to treble damages, and, in others, government entities may be able to assess substantial monetary fines.

From time to time, the System may be involved in a variety of activities that could receive scrutiny under antitrust laws, and THR cannot predict when or to what extent liability may arise. With respect to payor contracting, System hospitals may, from time to time, be involved in joint contracting activity with other hospitals or providers. The precise degree to which this or similar joint contracting activities may expose the participants to antitrust risk from governmental or private sources is dependent on a myriad of factual matters that may change from time to time.

Hospitals, including those controlled by the System, regularly have disputes regarding credentialing and peer review and may be subject to liability in this area. In addition, hospitals occasionally indemnify medical staff members who are involved in such credentialing or peer review activities and may also be liable with respect to such indemnity.

Court decisions have also established private causes of action against hospitals that use their local market power to promote ancillary health care businesses in which they have an interest. Such activities may result in monetary liability for the participating hospitals under certain circumstances where a competitor suffers business damage.

The ability to consummate mergers, acquisitions or affiliations may also be impaired by the antitrust laws, potentially limiting the ability of THR to fulfill its strategic plans. Liability in any of these or other antitrust areas of liability may be substantial, depending on the facts and circumstances of each case.

Malpractice and Other Claims. If one or more substantial medical malpractice claims, or claims arising from the corporate or business activities of THR, are successfully brought against THR or any wholly-controlled affiliate in excess of insurance coverage, or if other actions are successfully brought seeking punitive or other damages which are not covered by insurance, the financial results and condition of THR may substantially and adversely be affected. For a discussion of THR’s current litigation, see “LITIGATION AND REGULATORY MATTERS” in APPENDIX A and notes to audited consolidated financial statements in APPENDIX B. THR provides for self- insurance programs for the professional and general liabilities. See APPENDIX A “SYSTEM FACILITIES AND OPERATIONS OVERVIEW – Professional Liability and Other Insurance.” Should reserves be depleted to satisfy claims, required annual additions to reserves could increase substantially.

Professional liability and other actions alleging wrongful conduct and seeking punitive damages often are filed against health care providers. Litigation may also arise from the corporate and business activities of THR and its affiliates, employee-related matters, medical staff and provider network matters and denials of medical staff and provider network membership and privileges. As with professional liability, many of these risks are covered by insurance, but some are not. For example, some antitrust claims, business disputes and workers’ compensation claims are not covered by insurance or other sources and, in whole or in part, may be a liability of THR and its affiliates if determined or settled adversely. Claims for punitive damages may not be covered by insurance under Texas law. Although THR and its affiliates currently maintain actuarially determined self-insurance reserves and carry excess malpractice and general liability insurance which management of THR considers adequate, THR is unable to predict the availability, cost or adequacy of such insurance in the future.

THR is Dependent on, and Could Incur Liability in Denying Access to, the Medical Staffs of its Hospitals

The operation of THR’s hospitals is dependent on their ability to recruit and retain highly qualified physicians to the hospitals’ medical staffs, and to encourage non-employed physicians to admit patients to those hospitals rather than to competing hospitals where they maintain privileges. THR hospitals have a variety of relationships with physicians. Many of these relationships may be of material importance to operations. In an increasingly complex legal and regulatory environment, these relationships pose a variety of legal and business risks. Physicians are increasingly organizing or joining physician practice groups that are comprised of a large number of physicians. This consolidation increases the importance of attracting physicians in the groups to hospitals’ medical staff and increases the risk of the loss of the physicians as a group.

The primary relationship between a hospital and physicians who practice at the hospital is through the hospital’s organized medical staff. Medical staff bylaws, rules and policies establish the criteria and procedures by which the hospital will grant, restrict, deny or revoke a physician’s medical staff membership and/or clinical privileges. Physicians whose medical staff membership or privileges are denied, restricted or revoked often file legal actions against the hospital. Such actions may include a wide variety of claims, some of which could result in substantial uninsured damages to a hospital. In addition, failure of the hospital governing body to oversee adequately the conduct of its medical staff may result in hospital liability. All hospitals are subject to such risks.

THR May Not Be Able to Employ an Adequate Workforce on Affordable Terms

Hospitals are large employers with a wide diversity of employees. Increasingly, employees of hospitals are becoming unionized, and many hospitals have collective bargaining agreements with one or more labor organizations. Employees subject to collective bargaining agreements may include essential nursing and technical personnel, as well as food service, maintenance and other trade personnel. Although neither THR nor any of its controlled affiliates has ever been a party to a collective bargaining agreement, practices could change in the future, especially if the repeatedly proposed Employee Free Choice Act is finally enacted. To the extent a significant portion of THR’s employee base unionizes, it is possible its labor costs could increase materially.

A significant national nursing shortage exists, impacting patient care and labor costs. THR hospitals have taken recruiting and retention steps to maintain an adequate, effective professional nursing staff. There can be no assurance that the national nursing shortage will not affect THR in the future. To attract adequate staff, THR may be required to continue to enhance wages and benefits or to hire more expensive temporary or contract personnel. As a result, its labor costs could increase.

Because a significant percentage of THR’s revenues consists of fixed, prospective payments, its ability to pass along increased labor costs is constrained. Any failure to recruit and retain qualified management, nurses and other medical support personnel, or to control labor costs, could have a material, adverse effect on its results of operations.

THR Wholly-Controlled Affiliates or the Series 2016A Bonds Could Lose Their Tax-Exempt Status

Tax-Exempt Status of Interest on the Series 2016A Bonds. The Code imposes a number of requirements that must be satisfied for interest on state and local obligations, such as the Series 2016A Bonds, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of bond proceeds, limitations on the investment earnings of bond proceeds prior to expenditure, a requirement that certain investment earnings on bond proceeds be paid periodically to the United States, and a requirement that the issuers file an information report with the IRS. THR has agreed that it will, and that it will cause its wholly-controlled affiliates to, comply with such requirements. Failure to comply with the requirements stated in the Code and related regulations, rulings and policies may result in the treatment of the interest on the Series 2016A Bonds as taxable. Such adverse treatment may be retroactive to the date of issuance. See also “TAX MATTERS – Tax Exemption” below.

THR has not sought to obtain a private letter ruling from the IRS with respect to the exempt status of interest on the Series 2016A Bonds, and the opinion of Bracewell LLP is not binding on the IRS. There is no assurance that any IRS examination of the Series 2016A Bonds will not adversely affect the market value of the Series 2016A Bonds. See “TAX MATTERS – Tax Exemption” below.

Tax-Exempt Status of THR and Wholly-Controlled Affiliates. The tax-exempt status of the Series 2016A Bonds presently depends upon maintenance by THR and certain other benefited wholly-controlled affiliates of their

status as organizations described in section 501(c)(3) of the Code. The maintenance of this status depends on compliance with general rules regarding the organization and operation of tax-exempt entities, including their operation for charitable and educational purposes and their avoidance of transactions that may cause their earnings or assets to inure to the benefit of private individuals, such as the private benefit and inurement rules.

Tax-exempt organizations are subject to scrutiny from and face the potential for sanctions and monetary penalties imposed by the IRS. If a tax-exempt entity is engaged in private inurement or impermissible private benefit, the IRS may revoke its tax-exempt status. Although the IRS has not frequently revoked the tax-exempt status of nonprofit hospitals, it could do so in the future. If THR or another benefited wholly-controlled affiliate were to lose its tax-exempt status, interest on the Series 2016A Bonds could become taxable, defaults in covenants regarding the Series 2016A Bonds and other obligations would likely be triggered, and they could incur substantial tax liabilities on their income. For these reasons, any loss of the tax-exempt status of THR or any of their wholly- controlled affiliates could materially adversely affect the financial condition of THR. THR and wholly-controlled affiliates are also at risk for incurring monetary and other liabilities imposed by the IRS, including tax liability for unrelated business income. These liabilities could be materially adverse.

Under the Reform Acts, IRS Form 990 has been expanded for tax-exempt hospitals to report on new Code section 501(r) requirements. Under the Reform Acts, each tax-exempt hospital facility is required to (1) conduct a community health needs assessment at least every three years and adopt an implementation strategy to meet the identified community needs; (2) adopt, implement and widely publicize a written financial assistance policy and a policy to provide emergency medical treatment without discrimination; (3) limit charges to individuals who qualify for financial assistance under the 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 (4) refrain from taking extraordinary collection actions without first making reasonable efforts to determine whether the individual is eligible for assistance under the hospital’s financial assistance policy. In addition, under the Reform Acts, the Treasury Department is required to review information about a hospital’s community benefit activities at least once every three years. In recent years legislation has been proposed to repeal the exemption of nonprofit hospitals from federal income taxes. The Reform Acts may make it more difficult to comply with community benefit requirements. Any reduction in community benefits provided by nonprofit hospitals generally could increase the risk of passage of such legislation.

Schedule K to Form 990 is intended to 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. Schedule K requires substantial additional efforts on the part of many tax-exempt organizations to complete. Schedule K also focuses on the investment of bond proceeds that could violate the arbitrage rebate requirements and on the private use of bond-financed facilities. The new Form 990 provides additional, detailed information to the IRS, as well as to states’ attorneys general, unions, plaintiff class action lawyers and public interest groups, that is likely to result in increased enforcement actions, the effect of which cannot be determined at this time.

State and Local Tax Exemption. In recent years, state, county, and local taxing authorities have been undertaking audits and review of the operations of tax-exempt health care providers with respect to their property tax exemption for both real and personal property. Recent reviews have been conducted by local appraisal districts and have focused on large health care systems. The majority of the real and personal property of THR is currently exempt from property taxes. Investigations or audits could lead to challenges of the property tax exemption with respect to facilities that, if successful, could adversely and materially affect the property tax exemption with respect to certain of the facilities or property of THR.

It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to taxation of nonprofit corporations. There can be no assurance that future changes in the laws and regulations of federal, state or local governments will not materially adversely affect the operations and financial condition of THR or any of its wholly-controlled affiliates to pay income or local property taxes.

THR or Any of Its Tax-Exempt Affiliates Could Be Adversely Affected By Providing Too Much, or Too Little, Uncompensated Care to Indigents

Tax-exempt hospitals often treat large numbers of indigent patients who are unable to pay for their medical care. These hospitals may be susceptible to economic and political changes that could increase the number of indigents or the hospitals’ responsibility for caring for this population. General economic conditions that affect the number of individuals who have health coverage affects the ability of patients to pay for their care.

The Reform Acts impose requirements on tax-exempt hospitals to develop, implement and monitor charity care policies and procedures, as part of a larger objective to extend the availability and affordability of health care insurance to those segments of the population who have not been able to afford health insurance or who have not had access to health care services. In addition, under Texas law, nonprofit hospitals must provide charity care and government sponsored indigent health care in an amount (i) determined through a community needs assessment, based on available resources of the hospital and the tax-exempt benefits received by the hospital; (ii) equal to at least 100% of the hospital’s tax-exempt benefits (excluding federal income tax exemptions) or (iii) equal to at least 5% of the hospital’s net patient revenue, provided that charity care and government-sponsored indigent health care are provided in an amount equal to at least 4% of net patient revenue. Hospitals that qualify as disproportionate share hospitals are deemed to satisfy the requirements. Noncompliance with the charity care requirements may result in the loss of property, franchise and sales tax exemptions, which would have a material adverse effect on the financial condition of THR.

The System Could Lose Accreditation or Licenses

Health care facilities, including those operated by the System, are subject to the requirements of numerous governmental, licensing, certification and accreditation authorities. These include, but are not limited to, the Medicare and Medicaid programs, state licensing agencies, private payers and The Joint Commission. Renewal and continuation of certain of these licenses, certifications and accreditations are based on inspections, surveys, audits, investigations or other reviews, some of which may require or include affirmative activity or response by the System. These activities generally are conducted in the normal course of business of health care facilities. Nevertheless, an adverse result could cause a loss or restriction in licensure, certification or accreditation, reduce payments, or require repayment of amounts previously remitted to the provider. Accordingly, an adverse result could have a material and adverse effect on the operations or financial condition of the System.

THR’s Financial Obligations Could Increase or be Accelerated and Deplete Its Available Funds

Interest Rate Swaps. Currently, neither THR nor any other Obligated Group Member is a party to an interest rate swap agreement; however, one of THR’s Consolidated Joint Ventures has entered into interest rate swap agreement, which is not secured under the Master Indenture. See PLAN OF FINANCING here and APPENDIX B “Note 2 – Summary of Significant Accounting Policies – Derivative Instruments” and “Note 8 Long-Term Debt.” THR may enter into interest rate swap, cap, call or other derivative transactions in the future to manage its net exposure to changes in interest rates. The transactions would likely be subject to periodic “mark-to-market” valuations and at any time may have a negative value to THR. THR or counterparties to the transaction likely would be able to terminate the transactions upon the occurrence of certain “termination events” or “events of default.” If either a counterparty or THR terminates any of the transactions when they have negative value to THR, THR may be required to make a termination payment to a counterparty. Even absent termination, THR could be obligated to post collateral for the counterparty exposure from time to time. Any such transaction payment or posting could be material.

Demand Obligations. After the issuance of the Series 2016A Bonds, approximately $226,055,000 million aggregate principal amount of the Securities that are supported by THR’s self-liquidity could become due immediately, if such bonds are tendered for purchase but not remarketed. THR will also have $134,720,000 of Securities associated with certain bank loans that are subject to tender in 2025 ($67,500,000) and 2030 ($67,220,000), respectively, and mature in 2033 and 2035, respectively, if THR is unable to extend or replace the respective facilities. If THR is unable to extend, refund or replace such facilities in the future, it could be required to refinance such Securities at substantially higher interest rates than those assumed for such Securities herein. If it fails to do so, available cash and investments could be reduced to pay the principal of the Securities. See “PLAN OF FINANCING” herein and “OPERATING AND FINANCIAL DATA – Historical and Pro Forma Debt Service Coverage” in APPENDIX A.

Covenants. Financial agreements to which Obligated Group Members are a party contain various covenants that limit their ability to engage in specified types of transactions. They could impede the ability of the Obligated Group to realize cash flows sufficient to pay the Notes or maintain the ratings assigned to the Series 2016A Bonds and their value. The agreements require such Obligated Group Members to satisfy and maintain specified financial ratios. The ability of the Obligated Group Members to meet those financial ratios can be affected by events beyond its control, and there can be no assurance it will continue to meet those ratios. A breach of any of these covenants could result in a default under the Master Indenture and credit and liquidity agreements with banks. Upon an event of default under any of these agreements, creditors of the Obligated Group could elect to declare all outstanding advances immediately due and payable and terminate all commitments to extend further credit. Any 28

such action could reduce cash available to pay the Notes, or could result in an acceleration of the due date for the Series 2016A Bonds without the consent of their owners. See “APPENDIX A – OPERATING AND FINANCIAL DATA – Historical Liquidity – Days Cash on Hand.”

The Security Interests Securing the Notes are of Limited Value and Are Likely Inadequate to Assure Payment of the Bonds

Although the Securities, including the Notes, are secured by a pledge of certain receivables and revenues of the Obligated Group, the security interest does not extend to Medicare receivables or other claims against the federal government. In addition, no measures are expected to be taken to perfect the security interest in cash, investments, or other proceeds of receivables. The Master Indenture permits security interests to be granted to, among other things, secure substantial amounts of receivables factoring, purchase money, construction, and other debt, and it subordinates the security interest of the Master Trustee to these security interests. Accordingly, the security interest granted to the Master Trustee is expected to be effectively subordinate to a number of prior rights. Prior rights may include (i) rights of third parties in cash, securities and instruments not in possession of the Master Trustee, including accounts and general intangibles converted to cash, (ii) rights arising in favor of the United States of America or any agency thereof, (iii) constructive trusts, equitable liens or other rights impressed or conferred by any state or federal court in the exercise of its equitable jurisdiction and rights of donors of property, (iv) the rights of holders of perfected security interests in factored accounts receivable and other property permitted by the Master Indenture and proceeds thereof, (v) statutory liens, and (vi) the rights of parties secured by Permitted Liens, among other possible prior interests. In addition, any unperfected security interest and any security interest in post-petition revenues would be ineffective if an Obligated Group Member petitioned for a reorganization of its debts under the federal Bankruptcy Code, and an Obligated Group Member’s security interest will be released if it withdraws from the Obligated Group. For these reasons, and others, the security interest granted under the Master Indenture provides only limited security for the Notes. If an event of default does occur, it is uncertain that either the Master Trustee or the Bond Trustee could successfully obtain an adequate remedy at law or in equity on behalf of the owners of the Bonds. In addition, obligations other than the Notes and other outstanding Securities may be issued from time to time in the future pursuant to the Master Indenture, and such obligations will be on a parity with the Notes with respect to the benefits of the Master Indenture. In addition, should other entities become Obligated Group Members in the future, THR and the other Obligated Group Members would become jointly and severally liable for any obligations issued on behalf of such entities under the Master Indenture.

No facilities or other real property are pledged as security for the Securities, including the Notes. In addition, minimal property of THR and its wholly-controlled affiliates consists of general purpose buildings suitable for industrial or commercial use. Consequently, it could be difficult to find a buyer or lessee for the property, and, upon a default, the Bond Trustee or the Master Trustee may not obtain an amount equal to the aggregate liabilities of the Obligated Group (including liabilities in respect of the defaulted Bonds then outstanding) from the sale or lease of the property, whether pursuant to a judgment against any Obligated Group Member or otherwise.

The Master Indenture permits Obligated Group Members to incur substantial amounts of purchase and construction money debt and to secure the debt with a lien on the property acquired or improved. If they exercise that right, any claims against such property to satisfy the Obligated Group Members’ obligations on the Notes would be subordinate to the payment of such debt.

The Contractual Undertakings of the Obligated Group May Not Be Fully Enforceable

In determining whether various covenants and tests contained in the Master Indenture are met, the accounts of the members of the Combined Group will be combined, notwithstanding uncertainties as to the enforceability of certain obligations of the Obligated Group Members contained in the Master Indenture (and of agreements by Designated Members for the benefit of THR, the other Obligated Group Members and during the continuance of any default the Master Trustee, to observe and perform Master Indenture obligations and restrictions which the Obligated Group Members covenanted to cause such Designated Members to obtain and perform). Cash, investments, and other property may be transferred among members of the Obligated Group, and Combined Group members may be released from their obligations under the Master Indenture at the option of THR, without satisfying any financial ratio or similar condition. As long as THR has Securities Outstanding, including the Series 2016A Note, THR cannot withdraw from the Obligated Group. However, the other Obligated Group Members, may withdraw as long as the Obligated Group can issue one dollar of additional debt based on the Combined Group’s financial results. Therefore, all Obligated Group Members, other than THR, could become Designated Members while maintaining the Combined Group financial ratios. The Master Trustee does not have a security interest in the revenues and accounts receivable of the Designated Members and the security interest granted by the Obligated 29

Group Members in Revenues does not cover the undertaking by Designated Members to make advances for the payment of Securities, including Series 2016A Note. Therefore, if THR were to default and the Master Trustee tried to enforce the Designated Members’ undertakings to transfer funds, then all THR creditors may be equally entitled to such funds, since the Master Trustee does not have a security interest in them.

The joint and several obligations described herein of THR and the other Obligated Group Members, and the obligations of the Designated Members to transfer funds to THR or any other Obligated Group Member to make payments of debt service on the Notes, may not be enforceable to the extent (i) any Note is issued for a purpose that is not consistent with the charitable purposes of the Obligated Group Member or Designated Member from which such payment is requested or (ii) such payments will be made from property that is donor restricted or that is subject to a direct or express trust that does not permit the use of such property for such payments, would result in the cessation or discontinuation of any material portion of the health care or related services previously provided by the entity from which such payment is requested, or will be made pursuant to any loan violating applicable usury laws. In addition, nonprofit affiliates of THR are not permitted to pay dividends, so transfers to THR or other Obligated Group Members could be challenged by other creditors. Due to the absence of clear legal precedent in this area, the extent to which the property of THR or any other present or future Obligated Group Member or Designated Member is restricted cannot be determined and could be substantial.

An Obligated Group Member may not be required to make payments on the Notes, and a Designated Member may not be required to transfer funds to an Obligated Group Member to make payments on the Notes, to the extent that any such payment or transfer would render such paying entity insolvent or would conflict with, not be permitted by, or be subject to recovery for the benefit of other creditors of such entity under applicable fraudulent conveyance, bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights. In addition, any obligation on the part of an Obligated Group Member to cause a Designated Member to transfer funds to it would be subordinate to the claims of the Designated Member’s creditors. There is no clear precedent in the law as to whether payments by an Obligated Group Member on a promissory note issued by or for the benefit of another entity or transfers of funds by a Designated Member for such purposes may be voided. Under the United States Bankruptcy Code, a trustee in bankruptcy and, under fraudulent transfer statutes of the State of Texas, a creditor of a related guarantor may avoid any obligation incurred by a related guarantor, if, among other bases therefor, (i) the guarantor has not received fair consideration or reasonably equivalent value in exchange for the guaranty, and (ii) the guaranty renders the guarantor insolvent, as defined in the United States Bankruptcy Code or fraudulent transfers statutes of the State of Texas, or the guarantor is undercapitalized.

Application by courts of the tests of “insolvency”, “reasonably equivalent value” and “fair consideration” has resulted in a conflicting body of case law. It is possible that, in an action to force an Obligated Group Member to pay debt service on Notes issued by or for the benefit of another entity, or to force a Designated Member to transfer funds for such purpose, a court might not enforce such obligation in the event it is determined that such paying entity is analogous to a guarantor and that fair consideration or reasonably equivalent value for such guaranty was not received and that the incurrence of such obligation has rendered and will render the paying entity insolvent or the paying entity is or will thereby become undercapitalized.

The rights of the Bond Trustee to take certain actions in the event of default by THR are subject to the provisions of the Bond Indenture and the Master Indenture. Generally, the holders of specified percentages of Bonds may direct the Bond Trustee and holders of Securities may direct the Master Trustee in the event of certain defaults by the Obligated Group. Holders of Securities vote based upon the principal amount of Securities they hold or as otherwise described in APPENDIX C. After the issuance of the Series 2016A Bonds and the Series 2016A Note, the Series 2016A Bonds will comprise approximately 53.5*% in aggregate principal amount of the outstanding Bonds, and the Series 2016A Note will comprise approximately 36.2*% in aggregate principal amount of the outstanding Securities.

The Rights of Bondholders May Be Limited by Bankruptcy and Other Laws

The legal right and practical ability of the Bond Trustee to enforce rights and remedies under the Loan Agreement may be limited by laws relating to bankruptcy, insolvency, reorganization, fraudulent conveyance or moratorium and by other similar laws affecting creditors’ rights. Enforcement of such rights and remedies may require judicial actions that are subject to discretion and delay, that otherwise may not be readily available or that may be limited by certain legal principles.

* Preliminary, subject to change.

In the event of bankruptcy of THR or any of its wholly-controlled affiliates, the rights and remedies of the holders of the Bonds are subject to various provisions of the federal Bankruptcy Code. If THR or its wholly- controlled affiliates were to file a petition in bankruptcy, payments made by THR or wholly-controlled affiliates during the 90-day (or perhaps one-year) period immediately preceding the filing of such petition may be voidable as preferential transfers to the extent such payments allow the recipients to receive more than they would have received in the event of any such debtor’s liquidation. Security interests and other liens granted to the Bond Trustee or Master Trustee and perfected during such preference period also may be voided as preferential transfers to the extent such security interest or other lien secures obligations that arose prior to the date of such perfection. Such a bankruptcy filing would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against THR or such wholly-controlled affiliate and its property and as an automatic stay of any act or proceeding to enforce a lien upon or to otherwise exercise control over its property as well as various other actions to enforce, maintain or enhance the rights of the Bond Trustee or the Master Trustee. If the Bankruptcy Court so ordered, the property of THR or its wholly-controlled affiliates, including accounts receivable and proceeds thereof, could be used for the financial rehabilitation of any of the wholly-controlled affiliates despite any security interest of the Bond Trustee or Master Trustee therein. The rights of the Bond Trustee or Master Trustee to enforce any security interests it may have could be delayed during the pendency of the rehabilitation proceeding.

If THR or any of its wholly-controlled affiliates becomes the subject of a bankruptcy petition, it could file a plan of reorganization for the adjustment of its debts, which could include provisions modifying or altering the rights of creditors generally or any class of them, secured or unsecured. The plan, when confirmed by a court, binds all creditors who had notice or knowledge of the plan and, with certain exceptions, discharges all claims against the debtor to the extent provided for in the plan. No plan may be confirmed unless certain conditions are met, among which are conditions that the plan is feasible and that it shall have been accepted by each class of claims impaired thereunder. Each class of claims has accepted the plan if at least two-thirds in dollar amount and more than one-half in number of the class cast votes in its favor. Even if the plan is not so accepted, it may be confirmed if the court finds that the plan is fair and equitable with respect to each class of non-accepting creditors impaired thereunder and does not discriminate unfairly. Moreover, there is no assurance that certain covenants, including tax covenants, contained in the Loan Agreement or other documents would survive. Accordingly, THR or its wholly-controlled affiliates as debtors in possession or a bankruptcy trustee appointed by the Bankruptcy Court could take action that would adversely affect the exclusion of interest on the Series 2016A Bonds from gross income for federal income tax purposes.

The various legal opinions delivered concurrently with the issuance of the Series 2016A Bonds are qualified as to the enforceability of the various legal instruments by limitations imposed by state and federal laws, rulings, policies and decisions affecting remedies and by bankruptcy, reorganization or other laws of general application affecting the enforcement of creditors’ rights or the enforceability of certain remedies or document provisions.

The Master Indenture, Bond Indenture and Loan Agreement Could Be Amended Without Bondholder Consent

Certain amendments to the Master Indenture may be made with the consent of the holders of not less than a majority of the principal amount of Securities outstanding under the Master Indenture. Such percentage may be composed wholly or partially of the Holders of Securities other than Notes. Certain amendments to the Bond Indenture and the Loan Agreement may be made with the consent of the holders of not less than a majority of the outstanding principal amount of the Bonds. In addition, certain document amendments may be made without bondholder consent or notice. Any amendment could adversely affect the security for the Bonds, including the Series 2016A Bonds.

THR May Be Unable to Complete Construction Projects on Time or Within Budget, Which Could Reduce or Defer Expected Revenue

Timely completion of the projects to be financed by the Series 2016A Bonds is dependent upon a number of factors, including the receipt of building permits and other governmental approvals, the completion of plans and specifications, the availability of materials, labor and contractors to construct the improvements within management’s cost estimates or the availability of other funds to pay possible cost overruns, labor relations in the construction industry, the solvency of contractors, and other factors that cannot be predicted. Accordingly, there can be no assurances that plans for the projects will be fully realized on a timely basis or at all. If completion of the projects is delayed, or if cost overruns are incurred, or if demand for services at the new and expanded facilities

being financed by the Series 2016A Bonds is slow to develop, the revenues and cash position of THR could be materially adversely affected.

LITIGATION

The Issuer

There is not now pending or, to the knowledge of the Issuer, threatened any litigation restraining or enjoining the issuance or delivery of the Series 2016A Bonds of the Issuer or questioning or affecting the validity of the Series 2016A Bonds of the Issuer or the proceedings or authority under which such Series 2016A Bonds are to be issued. Neither the creation, organization or existence of the Issuer nor the title of any of the present directors or officers of the Issuer to their respective offices is being contested. There is no litigation pending or, to the knowledge of the Issuer, threatened, which in any manner questions the right of the Issuer to enter into its Bond Indenture or Loan Agreement or to secure the Series 2016A Bonds in the manner provided in the Bond Indenture.

THR

THR has advised that, other than as set forth under “LITIGATION AND REGULATORY MATTERS” in APPENDIX A, there is no litigation or proceedings pending or threatened against it or any wholly-controlled affiliates except litigation or proceedings in which the estimated probable ultimate recoveries and the costs and expenses of defense, in the opinion of management of THR, (i) will be entirely within applicable commercial insurance policy limits (subject to applicable deductibles) or are not in excess of the total available reserves held under applicable self-insurance programs or (ii) will not have a material adverse effect on the operation or financial condition of THR. No litigation or proceedings are pending or, to the knowledge of THR, threatened against any of them which in any manner question the right of THR or other Obligated Group Members to enter into the transactions described herein.

TAX MATTERS

Tax Exemption

In the opinion of Bracewell LLP, Bond Counsel, assuming compliance with certain covenants and based on certain representations, (i) interest on the Series 2016A Bonds is excludable from gross income for federal income tax purposes under existing law, and (ii) the Series 2016A Bonds are “qualified 501(c)(3) bonds” under the Code, and interest on the Series 2016A Bonds is not subject to the alternative minimum tax on individuals and corporations, except as described below in the discussion regarding adjusted current earnings for corporations.

The Code imposes a number of requirements that must be satisfied for interest on state or local obligations, such as the Series 2016A Bonds, to be excludable from gross income for federal income tax purposes. These requirements include a requirement that THR and its benefited affiliates be tax-exempt organizations described in Section 501(c)(3) of the Code, limitations on the use of proceeds and the source of repayment of bonds of the same issue, limitations on the investment of bond proceeds prior to expenditure, a requirement that excess arbitrage earned on the investment of such proceeds be paid periodically to the United States and a requirement that the Issuer file an information report with the IRS. The Issuer and THR have covenanted in the Bond Indenture and the Loan Agreement that they will comply (and, in the case of THR, that they will cause their benefited affiliates to comply) with these requirements.

For purposes of its opinion that the Series 2016A Bonds are “qualified 501(c)(3) bonds,” Bond Counsel will rely upon representations of the Issuer, and THR will assume continuing compliance with the covenants of the Bond Indenture and the Loan Agreement pertaining to those sections of the Code that affect the status of THR and their benefited affiliates as organizations described in Section 501(c)(3) of the Code and the exclusion from gross income of interest on the Series 2016A Bonds for federal income tax purposes. In addition, Bond Counsel will rely on representations by the Issuer, THR and the Underwriters with respect to matters solely within the knowledge of the Issuer, THR and the Underwriters, respectively, which Bond Counsel has not independently verified. If the Issuer or THR should fail to comply with the covenants in the Bond Indenture and the Loan Agreement or if the foregoing representations should be determined to be inaccurate or incomplete, interest on the Series 2016A Bonds could become includable in gross income for federal income tax purposes from the date of delivery of the Series 2016A Bonds, regardless of the date on which the event causing such includability occurs.

The Code also imposes a 20% alternative minimum tax on the “alternative minimum taxable income” of a corporation (other than any S corporation, regulated investment company, REIT or REMIC), if the amount of such alternative minimum tax is greater than the amount of the corporation’s regular income tax. Generally, the “alternative minimum taxable income” of a corporation includes 75% of the amount by which its “adjusted current earnings” exceeds its other “alternative minimum taxable income.” Because interest on certain tax-exempt obligations is included in a corporation’s “adjusted current earnings,” ownership of the Series 2016A Bonds could subject a corporation to alternative minimum tax consequences.

Except as stated above, Bond Counsel will express no opinion as to any federal, state or local tax consequences resulting from the ownership of, receipt of interest on or disposition of the Series 2016A Bonds.

Bond Counsel’s opinions are based on existing law, which is subject to change. Such opinions are further based on Bond Counsel’s knowledge of facts as of the date thereof. Bond Counsel assumes no duty to update or supplement its opinions to reflect any facts or circumstances that may thereafter come to Bond Counsel’s attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, Bond Counsel’s opinions are not a guarantee of result and are not binding on the IRS; rather, such opinions represent Bond Counsel’s legal judgment based upon its review of existing law and in reliance upon the representations and covenants referenced above that it deems relevant to such opinions. Bond Counsel observes that THR and their benefited affiliates have covenanted in the Loan Agreement not to take any action, or omit to take any action within their control, that if taken or omitted, respectively, will result in treatment of interest on the Series 2016A Bonds as includable in gross income for federal income tax purposes. The IRS has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given regarding whether or not the IRS will commence an audit of the Series 2016A Bonds. If an audit is commenced, in accordance with its current published procedures, the IRS is likely to treat the Issuer as the taxpayer and the owners of the Series 2016A Bonds may not have a right to participate in such audit. Public awareness of any future audit of the Series 2016A Bonds could adversely affect the value and liquidity of the Series 2016A Bonds regardless of the ultimate outcome of the audit.

Collateral Tax Consequences

Prospective purchasers of the Series 2016A Bonds should be aware that the ownership of tax-exempt obligations may result in collateral federal tax consequences to financial institutions, life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, low and middle income taxpayers qualifying for the health insurance premium assistance credit, and individuals otherwise qualifying for the earned income credit. In addition, certain foreign corporations doing business in the United States may be subject to the “branch profits tax” on their effectively-connected earnings and profits, including tax-exempt interest such as interest on the Series 2016A Bonds. These categories of prospective purchasers should consult their own tax advisors as to the applicability of these consequences. Prospective purchasers of the Series 2016A Bonds should also be aware that, under the Code, taxpayers are required to report on their returns the amount of tax-exempt interest, such as interest on the Series 2016A Bonds, received or accrued during the year.

Tax Accounting Treatment of Original Issue Premium

The issue price of a portion of the Series 2016A Bonds could exceed the stated redemption price payable at maturity of such Series 2016A Bonds. Such Series 2016A Bonds (the “Premium Bonds”) would be considered for federal income tax purposes to have “bond premium” equal to the amount of such excess. The basis of a Premium Bond in the hands of an initial owner is reduced by the amount of such excess that is amortized during the period such initial owner holds such Premium Bond in determining gain or loss for federal income tax purposes. This reduction in basis will increase the amount of any gain or decrease the amount of any loss recognized for federal income tax purposes on the sale or other taxable disposition of a Premium Bond by the initial owner. No corresponding deduction is allowed for federal income tax purposes for the reduction in basis resulting from amortizable bond premium. The amount of bond premium on a Premium Bond that is amortizable each year (or shorter period in the event of a sale or disposition of a Premium Bond) is determined using the yield to maturity on the Premium Bond based on the initial offering price of such Premium Bond.

The federal income tax consequences of the purchase, ownership and redemption, sale or other disposition of Premium Bonds that are not purchased in the initial offering at the initial offering price may be determined according to rules that differ from those described above. All owners of Premium Bonds should consult their own 33

tax advisors with respect to the determination for federal, state, and local income tax purposes of amortized bond premium upon the redemption, sale or other disposition of a Premium Bond and with respect to the federal, state, local, and foreign tax consequences of the purchase, ownership, and sale, redemption or other disposition of such Premium Bonds.

Tax Accounting Treatment of Original Issue Discount

The issue price of a portion of the Series 2016A Bonds could be less than the stated redemption price payable at maturity of such Series 2016A Bonds (the “Original Issue Discount Bonds”). The difference between (i) the amount payable at the maturity of each Original Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond constitutes original issue discount with respect to such Original Issue Discount Bond in the hands of any owner who has purchased such Original Issue Discount Bond in the initial public offering of the Original Issue Discount Bonds. Generally, such initial owner is entitled to exclude from gross income (as defined in Section 61 of the Code) an amount of income with respect to such Original Issue Discount equal to that portion of the amount of such original issue discount allocable to the period that such Original Issue Discount Bond continues to be owned by such owner. Because original issue discount is treated as interest for federal income tax purposes, the discussions regarding interest on the Series 2016A Bonds under the captions “TAX MATTERS – Tax Exemption,” “TAX MATTERS – Collateral Tax Consequences” and “TAX MATTERS – Tax Legislative Changes” generally apply, and should be considered in connection with the discussion in this portion of the Official Statement.

In the event of the redemption, sale or other taxable disposition of an Original Issue Discount Bond prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Bond was held by such initial owner) is includable in gross income.

The foregoing discussion assumes that (i) the Underwriters have purchased the Original Issue Discount Bonds for contemporaneous sale to the public and (ii) all of the Original Issue Discount Bonds have been initially offered, and a substantial amount of each maturity thereof has been sold, to the general public in arm’s-length transactions for a price (and with no other consideration being included) not more than the initial offering prices thereof stated on the cover page of this Official Statement. Neither the Issuer, THR nor Bond Counsel has made any investigation or offers any comfort that the Original Issue Discount Bonds will be offered and sold in accordance with such assumptions.

Under existing law, the original issue discount on each Original Issue Discount Bond accrues daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semi-annual anniversary dates of the date of the Series 2016A Bonds and ratably within each such six- month period) and the accrued amount is added to an initial owner’s basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (i) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (ii) the amounts payable as current interest during such accrual period on such Original Issue Discount Bond.

The federal income tax consequences of the purchase, ownership, and redemption, sale or other disposition of Original Issue Discount Bonds that are not purchased in the initial offering at the initial offering price may be determined according to rules that differ from those described above. All owners of Original Issue Discount Bonds should consult their own tax advisors with respect to the determination for federal, state, and local income tax purposes of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Bonds.

Stepped Coupon Bonds

The coupon rate on the Stepped Coupon Bonds is subject to increase on the dates (each a “Rate Step Date”), and in each case to the respective coupon rate, set forth on the cover of this Official Statement. The Treasury Department has issued regulations under Section 1271 through 1275 of the Code (the “OID Regulations”). Pursuant to the OID Regulations, a stepped coupon bond such as the Stepped Coupon Bonds can be treated as issued with OID; however, pursuant to Section 1.1272-1(c)(5) of the Regulations, it is presumed that the Stepped Coupon

Bonds will be called for redemption on the applicable Rate Step Date, and that, accordingly, the amount of OID with respect to the Stepped Coupon Bonds is treated as zero. In the event the Stepped Coupon Bonds are not redeemed on the applicable Rate Step Date, the Stepped Coupon Bonds will be considered to be reissued, solely for purposes of determining OID, on such Rate Step Date at an adjusted issue price.

Any future step-up in the interest rate of the Stepped Coupon Bonds will be similarly analyzed as of the applicable Rate Step Date for purposes of determining whether such increase(s) in the interest rate may be disregarded for purposes of characterizing the additional interest as OID. Holders are advised to consult with their own tax advisors for specific treatment of interest on the Stepped Coupon Bonds resulting from such holder’s ownership of the Stepped Coupon Bonds at the stepped interest rate(s).

Tax Legislative Changes

Current law may change so as to directly or indirectly reduce or eliminate the benefit of the exclusion of interest on the Series 2016A Bonds from gross income for federal income tax purposes. Any proposed legislation, whether or not enacted, could also affect the value and liquidity of the Series 2016A Bonds. Prospective purchasers of the Series 2016A Bonds should consult their own tax advisors with respect to any proposed, pending or future legislation.

UNDERWRITING

Morgan Stanley & Co. LLC, on behalf of itself, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Estrada Hinojosa & Company, Inc. (collectively, the “Underwriters”), will agree to purchase the Series 2016A Bonds, at a discount of $______from the aggregate initial offering prices set forth on the cover page, pursuant to a bond purchase agreement between the Issuer and the Underwriters. The bond purchase agreement provides that the Underwriters collectively will purchase all of the Series 2016A Bonds if any are purchased. The Underwriters reserve the right to join with dealers and other underwriters in offering the Series 2016A Bonds to the public. Pursuant to a letter of representation, THR will agree to indemnify the Underwriters and the Issuer against certain liabilities, including liabilities under federal and state securities laws. The obligation of the Underwriters to accept delivery of the Series 2016A Bonds is subject to various conditions contained in the bond purchase agreement.

Morgan Stanley & Co. LLC, an underwriter of the Series 2016A Bonds, has entered into a retail distribution arrangement with its affiliate Morgan Stanley Smith Barney LLC. As part of the distribution arrangement, Morgan Stanley & Co. LLC may distribute municipal securities to retail investors through the financial advisor network of Morgan Stanley Smith Barney LLC. As part of this arrangement, Morgan Stanley & Co. LLC may compensate Morgan Stanley Smith Barney LLC for its selling efforts with respect to the Series 2016A Bonds.

The Underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services. The Underwriters and their respective affiliates have provided, and may in the future provide, a variety of these services to THR and to persons and entities with relationships with THR, for which they received or will receive customary fees and expenses

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

Marketing Agreement(s)

Either of such Underwriters may engage in other transactions with THR in which they could earn additional compensation. Morgan Stanley & Co. LLC currently acts as the Remarketing Agent for the Series 2008A Bonds and Series 2008C Bonds, for which it receives periodic compensation.

RATINGS

S&P Global Ratings, a Standard & Poor’s Financial Services LLC business, and Moody’s Investors Service have assigned ratings of “AA” and “Aa2”, respectively, to the Series 2016A Bonds. Such ratings reflect only the views of the respective ratings services at the time the ratings were assigned, and neither the Issuer nor THR nor the Underwriters make any representation as to the appropriateness of such ratings. Any explanation of the significance of the ratings may only be obtained from the applicable ratings services. Certain information and materials not included in this Official Statement were furnished to the rating agencies. Generally rating agencies base their ratings on the information furnished and on investigations, studies and assumptions by the rating agencies. There is no assurance that such ratings will remain for any given period of time or that they will not be lowered or withdrawn entirely by the respective ratings services if in their judgment circumstances warrant. Any downward change in or withdrawal of any such rating may have an adverse effect on the market price of the Series 2016A Bonds.

LEGAL MATTERS

Legal matters incident to the authorization and issuance of the Series 2016A Bonds are subject to the approval of the Attorney General of the State of Texas and the legal opinion of Bracewell LLP, Bond Counsel. Certain legal matters will be passed upon by Bracewell LLP, as special counsel for THR, and THR’s General Counsel, and by Brown Pruitt Wambsganss Ferrill & Dean, PC, as counsel to the Issuer. Certain legal matters will be passed upon for the Underwriters by their counsel, Norton Rose Fulbright US LLP.

The various legal opinions to be delivered concurrently with the delivery of the Series 2016A Bonds express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of the attorney’s expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction, nor does the rendering of the opinion guarantee the outcome of any legal dispute that may arise out of the transaction.

INDEPENDENT AUDITORS

The consolidated financial statements of THR as of December 31, 2015 and 2014, and for the years then ended, included in APPENDIX B, have been audited by KPMG LLP, independent auditors, as stated in their report appearing in APPENDIX B.

FINANCIAL ADVISOR

H2C Securities Inc., a wholly-owned subsidiary of Hammond Hanlon Camp LLC and member of FINRA/SIPC (the “Financial Advisor”), has served as financial advisor to THR for purposes of assisting with the structuring of the Series 2016A Bonds. The Financial Advisor is not obligated to undertake, and has not undertaken, an independent verification of nor does the Financial Advisor assume responsibility for the accuracy, completeness, or fairness of the information contained in this Official Statement. The Financial Advisor is an independent healthcare advisory firm and has not been engaged in the underwriting or distribution of the Series 2016A Bonds.

VERIFICATION OF MATHEMATICAL COMPUTATIONS

Causey Demgen & Moore P.C. (the “Verification Agent”), will independently verify, and issue a report on, the arithmetical accuracy of the computations included in schedules provided to them by the Underwriters indicating the sufficiency of the anticipated receipts from the securities deposited under the Escrow Agreement, together with an initial cash deposit, to pay the redemption price of and interest on the Refunded Bonds on and prior to their redemption date. Such verification will be based solely on assumptions and information supplied by the Underwriters. Furthermore, the Verification Agent will have restricted its procedures to verifying the arithmetical accuracy of such computations and will not have made any study or evaluation of the assumptions and information on which the computations were based and, accordingly, will not express an opinion on such assumptions and information, the reasonableness of such assumptions, or the achievability of future events. Such verification report will be relied upon by Bond Counsel in rendering its opinions with respect to the defeasance of the Refunded Bonds.

CONTINUING DISCLOSURE

In accordance with Rule 15c2-12 (“Rule 15c2-12”) of the United States Securities and Exchange Commission (the “SEC”), THR has agreed, in a continuing disclosure agreement, for the benefit of the holders and

beneficial owners of the Series 2016A Bonds, to provide certain updated financial information and operating data annually, unaudited financial information quarterly, and timely notice of specified material events, to the Municipal Securities Rulemaking Board (the “MSRB”). The information will be available from the MSRB on the Internet at www.emma.msrb.org.

Annual Reports

THR is obligated to provide certain updated financial information and operating data with respect to THR and the Combined Group annually. The information to be provided includes the Combined Group’s audited financial statements or the audited consolidated financial statements for THR and its consolidated affiliates, as well as quantitative financial information and operating data of the type included in Appendices A and B. THR will provide this information within 150 days after the end of each fiscal year ending on or after December 31, 2016. If the Combined Group’s audited financial statements or the audited consolidated financial statements for THR and its consolidated affiliates are not available by the required time, THR will provide the Combined Group’s unaudited financial statements or the unaudited consolidated financial statements for THR and its consolidated affiliates on time and the Combined Group’s audited financial statements or the audited consolidated financial statements for THR and its consolidated affiliates when and if they become available.

