PRELIMINARY OFFICIAL STATEMENT DATED OCTOBER 9, 2012

Transcription

1 This Preliminary Official Statement and the information contained herein are subject to completion or amendment. These securities may not be sold, nor may offers to buy be accepted, prior to the time the Official Statement is delivered in final form. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. As of its date, this Preliminary Official Statement has been deemed final by the Authority and the Corporation for purposes of Rule 15c2-12 of the Securities and Exchange Commission. PRELIMINARY OFFICIAL STATEMENT DATED OCTOBER 9, 2012 NEW ISSUE - BOOK-ENTRY ONLY FORM RATINGS: Moody s: A2 S&P: A+ See RATINGS herein In the opinion of Bond Counsel, under existing law, interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, for the purpose of computing the federal alternative mimimum tax imposed on certain corporations, such interest is taken into account in determining adjusted current earnings. Bond Counsel is further of the opinion that, pursuant to the Act, the Bonds and the income thereof are exempt from all taxation in the State of Louisiana. See TAX EXEMPTION herein and the proposed form of opinion of Bond Counsel attached hereto as APPENDIX D. $100,000,000* LOUISIANA PUBLIC FACILITIES AUTHORITY Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2012B Dated: Date of Delivery Due: July 1, as shown on the inside cover The Louisiana Public Facilities Authority (the Authority ) is offering $100,000,000* of its Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2012B (the Bonds ) pursuant to and secured by a Trust Indenture (Series 2012B) dated as of November 1, 2012 (the Indenture ) and by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee, paying agent and registrar (the Trustee ). The Bonds are being offered in fully registered form without coupons in denominations of $5,000 or any integral multiple thereof as described herein. The Bonds will be initially registered in the name of CEDE & CO., as nominee for The Depository Trust Company, New York, New York ( DTC ), which will act as securities depository for the Bonds (the Securities Depository ). Purchasers will not receive certificates representing their interest in the Bonds purchased. Purchases of the Bonds may be made only in book-entry form in authorized denominations by credit to participating broker-dealers and other institutions on the books of DTC as described herein. The principal of, premium, if any, and interest on the Bonds will be payable by the Trustee to the Securities Depository, which will remit such payments in accordance with its normal procedures, as described herein. Interest on the Bonds is payable on January 1 and July 1 of each year, commencing July 1, The proceeds of the Bonds will be loaned by the Authority to the Franciscan Missionaries of Our Lady Health System, Inc. (the Corporation or the Obligated Group Agent ) on behalf of the Obligated Group composed of the Corporation, St. Francis Medical Center, Inc., Our Lady of the Lake Hospital, Inc., Our Lady of Lourdes Regional Medical Center, Inc. and Our Lady of the Lake Ascension Community Hospital, Inc. d/b/a St. Elizabeth Hospital (collectively, the Obligated Group ) under the Master Indenture (as hereinafter defined) pursuant to a Loan Agreement (Series 2012B) dated as of November 1, 2012 (the Loan Agreement ) by and between the Authority and the Corporation. The proceeds of the Bonds will be used by the Obligated Group for the purpose of financing or reimbursing the cost of (i) acquiring, constructing and equipping a patient tower and other capital improvements at the campus of Our Lady of the Lake Regional Medical Center located in Baton Rouge, Louisiana (the Project ) and (ii) paying the costs of issuance of the Bonds. See PLAN OF FINANCE and ESTIMATED SOURCES AND USES OF FUNDS herein. The loan by the Authority of the proceeds of the Bonds to the Corporation on behalf of the Obligated Group pursuant to the Loan Agreement will be evidenced by the Series 2012B Note (the Note ). The obligations of the Obligated Group, including the Note, have been issued by the Obligated Group under the terms of a Master Trust Indenture dated as of May 1, 1998, as supplemented and amended to the date hereof (the Original Master Indenture ) and as further supplemented and amended by Supplemental Master Trust Indenture No. 14, relating to the issuance of the Note, dated as of November 1, 2012 ( Supplemental Master Trust Indenture No. 14 and, together with the Original Master Indenture, the Master Indenture ), each by and between the Obligated Group and The Bank of New York Mellon Trust Company, N.A. (as successor to The Bank of New York), as master trustee (the Master Trustee ). The Master Indenture requires payments by the Obligated Group sufficient to provide for the payment of the obligations of the Obligated Group under the Master Indenture, including, without limitation, the principal of, premium, if any, and interest on the Note, in the amounts and on the dates which will enable the Authority to pay the principal of, premium, if any, and interest on the Bonds. The obligations of the Obligated Group and any future Obligated Group Members under the Master Indenture are secured by the Assignment, as defined herein. See SECURITY FOR THE BONDS herein. The Bonds are subject to optional, mandatory sinking fund and extraordinary special redemption prior to maturity as more particularly described herein. See DESCRIPTION OF THE BONDS - Redemption herein. THE BONDS ARE LIMITED AND SPECIAL OBLIGATIONS OF THE AUTHORITY AND DO NOT CONSTI TUTE OR CREATE AN OBLIGATION, GENERAL OR SPECIAL, DEBT, LIABILITY OR MORAL OBLIGATION OF THE STATE OF LOUISIANA (THE STATE ) OR ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF ANY CONSTITUTION AL OR STATUTORY PROVISIONS WHATSOEV ER AND NEITHER THE FAITH OR CREDIT NOR THE TAXING POWER OF THE STATE OR OF ANY POLITICAL SUBDIVI SION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, OR THE INTEREST ON THE BONDS. THE BONDS ARE NOT A GENERAL OBLIGATION OF THE AUTHORITY (WHICH HAS NO TAXING POWER AND RECEIVES NO FUNDS FROM ANY GOVERN MENTAL BODY) BUT ARE A LIMITED AND SPECIAL REVENUE OBLIGATION OF THE AUTHORITY PAYABLE SOLELY FROM THE TRUST ESTATE, INCLUDING THE INCOME, REVENUES AND RECEIPTS DERIVED OR TO BE DERIVED FROM PAYMENTS MADE PURSUANT TO THE LOAN AGREEMENT AND THE ASSIGNMENT. THIS COVER PAGE CONTAINS CERTAIN INFORMATION FOR QUICK REFERENCE ONLY. THIS COVER PAGE IS NOT INTENDED TO BE A SUMMARY OF THIS ISSUE. INVESTORS MUST READ THE ENTIRE OFFICIAL STATEMENT, INCLUDING ALL APPENDICES ATTACHED HERETO, TO OBTAIN INFORMATION ESSENTIAL TO THE MAKING OF AN INFORMED INVESTMENT DECISION. The Bonds are offered when, as and if issued by the Authority and received by the Underwriters, subject to the approving opinion of Foley & Judell, L.L.P., New Orleans, Louisiana, Bond Counsel, and certain other conditions. Certain legal matters will be passed upon for the Underwriters by their counsel, Adams and Reese LLP, Baton Rouge, Louisiana. Certain legal matters will be passed upon for the Authority by its special counsel, Jacob S. Capraro, Esq. New Orleans, Louisiana. Certain legal matters pertaining to the Obligated Group will be passed upon by its counsel, Breazeale, Sachse & Wilson, L.L.P., Baton Rouge, Louisiana. Certain legal matters will be passed upon for the Master Trustee and the Trustee by their counsel, Gregory A. Pletsch & Associates, Baton Rouge, Louisiana. It is expected that the Bonds will be available for delivery through the facilities of DTC, on or about November 1, J.P. Morgan Morgan Stanley BofA Merrill Lynch The date of this Official Statement is October, * Preliminary, subject to change.

2 AMOUNTS, MATURITIES, INTEREST RATES, PRICES, YIELDS AND CUSIPS* $100,000,000* Louisiana Public Facilities Authority Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2012B $ * % Term Bonds due July 1, 20, Yield %, Price: CUSIP** * Preliminary, subject to change. ** CUSIP is a registered trademark of the American Bankers Association. CUSIP data contained herein is provided by Standard & Poor s, CUSIP Service Bureau, a division of the McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. Neither the Authority, the Obligated Group nor the Underwriters take any responsibility for the accuracy of such CUSIP numbers.

3 REGARDING USE OF THIS OFFICIAL STATEMENT NO DEALER, BROKER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED BY THE AUTHORITY, THE OBLIGATED GROUP OR THE UNDERWRITERS TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS OFFICIAL STATEMENT, AND IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ANY OF THE FOREGOING. THIS OFFICIAL STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF, THE BONDS BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER, SOLICITATION OR SALE. 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 RESPONSIBILITY TO INVESTORS UNDER THE FEDERAL SECURITIES LAWS AS APPLIED TO THE FACTS AND CIRCUMSTANCES OF THIS TRANSACTION, BUT THE UNDERWRITERS DO NOT GUARANTEE THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION. THE INFORMATION SET FORTH HEREIN HAS BEEN OBTAINED FROM THE AUTHORITY, THE OBLIGATED GROUP AND OTHER SOURCES WHICH ARE BELIEVED TO BE RELIABLE. THE INFORMATION ON THE OBLIGATED GROUP IS NOT GUARANTEED AS TO ACCURACY OR COMPLETENESS BY, AND IS NOT TO BE CONSTRUED AS A REPRESENTATION OF, THE AUTHORITY. THE INFORMATION REGARDING DTC HAS BEEN OBTAINED FROM DTC, BUT IS NOT GUARANTEED AS TO ACCURACY OR COMPLETENESS BY THE AUTHORITY OR THE CORPORATION. THE AUTHORITY NEITHER HAS NOR WILL ASSUME ANY RESPONSIBILITY AS TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION IN THIS OFFICIAL STATEMENT OTHER THAN THAT INFORMATION RELATING TO THE AUTHORITY UNDER THE HEADINGS THE AUTHORITY AND ABSENCE OF LITIGATION-The Authority. THE INFORMATION AND EXPRESSIONS OF OPINION HEREIN ARE SUBJECT TO CHANGE WITHOUT NOTICE, AND NEITHER THE DELIVERY OF THIS OFFICIAL STATEMENT NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE AUTHORITY, THE OBLIGATED GROUP OR ANY OTHER ENTITY DESCRIBED HEREIN. THIS OFFICIAL STATEMENT DOES NOT CONSTITUTE A CONTRACT BETWEEN THE AUTHORITY, THE OBLIGATED GROUP OR THE UNDERWRITERS AND ANY ONE OR MORE OF THE PURCHASERS OR REGISTERED OWNERS OF THE BONDS. IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITERS MAY OVER ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE BONDS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR HAS THE INDENTURE BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS. THE REGISTRATION OR QUALIFICATION OF THE BONDS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF SECURITIES LAWS OF THE STATES IN WHICH THE BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE STATES NOR ANY OF THEIR AGENCIES HAVE PASSED UPON THE MERITS OF THE BONDS OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE.

4 IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE BONDS HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE. THIS OFFICIAL STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS, WHICH GENERALLY CAN BE IDENTIFIED WITH WORDS OR PHRASES SUCH AS ANTICIPATES, BELIEVES, COULD, ESTIMATES, 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 THE OBLIGATED GROUP 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 INVESTMENT CONSIDERATIONS IN THIS OFFICIAL STATEMENT AS WELL AS ADDITIONAL FACTORS BEYOND THE OBLIGATED GROUP S AND THE AUTHORITY 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 THE OBLIGATED GROUP S BUSINESS OR OPERATIONS. ALL SUBSEQUENT FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE OBLIGATED GROUP OR THE AUTHORITY 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 STATEMENTS. NO PERSON HAS ANY OBLIGATION TO PREPARE OR RELEASE ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS. THIS PRELIMINARY OFFICIAL STATEMENT IS BEING PROVIDED TO PROSPECTIVE PURCHASERS IN ELECTRONIC FORMAT ON THE FOLLOWING WEBSITE: THE FINAL OFFICIAL STATEMENT WILL BE PROVIDED TO PROSPECTIVE PURCHASERS EITHER IN BOUND FORM ( ORIGINAL BOUND FORMAT ) OR IN ELECTRONIC FORMAT ON THE SAME WEBSITE. THE FINAL OFFICIAL STATEMENT MAY BE RELIED UPON ONLY IF IT IS IN ITS ORIGINAL BOUND FORMAT OR AS PRINTED IN ITS ENTIRETY DIRECTLY FROM SUCH WEBSITE. WITH RESPECT TO THE BONDS, THIS PRELIMINARY OFFICIAL STATEMENT HAS BEEN DEEMED TO BE FINAL AS OF ITS DATE WITHIN THE MEANING OF RULE 15C2-12 UNDER THE SECURITIES EXCHANGE ACT OF 1934, EXCEPT FOR THE OMISSIONS OF THE OFFERING PRICE(S), INTEREST RATE(S), SELLING COMPENSATION, AGGREGATE PRINCIPAL AMOUNTS, PRINCIPAL AMOUNTS PER MATURITY, DELIVERY DATE(S), RATINGS AND OTHER TERMS OF SUCH BONDS DEPENDING ON SUCH MATTERS.

5 TABLE OF CONTENTS SUMMARY STATEMENT... i INTRODUCTION... 1 THE AUTHORITY... 3 Powers and Purpose... 3 Membership of the Authority... 4 Approval of Issuance of the Bonds... 4 Other Financings... 4 Legality of Investment... 4 Limitation of Liability... 5 THE SYSTEM AND THE OBLIGATED GROUP... 5 PLAN OF FINANCE... 6 The Project... 6 Series 2012A Bonds... 7 ESTIMATED SOURCES AND USES OF FUNDS... 8 DESCRIPTION OF THE BONDS... 8 General Description... 8 Book-Entry Only System... 8 Provisions Applicable if Book-Entry Only System is Terminated Redemption SECURITY FOR THE BONDS General Assignment Limited Obligations - The Bonds The Note Master Indenture Satisfaction of Debt Rate Covenant Obligations Not to Be Impaired Additional Indebtedness Existing Indebtedness Enforceability of Remedies DEBT SERVICE REQUIREMENTS HISTORICAL PRO FORMA DEBT SERVICE COVERAGE RATIO INVESTMENT CONSIDERATIONS General Impact of Disruptions in the Credit Markets and General Economic Factors Healthcare Reform and other Governmental Initiatives Investment Performance Health Care Regulation in General Adequacy of Revenues The Medicare Program The Medicaid Program Private Health Plans and Managed Care... 44

6 Risks in Health Care Delivery Business Relationships and Other Tax-Exempt Status Matters Relating to Enforceability of the Master Indenture Issues Related to the Health Care Markets and the Credit Group Members Other Factors Generally Affecting Health Care Providers TAX EXEMPTION General Tax Treatment of Original Issue Discount Tax Treatment of Premium Changes in Federal and State Tax Law LEGAL MATTERS RATINGS FINANCIAL ADVISOR INDEPENDENT AUDITORS CONTINUING DISCLOSURE UNDERWRITING ABSENCE OF LITIGATION The Authority The Obligated Group MISCELLANEOUS APPENDIX A - INFORMATION CONCERNING FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM...A-1 APPENDIX B - CONSOLIDATED AUDITED FINANCIAL STATEMENTS OF THE OBLIGATED GROUP... B-1 APPENDIX C - DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS... C-1 APPENDIX D - PROPOSED FORM OF OPINION OF BOND COUNSEL...D-1 APPENDIX E - FORM OF CONTINUING DISCLOSURE AGREEMENT OF THE OBLIGATED GROUP E-1

7 SUMMARY STATEMENT The following information is furnished solely to provide limited introductory information regarding the Obligated Group, the Authority and the Bonds and does not purport to be comprehensive. Such information is qualified in its entirety by reference to the more detailed information and descriptions appearing elsewhere in this Official Statement and should be read together therewith. The offering of the Bonds is made only by means of the entire Official Statement, including the Appendices hereto. No person is authorized to make offers to sell, or solicit offers to buy, the Bonds unless the entire Official Statement is delivered in connection therewith. Terms used in this Summary Statement and not otherwise defined shall have the meanings set forth in this Official Statement or in APPENDIX C hereto. The Authority: The Offering: The Obligated Group and the System: Uses of Proceeds: The Louisiana Public Facilities Authority (the Authority ) is a public body corporate and politic created under the Louisiana Public Trust Act, being Chapter 2-A of Title 9 of the Louisiana Revised Statutes of 1950, as amended (La. R.S. 9: ) (the Act ) with the power to issue revenue and refunding bonds for the purpose of financing and refinancing health care facilities for nonprofit corporations. The Authority is offering $100,000,000 * principal amount of its Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2012B (the Bonds ). The Bonds will be issued pursuant to and secured by a Trust Indenture (Series 2012B), dated as of November 1, 2012 (the Indenture ), and by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee, paying agent and registrar (the Trustee ). The proceeds of the Bonds will be used to fund the Project (hereinafter defined and as described below under Uses of Proceeds ) and pay the costs of issuance of the Bonds. See also PLAN OF FINANCE herein. Franciscan Missionaries of Our Lady Health System, Inc. (the Corporation ) is a Louisiana nonprofit corporation which oversees a health care delivery system including hospitals and related health care facilities, owned and operated by the Corporation, St. Francis Medical Center, Inc. ( St. Francis ), Our Lady of the Lake Hospital, Inc. ( Lake ), Our Lady of Lourdes Regional Medical Center, Inc. ( Lourdes ) and Our Lady of the Lake Ascension Community Hospital, Inc. d/b/a St. Elizabeth Hospital ( St. Elizabeth ), together with other entities owned thereby or otherwise related thereto, which hospitals and related health care facilities form the Franciscan Missionaries of Our Lady Health System (the System ). The Corporation has been designated as the Obligated Group Agent (the Obligated Group Agent ) under the Master Indenture. For further information regarding the Obligated Group and the System, see APPENDIX A hereto. Each of the Corporation, St. Francis, Lake, Lourdes and St. Elizabeth is an Obligated Group Member under the Master Indenture described herein and, together, presently constitute the entirety of the Obligated Group under the Master Indenture (the Obligated Group ). Only the Obligated Group is liable with respect to the Note (hereinafter defined). The other entities overseen by the Corporation have no liability with respect to the Note. The proceeds of the Bonds will be loaned to the Corporation, as Obligated Group Agent, pursuant to a Loan Agreement (Series 2012B), dated as of November 1, 2012 (the Loan Agreement ), by and between the Authority and the Corporation and will be used by the Obligated Group for the purpose of financing or reimbursing the cost * Preliminary, subject to change.

8 of (i) acquiring, constructing and equipping a patient tower and other capital improvements at the campus of Our Lady of the Lake Regional Medical Center located in Baton Rouge, Louisiana (the Project ) and (ii) paying the costs of issuance of the Bonds. See PLAN OF FINANCE and ESTIMATED SOURCES AND USES OF FUNDS herein. Security: The Bonds are limited obligations of the Authority and are payable solely from the Trust Estate, including income, revenues and receipts derived or to be derived from payments made by the Obligated Group pursuant to the Loan Agreement. The Obligated Group s obligations under the Loan Agreement with respect to the Bonds are evidenced by the Series 2012B Note (the Note ), dated the date of issuance of the Bonds and delivered by the Corporation, as Obligated Group Agent. The obligations of the Obligated Group, including the Note, have been issued by the Obligated Group under the terms of a Master Trust Indenture dated as of May 1, 1998, as supplemented and amended to the date hereof (the Original Master Indenture ) and as further supplemented and amended by Supplemental Master Trust Indenture No. 14, relating to the issuance of the Note, dated as of November 1, 2012 ( Supplemental Master Trust Indenture No. 14 and, together with the Original Master Indenture, the Master Indenture ), each by and between the Corporation, as Obligated Group Agent, and The Bank of New York Mellon Trust Company, N.A. (as successor to The Bank of New York), as master trustee (the Master Trustee ). The obligations of the Obligated Group under the Master Indenture are secured by the Assignment (hereinafter defined). The obligations of the Obligated Group under the Master Indenture are not obligations of the Franciscan Missionaries of Our Lady, North American Province, Inc. (the Province ), the nonprofit corporation which sponsors the Corporation, the Provincial of the Franciscan Missionaries of Our Lady, North American Province (the Provincial ) or any member of the Provincial Council of the Franciscan Missionaries of Our Lady, North American Province (the Provincial Council ). Pursuant to an Assignment of Receipts and Security Agreement dated as of July 1, 2005, as heretofore amended and supplemented to the date hereof, and as further amended and supplemented by Amendment No. 9 to the Assignment of Receipts and Security Agreement dated as of November 1, 2012 (collectively, the Assignment ), the Obligated Group has pledged and assigned its Receipts (as defined in the Loan Agreement) as security for payment of the Obligations under the Master Indenture, including, without limitation, the Note. See SECURITY FOR THE BONDS herein. Existing Indebtedness: The following table sets forth the Obligations issued under the Master Indenture which are currently Outstanding (collectively, the Existing Indebtedness ), excluding the Bonds and the Note: Date Amount and Description of Indebtedness Secured $178,730,000 original aggregate principal amount of Louisiana Public Facilities Authority Hospital Revenue and Refunding Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 1998A (the "Series 1998A Bonds") of which $40,700,000 will be outstanding as of the date of issuance of the Bonds and the related Series 1998A Note dated July 1, 1998 ( Series 1998A Note ). ii

9 Date Amount and Description of Indebtedness Secured $57,700,000 original aggregate principal amount of Louisiana Public Facilities Authority Taxable/Tax-Exempt Convertible Hospital Revenue and Refunding Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 1998B (the "Series 1998B Bonds") of which $24,285,000 will be outstanding as of the date of issuance of the Bonds and the related Series 1998B Note dated July 23, 1998 ( Series 1998B Note ) $80,000,000 original aggregate principal amount of Louisiana Public Facilities Authority Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2005A (the "Series 2005A Bonds") all of which will be outstanding as of the date of issuance of the Bonds and the related Series 2005A Note dated October 25, 2005 ( Series 2005A Note ) $50,000,000 original aggregate principal amount of Louisiana Public Facilities Authority Variable Rate Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2005B (the "Series 2005B Bonds") all of which will be outstanding as of the date of issuance of the Bonds. and the related Series 2005B Note dated October 4, 2005 ( Series 2005B Note ) $89,350,000 original aggregate principal amount of Louisiana Public Facilities Authority Variable Rate Hospital Revenue Refunding Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2005D (the "Series 2005D Bonds") of which $76,275,000 will be outstanding as of the date of issuance of the Bonds and the related Series 2005D Note dated October 25, 2005 ( Series 2005D Note ) Series 2005D Hedge Note No. 1 issued in connection with the interest rate swap agreements (the 2005D Swap Transaction ) entered into with respect to the Series 2005D Bonds ( Series 2005D Hedge Note ) Series 2005D Hedge Note No. 2 in connection with the 2005D Swap Transaction ( Series 2005D Hedge Note No. 2 and, together with the Series 2005D Hedge Note, the Series 2005D Hedge Notes ) Series 2008 Hedge Note No. 1 issued in connection with the 2008A Swap Agreements (the 2008A Swap Transaction and, together with the 2005D Swap Transaction, the Swap Transactions ) entered into with respect to the Series 2008A Bonds ( Series 2008 Hedge Note No. 1 ) Series 2008 Hedge Note No. 2 issued in connection with the 2008A Swap Transaction ( Series 2008 Hedge Note No. 2 and, together with the Series 2008 Hedge Note No. 1, the Series 2008A Hedge Notes ) Series 2005B Bank Note dated May 28, 2008 (the Series 2005B Bank Note ) Series 2005D Bank Note dated July 21, 2008 (the Series 2005D Bank Note ). iii