THR’s current fiscal year end is December 31. If THR changes its fiscal year, it will provide notice of the change to the MSRB.

Quarterly Reports

THR is also obligated to provide to the MSRB, within 60 days after the end of the first, second and third quarterly fiscal periods of each fiscal year, unaudited balance sheets, statements of operations and changes in net assets, and cash flow statements, with respect to the Combined Group or THR and its consolidated affiliates, all as of the end of and for each such quarterly fiscal period, shown in each case in comparative form.

Material Event Notices

THR is also obligated to provide notice of certain events to the MSRB in a timely manner within 10 business days after the event occurs. THR will provide notice of any of the following events with respect to the Series 2016A Bonds: (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 liquidity provider or credit enhancement or their failure to perform; (6) adverse tax opinions, the issuance by the IRS of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB), or other material notice or determinations with respect to the tax status of the Series 2016A Bonds, or other material events affecting the tax status of the Series 2016A Bonds; (7) modifications to rights of holders of the Series 2016A Bonds, if material; (8) Series 2016A Bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Series 2016A Bonds, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership, or similar event of any Combined Group Member; (13) the consummation of a merger, consolidation, or acquisition involving an Obligated Group Member or the sale of all or substantially all of its assets, other than in the ordinary course of business, the entry into of 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. In addition, THR will provide timely notice of any failure by THR to provide information, data, or financial statements to the MSRB in accordance with its agreement described above under “Annual Reports” and “Quarterly Reports.”

Availability of Information

THR will be obligated to provide the foregoing information only to the MSRB, as described above. THR has retained Digital Assurance Certification, L.L.C. (“DAC”) to act as dissemination agent on its behalf to file annual and quarterly reports and material event notices in compliance with the undertakings described above.

Limitations and Amendments

THR has agreed to update information and to provide notices of the events only as described above. THR has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, conditions or prospects or agreed to update any information that is provided, except

as described above. THR makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Series 2016A Bonds at any future date. THR disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Series 2016A Bonds may seek a writ of mandamus to compel THR to comply with its agreement.

THR may amend its continuing disclosure agreement to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status or type of operations of THR or any Combined Group member, if the agreement, as amended, would have permitted an underwriter to purchase or sell Series 2016A Bonds in the offering described herein in compliance with Rule 15c2-12 and either the holders of a majority in aggregate principal amount of the outstanding Series 2016A Bonds consent or any person unaffiliated with the Combined Group determines that the amendment will not materially impair the interests of the beneficial owners of the Series 2016A Bonds. THR may amend its continuing disclosure agreement without the consent of the Issuer or the Bond Trustee.

Failure to comply with THR’s disclosure agreement does not constitute an Event of Default under the Bond Indenture or Master Indenture.

MISCELLANEOUS

All information contained in this Official Statement is subject, in all respects, to the complete body of information contained in the original sources thereof. In particular, no opinion or representation is rendered as to whether any forecast will approximate actual results, and all opinions, estimates and assumptions, whether or not expressly identified as such, should not be considered statements of fact.

The distribution of this Official Statement has been approved by THR. The Issuer is not responsible for any information set forth herein except that contained under the captions “THE ISSUER” and “LITIGATION – The Issuer.”

The references herein to the Master Indenture, the Bond Indenture, the Loan Agreement, and the Notes are brief summaries of certain provisions thereof. Such summaries do not purport to be complete, and for full and complete statements of the provisions thereof reference is made to such documents in their entirety. Copies of drafts of such documents are on file at the offices of the Underwriters, and, following delivery of the Series 2016A Bonds, executed copies will be on file at the office of the Bond Trustee. All such references are qualified in their entirety by reference to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors’ rights and the possible exercise of judicial discretion in enforcing such rights.

The agreements of THR, the Obligated Group Members and the Issuer for the benefit of the owners of the Series 2016A Bonds are fully set forth in the Loan Agreement, the Bond Indenture, the Master Indenture, and the Notes, and neither any advertisement of the Series 2016A Bonds nor this Official Statement is to be construed as constituting an agreement with the purchasers of the Series 2016A Bonds.

The attached Appendices A, B, C and D are integral parts of this Official Statement and must be read together with all of the foregoing statements.

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APPENDIX A

APPENDIX A TEXAS HEALTH RESOURCES INDEX

History and Overview ...... A - 1

The System, Obligated Group, Designated Members, Combined Group, and Consolidated Joint Ventures ...... A-1 The System ...... A-1 The Obligated Group ...... A-2 The Designated Members and Combined Group ...... A-2 The Consolidated Joint Ventures ...... A-2

Corporate Structure and Governance ...... A-3 Members' Control of THR ...... A-3 THR's Control of the System ...... A-3 THR and Its Wholly-Controlled Affiliates ...... A-4

Governing Bodies ...... A-4 Board of Trustees of THR ...... A-4 Corporate Officers of THR ...... A-6

System Facilities and Operations Overview ...... A-6 System Facilities ...... A-7 Operated Beds ...... A-9 Net Patient Service Revenue ...... A-10 Medical Staff ...... A-11 Employees ...... A-11 Retirement Plan ...... A-11 Professional Liability and Other Insurance ...... A-11 Memberships and Accreditations ...... A-12 Strategic Relationships ...... A-12 Strategic Plans and Recent Developments ...... A-12 Quality and Patient Safety ...... A-14 Information Technology ...... A-14 Capital Expenditures ...... A-15 New Projects ...... A-15

Service Area Demographics...... A-16

Competition ...... A-17

Operating and Financial Data ...... A-18 Utilization of System Facilities ...... A-18 Sources of Consolidated Gross and Net Patient Service Revenues ...... A-19 Summary of Consolidated Revenues and Expenses ...... A-21 Schedule of Historical Revenues and Expenses ...... A-21 Historical Balance Sheets ...... A-22 Historical Liquidity – Days Cash on Hand ...... A-23 Investment Policy ...... A-24 Historical Capitalization – Debt to Capitalization Ratio ...... A-26 Historical and Pro Forma Debt Service Coverage ...... A-27

Management's Discussion of Recent Financial Performance ...... A-28 Six Months Ended June 30, 2016...... A-28 Fiscal Year 2015 ...... A-28 Fiscal Year 2014 ...... A-29

Litigation and Regulatory Matters ...... A-30

TEXAS HEALTH RESOURCES

History and Overview

Texas Health Resources, a Texas non-profit corporation (“THR”) operates, through its affiliates, an integrated health care system with services and facilities throughout north central Texas. THR was formed on April 1, 1997, to acquire the health care operations of Harris Methodist Health System, a Texas non-profit corporation (“HMHS”), and Presbyterian Healthcare Resources, a Texas non-profit corporation (“PHR”). THR is organized and operated for the benefit of its tax- exempt controlled affiliates and has been recognized by the Internal Revenue Service (the “IRS”) as exempt from federal income taxes under Section 501(a) of the Internal Revenue Code of 1986, as amended (the “Code”), as an organization described in Section 501(c)(3).

With operating revenue of approximately $4.3 billion, THR is one of the largest faith-based, non-profit health care systems in the United States. At June 30, 2016, THR had total assets of approximately $7.4 billion, of which approximately $4.2 billion were unrestricted cash and investments. THR, its wholly-controlled affiliates, and its consolidated and unconsolidated joint ventures are comprised of acute care (19), short-stay (5), and transitional and rehabilitation (3) hospital locations that are owned, operated, or joint-ventured with THR. Furthermore, THR also operates or holds ownership interests in over 100 outpatient facilities, freestanding emergency rooms, surgery centers, behavioral health facilities, fitness centers and imaging centers, and more than 250 other community access points.

THR maintains the leading inpatient market share in its service area, which encompasses the Dallas/Fort Worth Metroplex and surrounding counties. See “COMPETITION” herein. The service area has a large and growing population, and service area demographics are strong relative to national averages. See “SERVICE AREA DEMOGRAPHICS” herein.

THR has received awards for its high quality services including Premier Healthcare Alliance’s “QUEST: Award for High-Value Healthcare” for 2014 and 2015, and The Joint Commission’s “Top Performer on Key Quality Measures”® in 2014. As of June 30, 2016, the System employed approximately 23,500 employees at its wholly-controlled facilities and 2,200 employees at its consolidated joint ventures. THR’s recent significant awards and recognition include:

• FORTUNE 100 Best Companies to Work For® 2016 and 2015 • FORTUNE and Great Places to Work, Best Workplaces in Health Care - #1 in 2016 and 2015 • Becker’s Great Places to Work in Healthcare 2016 • Dallas Business Journal Healthiest Employers in North Texas 2016 • FORTUNE and Great Places to Work, Best Workplaces for Millennials 2015

The System, Obligated Group, Designated Members, Combined Group, and Consolidated Joint Ventures

The System. THR, its wholly-controlled affiliates and the Consolidated Joint Ventures, described below, are referred to in this Appendix A as the “System”. See “TABLE II –THR AND ITS WHOLLY-CONTROLLED AFFILIATES” herein. THR’s wholly-controlled facilities include 14 acute care hospital locations with 2,931 operated beds as of June 30, 2016 (one of which is projected to open September 27, 2016), and a 10 bed long-term care hospital. See “TABLE IV – OPERATED BEDS” herein. THR also provides administrative support services, direction and oversight to its wholly-controlled affiliates.

A-1 The Obligated Group. THR and seven of its wholly-controlled affiliates – Texas Health Arlington Memorial Hospital (“THAM”), Texas Health Harris Methodist Hospital Fort Worth (“THFW”), Texas Health Harris Methodist Hospital Hurst-Euless-Bedford (“THHEB”), Texas Health Harris Methodist Hospital Southwest Fort Worth (“THSW”), Texas Health Presbyterian Hospital Allen (“THA”), Texas Health Presbyterian Hospital Dallas (“THD”), and Texas Health Presbyterian Hospital Plano (“THP”), each a Texas non-profit corporation, are “Obligated Group Members” under the Master Indenture. THR and the other Obligated Group Members are referred to in this Appendix A as the “Obligated Group.” Members of the Obligated Group are obligated on or guarantee payment of THR’s obligations under the Master Indenture, including, without limitation, the notes securing the Series 2007A Bonds, the Series 2007B Bonds, the Series 2008 Bonds, the Series 2010 Bonds, the Series 2012 Bonds, the Series 2015 Bonds, the Series 2016 Bonds, the Bank Loans (as defined herein), and Credit Agreements (as defined herein) which are currently undrawn (collectively, the “Notes”). After the issuance of the Series 2016 Bonds and refunding of a portion of the Series 2007A Bonds, the outstanding principal amount of Notes and other Securities that will be Outstanding under the Master Indenture will be approximately $1,725,560,000.1 See “PLAN OF FINANCING” in the Official Statement. For the fiscal year ended December 31, 2015, the Obligated Group accounted for 63.1% of the net patient service revenue generated by the System. See “TABLE V – NET PATIENT SERVICE REVENUE” herein.

The Designated Members and Combined Group. Four THR wholly-controlled affiliates – Texas Health Specialty Hospital Fort Worth (“THSH”), Texas Health Harris Methodist Hospital Stephenville (“THS”), Texas Health Harris Methodist Hospital Azle (“THAZ”), and Texas Health Harris Methodist Hospital Cleburne (“THC”), each a Texas non-profit corporation, are “Designated Members” under the Master Indenture. The Designated Members have agreed to be bound by certain operating and financial covenants. The Designated Members are not obligated to pay the Notes or THR’s other obligations under the Master Indenture; however, they have agreed to transfer funds to THR if needed to pay debt service timely on the Notes. THR, the other Obligated Group Members, and the Designated Members are referred to in this Appendix A as the “Combined Group.” For the fiscal year ended December 31, 2015, the Combined Group accounted for 67.0% of the net patient service revenue generated by the System. See “TABLE V – NET PATIENT SERVICE REVENUE” herein.

The Consolidated Joint Ventures. THR and some of its controlled affiliates participate in joint ventures with physicians and non-physicians to operate hospitals and other health related ventures. See “SYSTEM FACILITIES AND OPERATIONS OVERVIEW - Strategic Relationships” herein. THR’s consolidated financial statements include the accounts of the following joint ventures (collectively known as the “Consolidated Joint Ventures”):

TABLE I CONSOLIDATED JOINT VENTURES

Leg al Name d/b/a (if applicable) Acronym AMH Cath Labs, L.L.C. Texas Health Heart & Vascular Hospital Arlington ACL Flower Mound Hospital Partners, L.L.C. Texas Health Presbyterian Hospital Flower Mound FMHP Health Imaging Partners, L.L.C. Envision Imaging Centers HIP Physicians Medical Center, L.L.C. Texas Health Center for Diagnostics & Surgery Plano PMC Presbyterian Cancer Center-Dallas, L.L.C. DCC Rockwall Regional Hospital L.L.C. Texas Health Presbyterian Hospital Rockwall RRH Southlake Specialty Hospital, L.L.C. Texas Health Harris Methodist Hospital Southlake SSH Texas Health MedSynergies, L.L.C. THM Texas Institute for Surgery, L.L.P. Texas Institute for Surgery at Texas Health Presbyterian Hospital Dallas TIS Women's Specialty Surgery Center of Dallas, L.L.C. Texas Health Women's Specialty Surgery Center Dallas WSSCD

None of the Consolidated Joint Ventures and none of THR’s other controlled affiliates are members of the Combined Group or are obligated to provide funds to pay the obligations under the Master Indenture.

Except as expressly noted herein, financial and operating data for the System provided in this Appendix A include data for all members of the System, including consolidating affiliates that are not members of the Combined Group, and all data for the Consolidated Joint Ventures, which includes data attributable to minority interests. For the fiscal year ended December 31, 2015, the Consolidated Joint Ventures accounted for 15.5% of the total net patient service revenue generated by the System. See “TABLE V – NET PATIENT SERVICE REVENUE” herein.

1 The Series 2016A Note is anticipated to be issued in the aggregate principal amount of $625,000,000 (preliminary, subject to change). A-2 Corporate Structure and Governance

Members' Control of THR. THR previously had two classes of corporate members (collectively, the “Members”): Founding Members and a Sponsoring Member. HMHS and PHR were the Founding Members of THR, and THAM was the sole Sponsoring Member. Effective December 31, 2014, articles of dissolution were filed for HMHS and PHR. Unlike THAM, HMHS and PHR did not operate any of the facilities of the System or provide any services on behalf of or to the System. Furthermore, neither HMHS nor PHR was obligated to make payments on any Security issued under the Master Indenture. Effective January 1, 2015, THR’s Certificate of Formation and Bylaws were amended to make THR a non- member corporation and remove all provisions for reserved powers of Founding and Sponsoring Members. THAM remains an Obligated Group Member.

THR's Control of the System. THR’s wholly-controlled hospital facilities are owned and operated by 14 separate Texas non-profit corporations. THR directly elects and may remove the members of each board of trustees of the separate non-profit corporations. The THR Board of Trustees appoints the THR CEO. The THR CEO is responsible for appointment, with approval of the respective entity board of trustees, and removal of presidents of THR’s wholly-controlled affiliates. In addition, THR is the sole member or sole shareholder of certain other wholly-controlled affiliates engaged in health care related activities in support of the System's mission. THR is (i) the sole corporate member of each member of the Combined Group and, in addition, Texas Health Physicians Group (“THPG”), and Texas Health Back Care (“THBC”), both Texas non-profit corporations certified by the Texas Medical Board pursuant to Section 162.001(b) of the Texas Occupations Code, Texas Health Presbyterian Hospital Denton (“THDN”), Texas Health Presbyterian Hospital Kaufman (“THK”), Texas Health Harris Methodist Hospital Alliance (“THAL”), Texas Health Outpatient Surgery Center Alliance (“THALSC”), Texas Health Resources Foundation (“THRF”), Texas Health Research and Education Institute (“THRE”), North Texas Healthy Communities (“NTHC”), and Texas Health Resources Medical Support, each a Texas non-profit corporation; (ii) the sole corporate member of Texas Health Resources Bundled Products, a Texas for-profit corporation; (iii) the sole shareholder of Grace Indemnity Company, Ltd., a foreign controlled corporation domiciled in the Cayman Islands (“GIC”) and, (iv) the sole owner of Texas Health Partners, L.L.C. (“THPR”), and THR-SCA Holdings, L.L.C. (“THR-SCA”), both Texas limited liability companies. See “TABLE II – THR AND ITS WHOLLY-CONTROLLED AFFILIATES” herein.

THR and its tax-exempt controlled affiliates receive support from the Texas Health Resources Foundation (“THRF”). THRF operates as a non-private foundation exempt from federal income taxes under Section 501(a) of the Code as organizations described in Section 501(c)(3), and THR is the sole corporate member.

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A-3 THR and Its Wholly-Controlled Affiliates. The following table lists the entities included in the System and excludes joint ventures for which THR and its wholly-controlled affiliates are not the sole owners. See “SYSTEM FACILITIES AND OPERATIONS OVERVIEW - Strategic Relationships” herein.

TABLE II THR AND ITS WHOLLY-CONTROLLED AFFILIATES

Texas Health Resources Obligated Group Members: Acronym Texas Health Harris Methodist Hospital Fort Worth (non-profit) THFW Texas Health Presbyterian Hospital Dallas (non-profit) THD Texas Health Arlington Memorial Hospital (non-profit) THAM Texas Health Presbyterian Hospital Plano (non-profit) THP Texas Health Harris Methodist Hospital Hurst-Euless-Bedford (non-profit) THHEB Texas Health Harris Methodist Hospital Southwest Fort Worth (non-profit) THSW Texas Health Presbyterian Hospital Allen (non-profit) THA

Designated Members: Texas Health Harris Methodist Hospital Cleburne (non-profit) THC Texas Health Harris Methodist Hospital Stephenville (non-profit)THS Texas Health Harris Methodist Hospital Azle (non-profit) THAZ Texas Health Specialty Hospital Fort Worth (non-profit) THSH

Other Wholly-Controlled Affiliates: Texas Health Presbyterian Hospital Denton (non-profit) THDN Texas Health Presbyterian Hospital Kaufman (non-profit) THK Texas Health Harris Methodist Hospital Alliance (non-profit) THAL Texas Health Outpatient Surgery Center Alliance (non-profit) THALSC Texas Health Research & Education Institute (non-profit) THRE Grace Indemnity Company, Ltd. (foreign corp) GIC Texas Health Physicians Group (non-profit) THPG Texas Health Back Care (non-profit pending) THBC Texas Health Partners, L.L.C. (for-profit) THPR THR-SCA Holdings, L.L.C. (for-profit) THR-SCA Texas Health Resources Foundation (non-profit) THRF North Texas Healthy Communities (non-profit) NTHC Texas Heatlh Resources Bundled Products (for-profit) Texas Health Medical Support (non-profit pending)

Governing Bodies

Board of Trustees of THR. The Board of Trustees of THR consists of 18 voting members and three non-voting members. Of the voting members: (i) all are nominated and elected by the Board of Trustees of THR; (ii) one is the Chair of the THR Physician Leadership Council, who serves ex officio with vote; (iii) one is the Chief Executive Officer of THR who serves ex officio with vote; (iv) one is the sitting Bishop of the Central Texas Conference of the United Methodist Church, who serves ex officio with vote; and (v) one is the sitting General Presbyter of the Grace Presbytery of the Presbyterian Church of the USA, who serves ex officio with vote. Non-voting ex officio members are the first three THR Board Chairs, who serve as Chairs Emeritus, but do not attend board meetings.

Members of the Board of Trustees of THR (other than ex officio members) are elected to terms of office of up to three years. Terms of office are staggered such that, as nearly as possible, one-third of the Trustees are elected each year. A Trustee (other than ex officio members) may serve on the Board of Trustees for a maximum of three consecutive full three- year terms, after which he or she shall be ineligible to serve on the Board of Trustees for a one-year period. Board members who are elected to serve in ex officio (with vote) capacities shall serve ex officio with vote during their tenure of service in such capacity.

A-4 The members of THR's Board of Trustees are: Current Term Expires on Name and Office Business or Profession December 31

Mr. John Robert Ferguson, III, Chair Retired Managing Director 2016 TD Industries, Inc.

Mrs. Anne T. Bass Community Leader (Immediate Past Chair) 2016

Mr. Barclay Berdan, FACHE Texas Health Resources Ex Officio (with vote) Chief Executive Officer

Lee C. Bloemendal, M.D., FACS Retired General Surgeon 2016

Judge Mary Tom Curnutt Tarrant County Precinct 2 2016 Justice of the Peace

Rev. Dr. Janet M. DeVries General Presbyter, Grace Presbytery Ex Officio (with vote) Presbyterian Church of the USA

Mr. Richard E. Greene University of Texas at Arlington, Adjunct Professor 2017 Former Mayor of Arlington

Mr. Joseph M. Haggar, III Retired CEO 2018 Haggar Clothing Company

Mr. Hunter Hunt Hunt Consolidated Energy, Inc., President 2016

Bishop J. Michael Lowry Bishop, Central Texas Conference Ex Officio (with vote) United Methodist Church

Mark Fleschler, M.D. THR Physician Leadership Council Ex Officio (with vote) Chair, Physician

Mr. Kenneth W. Reeves Director, Human Resources 2017 YMCA

W. Dennis Stripling, M.D. North Texas Hand Surgery Associates, 2017 Hand Surgeon

Mr. Stephen L. Tatum Cantey Hanger LLP, Partner and General Counsel 2017

Mr. Wesley R. Turner Advance Newspaper, 2016 Vice President, Strategic Planning and Former Publisher, Fort Worth Star Telegram

Richard M. Vigness, M.D. Cardiothoracic Surgeon 2018

Mr. Charles John Wilder, Jr. Executive Chairman 2018 Bluescape Resources Company, LLC

Mr. James Y. Wynne Partner 2018 American Liberty Oil Company

Mr. Jerry Farrington TXU Chair Emeritus Retired Chairman and Chief Executive (non-voting)

A-5 Current Term Expires on Name and Office Business or Profession December 31

Mr. J. Andy Thompson J. Andy Thompson Group, Inc., President Chair Emeritus (non-voting)

Mr. James E. Oesterreicher JC Penney Company, Retired Chairman and CEO Chair Emeritus (non-voting)

Corporate Officers of THR. The current key officers of THR are:

Barclay E. Berdan, Chief Executive Officer (63). The Board of Trustees of THR announced the selection of Mr. Berdan as the Chief Executive Officer of THR effective September 1, 2014. Mr. Berdan was previously appointed Chief Operating Officer in May 2012, and has served as Senior Executive Vice President of THR since June 2007. Prior to becoming Senior Executive Vice President of THR, Mr. Berdan served as Executive Vice President of Operations of THR since 2005 and President of THFW since 1999. Prior to becoming President of THFW, Mr. Berdan was President of THSW since its inception in 1987. Additionally, prior to becoming President of THFW, Mr. Berdan served as Chief Operating Officer of THFW since 1993. Mr. Berdan is a Fellow of the American College of Healthcare Executives.

Jeffrey L. Canose, M.D., FACHE, Senior Executive Vice President, Chief Operating Officer (58). Dr. Canose was appointed Senior Executive Vice President and Chief Operating Officer of THR effective September 1, 2014. Dr. Canose joined Texas Health Resources in January 2006 as Senior Vice President and Chief Operating Officer of THD. In June 2007, he transitioned to THP as Chief Operating Officer, and became President of THP in March 2009. In May 2012, Dr. Canose was named Executive Vice President and Operations Leader for THR’s Southwest Zone which covers Tarrant, Johnson, Parker, Hood, Somerville, and Erath counties. Dr. Canose is a Fellow of the American College of Healthcare Executives.

Daniel Varga, M.D., Senior Executive Vice President, Chief Clinical Officer (57). Dr. Varga joined Texas Health Resources on January 14, 2013, and holds direct leadership responsibility for the entire Texas Health clinical enterprise, including quality, patient safety, patient experience initiatives, employed and independent medical staff relationships, clinical integration, care design, and clinical research and education.

Kenneth Kramer, Executive Vice President, General Counsel (60). Mr. Kramer was appointed General Counsel of THR on November 1, 2015. Prior to becoming General Counsel, Mr. Kramer served as Senior Vice President and Associate General Counsel since August 1, 1997.

Ronald R. Long, Executive Vice President, Resource Development and Deployment, Chief Financial Officer, and Treasurer (62). Mr. Long joined THR in November 2006 as Executive Vice President and Chief Financial Officer. Mr. Long has responsibility for finance, managed care contracting, supply chain, revenue cycle, and real estate operations. Prior to joining THR, Mr. Long served as executive vice president and CFO for Health Alliance of Greater Cincinnati, a position he held since 2001. Mr. Long is a certified public accountant in Oregon and a Fellow of the Healthcare Financial Management Association (“HFMA”). Mr. Long served as HFMA National Chairman in 2000 – 2001.

System Facilities and Operations Overview

The System provides an array of health care and related services. The System (including wholly-controlled and consolidated joint ventures) includes 17 acute care hospital locations, a 10-bed long-term care hospital, and three short-stay hospitals. Additionally, the System has various ownership interests in unconsolidated joint ventures which collectively operate two acute care hospitals, two short-stay hospitals, and two rehabilitation hospitals. Other health care services provided by the System include ambulatory surgery centers, addiction treatment, mental health services, and an array of community-oriented educational programs. See “SYSTEM FACILITIES AND OPERATIONS OVERVIEW - System Facilities” herein. All references to beds in this Appendix A are to operated beds (and not to licensed beds) as of June 30, 2016. See “TABLE IV – OPERATED BEDS” herein.

THR provides direction and oversight to its wholly-controlled affiliates. The range of centralized services provided by THR include information services, managed care contracting, human resources, revenue cycle, billing and collections, patient access/admissions, legal, tax, compliance, supply chain, quality, business development, insurance, treasury, marketing, general accounting, real estate services, coding, transcription, and strategic planning.

A-6 System Facilities. The following hospital facilities are operated by the Obligated Group:

Texas Health Harris Methodist Hospital Fort Worth (“THFW”) is a 640-bed acute care, Magnet- designated regional referral center that has served the residents of Tarrant County since 1930. The hospital’s services include cardiovascular services, high-risk and routine obstetrics and gynecology, orthopedics and sports medicine, neonatal intensive care, and trauma/emergency medicine. THFW is also home to the 100-bed Texas Health Harris Methodist Heart Center. The hospital was designated a Level II Trauma Center by the Texas Department of Health, named as a Cycle III Chest Pain Center by the Society of Chest Pain Centers for Percutaneous Coronary Intervention and designated an Acute Heart Failure Center. It was also certified as a Primary Stroke Center by The Joint Commission, and the hospital earned its third Magnet Recognition Program Award for excellence in nursing services from the American Nurses Credentialing Center in 2014. More than 4,000 employees work at this hospital and nearly 1,000 physicians are practicing on its medical staff.

Texas Health Presbyterian Hospital Dallas (“THD”) is a 633-bed acute care hospital providing care to the residents of Dallas and surrounding communities since 1966. THD has been ranked among the nation’s best hospitals in digestive disorders, orthopedics, and neurology and neurosurgery. In 2015, THD received the Baby Friendly Designation by the World Health Organization and for the last two years THD has been named "Best Place to Have a Baby" in Dallas County by DallasChild magazine readers. THD has received the American College of Surgeons Commission on Cancer Outstanding Achievement Award four times consecutively being only one of six hospitals in the country, and the only hospital in Texas, to receive this distinction in 2015. THD activated its trauma program in November 2014, and anticipates being designated by the American College of Surgeons, as a Level II Trauma Center in 2016. In 2016, THD earned its third Magnet Re-Designation Recognition Program Award for excellence in nursing services by the American Nurses Credentialing Center. In 2016, THD was awarded the American Heart Association’s Mission: Lifeline Silver Quality Achievement Award and in 2015, THD received The Joint Commission Chest Pain Certification. Texas Health was redesignated as a Metabolic and Bariatric Surgery Accreditation Quality Improvement Program by the American Society for Metabolic and Bariatric Surgery and a Center of Excellence for gynecological surgery by the American Institute of Minimally Invasive Surgery. More than 3,200 employees work at this hospital and more than 1,500 physicians are practicing on its medical staff.

Texas Health Presbyterian Hospital Plano (“THP”) is a 358-bed acute care hospital providing care to Plano and surrounding areas since 1991. The hospital’s services include orthopedics, back and spine, cardiovascular services, oncology, pediatrics, behavioral health and women’s services. THP was the recipient of the Texas Award for Performance Excellence in 2008, recognizing organizations that have achieved performance excellence and adopted outstanding quality processes in day-to-day operations. In 2012, the hospital earned a Silver Texas Health Care Quality Improvement Award from the TMF Health Quality Institute. It has been awarded Magnet Recognition Program Award by the American Nurses Credentialing Center for excellence in nursing services and was designated an Advanced Level III Trauma Facility by the Texas Department of State Health Services. More than 1,600 employees work at this hospital and approximately 1,300 physicians are practicing on its medical staff.

Texas Health Arlington Memorial Hospital (“THAM”) is a 274-bed acute-care, full-service medical center serving Arlington and the surrounding communities since 1958. The hospital’s services include comprehensive cardiac care, women’s services, neurosurgery, orthopedics, behavioral health services, ENT, oncology, urology, an advanced imaging center and emergency services. THAM was designated a “Baby-Friendly Hospital” by the World Health Organization and UNICEF, a Cycle III Chest Pain Center by the Society of Chest Pain Centers, and an Accredited Acute Heart Failure Center by the Society of Cardiovascular Patient Care. It was among the first hospitals in North Texas to be named a Center of Excellence in Minimally Invasive Gynecology. More than 1,700 employees work at this hospital and more than 650 physicians are practicing on its medical staff.

Texas Health Harris Methodist Hospital Hurst-Euless-Bedford (“THHEB”) is a 256-bed, acute-care facility serving Northeast Tarrant County since 1973. The hospital’s services include women’s services, a Level III neonatal intensive care unit, a dedicated oncology unit, comprehensive cardiac services (including cardiac rehabilitation), orthopedic services, physical therapy, digestive diseases and behavioral health services through Texas Health Springwood Hospital. THHEB recently received Level III Trauma Center designation as well as dual accreditation as a Cycle IV Chest Pain Center and Heart Failure Center. The hospital also is accredited by the American College of Surgeons Commission on Cancer, certified as a Primary Stroke Center and designated as a "Baby Friendly" facility by the World Health Organization and UNICEF. More than 1,600 employees work at this hospital and more than 580 physicians are practicing on its medical staff.

A-7 Texas Health Harris Methodist Hospital Southwest Fort Worth (“THSW”) is a 205-bed acute care, full- service facility that has provided care to the residents of southwest Tarrant County for almost three decades. The hospital’s services include surgical and imaging services, a 24-hour emergency department, orthopedics and sports therapy, adult critical care, and a Level III neonatal intensive care unit. THSW earned a Silver Texas Health Care Quality Improvement Award from the TMF Health Quality Institute and is Heart Failure certified by The Joint Commission. More than 1,200 employees work at this hospital and approximately 600 physicians are practicing on its medical staff.

Texas Health Presbyterian Hospital Allen (“THA”) is a 56-bed acute-care hospital serving the northern Collin County area since 2000. The hospital’s services include emergency services, orthopedic care, back and spine, cardiac rehab, digestive health, wound care and women’s services. THA was designated a “Baby-Friendly Hospital” by the World Health Organization and UNICEF, and an Accredited Chest Pain Center by the Society of Chest Pain Centers. More than 410 employees work at this hospital and more than 450 physicians are practicing on its medical staff.

Other System Facilities. Other System hospital facilities are operated by Designated Members, other wholly-controlled affiliates that are not members of the Combined Group, and the Consolidated Joint Ventures.

TABLE III OTHER SYSTEM HOSPITAL FACILITIES

% Number Texas Hos pital Ownership of beds Location Proximity

Other Wholly Controlled: Acute care Texas Health Presbyterian Hospital Denton 100 190 Denton 40 miles northwest of THD Texas Health Harris Methodist Hospital Cleburne1 100 92 Cleburne 34 miles southwest of THFW Texas Health Presbyterian Hospital Kaufman 100 68 Kaufman 43 miles southeast of THD Texas Health Harris Methodist Hospital Alliance 100 74 Fort Worth 15 miles north of THFW Texas Health Harris Methodist Hospital Stephenville1 100 54 Stephenville 78 miles southwest of THFW Texas Health Harris Methodist Hospital Azle1 100 31 Azle 17 miles northwest of THFW Long-term care Texas Health Specialty Hospital Fort Worth1 100 10 Fort Worth Campus of THFW Total Designated Members and Non-Combined Group 519

Consolidated Joint Ventures: Acute care Texas Health Presbyterian Hospital Flower Mound 54 103 Flower Mound 21 miles north of THHEB Texas Health Presbyterian Hospital Rockwall 60 50 Rockwall 21 miles east of THD Texas Health Heart & Vascular Hospital Arlington 54 48 Arlington Campus of THAM Short-stay Texas Health Center for Diagnostics & Surgery Plano 53 18 Plano Campus of THP Texas Health Harris Methodist Hospital Southlake 54 16 Southlake 10 miles north of THHEB Texas Institute for Surgery at Texas Health Presbyterian Hospital Dallas 50 9 Dallas Campus of THD Total Consolidated Joint Ventures 244

Total Other System Hospital Facilities 763

1 Denotes Designated Members.

A-8 Operated Beds. The following table provides the operated beds for the System’s hospitals as of June 30, 2016 and December 31, 2015, 2014, and 2013:

TABLE IV OPERATED BEDS

Operated Beds Texas Location June 30, December 31, Hospital City County 2016 2015 2014 2013

Obligated Group Members: Texas Health Harris Methodist Hospital Fort Worth THFW Fort Worth Tarrant 640 639 656 638 Texas Health Presbyterian Hospital Dallas THD Dallas Dallas 633 633 646 624 Texas Health Presbyterian Hospital Plano THP Plano Collin 358 352 366 366 Texas Health Arlington Memorial Hospital THAM Arlington Tarrant 274 290 316 263 Texas Health Harris Methodist Hospital Hurst- THHEB Euless-Bedford Bedford Tarrant 256 268 275 256 Texas Health Harris Methodist Hospital Southwest Fort Worth THSW Fort Worth Tarrant 205 205 209 185 Texas Health Presbyterian Hospital Allen THA Allen Collin 56 48 73 73

Total Obligated Group Members 2,422 2,435 2,541 2,405

Designated Members: Texas Health Harris Methodist Hospital Cleburne THC Cleburne Johnson 92 90 90 90 Texas Health Harris Methodist Hospital Stephenville THS Stephenville Erath 54 54 54 54 Texas Health Harris Methodist Hospital Azle THAZ Azle Tarrant 31 31 31 31 Texas Health Specialty Hospital Fort Worth THSH Fort Worth Tarrant 10 10 10 10

Total Designated Members 187 185 185 185

Non-Combined Group: Texas Health Presbyterian Hospital Denton THDN Denton Denton 190 190 190 190 Texas Health Harris Methodist Hospital Alliance THAL Fort Worth Tarrant 74 74 58 58 Texas Health Presbyterian Hospital Kaufman THK Kaufman Kaufman 68 68 68 68

Total Non-Combined Group 332 332 316 316

Consolidated Joint Ventures 244 242 244 244

Total 3,185 3,194 3,286 3,150

A-9 Net Patient Service Revenue. The following table provides the amount and percentage of net patient service revenue (net of patient bad debt expense) generated by the System’s hospitals, surgery centers and THPG/THBC for the six months ended June 30, 2016 and for the fiscal years ended December 31, 2015, 2014, and 2013:

TABLE V NET PATIENT SERVICE REVENUE

Amount and % of Net Patient Service Revenue (Dollars in millions) Six Months Ended June 30, Fiscal Years Ended December 31, 2016 2015 2014 2013 Hospital Amount % Amount % Amount % Amount %

Obligated Group Members: Texas Health Harris Methodist Hospital Fort Worth$ 398 18.9%$ 742 18.4%$ 717 18.5% 688$ 18.9% Texas Health Presbyterian Hospital Dallas 310 14.8% 601 15.0% 600 15.5% 604 16.6% Texas Health Presbyterian Hospital Plano 198 9.4% 379 9.4% 357 9.2% 339 9.3% Texas Health Harris Methodist Hospital Southwest Fort Worth 139 6.7% 268 6.6% 235 6.1% 188 5.2% Texas Health Harris Methodist Hospital Hurst- Euless-Bedford 130 6.2% 251 6.2% 247 6.4% 234 6.4% Texas Health Arlington Memorial Hospital 115 5.5% 227 5.6% 223 5.8% 209 5.7% Texas Health Presbyterian Hospital Allen 40 1.9% 76 1.9% 72 1.9% 71 1.9%

Total Obligated Group Members 1,330 63.4% 2,544 63.1% 2,451 63.4% 2,333 64.0%

Designated Members: Texas Health Harris Methodist Hospital Cleburne 33 1.6% 68 1.7% 64 1.7% 62 1.7% Texas Health Harris Methodist Hospital Stephenville 25 1.2% 48 1.2% 45 1.2% 39 1.1% Texas Health Harris Methodist Hospital Azle 17 0.8% 32 0.8% 31 0.8% 28 0.8% Texas Health Specialty Hospital Fort Worth 4 0.2% 9 0.2% 9 0.2% 10 0.2%

Total Designated Members 79 3.8% 157 3.9% 149 3.9% 139 3.8%

Total Combined Group Members1 1,409 67.2% 2,701 67.0% 2,600 67.3% 2,472 67.8%

Non-Combined Group Members: Texas Health Presbyterian Hospital Denton 106 5.0% 193 4.8% 172 4.5% 159 4.4% Texas Health Harris Methodist Hospital Alliance 50 2.4% 90 2.2% 78 2.0% 50 1.4% Texas Health Presbyterian Hospital Kaufman 17 0.8% 38 1.0% 35 0.9% 36 1.0% Texas Health Outpatient Surgery Center Alliance 2 0.1% 5 0.1% 4 0.1% 4 0.1% Texas Health Physicians Group/Texas Health Back Care 194 9.3% 380 9.4% 379 9.8% 383 10.5%

Total Non-Combined Group Members 369 17.6% 706 17.5% 668 17.3% 632 17.4%

Consolidated Joint Ventures 318 15.2% 626 15.5% 597 15.4% 539 14.8%

Total 2,096$ 100.0% 4,033$ 100.0% 3,865$ 100.0% 3,643$ 100.0%

1 The Combined Group’s net patient service revenue grew 9.3% from fiscal year 2013 to fiscal year 2015.

A-10 Medical Staff. The System does not have a single System-wide medical staff. Rather each hospital has a separately credentialed medical staff, although there are a number of physicians who are on the medical staff of one or more of the hospitals. There are more than 5,700 physicians with active staff privileges at one or more System hospitals. As of June 30, 2016, THPG and THBC employed 870 physicians, physician assistants, and nurse practitioners. See “SYSTEM FACILITIES AND OPERATIONS OVERVIEW – Strategic Plans and Recent Developments” herein. The following table provides a summary of THPG’s and THBC’s employed physicians and mid level providers as of June 30, 2016 and December 31, 2015, 2014, and 2013:

TABLE VI PHYSICIAN AND MID LEVEL PROVIDER SUMMARY

June 30, December 31, Provider Type 2016 2015 2014 2013

Primary Care Physicians 228 231 229 255 Specialists 184 176 176 174 Hospitalists 141 143 136 130

Total Physicians 553 550 541 559

Mid Level - Primary Care 188 194 165 145 Mid Level - Specialists 90 97 99 86 Mid Level - Hospitalists 39 36 27 28

Total Mid Levels 317 327 291 259

Total Providers 870 877 832 818

Note: The fiscal year data above has been restated to include Mid Level – Hospitalists. The fiscal year 2013 amounts have been restated to conform with the fiscal years 2015 and 2014 presentation, which reflects a change in the classification of obstetrical providers and the exclusion of contracted providers prior to their commencement date.

Employees. THR and its wholly-controlled facilities combined employed approximately 23,500 full and part-time employees as of June 30, 2016. The Consolidated Joint Ventures employed approximately 2,200 employees as of June 30, 2016. There is no union representation of employees, and there are no collective bargaining agreements. Management believes that is has a good relationship with its employees.

Retirement Plan. The System maintains defined contribution plans that cover eligible full-time and part-time employees of the System. THR also maintains several frozen defined contribution plans to which no new contributions are made. Plan contributions in fiscal years ended December 31, 2015, 2014 and 2013 were approximately $60,788,000, $56,083,000, and $52,834,000 respectively. The System does not have any defined benefit plans. See Note 12 “Retirement Plans” in Appendix B.

Professional Liability and Other Insurance. The System has known professional and general liability claims and incidents that may result in the assertion of additional claims, as well as exposure from unknown incidents that may be asserted. In connection with these risks, THR maintains a self-insurance program for the professional and general liabilities of THR and its wholly-controlled affiliates whereby undiscounted reserves are recorded based on actuarial estimates from an independent third-party actuary. In connection with the self-insurance program, THR formed a captive insurance company in December 2014, for the purpose of paying professional liability and general liability claims. See “CORPORATE STRUCTURE AND GOVERNANCE – THR’s Control of the System” herein. Prior to January 1, 2015, THR maintained trust funds, included in assets limited as to use in the consolidated balance sheets, which held assets for the purpose of paying professional liability and general liability claims. THR also purchases insurance for professional liability and general liability claims in excess of THR’s self-insurance retention levels with the captive.

THR purchased claims-made professional liability coverage from commercial carriers for providers employed by THPG until December 31, 2014. The captive insurance company described above will be used to pay historical professional liabilities of THPG that occurred but were unknown prior to December 31, 2014, and all known and unknown liabilities that occur on or after January 1, 2015. A-11 THR purchases workers’ compensation insurance from commercial carriers with per claim deductibles and aggregate limits. Accrued claims include estimates for known claims and incidents incurred but not reported. THPG is included under THR’s workers compensation program.

THR maintains an Information Security & Privacy Insurance (Cyber) policy with total limits of $100,000,000. The retention is $500,000 per event. Coverage includes damages and claim expenses related to violation of a privacy law, privacy notification costs including call center services, legal services, computer experts and credit monitoring, regulatory fines and penalties, and website media content liability.

The Consolidated Joint Ventures each maintain separate insurance programs covering their risks individually.

Memberships and Accreditations. All currently operating hospital facilities in the System are fully accredited by The Joint Commission, licensed by the Texas Department of State Health Services and certified by the United States Department of Health and Human Services for participation in the Medicare and Medicaid programs. Accreditations, licenses and certifications are subject to renewal or review periodically.

Strategic Relationships. Since the mid-1980’s, THR’s controlled affiliates have participated in joint ventures with physicians and non-physicians as a model to strengthen governance, management and economic relationships. THR believes that it benefits from joint ventures through lower cost market entry and development strategy; strengthened relationships with physicians; and more effective operational efficiency given the specialized focus of the joint ventures. In return, THR is at-risk for varying levels of capital investment and possible operating deficits. THR intends to continue to use partnerships and other corporate structures, with both physicians and non-physicians, as appropriate, to implement its strategic plan.

Strategic Plans and Recent Developments. THR’s view of the future is to become a nationally recognized health system known for excellence and innovation through fully engaged physicians on its medical staff, nurses, and other caregivers redesigning and delivering coordinated patient care across the entire continuum of care. This initiative requires THR to: 1) move its focus from a hospital-centric mindset to one that is patient-centric using population-based care models (THR’s emphasis will be on adding value for people seeking health care throughout the entire care continuum, and not only on adding hospital-based volume); 2) learn how to deliver highly coordinated care in a personalized manner and do so at a lower cost per capita than achieved today; 3) engage clinicians in leadership, care redesign, quality and patient safety initiatives and following evidence based models of care; 4) improve its ability to motivate and encourage individuals to make healthy behavior changes, with an emphasis on preventative care and well-being initiatives; 5) develop the organization’s ability to move along the financial risk continuum for healthcare (e.g., bundled payments, gain-sharing, health plan) and develop capability to mitigate that risk by reducing variation, following evidence-based guidelines and controlling costs; 6) enter into aspects of financing and care delivery where elements of the industry (reimbursement, regulatory) may not yet be fully accepted; and 7) welcome clinicians into leadership positions at all levels of the organization.