10 Date Amount and Description of Indebtedness Secured $47,185,000 original aggregate principal amount of Louisiana Public Facilities Authority Variable Rate Hospital Revenue Refunding Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2008A (the "Series 2008A Bonds") of which $46,310,000 will be outstanding as of the date of issuance of the Bonds and the related Series 2008A Note dated August 7, 2008 ( Series 2008A Note ) Series 2008A Bank Note dated August 7, 2008 (the Series 2008A Bank Note ) $125,000,000 original aggregate principal amount of Louisiana Public Facilities Authority Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2009A (the "Series 2009A Bonds") all of which will be outstanding as of the date of issuance of the Bonds and the related Series 2009A Note dated July 23, 2009 ( Series 2009A Note ) $56,530,000 original aggregate principal amount of Louisiana Public Facilities Authority Hospital Revenue Refunding Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2012A (the "Series 2012A Bonds") all of which will be outstanding as of the date of issuance of the Bonds and the related Series 2012A Note dated October 3, 2012 ( Series 2012A Note ). (1) (1) The Series 2012A Bonds were issued by the Authority, on behalf of the Corporation, as fixed rate, tax-exempt bonds and privately placed with Capital One Public Funding, LLC. The proceeds of the Series 2012A Bonds were used by the Corporation, together with other available funds, to advance refund the Series 2005C Bonds. Upon the advance refunding of the Series 2005C Bonds, the Series 2005C Note was canceled. See PLAN OF FINANCE - Series 2012A Bonds herein and FINANCIAL AND OPERATING INFORMATION - Outstanding Indebtedness of the System in APPENDIX A attached hereto. The Series 1998A Bonds, the Series 1998B Bonds, the Series 2005A Bonds, the Series 2005B Bonds, the Series 2005D Bonds, the Series 2008A Bonds, the Series 2009A Bonds and the Series 2012A Bonds are herein sometimes referred to collectively as the Outstanding Bonds. The Series 1998A Note, the Series 1998B Note, the Series 2005A Note, the Series 2005B Note, the Series 2005B Bank Note, the Series 2005D Note, the Series 2005D Hedge Notes, the Series 2005D Bank Note, the Series 2008A Note, the Series 2008A Hedge Notes, the Series 2008A Bank Note, the Series 2009A Note and the Series 2012A Note, are herein sometimes referred to collectively as the Outstanding Notes. Additionally, the Lake, Lourdes, St. Francis and St. Elizabeth have unsecured working capital lines of credit outstanding with local banks as set forth under FINANCIAL AND OPERATING INFORMATION - Outstanding Indebtedness of the System in APPENDIX A attached hereto. Limited Obligations: THE BONDS ARE LIMITED AND SPECIAL OBLIGATIONS OF THE AUTHORITY AND DO NOT CONSTITUTE OR CREATE AN OBLIGA- TION, GENERAL OR SPECIAL, DEBT, LIABILITY OR MORAL OBLIGATION OF THE STATE OF LOUISIANA (THE STATE ) OR ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY PROVISIONS WHATSOEVER AND NEITHER THE FAITH OR CREDIT NOR THE TAXING POWER OF THE iv

11 STATE OR OF ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, OR THE INTEREST ON THE BONDS. THE BONDS ARE NOT A GENERAL OBLIGATION OF THE AUTHORITY (WHICH HAS NO TAXING POWER AND RECEIVES NO FUNDS FROM ANY GOVERNMENTAL BODY) BUT ARE A LIMITED AND SPECIAL REVENUE OBLIGATION OF THE AUTHORITY PAYABLE SOLELY FROM THE TRUST ESTATE, INCLUDING INCOME, REVENUES AND RECEIPTS DERIVED OR TO BE DERIVED FROM PAYMENTS MADE PURSUANT TO THE LOAN AGREEMENT AND THE ASSIGNMENT. The Note: Maturity: Interest: Redemption * : The Note is an obligation of the Obligated Group and entitled to the benefits of the Assignment. The Note is not an obligation of the Province, the Provincial or the members of the Provincial Council. The Bonds will mature as shown on the inside front cover page of this Official Statement. The Bonds will bear interest at the rates set forth on the inside front page of this Official Statement. Interest on the Bonds will be payable on January 1 and July 1 of each year, commencing July 1, Interest on the Bonds will be paid on the basis of a 360-day year consisting of twelve 30-day months. Mandatory Redemption. The Bonds are subject to mandatory sinking fund redemption prior to maturity at the principal amount of such Bonds to be redeemed, plus accrued interest to the date fixed for redemption, but without premium, on July 1 in the years and in the approximate amounts set forth herein under the caption DESCRIPTION OF THE BONDS - Redemption - Mandatory Redemption Without Premium. Optional and Extraordinary Special Redemption. The Bonds are also subject to optional and extraordinary special redemption prior to maturity as described herein under the caption DESCRIPTION OF THE BONDS - Redemption. Acceleration: Bondholders Risks: The Bonds are subject to acceleration of the maturity date upon the occurrence of an Event of Default under the Indenture. In addition, in the event the Note is subject to acceleration pursuant to the Master Indenture, the Bonds will be automatically accelerated accordingly. Payment of the principal of, premium, if any, and interest on the Bonds is dependent on the Obligated Group s ability to make payments under the Loan Agreement and/or on the Note. The Obligated Group s ability to make such payments may be adversely affected by many risk factors. There may also be legal and practical limitations on the enforcement of remedies and amounts which may be realized upon enforcement of remedies available to the Trustee, the Master Trustee and owners of the Bonds, including the enforcement of the Assignment. See SECURITY FOR THE BONDS and INVESTMENT CONSIDERATIONS herein. * Preliminary, subject to change. v

12 Summaries and Definitions: Certain provisions of the Master Indenture, the Loan Agreement, the Assignment and the Indenture are summarized in APPENDIX C hereto. Definitions of certain terms used in this Official Statement are also set forth in APPENDIX C hereto. vi

13 OFFICIAL STATEMENT $100,000,000 * Louisiana Public Facilities Authority Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2012B INTRODUCTION This Official Statement, including the cover page and Appendices hereto, is provided to furnish information with respect to the sale and delivery by the Louisiana Public Facilities Authority (the Authority ) of its $100,000,000 * aggregate principal amount of Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2012B (the Bonds ). The Bonds are being issued by the Authority pursuant to the Constitution and laws of the State of Louisiana (the State ), particularly the Louisiana Public Trust Act, being Chapter 2-A of Title 9 of the Louisiana Revised Statutes of 1950, as amended (La. R.S. 9: ) (the Act ), and the provisions of a Trust Indenture (Series 2012B) dated as of November 1, 2012 (the Indenture ), and by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee ). The proceeds of the Bonds will be loaned by the Authority to the Franciscan Missionaries of Our Lady Health System, Inc. (the Corporation or the Obligated Group Agent ) on behalf of the Obligated Group, as defined herein, currently composed of the following Obligated Group Members: the Corporation, St. Francis Medical Center, Inc. ( St. Francis ), Our Lady of the Lake Hospital, Inc. ( Lake ), Our Lady of Lourdes Regional Medical Center, Inc. ( Lourdes ) and Our Lady of the Lake Ascension Community Hospital, Inc. d/b/a St. Elizabeth Hospital ( St. Elizabeth ) (each, individually, an Obligated Group Member and, collectively, the Obligated Group ) under the Master Indenture (as hereinafter defined). See THE SYSTEM AND THE OBLIGATED GROUP herein. The proceeds of the Bonds will be loaned to the Corporation pursuant to a Loan Agreement (Series 2012B), dated as of November 1, 2012 (the Loan Agreement ) and by and between the Authority and the Corporation. The proceeds of the Bonds will be used by the Obligated Group for the purpose of financing or reimbursing the cost of (i) acquiring, constructing and equipping a patient tower and other capital improvements at the campus of Our Lady of the Lake Regional Medical Center located in Baton Rouge, Louisiana (the "Project") and (ii) paying the costs of issuance of the Bonds. See PLAN OF FINANCE and ESTIMATED SOURCES AND USES OF FUNDS herein. The Bonds are limited obligations of the Authority and are payable solely from the Trust Estate, including income, revenues and receipts derived or to be derived from payments made by the Obligated Group pursuant to the Loan Agreement. See SECURITY FOR THE BONDS herein. The Obligated Group s obligations under the Loan Agreement with respect to the Bonds will be evidenced by the Series 2012B Note (the Note ), dated the date of issuance of the Bonds and delivered by the Corporation, as Obligated Group Agent. The obligations of the Obligated Group, including the Note, have been issued by the Obligated Group under the terms of a Master Trust Indenture dated as of May 1, 1998, as supplemented and amended to the date hereof (the Original Master Indenture ) and as further supplemented and amended by Supplemental Master Trust Indenture No. 14, relating to the issuance of the Note, dated as of November 1, 2012 ( Supplemental Master Trust Indenture No. 14 and, together with the Original Master Indenture, the Master Indenture ), each by and between the Corporation, as Obligated Group Agent, and The Bank of New York Mellon Trust Company, N.A. (as successor to The Bank of New York), as master trustee (the Master Trustee ). The obligations of the Obligated Group under the Master Indenture are secured by the Assignment (defined herein). See SECURITY FOR THE BONDS herein. The Corporation, St. Francis, Lake, Lourdes and St. Elizabeth are each an Obligated Group Member under the Master Indenture and, together, presently constitute the entirety of the Obligated Group under the Master Indenture. Only the Obligated Group is liable with respect to the Note. The other entities overseen by the Corporation have no liability with respect to the Note. The accounts of the Obligated Group Members will be * Preliminary, subject to change.

14 combined for financial reporting purposes and for determining whether various covenants and tests contained in the Master Indenture (including tests relating to the incurrence of Additional Indebtedness) are met. The Master Indenture requires payments by the Obligated Group under the Note in an amount sufficient to provide for the payment of the principal of, premium, if any, and interest on the Bonds. The obligations of the Obligated Group and any future Obligated Group Members under the Master Indenture will be secured by the Assignment of Receipts and Security Agreement dated as of July 1, 2005, as heretofore amended and supplemented, and as amended and supplemented by Amendment No. 9 to the Assignment of Receipts and Security Agreement dated as of November 1, 2012, each by and among the Obligated Group Members and the Trustee (collectively, the Assignment ). The Master Indenture provides for the issuance of Obligations (hereinafter defined) thereunder. The Master Indenture may be replaced in the future by a replacement master indenture (the Replacement Master Indenture ) upon satisfaction of the terms and conditions set forth in the Master Indenture. See SECURITY FOR THE BONDS - Master Indenture herein and THE MASTER INDENTURE - Replacement Master Indenture in APPENDIX C hereto. The Corporation oversees a health care delivery system including hospitals and related health care facilities, owned and operated by the Corporation, St. Francis, Lake, Lourdes and St. Elizabeth, and other entities owned thereby or otherwise related thereto, which hospitals and related health care facilities form the Franciscan Missionaries of Our Lady Health System (the System ). See THE SYSTEM AND THE OBLIGATED GROUP and SECURITY FOR THE BONDS herein and INFORMATION CONCERNING FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM in APPENDIX A hereto. THE BONDS ARE LIMITED AND SPECIAL OBLIGATIONS OF THE AUTHORITY AND DO NOT CONSTITUTE OR CREATE AN OBLIGATION, GENERAL OR SPECIAL, DEBT, LIABILITY OR MORAL OBLIGATION OF THE STATE OR ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY PROVISIONS WHATSOEVER AND NEITHER THE FAITH OR CREDIT NOR THE TAXING POWER OF THE STATE OR OF ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, OR THE INTEREST ON THE BONDS. THE BONDS ARE NOT A GENERAL OBLIGATION OF THE AUTHORITY (WHICH HAS NO TAXING POWER AND RECEIVES NO FUNDS FROM ANY GOVERNMENTAL BODY) BUT ARE A LIMITED AND SPECIAL REVENUE OBLIGATION OF THE AUTHORITY PAYABLE SOLELY FROM THE TRUST ESTATE, INCLUDING INCOME, REVENUES AND RECEIPTS DERIVED OR TO BE DERIVED FROM PAYMENTS MADE PURSUANT TO THE LOAN AGREEMENT AND THE ASSIGNMENT. The obligations of the Obligated Group under the Master Indenture are not obligations of the Franciscan Missionaries of Our Lady, North American Province, Inc. (the Province ), the nonprofit corporation which sponsors the Corporation, the Provincial of the Franciscan Missionaries of Our Lady, North American Province (the Provincial ) or the members of the Provincial Council of the Franciscan Missionaries of Our Lady, North American Province (the Provincial Council ). The Bonds are subject to optional, mandatory sinking fund and extraordinary special redemption prior to maturity, as more fully described herein under DESCRIPTION OF THE BONDS - Redemption. For additional information concerning the Obligated Group and the operation of the System and Existing Indebtedness of the Obligated Group, see SUMMARY STATEMENT - Existing Indebtedness and SECURITY FOR THE BONDS - Master Indenture and - Existing Indebtedness herein. See also FINANCIAL AND OPERATING INFORMATION Outstanding Indebtedness of the System in APPENDIX A hereto. Definitions of certain terms used in this Official Statement are set forth herein under the caption DEFINITIONS in APPENDIX C hereto. This Official Statement contains brief descriptions of, among other things, the Bonds, the Corporation and the other Obligated Group Members, the System, the Loan Agreement, the Indenture, the Master Indenture and the Assignment. Such descriptions do not purport to be comprehensive or definitive, and references in this Official Statement to documents are qualified in their entirety by references to each such document, and references in this Official Statement to the Bonds are qualified in their entirety by reference to 2

15 the form of the Bonds, as applicable, included in the Indenture. Until the issuance and delivery of the Bonds, draft copies of such documents may be obtained from J.P. Morgan Securities LLC, 383 Madison Avenue Floor 08, New York, New York and from The Bank of New York Mellon Trust Company, N.A., Corporate Trust Department, One American Place, 301 Main Street, Suite 1510, Baton Rouge, Louisiana Information concerning the Obligated Group is included herein as APPENDIX A. The consolidated audited financial statements and supplemental schedules as of and for the years ended June 30, 2012 and 2011 are included herein as APPENDIX B. Definitions of certain terms and summaries of the principal documents are included herein as APPENDIX C. The Proposed Form of Opinion of Bond Counsel is included herein as APPENDIX D. The Form of the Continuing Disclosure Agreement of the Obligated Group (the Continuing Disclosure Agreement ) relating to the Bonds is included herein as APPENDIX E. Powers and Purpose THE AUTHORITY The Authority was created pursuant to the Authority s Indenture of Trust for the benefit of the State. The Governor, on behalf of the State, accepted the beneficial interest in the Authority by Executive Order Number 71 on August 27, The Authority is a public trust and a public corporation of the State organized pursuant to the laws of the State, including the Act, and is governed by seven trustees who are appointed for staggered terms by the Governor. The Authority has no taxing power and receives no appropriations from the State or any governmental body. The Authority is not organized for profit, and no part of its net earnings may inure to the benefit of any private person. The Act provides that no trustee of the Authority may be charged personally with any liability whatsoever by reason of any act or omission committed or suffered in the performance of the functions of the Authority or in the operation of the Authority s property. The Act requires that any amendments to the Indenture of Trust pursuant to which the Authority was created must be approved by a two-thirds (2/3) vote of both Houses of the Legislature and by the Governor of the State. The purposes of the Authority are to promote and encourage a wide range of public and industrial activities within the State, including the provision of hospital and health care facilities and services to the State and its agencies, instrumentalities and political subdivisions, and to provide funds in furtherance thereof. The Authority also has general powers which include the power to enter into, make and perform contracts of every lawful kind to accomplish its purposes. The Authority has not prepared or assisted in the preparation of this Official Statement, except the statements under this section with respect to the Authority and the information with respect to the Authority under the heading ABSENCE OF LITIGATION - The Authority, and except as aforesaid, the Authority is not responsible for any statements made in this Official Statement. Except for the execution and delivery of documents required to effect the offering of the Bonds, the Authority has not otherwise assisted in connection with the offering of the Bonds. Accordingly, except for the aforesaid, the Authority disclaims responsibility for the disclosure set forth in this Official Statement or otherwise in connection with the offering of the Bonds. 3

16 Membership of the Authority The present Board of Trustees of the Authority (the Board ), and their terms of office and occupations or affiliations, are as follows: Name Term Expires Principal Occupation/Affiliation Guy Campbell, III, Chairman October 15, 2012 Attorney, Snellings, Breard, Sartor, Inabnett & Trascher, L.L.P. Monroe, Louisiana Camille A. Cutrone, Vice Chairman January 31, 2016 Attorney, Cutrone, Verlander and Meyer, New Orleans, Louisiana Peter Egan, Secretary-Treasurer November 25, 2013 Egan Healthcare Services Metairie, Louisiana Dale Benoit December 20, 2013 Print All, Inc. Belle Chasse, Louisiana Craig Cheramie August 25, 2015 CPA, PFS, Cheramie Financial Services Harahan, Louisiana Lorin James Crenshaw June 21, 2015 Director of Investor Relations & Communications, Albemarle Corporation Baton Rouge, Louisiana Eric Liew August 2, 2017 President and CEO, AOSS Medical Supply, Inc., Monroe, Louisiana Mr. James W. Parks II serves as President and Chief Executive Officer and as Assistant Secretary for the Authority. The address of the Authority is 2237 South Acadian Thruway, Suite 650, Baton Rouge, Louisiana The Authority s telephone number is (225) and the Authority s facsimile number is (225) Approval of Issuance of the Bonds The issuance and sale of the Bonds was approved by the Authority s Board of Trustees on August 7, 2012, September 11, 2012 and October 2, Other Financings The Authority has issued, and may continue to issue, other series of bonds or notes for the purpose of financing other projects and programs. Each such series of bonds or notes is or will be secured by instruments separate and apart from the Indenture securing the Bonds and payable from different sources of revenue. Legality of Investment With respect to bonds and notes issued by the Authority, including the Bonds, the Act provides in La. R.S. 9:2347(A)(3) as follows: Bonds and notes issued hereunder are hereby declared legal investments and are hereby made securities in which all insurance companies and associations and other persons carrying on an insurance business, trust companies, banks, bankers, banking associations, savings banks and savings associations, including savings and loan associations, credit unions, building and loan associations, investment companies, executors, administrators, trustees and other fiduciaries, pension, profitsharing, retirement funds and other persons carrying on a banking business, and all other persons who are authorized to invest in revenue bonds may properly and legally invest funds, including capital in their control or belonging to them. Such bonds and notes are hereby made securities which may properly and legally be deposited with and received by any state or municipal or public officer or any 4

17 agency or political subdivisions of the State for any purpose for which the deposit of revenue bonds is authorized by law. Nothing contained herein shall authorize the investment of public pension or retirement funds in public trust bonds or other obligations. Limitation of Liability THE BONDS ARE LIMITED AND SPECIAL OBLIGATIONS OF THE AUTHORITY AND DO NOT CONSTITUTE OR CREATE AN OBLIGATION, GENERAL OR SPECIAL, DEBT, LIABILITY OR MORAL OBLIGATION OF THE STATE OR ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY PROVISIONS WHATSOEVER AND NEITHER THE FAITH OR CREDIT NOR THE TAXING POWER OF THE STATE OR OF ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, OR THE INTEREST ON THE BONDS. THE BONDS ARE NOT A GENERAL OBLIGATION OF THE AUTHORITY (WHICH HAS NO TAXING POWER AND RECEIVES NO FUNDS FROM ANY GOVERNMENTAL BODY) BUT ARE A LIMITED AND SPECIAL REVENUE OBLIGATION OF THE AUTHORITY PAYABLE SOLELY FROM THE TRUST ESTATE, INCLUDING INCOME, REVENUES AND RECEIPTS DERIVED OR TO BE DERIVED FROM PAYMENTS MADE PURSUANT TO THE LOAN AGREEMENT AND THE ASSIGNMENT. THE SYSTEM AND THE OBLIGATED GROUP The Corporation was formed in 1984, but traces its origins and history of serving residents of Louisiana to The Corporation is the sole member of the Lake d/b/a Our Lady of the Lake Regional Medical Center (Baton Rouge, Louisiana), St. Francis d/b/a St. Francis Medical Center (Monroe, Louisiana), Lourdes d/b/a Our Lady of Lourdes Regional Medical Center (Lafayette, Louisiana) and Our Lady of the Lake Ascension Community Hospital, Inc. d/b/a/ St. Elizabeth Hospital (Gonzales, Louisiana), each of which owns and operates an acute care hospital and related health care facilities which constitute part of the System. In addition to the Corporation, each of the Lake, St. Francis, Lourdes and St. Elizabeth will be an Obligated Group Member under the Master Indenture. The Corporation also is affiliated with other healthcare-related entities, which are not Obligated Group Members under the Master Indenture. See NON-OBLIGATED SYSTEM PARTICIPANTS in APPENDIX A hereto. Only the Obligated Group is obligated with respect to the Note, and the other entities affiliated with the Corporation and which own hospital and related health care facilities constituting part of the System, which are not Obligated Group Members, have no liability with respect to the Note. The Provincial and the members of the Provincial Council are the sole members of the Corporation. Neither the Province, the Provincial nor the members of the Provincial Council is obligated or liable with respect to the Note or any other obligation of the Obligated Group under the Master Indenture. As of and for the Fiscal Year ended June 30, 2012, the Obligated Group Members collectively accounted for 89.0% of the System's total operating revenue and 91.4% of the total assets of the System. Information concerning the Obligated Group and its facilities and operations and certain consolidated financial information of the Obligated Group for the Fiscal Year ended June 30, 2012, is included in APPENDIX A to this Official Statement. Consolidated audited financial statements and supplemental schedules for the years ended June 30, 2012 and 2011 of the Corporation and Affiliated Organizations are contained in APPENDIX B hereto. 5

18 PLAN OF FINANCE The Project The Obligated Group expects that a substantial portion of the proceeds of the Bonds will be used by the Lake to finance or reimburse the cost of acquiring, constructing and equipping a nine-story, 330,000 square foot patient bed tower dedicated to heart and vascular treatment (the Patient Bed Tower ) and other capital improvements to the existing Our Lady of the Lake Regional Medical Center, located in Baton Rouge, Louisiana. On the date of delivery, the Corporation expects to reimburse the Lake in the approximate amount of $50,000,000 * for certain prior expenditures with respect to the Patient Bed Tower. In the Spring of 2012, the Lake began construction on the Patient Bed Tower. The Patient Bed Tower is designed to include 120 specialized patient rooms, including 48 Intensive Care Unit rooms, 48 telemetry rooms and 24 cardiovascular universal beds, as well as catheterization and electrophysiology laboratories. The Intensive Care Unit rooms will house medical, surgical, trauma, brain injury and heart patients and state-of-the-art medical technology and amenities. The patient rooms are also designed to include a private restroom area and space for one overnight guest. The Patient Bed Tower is being constructed on the main campus of the Lake and will front on Essen Lane. It is expected to be completed in the Fall of The overall budget for constructing and equipping the Patient Bed Tower is approximately $181 million, with approximately $125 million for construction costs, $35 million for furniture, fixtures and equipment, $15 million for soft costs, and the balance for project contingency. The Patient Bed Tower is being financed through a combination of bond proceeds as described above and a combination of existing reserves, including investments plus current and anticipated positive operating cash flow from current and future operations. General Contractors. The general contractors for the Patient Bed Tower consist of a joint venture between J.E. Dunn Construction Company - Healthcare Division of Houston, Texas, and Milton J. Womack, Inc. of Baton Rouge, Louisiana, collectively assembled as Womack-Dunn Construction Group, LLC. The Lake has a fully executed guaranteed maximum price contract for the complete construction and equipping of the Patient Bed Tower. J.E. Dunn Construction Company is a national construction firm, specializing in healthcare construction and is recognized as "Healthcare Centers of Excellence". J.E. Dunn Construction Company was founded in 1924 by the Dunn family in Kansas City, Missouri, which serves as its headquarters. The company has 20 offices throughout the United States. Currently, JE Dunn Construction Company is ranked as No. 6 in the Top 25 Healthcare Builders and ranks 25th of the Nation's Top 400 Contractors. Milton J. Womack, Inc. is a local Baton Rouge construction firm incorporated in Milton J. Womack, Inc. is the largest healthcare builder in Louisiana and has completed hundreds of construction projects for the Lake over the past 37 years, since the initial hospital was built. Architects. The design team for the Patient Bed Tower consists of a joint venture between VOA Architects, of Chicago, Illinois and Bradley-Blewster & Associates of Baton Rouge, Louisiana, forming VOA+BBA Design Partnership, LLC. VOA Architects is a global architectural design firm founded in 1969 that specializes in healthcare. VOA Architects has offices in US - Chicago, New York, Orlando, Washington DC, China - Shanghai, Beijing and Sao Paulo, Brazil. * Preliminary, subject to change. 6

19 Bradley-Blewster & Associates has provided services for commercial and institutional clients since 1980 and focuses on designing hospitals, schools, churches as well as other projects. Bradley-Blewster & Associates has provided "in-house" type architectural services and completed hundreds of projects for the Lake since In addition, the remaining portion of the proceeds of the Bonds will be used to pay the costs of issuance of the Bonds. See also ESTIMATED SOURCES AND USES OF FUNDS herein. Series 2012A Bonds In addition to the issuance of the Bonds, on October 3, 2012, the Authority issued its Hospital Revenue Refunding Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2012A in the original principal amount of $56,530,000 (the Series 2012A Bonds ) for the purpose of advance refunding its Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2005C (the "Series 2005C Bonds") and paying the costs of issuance of the Series 2012A Bonds. A portion of the proceeds of the Series 2012A Bonds and other monies available to the Corporation were deposited in an Escrow Fund created pursuant to an Escrow Deposit Agreement dated the date of delivery of the Series 2012A Bonds for the purpose of defeasing and advance refunding the Series 2005C Bonds. The Series 2012A Bonds are not being offered by means of this Official Statement. The Series 2012A Bonds were issued as fixed rate, tax-exempt bonds and were purchased by Capital One Public Funding, LLC in a private placement transaction. See FINANCIAL AND OPERATING INFORMATION - Outstanding Indebtedness of the System in APPENDIX A attached hereto. [remainder of the page intentionally left blank] 7

20 ESTIMATED SOURCES AND USES OF FUNDS * The following table sets forth the estimated sources and uses of funds related to the Bonds. Sources of Funds: Par Amount of the Bonds $ 100,000,000 Net Original Issue Premium/Discount TOTAL $ Uses of Funds: Deposit to Construction Fund $ Deposit to Issuance Expense Fund to pay Costs of Issuance (1) TOTAL $ (1) Costs of Issuance includes Underwriters discount and expenses, financial advisor fee, legal, printing and other costs incurred in connection with the issuance of the Bonds. General Description DESCRIPTION OF THE BONDS The Bonds will be issued as fully registered bonds, without coupons, in denominations of $5,000 or any integral multiple thereof (when used in connection with the Bonds, Authorized Denominations ) initially in book-entry form, registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). Purchasers of the Bonds (the Beneficial Owners ) will not receive physical delivery of bond certificates. Ownership interests may be acquired in book-entry form only. See Book-Entry Only System. The Bonds will be dated their date of delivery, will mature (subject to prior redemption) and bear interest at the rates per annum (using a year of 360 days comprised of twelve 30-day months) as shown on the inside front page of this Official Statement. The Bonds shall bear interest payable on January 1 and July 1 of each year, commencing July 1, 2013 (when used herein in connection with the Bonds, each an Interest Payment Date ). Principal of, premium, if any, and interest on the Bonds will be payable in the manner described below under Book-Entry Only System. Payment of the Bonds will be made in such coin or currency of the United States of America as, at the respective times of payment, is legal tender for the payment of public and private debts. Book-Entry Only System The following information about the book-entry-only system applicable to the Bonds has been supplied by DTC. None of the Authority, the Obligated Group, the Trustee or the Underwriters makes any representations, warranties or guarantees with respect to its accuracy or completeness. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered bonds registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered Bond certificate will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the * Preliminary, subject to change. 8

21 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 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 and Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC s records. The ownership interest of each 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 transactions, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC will be registered in the name of DTC s nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee doe not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of the Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s 9

22 consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the Authority or the 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 Trustee or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the Authority or the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Bond certificates are required to be printed and delivered. The Authority may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered. The information in this section concerning DTC and DTC s book-entry system has been obtained from DTC, but neither the Authority, the Trustee, the Underwriters nor the Obligated Group take any responsibility for the accuracy thereof. THE AUTHORITY, THE OBLIGATED GROUP, THE UNDERWRITERS AND THE TRUSTEE CANNOT AND DO NOT GIVE ANY ASSURANCES THAT THE DIRECT PARTICIPANTS OR THE INDIRECT PARTICIPANTS WILL DISTRIBUTE TO THE BENEFICIAL OWNERS OF THE BONDS (i) PAYMENTS OF PRINCIPAL OF OR INTEREST AND PREMIUM, IF ANY, ON THE BONDS, (ii) CERTIFICATES REPRESENTING AN OWNERSHIP INTEREST OR OTHER CONFIRMATION OF BENEFICIAL OWNERSHIP INTERESTS IN THE BONDS, OR (iii) REDEMPTION OR OTHER NOTICES SENT TO DTC OR CEDE & CO., ITS NOMINEE, AS THE REGISTERED OWNERS OF THE BONDS, OR THAT THEY WILL DO SO ON A TIMELY BASIS OR THAT DTC OR DIRECT OR INDIRECT PARTICIPANTS WILL SERVE AND ACT IN THE MANNER DESCRIBED IN THIS OFFICIAL STATEMENT. THE CURRENT RULES APPLICABLE TO DTC ARE ON FILE WITH THE SECURITIES AND EXCHANGE COMMISSION AND THE CURRENT PROCEDURES OF DTC TO BE FOLLOWED IN DEALING WITH DTC PARTICIPANTS ARE ON FILE WITH DTC. NEITHER THE AUTHORITY, THE OBLIGATED GROUP, THE UNDERWRITERS NOR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATIONS TO SUCH DTC PARTICIPANTS OR THE BENEFICIAL OWNERS WITH RESPECT TO (1) THE BONDS; (2) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DTC PARTICIPANT; (3) THE PAYMENT BY ANY DTC PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL AMOUNT OF OR INTEREST OR PREMIUM, IF ANY, ON THE BONDS; (4) THE DELIVERY BY ANY DTC PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE INDENTURE TO BE GIVEN TO BONDHOLDERS; (5) THE SELECTION OF THE BENEFICIAL OWNERS TO RECEIVE PAYMENT IN THE EVENT OF ANY PARTIAL REDEMPTION OF THE BONDS; OR (6) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS BONDHOLDER. 10

23 Provisions Applicable if Book-Entry Only System is Terminated General. Purchasers of Bonds will receive principal and interest payments, and may transfer and exchange Bonds, pursuant to the following provisions only if the book-entry only system is terminated. Otherwise, payments and transfers will be made only as described above under Book-Entry Only System. Payment of Principal and Interest. The principal of and premium, if any, on the Bonds will be payable to the registered owners thereof upon surrender of the Bonds at the principal corporate trust office of the Trustee. The interest on the Bonds, when due and payable, will be paid by check or draft mailed by the Trustee on each Interest Payment Date to each person in whose name a Bond is registered, at the address(es) as they appear on the Bond Register maintained by the Trustee at the close of business on the applicable Record Date (the fifteenth day of the month next preceding each Interest Payment Date) irrespective of any transfer or exchange of the Bonds subsequent to such Record Date and prior to such Interest Payment Date, unless the Authority shall default in payment of interest due on such Interest Payment Date; and provided further, that a Bondholder of $1,000,000 or more in aggregate principal amount of the Bonds may request in writing payment of interest on such Bonds in immediately available funds by wire transfer to the bank account number of such owner furnished to the Trustee not less than seven (7) days prior to such Interest Payment Date and provided further, that so long as ownership of the Bonds is maintained in book-entry form by the Securities Depository, interest will be paid by wire transfer to the Securities Depository. In the event the Authority defaults in the payment of interest due on any Interest Payment Date, such defaulted interest shall be payable on a payment date established by the Trustee to the persons in whose names the Bonds are registered at the close of business on a special record date for the payment of such defaulted interest established by notice mailed by the Trustee to the registered owners of the Bonds not less than fifteen (15) days preceding such special record date. Registration, Exchange and Transfer. The Authority shall cause books for the registration and for the transfer of the Bonds as provided in this Indenture to be kept by the Trustee which is hereby appointed the transfer agent of the Authority for the Bonds. Notwithstanding such appointment, the Trustee is hereby authorized to make any arrangements with other institutions which it deems necessary or desirable in order that such institutions may perform the duties of transfer agent for the Bonds. Upon surrender for transfer of any Bond at the principal office of the Trustee, duly endorsed for transfer or accompanied by an assignment duly executed by the registered owner or his attorney duly authorized in writing, the Authority shall execute and the Trustee shall authenticate and deliver in the name of the transferee or transferees a new fully registered Bond for a like aggregate principal amount of the same maturity and interest rate. Bonds may be exchanged at the principal office of the Trustee for a like aggregate principal amount of fully registered Bonds of the same maturity and interest rate in Authorized Denominations. The Authority shall execute and the Trustee shall authenticate and deliver Bonds which the Bondholder making the exchange is entitled to receive, bearing numbers not contemporaneously Outstanding. The execution by the Authority of any fully registered Bond of any Authorized Denomination shall constitute full and due authorization of such denomination and the Trustee shall thereby be authorized to authenticate and deliver such fully registered Bond. The Trustee shall not be required to transfer or exchange any Bond during the period of fifteen (15) business days next preceding an Interest Payment Date on the Bonds or, in the case of any proposed redemption of Bonds, after the mailing of notice of redemption as herein provided. As to any Bond, the person in whose name the same shall be registered shall be deemed and regarded as the absolute owner thereof for all purposes, and payment of either principal or interest on any fully registered Bond shall be made only to or upon the written order of the registered owner thereof or his legal representative but such registration may be changed as hereinabove provided. All such payments shall be valid and effectual to satisfy and discharge the liability upon such Bond to the extent of the sum or sums paid. The Trustee shall require the payment by any Bondholder requesting exchange or transfer of any tax or other governmental charge required to be paid with respect to such exchange or transfer. The Obligated Group shall, under 11

24 the Loan Agreement, be liable to pay all other expenses and charges of the Authority and of the Trustee in connection with such exchange or transfer. Redemption * Mandatory Redemption Without Premium. The Bonds are subject to mandatory sinking fund redemption prior to maturity at the principal amount of such Bonds to be redeemed, plus accrued interest to the date fixed for redemption, but without premium, on July 1 in the following years and in the following amounts: *Final Maturity Year * Principal Amount In lieu of redeeming Bonds, the Trustee shall, at the written request of the Corporation, use such funds otherwise available under the Indenture for redemption of Bonds to purchase Bonds in the open market at a price not exceeding the optional redemption price then applicable to such Bonds, if any, under the Indenture. Any Bonds so purchased in lieu of redemption shall be delivered to the Trustee for cancellation at the option of the Corporation. In addition, the Corporation may use any of its own funds to purchase Bonds in the open market for any price and deliver them to the Trustee for cancellation at the option of the Corporation or the Corporation may purchase Bonds in lieu of redemption as set forth in the section entitled Mandatory Purchase in Lieu of Redemption. Not less than 45 days next preceding any mandatory sinking fund redemption date, the Obligated Group may (i) deliver to the Trustee for cancellation Bonds which are subject to sinking fund redemption on such date in an aggregate principal amount designated by the Obligated Group or (ii) specify a principal amount of such Bonds which prior to said date have been redeemed (otherwise than through the operation of such sinking fund) and canceled by the Trustee and not previously applied as a credit against any sinking fund redemption obligation for such Bonds. Each Bond so delivered or previously redeemed shall be credited by the Trustee at 100% of the principal amount redeemed against the obligation of the Obligated Group on such sinking fund redemption date and any excess shall be so credited against the next sinking fund redemption obligations for Bonds. Extraordinary Special Redemption Without Premium. (a) The Bonds are redeemable by the Authority upon the direction of the Corporation, in whole as a result of a redemption occurring as described in clause (i), (ii) or (iii) below or in part as a result of a redemption occurring as described in clause (i) or (iii) below on any date (and with respect to a redemption as a result of clause (iii)(b) below, such redemption date shall be within 180 days of the occurrence of the event specified therein), at a redemption price equal to the principal amount of each Bond redeemed, and accrued interest thereon to the redemption date, upon the Note being redeemed or prepaid in whole or in part pursuant to the Indenture or Loan Agreement upon the occurrence of events described below: (i) In the event of damage, destruction or condemnation with respect to the Corporation which exceeds 5% of the Book Value of the Operating Assets of the Obligated Group, but Bonds shall be redeemed only in an amount equal to the insurance of condemnation proceeds realized by the Corporation; (ii) If the Corporation shall have elected to make prepayment of all payments payable under the Loan Agreement as provided therein because there exists a substantial likelihood that any Obligated Group Member will be required to take any action or provide any service contrary to the Ethical and Religious Directives or similar guidelines promulgated by the National Council of Catholic Bishops by reason of (i) changes in the Constitution of the United States of America, (ii) legislative or administrative action or * Preliminary, subject to change. 12

25 inaction by the United States of America or any state, or any agency or political subdivision thereof, or (iii) any judicial decision of general applicability or applicable specifically to the Obligated Group. As a condition precedent to the exercise of such right of redemption, the Corporation shall file with the Trustee a certified resolution of its Board of Directors electing to exercise such right of redemption and stating the reasons therefor; and (iii) (A) If as a result of any changes in the Constitution of the State or the Constitution of the United States of America or of legislative, judicial or administrative action of the United States of America or the State or any agency, department or subdivision thereof, the Indenture or the Loan Agreement shall have become void or unenforceable or impossible of performance in accordance with the intention of the parties as expressed therein, or (B) after receipt by the Trustee of notice of (x) the issuance or modification or amendment of a public or private ruling of the Internal Revenue Service in which the Corporation has participated to the degree it deems sufficient and which ruling the Corporation, in its discretion, does not contest by an appropriate proceeding directly or through an owner of Bonds, or (y) a final determination by any court of competent jurisdiction in the United States in a proceeding to which the Corporation is a party, in either case to the effect that, as a result of failure by the Corporation to observe any covenant, agreement, representation or warranty in the Loan Agreement or the Tax Regulatory Agreement dated as of November 1, 2012 among the Authority, the Trustee and the Corporation related to the Bonds (the Tax Regulatory Agreement ), the interest payable on the Bonds is includable in the gross income for Federal income tax purposes of the owners thereof. Upon the occurrence of any event described in this clause (iii)(b), the Bonds shall be redeemed in whole unless, in the opinion of Bond Counsel mutually acceptable to the Authority, the Trustee and the Corporation, the redemption of a portion of such Bonds would have the result that interest payable on the Bonds remaining Outstanding after such redemption would not be includable in the gross income for Federal income tax purposes of any owner of any such Bonds. Any such partial redemption shall be by lot in such amount as is necessary to accomplish such result. Optional Redemption. The Bonds are subject to redemption prior to maturity at the option of the Authority upon request of the Corporation Representative on or after July 1, 20, as a whole or in part at any time, in the order directed by the Corporation and, if no order is directed, by lot within a maturity, at a redemption price equal to the principal amount thereof plus accrued interest to the redemption date. Purchase of Bonds. Unless expressly provided otherwise in the Indenture, moneys held in the Bond Principal Fund or Bond Interest Fund under the Indenture may be used to reimburse the Corporation for the purchases at not less than par plus accrued interest of Bonds that would otherwise be subject to redemption from such moneys upon the delivery of such Bonds to the Trustee for cancellation. Such reimbursement shall not, however, relieve the Corporation from its obligation to make payments under the Loan Agreement. Any such purchase must be completed prior to the time notice would otherwise be required to be given to redeem the related Bonds. All Bonds so purchased may, at the option of the Corporation, be canceled by the Trustee and applied as a credit as directed by the Corporation against the Authority s obligation to redeem such Bonds from such moneys. The Corporation may also use other funds to purchase Bonds as it deems desirable, and is granted the right to purchase or ask for the tender of Bonds for purchase at its option. (In the event of any such purchase or tender of the Bonds by the Corporation as described herein, the Indenture does not require that such Bonds be redeemed and/or cancelled.) Notice of Redemption. The Trustee will give notice of any redemption of the Bonds not less than 20 days prior to the Redemption Date, to the registered owners of the Bonds to be redeemed by mailing such notice by first class mail, postage prepaid, to such owners at their addresses appearing in the registration books maintained by the Trustee. Any such notice shall (i) specify (A) in the case of a partial redemption, the aggregate principal amounts of the Bonds to be redeemed, (B) the Redemption Date, (C) the redemption price per $5,000, and (D) the place or places where amounts due upon such redemption will be payable and (ii) state that on the Redemption Date, if sufficient moneys are available for such redemption, the Bonds or the portions thereof to be redeemed shall cease to bear interest. 13

26 With respect to any notice of optional redemption of Bonds, unless upon the giving of such notice such Bonds or portions thereof shall be deemed to have been paid within the meaning of the Indenture, such notice shall state that such redemption shall be conditioned upon the receipt by the Trustee on or prior to the date fixed for such redemption of moneys sufficient to pay the principal of, premium, if any, and interest on such Bonds or portions thereof to be redeemed, and that if such moneys shall not have been so received said notice shall be of no force and effect and the Authority shall not be required to redeem such Bonds or portions thereof. In the event that such notice of redemption contains such a condition and such moneys are not so received, the redemption shall not be made and the Trustee shall within five (5) days thereafter give notice, in the manner in which the notice of redemption was given, that such moneys were not so received. If, on or prior to the redemption date, sufficient moneys shall be deposited hereunder to pay the principal amount of the Bonds called for redemption and accrued interest or interest due thereon on such redemption date, the Bonds or portions thereof thus called and provided for as hereinabove specified shall not bear interest after the redemption date and shall not be considered to be Outstanding or to have any other rights under the Indenture other than this right to receive payment. Selection of Bonds to Be Redeemed. Unless otherwise specified in the above, if less than all of the Bonds shall be called for redemption, they shall be selected in the order directed by the Corporation and, if no order is directed, by random lot by the Trustee in such manner as the Trustee in its discretion may determine; provided, however, that the portion of any Bond to be redeemed shall be in the principal amount of $5,000 or an integral multiple thereof. If a portion of any Bond shall be called for redemption, a new Bond in principal amount equal to the unredeemed portion thereof shall be issued to the registered owner upon the surrender thereof. For the purposes of this paragraph, each $5,000 portion of principal shall be counted as one Bond. Mandatory Purchase in Lieu of Redemption. Each Bondholder or Beneficial Owner, by purchase and acceptance of any Bond, irrevocably grants to the Corporation the option to purchase such Bond at any time such Bond is subject to optional redemption, pursuant to the Indenture, such Bond to be purchased at a redemption price equal to the principal amount thereof plus accrued interest to the redemption date. In the event the Corporation determines to exercise such option, the Corporation shall deliver a favorable Bond Counsel Opinion to the Trustee and shall direct the Trustee to provide notice of mandatory purchase, such notice to be provided in accordance with the provisions of the Indenture relating to notice of redemption, and to select Bonds subject to mandatory purchase in the same manner as Bonds called for redemption pursuant to the Indenture. On the date fixed for purchase of any Bond in lieu of redemption, the Corporation shall pay the purchase price of such Bond to the Trustee in immediately available funds, and the Trustee shall pay the same to the Bondholders of such Bonds being purchased against delivery thereof. No purchase of any Bond in lieu of redemption as described in this paragraph shall operate to extinguish the indebtedness of the Corporation evidenced by such Bond. No Bondholder or Beneficial Owner may elect to retain a Bond subject to mandatory purchase in lieu of redemption. The Corporation shall have the right, in its discretion, to cancel any purchased Bonds if it delivers such Bonds to the Trustee for cancellation. General SECURITY FOR THE BONDS The Bonds are limited obligations of the Authority payable solely from the Trust Estate, defined in the Indenture as (a) the rights of the Authority under and pursuant to the Loan Agreement (other than the rights of the Authority with respect to administrative payments, reimbursement of expenses and indemnification and other than the rights of the Authority to perform certain discretionary acts as specifically provided in the Loan Agreement), (b) all right, title and interest of the Authority in the Note, and all sums payable in respect to the indebtedness collateralized thereby, (c) all Funds (except the Rebate Fund established under the Indenture and any moneys deposited with or paid to the Trustee for the redemption of Bonds, notice of the redemption of which has been duly given and the Bonds have become due and payable) created in the Indenture and all revenues payable to the Trustee by or for the account of the Authority pursuant to the Loan Agreement, the Note and the Indenture, subject only to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions 14

27 set forth in the Indenture, and (d) any and all other interests in real or personal property of every name and nature from time to time by delivery or by writing of any kind specifically mortgaged, pledged, or hypothecated, as and for additional security under the Indenture by the Authority or by anyone in its behalf or with its written consent in favor of the Trustee, which is authorized by the Indenture to receive any and all such property at any and all times and to hold and apply the same subject to the terms of the Indenture. Neither the Province, the Provincial nor the members of the Provincial Council is obligated or liable with respect to the Note or any other obligation of the Obligated Group under the Master Indenture. In order to evidence the loan of the proceeds of the Bonds, the Corporation, as the Obligated Group Agent, will issue to the Authority the Note in a principal amount equal to the aggregate principal amount of the Bonds. The Note constitutes an unconditional and irrevocable obligation of the Obligated Group to pay amounts thereunder sufficient to pay the principal of (whether at maturity, by acceleration or call for redemption) and premium, if any, and interest on the Bonds when due. The Authority has pledged and assigned its rights in and to the Note and the Loan Agreement (other than the rights of the Authority with respect to administrative payments, reimbursement of expenses and indemnification) to the Trustee as security for the Bonds. Assignment The Bonds are not secured by a mortgage or security interest in any of the property or facilities of the System. Pursuant to the Assignment, by and among each of the Obligated Group Members, as Assignors, and the Master Trustee, and as authorized by Supplemental Master Trust Indenture No. 14, the Obligated Group Members pledged and assigned their Receipts as security for their respective obligations under the Note. Receipts is defined in the Assignment as receipts, revenues, rentals, income, insurance proceeds and other moneys received by or on behalf of any Obligated Group Member, including (without limitation) revenues derived from (i) the ownership, operation or leasing of any Operating Assets and rights to receive the same, whether in the form of accounts receivable, contract rights, general intangibles or other rights, and the proceeds of such rights, 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 any Obligated Group Member incurred in the financing, operation, maintenance or repair of any of the Operating Assets, but excluding, however, (a) gifts, grants, bequests, donations and contributions to the Assignors heretofore or hereafter made, and the income and gains derived therefrom, which are specifically restricted by the donor or grantor to a particular purpose which is inconsistent with their use for payments required under the applicable supplemental indenture securing the Series 1998A Bonds, Series 1998B Bonds, Series 2005A Bonds, Series 2005B Bonds, Series 2005D Bonds, the Series 2008A Bonds, the Series 2009A Bonds, the Series 2012A Bonds and the Bonds or under the Series 2005D Hedge Note and the Series 2008 Hedge Note; provided that in the case of the proceeds of items mentioned in (a), such proceeds are maintained in such a fashion as to be specifically identifiable as the proceeds of such items of (a) and are not commingled with other funds of the Assignors. The Assignment equally and ratably secures the Outstanding Notes issued and secured under the Master Indenture relating to the Outstanding Bonds and the Swap Transactions. The Assignment also secures on a subordinated basis certain Subordinated Secured Obligations which initially constitute the obligations of the Obligated Group with respect to termination payments under the Series 2005D Hedge Notes and the Series 2008A Hedge Notes. In the opinion of Counsel to the Obligated Group, the Obligated Group's assignment to the Assignee of its present and future rights in and to Receipts is prior to any other lien on or assignment or pledge of the Obligated Group s rights in and to Receipts heretofore created or that may hereafter be created, except as may be limited by the following: (i) statutory liens, (ii) rights arising in favor of the United States of America or any agency thereof, (iii) prohibitions against assignments set forth in Federal statutes, including those governing Medicare and Medicaid, (iv) 15