THR’s strategy is to strengthen its position as a health care provider of choice by providing quality care and responding to the health care needs within the communities it serves. To increase the System’s ability to manage patient outcomes, diversify its revenue sources, and respond to health-care reform initiatives, the System’s employed physicians group has grown to 870 physicians, physician assistants and nurse practitioners, and THR plans to continue to increase the number of employed physicians through internal growth and acquisition opportunities. THR’s leadership structure includes collaborative leadership positions with physicians and advances the System from a hospital-centric organization to a patient- centered, fully integrated health system. THR plans for, evaluates and pursues potential merger and affiliation candidates on a continuing basis as part of its overall strategic planning and development process. THR may receive offers from, or conduct discussions with, third parties about the potential acquisition of operations or properties that may become part of the System in the future, or about the potential sale of some of the operations and properties of the System. Discussions with respect to affiliation, merger, acquisition, disposition, or change of use, including those that may impact the Obligated Group, are held on an intermittent and usually confidential basis with other parties.

A-12 THR has an agreement with Surgical Care Affiliates, LLC (“SCA”) to acquire and develop ambulatory surgery centers (“ASC’s”) in the Dallas Fort Worth Metroplex. THR owns THR-SCA Holdings, LLC and SCA manages the daily operations of the ASC’s. During 2013, THR-SCA Holdings acquired ownership interests in Texas Health Craig Ranch Surgery Center and Cleburne Surgical Center. During 2014, THR-SCA Holdings acquired ownership interests in Fort Worth Endoscopy Center, Southwest Fort Worth Endoscopy Center, Texas Health Surgery Center Addison, and Stonebridge Surgery Center. During 2015, THR-SCA Holdings acquired ownership interests in Texas Health Surgery Center Preston Plaza, LLC and Texas Health Surgery Center Rockwall, LLC. Effective March 1, 2016, THR-SCA Holdings acquired an ownership interest in Ophthalmology Surgery Center of Dallas, LLC. Effective August 1, 2016, THR-SCA Holdings acquired an ownership interest in Arlington Surgery Center Associates, LLC.

Effective November 27, 2013, THR entered into an agreement with Centerre Healthcare Corporation (“Centerre”) and others to form a joint venture for the development of an inpatient rehabilitation hospital in Arlington. Effective January 2, 2015, Centerre was acquired by Kindred Healthcare, Inc., but the joint venture continued with the construction of The Texas Rehabilitation Hospital of Arlington, which opened July 8, 2015. THR has a 30% ownership interest in the joint venture.

Effective December 31, 2013, THR’s consolidated joint venture, Health Imaging Partners, LLC, purchased the assets of eight outpatient imaging centers in the Fort Worth/Arlington and surrounding area.

In October, 2014, Optum, an information and technology-enabled health services business, acquired MedSynergies, Inc. (“MSI”), which provides physician practice management, revenue management, physician referral management and other business services to physician groups aligned with large health systems. THR had an investment in MSI and recorded a gain of approximately $74,480,000 related to the transaction, which is included in net realized investment income and gains in the Schedule of Historical Revenues and Expenses for the fiscal year ended December 31, 2014 herein. MSI will continue to provide certain management services to THR’s related physician operations.

On December 15, 2015, Texas Health Resources formed an integrated regional health network with The University of Texas Southwestern Medical Center (“UTSW”). This new network, Southwestern Health Resources (“SWHR”), is expected to offer key advantages for patients in North Texas including: a) a broad, integrated continuum of physician-driven care utilizing UTSW’s network of faculty and community-based physicians, THR’s employed physicians, and independent physicians affiliated with both organizations; and b) an integrated hospital network consisting of UTSW’s two university hospitals and THR’s wholly-controlled and joint-ventured community hospitals, a key component of which is a new organization – a Joint Operating Company formed to integrate the three Dallas hospitals (UTSW’s William P. Clements Jr. University Hospital and Zale Lipshy University Hospital, and THD). The new health network commenced activities on April 1, 2016. In conjunction with this arrangement, THR and UTSW entered into an Academic Affiliation Agreement in which THR committed to fund a maximum of $28,500,000 annually and not to exceed $140,000,000 over five years in support of medical education and research programs that benefit SWHR. This commitment is subject to certain conditions including THR achieving a minimum level of annual financial performance.

On May 10, 2016, THR and Adeptus Health Inc. (“Adeptus Health”) formed a joint venture to increase access to high quality, convenient emergency medical care in the Dallas-Fort Worth area. Under the joint venture, Adeptus Health's freestanding First Choice Emergency Rooms in North Texas, and its First Texas Hospital in Carrollton, aligned with THR to grow THR’s network of hospitals and outpatient centers.

On May 25, 2016, THR announced the creation of a jointly owned health plan company with Aetna. The partnership between Aetna and THR is one of the first of its kind in North Texas to fully align the incentives and capabilities of a national insurer and major health system. THR’s intent is to build a “value” business as a complement to its traditional fee-for-service business through a clinically integrated network and population health services. THR is acquiring a 50% interest in approximately 100,000 commercial lives. By sharing ownership, governance, accountability, and profitability equally, the new health plan will focus on the consumer experience by combining fully integrated care teams, health insurance benefits and administrative services to eliminate redundancies of care and to reduce administrative hassles; therefore, employers and consumers in North Texas will benefit from more affordable, high-quality and better-coordinated care. THR expects to invest between $75,000,000 and $110,000,000 in the joint venture. New fully-insured and self-insured commercial products will be offered to employers and consumers in 16 counties in North Texas and are anticipated to begin being introduced in 2017, pending regulatory approval. Aetna will provide administrative services.

A-13 In May 2016, THR purchased the assets of Forest Park Medical Center Fort Worth. The purchase further grows THR’s network of hospitals and outpatient centers. The facility is expected to become licensed as a department of Texas Health Harris Methodist Hospital Southwest Fort Worth, operated as an acute care hospital location, and will be in-network for all commercial payers, Medicare and other government payers along with offering the same charity care policy as the other System hospitals.

In June 2016, THR purchased the Atrium Medical Center facility in Corinth, which will be converted into an inpatient behavioral health facility called Texas Health Behavioral Health Hospital Corinth. Renovations began immediately and are expected to take approximately a year to complete. The facility will house 60 licensed beds treating four distinct patient populations: child, adolescent, adult and geriatric.

As described in “SYSTEM FACILITIES AND OPERATIONS OVERVIEW - Strategic Relationships” herein, THR continues to form joint ventures with physicians and other third parties, of which several are in various stages of formation. It is too early to predict if all or any of these joint ventures will become operational.

THR has also signed affiliation agreements with Methodist Health System, UNT Health Science Center, Cooper Aerobics, and Cook Children’s Health Care System to support THR’s initiative to improve population health management. THR continues to review potential strategic initiatives, some of which, if entered into, may be material.

Quality and Patient Safety. THR is committed to high quality patient care, patient safety and the patient experience, and has consistently scored top decile performance in nationally benchmarked quality and safety studies including Premier Healthcare Alliance’s QUEST Award for High-Value Healthcare, The Joint Commission scoring, Leapfrog and Truven’s 100 Top Hospitals. In recent reports, THR facilities ranked in the top 25% of all U.S. hospitals in the Centers for Medicare & Medicaid Services release of the first Overall Hospital Quality Star Ratings on its Hospital Compare website. THR hospitals also recently received the QUEST® Award for High-value Healthcare, the Supply Chain of Excellence Award, the American Excess Insurance Exchange (“AEIX”) Risk Management Award from Premier Healthcare Alliance, and made “A” grades for patient safety, according to the latest Hospital Safety Scores from The Leapfrog Group. As part of THR’s journey to become a High Reliability Organization (“HRO”), each of its more than 23,000 employees will complete a multi-course HRO training by the end of 2016.

Information Technology. THR has implemented a centralized Information Technology (“IT”) system that has been widely-recognized for its maturity in all domains, as evidenced by a broad ranging set of industry awards, recognitions, and certifications. THR’s use of the electronic health record (“EHR”) has been recognized by HIMSS with an EMRAM Stage 7 maturity rating, as well as receiving their prestigious Davies Award, which recognizes outstanding achievement in utilizing information technology to substantially improve patient outcomes. THR is also a current Most Wired recipient, and also has received recognition from Pink Elephant for maturity in technology process management capabilities. Most significantly, THR has received a HITRUST Certification demonstrating its commitment to keeping patient’s data secure. THR also routinely benchmarks itself against a variety of data sources (Gartner, TruVen, Epic, Scottsdale Institute, etc.) to ensure that we are not only delivering mature services across all IT domains, but doing so in a fiscally-responsible manner.

THR has a comprehensive cybersecurity program designed to identify and monitor risk, deploy policy, processes and technologies, monitor all alerts and address all breaches and emerging cyber threats in a coordinated and responsible manner. In 2015, THR began enhancing its technologies, processes and security awareness training to address advanced security threats, including ransomware. This effort included continually updating security controls, launching an anti- phishing program to reduce the risk of employees clicking on a malicious email link, and installing ransomware detection technology. THR’s dedication and transparency in protecting patient information is documented within the THR Community Responsibility and Sustainability Report.

THR began its EHR implementation in 2006, with deployment currently in all wholly-controlled hospitals, as well as three of five joint venture hospitals. In addition, the majority of THR’s ambulatory physician clinics are also on Epic’s EHR, with the migration of the remaining clinics set to be complete by the end of 2018. For those clinics not currently on the Epic platform, THR utilizes a private Health Information Exchange (“HIE”) to ensure that a patient’s continuity of care information is aggregated from Epic and non-Epic environments. This HIE also aggregates clinical information from the two managed joint venture hospitals not currently on Epic. To further demonstrate THR’s commitment to one patient – one record, each new external partnership is evaluated for their potential to migrate to THR’s Epic platform prior to consummating a relationship.

A-14 Capital Expenditures. Over the past three fiscal years the System has spent approximately $721,000,000on a variety of capital projects including equipment, information technology, and renovation or expansion projects. Subject to annual approval by the THR Board of Trustees and continuing satisfactory financial performance, THR believes the System will continue to spend at or above the historical annual rate in the future. The following summary presents the purchase, development, construction, reconstruction, renovation, rehabilitation and/or equipping of the System for the six months ended June 30, 2016 and for the fiscal years ended December 31, 2015, 2014 and 2013.

TABLE VII CAPITAL EXPENDITURES

Six Months Ended J une 3 0 , Fiscal Years Ended December 31, 2016 2015 2014 2013 (Dollars in Thousands)

Capital Expenditures $ 268,943 1 $ 232,388 $ 212,929 $ 275,685

1 Includes approximately $168,000,000 for the acquisitions of Forest Park Medical Center Fort Worth and Atrium Medical Center in Corinth. Approximately $100,000,000 of this expended amount is anticipated to be reimbursed from the proceeds of the Series 2016A Bonds.

New Projects. The proceeds of the Series 2016 Bonds will be used to reimburse costs of or finance the acquisition, construction, renovation, remodeling and/or equipping of capital improvements of THR. See “PLAN OF FINANCING” and “ESTIMATED SOURCES AND USES OF FUNDS” in the Official Statement. THR intends to use the Series 2016 Bonds to partially fund the following material acquisition, construction and renovation projects:

o Acquisition of Forest Park Medical Center Fort Worth. o Acquisition of Atrium Medical Center facility in Corinth. o Expansion of the emergency department (20 beds) and medical-surgical bed units (23 new beds including one room with a two station dialysis area) at THAL. o Construction of an 80-bed behavioral health and substance abuse residential treatment facility in Mansfield serving adults and adolescents. o Renovation and expansion of the surgical and sterile processing departments at THHEB. o Relocation and expansion of three cath lab procedure rooms at THHEB. o Renovation of 4th and 5th floors of Hamon Tower to include a dedicated orthopedic unit and dedicated neuro/trauma ICU and medical-surgical units, as well as expansion/renovation of the surgical department at THD. o Construction of a neuro interventional suite at THD. o Renovation of two operating rooms to provide two new cath labs at THSW. o Construction of a potential health facility to be located in Frisco.

Future capital expenditures, not funded with the Series 2016 Bonds, will be financed by internally generated funds and external financing sources including fundraising activities and proceeds from future bond issues and bank loans.

A-15 Service Area Demographics

The following table lists demographic information for THR’s 4-County Primary Service Area and its 16-County Service Area, as well as state and national averages.

TABLE VIII SERVICE AREA DEMOGRAPHICS

% Compound Annual Growth 2016 Average 2016 % of 2016 2016 Rate Proj. Hous ehold Population >65 Unempl oyment Population 2016-2021 Income Years of Ag e Rate

THR's 4-County Primary Service Area1 6,247,387 7.8% 85,960$ 10.3% 3.5% THR's 16-County Service Area2 7,273,996 7.6% 84,636$ 11.0% 3.5% Texas 27,611,474 7.2% 77,652$ 12.0% 4.5% United States 308,745,565 3.7% 77,135$ 15.1% 4.9%

1 Represents the Texas counties of Collin, Dallas, Denton, and Tarrant (collectively, “THR’s 4-County Primary Service Area”). Defined as patients from zip codes that comprise 50% of total System discharges. 2 Represents the Texas counties of Collin, Comanche, Dallas, Denton, Eastland, Ellis, Erath, Henderson, Hood, Hunt, Johnson, Kaufman, Parker, Rockwall, Tarrant and Wise (collectively, “THR’s 16-County Service Area”). Defined as patients from zip codes that comprise 75% of total System discharges. Source: Truven Health Analytics and US Census Bureau.

The map below shows THR’s 4-County Primary and 16-County Service Areas.

A-16 Competition

The following table lists 2016 licensed beds for the System and competitor hospital systems in THR’s 16-County Service Area. This information includes only acute care facility beds.

TABLE IX COMPETITOR LICENSED BEDS

Total Hos pital S ys tem Beds

Texas Health Resources1 3,856 Baylor Scott & White 3,807 The Healthcare Company (HCA) 3,063 Government/District/County Owned Facilities2 1,788 Methodist Healthcare System (Dallas) 1,397 Children's Hospitals3 1,149 University Hospitals of Dallas 608 Other Hospitals 1,140

Total Beds 16,808

1 Source: System management; includes the licensed beds of the consolidated joint venture hospitals of THR totaling 244 beds; however, it is unknown whether the other hospital systems total beds include their joint ventures. 2 Includes Parkland Health & Hospital System, JPS Health Network, Hunt Regional Medical Center at Greenville, Eastland Memorial Medical Center, and Wise Regional Health System. 3 Includes Children’s Medical Centers of Dallas and Plano, Cook Children’s Health Care System, and Texas Scottish Rite Hospital for Children. Source: Texas Department of State Health Services, except for THR.

The following table sets forth the inpatient discharges for THR’s 4-County Primary Service Area for fiscal years 2014, 2013, and 2012.

TABLE X FOUR-COUNTY PRIMARY SERVICE AREA INPATIENT DISCHARGES

2014 2013 2012 Inpatient Percentage Inpatient Percentage Inpatient Percentage Hospital System Discharges of Total Discharges of Total Discharges of Total

Texas Health Resources1 111,027 24.6% 107,989 24.1% 110,755 24.5% Baylor Scott & White 98,593 21.9% 94,554 21.1% 94,516 20.9% The Healthcare Company (HCA) 84,692 18.8% 86,707 19.4% 88,799 19.6% Government/District/County Owned Facilities2 48,891 10.8% 55,278 12.4% 53,333 11.8% Methodist Health Care System (Dallas) 38,797 8.6% 38,468 8.6% 38,148 8.4% Children's Hospitals 3 19,994 4.4% 18,500 4.1% 18,805 4.2% University Hospitals of Dallas 15,337 3.4% 15,169 3.4% 14,460 3.2% Tenet Healthcare Corporation 12,480 2.8% 10,428 2.3% 11,245 2.5% Other Hospitals 21,295 4.7% 20,298 4.6% 22,222 4.9%

Total Inpatient Discharges 451,106 100.0% 447,391 100.0% 452,283 100.0%

1 Includes discharges for the consolidated joint ventures of THR. 2 Includes Parkland Health & Hospital System and JPS Health Network. 3 Includes Children’s Medical Center of Dallas, Cook Children’s Health Care System, and Scottish Rite Hospital for Children. Source: Texas Health Care Information Council. Information excludes Behavioral Medicine, Rehabilitation, Neonates and Newborn DRG/MSDRG Product Lines. A-17 Operating and Financial Data

Utilization of System Facilities. The following table provides certain information concerning the combined utilization of the System facilities for the six months ended June 30, 2016 and 2015, and for the fiscal years ended December 31, 2015, 2014 and 2013:

TABLE XI UTILIZATION OF SYSTEM FACILITIES

Six Months Ende d J une 3 0 , Fiscal Years Ended December 31, Statistic 2016 2015 2015 2014 2013

Licenced Beds (at year/month-end)1 3,866 3,862 3,864 3,877 3,890 Operated Beds in Service (at year/month-end)1 3,185 3,241 3,194 3,286 3,150 Patient Days (inpatient) 383,677 374,822 747,669 723,277 716,061 Discharges (inpatient) 82,950 79,731 161,850 155,046 152,080 Average Length of Stay (days) 4.6 4.7 4.6 4.7 4.7 Average Daily Census2 2,108 2,071 2,048 1,982 1,962 Percent Occupancy 66.2% 63.9% 64.1% 60.3% 62.3% Outpatient Visits 3 768,745 731,916 1,507,521 1,444,566 1,283,154 Total Surgeries 49,873 47,194 99,848 97,262 99,397 Emergency Room Visits 365,919 354,151 715,764 711,464 693,719 Outpatient Gross Patient Service Revenue to Total Gross Patient Service Revenue4 42.7% 42.0% 42.8% 42.7% 41.8%

1 Includes beds at THR’s long-term care hospital, THSH. 2 Average Daily Census is calculated using 182 days for the six months ended June 30, 2016, 181 days for the six months ended June 30, 2015, and 365 days for the fiscal years ended December 31, 2015, 2014, and 2013 3 Includes hospital based outpatient clinic visits and other outpatient facilities’ visits. Excludes physician office visits. 4 Excludes physician activities, which represent 9.3%, 9.8%, 9.4%, 9.8%, and 10.5% of THR’s consolidated net patient service revenue for the six months ended June 30, 2016 and 2015, and for the fiscal years ended December 31, 2015, 2014 and 2013, respectively.

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A-18 Sources of Consolidated Gross and Net Patient Service Revenue. The System derives patient revenue from managed care programs and other private insurance carriers, from the State of Texas under the Medicaid Program, and from the federal government under the Medicare Program. See the discussion in the Official Statement under “BONDHOLDERS’ RISKS – The System is Largely Dependent on, and Could be Adversely Affected by Changes in Federal and State Funding” for a description of certain matters related to the Medicare and Medicaid programs. The following table sets forth the percentages of consolidated gross and net patient service revenue of the System, excluding THPG and 1115 Waiver and DSH programs, derived from each type of payer for the six months ended June 30, 2016 and the fiscal years ended December 31, 2015, 2014 and 2013:

TABLE XII SOURCES OF CONSOLIDATED GROSS AND NET PATIENT SERVICE REVENUE (Excludes Physician Activities and 1115 Waiver and DSH Programs)

Six Months Ende d J une 3 0 , Fiscal Years Ended December 31, 2016 2015 2014 2013 Payer Type Gross Net Gross Net Gross Net Gross Net

Managed Care 38.3% 66.9% 39.2% 66.8% 38.7% 64.7% 38.8% 63.3% Medicare 27.2% 16.6% 27.3% 16.6% 27.9% 17.1% 28.5% 17.6% Medicare Managed 17.4% 9.7% 16.4% 10.0% 15.4% 9.6% 14.3% 9.3% Medicaid 1.7% 0.9% 2.2% 0.4% 2.8% 0.6% 2.4% 0.7% Medicaid Managed 6.6% 3.1% 6.5% 3.1% 6.2% 2.9% 6.4% 3.1% Commercial Insurance 0.7% 1.9% 0.6% 1.5% 0.7% 1.3% 0.6% 1.3% Uninsured 8.1% 0.9% 7.8% 1.6% 8.3% 3.8% 9.0% 4.7%

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

THR’s largest commercial payor (based on percentage of consolidated gross and net patient service revenues) is Blue Cross Blue Shield of Texas (“Blue Cross”). THR’s contract with Blue Cross expires on December 31, 2016, and THR and Blue Cross are starting the negotiations regarding a renewal. THR’s contracts with other managed care payors are generally no more than three years in length and subject to automatic renewal, renegotiation or termination at the end of the term. Negotiations related to contract renewals can be acrimonious and such contracts may or may not be renewed. THR cannot predict with any certainty the ultimate outcome of future negotiations with managed care payors as contracts expire. As of the date of this Official Statement, there are no managed care contracts under termination notice.

Medicaid is the commonly used name for the combined federal and state program designed to pay providers for health care given to certain indigent populations. It is funded by federal and state appropriations and administered by the states. For the periods of operation described in this Appendix A, the Texas Medicaid program required residents of some geographic areas (including most of the areas in which THR’s 4 – County Primary Service Area are located) to enroll in Texas Medicaid managed care programs. These programs are: STAR (the primary managed care program); STAR+PLUS (the managed care program for disabled patients, or those aged 65 or older); STAR KIDS (the managed care program for kids and adults under the age of 20 with disabilities); and STAR HEALTH (Medicaid for children in protective services or foster care). Under these programs, the state pays capitated health insurance premiums to insurers for Medicaid-eligible insureds who elect or are required to obtain coverage, and the insurers negotiate payment rates with and pay hospitals and others for care provided to the insured patients. For patients who are not eligible for a managed care program, the state compensates providers directly for patient care to Medicaid eligible patients through traditional Medicaid fee for service programs reimbursing for most provider costs.

Effective in two stages in September 2011 and March 2012, the State extended the STAR managed care programs to all geographic areas within the State and increased the scope of services that they insure. Because so much of THR’s 4 – County Primary Service Area has been within geographic areas in which participation in STAR and STAR+Plus has been required, these changes had little impact on the revenue that THR receives through the Medicaid program.

Funding levels under existing payment programs are expected to change. Payments rates and formulas used in the Medicaid cost reimbursement system for THR patients who are not enrolled in STAR managed care programs are modified every September, in a manner and to an extent to be determined. Substantial changes to these programs may occur, since the periods for which THR’s financial results of operations are described in this Appendix A. The changes could affect THR’s future financial condition and prospects, and the changes could be material. A-19 In addition to ongoing Medicaid payments for patient service claims, for the periods of operation described in this Appendix A, THR received substantial Medicaid supplemental payments. The State of Texas secured a waiver from certain federal Medicaid requirements for the five-year period ended September 1, 2016, with an extension through December 31, 2017 (the “Section 1115 Waiver Program”). The Uncompensated Care (“UC”) pool under the Section 1115 Waiver Program helps hospitals and certain other providers offset the uncompensated costs they incur by providing services to Medicaid patients. THR receives other revenue from Delivery System Reform Incentive Payments (“DSRIP”), also part of the Section 1115 Waiver Program. Under the terms of the Section 1115 Waiver Program, THR’s affiliates operate 39 distinct DSRIP projects selected from a menu of Texas Health and Human Services Commission (“HHSC”) and Centers for Medicare and Medicaid Services (“CMS”) approved projects that contribute to delivery transformation and quality improvement. Funds are available within four areas: infrastructure development, program innovation and redesign, quality improvements, and population focused improvements. Only projects from this menu performed as outlined in an HHSC and CMS approved Regional Health Partnership plan with corresponding metrics and milestones are eligible for payments from the DSRIP pool. THR’s continued receipt of supplemental payments under the Medicaid program will depend upon its achieving patient access or other health milestones and metrics on which payments may be conditioned. Funding for both UC and DSRIP depends on the Tarrant County Hospital District and Dallas County Hospital District providing intergovernmental transfers to HHSC as the state share, which is then matched by federal funds. The public entities have the sole discretion to make or not make intergovernmental transfers. In a letter dated September 1, 2016, to HHSC, CMS has announced that for the quarter ended December 31, 2015, it is disallowing certain federal matching funds applicable to the Dallas County and Tarrant County affiliations. THR hospitals participate in both the Dallas County affiliation and the Tarrant County affiliation. CMS alleges that the private hospitals participating in these affiliations fail to comply with the federal provider-related donation requirements. HHSC has sixty days from the date of the disallowance to either request reconsideration by the Secretary of Health & Human Services or appeal the disallowance to the Departmental Appeals Board. It is too early to predict the outcome of this matter; however, System management does not anticipate a material impact to the System’s financials or operations. Additionally, the Disproportionate Share (“DSH”) program provides supplemental payments to hospitals that serve a disproportionately large share of Medicaid and other low–income patients. In the fiscal year ended December 31, 2015, the System recorded approximately $61,223,000, $39,128,000, and $20,838,000 in revenues from the UC, DSRIP, and DSH programs, respectively. Revenues received by THR under the UC and DSH programs are included in Net Patient Service Revenue, and revenues received under the DSRIP program are included in Other Operating Revenue in the “Table XII – SCHEDULE OF HISTORICAL REVENUES AND EXPENSES” herein. Refer to "BONDHOLDERS' RISKS - The System is Largely Dependent on, and Could Be Adversely Affected by Changes in, Federal and State Funding - Texas Health Care Transformation and Quality Improvement Program (Medicaid Section 1115 Waiver)" in the Official Statement for further discussion.

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A-20 Summary of Consolidated Revenues and Expenses. The summary below presents selected financial information of the System for the six months ended June 30, 2016 and 2015, and for the fiscal years ended December 31, 2015, 2014 and 2013. The revenue and expense information for fiscal years ended December 31, 2015, 2014 and 2013 was derived from the audited THR consolidated financial statements for these periods. The revenue and expense information for the six months ended June 30, 2016 and 2015 was derived from internal unaudited consolidated financial statements of THR and includes all adjustments, consisting of normal recurring adjustments, that management considers necessary for a fair presentation on a basis consistent with the audited financial statements. The summary on the following page does not include all components of changes in net assets. The information for the fiscal years ended December 31, 2015 and 2014 should be read in conjunction with the audited consolidated financial statements appended as Appendix B, including footnotes. Results of operations for an interim period should not be considered indicative of the results for a full fiscal year.

TABLE XIII SCHEDULE OF HISTORICAL REVENUES AND EXPENSES

Six Months Ended June 30, Fiscal Years Ended December 31, 2016 2015 2015 2014 2013 (Dollars in Thousands) Operating Revenue: Net patient service revenue before provision for bad debts1 $ 2,232,829 $ 2,023,754 $ 4,274,765 $ 4,175,756 $ 3,931,827 Less: Provision for bad debts 136,351 108,336 241,605 311,095 288,512 Net patient service revenue2 2,096,478 1,915,418 4,033,160 3,864,661 3,643,315 Equity in earnings of unconsolidated affiliates 31,039 28,424 67,541 60,070 42,130 Other operating revenue 67,872 66,287 160,091 139,664 160,802 Total operating revenue 2,195,389 2,010,129 4,260,792 4,064,395 3,846,247 Operating Expenses: Salaries, wages, and employee benefits 1,117,232 1,053,097 2,127,464 2,017,016 1,901,588 Supplies 345,535 314,607 664,194 635,945 635,482 Other operating expenses 421,991 407,455 831,635 825,986 742,303 Depreciation and amortization 110,098 109,705 220,277 209,894 192,846 Interest expense 40,563 36,003 78,610 62,323 54,749 Total operating expenses 2,035,419 1,920,867 3,922,180 3,751,164 3,526,968 Operating Income 159,970 89,262 338,612 313,231 319,279 Nonoperating Gains (Losses): Net realized investment income and gains 34,164 81,998 132,090 266,089 207,375 Net unrealized gains (losses) on investments 58,900 (22,475) (159,046) (21,728) 241,752 Equity in earnings (losses) of unconsolidated affiliates, nonoperating (739) 431 1,234 4,676 2,054 Settlement of interest rate swap agreement (1,031) - - - - Loss on extinguishment of long-term debt (28) - (487) - - Other, net 1,229 1,152 2,505 2,929 6,561 Total nonoperating gains (losses), net 92,495 61,106 (23,704) 251,966 457,742 Revenue and Gains in Excess of Expenses and Losses before Income Taxes 252,465 150,368 314,908 565,197 777,021 Less: Income Tax Expense (Benefit)3 2,346 2,705 4,608 (24,109) 9,293 Revenue and Gains in Excess of Expenses and Losses 250,119 147,663 310,300 589,306 767,728 Less: Revenue and Gains in Excess of Expenses and Losses Attributable to Non-Controlling Interest 34,702 28,928 67,306 64,077 63,164 Revenue and Gains in Excess of Expenses and Losses from Continuing Operations Attributable to THR4 $ 215,417 $ 118,735 $ 242,994 $ 525,229 $ 704,564

1 Fiscal year 2014 has been reclassified to include pay for performance insurance incentives in net patient service revenue rather than other operating revenue to conform to the 2015 presentation. There was no such revenue in fiscal year 2013. 2 For the fiscal year ended December 31, 2015, the Obligated Group and the Combined Group accounted for 63.1% and 67.0% of the net patient service revenue generated by the System, respectively. 3 During 2014, THR received notification from the IRS supporting THR's position that earnings from controlled joint ventures does not constitute UBI; therefore, THR reversed its accruals pending the appeal process. In addition, THR received a refund for years in which taxes had been paid. The total impact of the appeal was approximately $29,632,000. 4 For purposes of this Schedule of Historical Revenues and Expenses, the term “THR” represents the System less earnings attributable to non-controlling interest. Note – For a description of other changes in net assets, (net unrealized investment income, contributions, net assets released from donor restriction to purchase property and equipment, effects of transfers and disposals of operations, and changes in THRF net assets), refer to the consolidated statements of operations and changes in net assets in the audited consolidated financial statements appended as Appendix B.

A-21 Historical Balance Sheets. The summary below presents selected financial information of the System as of June 30, 2016 and December 31, 2015, 2014 and 2013. The information as of December 31, 2015, 2014 and 2013 was derived from the audited THR consolidated financial statements for these periods as reclassified (see 1). The information as of June 30, 2016 was derived from internal unaudited consolidated financial statements of THR and includes all adjustments, consisting of normal recurring adjustments, that management considers necessary for a fair presentation on a basis consistent with the audited financial statements. The information as of December 31, 2015 and 2014 should be read in conjunction with the audited consolidated financial statements appended as Appendix B, including footnotes.

TABLE XIV HISTORICAL BALANCE SHEETS

June 30, December 31, 2016 2015 2014 2013 Assets (Dollars in Thousands) Current Assets: Cash and cash equivalents $ 475,393 $ 463,079 $ 453,573 $ 334,539 Short-term investments 1,947 1,447 1,778 1,436 Receivables - Patient, net 456,352 439,611 403,821 402,477 Other, net 27,963 65,627 102,313 131,665 Assets limited as to use 270,270 292,579 204,902 226,762 Other current assets 122,497 114,626 117,631 106,870 Total current assets 1,354,422 1, 376,969 1, 284,018 1, 203,749 Assets Limited as to Use 3,677,565 3, 574,793 3, 205,709 2, 778,059 Property and Equipment, net 1,966,806 1, 807,449 1, 786,710 1, 781,225 Investments in Unconsolidated Affiliates 227,918 210,718 186,152 142,001 Goodwill and Intangible Assets, net 156,284 158,461 164,252 163,708 Other Assets, net1 56,359 46,751 33,686 28,123 Total assets $ 7,439,354 $ 7, 175,141 $ 6, 660,527 $ 6, 096,865

Liabilities and Net Assets Current Liabilities: Current portion of long-term debt $ 268,822 $ 269,849 $ 216,243 $ 214,839 Accounts payable 168,569 169,499 171,221 186,843 Estimated third-party payor settlements 37,816 31,193 35,166 39,790 Accrued salaries, wages, and employee benefits 250,413 202,300 235,594 225,313 Other accrued liabilities 166,121 151,549 151,379 163,985 Total current liabilities 891,741 824,390 809,603 830,770 Long-Term Debt, net of current portion1 1,519,730 1,545,218 1, 269,861 1, 275,739 Other Noncurrent Liabilities 73,822 79,543 90,486 63,379 Total liabilities 2,485,293 2, 449,151 2, 169,950 2, 169,888 Net Assets: Net assets of THR: Unrestricted 4,696,684 4, 470,386 4, 230,358 3, 692,334 Temporarily restricted 88,448 84,737 98,621 94,454 Permanently restricted 69,104 68,867 69,492 63,398 Total net assets of THR 4,854,236 4, 623,990 4, 398,471 3, 850,186 Noncontrolling ownership interest in equity of consolidated affiliates - unrestricted 99,825 102,000 92,106 76,791 Total net assets 4,954,061 4, 725,990 4, 490,577 3, 926,977

Total liabilities and net assets $ 7,439,354 $ 7, 175,141 $ 6, 660,527 $ 6, 096,865

1 Certain reclassifications have been made to the fiscal years 2015, 2014 and 2013 information to conform to the 2016 presentation. Refer to the Note on page A – 26 herein. Note: For purposes of the audited consolidated financial statements in Appendix B and these Historical Balance Sheets, the term “THR” represents the System less net assets of non-controlling interest. A-22 Historical Liquidity – Days Cash on Hand. The following table sets forth, for the six months ended June 30, 2016, and for the fiscal years ended December 31, 2015, 2014 and 2013, THR’s calculation of the System’s days cash on hand. The information for fiscal years ended December 31, 2015, 2014 and 2013 was derived from the audited THR consolidated financial statements for these periods. The information for the six months ended June 30, 2016 was derived from internal unaudited consolidated financial statements of THR and includes all adjustments, consisting of normal recurring adjustments, which management considers necessary for a fair presentation on a basis consistent with the audited financial statements. The information for the fiscal years ended December 31, 2015 and 2014 should be read in conjunction with the audited consolidated financial statements appended as Appendix B, including footnotes.

TABLE XV HISTORICAL LIQUIDITY – DAYS CASH ON HAND

Six Months Ended J une 3 0 , Fiscal Years Ended December 31,

2016 2015 2014 2013 (Dollars in Thousands)

Cash and Cash Equivalents $ 475,393 $ 463,079 $ 453,573 $ 334,539 Short-Term Investments 1,947 1,447 1,778 1,436 Assets Limited as to Use - Internally Designated 3,713,278 3,620,158 3,199,149 2,770,428

1 Total Available Cash $ 4,190,618 $ 4,084,684 $ 3,654,500 $ 3,106,403

Total Operating Expenses $ 2,035,419 $ 3,922,180 $ 3,751,164 $ 3,526,968 Plus - Income Taxes 2,346 4,608 (24,109) 9,293 Less - Depreciation and Amortization (110,098) (220,277) (209,894) (192,846)

Adjusted Total Operating Expenses$ 1,927,667 $ 3,706,511 $ 3,517,161 $ 3,343,415

2 Average Daily Operating Expense $ 10,592 $ 10,155 $ 9,636 $ 9,160

3 Days Cash Ratio (days) 395.7 402.2 379.3 339.1

1 To provide for the purchase of the Series 2012B Bonds and Series 2008A, B & C Bonds that are tendered and not remarketed, THR intends to maintain a combination of unrestricted cash, cash equivalents, and high grade fixed income securities that may be sold for same day settlement in an amount (valued at market) sufficient to purchase the entire principal amount of such bonds, if all tendered for purchase. Additionally, THR has undrawn Credit Agreements (as defined herein) totaling $150,000,000 available if needed. 2 Average Daily Census is calculated using 182 days for the six months ended June 30, 2016, and 365 days for the fiscal years ended December 31, 2015, 2014 and 2013. 3 Total Available Cash divided by Average Daily Operating Expense. Note: Approximately $125,000,000 of the proceeds of the Series 2016A Bonds are anticipated to be used to provide reimbursement for the prior payment of capital expenditures; such amount would increase the Days Cash Ratio to 407.4 days.

A-23

Investment Policy

THR holds and manages substantially all of its cash, short-term and long-term investments (excluding the Consolidating Joint Ventures) in accordance with an Investment Policy Statement (“IPS”). The IPS is drafted and recommended by THR’s Investment Sub-Committee (the “Committee”) and approved by the THR Board of Trustees. The Committee consists of a group of investment professionals and meets quarterly. The internal team is led by the Senior Vice President of Treasury-Chief Investment Officer who oversees treasury operations, capital structure, investment program, and insurance program. The IPS seeks to integrate THR’s strategic and financial plans with the asset allocation process in order to effectively manage risk across the organization. Below is a comparison of the actual asset allocation percentages of the Long Term Investment Assets (“LTIA”) as of June 30, 2016 and December 31, 2015, 2014 and 2013 to the Board approved target ranges:

Actual at June 30, December 31, IPS Target 2016 2015 2014 2013 Ranges

Fixed Income 35% 36% 35% 30% 30-60% Equities 65% 64% 65% 70% 40-70% Alternative Investments 0% 0% 0% 0% 0-10%

THR currently manages the core fixed income portfolio internally and retains various external investment managers and advisors to manage its investments in different classes of securities according to target allocations set forth in the IPS. Investment results are reviewed monthly by management and quarterly by the Committee. The Committee evaluates performance on a relative and absolute basis, measuring managers and the total fund against appropriate style specific benchmarks and appropriate peer group universes. The Committee has the authority to make decisions regarding engagement, retention, and termination of individual investment managers within the scope of the investment strategies approved in the IPS.

THR maintains a portion of its investments in government money market and fixed income investments that may be liquidated if required to provide funds for repurchase obligations or for retirement of debt. As of June 30, 2016, THR’s discounted coverage ratio of daily liquidity investment holdings to self-liquidity debt was 5.40 times. Basing the calculation on only US Treasury and Agency holdings (excluding money market holdings), the discounted coverage ratio remains 3.59 times coverage. The following table sets forth THR’s investments which can be liquidated on a same day basis to meet tender obligations as of June 30, 2016 and December 31, 2015, 2014 and 2013:

June 30, December 31, 2016 2015 2014 2013 (Dollar in Thousands)

Money Market Funds 409,347$ 355,825$ 389,998$ $ 305,235 US Treasuries & Agencies (<3 year maturity) 100,681 85,687 141,027 131,037 US Treasuries & Agencies (>3 year maturity) 848,655 924,202 648,471 511,201

Total 1,358,683$ 1,365,714$ 1,179,496$ $ 947,473

The increase in liquidity supporting THR’s self-liquidity program over these periods is the result of positive operating and investment performance. In addition to its liquid investments above, THR entered into credit agreements for general corporate purposes in December 2012, with Wells Fargo Bank N.A. and U.S. Bank N.A. for lines of credit of $75,000,000 each (the “Credit Agreements”). Under the Credit Agreements, outstanding balances under the lines of credit generally bear interest at a variable rate calculated as a percentage of LIBOR plus a spread. At June 30, 2016, there were no outstanding balances under these Credit Agreements. The Wells Fargo and U.S. Bank Credit Agreements will expire on December 31, 2016 and December 31, 2017, respectively. THR intends to renew each of these prior to expiration.

A-24

The following is a presentation of THR’s consolidated liquidity information as of June 30, 2016 (dollars in thousands):

TABLE XVI CONSOLIDATED LIQUIDITY PROFILE

ASSETS Accessible on a Daily Basis Cash & Money Market Fund (Moody's rated Aaamf) $ 475,393 U.S. Treasuries & Agencies (< 3 year maturity) 103,593 U.S. Treasuries & Agencies (> 3 year maturity) 879,166 Sub-Total Daily Liquidity 1,458,152

General Operating Lines of Credit 150,000 Drawn Portion of Line - Net Available Line 150,000

Subtotal Daily Liquidity Including Line of Credit $ 1,608,152

Accessible on a Weekly Basis Publicly Traded Fixed Income Securities (Investment Grade)$ 263,943 Exchange Traded Equities 1,556,628 Funds 689,971 Sub-Total Weekly Liquidity 2,510,542

Total Daily & Weekly Liquidity $ 4,118,694

Accessible Greater than 7 days Funds, vehicles, investments allowing withdrawals with one week notice or more $ 221,924

Total Available Cash 4,190,618 Total General Operating Lines of Credit (net) 150,000 Total Liquidity $ 4,340,618

LIABILITIES Weekly Put Bonds VRDB Self Liquidity (7 day put) $ 226,055 Total LIABILITIES (Self-Liquidity Debt ) $ 226,055

THR has been engaged by certain of its joint ventures to manage a portion of their short term investment assets.

A-25

Historical Capitalization – Debt to Capitalization Ratio. The following table sets forth, for the six months ended June 30, 2016 and for the fiscal years ended December 31, 2015, 2014 and 2013, THR’s calculation of the System’s debt to capitalization ratio, as well as THR’s estimate of the System’s pro forma debt to capitalization ratio as of June 30, 2016, determined as if the Series 2016 Bonds were then issued. The information for fiscal years ended December 31, 2015, 2014 and 2013 was derived from the audited THR consolidated financial statements for these periods as reclassified (see Note). The information for the six months ended June 30, 2016 was derived from internal unaudited consolidated financial statements of THR and includes all adjustments, consisting of normal recurring adjustments, that management considers necessary for a fair presentation on a basis consistent with the audited financial statements. The information for the fiscal years ended December 31, 2015 and 2014 should be read in conjunction with the audited consolidated financial statements appended as Appendix B, including footnotes.

TABLE XVII HISTORICAL CAPITALIZATION – DEBT TO CAPITALIZATION RATIO

Six Months Ended June 30, Fiscal Years Ended December 31, Fixed or Pro Forma Variable 2016* 2016 2015 2014 2013 (Dollars in Thousands) Debt: Series 2016A Bonds1 Fixed $ 707,512 -$ -$ -$ -$ Series 2015 Taxable Bonds Fixed 296,770 296,770 296,753 - - Series 2015A Bonds1 Fixed 59,983 59,983 59,983 - - Series 2012A (Taxable) Bonds Fixed 98,861 98,861 98,851 98,831 98,813 Series 2012B Bonds2 Variable 50,000 50,000 50,000 50,000 50,000 Series 2010 Bonds1 Fixed 151,072 151,072 150,998 150,857 150,722 Bank Loans3 Variable 134,233 134,233 134,218 134,502 134,608 Series 2008A, B & C Bonds2 Variable 176,055 176,055 176,055 176,055 176,055 Series 2007A Bonds1 Fixed 23,265 515,032 536,896 552,275 567,520 Series 2007B Bonds1 Fixed 101,583 101,583 101,598 101,627 101,655 Other Obligated Group Debt Fixed - - - 1,074 1,556 FMHP Term and Revolving Loans Combination 87,023 87,023 90,100 92,715 87,617 RRH Term and Revolving Loans Combination 38,519 38,519 38,914 44,590 50,250 HIP Term and Revolving Loans Combination 16,051 16,051 18,201 23,872 28,398 ACL Term and Revolving Loans Combination 18,583 18,583 19,009 19,859 20,709 Other Non-Obligated Group Debt4 Combination 44,787 44,787 43,491 39,847 22,675

Total Debt 2,004,297$ 1,788,552$ 1,815,067$ 1,486,104$ $ 1,490,578

Unrestricted Net Assets $ 4,696,684 4,696,684$ 4,470,386$ 4,230,358$ $ 3,692,334

Debt to Capitalization Ratio5 29.9% 27.6% 28.9% 26.0% 28.8%

* Preliminary, subject to change.

1 Net of premium/discounts. 2 Series 2012B and Series 2008A, B & C Bonds are demand securities supported by self liquidity provisions. 3 The unpaid principal balance of the Bank Loans may come due at the option of the respective banks at the end of each respective ten and fifteen year term. The Bank Loans bear interest at variable rates calculated as a percentage of LIBOR plus a spread. 4 Represents loans, notes payable, and capitalized leases of other Consolidated Joint Ventures. 5 Total Debt divided by Total Debt plus Unrestricted Net Assets of THR. Note: Certain reclassifications have been made to the fiscal year 2015, 2014 and 2013 debt balance information to conform to the fiscal year 2016 presentation. Effective January 1, 2016, THR adopted Financial Accounting Standards Board Accounting Standards Update 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs requiring debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The consolidated balance sheets and historical capitalization – debt to capitalization ratio table herein are presented in accordance with this new standard. Periods prior to June 30, 2016 have been restated to conform to this new presentation.

A-26

Historical and Pro Forma Debt Service Coverage. The following table sets forth, for the fiscal years ended December 31, 2015, 2014 and 2013, the consolidated revenue of the System available to pay debt service on System debt including debt attributable to non-controlling interest. The table also indicates the extent to which such consolidated available revenues for debt service would provide coverage for pro forma maximum annual debt service on the Series 2016 Bonds and all other outstanding long-term indebtedness of the System.