28 constructive trusts, equitable liens or other rights impressed or conferred by any state or Federal court in the exercise of equitable jurisdiction, (v) Federal bankruptcy laws affecting Receipts earned by the Obligated Group within 90 days preceding and after any effectual institution of bankruptcy, liquidation or reorganization proceedings by or against the Obligated Group, (vi) rights of third parties in Receipts converted to cash and not in the possession of the Trustee, (vii) the requirement that appropriate renewal be made in accordance with Louisiana law, as from time to time in effect, and (viii) those sales, liens and/or pledges made by the Obligated Group as permitted under the Master Indenture. See INVESTMENT CONSIDERATIONS herein. Limited Obligations - The Bonds THE BONDS ARE LIMITED AND SPECIAL OBLIGATIONS OF THE AUTHORITY AND DO NOT CONSTITUTE OR CREATE AN OBLIGATION, GENERAL OR SPECIAL, DEBT, LIABILITY OR MORAL OBLIGATION OF THE STATE OR ANY POLITICAL SUBDIVISION THEREOF WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY PROVISIONS WHATSOEVER AND NEITHER THE FAITH OR CREDIT NOR THE TAXING POWER OF THE STATE OR OF ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, OR THE INTEREST ON THE BONDS. THE BONDS ARE NOT A GENERAL OBLIGATION OF THE AUTHORITY (WHICH HAS NO TAXING POWER AND RECEIVES NO FUNDS FROM ANY GOVERNMENTAL BODY) BUT ARE A LIMITED AND SPECIAL REVENUE OBLIGATION OF THE AUTHORITY PAYABLE SOLELY FROM THE TRUST ESTATE, INCLUDING INCOME, REVENUES AND RECEIPTS DERIVED OR TO BE DERIVED FROM PAYMENTS MADE PURSUANT TO THE LOAN AGREEMENT AND THE ASSIGNMENT. The Note The Note is an obligation of the Obligated Group entitled to the benefits of the Assignment. Neither the Province, the Provincial nor the members of the Provincial Council is obligated or liable with respect to the Note or any other obligation of the Obligated Group under the Master Indenture. Master Indenture The Note will be issued by the Corporation, as the Obligated Group Agent, under the Master Indenture. The Outstanding Notes and any additional Obligations issued under the Master Indenture will be secured by the assignment of the Receipts of the Obligated Group and any future Obligated Group Members. The Master Indenture provides that any Person may become an Obligated Group Member upon the satisfaction of certain conditions. Upon compliance with such conditions, such Person will be jointly and severally liable for the payment of the principal of and premium, if any, and interest on all Obligations when due and the performance of all other representations, warranties, covenants, agreements and obligations under the Master Indenture and the Obligations, including the Note. Pursuant to the Master Indenture, the Obligated Group Members unconditionally and irrevocably covenant that they will promptly pay the principal of and interest and premium, if any, on, and the purchase price of, the Outstanding Obligations and all other amounts payable by the Obligated Group Members under the Master Indenture. The obligation of each Obligated Group Member to pay or cause to be paid the amounts payable under the Master Indenture and under the Obligations is absolute, irrevocable, complete and unconditional and the amount, manner and time of payment of such amounts may not be decreased, abated, rebated, setoff, reduced, abrogated, waived, diminished or otherwise modified in any manner or to any extent whatsoever regardless of any right of setoff, recoupment or counterclaim that any Obligated Group Member might otherwise have against the Master Trustee, the Holder of any Obligation, any Related Issuer or any other party and regardless of any contingency, force majeure, event or cause whatsoever. 16

29 The Obligated Group Members covenant under the Master Indenture to cause the Restricted Affiliates, if any exist in the future (subject, in the case of any Participant, as defined in the Master Indenture, to contractual limitations) to pay or otherwise transfer to the Obligated Group Agent such amounts as are necessary to duly and punctually pay the principal of and interest and premium, if any, on, and the purchase price of, the Outstanding Obligations and all other amounts payable by the Obligated Group Members under the Master Indenture. Notwithstanding uncertainties as to the enforceability of the covenants of each Obligated Group Member to be jointly and severally liable on each Obligation issued under the Master Indenture (as described herein under INVESTMENT CONSIDERATIONS ), the accounts of the Credit Group Members (presently consisting solely of the Obligated Group described herein) will be combined for financial reporting purposes and for determining whether various covenants and tests contained in the Master Indenture (including tests relating to the incurrence of Indebtedness) are met. Subject to certain limitations specified in the Master Indenture, the Obligated Group or any future Obligated Group Member may incur additional Indebtedness, which may, but need not, be evidenced or secured by a Note issued under the Master Indenture and which shall be authorized pursuant to a Supplemental Indenture. Additional Obligations may be issued to parties other than the Authority and the Trustee and will be equally and ratably secured by the Master Indenture with the Note and all other Outstanding Obligations. See Additional Indebtedness herein. As assignee of the Note, the Trustee is entitled to the protection of the covenants, restrictions and other obligations imposed upon the Obligated Group Members by the Master Indenture. Upon the occurrence of an Event of Default under the Master Indenture, including the failure by the Obligated Group to make any payment of the principal of, premium, if any, or interest on the Bonds, the Master Trustee may, in addition to taking other appropriate action, accelerate payment of the Note and all other Outstanding Obligations. However, the Master Trustee is not required to accelerate payment of the Note and all other Outstanding Obligations unless requested to do so by the holders of at least 25% in aggregate principal amount of the Outstanding Obligations (including the Note). Notwithstanding the foregoing, the Master Trustee may not declare the principal of the Note to be due and payable without the written direction of the Trustee, as assignee of the Authority, and may not declare the principal of any other Obligation to be due and payable without the written direction of any person whose direction is required as a condition to such declaration under the terms of the Supplemental Master Trust Indenture authorizing the issuance of such Obligation. Certain amendments may be made to the Master Indenture (i) without consent or notice to the holders of the Obligations issued thereunder and (ii) with the prior written consent of the holders of a majority of the outstanding Obligations. See THE MASTER INDENTURE - Modification or Amendment of Master Indenture in APPENDIX C. Upon the satisfaction of certain terms and conditions set forth in the Master Indenture, the Master Indenture may be replaced in the future by a Replacement Master Indenture by which the Obligated Group Members and certain other parties named therein (collectively, the New Group ) will have agreed to be bound and pursuant to which each member of the New Group will jointly and severally make payments upon each note and obligation, including any Substitute Obligations (which will include the Note to the extent the Bonds are Outstanding at that time and any other Obligations issued and Outstanding under the Master Indenture), issued under the Replacement Master Indenture. See THE MASTER INDENTURE - Replacement Master Indenture in APPENDIX C hereto. Each Obligated Group Member covenants not to create or permit to exist any lien, charge, encumbrance or security interest in its accounts or any facility except for Permitted Encumbrances. See DEFINITIONS - Permitted Encumbrances in APPENDIX C hereto. See also THE MASTER INDENTURE in APPENDIX C for a summary of certain provisions of the Master Indenture, including restrictions on the Obligated Group Members regarding federal tax exemptions, consolidation and merger, transfer of assets, permitted encumbrances and withdrawal from the Obligated Group. The enforceability of certain covenants under the Master Indenture may be limited under certain circumstances, as more fully discussed under INVESTMENT CONSIDERATIONS herein. 17

30 Satisfaction of Debt Pursuant to the Master Indenture, the Obligated Group Members shall cause the Credit Group Members to fix, charge and collect such fees, rentals, rates and other charges in connection with the operation of the Operating Assets and the products and services provided by the Credit Group Members that, together with the general funds of the Credit Group Members and any other moneys available to the Credit Group Members, shall provide moneys at least sufficient at all times to pay (i) all amounts payable on all Obligations, (ii) all expenses of operation, maintenance and repair of the Operating Assets and (iii) all other obligations of the Credit Group Members as they become due and payable. The Obligated Group Members shall cause the Credit Group Members, from time to time as often as necessary, to revise such fees, rentals, rates and other charges to the extent required to comply with the provisions of the Master Indenture. Rate Covenant Pursuant to the Master Indenture, the Obligated Group Members shall cause the Credit Group Members (Credit Group Members are composed of the Obligated Group Members and the Restricted Affiliates (there are currently no Restricted Affiliates), if any are added in the future pursuant to the Master Indenture), on a combined basis, to fix, charge and collect such fees, rentals, rates and other charges in connection with the operations of the Credit Group Members and the products and services provided by the Credit Group as shall be sufficient to produce in each Fiscal Year a Debt Service Coverage Ratio of the Credit Group (on a combined basis) as of the last day of such Fiscal Year that is not less than There shall be excluded from the calculation of the Debt Service Coverage Ratio required as described in this paragraph the Debt Service Requirements of any Long-Term Indebtedness issued to finance Capital Improvements until the earlier of (i) the first full Fiscal Year after the utilization of such Capital Improvements has begun and (ii) the earlier of the first Fiscal Year in which the principal of any such Long-Term Indebtedness shall become due and payable and the first Fiscal Year in which any interest on such Long-Term Indebtedness ceases to be paid from amounts deposited in escrow for payment of interest on such Long-Term Indebtedness. If the fees, rentals, rates and other charges imposed and collected by the Credit Group shall be less than the amount required as described in the preceding paragraph in any Fiscal Year, the Obligated Group Members at their expense, shall immediately employ a Management Consultant to submit a written report and recommendations with respect to such fees, rentals, rates and other charges and with respect to improvements or changes in the operations of or the services rendered by the Credit Group. The Obligated Group Members shall require any Management Consultant employed under the Master Indenture to file its report and recommendations within 180 days from the end of any such Fiscal Year with the Master Trustee, the Related Issuers and any holders of any Obligations or Related Bonds who shall have filed with the Master Trustee a written request for such report. Notwithstanding the provisions of the preceding paragraph, upon the Request of the Obligated Group Agent, the Master Trustee shall waive the requirement that the Obligated Group Members appoint a Management Consultant in accordance with the Master Indenture in such Fiscal Year, if: (i) the fees, rentals, rates and other charges imposed and collected by the Credit Group Members, together with any unrestricted funds and other moneys available to the Credit Group, shall equal or exceed the amount required under the first paragraph under this caption Rate Covenant in such Fiscal Year; and (ii) there is delivered to the Master Trustee the Statement of an Independent Public Accountant to the effect that Governmental Restrictions prevented the Credit Group Members from meeting the requirements described in the first paragraph under this caption Rate Covenant together with a concurring Opinion of Counsel as to any conclusions of law supporting such Statement. 18

31 If the Master Trustee waives the requirement that the Obligated Group Agent appoint a Management Consultant as described in this paragraph, the Master Trustee shall so notify the Related Issuers and any holders of Obligations or Related Bonds who shall have filed with the Master Trustee a Request for such notification. Any Management Consultant retained by the Obligated Group Agent as described above may recommend with respect to the fees, rentals, rates or other charges imposed and collected by the Credit Group and with respect to improvements or changes in the operations of or the services rendered by the Credit Group Members that the Credit Group Members either (A) make no change or (B) make some change, even though such recommendation is not calculated to result in compliance with the requirements described in the first paragraph under this caption Rate Covenant if the Management Consultant includes in its report and recommendations a statement to the effect that compliance with such recommendations should result in compliance with such requirements to the maximum extent feasible. To the extent permitted by applicable law, the Obligated Group Agent agrees in the Master Indenture to cause the Credit Group Members to revise their fees, rentals, rates and charges in conformity with any recommendation of the Management Consultant retained pursuant to the Master Indenture and to otherwise follow the recommendations of such Management Consultant. If the requirement for the appointment of a Management Consultant is waived in any Fiscal Year pursuant to the Master Indenture, or if the Credit Group Members shall revise such fees, rentals, rates and other charges in conformity with the recommendations of the Management Consultant and otherwise follow the recommendations of the Management Consultant, then the failure to meet the requirements described in the first paragraph of this caption Rate Covenant for such Fiscal Year shall not constitute an Event of Default. If approvals of any regulatory or supervisory authority are required in order to fix, charge, collect and otherwise implement any fees, rentals, rates and charges required by the operation of the Master Indenture, the Obligated Group Agent shall cause the Credit Group Members to take all action within their power to obtain such approvals in an expeditious manner. The requirements of the Master Indenture described above shall not be construed to prohibit any Credit Group Member from providing services to indigent patients without charge or at reduced rates to the extent required to retain such entity s status as tax-exempt under applicable law, to comply with then applicable requirements of law or to fulfill the medical responsibility of such entity to its patients or to the extent of moneys designated by their donor for the purpose of providing such services. Nothing in the Master Indenture shall be construed to excuse the Obligated Group Members from the payment in timely manner of all amounts due under any Obligation or the performance of any other obligation of the Obligated Group Members under the Master Indenture and failure to maintain a Debt Service Coverage Ratio of the Credit Group (on a combined basis) of at least 1.00 shall be an Event of Default thereunder. See DEFINITIONS - Debt Service Requirements in APPENDIX C for information with respect to the method of calculating the Debt Service Requirements for purposes of making the determinations described above. Obligations Not to Be Impaired Pursuant to the Master Indenture, while the covenants of the Obligated Group Members set forth under the captions Satisfaction of Debt and Rate Covenant herein are subject to applicable requirements imposed by law or lawfully imposed by federal, state or local regulatory authorities, nothing therein shall be construed or applied so as to permit any federal, state or local authority to impair the obligation of the Credit Group Members to fix, charge and collect fees, rentals, rates and other charges in the amounts required by such sections. The Obligated Group Members shall cause the Credit Group Members to make timely application for, and diligently pursue to a prompt conclusion, any proceedings required to obtain all regulatory approvals necessary to enable the Credit Group Members to perform in timely manner all of their obligations under the Master Indenture. 19

32 Additional Indebtedness Pursuant to the Master Indenture, the Obligated Group Members shall not permit any Credit Group Member to incur or permit to exist any Short-Term Indebtedness or Long-Term Indebtedness except as follows: (i) the Note and the Existing Indebtedness; (ii) Long-Term Indebtedness issued to refinance or refund any outstanding Indebtedness of any Credit Group Member ( Refunding Indebtedness ), if the Master Trustee shall have received an Officer s Certificate, supported by appropriate calculations, to the effect that, after giving effect to the proposed refinancing or refunding, Maximum Annual Debt Service on all Outstanding Long-Term Debt of the Credit Group will not be increased by more than ten percent; (iii) Non-Recourse Indebtedness; (iv) any other Long-Term Indebtedness, provided that (i) the incurrence of such Indebtedness shall not cause the Debt to Capitalization Ratio to exceed 0.70 and (ii) if the aggregate principal amount of such Indebtedness exceeds 10% of the Total Operating Revenues of the Credit Group for the most recent Fiscal Year for which audited financial statements have been prepared, there shall be delivered to the Master Trustee an Officer s Certificate to the effect set forth in clause (i) above and to the effect that if such Indebtedness had been incurred as of the first day of the immediately preceding Fiscal Year for which audited financial statements have been prepared, the Debt Service Coverage Ratio for such Fiscal Year would not have been less than 1.10; (v) any Indebtedness under any Credit Facility Agreement pursuant to which a Credit Facility shall have been issued with respect to any other Indebtedness (herein referred to as Credit Enhanced Debt ), provided that, if any amount shall have been realized under such Credit Facility for the purchase or payment of such Credit Enhanced Debt (i) amounts payable under such Credit Facility Agreement shall constitute Indebtedness in determining whether any additional Indebtedness may be incurred by the Credit Group Members in accordance with the Master Indenture, and (ii) if such Credit Enhanced Debt shall not have been retired by the application of amounts realized under such Credit Facility, the aggregate principal amount of such Credit Enhanced Debt shall be excluded in the calculation of the Debt Service Requirements under the Master Indenture; or (vi) Short-Term Indebtedness, whether secured or unsecured, provided, however, for a period of 30 consecutive calendar days during each Fiscal Year, the amount of the Outstanding Short-Term Indebtedness shall be reduced to not less than 20% of the original principal amount of Short-Term Indebtedness originally issued. At least ten Business Days prior to incurring any Indebtedness, the Obligated Group Agent shall give written notice to the Master Trustee regarding (i) the principal amount of the Indebtedness to be incurred, (ii) the date on which such Indebtedness is to be incurred and (iii) the provisions of the Master Indenture being relied upon to permit such Indebtedness to be incurred, and shall furnish to the Master Trustee such certificates as the Master Trustee may reasonably request to evidence compliance with the provisions of the Master Indenture. See DEFINITIONS - Debt Service Requirements in APPENDIX C for information with respect to the method of calculating the Debt Service Requirements for purposes of making the determinations described above. Existing Indebtedness The Existing Indebtedness issued under the Master Indenture is set forth herein under the caption SUMMARY STATEMENT - Existing Indebtedness on pages ii - iv hereof. 20

33 In addition, the Obligated Group Members have certain other outstanding long-term indebtedness which is not secured under the Master Indenture. See also FINANCIAL AND OPERATING INFORMATION Outstanding Indebtedness of the System in APPENDIX A hereto. Enforceability of Remedies Under the terms of the Master Indenture, the Obligated Group is obligated to make full and timely payment of principal of and interest on the Note and to observe numerous other agreements and covenants, and the Master Indenture provides remedies upon default by the Obligated Group. These remedies may, in many respects, require judicial actions which are often subject to discretion and delay. Under existing law, the remedies specified by the Master Indenture may not be readily available or may be limited. A court may decide not to order the specific performance of the covenants contained in the Master Indenture. The various legal opinions to be delivered concurrently with the delivery of the Bonds will be qualified as to the enforceability of the various legal instruments by limitations imposed by State and federal laws, rulings and decisions and principles of equity affecting remedies and by bankruptcy, reorganization or other laws affecting the enforcement of creditors rights generally. See INVESTMENT CONSIDERATIONS herein. [remainder of the page intentionally left blank] 21

34 DEBT SERVICE REQUIREMENTS * The following table sets forth, for each Fiscal Year of the Corporation ending June 30, the Debt Service Requirements of the Obligated Group on the Bonds and the other Outstanding Bonds of the Corporation and total combined debt service of the Obligated Group. Table does not reflect capitalized leases or other obligations of the Obligated Group. Numbers may not add due to rounding. The Bonds Fiscal Debt Service on Principal Interest Year Outstanding Bonds (1) 2013 $38,483, ,210, ,048, ,008, ,553, ,451, ,977, ,594, ,920, ,873, ,899, ,312, ,402, ,401, ,406, ,407, ,405, ,407, ,403, ,230, ,415, ,414, ,934, ,648, ,352, ,958, ,635, ,112, TOTAL $909,872,025 Total Combined Debt Service (1) Interest on the Series 2005B Bonds, the Series 2005D Bonds, the Series 2008A Bonds and the Series 2012A Bonds has been calculated using assumed interest rates of 2.34%, 3.53%, 3.66% and 2.47%, respectively. No assurance can be given that actual interest rates will match the assumed interest rates. Debt service on Series 2012A Bonds is calculated using the amortization schedule set forth in the trust indenture with respect to the Series 2012A Bonds. Capital One Public Funding, LLC may elect to have the Series 2012A Bonds redeemed on November 1, See PLAN OF FINANCE - Series 2012A Bonds herein and FINANCIAL AND OPERATING INFORMATION - Outstanding Indebtedness of the System in APPENDIX A attached hereto. * Preliminary, subject to change. 22

35 HISTORICAL PRO FORMA DEBT SERVICE COVERAGE RATIO * The following table presents, in summary form, the Credit Group s historical coverage of the pro forma Maximum Annual Debt Service (as defined in the Master Indenture) for the two Fiscal Years ended June 30, 2011 and Fiscal Year Ended June 30 (000 s omitted) Net Income Available for Debt Service (1) $228,885 $137,240 Pro Forma Maximum Annual Debt Service (2) $49,429 $49,429 Pro Forma Debt Service Coverage Ratio 4.6x 2.8x (1) Per the definition of Net Income Available for Debt Service in APPENDIX C attached hereto. Fiscal Year ended June 30, 2011 includes Department of Health and Hospital payments of $129 million to the Lake pursuant to the CEA (as defined herein). Excluding the $129 million results in the Pro Forma Debt Service Coverage ratio 2.0x for Fiscal Year ended June 30, See "INVESTMENT CONSIDERATIONS - Risks in Healthcare Delivery - Indigent Care" herein. (2) Includes debt service on the Bonds and the Outstanding Bonds. The interest on the Series 2005B Bonds, the Series 2005D Bonds, the Series 2008A Bonds and the Series 2012A Bonds has been calculated using at the assumed interest rates set forth in the footnote of the table in DEBT SERVICE REQUIREMENTS herein. Debt service on Series 2012A Bonds is calculated using the amortization schedule set forth in the trust indenture with respect to the Series 2012A Bonds. Capital One Public Funding, LLC may elect to have the Series 2012A Bonds redeemed on November 1, See PLAN OF FINANCE - Series 2012A Bonds herein and FINANCIAL AND OPERATING INFORMATION - Outstanding Indebtedness of the System in APPENDIX A attached hereto. Pro Forma Maximum Annual Debt Service calculations includes capital lease obligations. INVESTMENT CONSIDERATIONS The discussion herein of risks to the registered owners of the Bonds is not intended as dispositive, comprehensive or definitive, but rather is to summarize certain matters which could affect payment on the Bonds. Other sections of this Official Statement, as cited herein, should be referred to for a more detailed description of risks described in this section, which descriptions are qualified by reference to any documents discussed therein. Copies of all such documents are available for inspection at the designated office of the Trustee, located in Baton Rouge, Louisiana. General The Bonds are not a debt or liability of the State or any political subdivision thereof (other than the Authority to the limited extent set forth herein), or a pledge of the faith and credit of the State or any such political subdivision thereof, but are special and limited obligations of the Authority, payable solely from payments by the Obligated Group in accordance with the Loan Agreement, the Note and the Assignment, the funds and accounts held pursuant to the Indenture and certain investment income thereon. The Authority has no taxing power. Except as noted herein, the principal of, premium, if any, and interest on the Bonds will be payable from payments to be made to the Authority by the Corporation on the Note and the Loan Agreement and pledged under the Indenture. * Preliminary, subject to change. 23