TABLE XVIII HISTORICAL AND PRO FORMA DEBT SERVICE COVERAGE

December 31, 2015 2014 2013 (Dollars in Thousands) Revenue and Gains in Excess of Expenses and Losses from Continuing Operations Attributable to THR1 $ 242,994 $ 525,229 $ 704,564 Depreciation and Amortization 220,277 209,894 192,846 Interest Expense 78,610 62,323 54,749 Revenue and Gains in Excess of Expenses and Losses Attributable to Non-controlling Interest 67,306 64,077 63,164 Other Service Charges on Funded Debt 82 466 467 Excluding - Net Unrealized (Gains) Losses on Investments 159,046 21,728 (241,752) Change in fair value of interest rate swap agreements (1,623) (1,222) - Loss on Extinguishment of Long-Term Debt 487 - - Net (Gains) Losses on Impairment and Disposal of Property and Equipment 490 (74) (900)

Available Revenues for Debt Service $ 767,669 $ 882,421 $ 773,138

Actual Annual Debt Service Requirements on the Outstanding Long-Term Indebtedness $ 118,416 98,794$ 88,209$

Historical Coverage of the Actual Debt Service on the Outstanding Long-Term Indebtedness 6.48x 8.93x 8.76x

Maximum Pro Forma Annual Debt Service Requirements on the Outstanding Long-Term Indebtedness2,* $ 156,515 $ 156,515 $ 156,515

Historical Pro Forma Coverage of Maximum Pro Forma Annual Debt Service Requirements on the Outstanding Long-Term Indebtedness2,3,* 4.90x 5.64x 4.94x

Maximum Pro Forma Annual Debt Service Requirements on the Outstanding Long-Term Indebtedness, excluding participating convertible obligations2,4,* $ 119,878 $ 119,878 $ 119,878

Historical Pro Forma Coverage of Maximum Pro Forma Annual Debt Service Requirements on the Outstanding Long-Term Indebtedness, excluding participating convertible obligations2,4,* 6.40x 7.36x 6.45x

* Preliminary, subject to change.

1 For purposes of the audited THR consolidated financial statements in Appendix B and this Historical and Pro Forma Debt Service Coverage, the term “THR” represents the System less earnings attributable to non-controlling interest. 2 Maximum Pro Forma Annual Debt Service Requirements are calculated on the assumptions described under “ANNUAL DEBT SERVICE REQUIREMENTS” in the Official Statement. Actual debt service requirements could differ, and the difference could be substantial. The Series 2016A Bonds are based on estimated market rates. 3 For the fiscal year ended December 31, 2015, the Obligated Group and the Combined Group accounted for 63.1% and 67.0% of the net patient service revenue generated by the System, respectively. The historical pro forma coverage of maximum pro forma annual debt service requirements for the Combined Group for fiscal years 2015, 2014, and 2013 was 4.83x, 5.96x, and 5.10x, respectively. 4 Excludes non Combined Group participating convertible notes payable structured as a bullet maturity due in 2032. The amount outstanding as of June 30, 2016 was $31,172,000.

A-27

Management's Discussion of Recent Financial Performance

Overview. The purpose of this discussion is to provide an understanding of the System’s results of operations for the years ended December 31, 2015 and 2014, and for the six months ended June 30, 2016, compared to the prior comparable period.

Six Months Ended June 30, 2016. Inpatient days for the six months ended June 30, 2016, were 383,677, which represents an increase of 8,855 days or 2.4% from the six months ended June 30, 2015. Hospital based outpatient visits for the six months ended June 30, 2016, were 768,745 which represent an increase of 36,829 visits or 5.0% from the six months ended June 30, 2015. See “TABLE XI – UTILIZATION OF SYSTEM FACILITIES” herein.

Total operating revenue for the six months ended June 30, 2016, was $2,195.4 million, which represents an increase of $185.3 million or 9.2% from the six months ended June 30, 2015. The increase is primarily due to a $43.1 million increase in Section 1115 Waiver Program UC revenue, as well as volume increases in inpatient and outpatient utilization and moderate rate increases.

Total operating expenses for the six months ended June 30, 2016, were $2,035.4 million, which represents an increase of $114.6 million or 6.0% from the six months ended June 30, 2015. Total operating expenses, excluding depreciation and amortization and interest expense, increased $109.6 million or 6.2% from the six months ended June 30, 2015 to the six months ended June 30, 2016. Salaries, wages and employee benefits increased $64.1 million or 6.1% from the six months ended June 30, 2015 to the six months ended June 30, 2016, because of wage increases and the addition of approximately 437 FTE’s. The number of FTE’s increased due to added volume described above. Supplies expense for the six months ended June 30, 2016 was $345.5 million which represents an increase of $30.9 million or 9.8% from the six months ended June 30, 2015 due to volume increases including surgical procedures resulting in increased utilization in implants and pharmaceuticals, as well as inflation. Other operating expenses for the six months ended June 30, 2016 were $422.0 million, which represents an increase of $14.5 million or 3.6% from the six months ended June 30, 2015. The increase is primarily due to increases in consulting and physician fees. Professional liability insurance expense for the six months ended June 30, 2016 was $4.1 million. For the six months ended June 30, 2016, physician operations expenses and operating expenses excluding depreciation and amortization and interest expense increased approximately $29.7 million and $29.8 million, respectively, primarily as a result of physician practice acquisitions, additional providers, and the commencement of THBC operations in April 2016.

As a result of the activities described above, operating income for the six months ended June 30, 2016, was $160.0 million, which represents an increase of $70.7 million or 79.2% from the six months ended June 30, 2015. The System reported a 7.3% operating margin for the six months ended June 30, 2016.

Total net non-operating gains, for the six months ended June 30, 2016, were $92.5 million, which represents an increase of $31.4 million from the six months ended June 30, 2015; total net non-operating gains consisted primarily of net realized and unrealized gains on investments in THR’s long-term investment portfolio and other investments. Net realized and unrealized investment gains for the six months ended June 30, 2016, were $93.1 million, which represents an increase of $33.5 million or 56.3% from the six months ended June 30, 2015 primarily due to market fluctuations.

Total revenue and gains in excess of expenses and losses from continuing operations attributable to THR1 for the six months ended June 30, 2016, were $215.4 million, which represents an increase of $108.2 million from the six months ended June 30, 2015. Total revenue and gains in excess of expenses and losses from continuing operations attributable to THR1 represents a 9.4% excess margin.

Fiscal Year 2015. Inpatient days for the year ended December 31, 2015, were 747,669, which represents an increase of 24,392 days or 3.4% from fiscal year 2014. Hospital based outpatient visits for the year ended December 31, 2015, were 1,507,521, which represents an increase of 62,955 visits or 4.4% from fiscal year 2014. See “TABLE XI – UTILIZATION OF SYSTEM FACILITIES” herein.

Total operating revenue for the year ended December 31, 2015, was $4,260.8 million, which represents an increase of $196.4 million or 4.8% from fiscal year 2014. The increase is primarily due to volume increases in outpatient utilization and moderate rate increases.

1 For purposes of the audited THR consolidated financial statements in Appendix B and this discussion, the term “THR” represents the System less earnings of non-controlling interest. A-28

Total operating expenses for the year ended December 31, 2015, were $3,922.2 million, which represents an increase of $171.0 million or 4.6% from fiscal year 2014. Total operating expenses, excluding depreciation and amortization and interest expense, increased $144.3 million or 4.0% from fiscal year 2014 to fiscal year 2015. Salaries, wages and employee benefits increased $110.4 million or 5.5% from fiscal year 2014 to fiscal year 2015, because of wage increases and the addition of approximately 618 FTE’s. The number of FTE’s increased due to added volume described above. Supplies expense for the year ended December 31, 2015 was $664.2 million which represents an increase of $28.2 million or 4.4% due to volume increases including surgical procedures resulting in increased utilization in implants and pharmaceuticals, as well as inflation. Other operating expenses for the year ended December 31, 2015 were $831.6 million, which represents an increase of $5.6 million or 0.7%. The increase is primarily due to increases in consulting and physician fees. The System reported an expense increase of $1.4 million for all types of insurance coverage. Professional liability insurance expense for fiscal year 2015 was $2.5 million. Depreciation and amortization increased 4.9% from fiscal year 2014 to fiscal year 2015 reflecting the added costs associated with the opening of significant capital projects at various hospitals, as well as information technology projects. For fiscal year 2015, THPG operating expenses and operating expenses excluding depreciation and amortization and interest expense increased approximately $1.5 million and $1.3 million, respectively, primarily as a result of physician practice acquisitions and additional providers.

As a result of the activities described above, operating income for the year ended December 31, 2015, was $338.6 million, which represents an increase of $25.4 million or 8.1% from fiscal year 2014. The System reported a 7.9% operating margin for the year ended December 31, 2015.

Total net non-operating losses for the year ended December 31, 2015, were $23.7 million, which represents a decrease of $275.7 million from fiscal year 2014; total net non-operating losses consisted primarily of net realized gains and net unrealized losses on investments in THR’s long-term investment portfolio and other investments. Net realized and unrealized investment losses for the year ended December 31, 2015, were $27.0 million, which represents a decrease of $271.3 million or 111.0% from fiscal year 2014 primarily due to market fluctuations.

Total revenue and gains in excess of expenses and losses from continuing operations attributable to THR1 for the year ended December 31, 2015, were $243.0 million, which represents a decrease of $275.8 million from fiscal year 2014. Total revenue and gains in excess of expenses and losses from continuing operations attributable to THR1 represents a 5.7% excess margin.

Fiscal Year 2014. Inpatient days for the year ended December 31, 2014, were 723,277, which represents an increase of 7,216 days or 1.0% from fiscal year 2013. Hospital based outpatient visits for the year ended December 31, 2014, were 1,444,566, which represent an increase of 161,412 visits or 12.6% from fiscal year 2013 due to the shift towards outpatient procedures as opposed to inpatient. See “TABLE XI – UTILIZATION OF SYSTEM FACILITIES” herein.

Total operating revenue for the year ended December 31, 2014, was $4,064.4 million, which represents an increase of $218.1 million or 5.7% from fiscal year 2013. The increase is primarily due to volume increases in inpatient and outpatient utilization and moderate rate increases.

Total operating expenses for the year ended December 31, 2014, were $3,751.2 million, which represents an increase of $224.2 million or 6.4% from fiscal year 2013. Total operating expenses, excluding depreciation and amortization and interest expense, increased $199.6 million or 6.1% from fiscal year 2013 to fiscal year 2014. Salaries, wages and employee benefits increased $115.4 million or 6.1% from fiscal year 2013 to fiscal year 2014, because of wage increases and the addition of approximately 787 FTE’s. The number of FTE’s increased due to the added volume described above. Supplies expense for the year ended December 31, 2014, was $635.9 million, which represents an increase of $463 thousand or 0.1%. Supplies expense did not increase significantly even though volumes did because of a) an increase in supply rebates, b) efforts by Supply Chain to renegotiate vendor contracts with more favorable terms, and c) a 2.1% decrease in surgical cases which are typically higher users of more costly implant supplies and pharmaceuticals. Other operating expenses for the year ended December 31, 2014, were $826.0 million, which represents an increase of $83.7 million or 11.3%. The increase is due to consulting fees and other expenses for new or expanded community wellness programs and other new projects, and increased expenses related to community benefit programs to support indigent care. The System reported an expense decrease of $4.8 million for all types of insurance coverage for fiscal year 2014. Professional liability insurance expense decreased by $2.7 million for fiscal year 2014. Depreciation and amortization expense increased 8.8% from fiscal year 2013 to fiscal year 2014 reflecting the added costs associated with the opening of significant capital projects at multiple hospitals, as well as information technology projects. For fiscal year 2014, THPG operating expenses and

1 For purposes of the audited THR consolidated financial statements in Appendix B and this discussion, the term “THR” represents the System less earnings of non-controlling interest. A-29

operating expenses excluding depreciation and amortization and interest expense increased approximately $19.9 million and $18.9 million, respectively, primarily as a result of physician practice acquisitions and additional providers.

As a result of the activities described above, operating income for the year ended December 31, 2014, was $313.2 million, which represents a decrease of $6.0 million or 1.9% from fiscal year 2013. The System reported a 7.7% operating margin for the year ended December 31, 2014.

Total net non-operating gains, for the year ended December 31, 2014, were $252.0 million, which represents a decrease of $205.8 million or 45.0% from fiscal year 2013; total net non-operating gains consisted primarily of net realized gains and net unrealized losses on investments in THR’s long-term investment portfolio and other investments. Net realized and unrealized investment gains for the year ended December 31, 2014, were $244.4 million which represents a decrease of $204.8 million or 45.6% from fiscal year 2013 primarily due to market fluctuations.

Total revenue and gains in excess of expenses and losses from continuing operations attributable to THR1 for the year ended December 31, 2014, were $525.2 million, which represents a decrease of $179.3 million from fiscal year 2013. Total revenue and gains in excess of expenses and losses from continuing operations attributable to THR1 represents a 12.2% excess margin.

Litigation and Regulatory Matters

In May 2013, THR learned sheets of microfiche containing records for patients treated at Texas Health Harris Methodist Hospital Fort Worth from 1980-1990 were not securely handled by the outside vendor with which THR contracted for all of its document destruction. THR has made all legally required notifications of the incident, including letters to the patients involved, a notice posted on THR’s public website, and a press release. The Office of Civil Rights has closed this matter; however, to date, the State of Texas has not responded. THR does not anticipate a material financial impact due to this incident.

On March 2, 2015, a lawsuit was filed by a nurse who contracted EVD while treating the first patient admitted with the disease. The System is attempting to resolve this matter. The System has adequate legal defenses and insurance coverage for this matter, and management estimates that it will be resolved without material adverse effect on the System’s future financial position, results of operations, or cash flows.

In March 2015, the System made a disclosure to the Office of Inspector General (“OIG’) regarding THPG billing of certain PET scan tests and nuclear stress tests that did not meet Medicare medical necessity requirements. Management believes it is too early to predict with certainty the outcome of this matter; however, management does not anticipate a material financial impact.

THR’s Corporate Compliance Department investigates all compliance matters reported through its compliance program. As of the date of this Official Statement, there was no additional pending or, to the knowledge of System management, threatened litigation, including professional liability claims, or reported compliance issues which in the opinion of System management involves any substantial risk of material liability for the System, and where applicable, in excess of available reserves and insurance coverage.

1 For purposes of the audited THR consolidated financial statements in Appendix B and this discussion, the term “THR” represents the System less earnings of non-controlling interest A-30

APPENDIX B

TEXAS HEALTH RESOURCES CONSOLIDATED FINANCIAL STATEMENTS, DECEMBER 31, 2015 AND 2014 [THIS PAGE INTENTIONALLY LEFT BLANK]

Texas Health Resources Consolidated Financial Statements December 31, 2015 and 2014

(With Independent Auditors’ Report Thereon)

KPMG LLP Suite 1400 2323 Ross Avenue Dallas, TX 75201-2709

Independent Auditors’ Report

The Board of Trustees, Texas Health Resources:

We have audited the accompanying consolidated financial statements of Texas Health Resources, a Texas non-profit corporation, which comprise the consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of operations and changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ 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. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Texas Health Resources as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.

Dallas, Texas April 14, 2016

KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity. TEXAS HEALTH RESOURCES CONSOLIDATED BALANCE SHEETS December 31, 2015 and 2014 (Dollars in Thousands)

2015 2014

Assets Current Assets: Cash and cash equivalents $ 463,079 $ 453,573 Short-term investments 1,447 1,778 Receivables - Patient, less allowance for doubtful accounts of $107,776 in 2015 and $124,581 in 2014 439,611 403,821 Other, net 65,627 102,313 Assets limited as to use 292,579 204,902 Other current assets 114,626 117,631 Total current assets 1,376,969 1,284,018

Assets Limited as to Use 3,574,793 3,205,709 Property and Equipment, net 1,807,449 1,786,710 Investments in Unconsolidated Affiliates 210,718 186,152 Goodwill and Intangible Assets, net 158,461 164,252 Other Assets, net 55,944 39,401

Total assets $ 7,184,334 $ 6,666,242

Liabilities and Net Assets Current Liabilities: Current portion of long-term debt $ 269,849 $ 216,243 Accounts payable 169,499 171,221 Estimated third-party payor settlements 31,193 35,166 Accrued salaries, wages, and employee benefits 202,300 235,594 Other accrued liabilities 151,549 151,379 Total current liabilities 824,390 809,603

Long-Term Debt, net of current portion 1,554,411 1,275,576 Other Noncurrent Liabilities 79,543 90,486

Total liabilities 2, 458,344 2,175,665

Net Assets: Net Assets of THR: Unrestricted 4,470,386 4,230,358 Temporarily restricted 84,737 98,621 Permanently restricted 68,867 69,492 Total net assets of THR 4,623,990 4,398,471

Non-controlling ownership interest in equity of consolidated affiliates - unrestricted 102,000 92,106 Total net assets 4,725,990 4,490,577

Total liabilities and net assets $ 7,184,334 $ 6,666,242

See accompanying notes to consolidated financial statements.

1 Page 1 of 2 TEXAS HEALTH RESOURCES CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS Years ended December 31, 2015 and 2014 (Dollars in Thousands)

2015 2014

Operating Revenue: Net patient service revenue before provision for bad debts$ 4,274,765 $ 4,175,756 Less: Provision for bad debts 241,605 311,095 Net patient service revenue 4,033,160 3,864,661 Equity in earnings of unconsolidated affiliates 67,541 60,070 Other operating revenue 160,091 139,664

Total operating revenue 4,260,792 4,064,395

Operating Expenses: Salaries, wages, and employee benefits 2,127,464 2,017,016 Supplies 664,194 635,945 Other operating expenses 831,635 825,986 Depreciation and amortization 220,277 209,894 Interest expense 78,610 62,323

Total operating expenses 3,922,180 3,751,164

Operating Income 338,612 313,231

Nonoperating Gains (Losses): Net realized investment income and gains 132,090 266,089 Net unrealized losses on investments (159,046) (21,728) Equity in earnings of unconsolidated affiliates, nonoperating 1,234 4,676 Loss on extinguishment of long-term debt (487) - Other, net 2,505 2,929

Total nonoperating gains (losses), net (23,704) 251,966

Revenue and Gains In Excess of Expenses and Losses before Income Taxes 314,908 565,197

Less: Income Tax Expense (Benefit) 4,608 (24,109)

Revenue and Gains In Excess of Expenses and Losses 310,300 589,306

Less: Revenue and Gains in Excess of Expenses and Losses Attributable to Non-Controlling Interest 67,306 64,077

Revenue and Gains In Excess of Expenses and Losses from Continuing Operations Attributable to THR 242,994 525,229

(Continued) See accompanying notes to consolidated financial statements.

2 Page 2 of 2 TEXAS HEALTH RESOURCES CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONT.) Years ended December 31, 2015 and 2014 (Dollars in Thousands)

2015 2014

Other Changes in Unrestricted Net Assets: Net unrealized gains (losses) on investments, other than trading securities $ (7,340) $ 6,273 Net assets released from restrictions used for purchase of property and equipment 5,617 8,459 Change in fair value of interest rate swap agreements 77 357 Other changes, net (1,320) (2,294)

Increase in Unrestricted Net Assets 240,028 538,024

Changes in Temporarily Restricted Net Assets: Contributions received for purchase of property and equipment 1,424 8,511 Contributions received for operations 10,421 11,262 Net realized investment gain 2,490 4,563 Net unrealized losses on investments (5,508) (1,545) Change in value of split-interest agreement (225) 291 Net assets released from restrictions (22,486) (18,915)

Increase (Decrease) in Temporarily Restricted Net Assets (13,884) 4,167

Changes in Permanently Restricted Net Assets: Contributions 58 4,802 Net realized investment gain 53 988 Unrealized investment gains (losses) on beneficial interest in perpetual trust, net (736) 304

Increase (Decrease) in Permanently Restricted Net Assets (625) 6,094

Increase in Net Assets of THR 225,519 548,285

Net Assets of THR, beginning of year 4,398,471 3,850,186

Net Assets of THR, end of year $ 4,623,990 $ 4,398,471

See accompanying notes to consolidated financial statements.

3 Page 1 of 2 TEXAS HEALTH RESOURCES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2015 and 2014 (Dollars in Thousands)

2015 2014

Cash Flows From Operating Activities: Increase in net assets of THR $ 225,519 $ 548,285 Adjustments to reconcile increase in net assets to net cash provided by operating activities, excluding the net effects of acquisitions - Loss on extinguishment of long-term debt 487 - Impact of federal tax appeal decision - (27,683) Net unrealized losses on investments 172,630 16,696 Net realized gains on investments (76,035) (219,707) Change in value of split-interest agreement 225 (291) Provision for bad debts 241,809 311,841 Restricted contributions received for purchase of property and equipment (1,424) (8,511) Depreciation and amortization 220,277 209,894 Amortization of bond premiums (1,239) (1,304) Net losses on impairment and disposal of property and equipment 2,647 1,457 Equity in earnings of unconsolidated affiliates (67,541) (60,070) Distributions from unconsolidated affiliates 51,193 41,060 Equity in earnings of unconsolidated affiliates, nonoperating (1,234) (4,676) Change in fair value of interest rate swap agreements (1,700) (1,579) Revenue and gains in excess of expenses and losses attributable to non-controlling interest 67,306 64,077 (Increase) decrease in: Receivables, patient, net (277,395) (312,439) Receivables, other, net 36,482 35,056 Other assets, net (9,098) (19,551) Increase (Decrease) in: Accounts payable and accrued liabilities (36,230) (5,637) Other noncurrent liabilities (7,623) (4,326)

Net cash provided by operating activities 539,056 562,592

(Continued) See accompanying notes to consolidated financial statements.

4 Page 2 of 2 TEXAS HEALTH RESOURCES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.) Years ended December 31, 2015 and 2014 (Dollars in Thousands)

2015 2014

Cash Flows From Investing Activities: Purchases of property and equipment, net $ (234,172) $ (213,447) Proceeds from disposal of property and equipment 923 2,372 Cash used to acquire physician practices and other consolidated affiliates (4,381) (2,959) Investment in unconsolidated affiliates, net (6,984) (30,505) Purchases of short-term investments and assets limited as to use, net (553,250) (154,790)

Net cash used in investing activities (797,864) (399,329)

Cash Flows From Financing Activities: Proceeds from issuance of long-term debt 584,212 32,020 Debt issuance costs (4,391) - Principal payments on capital lease obligations (1,242) (567) Principal payments on long-term debt (38,450) (35,121) Redemption of long-term debt (211,618) - Settlement of interest rate swap agreement (3,911) - Contributions from non-controlling interest holders 4,933 3,847 Distributions to non-controlling interest holders (62,643) (52,919) Proceeds from restricted contributions received for purchase of property and equipment 1,424 8,511

Net cash provided by (used in) financing activities 268,314 (44,229)

Net Increase in Cash and Cash Equivalents 9,506 119,034

Cash and Cash Equivalents, beginning of year 453,573 334,539

Cash and Cash Equivalents, end of year $ 463,079 $ 453,573

Supplemental Disclosure of Cash Flow Information: Cash paid for interest $ 78,642 $ 62,640

Cash paid for income taxes $ 4,327 $ 4,478

Supplemental Schedule of Noncash Financing Activities: Property and equipment acquired through capital lease obligations $ 778 $ -

See accompanying notes to consolidated financial statements.

5 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015 and 2014

1. Organization

Texas Health Resources (THR), a Texas non-profit corporation, operates through its controlled affiliates a health care system with services and facilities throughout north central Texas. THR is organized and operated for the benefit of its tax-exempt controlled affiliates and has been recognized by the Internal Revenue Service (IRS) as exempt from federal income taxes under Section 501(a) of the Internal Revenue Code of 1986, as amended (the Code), as an organization described in Section 501(c)(3). THR’s wholly-controlled facilities include 13 acute care hospitals and a 10-bed long-term care hospital. The following table provides the locations of THR’s tax- exempt member hospitals (the Tax-Exempt Hospitals) as of December 31, 2015. The Tax- Exempt Hospitals have been recognized as exempt from federal income taxes under the Code as organizations described in Section 501(c)(3).

Location Tax-Exempt Hospital (Texas)

Texas Health Arlington Memorial Hospital Arlington Texas Health Harris Methodist Hospital Alliance Fort Worth Texas Health Harris Methodist Hospital Azle Azle Texas Health Harris Methodist Hospital Cleburne Cleburne Texas Health Harris Methodist Hospital Fort Worth Fort Worth Texas Health Harris Methodist Hospital Hurst-Euless-Bedford Bedford Texas Health Harris Methodist Hospital Southwest Fort Worth Fort Worth Texas Health Harris Methodist Hospital Stephenville Stephenville Texas Health Presbyterian Hospital Allen Allen Texas Health Presbyterian Hospital Dallas Dallas Texas Health Presbyterian Hospital Denton Denton Texas Health Presbyterian Hospital Kaufman Kaufman Texas Health Presbyterian Hospital Plano Plano Texas Health Specialty Hospital Fort Worth (10-bed long-term care hospital) Fort Worth

In addition, THR is the sole member or sole shareholder of certain other wholly-controlled affiliates engaged in health care related activities in support of its mission including Texas Health Physicians Group (THPG), a Texas non-profit organization certified by the Texas Medical Board pursuant to Section 162.001(b) of the Texas Occupations Code and recognized as exempt from federal income taxes under the Code as an organization described in Section 501(c)(3) that consists of approximately 880 employed physicians and mid-level providers in over 220 locations throughout north central Texas.

6 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

1. Organization, continued

THR and some of its controlled affiliates participate in joint ventures with physicians and non- physicians to operate hospitals and other health related ventures. The following table provides the location of the joint venture hospitals along with THR’s ownership interest in those hospitals at December 31, 2015.

Location Ownership Hospital (Texas) Interest

Consolidated: Texas Institute for Surgery, L.L.P. (d/b/a Texas Institute for Surgery at Texas Health Presbyterian Hospital Dallas) Dallas 50.0% Physicians Medical Center, L.L.C. (d/b/a Texas Health Center for Diagnostics & Surgery Plano) Plano 53.5% Southlake Specialty Hospital, L.L.C. (d/b/a Texas Health Harris Methodist Hospital Southlake) Southlake 53.7% Rockwall Regional Hospital L.L.C. (d/b/a Texas Health Presbyterian Hospital Rockwall) Rockwall 60.4% Flower Mound Hospital Partners, L.L.C. (d/b/a Texas Health Presbyterian Hospital Flower Mound) Flower Mound 53.6% AMH Cath Labs, L.L.C. (d/b/a Texas Health Heart & Vascular Hospital Arlington) Arlington 56.3%

Unconsolidated: USMD Hospital of Arlington, L.P. Arlington 51.0% USMD Hospital of Fort Worth, L.P. Fort Worth 51.0% Texas Health Huguley, Inc. (d/b/a Texas Health Huguley Hospital Fort Worth South) Fort Worth 51.0% Texas Rehabilitation Hospital of Fort Worth, L.L.C. Fort Worth 30.0% Texas Rehabilitation Hospital of Arlington, L.L.C. (under construction) Arlington 30.0%

In addition to the hospitals listed above, there are numerous other non-hospital health related joint ventures included in THR’s accompanying consolidated financial statements, including outpatient imaging and surgery centers.

THR and its tax-exempt controlled affiliates receive support from the Texas Health Resources Foundation (Foundation). The Foundation operates as a non-private foundation exempt from federal income taxes under Section 501(a) of the Code as an organization described in Section 501(c)(3), and THR is the sole corporate member.

The accompanying consolidated financial statements include the accounts of THR, the Foundation, its wholly controlled affiliates and its consolidated joint ventures (collectively, the System). All significant intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements.

7 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

2. Summary of Significant Accounting Policies

Use of Estimates

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

Cash and Cash Equivalents

Cash and cash equivalents include cash, money market funds, and governmental or other securities with original maturities of three months or less at time of purchase, excluding amounts limited as to use by board designation or other arrangements. THR’s cash management system provides for daily investment of available balances and the funding of outstanding checks when presented for payment. Outstanding, but unpresented, checks totaling approximately $23,272,000 and $23,103,000 at December 31, 2015 and 2014, respectively, have been included in accounts payable in the accompanying consolidated balance sheets. Upon presentation for payment, these checks are funded through available cash or cash equivalent balances. The change in outstanding but unpresented checks is included in cash used in operating activities on the accompanying consolidated statements of cash flows.

Investments and Investment Income

Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the consolidated balance sheets. Realized investment income or loss (including realized gains and losses on investments, interest, and dividends) is included in revenue and gains in excess of expenses and losses unless the income or loss is restricted by donor or law. Investments in mineral interests, which have limited marketability, are stated at fair value, as estimated based on a multiple of annual revenues. Investments in real estate are stated at fair value, as estimated by using private valuations. Investments in hedge funds are stated at fair value, as estimated by the general partner of the hedge fund and reviewed by management. Unrealized gains and losses on investments are excluded from revenue and gains in excess of expenses and losses unless the investments are trading securities. Management reviews individual securities to determine whether a decline in fair value below the amortized cost basis is other than temporary. If the decline in fair value is judged to be other than temporary, the cost basis of the individual security is written down to fair value as a new cost basis and the amount of the write-down is included in realized investment gains or losses in the consolidated statements of operations and changes in net assets. To determine whether a decline is other than temporary, management considers whether it has the ability and intent to hold the investment until a market price recovery, which may be maturity, and whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.

The System invests in various securities. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility risks. Due to the level of risk associated with certain investment securities, it is reasonable to assume that changes in the values of investment securities will occur in the near term and that such changes could be material to the accompanying consolidated financial statements.

Split-Interest Agreements

The System has received as contributions various types of split-interest agreements, including charitable gift annuities, charitable remainder unitrusts and perpetual trusts held by a third party.

8 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

2. Summary of Significant Accounting Policies, continued

Split-Interest Agreements, continued

Under charitable gift annuity arrangements for which the System is the trustee of the assets, the System records the assets at fair value and the liabilities to the beneficiaries at the present value of the estimated future payments to be distributed by the System to such beneficiaries. The amount of the contribution is the difference between the asset and the liability and is recorded as unrestricted revenue, unless otherwise restricted by the donor. Subsequent changes to the annuity liability are recorded as changes in value of split-interest agreements in the appropriate net asset class.

Under charitable remainder unitrust arrangements for which the System is the trustee of the assets, the System records as donor-restricted contributions the present value of the residual interest in the trust in the period in which the trust is established. The assets held in trust are recorded at fair value when received, and the liabilities to the beneficiaries are recorded at the present value of the estimated future payments to be distributed by the System to such beneficiaries. The amount of the contribution is the difference between the asset and the liability and is recorded as temporarily restricted or permanently restricted support. Subsequent changes in fair value for charitable remainder unitrusts are recorded as changes in value of split-interest agreements in the appropriate net asset class.

Under perpetual trusts held by a third-party arrangement, the System records contribution revenue and an asset when it is notified of the trust’s existence. The fair value of the contribution is measured at the present value of the estimated future cash receipts from the trust’s assets and that value may generally be measured by the fair value of the assets contributed to the trust, unless facts and circumstances indicate that the fair value of the assets contributed to the trust differs from the present value of the expected future cash flows. Distributions from the trust are reported as investment income that increases the appropriate net asset class. Adjustments to the amount reported as an asset, based on periodic review, are recognized as unrealized investment gains or losses on beneficial interest in perpetual trust in the permanently restricted net asset class.

Under the charitable gift annuity arrangements and charitable remainder unitrust arrangements for which the System is not the trustee of the assets, the System records a receivable and contribution revenue at the present value of the estimated future distributions expected to be received by the System over the expected term of the agreement. However, if an unrelated third- party has variance power to redirect the benefits to another organization or if the System’s rights to the benefits are conditional, the System does not recognize its potential for future distributions from the asset held by the trustee.

The discount rates and actuarial assumptions used in calculating present values have been based on Internal Revenue Service guidelines and actuarial tables. For agreements in which the System is the trustee, the discount rates used are commensurate with the risks involved at the time the contributions are initially recognized and are not subsequently revised. For agreements in which the System is not the trustee, under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 958-30, Not-for-Profit Entities Split Interest Agreements, and the guidance as provided in the AICPA Audit and Accounting Guide, Not-for- Profit Organizations, split-interest agreements held by others net expected cash flows are revalued to fair value at each year-end using a current risk-free rate of return, which ranged from 1.76% to 3.01% and 1.65% to 2.75% for the years ended December 31, 2015 and 2014, respectively.

9 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

2. Summary of Significant Accounting Policies, continued

Accounts Receivable and Allowance for Doubtful Accounts

Patient accounts receivable are reported net of estimated allowances for doubtful accounts and contractual adjustments in the balance sheets. The allowance and resulting provision for bad debts is based upon a combination of the aging of receivables and management’s assessment of historical and expected net collections considering business and economic conditions, trends in health care coverage and other collection indicators for each of its major payor sources of revenue. Management assesses the adequacy of the allowance for doubtful accounts based upon historical write-off experience and payment trends by payor category. Patient accounts are also monitored and, if necessary, past due accounts are placed with collection agencies in accordance with guidelines established by management. For receivables associated with services provided to patients who have third-party coverage, the System 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, 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), the System records a significant provision for bad debts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the billed rates and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts.

The System’s allowance for doubtful accounts for self-pay patients (including allowances for charity care) remained constant at 96.1% of self-pay accounts receivable at December 31, 2015 and 2014. In addition, the System’s self-pay write-offs for bad debts decreased from approximately $310,000,000 for fiscal year 2014 to approximately $250,000,000 for fiscal year 2015. The decrease in write offs was the result of a decrease in uninsured patients in fiscal year 2015, as well as a financial assistance policy change described in Note 5 - Charity Care and Community Benefit. The System does not maintain a material allowance for doubtful accounts from third-party payors, nor did it have significant write-offs from third-party payors.

Assets Limited as to Use

The System maintains certain assets that are limited as to use under board designation, indenture agreements, donor restriction, and other provisions. Amounts required to fund current liabilities of the System have been classified as current assets in the consolidated balance sheets.

Property and Equipment

Property and equipment acquisitions are recorded at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Equipment under capital lease obligations is amortized on the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the consolidated statements of operations and changes in net assets. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets.

10 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

2. Summary of Significant Accounting Policies, continued

Property and Equipment, continued

Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support and are excluded from revenue and gains in excess of expenses and losses unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service.

Goodwill and Intangible Assets

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized. The System reviews goodwill annually, or more frequently if circumstances warrant a more timely review, to determine if there has been an impairment. FASB ASC Topic 350, Intangibles—Goodwill and Other (Topic 350), provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or that indefinite-lived assets are impaired. If, after assessing the totality of events and circumstances, an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount or that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to perform the two-step goodwill impairment test described in Topic 350 or determine the fair value of the indefinite-lived intangible asset and perform a quantitative impairment test by comparing the fair value with the carrying amount. During fiscal years ended December 31, 2015 and 2014, the System prepared a qualitative assessment of goodwill and indefinite-lived intangible assets impairment for all reporting units that have assigned goodwill and indefinite- lived intangible assets, and no impairments were identified.

Effective January 1, 2015, one of the System’s consolidated joint ventures, Health Imaging Partners, LLC (HIP) adopted FASB Accounting Standards Update (ASU) 2014-02, Intangibles— Goodwill and Other (Topic 350): Accounting for Goodwill, a consensus of the Private Company Council, and began amortizing their existing goodwill on a straight-line basis over 10 years.

Goodwill activity for the years ended December 31, 2015 and 2014 is presented below (dollars in thousands):

2015 2014

Balance at beginning of year $ 151,262 $ 150,635 Goodwill acquired from purchases of consolidated affiliates and/or physician practices 2,349 627 Amortiztion of goodwill - consolidated joint venture (3,980) -

Balance at end of year $ 149,631 $ 151,262

11 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

2. Summary of Significant Accounting Policies, continued

Asset Retirement Obligations

The fair value of a liability for a legal obligation associated with the retirement of long-lived assets is recognized in the period in which it is incurred if the fair value can be reasonably estimated. The fair value, which approximates the cost a third party would incur in performing the tasks necessary to retire such assets, is recognized at the present value of expected future cash flows and is added to the carrying value of the associated asset and depreciated over the asset’s useful life. The liability is accreted over time and is reduced upon settlement of the obligation.

Impairment or Disposal of Long-Lived Assets

When events or changes in circumstances indicate that the carrying amount of long-lived assets, including property and equipment, or other long-lived assets, may not be recoverable, an evaluation of the recoverability of currently recorded costs is performed. When an evaluation is performed, the estimated value of undiscounted future net cash flows associated with the assets is compared to the assets’ carrying value to determine if a write-down to fair value is required.

If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Long-lived assets to be disposed of are reflected at the lower of either their carrying amounts or their fair value less costs to sell or close. In such circumstances, estimates of fair value are based on independent appraisals, established market prices for comparable assets, or internal calculations of estimated discounted future cash flows.

Derivative Instruments

Certain consolidated joint ventures, Rockwall Regional Hospital, L.L.C. (Rockwall), Flower Mound Hospital Partners, L.L.C. (Flower Mound) and AMH Cath Labs, L.L.C. (ACL), use interest rate swap agreements to manage interest rate risk associated with their floating rate borrowings and account for derivative instruments utilized in connection with these activities in accordance with FASB ASC Topic 815, Derivatives and Hedging, which requires entities to recognize all derivative instruments as either assets or liabilities in the consolidated balance sheets at their respective fair values.

These consolidated joint ventures designate and account for their interest rate swap agreements as cash flow hedges in accordance with FASB ASC Subtopic 815-30, Derivatives and Hedging – Cash Flow Hedges. For all hedging relationships, these consolidated joint ventures formally document the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. These consolidated joint ventures also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in the hedging transactions are highly effective in offsetting cash flows of hedged items. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as other changes in unrestricted net assets and reclassified into earnings in the same period or periods during which earnings are affected by the variability in cash flows of the designated hedged item. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in revenues and gains in excess of expenses and losses.

These consolidated joint ventures discontinue hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, or the derivative designation is removed.

12 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

2. Summary of Significant Accounting Policies, continued

Derivative Instruments, continued

In all situations in which hedge accounting is discontinued and the derivative is retained and not redesignated as part of a new hedging relationship, these consolidated joint ventures continue to carry the derivative at its fair value in the consolidated balance sheets and recognize any subsequent changes in its fair value in revenues and gains in excess of expenses and losses. When it is probable that a forecasted transaction will not occur, these consolidated joint ventures discontinue hedge accounting and recognize immediately any gains and losses that were accumulated in other changes in unrestricted net assets.

By using derivative financial instruments to hedge exposures to changes in interest rates, the System exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the System, which creates credit risk for the System. When the fair value of a derivative contract is negative, the System owes the counterparty and, therefore, the System is not exposed to the counterparty’s credit risk in these circumstances. The System minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties. The derivative instruments entered into by the System do not contain credit-risk-related contingent features.

Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

Other than the Treasury rate lock discussed in “Long-Term Debt” herein, the System does not enter into derivative instruments for any purpose other than cash flow hedging, and does not speculate using derivative instruments.

Physician Income Guarantees

Consistent with its policy on physician relocation and recruitment, THR hospitals provide income guarantee agreements to certain non-employed physicians who agree to relocate to its communities to fill a need in the hospital’s service area and commit to remain in practice there. Under such agreements, THR hospitals are required to make payments to the physicians in excess of the amounts they earn in their practice up to the amount of the income guarantee. The income guarantee periods are typically 12 months, but are occasionally negotiated for longer periods of time if obstacles to the physician’s startup are anticipated. Such payments plus interest are recoverable from the physicians if they do not fulfill their obligation to practice full-time in the community and maintain active privileges at the recruiting hospital for typically three years subsequent to the guarantee period. At December 31, 2015, the maximum potential amount of future payments under these guarantees was approximately $8,065,000.

At December 31, 2015 and 2014, THR had a liability of approximately $3,245,000 and $2,459,000, respectively, for the fair value of guarantees entered into, with a corresponding asset recorded in other current assets in the consolidated balance sheets, which will be amortized over the commitment period.

13 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

2. Summary of Significant Accounting Policies, continued

Donor-Restricted Gifts

Unconditional promises to give cash and other assets to THR and its tax-exempt controlled affiliates are reported at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the accompanying consolidated statements of operations and changes in net assets as net assets released from restrictions and other operating revenue.

Temporarily and Permanently Restricted Net Assets

Temporarily restricted net assets are those whose use by THR and its tax-exempt controlled affiliates have been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by THR and its tax-exempt controlled affiliates in perpetuity.

Revenue and Gains in Excess of Expenses and Losses

The consolidated statements of operations and changes in net assets include revenue and gains in excess of expenses and losses. Changes in unrestricted net assets which are excluded from revenue and gains in excess of expenses and losses, consistent with industry practice, include unrealized gains and losses on investments other than trading securities, permanent transfers of assets to and from affiliates for other than goods and services, contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets), and other items required by GAAP to be reported separately.

Net Patient Service Revenue

Net patient service revenue is recognized as services are provided and reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined.

Charity Care

The Tax-Exempt Hospitals and THPG provide care to patients who meet criteria established under THR’s financial assistance policy without charge or at amounts less than their established rates. The consolidated joint venture hospitals and healthcare entities have similar financial assistance policies, or have adopted the THR financial assistance policy. Because the System does not pursue collection of amounts determined to qualify as charity care, those amounts are not reported as net patient service revenue or patient receivables.

14 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

2. Summary of Significant Accounting Policies, continued

Electronic Health Record Incentive Payment Program

The American Recovery and Reinvestment Act of 2009 (the Act) established incentive payments under the Medicare and Medicaid programs for hospitals that meaningfully use certified electronic health record (EHR) technology. In order to qualify for the Act’s reporting period, a hospital is required to meet certain designated EHR meaningful use criteria from both mandatory and optionally selected requirements within the Act’s reporting year. The System has elected to apply the grant accounting model whereby incentive payments are recognized as income when there is reasonable assurance that the entity will successfully demonstrate compliance with the minimum number of meaningful use objectives. The System’s management believes the relevant criteria were met or are being met for Years One through Five reporting and determined compliance was reasonably assured.

The System’s eligible hospitals recognized revenue of approximately $1,110,000 and $9,112,000 in 2015 and 2014, respectively, under the Act’s Years One through Five reporting periods, which was recorded as other operating revenue in the accompanying consolidated statements of operations and changes in net assets. This recognized revenue includes accruals for EHR meaningful use of approximately $1,295,000 and $2,156,000 at December 31, 2015 and 2014, respectively, which are included in other receivables in the accompanying consolidated balance sheets. Of the reimbursement payments received by the System’s eligible hospitals since the program began, approximately $5,216,000 and $6,613,000 at December 31, 2015 and 2014, respectively, have been recorded as reserves for potential adjustments in estimated third party payor settlements in the accompanying consolidated balance sheets.

Self-Insurance

Under THR’s self-insurance programs, claims are reflected as liabilities based upon actuarial estimation, including both reported, and incurred but not reported claims, taking into consideration the severity of the incidents and the expected timing of claim payments.

Recent Accounting Pronouncements

In April 2013, the FASB issued ASU 2013-06, Not-for-Profit Entities (Topic 958): Services Received from Personnel of an Affiliate, which requires contributed services be recognized at fair value if employees of separately governed affiliated entities regularly perform services (in other than an advisory capacity) for and under the direction of the donee. In addition, the guidance indicates those contributed services should be recognized only if they (1) create or enhance non- financial assets or (2) require specialized skills, are provided by individuals possessing those skills, and typically would need to be purchased if not provided by donation. The provisions of this ASU were effective for THR beginning January 1, 2015, and adoption did not have a material impact on the consolidated financial statements.

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other standards. The core principle of the guidance in this ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Management has not evaluated all of the provisions of the ASU, which are effective for THR beginning January 1, 2018, as amended by ASU 2015-14.

15 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

2. Summary of Significant Accounting Policies, continued

Recent Accounting Pronouncements, continued

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). Management has evaluated the provisions of this ASU, which are effective for THR beginning January 1, 2016, and adoption is not expected to have a material impact on the consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which is intended to simplify the presentation of debt issuance costs. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. Management has evaluated the provisions of this ASU, which is effective for THR beginning January 1, 2016, and adoption is not expected to have a material impact on the consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which requires an entity to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion and transportation. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. Management has not yet evaluated all of the provisions of this ASU, which is effective for THR beginning January 1, 2017.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825- 10): Recognition and Measurement of Financial Assets and Financial Liabilities, which makes targeted improvements to the measurement and disclosure of financial assets and financial liabilities, especially equity investments and other financial instruments, liabilities resulting from instrument-specific credit risk, and valuation allowances for deferred tax assets. Management has not yet evaluated all of the provisions of this ASU, which is effective for THR beginning January 1, 2018.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which significantly modifies the treatment of leases requiring lessees to recognize most leases on the balance sheet. In addition, while the new standard retains most of the principles of the existing lessor model, it aligns many of those principles with the FASB’s new revenue guidance (ASU 2014-09). Management has not yet evaluated all of the provisions of this ASU, which is effective for THR beginning January 1, 2019.

Reclassifications

Certain reclassifications have been made to the December 31, 2014 financial statements to conform to the December 31, 2015 presentation. The reclassifications had no effect on revenue and gains in excess of expenses and losses or net assets as previously reported. Pay for performance insurance incentives are now included in net patient service revenue, rather than as a component of other operating revenue.

16 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

3. Net Patient Service Revenue

The System has agreements with third-party payors that provide for payments to the hospitals and THPG at amounts different from established rates. A summary of the payment arrangements with major third-party payors follows:

Medicare. 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. Inpatient non-acute services, outpatient services, and certain capital and medical education costs related to Medicare beneficiaries are paid based on a combination of prospective and cost reimbursement methodologies or fee schedule. The hospitals are reimbursed for cost reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports by the hospitals and audits thereof by the Medicare fiscal intermediary.

Medicaid. Inpatient services rendered to Medicaid program beneficiaries are reimbursed under a prospectively determined system similar to Medicare. Most outpatient services are reimbursed by the Medicaid program under a cost reimbursement methodology or fee schedule. The hospitals are reimbursed for cost reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports by the hospitals and audits thereof by the Medicaid fiscal intermediary.

Medicare and Medicaid cost report settlements are estimated in the period services are provided to the program beneficiaries. These estimates are revised as needed until final settlement of the cost report. Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. Net patient service revenue increased approximately $23,179,000 and $22,144,000 in 2015 and 2014, respectively, due to reassessment of settlement issues and other changes in estimates related to final settlements.

The System has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment to the hospitals and THPG under these arrangements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates. Items such as high cost drugs and implants are sometimes paid as an add-on to prospectively determined rates. All of these payment methods can occur independently or in combination for different commercial agreements.

Additionally, the Tax-Exempt Hospitals provide discounted pricing to uninsured patients. The pricing is calculated by applying a discount to charges for services received. The discount rate was 45% in 2015 and 2014. The consolidated and unconsolidated joint venture hospitals also provide similar discounted pricing to uninsured patients.

The System recognizes patient service revenue associated with services provided to patients who have third-party payor coverage on the basis of contractual rates for the services rendered. For uninsured patients that do not qualify for charity care, the System recognizes revenue on the basis of its standard discounted rates for services provided. On the basis of historical experience, a significant portion of the System’s uninsured patients will be unable or unwilling to pay for the services provided. Thus, the System records a significant provision for bad debts and/or charity care related to uninsured patients in the period the services are provided.

17 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

3. Net Patient Service Revenue, continued

Patient service revenue, net of contractual allowances and discounts (but before the provision for bad debts), recognized in the years ended December 31, 2015 and 2014 from these major payor sources, is as follows (dollars in thousands):

2015 2014

Medicare $ 759,693 $ 743,818 Medicare Managed Care 419,805 407,493 Medicaid 98,958 155,472 Medicaid Managed Care 130,709 119,649 Managed Care 2,645,727 2,469,570 Commercial and Other 145,026 130,101 Private Pay 74,847 149,653

$ 4,274,765 $ 4,175,756

4. Section 1115 Waiver

During 2012, the Texas Health and Human Services Commission (HHSC) implemented a five- year program, the Texas Healthcare Transformation and Quality Improvement Program: 1115 Waiver (Waiver Program). The Waiver Program provides for two pools of Medicaid supplemental funding, an uncompensated care (UC) pool and a delivery system reform incentive payment (DSRIP) pool. During 2015 and 2014, THR (through certain wholly controlled tax-exempt and joint venture hospitals) participated in UC programs in Tarrant, Dallas, Collin and Johnson counties.

During 2015 and 2014, THR, on behalf of its participating hospitals, recorded supplemental Medicaid patient service revenue of approximately $61,223,000 and $113,040,000, respectively, under the UC pool of the Waiver Program. At December 31, 2015 and 2014, THR has a receivable of approximately $17,330,000 and $46,013,000, respectively, related to the UC pool of the Waiver Program.

At December 31, 2015 and 2014, THR has deferred revenue of approximately $3,105,000 and $6,055,000, respectively included in other accrued liabilities on the consolidated balance sheets. The deferred revenue at December 31, 2015 represents advances and anticipated settlements of previously received funds. The deferred revenue at December 31, 2014 represents approximately 10% of the payments that have been received under the UC pool of the Waiver Program (all counties) relating to uncertainties surrounding the State of Texas capacity limits, which were resolved during 2015.

THR also receives other operating revenue from the DSRIP pool of the Waiver Program. The program provides for incentive revenue to be earned by facilities for initiating programs that benefit the community and lower overall healthcare cost, and for reaching preset goals for those programs. The DSRIP program will run through five years. For year one, facilities who chose to participate received incentive revenue for submitting acceptable project plans that would span the five years of the program. During years two through five, providers earn revenue by meeting the program goals and reporting them to the State. THR recognized approximately $39,128,000 and $23,957,000 in DSRIP revenue in 2015 and 2014, respectively, which was recorded as other operating revenue in the accompanying consolidated statements of operations and changes in net assets. This recognized revenue includes approximately $24,142,000 and $17,304,000 at December 31, 2015 and 2014, respectively, which are included in other receivables in the accompanying consolidated balance sheets. Approximately $512,000 and $2,951,000 at December 31, 2015 and 2014, respectively, have been recorded in other accrued liabilities in the accompanying consolidated balance sheets as a reserve for uncertainties surrounding the State of Texas capacity limits.

18 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

4. Section 1115 Waiver, continued

The Centers for Medicare & Medicaid Services (CMS) has reviewed certain funding arrangements, which include some THR hospitals, under the Waiver Program and their compliance with federal provider-related donation prohibitions to determine if any financing structure within the State Medicaid program violates federal law. On June 9, 2015, CMS authorized the current private-hospital funding arrangements in Texas to continue for waiver- payment dates through August, 2017, without risk of disallowance of federal matching funds. Waiver payments made to private hospitals after that date would be at risk if agreed-to changes are not made.

In addition, HHSC submitted to CMS on September 30, 2015, an 1115 Waiver Extension Application for the current Waiver program which expires September 30, 2016. HHSC is seeking feedback on transition year proposed changes to the Program Funding and Mechanics (PFM) Protocol for the DSRIP program. CMS has not approved the extension application, changes to the PFM Protocol, or UC funding beyond September 30, 2016. Considering these facts, there can be no assurance that THR will continue to receive DSRIP and UC payments after September 30, 2016.

5. Charity Care and Community Benefit

In accordance with its mission, the System commits substantial resources to sponsor a broad range of services for the indigent as well as the broader community. Community benefit provided to the indigent includes the cost of providing services to persons who cannot afford health care due to inadequate resources and/or to persons who are underinsured. This category of community benefit, in accordance with Texas law, includes the unreimbursed costs of traditional charity care as well as the estimated unreimbursed costs of care provided to beneficiaries of Medicaid and other indigent public programs. The System also benefits the communities it serves by providing facilities for the education and training of health care professionals and by participating in research activities that offer the potential of improving health care.

The System also promotes access to health care services by providing support for indigent care clinics; promotes community health education and wellness programs; supports other local community based non-profit organizations through charitable donations; and sponsors a variety of health-related support groups and programs. These activities are classified as community benefit under Texas law.

The System provides care to patients who meet criteria established under its financial assistance policy without charge or at amounts less than their established rates. Because the System does not pursue collection of amounts determined to qualify as charity care, they are not reported as net patient service revenue. When the System does not have the information required to properly determine charity status, the amounts owed by these individuals are classified as bad debt expense. The System estimates costs associated with charity care based on the ratio of cost to gross charges and applies this ratio to charity care gross charges. The System estimates direct and indirect costs associated with providing charity care was approximately $269,304,000 and $198,816,000 for the years ended December 31, 2015 and 2014, respectively. The System receives certain funds to offset or subsidize financial assistance provided from gifts or grants restricted for charity or indigent care. The amount of such funds recognized in unrestricted operations from such sources totaled approximately $963,000 and $707,000 for the years ended December 31, 2015 and 2014, respectively.

Effective January 1, 2015, THR no longer pursues collection of certain patient accounts that fall under its presumptive charity care specifications. Previously, collections were pursued and these accounts were included in revenue with a corresponding charge to bad debts if not collected. Under the new policy, such amounts are no longer recorded as revenue which correspondingly reduces the provision for bad debts. There has not been a significant impact to net patient service revenue as a result of this policy change.

19 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

5. Charity Care and Community Benefit, continued

THR (through certain wholly controlled tax-exempt and joint venture hospitals), Baylor Health Care System, HCA North Texas Division, and Methodist Hospitals of Dallas have created Dallas County Indigent Care Corporation (DCICC), and Tarrant County Indigent Care Corporation (TCICC), both Texas non-profit corporations, to provide joint community benefit programs and services. DCICC has entered into agreements with The University of Texas Southwestern Medical Center (UT Southwestern) to provide professional and technical services to indigent patients in Dallas County who seek medical care at Parkland Memorial Hospital and Healthcare System facilities. TCICC has entered into agreements with various physician groups to provide professional healthcare services to indigent persons in Tarrant County who present for care at John Peter Smith Hospital and Healthcare System facilities.

In 2013, THR (through certain wholly controlled tax-exempt hospitals) began participating in similar community benefit programs in other counties. These programs include: the Johnson County Community Care Corporation (JCCCC), which has entered into contracts with healthcare providers to pay for the care of indigent county residents: Collin County, where THR has entered into a contract with Primamed Physicians Association to pay for care of indigent county residents; and Denton County to provide hospital care for indigent county residents.

During 2015 and 2014, THR, on behalf of its participating hospitals, recorded expense of approximately $47,743,000 and $49,022,000, respectively, representing disbursements made for services listed above through DCICC, TCICC, JCCCC, and Collin and Denton Counties for providing services to indigent patients.

6. Investments

Short-Term Investments

The composition of short-term investments at December 31, 2015 and 2014 is set forth in the following table (dollars in thousands):

2015 2014

Fixed income securities $ 1,447 $ 1,414 Equity securities - 364

$ 1,447 $ 1,778

[Remainder of page intentionally left blank]

20 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

6. Investments, continued

Assets Limited as to Use

Assets limited as to use that are required for obligations classified as current liabilities are included in current assets in the consolidated balance sheets. The composition of assets limited as to use at December 31, 2015 and 2014 is set forth in the following table (dollars in thousands):

2015 2014

Internally designated: Cash and cash equivalents $ 2,623 $ 102 U.S. government securities 1,179 1,169 Fixed income securities 1,304,448 1,112,270 Equity securities 2,309,975 2,083,662 Mutual funds 586 516 Hedge funds 1,347 1,430 Donor-restricted special purpose and endowment funds: Cash and cash equivalents 1,134 1,399 Fixed income securities 37,187 35,084 Equity securities 89,695 91,617 Mutual funds - 42 Hedge funds - 82 Mineral interests 2,115 5,006 Real estate 18 2,618 Beneficial interest in perpetual trust, held in charitable remainder unitrusts, and held in charitable gift annuities: Cash and cash equivalents 361 350 Fixed income securities 2,186 2,023 Equity securities 5,077 5,819 Mutual funds 6,174 6,131 Mineral interests 950 1,292 Real estate 718 731 Other provisions: Cash and cash equivalents 42,693 32,269 Fixed income securities 38,368 - Equity securities 10,217 11,305

3,857,051 3,394,917 Less: Assets limited as to use - required for current liabilities (292,579) (204,902)

$ 3,564,472 $ 3,190,015

Excluded from the above table are promises to give of approximately $10,321,000 and $15,694,000 at December 31, 2015 and 2014, respectively that are included in assets limited as to use in the accompanying consolidated balance sheets.

21 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

6. Investments, continued

Assets Limited as to Use, continued

These promises to give are comprised of the following at December 31, 2015 and 2014 (dollars in thousands):

2015 2014

Unconditional promises to give before unamortized discount and allowance for uncollectibles $ 10,666 $ 16,315 Less: Unamortized discount (173) (208)

10,493 16,107 Less: Allowance for uncollectibles (172) (413)

Net unconditional promises to give $ 10,321 $ 15,694

Schedule of future amounts due: Less than one year $ 4,101 $ 7,532 One to five years 4,616 7,018 Over five years 1,949 1,765

Total $ 10,666 $ 16,315

Discount rates for these promises to give ranged from 0.61% to 4.59% and from 0.25% to 4.59% for the years ended December 31, 2015 and 2014, respectively.

THR and its wholly-controlled affiliates participate in a pooled, long term investment fund administered by THR. Amounts internally designated represent THR and its wholly-controlled affiliates pro rata share of the fund. These funds exist to provide liquidity for the System, to support its capital program, and to backstop short-term reserves as a buffer against interruption of business operations due to catastrophic events. The fund’s asset allocation is a reflection of the System’s investment objectives as stated in its investment policy statement. Prior to July 16, 2012, the fixed income securities in the pool, which are primarily U.S. government obligations, were designated as other-than-trading securities while the equity securities were designated as trading. As a result of modifications to THR’s investment policy statement effective July 16, 2012, all purchases of fixed income securities in the pool after this date are designated as trading securities.

Management evaluates THR and its wholly-controlled affiliates’ fixed income securities purchased prior to July 16, 2012 to determine whether any are deemed to be other-than- temporarily impaired due to credit worthiness of the bond issuers. There were no securities deemed to be other-than-temporarily impaired at December 31, 2015 or 2014.

At December 31, 2015, the fair value and gross unrealized losses on THR and its wholly- controlled affiliates’ fixed income securities that were purchased prior to July 16, 2012 and have been in a continuous unrealized loss position for twelve months or greater were approximately $13,025,000 and $61,000, respectively. At December 31, 2015, the fair value and gross unrealized losses on THR and its wholly-controlled affiliates’ fixed income securities that were purchased prior to July 16, 2012 and have been in a continuous unrealized loss position for less than twelve months were approximately $3,779,000 and $11,000, respectively. Because THR has the ability and intent to hold these investments until a market price recovery, which may be maturity, these investments are not considered other-than-temporarily impaired.

22 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

6. Investments, continued

Investment Income

Net realized investment income, included in revenue and gains in excess of expenses and losses in the consolidated statements of operations and changes in net assets, is comprised of the following for the years ended December 31, 2015 and 2014 (dollars in thousands):

2015 2014

Interest and dividends $ 58,598 $ 51,933 Realized gains, net 76,035 219,707

Total net realized investment income 134,633 271,640

Less: Net realized investment gain related to restricted funds (2,543) (5,551)

Net realized investment income, other than amount related to restricted funds $ 132,090 $ 266,089

7. Property and Equipment

A summary of property and equipment at December 31, 2015 and 2014 is as follows (dollars in thousands):

2015 2014

Land $ 144,912 $ 144,920 Buildings and improvements 2,109,248 2,043,737 Fixed equipment 429,817 385,494 Major movable equipment 1,020,909 981,538 Building and equipment under capital lease obligations 1,166 2,751

3,706,052 3,558,440 Less: Accumulated depreciation and amortization (1,985,071) (1,843,087)

1,720,981 1,715,353

Construction and renovation in progress 86,468 71,357

$ 1,807,449 $ 1,786,710

Depreciation and amortization expense related to property and equipment from continuing operations for the years ended December 31, 2015 and 2014 was approximately $210,721,000 and $204,581,000, respectively. Included in the above table is the cost, approximately $348,779,000 and $325,878,000, and accumulated depreciation, approximately $180,312,000 and $171,352,000, of land, buildings, and equipment held out for lease at December 31, 2015 and 2014, respectively.

23 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

7. Property and Equipment, continued

The System has several construction projects in progress, which include renovation and modernization of existing facilities and construction of new facilities. Total remaining estimated costs of these projects is approximately $163,510,000, of which the System has outstanding commitments of approximately $152,002,000 at December 31, 2015. Total interest capitalized during the years ended December 31, 2015 and 2014 was approximately $2,407,000 and $1,049,000, respectively.

The System recognizes a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. This applies to legal obligations to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The fair value of a liability for a legal obligation associated with the retirement of long-lived assets is recognized in the period in which it is incurred. The fair value, which approximates the cost a third party would incur in performing the tasks necessary to retire such assets, is recognized at the present value of expected future cash flows and is added to the carrying value of the associated asset and depreciated over the asset’s useful life.

Asset retirement obligations related to asbestos removal are recorded as other non-current liabilities in the accompanying consolidated balance sheets and totaled approximately $7,067,000 and $7,117,000 at December 31, 2015 and 2014, respectively. As a result of changes in estimated costs to abate certain types of asbestos, the System recorded increases to the liability and an increase in asbestos abatement expenses of approximately $495,000 and $808,000 during the years ended December 31, 2015 and 2014, respectively. Depreciation expense related to the associated assets was approximately $35,000 and $58,000 in 2015 and 2014, respectively. Additional accretion costs were approximately $325,000 and $313,000 for the years ended December 31, 2015 and 2014, respectively.

8. Long-Term Debt

A summary of long-term debt at December 31, 2015 and 2014 is as follows (dollars in thousands):

2015 2014

System Revenue Bonds (Texas Health Resources), Series 2015 (Taxable), fixed interest rate of 4.33%, due through 2055 $ 300,000 $ - System Revenue Bonds (Texas Health Resources), Series 2015A fixed interest rates of 4.25% and 5.00%, due through 2052 60,000 - System Tax-Exempt Loan (Texas Health Resources), The Northern Trust Company Private Loan, variable interest rates, due through 2033, (interest rate was 0.66% at December 31, 2015) 67,500 - System Tax-Exempt Loan (Texas Health Resources), UMB Bank N.A. Private Loan, variable interest rates, due through 2035, (interest rate was 0.84% at December 31, 2015) 67,220 - System Revenue Bonds (Texas Health Resources), Series 2012A (Taxable), fixed interest rate of 4.366%, due through 2047 100,000 100,000 System Revenue Bonds (Texas Health Resources), Series 2012B, variable interest rates, due through 2047 (interest rates were 0.01% and 0.18% at December 31, 2015 and 2014, respectively) 50,000 50,000 System Revenue Bonds (Texas Health Resources), Series 2010, fixed interest rate of 5.00%, due through 2040 157,550 157,550

24 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

8. Long-Term Debt, continued

2015 2014

System Tax-Exempt Loan (Texas Health Resources), Series 2010 Bank of America Private Loan, variable interest rates, (interest rate was 0.75% at December 31, 2014) - 67,375 System Tax-Exempt Loan (Texas Health Resources), Series 2010 Compass Private Loan, variable interest rates, (interest rate was 1.17% at December 31, 2014) - 67,500 System Revenue Bonds (Texas Health Resources), Series 2008A, 2008B, and 2008C, variable interest rates, due through 2033, (interest rates were 0.01% at December 31, 2015, and ranged from 0.14% to 0.18% at December 31, 2014) 176,055 176,055 System Revenue Bonds (Texas Health Resources), Series 2007A and 2007B, fixed interest rate of 5.00%, due through 2047 628,855 643,085 Term and Revolving Loans (Rockwall Regional Hospital, L.L.C.), variable interest rates, due through 2017, (interest rates ranging from 2.12% to 2.37% and 2.10% to 2.12% at December 31, 2015 and 2014, respectively) 35,214 39,171 Term and Revolving Loans (Flower Mound Hospital Partners, L.L.C.), fixed and variable interest rates, due through 2022, (interest rates ranging from 1.68% to 3.32% and 1.40% to 1.68% at December 31, 2015 and 2014, respectively) 90,163 92,895 Term and Revolving Loans (AMH Cath Labs, L.L.C.), variable interest rates, due through 2022, (interest rates ranging from 1.09% to 1.49% and 1.06% to 1.46% at December 31, 2015 and 2014, respectively) 19,096 19,964 Term Loan (Health Imaging Partners, LLC), fixed interest rate of 3.87%, due through 2020 18,201 23,872 Notes Payable (Health Imaging Partners, LLC), varying rates of interest, due through 2024, (interest rates ranging from 3.60% to 6.10% at December 31, 2015 and 2014) 11,305 12,547 Capital Lease Obligations, at imputed interest rates ranging from 5.00% to 6.48% collateralized by leased equipment 855 1,319 Other loans and notes payable, fixed and variable interest rates due through 2032 (interest rates ranging from 2.01% to 4.00% and 2.63% to 4.00% at December 31, 2015 and 2014, respectively) 35,126 32,662 1,817,140 1,483,995 Add: Unamortized original issue premium/discount, net 7,120 7,824 Less: Current portion of long-term debt (269,849) (216,243)

Long-term debt, net of current portion $ 1,554,411 $ 1,275,576

In December 2012, THR entered into credit agreements with Wells Fargo Bank N.A. and U.S. Bank N.A. for lines of credit of $75,000,000 each (the Credit Agreements). Under the Credit Agreements, outstanding balances under the lines of credit generally bear interest at a variable rate calculated as a percentage of LIBOR plus a spread. In December 2015, the Wells Fargo agreement was amended to extend the term date to December 28, 2016. The term date of the U.S. Bank agreement is December 31, 2017. At December 31, 2015 and 2014, there were no outstanding balances under these Credit Agreements.

25 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

8. Long-Term Debt, continued

THR issued Series 2015 Taxable (Series 2015 Taxable Bonds) and 2015A (Series 2015A Bonds) bonds (collectively the Series 2015 Bonds) through Tarrant County Cultural Education Facilities Finance Corporation (official statements dated April 28 and May 6, 2015) in the amounts of $300,000,000 and $60,000,000, respectively. The proceeds of the Series 2015 Bonds were used (a) to finance and or reimburse certain capital projects of THR, (b) to pay costs of issuance of the Series 2015 Bonds, and (c) for other eligible corporate purposes.

Effective July 31, 2015, THR refinanced tax-exempt advancing term loan agreements (Bank Loans) with Kansas City Financial Corporation, an affiliate of UMB Bank, N.A. (UMB) and The Northern Trust Company (Northern). The UMB bank loan was issued for $67,375,000 with a final maturity date of September 1, 2035, and an optional tender date of July 31, 2030. The Northern bank loan was issued for $67,500,000 with a final maturity date of December 1, 2033, and a mandatory tender date of July 31, 2025. Both new bank loans bear interest at variable rates calculated as a percentage of LIBOR plus a spread. The refinanced notes were effective November 2010, with Bank of America, N.A. and Compass Mortgage Corporation in the aggregate principal amount of $135,000,000. The proceeds of these Bank Loans were used (a) to pay costs of acquiring, constructing, renovating, remodeling and/or equipping capital improvements for certain THR tax-exempt health facilities; and (b) to pay certain costs incurred in connection with the Bank Loans.

THR issued Series 2012A (Series 2012A Bonds) and 2012B (Series 2012B Bonds) bonds (collectively the Series 2012 Bonds) through Tarrant County Cultural Education Facilities Finance Corporation (official statements dated September 27, 2012) in the amounts of $100,000,000 and $50,000,000, respectively. The proceeds of the Series 2012 Bonds were used to (a) finance and reimburse THR for the costs of the acquisition, construction, renovation, remodeling and/or equipping of capital improvements and (b) pay certain costs incurred in connection with the issuance of the Series 2012 Bonds. The Series 2012B Bonds are tax-exempt variable rate demand bonds, and are as such subject to periodic tender and remarketing provisions. The interest rates at which the bonds are remarketed are determined in accordance with the remarketing agreement applicable to the Series 2012B Bonds. Liquidity for payment of the Series 2012B Bonds tendered for purchase and not remarketed is provided by THR under a self liquidity program. As a result, THR has classified the Series 2012B Bonds as a current liability in the current portion of long-term debt. Actual scheduled principal repayment dates range from 2041 – 2047.

THR issued Series 2010 bonds (the Series 2010 Bonds) through the Tarrant County Cultural Education Facilities Finance Corporation (official statement dated November 11, 2010) in the amount of $157,550,000. The proceeds of the Series 2010 Bonds were used (a) to refund the Tarrant County Health Facilities Development Corporation Texas Health Resources System Revenue Bonds, Series 2008D, 2008F, and 2008G; and (b) to pay certain costs incurred in connection with the issuance of the Series 2010 Bonds and the provisions for payment of the refunded Series 2008D, 2008F, and 2008G Bonds.

26 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

8. Long-Term Debt, continued

THR issued Series 2008A-G bonds (the Series 2008 Bonds) through the Tarrant County Cultural Education Facilities Finance Corporation (official statement dated October 27, 2008) in the amount of $366,120,000. The proceeds of the Series 2008 Bonds were used (a) to refund the Tarrant County Health Facilities Development Corporation Texas Health Resources System Revenue Bonds, Series 2003 (the Series 2003 Bonds) ($300,000,000) and the Plano Health Facilities Development Corporation Unit Priced Demand Adjustable Revenue Bonds (Children’s and Presbyterian Healthcare Center of North Texas Project) Series 1989 (the Series 1989 Bonds) ($27,900,000); (b) to finance or refinance the purchase, development, construction, reconstruction, renovation, rehabilitation and/or equipping of certain THR tax-exempt health facilities ($35,900,000); and, (c) pay certain costs incurred in connection with the issuance of the Series 2008 Bonds and the provisions for payment of the refunded Series 2003 and Series 1989 Bonds. As previously discussed, THR defeased all of the outstanding Series 2008D, 2008F, and 2008G Bonds in November 2010, with proceeds from the issuance of the Series 2010 Bonds. In addition, THR redeemed all of the outstanding Series 2008E Bonds on November 22, 2010 at a purchase price equal to the principal amount ($36,140,000) thereof plus interest accrued thereon to the redemption date. THR used available cash to redeem the Series 2008E Bonds. In May 2015, THR remarketed the Series 2008C Bonds converting them from a daily to a weekly rate and converting the liquidity provision from a Standby Bond Purchase Agreement (SBPA) to self- liquidity.

The Series 2008 Bonds are variable rate demand bonds. Accordingly, the Series 2008 Bonds are subject to periodic tender and remarketing provisions. The interest rates at which the bonds are remarketed are determined in accordance with the remarketing agreement applicable to each series of the Series 2008 Bonds. Liquidity for payment of the outstanding Series 2008 Bonds tendered for purchase and not remarketed is provided by THR under a self liquidity program. As a result, THR has classified these series as current liabilities in the current portion of long-term debt. Actual scheduled principal repayment dates range from 2027 – 2033. Prior to the May 2015 remarketing, liquidity for payment of the Series 2008C Bonds tendered for purchase and not remarketed was provided by an SBPA with JPMorgan Chase Bank, N.A.

Concurrent with the issuance of the Series 1997 Bonds and amended in connection with the issuance of the Series 2008, Series 2012, and Series 2015 Bonds, THR entered into the Second Amended and Restated Master Trust Indenture (the Master Indenture). Among other requirements, THR granted a security interest in (a) certain of its revenue (as defined in the Master Indenture) and accounts receivable of the grantor; (b) all money and investments held or required to be held for the credit of the funds and accounts established by or under the Master Indenture; and (c) any and all property that may, from time to time, be subjected to the lien and security interest of the Master Indenture.

In April and May 2007, at THR’s request, Tarrant County Cultural Education Facilities Finance Corporation issued $597,840,000 of Refunding Revenue Bonds and $100,000,000 of Revenue Bonds, Series 2007A and 2007B, respectively. The proceeds of the Series 2007A Bonds were used (a) to provide payment of principal, redemption premium, and interest to redemption or maturity on $366,985,000 outstanding Series 1997A Bonds, $157,090,000 outstanding Series 1997B Bonds, and $68,745,000 outstanding Series 1997C Bonds, and (b) to pay certain costs incurred in connection with the issuance of the Series 2007A Bonds and the provisions for the refunded bonds. The proceeds of the sale of the Series 2007B Bonds were used (a) to pay or reimburse THR for the costs of acquiring, constructing, renovating, remodeling, and/or equipping capital improvements for THR and its tax-exempt controlled affiliates, and (b) to pay certain costs incurred in connection with the issuance of the Series 2007B Bonds.

27 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

8. Long-Term Debt, continued

On December 21, 2010, Rockwall entered into a Credit Agreement with JPMorgan Chase Bank N.A (the Chase Agreement). The Chase Agreement provides Rockwall with a Real Estate Term Loan of $42,000,000, an Equipment Term Loan of $13,000,000, and a Revolving Loan of $5,000,000 to be used as working capital. Under the Chase Agreement, outstanding balances bear interest based on a one-, two-, or three-month LIBOR rate, plus 1.95%. The Real Estate Term Loan and Equipment Term Loan had outstanding balances of approximately $31,500,000 and $3,714,000, and $33,600,000 and $5,571,000 at December 31, 2015 and 2014, respectively. There were no amounts outstanding on the Revolving Loan as of December 31, 2015 and 2014.

On January 13, 2011, Rockwall entered into a forward-starting swap agreement with JPMorgan Chase with respect to the $42,000,000 Real Estate Term Loan. This swap is intended to reduce the financial risk related to rising LIBOR interest rates by executing a cash flow hedge that will convert the floating rate exposure to a fixed rate hedge instrument. The fixed rate on this hedge is 2.70%, with a start date of January 31, 2011 and ending date of December 31, 2017. The fair value of the swap was a liability of approximately $1,026,000 at December 31, 2015, of which approximately $626,000 is expected to be reclassified into earnings during the next twelve months and is included in other accrued liabilities with the remainder included in other noncurrent liabilities on the accompanying consolidated balance sheets. The fair value of the swap was a liability of approximately $1,473,000 at December 31, 2014, of which approximately $784,000 is included in other accrued liabilities with the remainder included in other noncurrent liabilities on the accompanying consolidated balance sheets. The increase or decrease in the fair value for the ineffective portion of the swap is recorded in other nonoperating gains (losses) in the accompanying consolidated statements of operations and changes in net assets and amounted to approximately $(54,000) and $(57,000) for the years ended December 31, 2015 and 2014, respectively. The remainder of the increase or decrease in the fair value for the years ended December 31, 2015 and 2014 is recorded in other changes in unrestricted net assets and revenue and gains in excess of expenses and losses attributable to non-controlling interest in the accompanying consolidated statements of operations and changes in net assets. Realized gains and losses (settlements) on interest hedge derivatives are recorded as adjustments to interest expense in the statements of operations and are included in cash flows from operating activities in the statements of cash flows. For the years ended December 31, 2015 and 2014, settlements totaled approximately $836,000 and $901,000, respectively.

On February 28, 2008, Flower Mound entered into a Credit Agreement (the Agreement) with various lending institutions with JPMorgan Chase Bank, NA acting as agent for the lenders. The Agreement provides Flower Mound with an Advancing Term Loan Commitment of $105,000,000 and a Revolving Loan Commitment of $3,000,000 to be used as working capital. During 2014, the Agreement was amended to provide additional Term Loans of $11,280,000, comprised of a fixed rate term loan of $7,896,000 and a variable rate term loan of $3,384,000 bearing interest at LIBOR plus 1.43%. On December 22, 2015, Flower Mound refinanced its Advancing Term Loan Commitment with an amended and restated credit agreement with JP Morgan Chase. The refinanced agreement provides Flower Mound with a Term Loan of $81,176,000 comprised of a fixed rate term loan of $57,400,000 bearing interest at 3.32% and a variable rate term loan of $23,776,000 bearing interest on one-, two-, three-, or six-month LIBOR, plus 1.43%. The balance outstanding on all Term Loans as of December 31, 2015 and 2014 was approximately $90,163,000 and $92,895,000, respectively. There were no amounts outstanding on the Revolving Loan as of December 31, 2015 and 2014.

28 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

8. Long-Term Debt, continued

On March 10, 2008, Flower Mound entered into a forward-starting interest swap agreement with JPMorgan Chase with respect to $73,500,000 of the Advancing Term Loan. This swap was intended to reduce the financial risk related to rising LIBOR interest rates by executing a cash flow hedge that converted the floating rate exposure to a fixed rate hedge instrument. The fixed rate on the hedge was 4.76% with a start date of September 30, 2009. The interest swap agreement was terminated on December 22, 2015 as part of the refinancing discussed above with a settlement payout of approximately $4,433,000, of which approximately $523,000 was a payment of accrued interest, and approximately $3,910,000 was a payment to settle outstanding swap liabilities. The fair value of the swap was a liability of approximately $5,588,000 at December 31, 2014, of which approximately $2,430,000 is included in other accrued liabilities with the reminder included in other noncurrent liabilities on the accompanying consolidated balance sheets. For the year ended December 31, 2015, the increase in the fair value prior to the termination of approximately $1,678,000 is recorded in other nonoperating gains (losses) in the accompanying consolidated statement of operations and changes in net assets. For the year ended December 31, 2014, approximately $714,000 of the increase in the fair value is recorded in other changes in unrestricted net assets and approximately $1,280,000 of the increase in fair value is recorded in other nonoperating gains (losses) in the accompanying consolidated statements of operations and changes in net assets. For the years ended December 31, 2015 and 2014, settlements totaled approximately $2,438,000 and $2,749,000, respectively.

On December 28, 2011, ACL entered into Loan Agreements with Bank of America, N.A. (the Agreements). The Agreements provide ACL with a ten year floating rate Service Line Term Loan of $15,300,000, a seven year floating rate Equipment Term Loan of $6,400,000, and a five year floating rate Revolving Line of Credit of $10,000,000. The loans bear interest at LIBOR plus a credit spread of 1.3% for the Service Line Term Loan and 0.9% for the Equipment Term Loan and Revolving Line of Credit. Balances outstanding as of December 31, 2015 and 2014, respectively, were approximately $13,464,000 and $14,076,000 on the Service Line Term Loan and approximately $5,632,000 and $5,888,000 on the Equipment Term Loan. There was no outstanding balance on the Revolving Line of Credit as of December 31, 2015 and 2014.

On December 22, 2011, ACL entered into Interest Rate Swap Agreements with Bank of America N.A. with respect to the Service Line and Equipment Term Loans. These swaps are intended to reduce the financial risk related to rising LIBOR interest rates by executing a cash flow hedge that will convert the floating rate exposure to a fixed rate hedge instrument. The fixed rate on the Service Line Term Loan hedge is 2.0025%, with a start date of December 28, 2011 and ending date of January 1, 2022. The fixed rate on the Equipment Term Loan hedge is 1.6470%, with a start date of December 28, 2011 and ending date of January 1, 2019. The fair value of the swaps at December 31, 2015 and 2014 was a liability of approximately $315,000 and $188,000, respectively, and is included in other noncurrent liabilities on the accompanying consolidated balance sheets. All of the increase or decrease in the fair value of the swaps for the years ended December 31, 2015 and 2014 is recorded in other changes in unrestricted net assets and revenue and gains in excess of expenses and losses attributable to non-controlling interest in the accompanying consolidated statements of operations and changes in net assets. For the years ended December 31, 2015 and 2014, settlements totaled approximately $353,000 each year.

29 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

8. Long-Term Debt, continued

In December 2013, HIP entered into a Senior Secured Credit Facility with KeyBank National Association (the Credit Facility). The Credit Facility provides HIP with a seven year fixed rate Term Loan of $28,500,000 and a two year fixed or floating rate Revolving Line of Credit of $3,000,000. The Term Loan bears interest at 3.87% and the Revolving Line of Credit bears interest at either a floating rate advance or a LIBOR rate advance based on timing of when the advance is made. The balance outstanding on the Term Loan as of December 31, 2015 and 2014 was approximately $18,201,000 and $23,872,000, respectively. The balance outstanding on the Revolving Line of Credit as of December 31, 2015 and 2014 was approximately $35,000 and $81,000, respectively.

Scheduled principal repayments on long-term debt are as follows (dollars in thousands):

Principal Scheduled Based on Year Ending Principal Liquidity December 31, Payments Provisions

2016 $ 43,794 $ 269,849 2017 71,235 71,235 2018 38,477 38,477 2019 41,906 41,906 2020 38,300 38,300 Thereafter 1,583,428 1,357,373

Total $ 1,817,140 $ 1,817,140

Unamortized bond and debt issuance costs at December 31, 2015 and 2014 were approximately $9,193,000 and $5,715,000, respectively, and are included in other assets in the accompanying consolidated balance sheets.

The Master Indenture, Bank Loans and Credit Agreements contain various covenants which require, among other things, the maintenance of certain financial ratios and certain other restrictions. Management believes THR is in compliance with its covenants as of December 31, 2015.

9. Net Assets

Temporarily Restricted Net Assets

Temporarily restricted net assets at December 31, 2015 and 2014 were restricted for the following purposes (dollars in thousands):

2015 2014

Capital improvements $ 23,104 $ 25,367 Education and training 18,626 23,268 Patient care 17,845 15,800 Research 9,381 9,737 Community outreach 6,732 13,581 Other restricted purposes 9,049 10,868

$ 84,737 $ 98,621

30 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

9. Net Assets, continued

Permanently Restricted Net Assets

Permanently restricted net assets at December 31, 2015 and 2014 were restricted by donors to be maintained by THR in perpetuity for the following purposes (dollars in thousands):

2015 2014

Education and training $ 24,681 $ 24,502 Patient care 12,426 12,515 Research 12,383 12,374 Capital improvements 3,669 3,665 Community outreach 2,627 2,626 Other restricted purposes 13,081 13,810

$ 68,867 $ 69,492

10. Endowment

The System’s endowments consist of donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. Net assets associated with endowment funds, including funds designated by the Board of Trustees to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions.

Based on the interpretation of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) by the Board of Trustees, the guidance in FASB ASC 958-205, Not-for-Profit Entities Presentation of Financial Statements, and absent explicit donor stipulations to the contrary, the System classifies the original value of gifts donated to the permanent endowment as well as accumulations to the permanent endowment made at the direction of the donor or by policy as permanently restricted net assets. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the System in a manner consistent with the standard of prudence prescribed in UPMIFA.

In accordance with UPMIFA, the System considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds:

(1) The duration and preservation of the fund (2) The purposes of the Foundation and the donor-restricted endowment fund (3) General economic conditions (4) The possible effect of inflation and deflation (5) The expected total return from income and the appreciation of investments (6) Other resources of the Foundation (7) The investment policies of the Foundation

31 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

10. Endowment, continued

Changes in the System’s invested endowment assets for the years ended December 31, 2015 and 2014 are as follows (dollars in thousands):

Board Designated Endowment Donor- Restricted Funds Endowment Funds Total Temporarily Permanently Endowment Unrestricted Restricted Restricted Funds

Balance at December 31, 2013 $ 53,344 $ 39,283 $ 50,933 $ 143,560

Contributions collected - - 4,435 4,435 Interest and dividends 133 1,635 - 1,768 Realized and unrealized gains, net 2,682 1,271 987 4,940 Amounts appropriated for expenditure (144) (1,611) - (1,755)

Balance at December 31, 2014 56,015 40,578 56,355 152,948

Contributions collected - - 575 575 Interest and dividends 592 1,229 - 1,821 Realized and unrealized gains (losses), net (1,064) (5,773) 53 (6,784) Amounts appropriated for expenditure (269) (3,717) - (3,986)

Balance at December 31, 2015 $ 55,274 $ 32,317 $ 56,983 $ 144,574

From time to time, the fair value of assets associated with an individual donor-restricted endowment fund may fall below the original value of the fund. In accordance with GAAP, deficiencies of this nature are reported in unrestricted net assets and were approximately $22,000 as of December 31, 2015. These deficiencies resulted from unfavorable market fluctuations that occurred after the investment of permanently restricted contributions and continued appropriation for certain programs that were deemed prudent by the Board of Trustees. There were no deficiencies of this nature as of December 31, 2014.

The System has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Under this policy, the endowment assets are invested in securities and other instruments which compliment or balance one another, thereby reducing risk without significantly reducing average returns.

To satisfy its long-term rate-of-return objectives, the System relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The System targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints.

The System has spending policies that allow up to 4% of the endowment to be appropriated for expenditure unless otherwise stipulated in the donor agreement, calculated after the endowment principal has been increased by the annual Consumer Price Index. This is consistent with the System’s objectives to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth.

32 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

11. Non-Controlling Interests

The System controls and therefore consolidates certain investments in its joint ventures with physicians and non-physicians to operate hospitals and other health related ventures. The activity for non-controlling interests for the years ended December 31, 2015 and 2014 is summarized below (dollars in thousands):

2015 2014

Non-controlling ownership interest in equity of consolidated affiliates, beginning of year $ 92,106 $ 76,791 Revenue and gains in excess of expenses and losses attributable to non-controlling interest 67,306 64,077 Non-controlling interest in change in fair value of interest rate swap agreements 298 310 Contributions from non-controlling interest holders 4,933 3,847 Distributions to non-controlling interest holders (62,643) (52,919)

Non-controlling ownership interest in equity of consolidated affiliates, end of year $ 102,000 $ 92,106

12. Retirement Plans

The System has various plans, primarily defined contribution plans, which cover eligible full-time and part-time employees of the System. Plan contributions, included in salaries, wages, and employee benefits in the consolidated statements of operations and changes in net assets, were approximately $60,788,000 and $56,083,000 for the years ended December 31, 2015 and 2014, respectively.

13. Federal and State Income Taxes

The System has certain subsidiaries and operations such as joint venture interests, retail pharmacies and outside laboratory services that are taxable for federal income tax purposes. The taxable activities of all includible entities have approximately $458,000 and $431,000 in net deferred tax assets, against which a 100% valuation allowance has been recorded, for the years ended December 31, 2015 and 2014, respectively. While the System expects to generate taxable income from certain activities in the future, the valuation allowance has been recorded because the System does not believe taxable income will be incurred by the entities that generated the net deferred tax assets.

The Texas franchise tax applies to certain of the System’s consolidated for-profit and joint venture interests. Under this law, tax is calculated on a margin base and is therefore reflected in the System’s statements of operations and changes in net assets as income tax expense.

During 2014, THR received notification from the IRS supporting THR's position that earnings from controlled joint ventures do not constitute Unrelated Business Income (UBI); therefore, THR reversed its accruals pending the appeal process. The total impact of the appeal was approximately $29,632,000.

Federal and state income tax expense (benefit) of approximately $4,608,000 and $(24,109,000) is included in the consolidated statements of operations and changes in net assets for the years ended December 31, 2015 and 2014, respectively.

33 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

14. Concentrations of Credit Risk

Financial institutions that potentially subject the System to concentrations of credit risk consist of deposits in banks and investments in excess of the Federal Deposit Insurance Corporation, Securities Investor Protection Corporation and other privately insured limits. The System has not experienced any credit losses on these financial instruments.

The hospitals and physician practices grant credit without collateral to their patients, most of whom are local residents and are insured under third-party payor agreements. The mix of gross receivables from patients and third-party payors at December 31, 2015 and 2014 is as follows:

2015 2014

Medicare 19% 20% Medicare Managed Care 13% 11% Medicaid 2% 3% Medicaid Managed Care 5% 5% Managed care organizations 47% 43% Other third-party payors 3% 3% Patients 11% 15%

100% 100%

15. Commitments and Contingencies

Management evaluates contingencies based upon available evidence. In addition, allowances for losses are provided each year for disputed items which have continuing significance. Management believes that allowances for losses have been provided to the extent necessary and that its assessment of contingencies is reasonable. Due to the inherent uncertainties and subjectivity involved in accounting for contingencies, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. To the extent that the resolution of contingencies results in amounts which vary from management’s estimates, future operating results will be charged or credited. The principal commitments and contingencies are described below:

Professional and General Liability Insurance

The System has known professional and general liability claims and incidents that may result in the assertion of claims, as well as exposure from unknown incidents that may be asserted. In connection with these risks, THR maintains a self-insurance program for the professional and general liabilities of THR and its wholly-controlled affiliates whereby undiscounted reserves are recorded based on actuarial estimates from an independent third-party actuary. The self- insurance program includes coverage for general liability exposure of THPG. In connection with the self-insurance program, THR formed Grace Indemnity Company, Ltd., a wholly-owned captive insurance company in December 2014, for the purpose of paying professional liability and general liability claims. Prior to January 1, 2015, THR maintained trust funds, which held assets for the purpose of paying potential professional liability and general liability claims. The System also purchases insurance for professional liability and general liability claims in excess of THR’s self-insurance retention level.

The System purchased claims-made professional liability coverage from commercial carriers for providers employed by THPG until December 31, 2014. The captive will also be used to pay historical professional liabilities of THPG that occurred and are unknown prior to December 31, 2014, and all known and unknown liabilities that occur on or after January 1, 2015. The System’s consolidated joint ventures each maintain separate professional and general liability insurance programs covering their risks individually.