36 Impact of Disruptions in the Credit Markets and General Economic Factors The disruption of the credit and financial markets in the last several years led to volatility in the securities markets, significant losses in investment portfolios, increased business failures and consumer and business bankruptcies, and was a major cause of the economic recession in 2008 and The disruption has had a particularly acute impact upon the financial sector, and has caused many banks and other financial institutions to seek additional capital, to merge, and in some cases, to fail. Additionally, substantial amounts have been withdrawn from tax-exempt money market funds, one of the largest purchasers of variable rate tax-exempt bonds. The health care sector, including the System, was materially adversely affected by these developments. The consequences of these developments generally included, among other things, realized and unrealized investment portfolio losses, increased borrowing costs and periodic disruption of access to the capital markets. Potential investors are advised to refer to APPENDIX A of this Official Statement for specific information about the effects of these factors upon the recent financial performance of the System and its financial condition. In particular, reference is made to information in APPENDIX A under the captions FINANCIAL AND OPERATING INFORMATION - Summary of Operations of the System and - Management's Discussion and Analysis of Recent Financial Performance. See also APPENDIX B of this Official Statement for additional information on the financial performance of the Corporation. In response to the disruption, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Financial Reform Act") was enacted on July 21, The Financial Reform Act includes broad changes to the existing financial regulatory structure, including the creation of new federal agencies to identify and respond to risks to the financial stability of the United States. Additional legislation is pending or under active consideration by Congress and regulatory action is being considered by various federal agencies and the Federal Reserve Board and foreign governments, which are intended to increase the regulation of domestic and global credit markets. Additionally, on February 17, 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 framework for the implementation of a nationally-based health information technology program, including incentive payments which commenced in 2011 to eligible healthcare providers to encourage implementation of health information technology and electronic health records. The incentive payments will be payable through 2014 to hospitals and physicians that comply with federal requirements. The incentive payments will be payable annually for a period of up to four years to eligible providers that demonstrate "meaningful use" of electronic health records, assuming federal funding exists. Pursuant to ARRA, commencing in 2015, Medicare eligible providers that do not demonstrate "meaningful use" of electronic health records will receive a downward adjustment in their Medicare reimbursement. The effects of the Financial Reform Act, ARRA and of these legislative, regulatory and other governmental actions, if implemented, are unclear. The impact of these disruption of the credit and financial markets, including without limitation its impact on the availability of credit, personal, corporate and governmental revenues and the market for and interest payable on the Corporation s variable rate indebtedness (see Issues Related to the Health Care Markets and the Obligated Group Members - Risks Related to Variable Rate Indebtedness herein), may adversely affect the System and jeopardize its ability to generate revenues and make loan repayments and the Obligated Group Member s ability to make payments under its obligations when due. Healthcare Reform and other Governmental Initiatives Health Care Reform. The Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010 (collectively referred to as the "Health Care Reform Law") is designed to overhaul the United States health care system and regulate many aspects of and players in the health care arena, including individuals, employers and health insurers. 24

37 On June 28, 2012, the U.S. Supreme Court upheld the constitutionality of most of the Health Care Reform Law, including the individual mandate which will require most Americans to purchase health insurance coverage by January 1, While the individual mandate has been upheld by the Supreme Court, the Supreme Court held unconstitutional sections of the Health Care Reform Law that sought to withdraw federal Medicaid funding in the event that states do not agree to participate in increased coverage. The Governor of Louisiana recently announced his opposition to increasing Medicaid coverage in Louisiana. It remains unclear whether future legislation will be passed seeking to encourage state participation in compliance with the Supreme Court s decision. Further, since the Supreme Court's decision was handed down, certain political leaders have announced their intention to proceed with legislation to repeal or amend provisions of the Health Care Reform Law. The ultimate outcome of legislative attempts to repeal or amend the Health Care Reform Law and legal challenges to the Health Care Reform Law are unknown. A significant component of the Health Care Reform Law is the expansion of the base of health care consumers through the reformation of the sources and methods by which consumers will pay for health care for themselves and their families and by which employers will procure health insurance for their employees and dependents of their employees. One of the primary drivers of the Health Care Reform Law is to provide, make available, or subsidize the premium costs of health care insurance for some of the millions of currently uninsured (or underinsured) consumers who fall below certain income levels. The Health Care Reform Act proposes to accomplish that objective through various provisions, including, but not limited to, the following: (i) the creation of active markets (referred to as exchanges) in which individuals and small employers can purchase health care insurance for themselves and their families or their employees and dependents, (ii) providing subsidies for premium costs to individuals and families based upon their income relative to federal poverty levels, (iii) mandating that individual consumers obtain and certain employers provide a minimum level of health care insurance, and providing for penalties or taxes on consumers and employers that do not comply with these mandates, (iv) expansion of private commercial insurance coverage generally through such reforms as prohibitions on denials of coverage for pre-existing conditions and elimination of lifetime or annual benefits caps, and (v) expansion of existing public programs, including Medicaid, for individuals and families. In March 2010, the Congressional Budget Office ("CBO") estimated that in federal fiscal year 2015, twentyfour million consumers who are currently uninsured will become insured, followed by an additional five million consumers in federal fiscal year To the extent all or any of the Health Care Reform Law provisions produce the intended result, an increase in utilization of health care services by those who are currently avoiding or rationing their health care can be expected and bad debt expenses may be reduced. Associated with increased utilization will be increased variable and fixed costs of providing health care services (which may or may not be offset by increased revenues) and a risk of physician shortages, especially in specialties necessary to provide critical intervention or chronic disease management (e.g., primary care). The Health Care Reform Law also contains more than 32 sections related to health care fraud and abuse and program integrity as well as significant amendments to existing criminal, civil and administrative anti-fraud statutes. See Health Care Regulation in General herein. Increased compliance and regulatory requirements, disclosure and transparency obligations, quality of care expectations and extraordinary enforcement provisions that could greatly increase potential legal exposure are all aspects of the Health Care Reform Law that could increase operating expenses for the System and its Hospitals. With respect to charity care, the Health Care Reform Law contains many features from previous tax exemption reform proposals, including a set of sweeping changes applicable to charitable hospitals exempt under Section 501(c)(3) of the Internal Revenue Code of 1986 (the Code ). The Health Care Reform Law: (a) imposes new eligibility requirements for 501(c)(3) hospitals, coupled with an excise tax for failures to meet certain of those requirements; (b) requires mandatory Internal Revenue Service ( IRS ) review of the hospitals' entitlement to exemption; (c) sets forth new reporting requirements including information related to community health needs assessments and audited financial statements; and (d) imposes further reporting requirements on the Secretary of the Treasury regarding charity care levels. The Health Care Reform Law does not, however, mandate specific levels of charity care for nonprofit hospitals despite the efforts of Senate Finance Committee ranking Republican Charles E. Grassley (R-Iowa) and others to impose such a requirement. See Tax-Exempt Status - Tax-Exempt Status of the Obligated Group Members herein. 25

38 Some provisions of the Health Care Reform Law took effect immediately upon passage, while others are being phased in over time, beginning in September 2010 and continuing for up to ten years. Given the general complexity of the Health Care Reform Law, additional legislation is likely to be considered and enacted over time. The Health Care Reform Law will also require the promulgation of substantial regulations with significant effects on the healthcare industry and third-party payors. In response, third-party payors as well as suppliers and vendors of goods and services to healthcare providers are expected to impose new contractual terms and conditions. Thus, the healthcare industry will be subjected to significant new statutory and regulatory requirements as well as contractual terms and conditions, and consequently to structural and operational changes and challenges, for a substantial period of time. Management of the Corporation is analyzing the Health Care Reform Law and will continue to do so in order to assess the effects of the legislation and/or regulations on current and projected operations, financial performance and financial condition. However, management cannot predict with any reasonable degree of certainty or reliability any interim or ultimate effects of the legislation or promulgated regulations. As a part of the Health Care Reform Law, the payment structure from governmental payors, including Medicare and Medicaid, as well as from private payors, may be altered from current methodologies. With varying effective dates, the annual Medicare market basket updates for many providers, including hospitals, will be reduced, and adjustments to payments for expected productivity gains will be implemented. Effective federal fiscal year 2012 (which began October 1, 2011) and going forward, Medicare payments that would otherwise be made to hospitals will be reduced by specified percentages to account for excess or preventable hospital admissions and a value-based purchasing program established under the Medicare program will pay hospitals based on performance tested against quality measures. The Health Care Reform Law also provides for the implementation of various demonstration projects and pilot projects to test, evaluate, encourage, and expand new payment structures and methodologies to reduce health care expenditures while maintaining or improving quality of care, including bundled payments under Medicare and Medicaid, and comparative effectiveness research programs that compare the clinical effectiveness of medical treatments and develop recommendations concerning practice guidelines and coverage determinations. Certain other provisions of the Health Care Reform Law encourage the creation of new health care delivery programs, such as accountable care organizations in which a group of providers is held jointly responsible for improving the quality and cost of health care of a certain population, with the opportunity to share in financial benefits that result, or combinations of provider organizations that voluntarily meet quality thresholds being able to share in the cost savings they achieve for the Medicare program. The outcomes of these projects and programs, including their effect on payments to providers and financial performance, cannot yet be predicted. The financial and other results of operation included in Appendices A and B were realized prior to enactment and/or full implementation of the provisions of the Health Care Reform Law. No assurance can be given that they are indicative of results of operations that the System and the Obligated Group Members will be able to achieve after implementation of the provisions of the Health Care Reform Law. Budget Control Act. On August 3, 2011, President Obama signed the Budget Control Act of 2011 (the "Budget Control Act"). The Budget Control Act limits the federal government's discretionary spending caps at levels necessary to reduce expenditures by $917 billion from the current federal budget baseline between federal fiscal years 2012 and Medicare, Social Security, Medicaid and other entitlement programs will not be affected by the limit on discretionary spending caps. The Budget Control Act also created a Joint Select Committee on Deficit Reduction (the "Committee"), which was tasked with making recommendations to further reduce the federal deficit by $1.5 trillion. Committee recommendations were to include reductions in Medicare, Medicaid, Social Security and other entitlement programs. The Committee was required to report its recommendations to Congress by a majority vote no later than November 23, After several months of negotiations, the Committee was unable to reach agreement on spending reductions. 26

39 As a result of this failure, and in exchange for raising the debt ceiling, the Budget Control Act also set in place a protocol for mandatory spending cuts. Known as sequestration (across the board cuts), these cuts will be triggered in an amount necessary to achieve $1.2 trillion in savings in January A wide range of spending, however, is exempted from sequestration, including: Social Security, Medicaid, Veteran's benefits and pensions, federal retirement funds, civil and military pay, child nutrition, and other specified programs. Medicare is not exempted from sequestration, however cuts to Medicare cannot come at the cost of beneficiaries. Consequently, Medicare payments to providers could be reduced as a result of these across the board spending reductions, limited to 2% of total program costs. The method for achieving federal deficit reduction has been intensely debated, with significant disagreement among the Senate, the House and the President. Absent further Congressional action prior to January 1, 2013, the effective date of sequestration, the automatic spending cuts described above will be triggered. Because Congress may make changes to the budget in the future, it is impossible to predict the impact any spending cuts that are approved may have upon the System and the Obligated Group Members. Similarly, it is impossible to predict whether any automatic reductions to Medicare may be triggered in lieu of other spending cuts that may be proposed by Congress. If Medicare and/or Medicaid spending is reduced under either scenario, such an event may have an adverse effect on the financial condition of the System and the Obligated Group Members, which could be material. Investment Performance The System has significant holdings in a broad range of investments. Market fluctuations have affected and will continue to affect the value of those investments and those fluctuations may be material. A material reduction in investment income may have a negative impact on the System s ability to provide its own liquidity for variable rate debt. Investment income (including both realized and unrealized gains on investments) has contributed to the System s financial results over recent years. For a discussion of the System s investments and recent declines, see APPENDIX A - INFORMATION CONCERNING FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM FINANCIAL AND OPERATING INFORMATION - System Investment Policy and Allocations and - Management s Discussion and Analysis of Financial Performance. Health Care Regulation in General For more than a decade, health care providers, including the Obligated Group Members, have been under increasing economic pressure from third party payers, both governmental (particularly, Medicare and Medicaid) and private (e.g., health maintenance organizations). These third party payers have limited the payment rates for hospital stays and procedures, creating incentives to reduce hospital inpatient utilization and to increase the use of outpatient services and out-of-hospital care. Moreover, certain payers have pressured health care providers to accept capitated reimbursement that has the effect of shifting the economic risk of providing health care from the payers to the health care providers. Shifts in third party payer policies and the need for providers to adapt to changing and complex payment arrangements have had and will continue to have a significant impact upon the economic performance of the Obligated Group. In addition to these economic trends, health care providers are subject to extensive government regulation that has increased and is likely to continue to increase the cost and risk of doing business. Federal and state governments continually revise laws, regulations and policies related to services, accounting, billing and payment, and audit and monitor compliance with Medicare, Medicaid and other federal and state health care programs. The Medicare and Medicaid programs accounted for approximately 45% and 15%, respectively, of the consolidated gross patient revenues of the Obligated Group for the Fiscal Year ended June 30, The Obligated Group Members are also subject to potential investigation, fines, litigation and extensive regulation in connection with employment practices, environmental compliance, business relationships with physicians, Emergency Medical Treatment and Labor Act ( EMTALA ), and antitrust and fair competition concerns. The status of the Obligated Group Members as tax-exempt organizations makes them subject to government regulation, policy and enforcement efforts that may result in investigations and fines or loss of tax exempt status. In addition, compliance with other regulatory 27

40 requirements at the federal, state and local levels imposes uncertainty and potentially significant capital and operating cost increases. The Corporation s ability to develop and expand the services of the System and, therefore, its profitability is dependent upon the ability of the Obligated Group Members to enter into contracts with third-party payors at competitive rates. There can be no assurance that the Obligated Group Members will be able to attract and maintain third-party payors in the future, and where they do, there can be no assurance that they will be able to contract with such payors on satisfactory terms. The inability of the Obligated Group Members to contract with a sufficient number of such payors on advantageous terms would have a material adverse effect on the Obligated Group s obligations and financial results. Further, while the Corporation expects to employ a system to control health care service utilization and increase quality, the Corporation cannot predict changes in utilization patterns or of health care providers. Any of these factors may affect the Obligated Group s ability to generate revenues and to make payments on the Note and thus, the Authority s ability to pay the principal of, premium (if any) and interest on the Bonds. There can be no assurance that the financial condition of the Obligated Group and/or the utilization of the System s facilities will not be adversely affected by any of these circumstances. These and other risks are described in greater detail below. Fraud and Abuse Enforcement. Health care fraud and abuse laws have been enacted at the federal and state levels to regulate both the provision of services to government program beneficiaries and the submission of claims for services rendered to such beneficiaries. Under these laws, individuals and organizations can be punished for submitting claims for services that were not provided, billed at a level higher than supported by documentation, not medically necessary, provided by an improper person, accompanied by an illegal inducement to utilize or refrain from utilizing a service or product, or billed in a manner that does not comply with applicable government requirements. Federal and state governments have a range of criminal, civil and administrative sanctions available to penalize and remediate health care fraud and abuse, including recoveries of amounts paid to the provider, imprisonment, exclusion of the provider from participation in the Medicare/Medicaid programs, civil monetary penalties and suspension of payments. See The Medicare Program and The Medicaid Program herein. Fraud and abuse cases may be prosecuted by one or more government entities and/or private individuals, and more than one of the available penalties may be imposed for each violation. The federal government has made the investigation and prosecution of health care fraud and abuse a priority, and Congress has passed legislation and authorized significant funding to this effort. As a result, there have been a substantial number of investigations, prosecutions and civil enforcement proceedings of health care-related fraud and abuse in recent years. In fact, the Health Care Reform Law includes additional federal funding of $350 million over the next decade to fight health care fraud, waste and abuse, including $105 million for federal fiscal year 2011 and $65 million for federal fiscal year Laws governing fraud and abuse apply to virtually all individuals and entities with which a health care provider does business, including hospitals, home health agencies, long-term care entities, infusion providers, pharmaceutical providers, insurers, HMOs, PPOs, third party administrators, physicians, physician groups, physician practice management companies, ambulatory care entities, laboratories, diagnostic testing facilities and suppliers of medical items and services. Fraud and abuse prosecutions can have a catastrophic effect on such entities and a material adverse impact on the financial condition of other entities in the health care delivery system of which that entity is a part. Both individuals and organizations are subject to prosecution under the criminal fraud and abuse statutes. Criminal conviction for an offense related to a health care provider s participation in the Medicare and Medicaid program may result in substantial fines and/or the provider s exclusion and debarment from all government programs, including the Medicare and Medicaid program. Any such fines or exclusion and debarment could have a material adverse effect on the Obligated Group s financial condition. 28

41 False Claims Acts. The criminal False Claims Act ( Criminal FCA ) prohibits anyone from knowingly submitting a false, fictitious or fraudulent claim to the federal government. There are numerous specific rules that a health care provider must follow with respect to the submission of claims. Violation of the Criminal FCA can result in imprisonment of up to five years and a fine of up to $250,000 for an individual or $500,000 for an organization. The civil False Claims Act (the Civil FCA ), provides that any person who "knowingly presents, or causes to be presented" a "false or fraudulent claim for payment or approval" to the United States, its agents or its contractors is liable for a civil penalty ranging from $5,500 to $11,000 per claim, plus three times the amount of damages sustained by the government. Under the Civil FCA's so-called "reverse false claims," liability also could arise for "using" a false record or statement to "conceal," "avoid" or "decrease" an "obligation to pay or transmit money or property to the government." The Civil FCA also empowers and provides incentives to private citizens (commonly referred to as qui tam relator or whistleblower ) to file suit on the government's behalf. The qui tam relator's share of the recovery can be between 15% and 25% in cases in which the government intervenes, and 25% to 30% in cases in which the government does not intervene. The government may use the Civil FCA to prosecute Medicare and other government program fraud in areas such as coding errors, billing for services not provided and submitting false cost reports. Recent amendments to the Civil FCA in the Fraud Enhancement and Recovery Act of 2009 ("FERA") and the Health Care Reform Law amend and expand the reach of the Civil FCA. FERA expanded the Civil 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. The Health Care Reform Law further addresses the retention of overpayments by defining the term overpayment and the circumstances and timing under which an overpayment needs to be returned to the government before it becomes an "obligation" under the Civil FCA. FERA and the Health Care Reform Law also amend certain jurisdictional bars to the Civil FCA, effectively narrowing the public disclosure bar and expanding the definition of "original source," thus potentially broadening the field of potential whistleblowers. The federal Deficit Reduction Act of 2005 ( DRA ) provided a financial incentive to states to enact a state False Claims Act or to amend an existing state False Claims Act to track the Civil FCA more closely with regard to penalties and rewards to qui tam relators. The State has adopted the Medical Assistance Programs Integrity Law ( MAPIL ), which imposes sanctions and civil penalties on any healthcare provider that knowingly presents a false or fraudulent claim to, or conspires to defraud, any State medical assistance program (primarily Medicaid, but includes any other state programs), or fails to furnish medically necessary and appropriate services or goods in connection with such programs. Upon violation of MAPIL, a healthcare provider will be required to restore the value of the goods or services, and may be subject to claims for damages, civil penalties of three times the value of the services (for violation of the Medical Assistance Programs anti-kickback provisions) up to $10,000 (for each false or fraudulent claim), with interest and attorneys fees. Violation of the MAPIL may also result in the revocation of a provider's participation in the State's medical assistance programs. While the System and the Obligated Group Members make every effort to be in compliance with applicable federal and state health care program requirements, there can be no assurance that the System and the Obligated Group Members will not be subject to an investigation. In 2010, the U.S. Department of Justice announced a patient-by-patient investigation into thousands of implantable cardioverter defibrillators (known as ICDs) for Medicare beneficiaries between 2003 and 2010 at hospitals across the country. St. Francis, the Lake and Lourdes received notice that each are included in such investigation. Each Hospital is cooperating fully in the investigation. Anti-Kickback Law. The Federal Medicare/Medicaid Anti-Fraud and Abuse Amendments to the Social Security Act (the Anti-Kickback Law ) make it a felony offense to knowingly and willfully offer, pay, solicit or receive remuneration in order to induce business for which reimbursement is provided under the Medicare or Medicaid programs. The law has been interpreted to encompass any arrangement where one purpose of the 29

42 remuneration is to receive money or anything of value for the referral of services or to induce referrals. In addition to criminal penalties, including fines of up to $25,000 and five years imprisonment, violations of the Anti-Kickback Law can lead to civil monetary penalties ( CMPs ) and exclusion from Medicare, Medicaid and certain other state and federal health care programs. The scope of prohibited payments in the Anti-Kickback Law is broad and includes economic arrangements involving hospitals, physicians and other health care providers, including joint ventures, space and equipment rentals, purchases of physician practices and management and personal services contracts. U.S. Department of Health and Human Services ( DHHS ) has published regulations which describe certain safe harbor arrangements that will not be deemed to constitute violations of the Anti-Kickback Law. The safe harbors described in the regulations are narrow and do not cover a wide range of economic relationships which many hospitals, physicians and other health care providers consider to be legitimate business arrangements not prohibited by the statute. Because the regulations describe safe harbors and do not purport to describe comprehensively all lawful or unlawful economic arrangements or other relationships between health care providers and referral sources, hospitals and other health care providers having these arrangements or relationships may be required to alter them in order to ensure compliance with the Anti-Kickback Law. In addition to current CMP, the Balanced Budget Act of 1997 created a new CMP for violations of the federal Anti-Kickback Law for cases in which a person contracts with an excluded provider for the provision of health care items or services where the person knows or should know that the provider has been excluded from participation in a federal health care program. Violations will result in damages three times the remuneration involved as well as a penalty of $50,000 per violation. The Health Care Reform Law 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 Health Care Reform Law also provides that any claims for items or services that violate the Anti-Kickback Law are also considered false claims for purposes of the Civil FCA. The Louisiana Anti-kickback Law, La. Rev. Stat. 37:1745 (the State Physician Referrals Prohibition Law ) provides in pertinent part that [n]o health care provider shall offer, make, solicit, or receive payment, directly or indirectly, in cash or in kind, for referring or soliciting patients. Pursuant to La. Adm. C. 46:XLV.4505B, a physician shall not knowingly and willfully solicit, receive, or accept any payment, directly or indirectly, overtly or covertly, in cash or in kind, in return for referring a patient to a health care provider for the furnishing or arranging for the furnishing of any health care item or service. While it is similar in application to the Federal Anti-Kickback Law and allows for practices which are safe harbored under federal regulation to be protected from state action, the state law examines referrals for payments by all payor sources, thereby significantly expanding the scope of the state law. Management of the System and the Obligated Group Members believe that the System and the Obligated Group Members are in compliance with the State Physician Referrals Prohibition Law and the Federal Anti-Kickback Law. However, in light of the narrowness of the safe harbor regulations and the scarcity of case law interpreting the State Physician Referrals Prohibition Law and the Federal Anti-Kickback Law, there can be no assurances that the System and the Obligated Group Members will not be found to have violated the State Physician Referrals Prohibition Law and the Federal Anti-Kickback Law and, if so, whether any sanction imposed would have a material adverse effect on the operations of the System and the Obligated Group Members. Stark Referral Law. Section 1077 of the Social Security Act (42 U.S.C. 1395nn), also known as the physician self-referral law and commonly referred to as the Stark Law prohibits a physician from making referrals for certain designated health services ( Designated health services or DHS ) payable under a Federal healthcare program to an entity with which he or she (or an immediate family member) has a financial interest (ownership, investment or compensation), unless an exception applies. DHS include the following: clinical laboratory services; physical therapy services; occupational therapy services; radiology and other imaging services; radiation therapy services and supplies; durable medical equipment and services; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. The Stark Law also prohibits the furnishing entity from 30