34 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

15. Commitments and Contingencies, continued

Professional and General Liability Insurance, continued

The System’s established liability for professional and general liability claims was approximately $30,456,000 and $30,459,000 at December 31, 2015 and 2014, respectively, and is recorded in other accrued liabilities and other non-current liabilities in the accompanying consolidated balance sheets.

Workers’ Compensation Insurance

The System purchases workers’ compensation insurance from commercial carriers with per claim deductibles and aggregate limits. Accrued claims include estimates for known claims and incidents incurred but not reported at December 31, 2015 and 2014, respectively. The System’s established liability for workers’ compensation claims was approximately $5,186,000 and $8,171,000 at December 31, 2015 and 2014, respectively, and is recorded in other accrued liabilities in the accompanying consolidated balance sheets.

Employee Health Insurance

THR maintains a self-insurance medical plan for the employees of THR and its wholly-controlled affiliates. Accrued claims include estimates for known claims and services incurred but not reported at December 31, 2015 and 2014, respectively. THR also purchases stop-loss insurance to limit its losses on claims for medical expenses. The System’s consolidated joint ventures each maintain separate employee health insurance programs. The System’s established liability for employee health claims was approximately $18,398,000 and $17,391,000 at December 31, 2015 and 2014, respectively, and is recorded in accrued salaries, wages, and employee benefits in the accompanying consolidated balance sheets.

Guarantees of Indebtedness

The Tax-Exempt Hospitals guaranteed approximately $22,558,000 and $21,957,000 of patient notes purchased by banks at December 31, 2015 and 2014, respectively. The System recorded a contingent liability of approximately $6,705,000 and $6,339,000 at December 31, 2015 and 2014, respectively, for these guarantees based on historical default rates.

In February, 2013, THR entered into a limited guaranty agreement with JPMorgan Chase Bank, N.A. (JPM) for 51% of any indebtedness outstanding between JPM and USMD Arlington. In May, 2013, THR entered into a limited guaranty agreement with Southwest Bank for 51% of any indebtedness outstanding between Southwest Bank and USMD Fort Worth up to a maximum guaranty amount of $6,150,000. In September 2015, the limited guaranty agreement for USMD Arlington was amended in conjunction with their debt refinancing. At December 31, 2015 and 2014, THR’s share of principal on USMD Arlington’s and USMD Fort Worth’s outstanding indebtedness was approximately $22,817,000 and $4,645,000, and $16,282,000 and $5,486,000, respectively. Payments are due from THR if USMD Arlington or USMD Fort Worth is unable to fulfill its obligations at the scheduled payment dates. As of December 31, 2015, it is not probable that THR will be required to make significant payments under the limited guaranty agreements. No amounts have been recorded in the accompanying consolidated financial statements for these guarantees.

Litigation

The System is a party to several legal actions arising in the ordinary course of its business. In management’s opinion, the System has adequate legal defenses, insurance coverage, and (or) self-insured retention for each of these actions, and management estimates that these matters will be resolved without material adverse effect on the System’s future financial position, results of operations, or cash flows.

35 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

15. Commitments and Contingencies, continued

Regulatory Compliance

The health care industry is subject to numerous laws and regulations of federal, state, and local governments and compliance can be subject to future review and interpretation as well as the possible emergence of regulatory actions unknown or unasserted at this time. Management believes that the System is in substantial compliance with applicable government laws and regulations. Regulatory inquiries and voluntary reports may be made from time-to-time. It is management’s policy to cooperate fully in resolving any such reports or inquiries.

In March 2015, the System made a disclosure to the Office of Inspector General (OIG) regarding THPG billing of certain PET scan tests and nuclear stress tests that did not meet Medicare medical necessity requirements. Management believes it is too early to predict with certainty the outcome of this matter; however, management does not anticipate a material financial impact.

THR’s Corporate Compliance Department investigates all compliance matters reported through its compliance program. As of the date of these financial statements, there was no additional pending or, to the knowledge of System management, threatened litigation, including professional liability claims, or reported compliance issues which in the opinion of System management involves any substantial risk of material liability for the System, and where applicable, in excess of available reserves and insurance coverage. In management’s opinion, the System does not expect the resolution of any known regulatory compliance matters to have a material adverse effect on the System’s future financial position, results of operations, or cash flows.

Operating Leases

The System leases various equipment and facilities under operating leases expiring at various dates through 2030. Total rental expense, included in other operating expenses in the consolidated statements of operations and changes in net assets, was approximately $72,569,000 and $77,602,000 for the years ended December 31, 2015 and 2014, respectively.

The following is a five year schedule, by year, of future minimum lease payments under non- cancelable operating leases that have initial terms in excess of one year as of December 31, 2015 (dollars in thousands):

Year Ending December 31,

2016 $ 49,708 2017 45,523 2018 34,498 2019 22,302 2020 17,243 Thereafter 53,494

$ 222,768

The System leases office space and land at fair market value to non-THPG physicians, health care related businesses, and others under operating leases expiring at various dates through 2072. Total rental income, included in other operating revenue and other non-operating gains in the consolidated statements of operations and changes in net assets, was approximately $31,226,000 and $33,535,000 for the years ended December 31, 2015 and 2014, respectively.

36 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

15. Commitments and Contingencies, continued

Operating Leases, continued

The following is a five-year schedule, by year, of future minimum rental income payments under non-cancelable leases that have initial terms in excess of one year as of December 31, 2015 (dollars in thousands):

Year Ending December 31,

2016 $ 24,594 2017 19,189 2018 14,658 2019 10,966 2020 8,844 Thereafter 109,303

$ 187,554

16. Functional Operating Expenses

The System provides general and comprehensive health care services to residents within its geographic locations. Operating expenses related to providing these services for the years ended December 31, 2015 and 2014 were as follows (dollars in thousands):

2015 2014

Patient care services $ 3,356,187 $ 3,238,342 General and administrative 544,392 490,798 Research and physician education 15,474 16,050 Fundraising 6,127 5,974

$ 3,922,180 $ 3,751,164

17. Fair Value Measurements

The System follows the provisions of FASB ASC 820, Fair Value Measurements and Disclosures, for its financial assets and liabilities that are measured and reported at fair value each reporting period. The financial assets recorded at fair value on a recurring basis primarily relate to investments, assets limited as to use, interest rate swap agreements, and contributions receivable from split-interest agreements. FASB ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

37 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

17. Fair Value Measurements, continued

The following tables present information about the System’s assets and liabilities (dollars in thousands) that are measured at fair value on a recurring basis as of December 31, 2015 and 2014, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The System’s assets limited as to use that are categorized as Level 3, or valued using significant unobservable inputs, primarily represent an investment in the Texas Methodist (formerly Central Texas Methodist) Foundation, contributions receivable from split-interest agreements and an endowment fund primarily holding mineral interests that are valued based on a multiple of annual revenues.

Quoted Prices Significant in Active Other Significant Markets for Observable Unobservable Identical Assets Inputs Inputs 2015 (Level 1) (Level 2) (Level 3)

Cash and cash equivalents $ 46,811 $ 45,868 $ 943 $ - Domestic equity securities: Cash equivalents 35,645 35,645 - - Mutual funds 87,166 87,166 - - Common collective trust 230,933 230,933 - - Energy 76,196 75,870 326 - Materials 71,000 71,000 - - Industrials 105,468 105,468 - - Consumer discretionary 194,211 193,797 414 - Consumer staples 73,007 72,706 301 - Health care 235,282 234,495 787 - Financials 332,596 331,817 779 - Information technology 348,254 348,181 73 - Telecommunication services 30,123 29,862 261 - Utilities 29,011 28,956 55 - Other 16,408 12,899 3,509 - International equity securities: Mutual funds 245,535 245,535 - - Common collective trusts 304,129 304,129 - - Fixed income securities: Cash equivalents 35,915 - 35,915 - U.S. Government 38,422 - 38,422 - Corporate bonds 264,035 - 264,035 - Agency mortgages 485,628 - 485,628 - U.S. Agencies 556,827 - 556,827 - Other 2,809 - 2,809 - Mutual funds (blended securities) 6,760 586 6,174 - Hedge funds 1,347 - 1,347 - Texas Methodist Foundation 1,179 - - 1,179 Real estate 736 - 718 18 Mineral interests 3,065 - - 3,065 Contributions receivable from split-interest agreements 1,574 - - 1,574

Total assets $ 3,860,072 $ 2,454,913 $ 1,399,323 $ 5,836

Interest rate swap agreements $ (1,340) $ - $ (1,340) $ -

38 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

17. Fair Value Measurements, continued

Quoted Prices Significant in Active Other Significant Markets for Observable Unobservable Identical Assets Inputs Inputs 2014 (Level 1) (Level 2) (Level 3)

Cash and cash equivalents $ 34,122 $ 32,895 $ 1,227 $ - Domestic equity securities: Cash equivalents 40,412 40,412 - - Mutual funds 114,907 114,907 - - Common collective trust 294,119 294,119 - - Energy 90,379 89,980 399 - Materials 59,608 59,608 - - Industrials 113,341 113,341 - - Consumer discretionary 244,981 244,586 395 - Consumer staples 76,012 75,728 284 - Health care 179,537 178,773 764 - Financials 292,862 292,043 819 - Information technology 308,675 308,594 81 - Telecommunication services 34,717 34,456 261 - Utilities 23,878 23,807 71 - Other 17,300 13,499 3,801 - International equity securities: Mutual funds 149,514 149,514 - - Common collective trust 152,156 152,156 - - Fixed income securities: Cash equivalents 79,145 - 79,145 - U.S. Government 30,121 - 30,121 - Corporate bonds 225,865 - 225,865 - Agency mortgages 361,743 - 361,743 - U.S. Agencies 451,743 - 451,743 - Other 2,175 - 2,175 - Mutual funds (blended securities) 7,137 591 6,546 - Hedge funds 1,430 - 1,430 - Texas Methodist Foundation 1,169 - - 1,169 Real estate 3,349 - 3,331 18 Mineral interests 6,298 - - 6,298 Contributions receivable from split-interest agreements 1,690 - - 1,690

Total assets $ 3,398,385 $ 2,219,009 $ 1,170,201 $ 9,175

Interest rate swap agreements $ (7,250) $ - $ (7,250) $ -

Included in assets limited as to use in the accompanying consolidated balance sheets is approximately $8,747,000 and $14,004,000 at December 31, 2015 and 2014, respectively, of pledges receivable that have been excluded from the above tables.

The System’s policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. During the year ended December 31, 2014, the System reallocated approximately $140,000,000 in funds within its long term investment pool from equity managers to its bond portfolio representing a transfer from level 1 to level 2. There were no such reallocations during the year ended December 31, 2015.

39 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

17. Fair Value Measurements, continued

The change in the fair value of the System’s assets limited as to use valued using significant unobservable inputs (Level 3) is shown below (dollars in thousands):

2015 2014

Fair value recorded at beginning of year 9,175$ 9,600$

Net contributions/withdrawals - (139) Adjustment to record increase in estimated fair value due to realized investment gains 9 9 Adjustment to record increase (decrease) in estimated fair value due to unrealized gains (losses) (3,232) (542) Change in value of splilt-interest agreements (116) 247

Fair value recorded at end of year 5,836$ 9,175$

The adjustment to record the increase (decrease) in estimated fair value due to realized and unrealized gains (losses) on the investments valued using significant unobservable inputs is included in changes in temporarily and permanently restricted net assets in the accompanying consolidated statements of operations and changes in net assets. The change in value of split- interest agreements on the investments valued using significant unobservable inputs is included in changes in unrestricted and temporarily restricted net assets in the accompanying consolidated statements of operations and changes in net assets. The increase in unrealized gains (losses) relating to assets still held at December 31, 2015 and 2014 is approximately $(3,201,000) and $(542,000), respectively.

The following methods and assumptions were used by the System in estimating the fair value of its financial instruments:

Cash and Cash Equivalents

The carrying amounts, at face value or cost plus accrued interest, approximate fair value because of the short maturity of these instruments.

Equity Securities

Equity securities held by THR or held in trust controlled by THR are measured using quoted market prices. Equity securities held in trust not controlled by THR are measured using the net asset value of the trust based on the fair value of underlying securities, which are measured using quoted market prices.

Fixed Income Securities

Fixed income securities are measured using quoted market prices, if available, or estimated using quoted market prices for similar assets.

Common Collective Trusts

Investments in common collective trusts may be accessed at any time at the net asset value as reported by the manager on a daily basis. THR’s interest in these trusts contains no other rights or obligations. As such, net asset value represents fair value for these investments. Each common collective trust invests in either equity or fixed income securities.

40 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

17. Fair Value Measurements, continued

Mutual Funds

Values of investments in mutual funds are based on quoted market prices for publicly traded funds and net asset values for funds that are not publicly traded. THR’s interest in these funds contains no other rights or obligations. As such, net asset value represents fair value for these investments. Each fund invests in either equity or fixed income securities.

Hedge Funds

Values of investments in hedge funds are based on net asset value as estimated by the general partner of the hedge fund based on the underlying securities which are primarily level 1 and 2 financial instruments and reviewed by management of THR.

Texas Methodist Foundation

The value of the investment in the Texas Methodist Foundation is estimated by the manager of the foundation based on the valuation of loans made by the foundation.

Real Estate

Investments in real estate are measured by private valuations.

Mineral Interests

Investments in mineral interests are estimated based on a multiple of annual revenues.

Contributions Receivable from Split-Interest Agreements

The fair value of the contribution is measured at the present value of the estimated future cash receipts from the trust’s assets.

Long-Term Debt

Fair value of the System’s long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the System for debt of the same remaining maturities and is therefore classified as Level 2 under the fair value hierarchy. The carrying amounts and fair value of the System’s long-term debt at December 31, 2015 and 2014 were as follows (dollars in thousands):

Book Value Estimated Fair Value 2015 2014 2015 2014

Fixed rate $ 1,328,169 $ 932,330 $ 1,508,911 $ 985,975 Variable rate 476,158 537,265 476,158 537,265 Other 19,933 22,224 19,933 22,224

$ 1,824,260 $ 1,491,819 $ 2,005,002 $ 1,545,464

Interest Rate Swap Agreements

Current market pricing models were used to estimate fair values of interest rate swap agreements.

41 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

17. Fair Value Measurements, continued

Other Financial Instruments

The carrying amount reported in the consolidated balance sheets for cash and cash equivalents, receivables, accounts payable, estimated third-party settlements, accrued salaries, wages, and employee benefits, and other accrued liabilities approximates its fair value due to the short-term nature of these financial instruments.

18. Investments in Unconsolidated Affiliates

THR and its controlled affiliates participate with other organizations, physicians, and non- physicians to provide health care related services. At December 31, 2015, THR and its controlled affiliates own interests in Community Hospice of Texas (Hospice), a provider of hospice services; North Central Texas Services (d/b/a CareFlite) (CareFlite), a provider of helicopter, fixed wing and ground ambulance services; North Texas Health Care Laundry Cooperative Association (NTHC Laundry), a provider of laundry services; USMD Arlington and USMD Fort Worth, short- stay hospitals; Imaging Center Partnership, L.L.P. (d/b/a Southwest Diagnostic Imaging Center) (SDIC), a provider of outpatient diagnostic imaging services; Texas Health Huguley, Inc. (d/b/a Texas Health Huguley Hospital Fort Worth South) (Huguley), an acute care hospital; 13 ambulatory surgery centers; two endoscopy centers; and other joint ventures.

In October, 2014, Optum, an information and technology-enabled health services business, acquired MedSynergies, Inc. (MSI), which provides physician practice management, revenue management, physician referral management and other business services to physician groups aligned with large health systems. THR had an investment in MSI and recorded a gain of approximately $74,480,000 related to the transaction, which is included in net realized investment income and gains in the consolidated statements of operations and changes in net assets. MSI will continue to provide certain management services to THPG.

The ownership interests, carrying amounts, and equity in earnings of investments in unconsolidated affiliates at December 31, 2015 and 2014 were as follows (dollars in thousands):

Ownership Interest Carrying Value Equity in Earnings 2015 2014 2015 2014 2015 2014

Surgery Centers 51.0% - 80.3% 51.0% - 80.3%$ 54,768 45,104$ 31,273$ 21,599$ Huguley 51.0% 51.0% 51,760 42,872 8,888 13,226 USMD Arlington 51.0% 51.0% 28,307 25,370 10,539 9,746 Endoscopy Centers 51.0% 51.0% 25,253 24,253 9,897 5,097 Hospice 50.0% 50.0% 20,152 19,767 385 1,973 USMD Fort Worth 51.0% 51.0% 12,836 12,156 1,148 3,958 CareFlite 50.0% 50.0% 9,549 8,331 843 2,641 NTHC Laundry 45.6% 45.8% 5,031 4,770 473 884 SDIC 50.0% 50.0% 1,634 1,507 3,661 3,770 Others 1.2% - 30.0% 1.2% - 51.0% 1,428 2,022 1,668 1,852

$ 210,718 $ 186,152 $ 68,775 64,746$

The equity in earnings of unconsolidated affiliates providing services that the System does not provide as part of its routine services are included in nonoperating gains (losses) in the accompanying consolidated statements of operations and changes in net assets. All others are included in operating revenue.

42 TEXAS HEALTH RESOURCES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

19. Related-Party Transactions

THR incurred expenses for purchased services from NTHC Laundry of approximately $9,782,000 and $9,141,000 for the years ended December 31, 2015 and 2014, respectively, which is recorded in other operating expenses in the accompanying consolidated statements of operations and changes in net assets. Amounts due to NTHC Laundry, which total approximately $988,000 and $1,056,000 at December 31, 2015 and 2014, respectively, are reflected in current liabilities in the accompanying consolidated balance sheets. Additionally, THR has various other immaterial transactions with certain of its nonconsolidated affiliates throughout the year.

20. Subsequent Events

The System evaluated events subsequent to December 31, 2015 and through April 14, 2016, the date on which the financial statements were issued.

On December 15, 2015, Texas Health Resources formed an integrated regional health network with UT Southwestern Medical Center (UTSW). This new network, to be named Southwestern Health Resources, is expected to offer key advantages for patients in North Texas including a) a broad, integrated continuum of physician-driven care utilizing UTSW’s network of faculty and community-based physicians, THR’s employed physicians, and independent physicians affiliated with both organizations; and b) an integrated hospital network consisting of UTSW’s two university hospitals and THR’s 25 wholly-controlled and joint-ventured community hospitals, a key component of which will be a new organization – a Joint Operating Company formed to bring together the three Dallas hospitals (UTSW’s William P. Clements Jr. University Hospital and Zale Lipshy University Hospital, and THR’s Texas Health Presbyterian Hospital Dallas). The new health network commenced activities on April 1, 2016.

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APPENDIX C

SUMMARY OF CERTAIN DOCUMENTS AND DEFINITION OF CERTAIN TERMS

TABLE OF CONTENTS

Page

DEFINITION OF CERTAIN TERMS ...... C-1

THE LOAN AGREEMENT ...... C-16

General ...... C-16 Covenants of THR ...... C-17 Amendments ...... C-17 Term ...... C-17

THE BOND INDENTURE...... C-18

Trust Estate ...... C-18 Funds ...... C-18 Investment of Funds ...... C-19 Covenants of the Issuer ...... C-19 Tax Covenants ...... C-19 Defaults and Remedies ...... C-20 Application of Money Collected ...... C-22 Limitation on Suits and Control of Remedies ...... C-22 Control by Holders of Bonds ...... C-22 Supplemental Indentures and Amendatory Agreements ...... C-23 Concerning the Bond Trustee ...... C-24 Trustee May Own Bonds ...... C-25 Moneys to be Held in Trust ...... C-25 Resignation and Removal of the Bond Trustee ...... C-25 Satisfaction and Discharge of Bond Indenture ...... C-26

THE MASTER INDENTURE ...... C-27

Security Interests Granted ...... C-27 Covenants of the Obligated Group ...... C-28 Consolidation, Merger, Conveyance and Transfer ...... C-35 Membership in the Combined Group ...... C-36 Remedies of the Master Trustee and Holder of Securities in Event of Default ...... C-39 Concerning the Master Trustee ...... C-42 Supplements ...... C-43 Satisfaction and Discharge of Indenture ...... C-45

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DEFINITION OF CERTAIN TERMS

In addition to the terms defined elsewhere in this Official Statement, the following terms have the following meanings when used in the summaries of provisions of the Master Indenture, the Bond Indenture and the Loan Agreement contained in this Appendix and the Official Statement unless the context clearly otherwise requires. Reference is hereby made to the Master Indenture, the Bond Indenture and the Loan Agreement for complete definitions of all terms.

“Accountant” means a Person engaged in the practice of accounting who is a nationally recognized certified public accountant and who (except as otherwise expressly provided in the Master Indenture) may be employed by or affiliated with any member of the Combined Group.

“Adjusted Revenues” of any specified Person means, for any period, net patient revenues of such Person, plus investment and other income or loss of such Person for such period; provided there shall not be included in investment and other income or loss for such period any amounts excluded pursuant to the definition of Debt, or any gain or loss arising from the early retirement of indebtedness, or from change in market value of investments.

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, “control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the power to appoint and remove its directors, the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Annual Debt Service Requirements” of any specified Person means, for any period, the principal of (and premium, if any) and interest and other debt service charges (which include for purposes hereof, any fees or premiums for any letter of credit, surety bond, policy of insurance, bond purchase agreement or any similar credit or liquidity support secured in connection therewith) on all Funded Debt of such Person paid or payable by such Person during such period, and, for such purposes, any one or more of the following rules shall apply at the election of THR:

(a) Refinanced Amounts - if such Person has refunded or purchased any of its Funded Debt at or prior to its Maturity with the proceeds of other Funded Debt, then the portion of the Funded Debt refunded or purchased shall be excluded from such calculation and the principal of (and premium, if any) and interest on the Funded Debt incurred for such refunding, refinancing or purchase maturing in the period for which the calculation is being made shall be added;

(b) Prefunded Payments - principal of (and premium, if any) and interest and other debt service charges on Debt, or portions thereof, shall not be included in the computation of the Annual Debt Service Requirements for any Fiscal Year for which such principal, premium, interest or other debt service charges are paid from funds irrevocably deposited or set aside in trust for the payment thereof (including without limitation capitalized interest and accrued interest so deposited or set aside in trust or escrowed with the Master Trustee or another Independent Person approved by the Master Trustee);

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(c) Contingent Obligations - in the case of any guarantees or other Debt described in clause (c) of the definition of Debt, the principal of (and premium, if any) and interest and other debt service charges on such Debt for such period shall not be included in such calculation unless the Person which guaranteed or is otherwise obligated in respect of such Debt was actually required to make, or transfer funds to enable the obligor to make, any payment in respect of such Debt during such period, in which case the total amount paid by such Person in respect of such guarantee or other obligation in such period shall be included in any computation of the Annual Debt Service Requirements of such Person for such period; or

(d) Hedge Agreements - any amounts paid or received pursuant to a Hedge Agreement by the Person for which Annual Debt Service Requirements are to be calculated during such period shall be treated as additional debt service charges or as a reduction in debt service charges, as appropriate, for purposes of this definition.

“Available Revenues” of any Person means, as to any period of time, the combined excess of revenues over expenses from continuing operations before deductions for minority interest in net earnings of consolidated affiliates (or, as the case may be, net income after taxes) of such Person for such period (including any realized investment income and losses), to which shall be added depreciation, amortization and interest (and Hedge Payments and Hedge Extraordinary Payments to the extent that such payments are treated as an expense during such period of time in accordance with GAAP), provided that Available Revenues shall not include: (i) any gain or loss resulting from (a) the extinguishment of Debt, (b) any disposition of property, plant and equipment not made in the ordinary course of business, (c) any discontinued operations or (d) adjustments to the value of assets or liabilities resulting from changes in GAAP, (ii) unrealized gains or losses on marketable securities, (iii) gains or losses resulting from changes in valuation of any Hedge Agreement, (iv) unrealized gains or losses from the write-down, reappraisal or revaluation of assets including for “other than temporary” declines in value, (v) any extraordinary gains or losses, (vi) unrealized gains or losses that do not result in the receipt or expenditure of cash, (vii) any other non-cash expense (other than bad debt), or (viii) income from any amounts deposited for payment of principal (and premium, if any) and interest and other debt services charges (a) as provided in the definition of Debt, or (b) to the extent such income was used in any adjustment of Annual Debt Service Requirements pursuant to clause (b) of the definition of Annual Debt Service Requirements.

“Board Resolution” of any specified Person means a copy of a resolution certified by the Person responsible for maintaining the records of the Governing Body of such Person to have been duly adopted by the Governing Body of such Person and to be in full force and effect on the date of such certification and delivered to the Trustee or the Master Trustee, as applicable.

“Bonds” means any Bonds issued by the Issuer and authenticated by the Bond Trustee pursuant to the Bond Indenture.

“Bond Counsel” means an attorney or firm of attorneys nationally recognized as experienced in the field of bonds of governmental issuers appointed by THR Order and acceptable to the Bond Trustee.

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“Bond Documents” means the Financing Documents, the Bonds and all other agreements, documents and instruments ever delivered pursuant to any of the foregoing and any and all future renewals and extensions or restatements of any of the foregoing.

“Bond Holder” or “Holder” means a Person in whose name a Bond is registered in the Bond Register; provided, however, that, if and to the extent provided in any supplemental indenture, the Credit Enhancer for the Bonds of any series may be considered the sole Holder of Bonds of such series for the purposes of any Act of the Holders of such Bonds.

“Bond Indenture” means the Trust Indenture dated as of October 1, 2008, between the Issuer and the Bond Trustee as amended or supplemented from time to time in accordance with its terms.

“Bond Obligations” means all Debt Service and any other amounts which may be owed by THR to, or on behalf of, an Issuer or the Bond Trustee under the Bond Documents.

“Bond Trustee” means The Bank of New York Mellon Trust Company, National Association, a national banking association, and its successors and assigns.

“Code” means the Internal Revenue Code of 1986, as amended from time to time and the corresponding provisions, if any, of any successor internal revenue laws of the United States.

“Combined Group” means THR, all other Obligated Group Members and all Designated Members.

“Consent,” “Order” and “Request” of any specified Person mean, respectively, a written consent, order or request signed in the name of such Person by the chair of its Governing Body, its president, any of its vice presidents or another executive officer of such Person, and delivered to the Bond Trustee or the Master Trustee, as applicable.

“Credit Agreement” (a) with respect to any series of Bonds means any agreement or other obligation of THR entered into to provide credit or liquidity support relating to a series of Bonds, and designated as a Credit Agreement by THR Order or supplemental indenture, and (b) with respect to any series of Securities means any agreement or other obligation of an Obligated Group Member entered into to provide credit or liquidity support relating to a series of Securities, or relating to other obligations secured by Securities, and designated as a Credit Agreement by THR Order.

“Credit Enhancer” (a) with respect to any series of Bonds means the Person designated as such by THR Order or supplemental indenture, and (b) with respect to any series of Securities means the Person designated as such by THR Order or supplemental indenture.

“Credit Facility” (a) with respect to any series of Bonds means any bond insurance policy or other instrument or undertaking issued by the Credit Enhancer and designated as a Credit Facility by THR Order or supplemental indenture, and (b) with respect to any series of Securities means any letter of credit, bond insurance policy or other instrument or undertaking issued by a Credit Enhancer with respect to a series of Securities or other instruments secured by Securities and designated as a Credit Facility by THR Order or supplemental indenture.

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“Debt” of any specified Person means all:

(a) indebtedness incurred or assumed by such Person for borrowed money or for the acquisition, construction or improvement of property other than goods or services that are acquired in the ordinary course of business of such Person;

(b) lease obligations of such Person that, in accordance with generally accepted accounting principles, are shown on the liability side of a balance sheet;

(c) all indebtedness (other than indebtedness otherwise treated as Debt under the Master Indenture) for borrowed money or the acquisition, construction or improvement of property or capitalized lease obligations guaranteed, directly or indirectly, in any manner by such Person, or in effect guaranteed, directly or indirectly, by such Person through an agreement, contingent or otherwise, to purchase any such indebtedness or to advance or supply funds for the payment or purchase of any such indebtedness or to purchase property or services primarily for the purpose of enabling the debtor or seller to make payment of such indebtedness, or to assure the owner of the indebtedness against loss, or to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether or not such property is delivered or such services are rendered), or otherwise; and

(d) all indebtedness secured by any mortgage, lien, charge, encumbrance, pledge or other security interest upon property owned by such Person whether or not such Person has assumed or become liable for the payment thereof;

For the purpose of computing the “Debt” of any Person, there shall be excluded (i) any particular Debt if, upon or prior to the Maturity thereof, there shall have been deposited with the proper depository in trust the necessary funds (or evidences of such Debt or investments that will provide sufficient funds, if permitted by the instrument creating such Debt) for the payment, redemption or satisfaction of such Debt; and thereafter such funds, evidences of Debt and investments so deposited shall not be included in any computation of the assets of such Person, and the income from any such deposits shall not be included in the calculation of Adjusted Revenues or Available Revenues of such Person, (ii) any agreement or undertaking by THR to supply funds or to invest in any Affiliate as a condition to the transaction of any business or the exercise of any privilege or license in the ordinary course of business by such Affiliate so long as either (1) such Affiliate does not incur any indebtedness described in clauses (a) or (b) of this definition, or (2) such agreement or undertaking by its terms does not apply to any such indebtedness; (iii) Debt of one Combined Group Member to another Combined Group Member, or the guarantee by any Combined Group Member of Debt of any Combined Group Member; and (iv) the value of any Hedge Agreement.

Provided, however, if more than one Combined Group Member shall have incurred or assumed a guarantee of a Person, other than a Combined Group Member, or if more than one Combined Group Member shall be obligated to pay any obligation, for purposes of any computations or calculations of Debt, such guarantee or obligation shall be included only one time.

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“Debt Service” means the principal of, premium, if any, and interest on the Bonds or on any Security, whether at the Stated Maturity thereof or by call for redemption, or declaration of acceleration.

“Debt to Capitalization Ratio” of any Person for any Fiscal Year means the ratio of Total Debt of such Person over the sum of Total Debt plus unrestricted net assets of such Person.

“Defeasance Obligations” means (a) as used in the Bond Indenture, obligations described in clauses (a), (b) and (g) of the definition of Eligible Securities; and

(b) as used in the Master Indenture,

(1) Direct obligations of the United States of America or obligations to the full and prompt payment of which the full faith and credit of the United States of America is irrevocably pledged or evidence of direct ownership of interests in future interest and principal payments on such obligations held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor on such obligations, and which underlying obligations are not available to satisfy any claim of the custodian or any person claiming through the custodian or to whom the custodian may be obligated; or

(2) Obligations the interest of which is excludable from the gross income of all owners thereof for federal income tax purposes, and provision for the payment of the principal of (and premium, if any) and interest on which shall have been made by the irrevocable deposit at least 123 days preceding the date of determination with a bank or trust company acting as a trustee or escrow agent for holders of such obligations of money, or obligations described in clause (a) above, the maturing principal of and interest on which, when due and payable, without reinvestment will provide money, sufficient to pay when due the principal of (and premium, if any) and interest on such obligations, and which money, or obligations described in clause (a) above, are not available to satisfy any other claim, including any claim of the trustee or escrow agent or any claim of any Person claiming through the trustee or escrow agent or any claim of any Person to whom the Person on whose behalf such irrevocable deposit was made, the trustee or the escrow agent may be obligated, whether arising out of the insolvency of the Person on whose behalf such irrevocable deposit was made, the trustee or escrow agent or otherwise; provided that, at the time of their purchase, such obligations are rated in the highest generic long-term debt rating category by at least one Rating Service; or

(3) with respect to any series of Securities, such obligations as may be designated in the instruments pursuant to which such series is created as “Defeasance Obligations.”

“Designated Corporate Trust Office” means the corporate trust office designated by the Bond Trustee or the Master Trustee, as applicable, from time to time as the Designated Corporate Trust Office for purposes of the Indenture or the Master Indenture, respectively.

“Designated Member” means each of Harris Continued Care Hospital, a Texas nonprofit corporation, Harris Methodist Erath County, a Texas nonprofit corporation, Harris Methodist

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Northwest, a Texas nonprofit corporation, Walls Regional Hospital, a Texas nonprofit corporation, and any other Person that has satisfied the requirements set forth in Section 604 of the Master Indenture for becoming a Designated Member and its successors until such Person or a successor or transferee Person has satisfied the requirements set forth in Section 605 of the Master Indenture for ceasing to be an Designated Member.

“Eligible Securities” means the following obligations or securities, maturing or redeemable at the option of the Bond Trustee, or marketable, prior to the maturities thereof, at such time or times as to enable disbursements to be made from any fund in accordance with the terms of the Bond Indenture:

(a) Direct obligations of the United States of America or obligations to the full and prompt payment of which the full faith and credit of the United States of America is irrevocably pledged or evidences of direct ownership of interests in future interest and principal payments on such obligations held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor on such obligations, and which underlying obligations are not available to satisfy any claim of the custodian or any person claiming through the custodian or to whom the custodian may be obligated.

(b) Obligations of, or obligations guaranteed as to principal and interest by the United States of America or any agency or instrumentality thereof, when such obligations are backed by the full faith and credit of the United States of America including, but not limited to, obligations issued by:

i. U.S. Export Import Bank (Eximbank) ii. FmHA iii. Federal Financing Bank iv. Federal Housing Administration Debentures (“FHA”) v. General Services Administration (Participation Certificates) vi. Government National Mortgage Association (“GNMA” or “Ginnie Mae”) vii. U.S. Maritime Administration viii. HUD.

(c) Direct obligations of any of the following federal agencies which obligations are not fully guaranteed by the full faith and credit of the United States of America:

i. Senior debt obligations issued by the Federal Home Loan Bank System ii. REFCORP iii. Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) iv. Mortgage backed securities and senior debt obligations of the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) v. Farm Credit System (consolidated system wide bonds and notes) vi. Senior debt obligations of other Government Sponsored Agencies.

(d) U.S. dollar denominated deposit accounts, federal funds and bankers’ acceptances with domestic commercial banks which have a rating on their short term certificates of deposit

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on the date of purchase of “P-1” or “A-3,” or better, by Moody’s, and “A-1” or “A” by S&P, and maturing not more than 360 calendar days after the date of purchase. (Ratings on holding companies are not considered as the rating of the bank).

(e) Commercial paper which is rated at the time of purchase in the single highest classification, “P-1” and “A-1,” or better, by each Rating Service and which matures not more than 270 calendar days after the date of purchase.

(f) Investments in a money market fund registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and rated “AAAm” or “AAAm-G” or better by S&P, or “Aaa,” “Aa1,” or “Aa2” by Moody’s, including any money market funds managed by the Bond Trustee or its affiliates and with respect to which the Bond Trustee or such affiliates receives compensation.

(g) Pre-refunded Municipal Obligations defined as follows: any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which are not callable at the option of the obligor prior to maturity or as to which irrevocable instructions have been given by the obligor to call on the date specified in the notice; and

i. which are rated, based on an irrevocable escrow account or fund (the “Escrow”), in the highest rating category of each Rating Service; and ii. (A) which are fully secured as to principal and interest and redemption premium, if any, by an Escrow consisting only of cash or obligations described in clause (b) above, which Escrow may be applied only to the payment of such principal of an interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, and (B) which escrow is sufficient, as verified by a nationally recognized independent certified public accountant, to pay principal of and interest and redemption premium, if any, on the bonds or other obligations described in this paragraph on the maturity date or dates specified in the irrevocable instructions referred to above, as appropriate.

(h) Municipal obligations rated “Aaa/AAA” or general obligations of States with a rating of “A2/A” or higher by each Rating Service.

(i) Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC, including BIF and SAIF.

(j) Investment agreements or guaranteed investment contracts with any Person the senior unsecured long-term debt obligations of which are rated in one of the three highest rating categories (determined without regard to subcategories) by each Rating Service, provided, that at least one Rating Service has a rating assigned to the Bonds.

“Enabling Act” means the Cultural Education Facilities Finance Corporation Act, Article 1528m, Texas Revised Civil Statutes, as amended from time to time.

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“Fair Market Value,” when used in connection with Property, means the fair market value of such Property as determined by either:

(a) an appraisal of the portion of such Property which is real property made within five years of the date of determination by a “Member of the Appraisal Institute” and by an appraisal of the portion of such Property which is not real property made within five years of the date of determination by any expert qualified in relation to the subject matter, provided that any such appraisal shall be performed by a Person or firm that (i) is in fact independent, (ii) does not have any direct financial interest or any material indirect financial interest in any Combined Group Member or Affiliate and (iii) is not connected with any Combined Group Member or Affiliate as an officer, employee, promoter, trustee, partner, director or person performing similar functions, adjusted for the period, not in excess of five years, from the date of the last such appraisal for changes in the implicit price deflator for the gross national product as reported by the United States Department of Commerce or its successor agency, or if such index is no longer published, such other index certified to be comparable and appropriate in an Officer’s Certificate delivered to the Master Trustee;

(b) a bona fide offer for the purchase of such Property made on an arm’s-length basis within six months of the date of determination, as established by an Officer’s Certificate; or

“Financing Documents” means the Bond Indenture and any supplemental indenture thereto, the Notes, the Master Indenture and the Loan Agreement.

“Fiscal Year” of any specified Person means an annual period adopted by such Person as the accounting period used for preparation of the financial statements required to be delivered pursuant to the Master Indenture.

“Funded Debt” of any specified Person means all Debt created, assumed or guaranteed by such Person that matures by its terms (in the absence of the exercise of any earlier right of demand), or is renewable at the option of such Person to a date, more than one year after the original creation, assumption or guarantee of such Debt by such Person.

“Governing Body” of any specified Person means the board of directors or board of trustees of such Person or any duly authorized committee of that board, or if there be no board of trustees or board of directors, then the person or body which pursuant to law or the Organizational Documents of such Person is vested with powers similar to those vested in a board of trustees or a board of directors.

“Hedge Agreement” means an interest rate swap, cap, basis swap, collar, option, floor, forward or other hedging agreement, arrangement or security, however denominated, identified to the Master Trustee in an Officer’s Certificate entered into by an Obligated Group Member with a Qualified Provider with respect to Debt to be incurred or identified in such Officer’s Certificate.

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“Hedge Extraordinary Payments” means any payments required to be paid to a counterparty by an Obligated Group Member pursuant to a Hedge Agreement in connection with the termination thereof, tax gross-up payments, expenses, default interest, and any other payments or indemnification obligations to be paid to a counterparty by a Obligated Group Member under a Hedge Agreement, which payments are not Hedge Payments.

“Hedge Payments” means regularly scheduled payments required to be paid to a counterparty by an Obligated Group Member pursuant to a Hedge Agreement.

“Highest Lawful Rate” means the maximum rate of non-usurious interest (determined as provided in the Loan Agreement) applicable to each loan made to THR under the Loan Agreement allowed from time to time by applicable law as then in effect or, to the extent allowed by applicable law, such higher rate as may thereafter be in effect.

“Historical Debt Service Coverage Ratio” of any Person means for any period, the decimal fraction resulting from dividing the Available Revenues of such Person for such period by the Annual Debt Service Requirements of such Person for such period.

“Independent” when used with respect to any specified Person means such a Person who (i) is in fact independent, (ii) does not have any direct financial interest or any material indirect financial interest in THR or any other obligor upon the Securities or in any Affiliate of THR or such other obligor, and (iii) is not connected with THR or such other obligor or with any Affiliate of THR or such other obligor as an officer, employee, promoter, trustee, partner, director or person performing similar functions. Whenever it is provided in the Bond Indenture, the Loan Agreement or the Master Indenture, as applicable, that any Independent Person’s opinion or certificate shall be furnished to the Bond Trustee or the Master Trustee, such Person shall be appointed by Order of the Person making such appointment and approved by the Trustee in the exercise of reasonable care, and such opinion or certificate shall state that the signer has read this definition and that the signer is Independent within the meaning of this definition.

“Interest Payment Date” means the Stated Maturity of an installment of interest on the Bonds or any Security.

“Legal Restrictions” means Federal, State or other applicable governmental laws or regulations affecting any member of the Combined Group and its health care facilities.

“Liquidity Facility” with respect to any series of Bonds shall have the meaning assigned to such term in the supplemental indenture with respect to such Bonds.

“Loan Agreement” means that certain Loan Agreement, dated as of October 1, 2008, between the Issuer and THR as amended or supplemented from time to time in accordance with its terms.

“Management Consultant” means a nationally recognized firm of Independent professional management consultants or an Independent hospital management organization knowledgeable in the operation of hospitals and having a favorable reputation for skill and experience in the field of hospital management consultation.

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“Master Indenture” means the Second Amended and Restated Master Trust Indenture dated as of October 1, 2008, among THR and such other Persons as from time to time are Members of the Obligated Group and the Master Trustee, as amended or supplemented from time to time in accordance with its terms.

“Master Trustee” means The Bank of New York Mellon Trust Company, National Association, a national banking association, and its successors and assigns serving as master trustee pursuant to the Master Indenture.

“Maturity” when used with respect to any Bond or Security means the date on which the principal of such Bond or Security becomes due and payable as therein provided, whether at the Stated Maturity thereof or by declaration of acceleration, call for redemption or otherwise.

“Moody’s” means Moody’s Investors Services, Inc., and any successor thereto maintaining a rating on the Bonds.

“Note” or “Notes” means any note or notes of THR evidencing a loan made pursuant to the Loan Agreement.

“Obligated Group” means all Obligated Group Members.

“Obligated Group Member” or “Member of the Obligated Group” means each of THR, Texas Health Presbyterian Hospital Dallas, a Texas nonprofit corporation, Texas Health Presbyterian Hospital Plano, a Texas nonprofit corporation, Texas Health Presbyterian Hospital Allen, a Texas nonprofit corporation, Texas Health Harris Methodist Hospital Fort Worth, a Texas nonprofit corporation, Texas Health Harris Methodist Hospital Hurst-Euless-Bedford, a Texas nonprofit corporation, Texas Health Harris Methodist Hospital Southwest Fort Worth, a Texas nonprofit corporation, Texas Health Arlington Memorial Hospital, a Texas nonprofit corporation, and any other Person who has satisfied the requirements set forth in the Master Indenture for becoming an Obligated Group Member and its successors until such Person or a successor or transferee Person has satisfied the requirements set forth in the Master Indenture for ceasing to be an Obligated Group Member.

“Officer’s Certificate” of any specified Person means a certificate signed by the chair of its Governing Body, its president, any of its vice presidents, another executive officer or such officer designated by the Chairman of the Governing Body of such Person, and delivered to the Bond Trustee or the Master Trustee, as applicable.

“Opinion of Bond Counsel” means an Opinion of Counsel rendered by Bond Counsel addressed to the Issuer, the Bond Trustee, and such other Persons as required by a supplemental indenture or Issuer Order creating a series of Bonds to the effect that the action proposed to be taken is authorized or permitted by the Bond Documents and by the laws of the State, that all conditions precedent under the relevant documents have been fulfilled, and that such proposed action will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the affected Bonds or validity or enforceability of the affected Bonds.

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“Opinion of Counsel” means a written opinion of counsel, who may (except as otherwise expressly provided) be counsel to any member of the Combined Group, and shall be reasonably acceptable to the Bond Trustee or Master Trustee, as applicable.

“Organizational Documents” of any corporation means the articles of incorporation, certificate of incorporation, certificate of formation, corporate charter or other document pursuant to which such corporation was organized, and its bylaws, each as amended from time to time, and as to any other Person, means the instruments pursuant to which it was created and which govern its powers and the authority of its representatives to act on its behalf.

“Outstanding” (a) when used with respect to the Bonds means, as of the date of determination, all Bonds theretofore authenticated and delivered under the Bond Indenture, except:

(i) Bonds theretofore canceled by the Bond Trustee or delivered to the Bond Trustee for cancellation;

(ii) Bonds for whose payment or redemption money (or Defeasance Obligations to the extent permitted by the Bond Indenture) in the necessary amount has been theretofore deposited with the Bond Trustee or any paying agent for such Bonds in trust for the Holders of such Bonds pursuant to the Bond Indenture; provided, that, if such Bonds are to be redeemed, notice of such redemption has been duly given pursuant to the Bond Indenture or irrevocable provision therefor satisfactory to the Bond Trustee has been made; and

(iii) Bonds upon transfer of or in exchange for or in lieu of which other Bonds have been authenticated and delivered pursuant to the Bond Indenture; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Bonds have given any request, demand, authorization, direction, notice, consent or waiver under the Bond Indenture, Bonds owned by THR or any other obligor upon the Bonds or Notes or any Affiliate of THR or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Bond Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Bonds which the Bond Trustee knows to be so owned shall be so disregarded. Bonds so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Bond Trustee the pledgee’s right so to act with respect to such Bonds and that the pledgee is not THR or any other obligor upon the Bonds or Notes or any Affiliate of THR or such other obligor; and

(b) when used with respect to the Securities means, as of the date of determination, the Previously Issued Securities and all Securities theretofore authenticated and delivered under the Master Indenture, except:

(i) Securities theretofore canceled by the Master Trustee or delivered to the Master Trustee for cancellation;

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(ii) Securities for whose payment or redemption money (or Defeasance Obligations to the extent permitted by the Master Indenture) in the necessary amount has been theretofore deposited with the Master Trustee or any paying agent for such Securities in trust for the Holders of such Securities pursuant to the Master Indenture; provided, that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to the Master Indenture or irrevocable provision therefor satisfactory to the Master Trustee has been made; and

(iii) Securities upon transfer of or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to the Master Indenture; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver under the Master Indenture, Securities owned by THR or any other obligor upon the Securities or any Affiliate of THR or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Master Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Master Trustee knows to be so owned shall be so disregarded. The Master Trustee shall be under no duty to investigate whether any Securities are so owned, but may, in its discretion, make such further investigation or inquiry as it may see fit. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Master Trustee the pledgee’s right so to act with respect to such Securities and that the pledgee is not THR or any other obligor upon the Securities or any Affiliate of THR or such other obligor.

“Paying Agent” (i) with respect to the Bonds means initially the Bond Trustee, and any other Person authorized by Issuer to pay Debt Service on the Bonds on behalf of the Issuer, or (ii) with respect to any Security, means initially the Master Trustee, and any other Person authorized by THR to pay Debt Service on any Securities on behalf of THR.

“Permitted Encumbrances” with respect to any specified Person means:

(a) liens arising by reason of good faith deposits by or with such Person in connection with tenders, leases of real estate, bids or contracts (other than contracts for the payment of money), deposits by any such Person to secure public or statutory obligations or to secure, or in lieu of, surety, or appeal bonds, and deposits as security for the payment of taxes or assessments or other similar charges;

(b) 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 in the ordinary course of business, or to enable such Person 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, old age pensions or other social security, or to share in the privileges or benefits required for institutions participating in such arrangements, including, without limitation, any funds or assets required by law or governmental regulation to be kept free of

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encumbrance as a condition to the transaction of any business or the exercise of any privilege or license in the ordinary course of business, which will for all purposes of the Master Indenture be deemed a Permitted Encumbrance subject to a lien in favor of such governmental agency superior to the lien of the Master Trustee under the Master Indenture for so long as such transaction remains in effect;

(c) liens created by or existing from any litigation or legal proceeding which is currently being contested in good faith by appropriate proceedings;

(d) rights reserved to or vested in any municipality or public authority by the terms of any right, power, franchise, grant, license, permit or provision of law affecting any property (i) to terminate such right, power, franchise, grant, license or permit; provided that the exercise of such right would not in the opinion of the Governing Body of such Person materially impair the use of such property for its intended purpose or materially and adversely affect the value thereof, or (ii) to purchase, condemn, appropriate, recapture or designate a purchaser of such property, or (iii) to control, regulate or zone such property or the use of such property in any manner, that do not in the opinion of the Governing Body of such Person materially impair the use of such property for its intended purposes or materially and adversely affect the value thereof;

(e) liens for taxes or assessments or other governmental charges or levies to the extent not required to be paid pursuant to the Master Indenture;

(f) pledges or deposits to secure obligations under worker’s compensation laws or similar legislation, including liens of judgments thereunder that are not currently dischargeable;

(g) materialmen’s, mechanics’, carriers’, workmen’s, repairmen’s or other like liens arising in the ordinary course of business, or deposits to obtain the release of such liens;

(h) leases made, or existing on property acquired, in the ordinary course of business;

(i) statutory landlords’ liens under leases to which such Person is a party;

(j) farmout or carried working interest agreements for development by such Person or others of non-producing leases or nonproducing portions of oil or gas producing property;

(k) participations in joint operating agreements and unitization agreements and operations covering oil and gas producing properties;

(l) liens on money deposited by or for the account of patients of such Person as security for or as prepayment for the cost of patient care;

(m) liens or encumbrances on property (or on the income therefrom) received by such Person as a gift, grant or bequest, if such lien or encumbrance constitutes or results from restrictions (other than the requirement that the grantee thereof make payment in respect of Funded Debt incurred by the grantor with respect to such property) placed on such gift, grant or bequest (or on the income therefrom) by the grantor thereof;

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(n) liens on money and receivables securing rights of third party payors to recoupment of amounts paid to such Person;

(o) any other lien or encumbrance created or incurred in the ordinary course of business that does not secure, directly or indirectly, the repayment of Debt and that, individually or in the aggregate, does not materially impair the value of the utility of the property subject to such lien or encumbrance;

(p) liens on proceeds of Debt (or on income from the investment of such proceeds) that secure payment of such Debt;

(q) liens on money or obligations deposited with a trustee or escrow agent to cause all or any portion of Debt to be no longer outstanding;

(r) liens on money or obligations deposited to fund a debt service fund in an amount not exceeding the amount of the Debt to which such debt service fund relates that matures in the Fiscal Year in which such deposit is made plus a reasonable carryover amount or deposited to a reserve fund in an amount not in excess of 15% of the principal amount of the Debt to which such reserve fund relates in accordance with the instrument under which such Debt may be secured;

(s) easements, zoning restrictions, licenses, restrictions on the use of real property, minor restrictions or irregularities of title and other encumbrances that do not, in the opinion of the Governing Body of such Person, materially impair the value of such property or the use of such property in the operation of the business of such Person; and

(t) liens on debt instruments owned by such Person which have been purchased under a credit or liquidity facility issued to secure or support other Debt.

“Person” means any individual, corporation, partnership, joint venture, association, joint- stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.

“Place of Payment” for any series of Bonds or Securities means a city or any political subdivision thereof designated as such by THR Order from time to time.

“Previously Issued Securities” means each of the promissory notes or other obligations designated as Securities described in the Master Indenture.

“Project” means the Series 2016A Project and any other property financed or refinanced from the proceeds of the Bonds.

“Project Costs” means costs permitted to be paid out of proceeds of the Bonds by the Act and by the Code including costs of issuance and the costs related to any Project.

“Property” means any and all rights, titles and interests in and to any and all property of a Person whether real or personal, tangible or intangible and wherever situated.

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“Qualified Provider” means any financial institution or insurance company that is a party to a Hedge Agreement if the unsecured long-term debt obligations of such financial institution or insurance company (or of the parent or a subsidiary of such financial institution or insurance company if such parent or subsidiary guarantees the performance of such financial institution or insurance company under such Hedge Agreement), or obligations secured or supported by a letter of credit, contract, guarantee, agreement, insurance policy or surety bond issued by such financial institution or insurance company (or such guarantor parent or subsidiary), are rated in one of the three highest Rating Categories of a Rating Service at the time of the execution and delivery of the Hedge Agreement.

“Rating Category” means (i) with respect to any long-term rating category, all ratings designated by a particular letter or combination of letters, without regard to any numerical modifier, plus or minus sign or other modifier and (ii) with respect to any short-term or commercial paper rating category, all ratings designated by a particular letter or combination of letters and taking into account any numerical modifier, but not any plus or minus sign or other modifier.

“Rating Service” means each nationally recognized statistical rating organization, within the meaning of the rules of the United States Securities and Exchange Commission which at the time has a credit rating assigned to any series of the Securities (or any other indebtedness secured by Securities) at the request of THR.

“Responsible Officer” when used with respect to the Bond Trustee or the Master Trustee means the officer in the Global Corporate Trust Department of the Bond Trustee or the Master Trustee (or any comparable business unit of any successor Trustee) having direct responsibility for the administration of the Bond Indenture or the Master Indenture.

“Revenues” of any Person means all receipts, revenues, rentals, income, insurance proceeds (including, without limitation, all Medicaid, Medicare and other third party payments), condemnation awards and other moneys received by or on behalf of such Person, including (without limitation) revenues derived from (i) the ownership, operation or leasing of any portion of the facilities of such Person and all rights to receive the same, whether in the form of accounts, general intangibles or other rights, and the proceeds of any of the foregoing, whether now existing or hereafter coming into existence or whether now owned or held or hereafter acquired, and (ii) gifts, grants, bequests, donations and contributions heretofore or hereafter made that are legally available to meet any of the obligations of such Person incurred in the financing, operation, maintenance or repair of any portion of the facilities.

“S&P” means Standard & Poor’s Financial Services LLC, a subsidiary of S&P Global Inc. or any successor thereto maintaining a rating on the Bonds.

“Security” means any obligation of the Obligated Group, authenticated and delivered pursuant to the Master Indenture and each of the Previously Issued Securities.

“Series 2016A Bonds” means the Tarrant County Cultural Education Facilities Finance Corporation Texas Health Resources System Revenue Bonds, Series 2016A.

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“Series 2016A Note” or “Series 2016A Security” means the Note evidencing the obligation of THR to repay the loan made in connection with the Series 2016A Bonds.

“Stated Maturity” when used with respect to any Bond or Security or any installment of interest thereon means the date specified in such Bond or Security as the fixed date on which the principal of such Bond or Security or such installment of interest thereon is due and payable.

“THR” means Texas Health Resources, a Texas nonprofit corporation, and its successors and assigns permitted by the Master Indenture.

“Total Debt” of any Person for any Fiscal Year means the sum of all Funded Debt of such Person, provided that, for the purposes of this calculation, in the case of any amount treated as Debt pursuant to clause (c) of the definition of “Debt,” the principal of (and premium, if any) and interest and other debt service charges on such Debt for such period shall not be included in such calculation unless the Person that guaranteed or is otherwise obligated in respect of such Debt was actually required to make, or transfer funds to enable the obligor to make, any payment in respect of such Debt during such period, in which case the amount of the guarantee or other obligation to be included in any computation of the Total Debt of such Person for such period shall be equal to the total amount paid by such Person in respect of such guarantee or other obligation in such period.

“Trust Estate” means the rights, property and interests of the Issuer described in the Granting Clauses of the Bond Indenture and pledged to the payment of the Bonds, and the performance of the covenants contained therein.

THE LOAN AGREEMENT

The following is a summary of certain provisions contained in the Loan Agreement. The following is not a comprehensive description, however, and is qualified in its entirety by reference to the Loan Agreement for a complete recital of the terms thereof.

General

Loan. Pursuant to the terms of the Loan Agreement, the proceeds of the sale of each series of Bonds, including the Series 2016A Bonds will be loaned by the Issuer to THR to provide funds for the purposes described in the Loan Agreement. THR will deliver to the Issuer a Note in connection with each loan made under the Loan Agreement.

Loan Payments. THR is required to make loan payments in accordance with the Bond Indenture and the Loan Agreement directly to the Bond Trustee for deposit to the Debt Service Fund, on the dates, at the places and in the manner specified in the Loan Agreement in amounts sufficient to pay the Debt Service on the Bonds when due.

Nature of Obligations of THR. THR agrees that its obligations to make payments under the Loan Agreement are absolute and unconditional, irrespective of any rights of set-off, diminution, abatement, recoupment or counterclaim THR might otherwise have against any Person, and, except in connection with a discharge of the Bond Indenture, THR will perform and

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observe all its payment obligations and covenants, representations and warranties under the Loan Agreement without suspension, and THR will not terminate the Bond Documents for any cause.

Limitation on Interest. Pursuant to the Loan Agreement, THR and the Issuer agree that in no event shall the amount of interest contracted for, charged, reserved, received or taken in connection with any loan made under the Loan Agreement exceed the amount of interest which could have been contracted for, charged, reserved, received or taken at the Highest Lawful Rate.

Other Obligations of THR. THR agrees to pay promptly on demand all costs paid, incurred or charged by the Issuer in connection with the Bonds, including without limitation, (i) all amounts payable to the Bond Trustee pursuant to the Bond Indenture, (ii) fees of the Issuer, (iii) all out-of-pocket expenses (including reasonable attorney’s fees and expenses) and costs of issuance reasonably incurred by the Issuer in connection with the issuance of the Bonds and the administration of the Bond Documents, (iv) all out-of-pocket expenses (including reasonable attorney’s fees and expenses) reasonably incurred by the Issuer in connection with the enforcement of any of its rights or remedies or the performance of its duties under the Bond Documents, and (v) all amounts payable to any Credit Enhancer.

Covenants of THR

Tax Covenants. THR agrees that it will not take, or omit to take any action that will adversely affect the exclusion from gross income for federal income tax purposes of interest paid on the Bonds, and, in the event of such action or omission, it will use all reasonable efforts to cure the effect of such action or omission. With the intent not to limit the generality of this provision, the Loan Agreement enumerates various specific covenants of THR relating to the continued exclusion from gross income for federal income taxation of interest on the Bonds.

Security Interests. As security for repayment of the Note and performance of THR’s obligations under the Loan Agreement, THR has agreed to pledge, set over, assign and grant a security interest to the Issuer in all of THR’s right, title and interest in and to all amounts at any time deposited in the funds established under the Bond Indenture, including all investments and reinvestments and the proceeds thereof.

THR has agreed to cause any Bond Document and each amendment or supplement thereto to be filed, registered and recorded in such manner, at such times and in such places, and to take such further actions as may be required to perfect or continue the perfection of the security interests and fully protect the liens created thereby.

Amendments

The Loan Agreement may only be amended in accordance with the terms of the Bond Indenture.

Term

The Loan Agreement will remain in full force and effect until the Bond Indenture has been discharged in accordance with the provisions thereof. However, certain provisions of the Loan Agreement will survive any expiration or termination of the Loan Agreement, and if the

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Bond Indenture is discharged prior to the final Maturity of the Bonds, certain other provisions of the Loan Agreement will continue until the final Maturity of the Bonds.

THE BOND INDENTURE

The following is a summary of certain provisions contained in the Bond Indenture. The following is not a comprehensive description, however, and is qualified in its entirety by reference to the Bond Indenture for a complete recital of the terms thereof.

Trust Estate

The Issuer, in order to secure the payment of the principal of, redemption premium, if any, and interest on all of the Bonds issued and outstanding under the Bond Indenture and the performance of the covenants contained in the Bond Indenture and in the Bonds and to declare the terms and conditions on which the Bonds are secured, pledges and assigns to the Bond Trustee, and grants a security interest in (i) all right, title, and interest of the Issuer in and to the Loan Agreement, including the loan payments, any and all Notes by which the rights to the loan payments are evidenced, the right to bring proceedings under the Loan Agreement or on the Notes or for the enforcement thereof and to do any and all things which the Issuer is or may become entitled to do thereunder, but excluding the amounts agreed to be paid by THR pursuant to certain sections of the Loan Agreement; (ii) all right, title, and interest of the Issuer in and to all money and investments held for the credit of the funds and accounts (except the Rebate Fund and the Purchase Fund) established by or under the Bond Indenture; and (iii) any and all property that may, from time to time, be subjected to the lien and security interest of the Bond Indenture by the grantor or by anyone in its behalf subject to any reservations, limitations, or conditions.

Funds

The Bond Indenture establishes with the Bond Trustee the Debt Service Fund and the Construction Fund. The Bond Indenture also establishes the Rebate Fund which is not part of the Trust Estate.

Debt Service Fund. The Bond Trustee is required to deposit to the Debt Service Fund upon receipt (a) accrued interest from the sale of any series of Bonds, (b) all loan payments, and (c) any other amounts delivered to the Bond Trustee for deposit thereto. Monies on deposit in the Debt Service Fund will be applied by the Bond Trustee to the payment, when due, of Debt Service on the Bonds.

Construction Fund. The Bond Trustee is required to deposit to the Construction Fund all amounts paid to the Bond Trustee for such purpose by the Issuer or THR and the proceeds of Bonds to the extent specified by Issuer Order. Amounts on deposit in the Construction Fund will be used to pay or reimburse THR for Project Costs. Upon completion of the Project, unexpended monies remaining in the Construction Fund will be transferred to the Debt Service Fund unless the Bond Trustee receives a THR Request to the contrary accompanied by an Opinion of Bond Counsel, in which case the Bond Trustee is required to comply with the THR Request.

Rebate Fund. The Bond Trustee is required to deposit to the Rebate Fund (which is not part of the Trust Estate) such amounts delivered to the Bond Trustee or directed by THR to be

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transferred to the Rebate Fund. At the direction of THR the Bond Trustee will make payments to the United States of America in such amounts and at the times required by the Code necessary to preserve the exclusion from gross income for federal income taxation of the interest on the Bonds.

Investment of Funds

Subject to limitations specified in the Bond Indenture, pursuant to THR Order the Bond Trustee will invest amounts on deposit in the funds in Eligible Securities. Unless otherwise provided by supplemental indenture or in the Bond Indenture, investment earnings or losses will be credited to or charged against, as applicable, the respective fund from which such investment was made. The Bond Trustee may make investments through its own trust department or through any affiliate. The Bond Trustee will convert investments to cash as needed for the purposes specified in the Bond Indenture.

Pursuant to the Loan Agreement, THR covenants to restrict the investment of money in the funds created under the Bond Indenture in such manner and to such extent as may be necessary so that the Bonds will not constitute arbitrage bonds under Section 148 of the Code and the Regulations.

Covenants of the Issuer

The Issuer covenants to punctually pay Debt Service in accordance with the terms of the Bond Indenture; provided, however, that the payment of Debt Service is a limited obligation of the Issuer payable solely from the assets of the Trust Estate. The Issuer covenants to maintain a paying agent in each place of payment for the Bonds in accordance with the requirements of the Bond Indenture.

The Issuer covenants that it will not (i) create any mortgage, lien, encumbrance, pledge or other exception to title (other than those created by the Bond Indenture) upon or against the properties of the Trust Estate or the revenues derived therefrom superior to or on a parity with the lien created by the Bond Indenture; (ii) sell, lease, transfer, convey or otherwise dispose of the Trust Estate of except subject to the interests of the Trustee created by the Bond Indenture; (iii) create, incur or assume any debt secured by the Trust Estate or the Issuer’s interest therein or the revenues pledged under the Bond Indenture except in connection with the issuance of additional Bonds or on a basis subordinate to the liens created by the Bond Indenture; or (iv) knowingly take any other action that will impair the lien of the Bond Indenture or the Trust Estate.

Tax Covenants

No Arbitrage Bonds. The Issuer agrees that it will not use or direct the use of any money on deposit in any fund maintained in connection with the Bonds in a manner that would cause the Bonds of any issue to be arbitrage bonds, within the meaning of Section 148 of the Code. The Issuer will deliver to the Bond Trustee, and the Bond Trustee will take such action specified in, a THR Order to restrict or limit the yield on the investment of moneys held by the Bond Trustee under the Bond Indenture, or to use such moneys in any certain manner to avoid the Bonds of any issue being considered arbitrage bonds.

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Use of Proceeds. The Issuer will not use or direct the use or permit the use of any proceeds of Bonds or any other funds of the Issuer, directly or indirectly, in any manner, and will not take any other action or actions, which would result in any of the Bonds being treated other than as an obligation described in Section 103(a) of the Code.

Exempt Person Status Maintained. The Issuer will not use or direct the use of any portion of the proceeds of the Bonds, including any investment income earned on such proceeds, directly or indirectly, to make or finance loans to persons who are not Exempt Persons, as such term is defined in the Code.

No Federal Guaranties. The Issuer will not take any action which would result in all or any portion of the Bonds being treated as federally guaranteed within the meaning of Section 149(b)(2) of the Code.

Basis for Issuer Compliance. For purposes of the provisions related to the tax covenants set forth in the Bond Indenture, the Issuer’s compliance shall be based solely on acts or omissions by the Issuer, and no acts, omissions or directions of THR, the Bond Trustee or any other Persons will be attributable to the Issuer. The Issuer covenants that it will not take any action or omit to take an action, which action or omission will adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds and to promptly take such corrective lawful action as may be necessary or advisable to negate or rescind such action or omission.

Defaults and Remedies

Events of Default. Each of the following constitutes an “Event of Default” under the Bond Indenture:

(a) default in the payment of the principal of or premium, if any, on any Bond when the same shall become due and payable, whether at the Stated Maturity thereof, or upon proceedings for redemption or as required by the sinking fund provisions of the Bond Indenture or otherwise; or

(b) default in the payment of the purchase price when due of any Bond required to be purchased by THR if there is no Liquidity Facility in place with respect to such Bond; or

(d) an event of default has occurred and is continuing under the Master Indenture; or

(e) default in the performance, or breach, of any covenant or agreement by the Issuer or THR contained in the Bond Indenture or the Loan Agreement (other than a covenant or agreement whose performance or observance is specifically dealt with elsewhere in the Bond Indenture) and continuance of such default or breach for a period of 30 days after notice to the Issuer and THR by the Bond Trustee, or to the Issuer, THR and the Bond Trustee by the Holders of at least 25% in principal amount of Bonds then Outstanding or, if and to the extent provided in any supplemental indenture, any Credit Enhancer; provided that if such default can be cured by

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the Issuer or THR but cannot be cured within the 30-day curative period described above, then, unless otherwise provided in any supplemental indenture, it will not be an Event of Default if corrective action is instituted by the Issuer or THR within such 30-day period and diligently pursued until the default is corrected.

Remedies. Acceleration in Certain Cases; Rescission and Annulment. If an Event of Default other than an Event of Default described in clause (d) under the subheading “THE BOND INDENTURE–Defaults and Remedies–Events of Default” above occurs and is continuing, the Bond Trustee or the Holders of not less than 25% in principal amount of the Bonds Outstanding, may declare the principal of all of the Bonds to be due and payable immediately. If an Event of Default described in such clause (d) occurs and is continuing, the Bond Trustee will promptly declare the principal of all the Bonds to be due and payable immediately and upon any such declaration such principal will become immediately due and payable. Notwithstanding the foregoing, no series of Bonds in respect of which a Credit Facility exists and is not in default shall become due and payable immediately without the written consent of the Credit Enhancer therefor, if any.

At any time after a declaration of acceleration and before a judgment or decree for payment has been obtained by the Bond Trustee, the Holders of a majority in principal amount of the Bonds Outstanding, by written notice to the Issuer and the Bond Trustee, in the case of acceleration of maturity of the Bonds, or by written notice to THR and the Master Trustee to the extent and in the manner permitted by the Master Indenture in the case of acceleration of maturity of the Notes, may rescind and annul such declaration and its consequences if (i) there has been paid or deposited with the Bond Trustee (other than from the Credit Enhancer) a sum sufficient to pay (a) all overdue interest on all Bonds, (b) the principal of (and premium, if any, on) any Bonds which has become due other than by declaration of acceleration and interest thereon at the rate borne by the Bonds, and (c) all sums paid or advanced by the Bond Trustee under the Bond Indenture and the reasonable compensation, expenses, disbursements and advances of the Bond Trustee, its agents and counsel; and (ii) all Events of Default, other than the nonpayment of the principal of Bonds which have become due solely by such acceleration, have been cured or waived as provided in the Bond Indenture. No such rescission shall affect any subsequent default or impair any consequent right.

Under the Bond Indenture the Issuer covenants that if default is made in the payment when due of Debt Service on any Bond the Issuer will pay to the Bond Trustee (but solely from the Trust Estate pledged under the Bond Indenture), for the benefit of the Holders of such Bonds, the whole amount then due, with interest on the overdue principal (and premium, if any), together with any amounts necessary to cover the costs of collection.

If the Issuer fails to pay any of the foregoing amounts on demand, the Bond Trustee may institute and prosecute a judicial proceeding for the collection of amounts due and unpaid by the Issuer, and may enforce a judgment or final decree against the Issuer or any other obligor upon the Bonds and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property constituting the Trust Estate.

If an Event of Default occurs and is continuing, the Bond Trustee may proceed to protect and enforce its rights and the rights of the Holders of Bonds by judicial proceedings, whether for

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the specific enforcement of any covenant or agreement in the Bond Indenture or in aid of the exercise of any power granted therein, or to enforce any other proper remedy.

Application of Money Collected

Any money collected by the Bond Trustee or on deposit in the Debt Service Fund or the Construction Fund or any fund created by supplemental indenture (subject to any limitations therein provided) during the continuance of any Event of Default described in paragraphs (a), (b), or (c) under “THE BOND INDENTURE–Defaults and Remedies–Events of Default” will be applied in the following order, at the date or dates fixed by the Bond Trustee and, in case of the distribution for the payment of Debt Service on the Bonds, upon presentation of the Bonds and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:

First: To the payment of all amounts due the Bond Trustee under the Bond Indenture;

Second: To the payment of the amounts then due and unpaid upon the Bonds for principal (and premium, if any) and interest, for which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Bonds, or, if payment has been made by a Credit Enhancer pursuant to the Credit Facility for such Bonds, then to such Credit Enhancer to the extent such payment and interest thereon has not been previously reimbursed to it; and

Third: To THR, any remaining amounts of money so collected.

Limitation on Suits and Control of Remedies

No Holder of any Bond has the right to institute any proceeding, judicial or otherwise, with respect to the Bond Indenture, or for the appointment of a receiver or trustee, or for any other remedy under the Bond Indenture, unless (i) such Holder has previously given written notice to the Bond Trustee of a continuing Event of Default; (ii) the Holders of not less than 25% in principal amount of the Outstanding Bonds shall have made written request to the Bond Trustee to institute proceedings in respect of such Event of Default; (iii) such Holder or Holders have offered to the Bond Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (iv) the Bond Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (v) no direction inconsistent with such written request has been given to the Bond Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Bonds; it being understood and intended that no one or more Holders of Bonds shall have any right in any manner whatever to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders, to take any action that would affect the validity of the lien of the Bond Indenture on the Trust Estate, or to enforce any right under the Bond Indenture, except in the manner provided in the Bond Indenture and for the equal and ratable benefit of all the Holders.

Control by Holders of Bonds

Subject to certain limitations set forth in the Bond Indenture, the Holders of a majority in principal amount of the Outstanding Bonds shall have the right to direct the time, method and

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place of conducting any proceeding for any remedy available to the Bond Trustee or exercising any trust or power conferred on the Bond Trustee, provided that such direction shall not be in conflict with any rule of law or with the Bond Indenture, and the Bond Trustee may take any other action deemed proper by the Bond Trustee which is not inconsistent with such direction.

Supplemental Indentures and Amendatory Agreements

Without Consent of Holders of Bonds. Without the consent of the Holders of any Bonds, but with consent of THR and subject to certain provisions of the Bond Indenture, the Issuer and the Bond Trustee may enter into or consent to one or more supplemental indentures or amendments to the Bond Indenture, the Loan Agreement or the Master Indenture, for any of the following purposes:

(a) to authorize an additional series of Bonds or to make provision for the rebate of investment earnings to the United States of America in connection with the issuance of such additional Bonds;

(b) to evidence the succession of another Person to the Issuer or THR, or successive successions, and the assumption by the successor Person of the covenants, agreements and obligations of the Issuer as permitted by the Bond Indenture or of THR as permitted by the Loan Agreement;

(c) to add to the covenants of the Issuer or THR for the benefit of the Holders of Bonds, to surrender any right or power in the Bond Indenture conferred upon the Issuer or THR;

(d) to cure any ambiguity or to correct or supplement any provision of the Bond Indenture or supplement which may be inconsistent with any other provision, or to make any other provisions with respect to matters or questions arising under the Bond Indenture or the Loan Agreement which shall not, in the judgment of the Bond Trustee, be inconsistent with the Bond Indenture or the Loan Agreement, provided such action shall not adversely affect the interests of the Holders of Bonds;

(e) to modify or supplement the Bond Indenture in such manner as may be necessary or appropriate to qualify the Bond Indenture under the Trust Indenture Act of 1939, or similar federal or state statute or regulation; provided, however, that nothing contained in the Bond Indenture shall be deemed to authorize inclusion in the Bond Indenture or in any supplemental indenture, provisions referred to in Section 316(a)(2) of the said Trust Indenture Act or any corresponding provision provided for in any similar statute subsequently in effect;

(f) in connection with any change which, in the judgment of a Management Consultant, (i) is in the best interest of THR and (ii) does not materially adversely affect the Holder of any Bond; provided that no such change shall be made if within 30 days of its receipt of such Management Consultant’s report, the Bond Trustee shall have obtained a report from another Management Consultant indicating that in its opinion either clause (i) or clause (ii) of this subsection (f) is not satisfied; provided further, that the Bond Trustee shall be under no duty to retain another such Management Consultant; and

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(g) to make any amendment to any provision of the Bond Indenture or to any supplemental indenture which is only applicable to Bonds issued subsequently, or after a mandatory purchase of such Bonds, or that will not apply so long as any Bond then Outstanding remains Outstanding.

With Consent of Holders of Bonds. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Bonds, and with the consent of THR, the Issuer and the Bond Trustee may enter into or consent to supplemental indentures (subject to certain provisions of and in accordance with the procedures in the Bond Indenture) or amendments to the Loan Agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Bond Indenture or the Loan Agreement or of modifying in any manner the rights of the Holders of the Bonds under the Bond Indenture or the Loan Agreement; provided, however, that no such supplemental indenture or amendment shall, without the consent of the Holder of each Outstanding Bond affected thereby,

(a) change the Stated Maturity of the principal of, or any installment of interest on, any Bonds or any date for mandatory redemption thereof, or reduce the principal amount thereof or the interest thereon or any premium payable upon the redemption thereof, or change the coin or currency in which, any Bonds or the interest thereon is payable, or impair or subordinate the lien of the Bond Indenture on the Trust Estate or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the redemption date), or

(b) reduce the percentage in principal amount of the Outstanding Bonds, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of the Bond Indenture or certain defaults thereunder and their consequences) provided for in the Bond Indenture, or

(c) modify any of the provisions under this subheading or certain other provisions in the Bond Indenture, except to increase any such percentage or to provide that certain other provisions of the Bond Indenture cannot be modified or waived without the consent of the Holder of each Bond affected thereby.

Concerning the Bond Trustee

The Bond Indenture contains various limitations on the liability of the Bond Trustee. The Bond Trustee is not liable for any error of judgment made in good faith by a Responsible Officer, unless it has been proved that the Bond Trustee was negligent in ascertaining the pertinent facts. The Bond Trustee is not liable for any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in aggregate principal amount of Bonds then Outstanding relating to the time, method, and place of conducting any proceeding for any remedy available to the Bond Trustee, or exercising any trust or power conferred upon the Bond Trustee, under the Bond Indenture.

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Trustee May Own Bonds

The Bond Trustee or other agent of the Issuer, in its individual or any other capacity, may become the owner or pledgee of Bonds and may otherwise deal with the Issuer with the same rights it would have if it were not Trustee or such other agent.

Moneys to be Held in Trust

All moneys received by the Bond Trustee are required to be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by law. The Bond Trustee shall be under no liability for interest on any moneys received other than as expressly agreed.

Resignation and Removal of the Bond Trustee

No resignation or removal of the Bond Trustee and no appointment of a successor Bond Trustee shall become effective until the acceptance of appointment by the successor Bond Trustee in accordance with the terms of the Bond Indenture.

The Bond Trustee may resign at any time upon written notice to the Issuer and may petition a court of competent jurisdiction for the appointment of a successor Bond Trustee if a successor Bond Trustee has not accepted appointment within 30 days of the giving of such notice.

The Bond Trustee may be removed at any time by (i) THR Order, except during the occurrence and continuance of an Event of Default, delivered to the Bond Trustee and the Issuer at least 60 days prior to the proposed effective date of such removal, or (ii) act of the Holders of a majority in principal amount of the Outstanding Bonds delivered to the Bond Trustee and the Issuer.

If the Bond Trustee becomes ineligible under the Bond Indenture and fails to resign after written request by the Issuer or by any Holder of Bonds, or becomes incapable of acting or is adjudged a bankrupt or insolvent, or a receiver of the Bond Trustee or of its property is appointed or any public officer takes charge or control of the Bond Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, the Issuer, with the consent of the Credit Enhancer, may remove the Bond Trustee, or any Holder of Bonds who has been a bona fide Holder of a Bond for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Bond Trustee and the appointment of a successor Bond Trustee.

If the Bond Trustee resigns, is removed or becomes incapable of acting, or if a vacancy occurs in the office of Bond Trustee for any cause, the Issuer is required to promptly appoint a successor Bond Trustee. Within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Bond Trustee may be appointed by act of the Holders of a majority in principal amount of the Outstanding Bonds delivered to the Issuer and the retiring Bond Trustee. If no successor Bond Trustee is appointed by the Issuer or the Holders of Bonds and accepts appointment as required under the Bond Indenture, any Holder of Bonds who has been a bona fide Holder of a Bond for at least six months may, on behalf of himself and all

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others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Bond Trustee.

No resignation or removal of the Bond Trustee will become effective until the appointment of and acceptance by the successor Trustee.

Satisfaction and Discharge of Bond Indenture

If at any time the Issuer has paid or caused to be paid the principal of (and premium, if any) and interest on all the Bonds Outstanding under the Bond Indenture when due, and if the Issuer has paid or provided for the payment of all other sums payable under the Bond Indenture by the Issuer, and THR has paid all of the Bond Trustee’s fees and expenses pursuant to the Loan Agreement, the Bond Indenture shall cease to be of further effect (except as to (i) rights of registration of transfer and exchange, (ii) substitution of mutilated, defaced, or apparently destroyed, lost or stolen Bonds, (iii) rights of Holders to receive payments of Debt Service on the Bonds and remaining obligations of the Issuer to make mandatory sinking fund payments, (iv) the rights, remaining obligations, if any, and immunities of the Bond Trustee, and (v) the rights of the Holders as beneficiaries with respect to property deposited with the Bond Trustee payable to all or any of them) and the Bond Trustee, on Issuer Request accompanied by an Officer’s Certificate and an Opinion of Counsel to the effect that the conditions precedent to the satisfaction and discharge of the Bond Indenture have been fulfilled and at the cost and expense of THR, shall execute proper instruments acknowledging satisfaction of and discharging the Bond Indenture.

Notwithstanding the satisfaction and discharge of the Bond Indenture, certain obligations of the Issuer to the Bond Trustee and, if funds have been deposited with the Bond Trustee relating to payment or holding for payment of the Bonds, certain obligations of the Bond Trustee will survive.

Bonds Deemed Paid. Bonds of any series shall be deemed to have been paid if (i) in case said Bonds are to be redeemed on any date prior to their Stated Maturity, THR has given to the Bond Trustee irrevocable instructions to give notice of redemption of such Bonds, in the manner required by the Bond Indenture, on said redemption date; (ii) there has been deposited with the Bond Trustee either money sufficient, or Defeasance Obligations the principal of and the interest on which will provide money sufficient without reinvestment (as established by an Officer’s Certificate delivered to the Bond Trustee accompanied by a report of an Independent certified public accountant setting forth the calculations upon which such Officer’s Certificate is based), to pay when due the principal of (and premium, if any) and interest due and to become due on said Bonds on and prior to the Maturity thereof, assuming the maximum rate during any period in which interest on the Bonds is subject to adjustment; (iii) in the event said Bonds are not by their terms subject to redemption within the next 45 days, THR has given the Bond Trustee irrevocable instructions to give notice to the Holders of such Bonds that the deposit required by clause (ii) in this subsection has been made with the Bond Trustee and that said Bonds are deemed to have been paid in accordance with this provision and stating such Maturity Date upon which moneys are to be available for the payment of the principal of (and premium, if any) and interest on said Bonds; and (iv) there is delivered to the Bond Trustee an Opinion of Bond Counsel.

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Application of Trust Money. The Defeasance Obligations and money deposited with the Bond Trustee pursuant to certain provisions of the Bond Indenture and principal or interest payments on any such Defeasance Obligations shall be held in trust, shall not be sold or reinvested, and shall be applied by it, in accordance with the provisions of the Bonds and the Bond Indenture, to the payment, either directly or through any paying agent as the Bond Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money or Defeasance Obligations were deposited; provided that, upon delivery to the Bond Trustee of an Officer’s Certificate (accompanied by the report of an Independent certified public accountant setting forth the calculations upon which such Officer’s Certificate is based) establishing that the money and Defeasance Obligations on deposit following the taking of the proposed action will be sufficient for the purposes described in clause (ii) under the subheading “THE BOND INDENTURE–Satisfaction and Discharge of Bond Indenture–Bonds Deemed Paid,” any money received from principal or interest payments on Defeasance Obligations deposited with the Bond Trustee or the proceeds of any sale of such Defeasance Obligations, if not then needed for such purpose, are required, upon THR Request, to be reinvested to the maximum extent possible in other Defeasance Obligations or disposed of as requested by THR. For purposes of any calculation required by the provisions described under “THE BOND INDENTURE–Satisfaction and Discharge of Bond Indenture,” any Defeasance Obligation which is subject to redemption at the option of its issuer, the redemption date for which has not been irrevocably established as of the date of such calculation, is required to be assumed to cease to bear interest at the earliest date on which such obligation may be redeemed at the option of the issuer thereof and the principal of such obligation shall be assumed to be received at its stated maturity.

THE MASTER INDENTURE

The following is a summary of certain provisions of the Master Indenture. Such summary does not purport to be complete and is qualified in its entirety by reference to the Master Indenture for a complete recital of the terms thereof.

Security Interests Granted

In order to secure the payment of Outstanding Securities without priority of any such Securities over any other such Securities, and to secure the performance of the covenants contained therein, THR and the Obligated Group Members have granted a security interest in (i) all Revenues and accounts receivable of the grantors, including without limitation rights to receive payments from third party payors such as Medicare and Medicaid, except and excluding all such items, whether now owned or hereafter acquired by such Person, which by their terms or by reason of applicable law would become void or voidable if granted or pledged under the Master Indenture; (ii) all right, title and interest in and to all money and investments held or required to be held for the credit of the funds and accounts established by or under the Master Indenture; and (iii) any all property that may, from time to time, be subjected to the lien and security interest of the Master Indenture by the grantor or by anyone on its behalf, which subjection as additional security may be made subject to reservations, limitations or conditions.

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Covenants of the Obligated Group

Payment of Debt Service. THR will duly and punctually pay the Debt Service on the Securities in accordance with the terms of the Securities and the Master Indenture.

Each Obligated Group Member jointly and severally unconditionally guarantees the full and timely payment of the Debt Service on all Outstanding Securities which such Person has not created or otherwise made (and on which such Person is not otherwise primarily liable) in accordance with the terms of such Securities. Such guaranty will not be affected, modified or impaired upon the happening of any event, other than the payment of such Securities, including, without limitation, any of the following, whether or not with notice to, or the consent of, the guarantor:

(a) the waiver, compromise, settlement, release or termination by any Person of the obligations evidenced by such Securities or any covenant or security in support thereof;

(b) the failure to give notice to the guarantor of the occurrence of an event of default under the terms and provisions of the Master Indenture or any agreement under which such Securities are created, assumed, guaranteed or secured;

(c) any failure, omission or delay on the part of the Master Trustee or the Holder of such Securities to enforce, assert or exercise any right, power or remedy conferred on the Master Trustee or such Holder in the Master Indenture or any other agreement under which such Securities are created, assumed, guaranteed or secured;

(d) the voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all the assets, marshaling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization or arrangement under bankruptcy or similar laws, composition with creditors or readjustment of, or other similar proceedings affecting any such guarantor or any other obligor on Securities;

(e) any acts or circumstances that may constitute failure of consideration, destruction of or damage to any property of the Member, commercial frustration of purpose, any change in the tax or other laws of the United State of America, the State of Texas or any political subdivision thereof, or any failure of THR or any other Combined Group Member to perform and observe any agreement, liability or obligation arising out of or connected with this undertaking, the Master Indenture, any undertaking of any other Designated Member or any Security;

(f) the invalidity, irregularity, illegality, unenforceability or lack of value of, or any defect in any of the Securities so guaranteed or any collateral security therefor; or

(g) to the extent permitted by law, any event or action that would, in the absence of this covenant; result in the release or discharge by operation of law of such guarantor from the performance or observance of any obligation, covenant or agreement contained in the Master Indenture.

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Each Obligated Group Member is required to cause each of its Designated Members within its control to make contributions, advances or loans subordinate in time and right of payment to the Securities to the Obligated Group Member from any funds lawfully available for such purpose to the extent necessary to provide for the due and punctual payment of Debt Service on the Outstanding Securities, whether as primary obligor or guarantor; provided, however, that no Obligated Group Member is required to cause any Designated Member to make any transfer that would likely, in the Opinion of Counsel satisfactory to THR and the Master Trustee, cause the members of the Governing Body of the Designated Member to incur personal liability to the other creditors of the Designated Member solely as a result of such transfer.

Maintenance of Office or Agency. THR is required to maintain an office or agency in each Place of Payment where Securities may be presented or surrendered for payment, where Securities may be surrendered for transfer or exchange and where notices and demands to or upon THR in respect of the Securities and the Master Indenture may be served. THR is required to give prompt written notice to the Master Trustee of the location, and of any change in the location, of such office or agency. In addition, such presentations, surrenders, notices and demands may be made or served at the Designated Corporate Trust Office of the Master Trustee, and THR has appointed the Master Trustee its agent to receive all such presentations, surrenders, notices and demands.

Money for Security Payments to be Held in Trust; Appointment of Paying Agents. THR is required to appoint a paying agent in each Place of Payment for each series of the Securities and to deposit in immediately available funds with each paying agent, on or prior to the date payment is due, the amount required to pay Debt Service on the Securities. Each paying agent other than the Master Trustee will execute an agreement agreeing to (i) hold all sums for the payment of Debt Service in trust for the benefit of the Persons entitled thereto; (ii) give the Master Trustee notice of any default by THR (or any other obligor) in making payment of Debt Service; and (iii) at any time during the continuance of any default, upon the written request of the Master Trustee, pay to the Master Trustee all amounts held in trust by such paying agent. THR may at any time direct any paying agent to pay all sums held in trust to the Master Trustee.

Any money deposited with the Master Trustee or any paying agent for the payment of Debt Service on any Security and remaining unclaimed, as provided in the Master Indenture, will be paid to THR and the Holder of such Security will thereafter be deemed to be an unsecured general creditor and may look only to the Obligated Group for payment thereof.

Payment of Taxes and Other Claims. Each Obligated Group Member is required (and is required to cause each of its Designated Members to) pay on a timely basis, (i) all taxes, assessments and other governmental charges lawfully levied or assessed or imposed upon it or upon its income, profits or property, and (ii) all lawful claims for labor, materials and supplies which, if unpaid, might become a lien upon its property; provided, however, that no such Person shall be required to pay any such tax, assessment, governmental charge or claim to the extent that the amount, applicability or validity is being contested in good faith and adequate reserves are established and maintained for payment.

Maintenance of Properties. Each Obligated Group Member is required to (and is required to require each of its Designated Members to) (i) cause its properties used in the

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conduct of its business to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment, ordinary wear and tear, casualty, condemnation and acts of God excepted; and (ii) cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of such Person may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times, and maintenance and operation of properties that are not desirable in the conduct of the business may be discontinued as provided in the Master Indenture.

Statement as to Compliance. THR will deliver within 150 days after the end of each Fiscal Year a statement signed by certain officers stating that (i) a review of the activities of such Obligated Group Member and its Designated Members during such year and of its performance under the Master Indenture has been made under the signer’s supervision, and (ii) to the best of the signer’s knowledge, based on such review, the Obligated Group Member and its Designated Members have fulfilled all their obligations throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each default known and the nature and status thereof.

THR is required to give written notice to the Master Trustee of the discovery of any default which has not been cured or waived under any instrument creating any material Debt of any member of the Combined Group.

Corporate Existence. Subject to certain sections of the Master Indenture regarding merger and consolidation, each Obligated Group Member is required to, and is required to cause each of its Designated Members to, do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises. No Person is required to preserve such rights and franchises if its Governing Body determines that the preservation thereof is no longer desirable in the conduct of its business and that the loss thereof is not disadvantageous in any material respect to the Holders of the Securities.

To Keep Books; Financial Reports and Inspection by Master Trustee. Each Obligated Group Member is required to (and is required to cause each of its Designated Members to) at all times keep books or records and accounts, in accordance with generally accepted accounting principles. THR is required to furnish to the Master Trustee as soon as available, and in any event within 150 days after the end of each Fiscal Year, combined or consolidated financial statements of THR, and the combined or consolidated financial statements that include each Combined Group Member that is not otherwise included in the combined or consolidated financial statements of THR as of the end of such Fiscal Year or for such Fiscal Year then ended, as applicable, shown in each case in comparative form with the preceding Fiscal Year, together with the report of a nationally recognized Independent Accountant selected by the Obligated Group Member or Designated Member who has examined such statements in accordance with generally accepted auditing standards as to the fairness of presentation of such statements. At the option of the Obligated Group Member or Designated Member, such financial statements need not include entities that are not members of the Combined Group.