43 submitting a claim for reimbursement or otherwise billing a Federal healthcare program or any other person or entity for improperly referred DHS. An entity that submits a claim for reimbursement in violation of the Stark Law must refund any amounts collected and may be (1) subject to a civil penalty of up to $15,000 for each prohibited self-referred service and (2) excluded from participation in federal health care programs. In addition, a physician or entity that has participated in a "scheme" to circumvent the operation of the Stark Law is subject to a civil penalty of up to $100,000 and possible exclusion from participation in federal health care programs. Centers for Medicare and Medicaid Services ( CMS ) of DHHS, the federal agency with primary responsibility for enforcement of the Stark Law has, over the years, published a number of regulations interpreting the Stark Law. The final rule relating to proposals from CMS' 1998 proposed rule were divided into three separate rulemakings. CMS issued the "Phase I" final rule with comment period in 2001; in 2004, it issued the "Phase II" interim final rule with comment period; and, in 2007, it issued the "Phase III" final rule. CMS, on September 23, 2010, published a self-referral disclosure protocol ("SRDP") pursuant to the Health Care Reform Law. The SRDP sets forth a process to enable providers of services and suppliers to self-disclose actual or potential violations of the Stark Law. Additionally, the Health Care Reform Law gives the Secretary of DHHS the authority to reduce the amount due and owing for violations under the Stark Law. The Health Care Reform Law narrowed access to the "rural provider" and "whole hospital" exceptions to the physician self-referral law by prohibiting their use by new physician-owned hospitals, and limiting the ability of existing physician-owned hospitals to expand their capacity. Under the Health Care Reform Law, physician-owned hospitals that were converted from ambulatory surgical centers on or after March 23, 2010, cannot qualify for the revised rural provider and whole hospital exceptions. Additional provisions in Health Care Reform Law were aimed at preventing conflicts of interest, ensuring that all ownership and investment interests are bona fide, and promoting patient safety. In the 2011 Outpatient Prospective Payment System ( OPPS ) final rule, CMS incorporated changes mandated by the Health Care Reform Law into regulation. In the 2012 OPPS final rule, CMS continues to implement these changes. Portions of the 2011 Medicare Physician Fee Schedule Final Rule (the "2011 MPFS") also implemented changes from the Health Care Reform Law related to self-referral disclosures. The Health Care Reform Law amended the in-office ancillary services exception to the physician self-referral law as applied to magnetic resonance imaging, computed tomography, and positron emission tomography, to require a physician to disclose to a patient in writing at the time of the referral that the patient may obtain these services from another supplier. CMS now requires, according to the final rule, that the referring physician provide the patient with a list of five alternative suppliers within a 25-mile radius of the physician's office location at the time of the referral who provide the imaging services ordered. The State Physician Referrals Prohibition Law prohibits physicians and physician groups from referring patients to any provider of healthcare services or goods in which the referring physician or group has a financial interest or receives direct or indirect remuneration for referral unless the patient is given written disclosure of the financial interest. The State Physician Referral Prohibition Law also prohibits certain cross-referral arrangements. There are no references in the statute to federal exceptions. Remuneration received after disclosure could result in violation of State anti-kickback laws even though permitted under the State Physician Referral Prohibition Law. Violation of the State Physician Referral Prohibition Law could result in a requirement that the physician or physician group refund to the patient all sums received in payment for the services or goods furnished without disclosure of the financial interest. Violation could also result in suspension or revocation of the license or other credentials of the physician or physician group. The Louisiana State Board of Medical Examiners has published regulations for the implementation and enforcement of the State Physician Referrals Prohibition Law. In addition to the State Physician Referrals Prohibition Law, the MAPIL prohibits all persons from paying, offering, soliciting or receiving remuneration in return for a referral for medical services or the purchase or furnishing of any goods in connection with a State medical assistance program, including the State's Medicaid program. 31

44 Violation of MAPIL constitutes fraud on the medical assistance program, discussed herein under the subheading False Claims Acts above. The management of the System and the Obligated Group Members believe that the System and the Obligated Group Members are currently in material compliance with the State Physician Referrals Prohibition Law and Stark Law provisions. However, in light of the scarcity of case law interpreting the State Physician Referrals Prohibition Law and the Stark Law provisions, there can be no assurances that the System and the Obligated Group Members will not be found to have violated the State Physician Referrals Prohibition Law and the Stark Law provisions and, if so, whether any sanction imposed would have a material adverse effect on the operations of the System and the Obligated Group Members, the financial condition of the System and the Obligated Group Members, or the status of the Corporation and certain of its applicable entities as organizations described in Section 501(c)(3) of the Code. Administrative Enforcement. Administrative regulations may require less proof of a violation than do other Federal and State criminal laws, and, thus, health care providers may have a higher risk of imposition of monetary penalties as a result of an administrative enforcement actions. Civil Monetary Penalties Law. The federal Civil Monetary Penalty Law ( CMPL ) provides for administrative sanctions against health care providers for a broad range of billing and other abuses. A health care provider is liable under the CMPL if it knowingly presents, or causes to be presented, improper claims for reimbursement to a federal or state agency, such as those that administer the Medicare and Medicaid programs. A hospital that participates in arrangements through which DHHS determines a hospital offers to pay physicians to limit or reduce medically necessary services to Medicare fee-for-service beneficiaries, also may be subject to CMPs. CMPs may be assessed against any person or entity that presents a claim for services that were furnished by a person or entity that has been excluded from participating in the Medicare and Medicaid programs. The CMPL authorizes imposition of CMPs of up to $10,000 for each item or service improperly claimed, fines of up to three times the amount claimed and exclusion from participation in Medicare and other federal and state health care programs. The Health Care Reform Law amended the CMPL to authorize CMPs 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 ( OIG ) timely access for audits, investigations, or evaluations; and (iii) failing to report and return a known overpayment within statutory time limits. A health care provider may be found liable under the CMPL even if it did not have actual knowledge of the impropriety of the claim. It is sufficient that the provider should have known that the claim was false. Ignorance of the Medicare regulations is no defense. The imposition of CMPs on the Obligated Group and/or the related entities could have a material adverse impact on the Obligated Group<s financial condition and continued participation in the Medicare program. Health Insurance Portability and Accountability Act of 1996 ( HIPAA ) added two prohibited practices, the commission of which may lead to civil monetary penalties: (1) the practice or pattern of presenting a claim for an item or service on a reimbursement code that the person knows or should know will result in greater payment than appropriate, i.e., upcoding, and (2) engaging in a practice of submitting claims for payment for medically unnecessary services. Violation of such prohibited practices could amount to civil monetary penalties of up to $10,000 for each item or service involved. Management of the System does not expect that the prohibited practices provisions of HIPAA will affect the System in any material respect. Exclusions from Medicare or Medicaid Participation. The term exclusion means that no Medicare or state health care program reimbursement (including Medicaid and the Maternal and Child Health programs) will be made for any services rendered by the excluded party or for any services rendered on the order or under the supervision of an excluded physician. The Secretary of DHHS is required to exclude from program participation for not less than five years any individual or entity that has been convicted of a criminal offense relating to the delivery of any item or service reimbursed under Medicare or a state health care program; any criminal offense relating to patient neglect or abuse in connection with the delivery of health care; a felony relating to fraud, theft, embezzlement, breach of fiduciary responsibility or other misdemeanor in connection with the delivery of health care services or with respect 32

45 to any act or omission in a health care program (other than Medicare or a state health care program) operated by or financed in whole or in part by a governmental agency; or a felony offense relating to the illegal manufacture, distribution, prescription or dispensing of a controlled substance. The Secretary also has permissive authority to exclude individuals or entities under certain other circumstances, such as a misdemeanor conviction for fraud in connection with delivery of health care services or conviction for obstruction of an investigation of a health care violation. The minimum period of exclusion for certain permissive exclusions is three years. Enforcement Activity. Enforcement activity against health care providers is increasing, and enforcement authorities are adopting more aggressive approaches. In the current regulatory climate, it is anticipated that many hospitals and physician groups will be subject to investigation, audit or inquiry regarding billing practices or false claims. As with other health care providers, the Obligated Group Members may be the subject of Medicare intermediary or carrier, OIG, U.S. Attorney General, Department of Justice Medicaid fraud control unit and/or state attorney general investigations, audits, inquiries or qui tam lawsuits in the future. Because of the complexity of these laws, the instances in which an alleged violation may arise to trigger such investigations, audits, inquiries or actions is increasing and could result in an enforcement action against Obligated Group Members. Regardless of the merits of a particular case or cases, the Obligated Group could experience materially adverse legal and settlement costs. Prolonged and publicized investigations could be damaging to the reputation, business and credit of the System, regardless of the outcome, and could have material adverse consequences on the financial condition of the Obligated Group. Certain acts or transactions may result in violation or alleged violation of a number of the federal health care fraud laws described above and, therefore, penalties or settlement amounts can be compounded. Generally these risks are not covered by insurance. EMTALA and the Louisiana Hospital Licensing Law. 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. If the medical screening examination indicates an emergency medical condition or active labor, the hospital must stabilize the patient or provide an appropriate transfer to another facility. A hospital that violates EMTALA is subject to civil penalties of up to $50,000 per violation and exclusion from the Medicare and Medicaid programs. Over the last few years, the federal government has increased its enforcement of EMTALA. The Louisiana Hospital Licensing Law (the "Licensing Law") requires licensed hospitals that are funded in part by tax-exempt bonds and which offer emergency services to provide such services on standards similar to EMTALA. A hospital violating this requirement will be denied further referrals from the State's Department of Health and Hospitals. The Licensing Law also prohibits medical staff, officers and employees of any licensed hospital from denying emergency services available at the hospital based on inability to pay, race, religion or national ancestry, and requires all licensed hospitals to inform their medical staff of the prohibition. Violation by hospital employees of the Licensing Law may be subjected to fines and suspension or termination of participation in State medical assistance programs. Substantial failure of a hospital to comply with the Licensing Law could result in suspension or revocation of the hospital's license. The future cost of such mandatory free care could be material. The System and the Obligated Group Members have in effect policies and procedures it believes will ensure compliance with EMTALA or the Licensing Law; however, the System and the Obligated Group Members cannot predict the future impact of providing care required by EMTALA or the Licensing Law at the facilities of the System and the Obligated Group Members. HIPAA Administrative Simplification and HITECH Act. HIPAA includes administrative simplification provisions intended to facilitate the processing of health care payments by encouraging the electronic exchange of information and the use of standardized formats for health care information. Congress recognized, however, that standardization of information formats and greater use of electronic technology present additional privacy and security risks due to the increased likelihood that databases of individually identifiable health care information will be created and the ease with which vast amounts of such data can be transmitted. 33

46 Therefore, HIPAA requires the establishment of distinct privacy and security protections for individually identifiable health information. DHHS promulgated privacy regulations under HIPAA that protect patient medical records and other personal health information maintained by health care providers, health plans and health care clearinghouses. Compliance with the privacy regulations was required as of April 14, The System is committed to protection of its patients privacy and security of its electronic health records in accordance with the HIPAA standards, as well as all other applicable state and federal privacy guidelines. The management of the System believes that operations and information systems of the Obligated Group comply with the HIPAA privacy regulations as of the effective date. Regulations protecting the security of electronic health information have also been promulgated under HIPAA. Compliance with the security regulations was required as of April 21, Management of the System believes it is in compliance with HIPAA security regulations. DHHS also promulgated regulations to standardize the electronic transfer of information pursuant to certain enumerated transactions (the Code Set Transactions ), with a compliance deadline of October 16, Each Obligated Group Member believes that all of its health care facilities are compliant with the Code Set Transactions regulations. On February 17, 2009, President Obama signed into law the Health Information Technology for Economic and Clinical Health Act (the HITECH Act ), which is part of ARRA. The HITECH Act significantly changes the landscape of federal privacy and security law with regard to individually identifiable health information. The HITECH Act (i) extended the reach of HIPAA and the Security Regulations, (ii) imposed a breach notification requirement on HIPAA covered entities, (iii) limited certain uses and disclosures of individually identifiable health information, (iv) increased individuals rights with respect to individually identifiable health information and (v) increased enforcement of, and penalties for, violations of privacy and security of individually identifiable health information. Many of the HITECH Act s provisions became effective on February 17, 2010, and other provisions became effective thereafter. Management of the System does not expect that the prohibited practices provisions of the HITECH Act will affect the Corporation in a material respect. Any violation of HIPAA, the HITECH Act, or the regulations promulgated under either is subject to HIPAA civil and criminal penalties that include monetary penalties and/or imprisonment. Significantly, the HITECH Act created a tiered approach to the imposition of CMPs for violations of HIPAA, the HITECH Act, and the regulations promulgated under each that became effective immediately upon President Obama signing the HITECH Act into law. The new tiered approach provides for CMPs of up to $1.5 million for violations of an identical requirement during a calendar year. Management of the System and the Obligated Group Members believes that all of the health care facilities are in substantial compliance with HIPAA, the HITECH Act, and the rules promulgated thereunder. Licensing, Surveys, Investigations and Audits. 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, the Accreditation Council of Graduate Medical Education and The Joint Commission (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. Actions in any of these areas could result in the loss of utilization or revenues, or the ability of the System to operate all or a portion of its health care facilities, and, consequently, could have a material and adverse effect on the operations or financial condition of the Obligated Group. 34

47 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 and properties owned or operated by providers. The types of regulatory requirements faced by health care providers include, but are not limited to: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to certain hazardous materials customarily used in facilities operated by the Members of the Obligated Group; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at facilities operated by the Members of the Obligated Group; and requirements for training employees in the proper handling and management of hazardous materials and wastes. In their role as owners and/or operators of properties or facilities, the Obligated Group Members may be subject to liability for investigating and remedying any hazardous substances which have come to be located on the property, as well as for any such substances that may have migrated off of the property or which have been improperly disposed of off-site. Typical health care provider operations include, but are not limited to, in various combinations, 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 injury to individuals and damage to property or the environment; may interrupt operations and/or increase their costs; may result in legal liability which could, in turn, result in significant damages, injunctions or fines; may 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 the System 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 Obligated Group. Management of the System is not aware of any pending or threatened claim, investigation or enforcement action regarding environmental matters which it believes would have a material adverse impact on any Member of the Obligated Group. Increased Enforcement Affecting Research. In addition to increasing enforcement of laws governing payment and reimbursement, the federal government has also stepped up enforcement of laws and regulations governing the conduct of clinical trials at hospitals. DHHS elevated and strengthened its Office of Human Research Protection, one of the agencies with responsibility for monitoring federally funded research. In addition, the National Institutes of Health significantly increased the number of facility inspections that these agencies perform. The Food and Drug Administration ("FDA") also has authority over the conduct of clinical trials performed in hospitals when these trials are conducted on behalf of sponsors seeking FDA approval to market the drug or device that is the subject of the research. Moreover, the OIG, in its "Work Plans," has included several enforcement initiatives related to reimbursement for experimental drugs and devices (including kickback concerns). The Department of Justice may also become involved in enforcement actions relating to the use of federal funds or submission of information to federal agencies. There have been a number of recent government investigations and settlements involving hospital use of federal grant funding in connection with clinical trials and also a settlement involving the submission of claims to Medicare for services provided in a clinical trial. These agencies' enforcement powers range from substantial fines and penalties to exclusion of researchers and suspension or termination of entire research programs, and errors in billing of the Medicare or Medicaid programs for care provided to patients enrolled in clinical trials that is not eligible for Medicare reimbursement can subject the System and the Obligated Group Members to sanctions as well as repayment obligations. Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures. Health plans, Medicare and Medicaid programs, employers, trade groups and other purchasers of health services, private standard-setting organizations and accrediting agencies increasingly are using statistical and other measures in efforts to characterize, publicize, compare, rank and change the quality, safety and cost of health care services provided by hospitals and health care providers. Published rankings such as "score cards" tiered hospital networks with higher co-payments and deductibles for non-emergent use of lower-ranked providers, "Pay for performance" and other financial and non-financial incentive programs are being introduced to affect the reputation 35

48 and revenue of hospitals, the members of their medical staffs and other health care providers and to influence the behavior of consumers and providers such as the Obligated Group Members. Prevalent currently are measures of quality based on clinical outcomes of patient care, reduction in costs, patient satisfaction and investment in health information technology. Measures of performance set by others that characterize a hospital or a health care provider negatively may adversely affect its reputation and financial condition. Implementation of Revised ICD-10. United States health care providers and payors (including Medicare and Medicaid) currently operate under the International Classification of Diseases ( ICD ) Number 9 to report and bill for care. Revised ICD-10 is a new system for medical diagnosis and inpatient and outpatient procedure coding and is to go into effect in the United States on October 1, 2014 for every person and organization covered by HIPAA. Australia and Canada have already implemented ICD-10 and their experience shows that providers and payors in the United States need to invest significantly in software, education and training for this implementation. Providers will be required to maintain the ICD-9 system in parallel with the Revised ICD-10 system for the first 2 years. The Revised ICD-10 focuses on data integrity which requires a qualitatively different management of claims information and processing. Implementation will affect clinical data, medical records reporting, practice management systems, public health reporting and quality review and utilization reporting systems. Planning for these changes is going on simultaneously with changes in electronic health record transmission to CMS which went into effect January 1, 2012 under new Version Submission and processing of claims data under ICD-10 will be more complex; it is likely that some claims may be rejected or delayed due to faulty transmission or receipt of data. Delayed payments would result in lower cash flow to providers. Management of the System and the Obligated Group Members are working on implementation of Revised ICD-10 but cannot in these early stages predict the impact of these changes on the finances and operations of the Corporation. Adequacy of Revenues Except to the extent otherwise noted herein, the Bonds are payable solely from the payments required to be made by the Obligated Group to the Authority under the Note and the Loan Agreement. No representation or assurance can be made that revenues will be realized by the Obligated Group in amounts sufficient to pay maturing principal of, redemption premium, if any, and interest on the Bonds. Neither the Trustee, the Authority nor the Underwriters has made any independent evaluation of the Obligated Group's ability to make the payments required under the Loan Agreement and the Note. The ability of the Obligated Group to make required payments on the Note is subject to, among other things, the capabilities of the management of the Obligated Group Members and future economic and other conditions, which are unpredictable and which may affect revenues and, in turn, the payment of principal of, premium, if any, and interest on the Bonds. Future revenues and expenses of the System will be affected by events and conditions relating generally to, among other things, demand for the System s services, its ability to provide the services required by patients, physicians' relationships with the Obligated Group Members, management capabilities, the design and success of the Obligated Group s strategic plans, economic developments in the service area of the System, the Obligated Group Members ability to control expenses, maintenance by the Obligated Group of relationships with health maintenance organizations ( HMOs ) and preferred provider organizations ( PPOs ), competition, rates, costs, third-party reimbursement, legislation and governmental regulation. Additionally, the Obligated Group Members are subject to a wide variety of federal and state regulatory actions and legislative and policy changes by those governmental and private agencies that administer Medicare, Medicaid, other third-party payors and governmental payors and are subject to actions by, among others, the Joint Commission, the CMS, and other federal, state and local government agencies. Federal and state funding statutes and regulations are the subject of intense legislative debate and are likely to change, and unanticipated events and circumstances may occur which cause variations from the Obligated Group s expectations, and the variations may be material. 36

49 NO REPRESENTATION OR ASSURANCE CAN BE GIVEN THAT THE OBLIGATED GROUP WILL GENERATE REVENUES SUFFICIENT TO ALLOW PAYMENT OF DEBT SERVICE ON THE BONDS WHEN DUE. None of the provisions, covenants, terms and conditions of the Loan Agreement will afford the Trustee any assurance that the principal and interest owing under the Note will be paid as and when due, if the financial condition of the Obligated Group deteriorates to a point where the Obligated Group is unable to pay its debts as they come due, or otherwise becomes insolvent. The Medicare Program Approximately 45% of the gross patient service revenues of the Obligated Group were derived from the Medicare program for the Fiscal Year ended June 30, As a consequence, any adverse development or change in Medicare reimbursement could have an adverse effect on the financial condition and results of operations of the Obligated Group. Hospital Payments. Medicare Part A pays acute care hospitals for most inpatient services under a payment system known as the Prospective Payment System or PPS. Separate PPS payments are made for inpatient operating costs and inpatient capital-related costs. Inpatient Operating Costs. Acute care hospitals are paid a specified amount toward their operating costs based on the Diagnosis Related Group ( DRG ) to which each Medicare patient is assigned, determined by the patient s diagnosis, procedures performed and other factors for each patient s particular inpatient stay. The amount paid for each DRG is established prospectively by CMS and is not directly related to a hospital s actual costs. However, the federal rate is geographically wage adjusted. For certain Medicare beneficiaries who have unusually costly hospital stays ( outliers ), CMS will provide additional payments above those specified for the DRG. Outlier payments cease to be available upon the exhaustion of such patient s Medicare benefits or a determination that acute care is no longer necessary, whichever occurs first. There is no assurance that any of these payments will cover the actual costs incurred by a hospital. In addition, recent revisions to the outlier regulations implemented in order to curb outlier payment abuse may adversely affect a hospital s ability to receive such subsidies. DRG payments are adjusted annually based on the hospital market basket index, or the cost of providing health care services. For nearly every year since 1983, Congress has modified the increases and given substantially less than the increase in the market basket index. CMS has also implemented a documentation and coding adjustment to account for changes in payments under the new Medicare Severity Diagnosis Related Group, or MS- DRG, system that are not related to changes in case mix. CMS did elect to phase in such adjustments in fiscal year 2011 and federal fiscal year 2012, as discussed below. The Health Care Reform Law will reduce the annual Medicare market basket updates from federal fiscal year 2010 through federal fiscal year Beginning in federal fiscal year 2012, the Health Care Reform Law also provides that annual Medicare market basket updates will be subject to productivity adjustments, further reducing Medicare payments to hospitals. The reductions in market basket updates and the productivity adjustments will have a disproportionately negative effect upon those providers that are relatively more dependent upon Medicare than other providers. Additionally, the reductions in market basket updates will be effective prior to the periods during which insurance coverage and the insured consumer base will expand, which may have an interim negative effect on revenues. The combination of reductions to the market basket updates and the imposition of the productivity adjustments may, in some cases and in some years, result in reductions in Medicare payment per discharge on a year-to-year basis. For further information regarding the Health Care Reform Law and its provisions, see "INVESTMENT CONSIDERATIONS - Health Care Reform and Other Governmental Initiatives - Health Care Reform" herein. As required by the DRA, hospitals that do not participate successfully in the Hospital Inpatient Quality Reporting Program (formerly known as the Reporting Hospital Quality Data for Annual Payment Update or RHQDAPU) will receive market basket update less 2.0%. CMS continues to update the quality measures that hospitals must report in order to qualify for the full market basket update. The Obligated Group Members participate in the Hospital Quality Initiative. 37