The Master Trustee, its agents and attorneys may (and upon request of a majority in principal amount of Securities are required to) inspect the property of any Obligated Group Member or any of its Designated Members, or any of their consolidated subsidiaries and to

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examine all the books of account, records, reports and other financial papers of such Persons. Each Obligated Group Member is required to (and is required to cause each of its Designated Members to) furnish the Master Trustee any and all information as the Master Trustee may reasonably request with respect to the performance or observance by such Persons of their covenants in the Master Indenture.

Calculations Under the Master Indenture. All calculations required to be made under the Master Indenture with respect to any Person shall be made by THR unless otherwise required, and shall be made after elimination of inter-company items on a consolidated basis with respect to THR and those entities reflected in its consolidated financial statements filed with the Master Trustee as described under the subheading, “THE MASTER INDENTURE– Covenants of the Obligated Group–To Keep Books; Financial Reports and Inspection by Master Trustee,” or, at the sole discretion of THR, from the separate company financial information of the Persons to which a specific calculation is to be made during any period. The character or amount of any asset, liability, or item of income or expense required to be determined or any consolidation, combination or other accounting computation required to be made for the purposes of the Master Indenture, shall be determined or made in accordance with generally accepted accounting principles at the time in effect.

Insurance. Each Obligated Group Member is required (and will cause each of its Designated Members to) at all times keep all its property and operations of an insurable nature and of the character usually insured by companies operating similar properties and engaged in similar operations insured in amounts customarily carried, and against loss or damage from such causes as are customarily insured against, by similar companies. Insurance may be effected with responsible insurance carriers or through a self-insurance program.

Limitation on Liens. Each Obligated Group Member is not permitted to (and is not permitted to permit any of its Designated Members to) grant, create, assume or incur or suffer to be granted, created, assumed or incurred or to exist any mortgage, lien, charge or encumbrance of any kind upon, or pledge of or security interest in, any property of such Person whether owned at the date of execution and delivery of the Master Indenture or thereafter acquired except the following:

(a) Within the Combined Group. Mortgages, liens, charges, encumbrances, pledges or other security interests created by any member of the Combined Group as security for Debt owed to any other member of the Combined Group; or

(b) Permitted Encumbrances; or

(c) Purchase and Construction Money. Purchase or construction money mortgages, liens, charges, encumbrances, pledges or security interests (including conditional sale agreements or other title retention agreements and leases in the nature of title retention agreements) upon or in property acquired or improved after the date of the Master Indenture, or renewals of any such mortgages, liens, charges, encumbrances, pledges or security interests in connection with the replacement, extension or renewal (without increase in principal amount) of the Debt secured thereby, provided that no such mortgage, lien, charge, encumbrance, pledge or security interest extends or shall extend to or cover any property of any member of the Combined

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Group other than the property then being acquired or constructed or on which improvements are being so constructed, and fixed improvements then or thereafter erected thereon and related insurance coverage and proceeds; or

(d) Pari Passu. Any mortgage, lien, charge, encumbrance, pledge or other security interest of any kind upon any property of any character of any Obligated Group Member or any of its Designated Members or any conditional sale agreement or similar title retention agreement with respect to any such property, if such Person makes effective provision, and each Obligated Group Member covenants that in any such case it will make or cause to be made effective provision, whereby all the Outstanding Securities shall be directly secured by such mortgage, lien, charge, encumbrance, pledge or other security agreement equally and ratably upon the same property, or upon other property with a fair market value at least equal to the fair market value of property to be mortgaged, with any and all other obligations and indebtedness thereby secured for so long as such obligations or indebtedness are so secured; or

(e) Existing Liens. Any mortgage, lien, charge, encumbrance, pledge or other security interest that is existing on any property of an Obligated Group Member on the date of the Master Indenture or any mortgage, lien, charge, encumbrance, pledge or other security interest that is existing on any real or personal property on the date of acquisition thereof, or that is existing on the property of any Person on the date such Person becomes a member of the Combined Group; provided that no lien so described or the Debt secured thereby may be extended or renewed or may be modified to spread to any property of the Combined Group not subject to such lien on such date, except to the extent that such lien, as so extended, renewed or modified could have been granted or created under any provision of the Master Indenture; or

(f) Factoring. Any security interest or pledge in accounts receivable and the proceeds thereof securing an obligation on the part of one or more members of the Combined Group to repurchase or replace accounts receivable sold so long as the maximum amount secured by such pledge or security interest does not exceed 15% of Adjusted Revenues of the Combined Group for the Fiscal Year preceding, or any consecutive 12 month period of comparable length ending within 180 days preceding, the date of creation of such security interest or pledge; or

(g) Basket. Any mortgage, lien, charge, encumbrance, pledge or other security interest of any kind if the book value (or, at the option of THR, current value) of all property of the Combined Group subjected to mortgages, liens, charges, encumbrances, pledges or other security interests pursuant to this clause does not exceed 25% of the book value (or, if THR chooses to use the current value of the property so subjected, 25% of the current value) of all property of the Combined Group.

An oil or gas royalty, overriding royalty or production payment shall not be deemed to be a charge or encumbrance upon the related working interest.

To Maintain Rates. In each Fiscal Year, each Obligated Group Member has covenanted to (and to cause each of its Designated Members to) establish, charge and use its reasonable efforts to collect rates, fees and charges for goods and services furnished by, and for the use of, its properties which, if collected, would be sufficient to cause the Historical Debt Service Coverage Ratio of the Combined Group for the current Fiscal Year to be not less than 1.10. If

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the Historical Debt Service Coverage Ratio of the Combined Group for any Fiscal Year is less than 1.10, THR, within 165 days after the close of such Fiscal Year, is required to engage a Management Consultant acceptable to the Master Trustee to make recommended changes in rates, fees and charges or expenses, or in such other affairs, such that the Historical Debt Service Coverage Ratio of the Combined Group for the current Fiscal Year will be at least 1.10. Subject to any contractual commitments or Legal Restrictions to which the Obligated Group Members and their Designated Members may be subject, each Obligated Group Member is required to (and is required to cause its Designated Members to) implement such changes to the fullest extent practicable.

The failure of the Combined Group to attain a Historical Debt Service Coverage Ratio of 1.10 for any Fiscal Year is not be a default under the Master Indenture if such Management Consultant is so retained and the recommendations of such Management Consultant are so implemented and the Historical Debt Service Coverage Ratio of the Combined Group is equal to at least 1.0 for the current Fiscal Year. Moreover, if such Management Consultant concludes that applicable Legal Restrictions have caused the Historical Debt Service Coverage Ratio of the Combined Group for the prior Fiscal Year to be less than 1.10, it will not constitute a default if a certificate of such Management Consultant (supported by an Opinion of Counsel, if required by the Master Trustee) is delivered to the Master Trustee stating that, taking into account such Legal Restrictions, the Historical Debt Service Coverage Ratio of the Combined Group estimated for the current Fiscal Year and for each of the next two Fiscal Years will be the maximum amount permitted by such Legal Restrictions and at least 1.0.

Waiver of Certain Covenants. No Obligated Group Member is obligated to comply with any covenant or condition set forth in the Master Indenture if before or after the time for such compliance the Holders of the same percentage in principal amount of all Securities then Outstanding the consent of which would be required to amend the provisions of the Master Indenture to permit such noncompliance either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver will extend to or affect such covenant or condition except to the extent so expressly waived and, until such waiver shall become effective, the obligations of each Obligated Group Member and the duties of the Master Trustee in respect of any such covenant or condition shall remain in full force and effect.

Limitation on Debt. Each Obligated Group Member covenants that it will not (and will not permit any of its Designated Members to incur additional Debt unless the Debt proposed to be incurred is as described below:

(a) Funded Debt. Funded Debt, other than Funded Debt otherwise described in this section, incurred for any purpose if, prior to incurrence of such Funded Debt, the Master Trustee receives an Officer’s Certificate certifying that (i) after giving effect to the incurrence of such Debt the Combined Group will have a Debt to Capitalization Ratio not greater than 75%, and (ii) the Historical Debt Service Coverage Ratio of the Combined Group for the Fiscal Year preceding the date of incurrence of such Debt was at least 1.1:1.0 (with respect to the Funded Debt of the Combined Group Outstanding immediately prior to the incurrence of such Debt);

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(b) Completion Debt. Funded Debt incurred by an Obligated Group Member for the purpose of financing the completion, constructing, or equipping of facilities for which Funded Debt had previously been incurred and which the Obligated Group Member in good faith expected to be sufficient to complete such facilities, to the extent necessary to provide a completed and equipped facility of the type and scope contemplated at the time and in accordance with the general plans and specifications for such facility as originally prepared, with only such changes as have been made in conformance with the documents pursuant to which such Funded Debt was originally incurred;

(c) Refunding Debt. Debt of an Obligated Group Member incurred to refund or defease any Debt of an Obligated Group Member;

(d) Short Term. Debt payable on demand or that matures not more than one year from the date of incurrence, extension, or renewal (other than debt which could come due on demand by the holder thereof, but that has a Stated Maturity greater than one year from such date), if

(i) the amount of Debt incurred pursuant to this clause and then Outstanding, including the Debt proposed to be incurred, does not exceed, at the time of incurrence, 20% of the Adjusted Revenues of the Combined Group for the Fiscal Year preceding, or any consecutive 12-month period of comparable length ending within 180 days preceding, the date of incurrence; and

(ii) there has been a period of 20 consecutive days within the 12-month period immediately preceding the date of such incurrence, extension or renewal (and THR will maintain, or cause to be maintained at least 1 such period in each Fiscal Year) during which the total amount of Outstanding Debt of the Combined Group incurred pursuant to this clause (d) does not exceed 5% of the Adjusted Revenues of the Combined Group for the Fiscal Year preceding, or any period of comparable length ending within 180 days preceding, the date of incurrence;

(e) Nonrecourse. Debt incurred by any Person to acquire or improve Property which by its terms gives the holder thereof no right to seek payment of any deficiency from such Person or from any other Property of such Person;

(f) Subordinated. Debt specifically subordinated as to payment and security to payment of the Securities upon liquidation or reorganization and upon the occurrence and continuance of an Event of Default;

(g) Credit Facilities. Reimbursement or other repayment obligations arising under reimbursement or similar agreements with banks or other financial institutions relating to letters or lines of credit or other credit facilities used to secure or provide liquidity with respect to Debt;

(h) Ordinary Course of Business. Reimbursement or other repayment obligations arising under reimbursement or similar agreements with banks or other financial institutions securing contracts or other obligations incurred in the ordinary course of business in a total aggregate principal amount not exceeding 5% of Adjusted Revenues; or

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(i) Mandated Debt. Debt that is incurred to construct, renovate or replace any property, plant and equipment of a Combined Group Member if federal or state agencies, authorities, officials or similar governmental bodies with jurisdiction over the Combined Group Member specifically mandate such construction, renovation or replacement as a condition to the Combined Group Member being able to continue to carry on such of its activities as are subject to the jurisdiction of such federal or state agency, authority, official or similar governmental body.

Sale, Lease or Other Disposition of Property. Each Obligated Group Member covenants that it will not, and that it will not permit any of its Designated Members to, in any Fiscal Year, sell, lease or otherwise dispose of any Property, except for sales, leases or dispositions of Property:

(a) In the ordinary course of business;

(b) In connection with a true sale and leaseback under the Code;

(c) If, in the opinion of THR, 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, removal or other disposition thereof will not materially adversely impair the operations of the Combined Group Members;

(d) To any Person, provided that prior to the sale, lease or disposition of Property, the Master Trustee shall have received an Officer’s Certificate to (i) the effect that the condition described in subsection (a) of “Limitation on Debt” above would be met for the incurrence of one dollar of additional Funded Debt immediately following such sale, lease or disposition, or (ii) an Officer’s Certificate to the effect that the projected Historical Debt Service Coverage Ratio for the first Fiscal Year succeeding such sale, lease or disposition is equal to or greater than the projected Historical Debt Service Coverage Ratio prior to such sale, lease or disposition, but not less than 1.0:1.0;

(e) To any Person, provided such Property was received by a Combined Group Member as a gift, grant, bequest or donation and is restricted as to use for a particular purpose inconsistent with its use for the payment of principal of, prepayment premium and interest on Debt or the payment of operating expenses;

(f) To any Person provided that such Property is transferred for Fair Market Value;

(g) In connection with the lease or license of a part of Property in connection with the economical use of such Property; or

(h) To an Obligated Group Member.

Consolidation, Merger, Conveyance and Transfer

Consolidation, Merger, Conveyance or Transfer Only on Certain Terms. No Obligated Group Member may consolidate with or merge into any corporation or convey or transfer its properties substantially as an entirety to any Person, unless

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(a) such consolidation, merger or transfer (i) is between Members of the Obligated Group, and (ii) the surviving Person is an Obligated Group Member, or

(b) all of the following conditions exist:

(i) the Person formed by such consolidation or into which the Obligated Group Member merges or the Person which acquires substantially all of the properties of the Obligated Group Member as an entirety shall be a Person organized and existing under the laws of the United States of America or any state or the District of Columbia and shall expressly assume by instrument supplemental to the Master Indenture executed and delivered to the Master Trustee, in form satisfactory to the Master Trustee, the due and punctual payment of Debt Service on the Securities and the performance and observance of every covenant and condition on the part of the Obligated Group Member to be performed or observed under the Master Indenture;

(ii) immediately after giving effect to such transaction, no default under the Master Indenture shall have occurred and be continuing; and

(iii) THR has delivered to the Master Trustee an officer’s certificate and an Opinion of Counsel, each of which state that such consolidation, merger, conveyance or transfer and such supplemental instrument comply with the Master Indenture and will not affect the status of interest on any indebtedness secured by Outstanding Securities under the Code, and that all conditions precedent to such transaction have been complied with.

Successor Corporation Substituted. Upon any consolidation or merger or any conveyance or transfer of the properties and assets of an Obligated Group Member substantially as an entirety in accordance with the foregoing section, the successor Person formed by such consolidation or into which the Obligated Group Member is merged or to which such conveyance or transfer is made will succeed to, and be substituted for, and may exercise every right and power of, such Obligated Group Member with the same effect as if such successor Person had been named as such Obligated Group Member. No such conveyance or transfer will have the effect of releasing any other Person which previously became an Obligated Group Member in the manner described in the Master Indenture from its liability as obligor and maker on any of the Securities.

Membership in the Combined Group

Admission of Obligated Group Members. A Person may become an Obligated Group Member only if:

(a) the Person proposing to become an Obligated Group Member executes and delivers to the Master Trustee an indenture supplemental to the Master Indenture which evidences the agreement of such Person while such Person is an Obligated Group Member (i) jointly and severally to assume or guarantee on the terms provided in the Master Indenture the obligation to pay all Securities then Outstanding and thereafter incurred and (ii) to observe and perform the obligations of each Obligated Group Member set forth in the Master Indenture;

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(b) THR has consented to the inclusion of such Person as an Obligated Group Member as evidenced by a THR Consent;

(c) immediately after giving effect to such admission, no default under the Master Indenture will have occurred and be continuing;

(d) THR has delivered to the Master Trustee an Officer’s Certificate which states that the admission of such Person and the delivery of such supplemental indenture comply with the Master Indenture and that all conditions precedent relating to such transaction have been complied with;

(e) THR has delivered to the Master Trustee an Opinion of Counsel which states that the admission of such Person and the delivery of such supplemental indenture comply with the requirements of the Master Indenture, that such admission will not adversely affect the exclusion from gross income of interest under the Code on any indebtedness secured by Outstanding Securities and otherwise entitled to such exemption, that the supplemental indenture and the Master Indenture as so supplemented each constitute legal, valid and binding obligations of such Person enforceable in accordance with their respective terms subject to customary exceptions, that the admission of such Person as an Obligated Group Member will not adversely affect the enforceability of the Master Indenture against any Obligated Group Member, and that all conditions precedent relating to such transaction have been complied with; and

(f) THR has delivered to the Master Trustee an Officer’s Certificate to the effect that the Obligated Group could incur one dollar of additional Funded Debt under subparagraph (a) of “Limitation on Debt” above, immediately following the addition of such new Obligated Group Member or an Officer’s Certificate to the effect that the projected Historical Debt Service Coverage Ratio for the first Fiscal Year succeeding the date of admission of such Person is equal to or greater than the projected Historical Debt Service Coverage Ratio without such Person, but not less than 1.0:1.0.

Obligated Group Members. Upon any Person becoming an Obligated Group Member: (i) the Master Trustee may pursue any remedies consequent upon a default against any Obligated Group Member, or all of them, without notice to, demand upon or joinder of (and without in any way releasing) any of the others, or against any one or more or all of them at the same time or at different times including enforcement of Designated Members’ Undertakings to the Obligated Group Member; (ii) any right of contribution or right acquired by subrogation by any Obligated Group Member against any other Obligated Group Member arising out of the payment of Debt is required to be subordinated in time and right to the rights of the Master Trustee and the Holders of Securities; and (iii) each Obligated Group Member is required to be deemed to have irrevocably designated THR as its attorney in fact with full power of substitution to perform, satisfy and discharge every obligation, covenant, duty or liability to be performed on the part of the Obligated Group Member, to exercise any right, privilege or power under the Master Indenture or in respect of any Security, and to execute and deliver in the name and on behalf of such Obligated Group Member any instrument required or permitted to be executed by such Obligated Group Member.

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Withdrawal of Obligated Group Members. Any Obligated Group Member may, upon 30 days’ prior written notice to the Master Trustee, withdraw as an Obligated Group Member, and the Master Trustee, upon Request of such Obligated Group Member and at such withdrawing Obligated Group Member’s expense, is required to execute and deliver an appropriate instrument releasing such Obligated Group Member from any liability, any security interest created by, or obligation under the provisions of the Master Indenture provided that:

(a) the withdrawing Obligated Group Member has requested such release by Board Resolution;

(b) either the withdrawing Obligated Group Member does not have any Securities Outstanding, or THR confirms the obligation of each remaining Obligated Group Member to repay any Securities of such withdrawing Obligated Group Member Outstanding after such withdrawal;

(c) immediately after giving effect to such withdrawal, no default under the Master Indenture shall have occurred and be continuing;

(d) THR has delivered to the Master Trustee an Officer’s Certificate stating that THR has by Board Resolution consented to such withdrawal and that all conditions precedent provided in this Section relating to such withdrawal have been complied with;

(e) THR has delivered to the Master Trustee an Opinion of Counsel stating that such withdrawal will not affect the status of interest under the Code on any indebtedness secured by Outstanding Securities and that all conditions precedent provided in this section relating to such withdrawal have been complied with; and

(f) THR has delivered to the Master Trustee an Officer’s Certificate to the effect that the Obligated Group could incur one dollar of additional Funded Debt under subsection (a) of “THE MASTER INDENTURE–Covenants of the Obligated Group–Limitation on Debt” above immediately following the withdrawal of such Obligated Group Member or an Officer’s Certificate to the effect that the projected Historical Debt Service Coverage Ratio for the first Fiscal Year succeeding the date of withdrawal of such Person is equal to or greater than the projected Historical Debt Service Coverage Ratio without such Person, but not less than 1.0:1.0.

Any Person that has withdrawn from the Obligated Group may again become a member of the Obligated Group in accordance with the provisions of the Master Indenture.

Designation as a Designated Member. Any Person may become a Designated Member of an Obligated Group Member upon Request of the Obligated Group Member accompanied by (i) a written undertaking for the benefit of the requesting Obligated Group Member and THR (and during the continuance of any default under the Master Indenture, for the benefit of the Master Trustee) agreeing that such Person will observe and perform the obligations which the Obligated Group Member has covenanted to cause Designated Members to observe and perform; (ii) a Board Resolution of such proposed Designated Member authorizing such undertaking; and (iii) an Opinion of Counsel to the effect that any transfers of money by such proposed Designated Member to an Obligated Group Member to the extent required under the Master Indenture are permissible under the laws of the jurisdiction in which such proposed Designated

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Member is organized (a) except to the extent that such transfers would (1) render such proposed Designated Member insolvent, (2) conflict with any applicable statutory provision relating to fraudulent transfers, and (3) in the case of any transfer by dividend, violate applicable statutory restrictions on the declaration and payment of dividends by such proposed Designated Member and (b) in the case of any proposed Designated Member which is an organization described in Section 501(c)(3) of the Code, assuming that such Obligated Group Member continues to maintain its status as an organization described in Section 501(c)(3) of the Code.

Release of a Designated Member. Any Person shall be released from its obligations and status as a Designated Member upon Request of the applicable Obligated Group Member upon delivery to the Master Trustee of an Officer’s Certificate of the Obligated Group Member requesting such release, and stating that all conditions precedent relating to the release of such Person as a Designated Member have been complied with and that, were such Person released as a Designated Member on the date of such Officer’s Certificate, no default would arise out of such release.

Remedies of the Master Trustee and Holder of Securities in Event of Default

Events of Default under the Master Indenture. “Event of Default” means any one of the following events (whatever the reason for such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

(a) default in the payment of the principal of, the premium, if any, or interest on any Security at its Maturity; or

(b) default in the performance, or breach, of any covenant or agreement on the part of any Obligated Group Member contained in the Master Indenture (other than a covenant or agreement whose performance or observance is waived pursuant to the terms of the Master Indenture or whose performance or observance is otherwise specifically dealt with) and continuance of such default or breach for a period of 30 days after there has been given, by registered or certified mail, to THR by the Master Trustee, or to THR and the Master Trustee by the Holders of at least 25% in principal amount of Securities then Outstanding, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” under the Master Indenture; provided that if such default can be cured by the Obligated Group Members but cannot be cured within the 30-day curative period described above, it shall not constitute an Event of Default if corrective action is instituted by the Obligated Group Members within such 30-day period and diligently pursued until the default is corrected; or

(c) a decree or order by a court having jurisdiction in the premises shall have been entered adjudging THR as bankrupt or insolvent, or approving as properly filed a petition seeking reorganization or arrangement of THR under the federal Bankruptcy Code or any other similar applicable federal or state law, and such decree or order shall have continued undischarged and unstayed for a period of 90 days; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or trustee or assignee in bankruptcy or insolvency of THR or of THR’s property, or for the winding up or liquidation of THR’s

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affairs, shall have been entered, and such decree or order shall have remained in force undischarged and unstayed for a period of 90 days; or

(d) THR shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the institution of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization or arrangement under the federal Bankruptcy Code or any other similar applicable federal or state law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or trustee or assignee in bankruptcy or insolvency of it or of its property, or shall make assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or corporate action shall be taken by THR in furtherance of any of the aforesaid purposes; or

(e) an event of default, as therein defined, under any instrument under which Securities may be incurred or secured, or under which Debt issued by or on behalf of a state or a political subdivision secured by a pledge of Securities is incurred or secured, occurs and is continuing beyond the applicable period of grace, if any.

Acceleration of Maturity in Certain Cases; Rescission and Annulment. If an Event of Default occurs and is continuing, then and in every such case the Master Trustee or the Holders of not less than 25% in principal amount of (i) the Securities of any series then Outstanding, if such Event of Default arises by reason of the failure of THR or any Obligated Group Member to pay Debt Service on any Security of such series or by reason of the acceleration of any indebtedness evidenced, collateralized or secured by any Security of such series, or (ii) the Securities Outstanding (or, in the case of any Event of Default described in clause (e) above resulting in the loss of any exclusion from gross income of interest on, or the invalidity of, any Debt secured by a pledge of Securities, the Holders of not less than 25% in principal amount of the Securities Outstanding of the affected series) may declare the principal of all of the Securities to be due and payable immediately, by written notice to THR (and to the Master Trustee if given by the Securityholders), and upon any such declaration such principal shall become immediately due and payable.

At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Master Trustee as described below, the Holders of a majority in principal amount of the Securities Outstanding, by written notice to THR and the Master Trustee, may rescind and annul such declaration and its consequences if (i) THR has caused to be paid or deposited with the Master Trustee a sum sufficient to pay (a) all overdue interest on all Securities, (b) the principal of (and premium, if any, on) any Securities which have become due other than by declaration of acceleration and interest thereon at the rate borne by the Securities; and (c) all sums paid or advanced by the Master Trustee and the reasonable compensation, expenses, disbursements and advances of the Master Trustee, its agents and counsel; (ii) all Events of Default, other than the nonpayment of the principal of Securities which have become due solely by such acceleration, have been cured or waived as provided in the Master Indenture. No such rescission shall affect any subsequent default or impair any consequent right.

Collection of Indebtedness and Suits for Enforcement by Master Trustee. Each Obligated Group Member covenants that if default is made in the payment when due of Debt

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Service on any Security, each Obligated Group Member will, upon demand of the Master Trustee, pay to the Master Trustee, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities with interest upon the overdue principal (and premium, if any) together with any amounts necessary to cover the costs of collection.

If any Obligated Group Member fails to pay any of the foregoing amounts on demand, the Master Trustee may institute and prosecute a judicial proceeding for the collection of the sums due and unpaid and may enforce the same against THR or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of THR or any other obligor upon the Securities, wherever situated.

If an Event of Default occurs and is continuing, the Master Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities by such appropriate judicial proceedings as the Master Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in the Master Indenture or in aid of the exercise of any power granted in the Master Indenture or to enforce any other proper remedy.

Application of Money Collected. Any money collected by the Master Trustee during the continuance of any Event of Default described in paragraph (a) under the heading “THE MASTER INDENTURE–Remedies of the Master Trustee and Holder of Securities in Event of Default–Events of Default Under the Master Indenture” shall be applied in the following order, at the date or dates fixed by the Master Trustee and, in case of the distribution of such money for payment of Debt Service, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:

First: To the payment of all amounts due the Master Trustee under the Master Indenture;

Second: To the payment of the amounts then due and unpaid upon the Securities for principal (and premium, if any) and interest, for which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities; and

Third: To THR, any remaining amounts of money so collected.

Limitation on Suits. No Holder of any Security will have any right to institute any proceeding, judicial or otherwise, with respect to the Master Indenture, or for the appointment of a receiver or trustee, or for any other remedy under the Master Indenture, unless (i) such Holder has previously given written notice to the Master Trustee of a continuing Event of Default; (ii) the Holders of not less than 25% in principal amount of the Outstanding Securities (or of the affected series of Securities to the extent permitted by the Master Indenture) has made written request to the Master Trustee to institute proceedings in respect of such Event of Default; (iii) such Holder or Holders have offered to the Master Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (iv) the Master Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (v) no direction inconsistent with such written request has

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been given to the Master Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities; it being understood and intended that no one or more Holders of Securities will have any right in any manner whatever by virtue of, or by availing of, any provision of the Master Indenture to affect, disturb or prejudice the rights of any other Holders of Securities, or to obtain or to seek to obtain priority or preference over any other Holders, or to enforce any right under the Master Indenture, except in the manner therein provided and for the equal and ratable benefit of all the Holders of Securities.

Unconditional Right of Holders of Securities to Receive Principal, Premium and Interest. Notwithstanding any other provision in the Master Indenture, the Holder of any Security shall have the right which is absolute and unconditional to receive payment of the principal of (and premium, if any) and interest on such Security, but solely from the sources provided in the Master Indenture, on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the redemption date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder.

Control by Holders of Securities. The Holders of a majority in principal amount of the Outstanding Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Master Trustee or exercising any trust or power conferred on the Master Trustee, provided that (i) such direction is not in conflict with any rule of law or with the Master Indenture, and (ii) the Master Trustee may take any other action deemed proper by the Master Trustee which is not inconsistent with such direction.

Concerning the Master Trustee

Duties and Liabilities of Master Trustee. The Master Indenture contains various limitations on the liability of the Master Trustee. Except during the continuance of an Event of Default, (i) the Master Trustee undertakes to perform such duties and only such duties as are specifically set forth in the Master Indenture and no implied covenants or obligations shall be read into the Master Indenture against the Master Trustee; and (ii) in the absence of bad faith on its part, the Master Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Master Trustee and conforming to the requirements of the Master Indenture. In case any Event of Default has occurred and is continuing, the Master Trustee shall exercise such of the rights and powers vested in it by the Master Indenture, and use the same degree of care and skill in their exercise, as a reasonably prudent man would exercise or use under the circumstances in the conduct of its own affairs.

Master Trustee May Own Securities. The Master Trustee or other agent of the Obligated Group Members, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Obligated Group Members with the same rights it would have if it were not Trustee or such other agent.

Moneys to Be Held in Trust. All moneys received by the Master Trustee are required to be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by law. The Master Trustee is not liable for interest on any moneys received by it under the Master Indenture, except by express agreement.

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Corporate Trustee Required; Eligibility. There must at all times be a Master Trustee which is a corporation organized and doing business under the laws of the United States of America or of any state, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $100,000,000, subject to supervision or examination by federal or state authority as further provided in the Master Indenture. If at any time the Master Trustee ceases to be eligible under the Master Indenture, it is required to resign immediately in accordance with the terms of the Master Indenture.

Resignation and Removal; Appointment of Successor. No resignation or removal of the Master Trustee and no appointment of a successor Master Trustee may become effective until the acceptance of appointment by the successor Master Trustee in accordance with the Master Indenture. The Master Trustee may resign at any time upon written notice to THR. The Master Trustee may be removed at any time by the Holders of a majority in principal amount of the Outstanding Securities, or, so long as no Event of Default has occurred and is continuing, by THR, subject to revocation of removal by the Holders of a majority in outstanding principal amount of Securities not held by the Master Trustee, as described in the Master Indenture. If the Master Trustee becomes ineligible or incapable of serving it may be removed in accordance with the procedures described in the Master Indenture.

Merger or Consolidation. Any corporation into which the Master Trustee may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Master Trustee may be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Master Trustee, shall be the successor Master Trustee provided such corporation shall be otherwise qualified and eligible to serve.

Supplements

Supplemental Indentures Without Consent of Holders of Securities. Without the consent of the Holders of any Securities, THR and the Master Trustee may enter into or consent to one or more supplemental indentures, subject to provisions described below, for any of the following purposes:

(a) to authorize a series of additional Securities, or to reflect the admission or withdrawal of an Obligated Group Member;

(b) to evidence the succession of another Person to an Obligated Group Member, or successive successions, and the assumption by the successor Person of the covenants, agreements and obligations of the Obligated Group Member as permitted by the Master Indenture;

(c) to add to the covenants of the Obligated Group for the benefit of the Holders of Securities or any Credit Enhancer, or to surrender any right or power conferred upon the Obligated Group;

(d) to cure any ambiguity or to correct or supplement any provision which may be inconsistent with any other provision, or to make any other provisions with respect to matters or questions arising under the Master Indenture which shall not be inconsistent with the Master Indenture, provided such action shall not, in the opinion of the Master Trustee, adversely affect the interests of the Holders of Securities;

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(e) to modify or supplement the Master Indenture in such manner as may be necessary or appropriate to qualify the Master Indenture under the Trust Indenture Act of 1939, or under any similar federal or state statute or regulation; provided, however, that nothing in the Master Indenture will be deemed to authorize inclusion in the Master Indenture or in any supplemental indenture, provisions referred to in Section 316(a)(2) of the said Trust Indenture Act or any corresponding provision provided for in any similar statute subsequently effect;

(f) in connection with any other change which, in the judgment of an Independent Management Consultant, (i) is in the best interest of the Obligated Group Members and (ii) does not materially adversely affect the Holder of any Security; provided that no such change shall be made if within 30 days of its receipt of such Independent Management Consultant’s report, the Master Trustee shall have obtained a report from another Independent Management Consultant indicating that in its opinion either clause (i) or clause (ii) of this paragraph (f) is not satisfied; provided further, that the Master Trustee shall be under no duty to retain another such Independent Management Consultant; and

(g) to make any amendment to any provision of the Master Indenture or to any supplemental indenture which is only applicable to Securities issued subsequently or which will not apply so long as any Security then Outstanding remains Outstanding.

Supplemental Indentures With Consent of Holders of Securities. With the consent of the Holders (or, in the case of any Securities that are subject to a Credit Facility, or that are pledged to secure the repayment of other indebtedness that is subject to a Credit Facility, the Credit Enhancer with respect to such Securities unless the Credit Enhancer is in default in performance of its obligations with respect to such Credit Facility) of not less than a majority in principal amount of the Outstanding Securities, by act of said Holders (and such Credit Enhancer) delivered to THR and the Master Trustee, THR and the Master Trustee may enter into or consent to an indenture or supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Master Indenture or of modifying in any manner the rights of the Holders of the Securities under the Master Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby,

(a) change the Stated Maturity of the principal of, or any installment of interest on, any Securities or any date for mandatory redemption thereof, or reduce the principal amount thereof or the interest thereon or any premium payable upon the redemption thereof, or change the coin or currency in which, any Securities or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the redemption date), or

(b) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of the Master Indenture or certain defaults thereunder and their consequences) provided for in the Master Indenture, or

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(c) modify any of the provisions of this subheading or certain other provisions described in the Master Indenture, except to increase any such percentage or to provide that certain other provisions of the Master Indenture cannot be modified or waived without the consent of the Holder of each Security affected thereby, or

(d) permit the preference or priority of any Security or Securities over any other Securities then Outstanding, or

(e) modify the right of the holders of not less than 25% of the aggregate principal amount of any series of Securities Outstanding of any series to declare the principal amount of all Securities Outstanding to be due and payable as provided in the heading “THE MASTER INDENTURE–Remedies of the Master Trustee and Holder of Securities in Event of Default– Acceleration of Maturity in Certain Cases; Rescission and Annulment.”

So long as no Event of Default has occurred and is continuing, the Master Trustee shall not execute any supplemental indenture without the consent of THR.

Satisfaction and Discharge of Indenture

If at any time the Members of the Obligated Group have paid or caused to be paid the principal of (and premium, if any) and interest on all the Securities Outstanding when due and if THR has paid or provided for the payment of all other sums payable by THR under the Master Indenture and has paid all of the Master Trustee’s fees and expenses, then the Master Indenture shall cease to be of further effect (except as to (i) rights of registration of transfer and exchange, (ii) substitution of mutilated, defaced or apparently destroyed, lost or stolen Securities, (iii) rights of Holders to receive payments of Debt Service on the Securities and remaining obligations of THR to make mandatory sinking fund payments, (iv) the rights, remaining obligations, if any, and immunities of the Master Trustee under the Master Indenture, and (v) the rights of the Holders as beneficiaries under the Master Indenture with respect to the property deposited with the Master Trustee payable to all or any of them) and the Master Trustee, on THR Request accompanied by an Officer’s Certificate and an Opinion of Counsel to the effect that the conditions precedent to the satisfaction and discharge of the Master Indenture have been fulfilled and at the cost and expense of THR, shall execute proper instruments acknowledging satisfaction of and discharging the Master Indenture.

Notwithstanding the satisfaction and discharge of the Master Indenture, certain provisions of the Master Indenture will survive.

Securities Deemed Paid. Securities of any series shall be deemed to have been paid if (i) in case said Securities are to be redeemed on any date prior to their Stated Maturity, THR has given to the Master Trustee irrevocable instructions to give notice of redemption of such Securities on said redemption date, (ii) there has been deposited with the Master Trustee either money sufficient, or Defeasance Obligations the principal of and the interest on which will provide money sufficient without reinvestment (as established by an Officer’s Certificate delivered to the Master Trustee accompanied by a report of an Independent Accountant setting forth the calculations upon which such Officer’s Certificate is based), to pay when due the principal of (and premium, if any) and interest due and to become due on said Securities on and

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prior to the Maturity thereof, and (iii) in the event said Securities are not by their terms subject to redemption within the next 45 days, THR has given the Master Trustee irrevocable instructions to give a notice to the Holders of such Securities that the deposit required by (ii) above in this paragraph has been made with the Master Trustee and that said Securities are deemed to have been paid in accordance with this provision and stating such Maturity date upon which moneys are to be available for the payment of the principal of (and premium, if any) and interest on said Securities.

Application of Trust Money. The Defeasance Obligations and money deposited with the Master Trustee and principal or interest payments on any such Defeasance Obligations are required to be held in trust, cannot be sold or reinvested, and are required to be applied in accordance with the provisions of the Securities and the Master Indenture, to the payment to the Persons entitled thereto of the principal (and premium, if any) and interest for whose payment such money or Defeasance Obligations were deposited. Upon delivery to the Master Trustee of an Officer’s Certificate (accompanied by the report of an Independent Accountant setting forth the calculations upon which such Officer’s Certificate is based) as to the sufficiency thereof, any money received from principal or interest payments on Defeasance Obligations deposited with the Master Trustee or the proceeds of any sale of such Defeasance Obligations, if not then needed for such purpose, is required to be reinvested in other Defeasance Obligations or disposed of as requested by THR.

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APPENDIX D

FORM OF OPINION OF BOND COUNSEL [THIS PAGE INTENTIONALLY LEFT BLANK] Texas 800.404.3970 Fax New York Washington, DC Bracewell LLP Connecticut 1445 Ross Avenue Seattle Suite 3800 Dubai Dallas, Texas London 75202-2711

November ____, 2016

Tarrant County Cultural Education Facilities Finance Corporation Fort Worth, Texas

The Bank of New York Mellon Trust Company, National Association, as Trustee Houston, Texas

Ladies and Gentlemen:

We have acted as Bond Counsel to Texas Health Resources (“THR”) in connection with the issuance by the Tarrant County Cultural Education Facilities Finance Corporation (the “Issuer”) of its Texas Health Resources System Revenue Bonds, Series 2016A issued in the aggregate principal amount of $______(the “Bonds”). The Bonds are being issued pursuant to a Trust Indenture as heretofore supplemented and as further supplemented by a Fifth Supplemental Trust Indenture, dated as of November 1, 2016 (as supplemented, the “Indenture”), between the Issuer and The Bank of New York Mellon Trust Company, National Association, as trustee (the “Trustee”). The proceeds of the Bonds will be loaned by the Issuer to THR pursuant to a Loan Agreement as heretofore amended and as further amended by Amendment Number Four to Loan Agreement dated as of November 1, 2016 (as amended, the “Loan Agreement”), between the Issuer and THR, which loan will be evidenced by a promissory note of THR in the principal amount of the Bonds (the “Note”). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Indenture or the Loan Agreement, as applicable.

We have acted as Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Bonds from gross income for federal income tax purposes. We have not investigated or verified original proceedings, records, data or other material, but have relied solely upon the transcript of certified proceedings described in the following paragraph. We have not assumed any responsibility with respect to the financial condition or capabilities of the Issuer or THR or the disclosure thereof in connection with the offer and sale of the Bonds.

In our capacity as Bond Counsel, we have participated in the preparation of and have examined a transcript of certified proceedings pertaining to the authorization and issuance of

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the Bonds on which we have relied in giving our opinion. The transcript contains certified copies of certain proceedings of the Commissioners Court of Tarrant County, Texas, the Board of Directors of the Issuer, and certain certificates and other documents of representatives of Tarrant County, Texas, the Issuer, the Trustee, THR, and others. We have also examined such portions of the Constitution and statutes of the State of Texas, and such applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), court decisions, regulations and published rulings of the Internal Revenue Service (the “Service”), as we have deemed necessary for the purposes of this opinion. We have examined an executed Bond and, in our opinion, the form of said Bond and its execution are regular and proper.

As to questions of fact material to our opinion, we have relied, with your permission, upon representations of the Issuer and THR contained in the Indenture and the Loan Agreement, the certified proceedings and other certifications of public officials furnished to us, and certifications, documents and other information furnished to us by or on behalf of the Issuer, THR, Morgan Stanley & Co. LLC on behalf of itself and as representative of the other underwriters of the Bonds (collectively, the “Underwriters”) and others, without undertaking to verify the same by independent investigation.

We have assumed, with your permission, and without independent verification (i) the genuineness of certificates, records and other documents and the accuracy and completeness of the statements contained therein; (ii) the due authorization, execution and delivery of the Indenture by the Trustee, and the validity and binding effect of the Indenture on the Trustee; (iii) that all documents and certificates submitted to us as originals are accurate and complete; (iv) that all documents and certificates submitted to us as copies are true and correct copies of the originals thereof; and (v) that all information submitted to us was accurate and complete. No information has come to our attention that is inconsistent with the material facts that have been certified by the Issuer, the Trustee, THR and others, and upon which we have relied in our opinions.

Based on the foregoing, and subject to the matters set forth herein, we are of the opinion that under existing law:

1. The Indenture has been duly authorized, executed, and delivered by the Issuer and is a valid and binding obligation of the Issuer enforceable against the Issuer in accordance with its terms. The Issuer has assigned its rights, title, and interest in and to the Note, the Loan Agreement (except for certain rights of the Issuer to indemnification and payment of its fees and expenses) and the funds pledged under the Indenture and all amounts held therein (other than the Rebate Fund), and has granted a valid security interest therein, to the Trustee pursuant to the Indenture as security for the Bonds. The Indenture validly and effectively creates the security interest that it purports to create and no additional instrument of conveyance, assignment, or transfer is necessary to create such security interest. No filing

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or recording of any document is required as of this date to perfect or maintain the security interest created by the Indenture.

2. The Bonds have been duly authorized, executed, and delivered by the Issuer, and are valid and binding special obligations of the Issuer entitled to the benefits and security of the Indenture. The Bonds are limited obligations of the Issuer payable solely from the Trust Estate under the Indenture and the revenues derived therefrom. The Bonds are not obligations of the State of Texas, Tarrant County, Texas, nor any political corporation, subdivision or agency of the State of Texas.

3. Interest on the Bonds is excludable from gross income for federal income tax purposes under existing law.

4. The Bonds are “qualified 501(c)(3) bonds” within the meaning of section 145 of the Code, and interest on the Bonds is not subject to the alternative minimum tax on individuals and corporations, except that interest on the Bonds will be included in the “adjusted current earnings” of a corporation (other than any S corporation, regulated investment company, REIT, or REMIC) for purposes of computing its alternative minimum tax.

The opinions expressed herein are limited to the extent that (i) the performance and enforceability of the Indenture, the Bonds and the Loan Agreement may be subject to applicable bankruptcy, reorganization, moratorium or other similar laws affecting generally the enforcement of creditors’ rights; (ii) general equitable principles may limit the availability of equitable remedies, including, but not limited to, the remedy of specific performance; and (iii) the enforceability of provisions relating to indemnification may be limited by public policy or applicable securities law.

In rendering these opinions, we have assumed with your permission the truth and accuracy as to factual matters of all statements and certifications made to us by THR, the Issuer, and the Underwriters. We have relied, with your permission, on, among other things, certificates signed by officers of the Issuer, THR, and the Underwriters with respect to certain material facts, estimates, and expectations which are solely within the knowledge of the Issuer, THR, and the Underwriters, respectively, and which we have not independently verified. In addition, in rendering the opinions set forth in paragraphs 3 and 4, we have assumed continuing compliance with the covenants in the Loan Agreement and the Indenture pertaining to those sections of the Code that affect the status of THR and the Members of the Obligated Group as organizations described in section 501(c)(3) of the Code and the exclusion from gross income of interest on the Bonds for federal income tax purposes. If the certificates upon which we have relied are determined to be inaccurate or incomplete, or the Issuer or THR or the other Members of the Obligated Group fail to comply with such covenants, interest on the Bonds could become includable in gross income from the date of

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their original delivery, regardless of the date on which the event causing such inclusion occurs.

Except as stated above, we express no opinion as to any federal, state or local tax consequences resulting from the ownership of, receipt of interest on or disposition of the Bonds.

Owners of the Bonds should be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to financial institutions, life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, low and middle income taxpayers otherwise qualifying for the health insurance premium assistance credit, and individuals otherwise qualifying for the earned income tax credit. In addition, certain foreign corporations doing business in the United States of America may be subject to the “branch profits tax” on their effectively-connected earnings and profits (including tax-exempt interest such as interest on the Bonds).

The opinions expressed herein are not a guarantee of result and are not binding on the Service; rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given as to whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures, the Service is likely to treat the Issuer as the taxpayer. We observe that THR has covenanted in the Loan Agreement not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes.

This opinion speaks only as of its date and only in connection with the Bonds and may not be applied to any other transaction. We do not undertake to advise you of matters which may come to our attention subsequent to the date hereof that may affect our legal opinion and conclusions expressed herein. Further, this opinion is specifically limited to the laws of the State of Texas and, to the extent applicable, the federal laws of the United States of America.

Very truly yours,

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Tarrant County Cultural Education Facilities Finance Corporation • Texas Health Resources System Revenue Bonds, Series 2016A