50 For federal fiscal year 2012, CMS increased acute care hospital rates by 1.1%. This increase reflects the following: a market basket increase of 3.0%; a 1.1% increase in response to litigation regarding application of a rural floor and rural floor budget neutrality; a further 2.0% documentation and coding reduction; a 1.0% productivity adjustment reduction; a 0.1% reduction imposed by the Health Care Reform Law, and other adjustments. There is no assurance that future increases in the DRG payments will keep pace with the increases in the cost of providing hospital services. The Secretary of the DHHS is required to review annually the DRG categories to take into account any new procedures, to reclassify DRGs and to recalibrate the DRG relative weights that reflect the relative hospital resources used by hospitals with respect to discharges classified within a given DRG category. There is no assurance that the Obligated Group will be paid amounts that will adequately reflect changes in the cost of providing health care or in the cost of health care technology being made available to patients. During federal fiscal years , CMS has created new DRGs and revised or deleted others in order to better recognize the severity of illness for each patient. CMS may only adjust DRG weights on a budget-neutral basis. Inpatient Capital Costs. Hospitals are reimbursed on a fully prospective basis for capital costs (including depreciation and interest) related to the provision of inpatient services to Medicare beneficiaries. Thus, capital costs are reimbursed exclusively on the basis of a standard federal rate (based on average national costs adjusted geographically), subject to certain adjustments (such as for disproportionate share, indirect medical education and outlier cases) specific to the hospital. Hospitals are reimbursed at 100% of the standard federal rate for all capital costs. This applies to the standard federal rate before the application of the adjustment factors for outliers, exceptions and budget neutrality. There can be no assurance that the prospective payments for capital costs will be sufficient to cover the actual capital-related costs of the System allocable to Medicare patient stays or to provide adequate flexibility in meeting the System s future capital needs. Disproportionate Share Adjustments. Under PPS, hospitals that serve a disproportionate share of lowincome patients may receive an additional disproportionate share hospital adjustment ( DSH ). A hospital may be classified as a DSH hospital based upon any of several circumstances related to the number of beds, the hospital s location, and its disproportionate patient percentage. The DSH adjustment is calculated under one of several methods, depending upon the basis for the hospital s classification as a DSH hospital. Each Member of the Obligated Group received DSH adjustments in Fiscal Year ending June 30, Under the Health Care Reform Law, with the expected decrease in the uninsured population, federal DSH payments will be reduced by 75% commencing in federal fiscal year 2014 and state Medicaid DSH payments are anticipated to be reduced quarterly starting in From 2014 to 2020, the estimated total loss of Medicaid DSH funds to states will be $18.1 billion. There is no assurance that the System's hospitals will receive DSH payments in the future. Outpatient Services. Hospital outpatient services, including hospital operating and capital costs, are reimbursed on a PPS basis. Several Part B services are specifically excluded from this rule, including certain physician and non-physician practitioner services, ambulance, physical and occupational therapy, and speech pathology services, which are paid under a fee schedule. Under the hospital outpatient PPS, predetermined amounts are paid for designated services furnished to Medicare beneficiaries. CMS classifies outpatient services and procedures that are comparable clinically and in terms of resource use into ambulatory payment classification ( APC ) groups. Using hospital outpatient claims data from the most recent available hospital cost reports, CMS determines the median costs for the services and procedures in each APC group. OPPS rates are adjusted annually (on a calendar year schedule) based on the hospital inpatient market basket percentage increase. In the final 2012 OPPS rule, CMS authorizes a market basket increase of 1.9%, reflecting a projected 3.0% market basket increase, offset by a productivity adjustment of 1.0% and a Health Care Reform Law reduction of 0.1%. Hospitals that fail to report data related to fifteen required quality measures will have their market basket percentage increase reduced by 2%, resulting in a negative adjustment of 0.1% for calendar year There 38

51 can be no assurance that the hospital OPPS rate, which bases payment on APC groups rather than on individual services, will be sufficient to cover the actual costs of the Obligated Group allocable to Medicare patient care. In addition to the APC rate, there is a predetermined beneficiary coinsurance amount for each APC group. CMS projects the overall beneficiary coinsurance for OPPS services to be 21.8% in There can be no assurance that the beneficiary will pay this amount. The OPPS final rule for calendar year 2011 also implemented several provisions of the Health Care Reform Law which may impact the reimbursement and operations of hospitals across the country. These provisions continue to be implemented by CMS in the 2012 OPPS final rule. Some of the specific reforms addressed in the 2011 OPPS final rule and 2012 OPPS final rule that have the potential to impact hospitals are: (i) reduction of the OPPS market basket increase factor by a productivity adjustment (effective 2012) and an additional adjustment for payments to hospital outpatient departments (from 2010 through 2019); (ii) application of similar productivity adjustments for payment for ambulatory surgical center services, which began with calendar year 2011; (iii) new provisions relating to the prohibition against referrals to a hospital by a physician who has an ownership or investment interest in the hospital; (iv) adjustments to the area wage adjustment factor for outpatient department services; and (v) changes related to payment for graduate medical education and indirect medical education. Physician Payment. Certain physician services are reimbursed on the basis of a national fee schedule called the resource based relative value scale ( RBRVS ). The RBRVS fee schedule establishes payment amounts for all physician services, including services of provider-based physicians, and is subject to annual updates. In the RBRVS system, payments for physician services are determined by the resource costs needed to provide them. The Sustainable Growth Rate ("SGR"), which is a limit on the growth of Medicare payments for physician services, is linked to changes in the U.S. Gross Domestic Product over a ten-year period. SGR targets are compared to actual expenditures in order to determine subsequent physician fee schedule updates. Use of the SGR in determining physician fee schedule updates has been widely criticized as an unworkable formula, and in the absence of continuing Congressional intervention the use thereof will result in a considerable decrease to Medicare physician payments. The 2012 Medicare Physician Fee Schedule Final Rule (the "2012 MPFS") was released on November 2, The 2012 MPFS reduces the conversion factor under the 2012 RBRVS fee schedule by 27.4%. On February 22, 2012, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012, which prevented payment reductions to physicians through There can be no guarantee that Congress will act to stop future reductions in the physician fee schedule. The 2012 MPFS contains provisions implementing the Health Care Reform Law which may impact the reimbursement levels of hospitals, such as: (i) identification and review of potentially misvalued codes; (ii) expansion of the multiple procedure payment reduction policy for advanced imaging services; (iii) methodology for determining the productivity adjustment for ambulatory surgical centers, clinical laboratory services, and the durable medical equipment fee schedule; (iv) revisions to the practice expense methodology; (v) bundling of payments for services provided to outpatients who are later admitted as inpatients (i.e., the 3-day payment window policy); and (vi) hospital discharge care coordination. Skilled Nursing Care. Medicare Part A reimburses on a PPS basis certain post-acute inpatient skilled nursing and rehabilitation care for up to 100 days during the same spell of a patient s illness. The federal government has implemented a PPS for skilled nursing facilities ( SNFs ) Medicare reimbursement based on the Resource Utilization Groups ( RUGs ) system that shifts more of the financial risk of the costs of long-term care from the federal government to the provider and is based on historical costs and resource utilization of the residents. Under RUGs, payments are made at a predetermined per diem amount. CMS found that a parity adjustment made in fiscal year 2011, intended to ensure that a new RUG-IV system would not change overall spending levels from the prior year, instead resulted in a significant increase in Medicare expenditures during fiscal year As a result, a recent CMS final rule reduced Medicare SNF PPS payments in fiscal year 2012 by 11.1%. It is unclear what effect these provisions will have on the System s finances at this time. 39

52 Home Health Care. CMS has developed a PPS for home health services. Such payments are increased annually, but it is likely that the increases of such payments will not keep pace with the increases in the cost of providing home health services. Any such failure to increase adequately such payments will have an adverse effect on home health providers whose costs exceed the level of prospective reimbursement. The actual financial effect on the System from such a system cannot be determined at this time. Ambulatory Surgical Centers. Medicare pays for ambulatory surgical center ( ASC ) services on a PPS basis. Historically, these rates have been updated annually for inflation by the consumer price index ( CPI ), effective each Federal fiscal year commencing October 1. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the MMA ) changed the update cycle to a Calendar Year. Pursuant to the DRA, effective January 1, 2007, payments to ASCs are required to be capped at the corresponding OPPS amount paid to a hospital for the same procedure. On November 1, 2011, CMS finalized its 2012 ASC payment policies. In 2012, ASCs will see an increase of 1.6% across the board. CMS has added six new procedures to the list of ASC payable procedures for ASCs will be required to report data on five quality measures beginning October 1, 2012, or face reductions in their 2014 Medicare payments. Provider-Based Standards. CMS made significant changes to the provider-based regulation included in the final OPPS rulemaking for federal fiscal year Generally, CMS eliminated a few requirements for on-site provider-based facilities and clarified some of the provisions of the prior provider-based rules. CMS clarified that prior approval of provider-based status by CMS is not required for an entity to bill as provider-based. Rather, a provider may provide an optional attestation of its status as a provider-based entity. Although such attestation is not required to bill as a provider-based entity, it may provide some overpayment protection in the event that CMS subsequently makes a determination that an entity is not provider-based, assuming accurate representation by the provider to CMS. Any reclassification by CMS may adversely affect the entity s reimbursement under the Medicare program. Based on current regulations, the Management of the System believes all of their respective current facilities that bill for services as provider-based entities qualify as provider-based entities under the current regulations. Medicare Advantage. Medicare beneficiaries may obtain Medicare coverage through a Medicare Advantage plan, a managed care plan formerly known as a Medicare+Choice plan. A Medicare Advantage plan may be offered by a coordinated care plan (such as an HMO or PPO), a provider sponsored organization ( PSO ) (a network operated by health care providers rather than an insurance company), a private fee-for-service plan, or a combination of a medical savings account ( MSA ) and contributions to a Medicare Advantage plan. Each Medicare Advantage plan, except an MSA plan, is required to provide benefits approved by the Secretary of DHHS. A Medicare Advantage plan will receive a monthly capitated payment from DHHS for each Medicare beneficiary who has elected coverage under the plan. Health care providers such as the Members of the Obligated Group must contract with Medicare Advantage plans to treat Medicare Advantage enrollees at agreed upon rates or may form a PSO to contract directly with DHHS as a Medicare Advantage plan. Covered inpatient and emergency services rendered to a Medicare Advantage beneficiary by a hospital that is an out-of-plan provider (i.e., that has not entered into a contract with a Medicare Advantage plan) will be paid at Medicare fee-for-service payment rates as payment in full. The Health Care Reform Law provides that from October 1, 2010 through September 30, 2019, payments under the Medicare Advantage programs will be reduced, which may result in increased premiums or out-of-pocket costs to Medicare beneficiaries enrolled in Medicare Advantage plans. These beneficiaries may terminate their participation in such Medicare Advantage plans and opt for the traditional Medicare fee-for-service program. The reduction in payments to Medicare Advantage plans may also lead to decreased payments to providers by managed care companies operating Medicare Advantage plans. There can be no assurance that the rates negotiated for the treatment of Medicare Advantage enrollees will be sufficient to cover the cost of providing services to such patients. All or any of these outcomes will have a disproportionately negative effect upon those providers with relatively high dependence upon Medicare managed care revenues. For further information regarding the Health Care Reform Law and its provisions, see "INVESTMENT CONSIDERATIONS - Health Care Reform and Other Governmental Initiatives - Health Care Reform" herein. 40

53 Medicare Audits. Hospitals participating in Medicare are subject to audits and retroactive audit adjustments with respect to reimbursement claimed under the Medicare program. Medicare regulations also provide for withholding Medicare payment in certain circumstances if it is determined that an overpayment of Medicare funds has been made. In addition, under certain circumstances, payments may be determined to have been made as a consequence of improper claims subject to the federal False Claims Acts or other federal statutes, subjecting the Members of the Obligated Group to civil or criminal sanctions. Management of the System is not aware of any situation whereby a material Medicare payment is being withheld from the System. Authorized by HIPAA, the Medicare Integrity Program ("MIP") was established to deter fraud and abuse in the Medicare program. Funded separately from the general administrative contractor program, the MIP allows CMS to enter into contracts with outside entities and insure the "integrity" of the Medicare program. These entities, Medicare zone program integrity contractors ("ZPICs"), formerly known as program safeguard contractors, are contracted by CMS to review claims and medical charts, both on a prepayment and post-payment basis, conduct cost report audits and identify cases of suspected overpayments and/or fraud. ZPICs have the authority to deny and recover payments as well as to refer cases to the OIG for further investigation. CMS is also planning to enable ZPICs to compile claims data from multiple sources in order to analyze the complete claims histories of beneficiaries for inconsistencies. RAC Audits. The MMA established the Medicare Recovery Audit Contractor ("RAC") program initially as a demonstration program to identify improper Medicare payments. CMS contracts with private contractors to conduct RAC audits (the "RAC Contractors"). RAC Contractors are paid on a contingency fee basis, receiving a percentage of the improper overpayments and underpayments they collect from providers. RAC Contractors can retrospectively review claims for up to three years from the date the claim was paid and review provider claims for the following types of services: hospital inpatient and outpatient, skilled nursing facility, physician, ambulance and laboratory, as well as durable medical equipment. RAC Contractors use automated software programs to identify potential payment errors in such areas as duplicate payments, fiscal intermediaries' mistakes, medical necessity and coding, and identified significant overpayments for collection in the demonstration states. In accordance with the MMA and the Tax Relief and Health Care Act of 2006 (the "2006 Tax Act"), CMS designated the use of recovery audit contractors to search for improper Medicare payments in Arizona, Florida, California, Massachusetts, New York and South Carolina. While originally part of a demonstration program that was set to expire in 2008, the provisions of the 2006 Tax Act made the RAC program permanent and authorized CMS to expand the program to all 50 states by As required by the 2006 Tax Act, permanent RAC programs have been implemented in all 50 states. RAC audits began in Louisiana in August Management cannot anticipate the amount or volume of the Obligated Group's past Medicare claims that will be reviewed under the RAC program or what the results of such audits may be. The RAC program was expanded through the Health Care Reform Law to Medicare Part C (Medicare Advantage plans), Medicare Part D (prescription drug coverage) and Medicaid. On November 15, 2011, CMS announced new demonstration projects which took effect on January 1, The first such project, the Recovery Audit Prepayment Review demonstration, applies to eleven states, and allows RAC Contractors to review claims before they are paid to ensure that the applicable provider complied with all Medicare payment rules. The second demonstration project applies to seven states and requires prior authorization for certain medical equipment for all people covered by Medicare who reside in the applicable states. This prior authorization demonstration program will be implemented in two phases. During the first phase, Medicare administrative contractors will conduct prepayment reviews on certain medical equipment claims. The second phase will implement prior authorization in a manner similar to that employed by private-sector health care payers. It is unknown at this time how these new CMS demonstration projects will impact the System and the Obligated Group Members. Medical Education Payments. Medicare currently pays for a portion of the costs of medical education at hospitals that have teaching programs. Commencing in the Fall of 2013, due to the expansion of Graduate Medical 41

54 Education services at the Lake (see Risks in Health Care Delivery - Indigent Care herein), the Lake will begin receiving an increase in such medical education payments. These payments are vulnerable to reduction or elimination. The Medicaid Program General Provisions. Medicaid is a governmental program that reimburses health care providers for certain items and services provided to Medicaid eligible individuals. Medicaid is funded through federal and state appropriations, and administered by the various states. Each state develops its own program and, within limits, determines what costs it will pay and who is eligible for benefits. Benefits are available within prescribed limits to persons meeting certain minimum income or other eligibility requirements. The Medicaid program in Louisiana is administered by the Department of Health and Hospitals ( DHH ) under procedures established by the federal government (through approval of State Plan Amendments). Hospitals, skilled nursing facilities and intermediate care facilities are paid rates that must be reasonable and adequate to meet costs incurred by efficiently and economically operated facilities to provide services in conformity with state and federal laws, regulations and quality and safety standards. In fact, the rates that are paid to health care providers are typically significantly less than the health care providers usual charges. The Obligated Group is reimbursed at a per diem rate for inpatient hospital services provided to Medicaid recipients. Medicaid reimbursement for outpatient clinical laboratory, ambulatory surgical and rehabilitation services is based on a fee schedule. For some services, a Medicaid provider receives provisional reimbursement, with final settlement of reimbursement determined after submission of annual cost reports by the Medicaid provider and audits by the Louisiana Medicaid fiscal intermediary. Approximately 15% of the gross patient service revenues of the Obligated Group for the year ended June 30, 2012 were derived from the Medicaid program. Medicaid programs vary widely from state to state and are continually being amended and revised. There can be no assurance that the Obligated Group s patient service revenues will not be adversely affected by any future amendments and revisions to the Medicaid programs. In fact, the federal and state governments, including Louisiana, have considered, and are continuing to consider, changes to Medicaid funding, particularly in light of the budget crises facing many states, including Louisiana. Since most states must operate with balanced budgets and since the Medicaid program is often the state's largest program, states have adopted or considered adopting legislation designed to reduce their Medicaid expenditures in recent years. The economic downturn and budgetary constraints have resulted in pressure to decrease spending for Medicaid. Historically, states often have attempted to reduce Medicaid spending by limiting benefits and tightening Medicaid eligibility requirements. See State Medicaid Program Expenditures below. The Health Care Reform Law expands Medicaid coverage (in states that agree to participate in the expansion) to all individuals under age 65 with incomes up to 133% of the federal poverty level ("FPL") by Further, the Health Care Reform Law also requires states to apply a "5% income disregard" to the Medicaid eligibility standard, so that Medicaid eligibility will effectively be extended to those with incomes up to 138% of the FPL. The Health Care Reform Law requires states to at least maintain Medicaid eligibility standards established prior to the enactment of the law, for adults until January 1, 2014 and for children until October 1, It remains unclear whether the State will adopt Medicaid expansion provisions. See "INVESTMENT CONSIDERATIONS - Health Care Reform and Other Governmental Initiatives - Health Care Reform" herein. Due to the federal legislative expansion of Medicaid in the face of the budgetary pressures at the state level, payments made to hospitals under Medicaid are subject to change as a result of federal or state legislative and administrative actions, including changes to the methods for calculating payments, the amount of payments that will be made for covered services and the types of services that will be covered under the program. Also, measures may be taken to increase enrollment in Medicaid recipients in managed care programs and/or to impose additional taxes on hospitals to help finance or expand the state's Medicaid system. Both the federal and state governments continue to explore options for long-term solutions to the funding difficulties with Medicaid. 42

55 State Medicaid Program Expenditures. In Louisiana, the total annual expenditure for the Medicaid program is limited by the State legislature in the general appropriations bills. The appropriation for State Fiscal Year is $7.3 billion allocated to medical vendor payments which is an increase from State Fiscal Year Approximately $324 million was allocated to medical vendor administration, which includes claims processing. The total State appropriated contribution for State Fiscal Year was approximately $2.2 billion. Due to the national economic downturn (see Impact of Disruptions in the Credit Markets and General Economic Factors herein), significant declines in the price of oil and natural gas and the leveling off of the post Hurricane Katrina economic boom, Louisiana has realized substantially lower state revenues. Therefore, over the course of the last several years, there has been significant reduction in Medicaid funding. In fact, the Governor's Executive Budget for State Fiscal Year reflects significant cost-saving measures and an overall reduction in DHH funding of approximately $859 million, which includes more than $300 million reduction in appropriations to the State s charity hospital system operated by Louisiana State University and Agricultural and Mechanical College ( LSU ). See Risks in Health Care Delivery - Indigent Care herein. The Fiscal Year reduction includes a recently announced Congressional action to reduce the Federal Matching Assistance Percentage ("FMAP") rate from 71.92% to a projected 65.51%, which represents the lowest reimbursement rate the State has had in more than 25 years. For Fiscal Year , the decrease in the FMAP rate equates to a total impact of a loss of $287 million of Medicaid funds. It is not possible to predict the impact of these changes on the revenues or operations of the Obligated Group. LaCHIP Program. The Children's Health Insurance Program ("CHIP") is a federally funded insurance program for families which are financially ineligible for Medicaid, but cannot afford commercial health insurance. CMS administers CHIP, but each state creates its own program based upon minimum federal guidelines. CHIP insurance is provided through private health plans contracting with the State. Louisiana Children's Health Insurance Program ("LaCHIP") provides health care coverage for children whose family income is too high to qualify for Medicaid, but for whom the cost of private insurance is too high. A task force recommended that LaCHIP be a Medicaid expansion program instead of a separate private insurance model. The phase-in began for families earning 133% of the FPL. It was then expanded twice, first to 150%, and then to 200% of the FPL. Louisiana currently has 2 LaCHIP plans - the Regular LaCHIP Plan for families with income too high for Medicaid but below 200% of the FPL and the LaCHIP Affordable Plan for families with income too high for the Regular LaCHIP Plan but below 250% of the FPL. There are over 700,000 children in Louisiana who are covered by Medicaid or LaCHIP. LaCHIP operates through BAYOU HEALTH, the State s new Coordinated Care Network ( CCN ) for Medicaid, since its implementation in February See Recent Initiatives below. Each state must periodically submit its CHIP plan to CMS for review to determine if it meets the federal requirements. If it does not meet the federal requirements, a state can lose its federal funding for the program. On February 4, 2009, President Obama signed the Children's Health Insurance Reauthorization Act of 2009, which expanded the program to an additional 4 million children and pregnant women, including for the first time legal immigrants with no waiting period. Previously, federal law required a 5-year waiting period before most legal immigrants were permitted to enroll in CHIP, although many states offered health coverage to these populations with state-only funds. Further, the Health Care Reform Law is expected to result in a substantial increase in the number of pediatric patients covered by CHIP in the coming years. Federal authority for CHIP extends to The Obligated Group is unable to predict what effect any of these programs may have on either the Louisiana Medicaid program or the financial condition of the Obligated Group in future years. Other Medicaid Benefit Issues. Increasing drug prices and the cost of drugs newly approved by the Food and Drug Administration continue to be major issues faced by the Louisiana Medicaid program. Louisiana law authorizes DHH to implement a pharmacopoeia program (preferred drug list) and a drug utilization review process, that are expected to slow growth in Medicaid pharmacy expenditures. 43

56 Court rulings have been rendered and settlements reached requiring Medicaid-funded treatment for autism and community-based services for elderly and disabled, and an immediate fiscal impact on the Louisiana Medicaid program is expected as a result. No prediction can be made as to the fiscal impact of the foregoing described issues on the Louisiana Medicaid program. There is no assurance that there will not be delays in appropriations or state budget deficits in the future that may create a risk that payment for services to a Medicaid patient will be withheld or delayed. According to the 2011 Louisiana Health Insurance Survey, which is performed every 2 years, the number of uninsured children and adults in Louisiana continues to decline. The current economic downturn and projected budget cuts, however, will have a negative effect on the Louisiana Medicaid program. An adverse event, such as a catastrophic hurricane, could result in a larger number of residents becoming eligible for Medicaid benefits, straining the funds appropriated for the program and leading to reduced state funds available to match the federal financial participation for Medicaid funding. Recent Initiatives. In February 2012, DHH instituted a statewide managed care program BAYOU HEALTH, the new health care delivery model in Louisiana in which recipients' care is coordinated in a CCN administered by one of five private health plans. BAYOU HEALTH was initially only active in five regions of the State (Greater New Orleans Area, Capital Area, South Central Louisiana, Acadiana and Northshore), and was implemented statewide on June 1, Private health plans typically use discounts and other economic mechanisms to manage cost and utilization of health care services. See Private Health Plans and Managed Care herein. It is not possible to predict the impact of the implementation of BAYOU HEALTH on the revenues or operations of the Obligated Group. Medicaid Audits. Hospitals participating in Medicaid are subject to audits and retroactive audit adjustments with respect to reimbursement claimed under the Medicaid program. Medicaid regulations also provide for withholding Medicaid payment in certain circumstances if it is determined that an overpayment of Medicaid funds has been made. In addition, under certain circumstances, payments may be determined to have been made as a consequence of improper claims subject to the federal False Claims Acts or other federal statutes, subjecting the providers to civil or criminal sanctions. Management of the System is not aware of any situation whereby a material Medicaid payment is being withheld from the System. Under the Health Care Reform Law, the RAC program was expanded to include Medicaid by requiring states to contract with RAC Contractors to conduct such audits. See The Medicare Program - RAC Audits herein. In addition, CMS has instituted a Medicaid Integrity Program, modeled on the MIP. Medicaid Integrity Program contractors assist state Medicaid agencies by analyzing Medicaid claims data to identify high-risk areas and potential vulnerabilities and conducting post-payment field audits and desk review audits of Medicaid provider payments. Private Health Plans and Managed Care Health care, including hospital services, increasingly is being financed through managed care plans that use discounts and other economic incentives to manage the cost and utilization of health care services. The System has entered in to contractual arrangements with managed care plans pursuant to which it agrees to provide or arrange to provide certain health care services for these plans eligible enrollees. Payments to the System from managed care plans typically are lower than those received from traditional indemnity/commercial insurers. Failure to maintain contracts with managed care organizations could have the effect of reducing the market share and gross patient services revenues of the System. Conversely, participation in managed care plans may maintain or increase the patient base, but could result in lower net income to the Obligated Group if it is unable to adequately contain its costs. Thus, managed care poses a significant business risk to the Obligated Group. In many markets, including Louisiana, managed care plans and preferred provider plans have begun to replace indemnity insurance as the prime source of nongovernmental payment for hospital services. In regions where managed care is prevalent, health care providers must be capable of attracting and maintaining managed care business, often on a regional basis. To do so, regional coverage and aggressive pricing may be required. However, it also is essential 44

57 that contracting providers be able to provide the contracted services without significant operating losses, all of which may require innovative cost containment efforts. The Health Care Reform Law imposes, over time, increased regulation of the industry, the use and availability of state-based exchanges in which health insurance can be purchased by certain groups and segments of the population, the extension of subsidies and tax credits for premium payments by some consumers and employers, and the imposition upon commercial insurers of certain terms and conditions that must be included in contracts with providers. In addition, the Health Care Reform Law imposes many new obligations on states related to health care insurance. It is unclear how the increased federal oversight of state health care may affect future state oversight or affect the Obligated Group. The effects of these changes upon the financial condition of any third-party payor that offers health care insurance, rates paid by third-party payors to providers and, thus, the revenues of the Obligated Group, and upon the operations, results of operations and financial condition of the System cannot be predicted. Many PPOs and HMOs currently pay providers on a negotiated fee-for-service basis or on a fixed rate per day of care, which, in each case, usually is discounted from the providers usual charges for the care provided. As a result, the discounts offered to HMOs and PPOs may result in payment to a provider that is less than its actual cost. There can be no assurance that revenues received under such managed care contracts will be sufficient to cover all costs of services provided. Additionally, the volume of patients directed to a hospital may vary significantly from projections, and/or changes in the utilization of certain services offered by the provider may be dramatic and unexpected, thus further jeopardizing the provider's ability to contain costs. In the past, some HMOs have employed 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. In some cases, the capitated payment covers total hospital patient care provided. However, if payment under an HMO or PPO contract is insufficient to meet the hospital's costs of care or if utilization by such enrollees materially exceeds projections, the financial condition of the hospital could erode rapidly and significantly. At present, the Obligated Group is not a party to any capitated or other risk agreements and does not intend to be a party to these types of agreements in the future. Often, an HMO contract is enforceable for a stated term, regardless of whether the hospital suffers a financial loss under the contract or the HMO is unable to pay the hospital. In the event that an HMO fails to pay a provider for care, the provider is generally prohibited from seeking payment from the patient directly. As with other health care providers, the System from time to time has disputes with HMOs, PPOs and other managed care payers concerning contract interpretation issues. Such disputes may result in mediation, arbitration or litigation and may have a material adverse effect upon the financial condition of the Obligated Group. Additionally, employers are increasingly using health savings accounts and other health plans which have higher deductibles and lower limits. Such higher deductibles may result in lower collections for the Obligated Group. Risks in Health Care Delivery General. Efforts by health insurers and governmental agencies to limit the cost of hospital services and to reduce utilization of hospital facilities may reduce future revenues of the Obligated Group. Hospitals. Hospitals in the United States are considered to have significant excess capacity. Because of various changes in government policy, competition, advances in technology and treatment, and changes in payment methodology to reduce incentives for inpatient hospital utilization, inpatient hospitalizations have decreased throughout the past five years. It is probable that these trends will continue and that the factors mentioned above will continue to create operational and economic uncertainty for hospitals. It is generally acknowledged that hospital operations pose greater complexity and higher risk than in years past, and this trend is likely to continue. It is not practical to enumerate each and every operating risk that may result from hospital operations, and certain risks or 45

58 combinations of risks that now are unanticipated may have material adverse effects in the future. Certain of these risks relating to hospital operations are enumerated below. Technology and Services. Scientific and technological advances, new procedures, drugs and devices, preventive medicine, occupational health and safety, and outpatient health care delivery may reduce utilization and revenues of the Obligated Group in the future. Technological advances in recent years have accelerated the trend toward the use by hospitals of sophisticated and costly equipment and services. The acquisition and operation of certain equipment and services may continue to be a significant factor in hospital utilization, but the ability of the System to offer such equipment or services may be subject to the availability of equipment and specialists, governmental approval and the ability to finance such acquisitions and operations. Physician Contracting and Relations. The Obligated Group has a variety of relationships with physicians. Many of these relationships may be of material importance to the operations of the System s facilities; however, in an increasingly complex legal and regulatory environment, these relationships pose a variety of legal and business risks. For purposes of contracting with managed care organizations, physicians are organizing or joining physician practice groups or independent practice associations that are comprised of a large number of physicians. This consolidation increases the importance of these contracts to hospitals and increases the risk of the loss of one or more of such contracts. The ability to recruit and retain highly qualified physicians to a hospital's medical staff is one of the most significant factors in the competitive position of a hospital. Also, management's ability to negotiate service contracts with purchasers of group health care services is another major factor in the competitive position of a hospital. There can be no assurance that the impact of these factors on the System will not be adverse. 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. Labor Relations. 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. The Obligated Group Members are not parties to collective bargaining agreements. Nursing Shortage. There currently exists a pervasive nationwide shortage of qualified licensed nurses. Despite this national shortage, the System has managed to retain a sufficient nursing staff and currently is not experiencing any significant staffing issues. The System has undertaken substantial nurse recruiting efforts. In the future, however, unless this nursing shortage is alleviated, the System could be required to incur significantly higher wage and labor costs to maintain a sufficient nursing staff. Contract Employee Issues. An additional area of economic exposure for employers, including health care providers, is misclassification of workers as independent contractors, rather than employees. If a worker is classified as an employee, the employer pays certain taxes based upon the amounts earned by the employee. Independent contractors, however, bear the entire economic burden of such taxes by paying self-employment taxes. Consequently, if an employer classifies a worker as an independent contractor and the IRS subsequently reclassifies the worker as an employee, the employer is liable for all taxes the employer otherwise would have paid to the IRS. Although a single misclassification may not have a material adverse effect on the System, a number of misclassifications over a period of time, together with any resulting penalties, may have an adverse financial impact. Moreover, the IRS has taken a broad view of the relations between hospitals and physicians that require hospitals to pay employment tax for 46

59 certain amounts paid to physicians. Accordingly, the System might be broadly liable for employment taxes for contract payments made to physicians. Such liability could have a material adverse effect on the financial condition of the Obligated Group. Indigent Care. 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 employed individuals who have health coverage affects the ability of patients to pay for their care. See Impact of Disruptions in the Credit Markets and General Economic Factors herein. Similarly, changes in governmental policy, which may result in coverage exclusions under local, state and federal health care programs (including Medicare and Medicaid), may increase the frequency and severity of indigent treatment in such hospitals. See Healthcare Reform and other Governmental Initiatives - Health Care Reform herein. The patients at the System typically have private insurance or are covered by Medicaid. LSU operates the State s charity hospital system (the LSU Health System ), consisting of ten hospitals located throughout the State, to which a significant number of Medicaid patients are admitted. The State transferred the operation of the charity system to LSU pursuant to legislative action taken in Due to the current budget crisis, the State Budget for Fiscal Year includes an overall reduction in DHH funding of approximately $859 million, which includes more than $300 million reduction in appropriations to the LSU Health System or a quarter of the LSU Health System s budget. See The Medicaid Program - State Medicaid Program Expenditures herein. Management of the LSU Health System has implemented a temporary plan to address the budget shortfall in which none of the LSU Health System hospitals will be closed but some services will be curtailed. The temporary plan entails physicians taking less money, delaying purchases and diverting existing state funds to match federal health care dollars. Further, on October 4, 2012, the Board of Supervisors of LSU, the management board of the LSU System, approved a plan proposed by the management of the LSU Health System which includes additional reductions in the budget of the LSU Health System of up to $152 million, elimination of dozens of inpatient beds, reduction of clinic services and eliminating nearly 1,500 jobs. These additional reductions will impact seven south Louisiana hospitals, carving out 19% of the spending that had been planned for the facilities operated by the LSU Health System. In Baton Rouge, the plan includes cutting the Earl K. Long Medical Center's budget by $38.7 million and eliminating 341 jobs. At the LSU Health System hospitals in Lake Charles, Lafayette and Tangipahoa Parish, inpatient bed counts will drop to 10 each. The approved plans do not include the LSU Health System hospitals in Shreveport, Monroe and Pineville. Management of the LSU Health System expressed belief that the services being eliminated at the public hospitals will be absorbed by private health care providers. At this time it is unclear where uninsured patients will receive care when such services are no longer available at the facilities of the LSU Health System. These reductions of services and inpatient beds at the LSU Health System hospitals located in any of the Obligated Group Members service areas will cause an increase in the number of uninsured or Medicaid patients seeking treatment at the System s facilities. Such an event could have a material adverse effect on the financial condition of the System. Funding and related issues involving the LSU Health System and the indigent population will continue to create significant issues for the Louisiana legislature and the operations of hospitals located in the State for a significant time. In February 2012, LSU Health System, DHH and the Lake entered into a Cooperative Endeavor Agreement (the CEA ) which commences in the Fall of 2013 for the expansion of Graduate Medical Education services at the Lake, moving certain inpatient operations (exclusive of prisoner care and obstetrical services) and the residents that practice at the Earl K. Long Medical Center to the Lake. The parties received associated governmental approval of the agreement from CMS on July 13, The CEA includes the following major components: (i) the Lake will construct an LSU Health Medical Education and Innovation Center to house the LSU medical education training programs (to be donated by the Lake to LSU at completion of construction), will expand its clinical capacity by 60 licensed beds, and will implement a Trauma Center, (ii) DHH will provide payments under a new reimbursement structure to the Lake, which, together with the $129,000,000 payment described below, are intended to compensate the Lake for incremental costs associated with higher Medicaid and uninsured patient volumes that are generally expected to accompany the Lake's increased role in LSU's graduate medical education program, and (iii) during the Fiscal Year ended June 30, 2011, DHH submitted a State Plan Amendment that obligated itself to make supplemental Medicaid payments to the Lake equal to a total of $129,000,000 for the period October 1, 2009, through June 30,

60 and requires DHH to make payments under the new reimbursement structure discussed above for the ensuing two year period (the amount of funds ultimately paid to the Lake under the new reimbursement structure will depend on the actual level of Medicaid and uninsured patient volume that the Lake experiences as a result of their increased role and those amounts are not yet determinable). Although the Earl K. Long Medical Center will close, the LSU Health System will continue to operate outpatient facilities in the Baton Rouge area. Upon consummation of the CEA, the Lake will become a major academic training facility. There are a variety of risks and uncertainties to the Lake associated with the implementation of the CEA which could adversely impact the revenues of the Lake. Some of the significant risks and uncertainties include, but are not limited to, the following: (i) certain financial uncertainties (including, but not limited to, sufficient capital and operating funds needed in connection with the affiliation, maintaining the agreed-upon reimbursement levels after changes in State administration and financial impact of increased level of Medicaid and uninsured patient volume), (ii) public perception issues, (iii) impact on clinical quality and (iv) impact on medical staff at the Lake. Management of the Lake believes the implementation of the CEA and the Lake s strategy of becoming a major academic training facility will be successful; however, there can be no assurance of the overall financial and operational impact on the Lake of the CEA when fully implemented. Pension and Benefit Funds. As large employers, hospitals may incur significant expenses to fund pension and benefit plans for employees and former employees, and to fund required workers compensation benefits. Funding obligations in some cases may be erratic or unanticipated and may require significant commitments of available cash needed for other purposes. Business Relationships and Other Absence of Certificate of Need Regulations in the State. Louisiana does not currently have a certificate of need law in connection with the constructing and equipping of hospitals. Except with respect to nursing home facilities and certain other long term care facilities, there are no regulatory limitations on the construction of facilities which may compete with the facilities of the Obligated Group, regardless of the fact that such facilities may provide duplicate services and facilities. In recent years, the Obligated Group has seen an increase in the number of both inpatient and outpatient facilities which compete with those facilities of the Obligated Group. Competition. Generally, other hospitals and health facilities providing services to residents and employees in the System s service areas are the major source of competition for the System. Competition from a variety of potential sources, including, but not limited to, inpatient and outpatient health care facilities, clinics and physicians, may adversely affect the utilization and/or revenues of the System. In addition, nontraditional competitors, such as physician management companies, disease management companies and outpatient service providers, could have the same effect. Certain new competitors, such as home health and infusion providers, and certain niche providers, such as specialized cardiology, dialysis or oncology companies, specifically target hospital patients as their prime source of revenue growth. Further, because existing and potential competitors may not be subject to the regulations and restrictions applicable to the System, these competitors may be more flexible in their ability to adapt to competitive opportunities and risks. If these competitors and any future competitors are successful, some of the most profitable aspects of hospital operations may be stripped away and/or overall hospital utilization may decline. Additionally, mergers or affiliations of existing competitors may create larger, more viable entities that may be more formidable competitors than the original constituent entities. While the effect of such actions is uncertain, mergers and acquisitions can be expected to increase the level of competition faced by the System, and the utilization and revenues of the System could be adversely affected. The Obligated Group and any future Credit Group Members could face increased competition in the future from other health care providers and from other entities that offer services to the populations which the System currently serves. This could include new or existing home care, outpatient care, outpatient services and preventive care programs. 48

61 Future Affiliation, Merger, Acquisition and Divestiture Activity. As with many other health care systems, the Corporation 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, it is probable that certain newly acquired or affiliated organizations and their assets and liabilities may be added to the System, or certain existing facilities may no longer be part of the System, although the System would continue to be responsible for any remaining liabilities attributable to the divested facilities, as any consideration received for the divested property could be insufficient to pay all related liabilities. Further, there is no assurance that completed affiliations will be permanent, even when they are originally intended to be. Any such changes to the corporate structure of the System will be subject to the provisions of the Master Indenture that apply to merger, consolidation or sale of assets. As part of its ongoing planning and property management functions, the Corporation also reviews the use, compatibility and business viability of many of the System s operations and facilities, and, from time to time, the Corporation may pursue changes in the use or disposition of such facilities. Likewise, the Corporation 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 the System s operations and properties. See APPENDIX A attached hereto for recent developments involving the System. Significant numbers of affiliations, mergers, acquisitions and divestitures have occurred in the health care industry recently. As part of their ongoing planning process, the Obligated Group considers potential affiliations and acquisition of operations or properties which may become affiliated with or become part of the Credit Group Members in the future. As a result, it is possible that the organizations and assets comprising the Credit Group Members may change from time to time. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL DOCUMENTS THE MASTER INDENTURE Consolidation, Merger, Sale or Conveyance. Antitrust. Enforcement of the antitrust laws against health care providers is becoming more common, and antitrust liability may arise in a wide variety of circumstances, including medical staff privilege and provider network disputes, payer contracting, physician relations, joint ventures, merger, affiliation and acquisition activities and certain pricing or salary setting activities, as well as other areas of activity. The application of the federal and state antitrust laws to health care is still evolving, and enforcement activity by federal and state agencies appears to be increasing. At various times, health care providers may be subject to an investigation by a governmental agency charged with the enforcement of antitrust laws, or may be subject to administrative or judicial action by a federal or state agency or a private party. Violators of the antitrust laws may be subject to criminal and/or 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, governmental entities may be able to assess substantial monetary fines. Common areas of potential liability are joint action among providers with respect to payer contracting and medical staff and provider network credentialing. With respect to payer contracting, the System, from time to time, may be involved in joint contracting activity with hospitals, physicians or other providers. The precise degree, if any, to which this or similar joint contracting activities may expose the participants to antitrust risk is dependent on a myriad of factual matters. Physicians who are subject to adverse peer review proceedings may file federal antitrust actions against hospitals and other health care providers and seek treble damages. Hospitals and other health care providers, including the Members of the Obligated Group, regularly have disputes regarding credentialing and peer review and, therefore, may be subject to liability in this area. In addition, hospitals and other health care providers occasionally indemnify medical staff members who are involved in administering such credentialing or peer review activities and also may be liable with respect to such indemnity. Exposure to this liability is mitigated by complying with requirements of the federal Health Care Quality Improvement Act ( HCQIA ). The System and other health care providers intend their peer review activities to result in HCQIA protection. Nonetheless, some activities are not HCQIA-protected, and there can be no assurances that material and adverse liability will not result. Another potential area of antitrust liability is restraint on growth or the potential for mandated divestiture of facilities or operations if a hospital's local market power in the inpatient hospital market or related health care business 49

62 is determined to be too great. In addition, the creation of market power or monopoly power through contracting with a high percentage of physicians within a given market may result in a required divestiture or other antitrust risks. The Members of the Obligated Group may work with, rely upon and sometimes invest in medical groups or physician practice management companies. If any of these medical groups or management companies is determined to have violated the antitrust laws, the System also may be subject to liability. From time to time, the Members of the Obligated Group may be involved with all of these types of activities, and it cannot be predicted when or to what extent liability may arise, if any. However, liability in any of these or other antitrusts areas of liability may be substantial, depending on the facts and circumstances of each case. Bankruptcy and Creditors Rights. In the event of bankruptcy of the Corporation or any Obligated Group Member, the rights and remedies of the Holders of the Bonds are subject to various provisions of the federal Bankruptcy Code. If an Obligated Group Member were to file a petition in bankruptcy, payments made by the Members of the Obligated Group during the 90-day (or perhaps one-year) period immediately preceding the filing of such petition may be avoidable 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 Trustee and perfected during such preference period also may be avoided 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 the Corporation or the Obligated Group Members and their 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 Trustee. If the Bankruptcy Court so ordered, the property of the Corporation or any Obligated Group Member, including accounts receivable and proceeds thereof, could be used for the financial rehabilitation of any controlled affiliate of the Obligated Group despite any security interest of the Trustee therein. The rights of the Trustee to enforce any security interests it may have could be delayed during the pendency of the rehabilitation proceeding. If a Member of the Obligated Group was, or the Obligated Group were, the subject of a bankruptcy petition, it could file a plan of reorganization for the adjustment of their debts in any such proceeding, which plan 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. In the event of bankruptcy of a Member of the Obligated Group, there is no assurance that certain covenants, including tax covenants, contained in the Loan Agreement, the Master Indenture or other documents would be stayed. Accordingly, the Obligated Group as debtor in possession or a bankruptcy trustee appointed by the Bankruptcy Court could take action that would adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes. The legal right and practical ability of the Trustee to enforce rights and remedies under the Loan Agreement or the Master Trustee under the Master Indenture 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 will depend upon the exercise of various remedies specified by such documents, which, in many instances, may require judicial actions that are subject to discretion and delay, that otherwise may not be readily available or that may be limited by certain legal principles. There exists common law authority and authority under certain statutes for the ability of the courts to terminate the existence of a nonprofit corporation or undertake supervision of its affairs on various grounds, including 50

63 a finding that such corporation has insufficient assets to carry out its stated charitable purposes. Such court action may arise on the court's own motion or pursuant to a petition of the state Attorney General or such other persons who have interests different from those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to see to the application of their funds to their intended charitable uses. The various legal opinions delivered concurrently with the issuance of the 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. Professional Liability Claims and General Liability Insurance. In recent years, the number of professional and general liability suits and the dollar amounts of damage recoveries have increased nationwide, resulting in substantial increases in insurance premiums. Professional liability and other actions alleging wrongful conduct and seeking damages often are filed against health care providers. Litigation may also arise from the corporate and business activities of the System, 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 the Obligated Group Members if determined or settled adversely. The ability of, and the cost to, the Obligated Group Members to insure or otherwise protect themselves against liability claims may adversely affect the System and the operation of its hospital facilities and the ability of the Obligated Group to fulfill its obligations under the Master Indenture, Loan Agreement, Assignment and the Note. Under current Louisiana law, there exists a statutory cap on liability which provides that no award can be rendered against the healthcare facilities of the System operated by the Obligated Group Members, as participants in the Louisiana Patients Compensation Fund (the PCF ), for medical and malpractice claims in excess of $500,000 plus future medical expenses, interest and costs. The PCF provides coverage for damages over $100,000 plus interest and up to $500,000 plus future medical expenses. The constitutionality of the statutory cap has been upheld by the Louisiana State Supreme Court in Butler v. Flint-Goodrich Hospital of Dillard University, 607 So.2d 517 (La. 1992), Taylor v. Clement, 947 So. 2d 721 (La. 2007), Arrington v. Galen-Med, Inc., 947 So. 2d 719 (La. 2007), Oliver v. Magnolia Clinic, 85 So.3d 39 (La. 2012), and Arrington v. Galen-Med, Inc., 89 So.3d 1159 (La. 2012). However, additional legal challenges to the constitutionality of the PCF and the amount of the cap may be filed and statutory changes to the PCF may be made by the Louisiana legislature, either or both of which could mitigate or eliminate the current cap on medical malpractice damages established by state law in Louisiana. Changes in the cost of premiums and paying claims in excess of insurance coverage could directly (and indirectly by affecting the number of practicing physicians or specialty practices of physicians) adversely affect the operating results of the Obligated Group. The prohibitive cost and unavailability of other types of insurance which the Obligated Group Members desire to obtain may also adversely affect the Obligated Group. Litigation, Malpractice Claims and Insurance. One or more substantial medical malpractice claims or claims arising from the hospital or business activities of the System in excess of such member s insurance coverage or other actions seeking punitive or other damages which are not covered by insurance could adversely affect the Obligated Group s financial results and condition. For a discussion of the System s insurance and pending litigation, see APPENDIX A and notes to financial statements in APPENDIX B. Tax-Exempt Status Tax-Exempt Status of Interest on the Bonds. The Code imposes a number of requirements that must be satisfied for interest on state and local obligations, such as the 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. The Obligated Group has agreed that it will comply with such requirements. Failure to comply with the 51

64 requirements stated in the Code and related regulations, rulings and policies may result in the treatment of the interest on the Bonds as taxable. Such adverse treatment may be retroactive to the date of issuance. See also TAX EXEMPTION below. The Corporation has not sought to obtain a private letter ruling from the IRS with respect to the Bonds, and the opinion of Foley & Judell, L.L.P., the form of which is attached hereto as APPENDIX D, is not binding on the IRS. There is no assurance that any IRS examination of the Bonds will not adversely affect the market value of the Bonds. See TAX EXEMPTION below. Tax-Exempt Status of the Obligated Group Members. The tax-exempt status of the Bonds presently depends upon maintenance by the Obligated Group Members of their status as organizations described in Section 501(c)(3) of the Code. The opinion of Bond Counsel, the form of which is attached hereto as APPENDIX D, relies on the opinion of counsel to the Obligated Group as to the status of the Obligated Group Members as 501(c)(3) organizations. The maintenance of this status depends on compliance with general rules regarding the organization and operation of tax-exempt entities, including the Obligated Groups operation exclusively for charitable and educational purposes and the Obligated Groups avoidance of transactions that may cause the Obligated Groups earnings or assets to inure to the benefit of private individuals or entities controlled by such individuals. The IRS has announced that it intends to closely scrutinize transactions between tax-exempt corporations and private individuals and for-profit entities. Although specific activities of hospitals, such as medical office building leases, joint ventures and compensation arrangements and other contracts with physicians have been the subject of administrative guidance by the IRS in the form of private letter rulings and revenue rulings, many activities regularly engaged in by hospitals have not. Because the Obligated Group Members conduct large-scale and diverse operations involving physician practices, there can be no assurances that certain of the Obligated Group Members transactions would not be challenged by the IRS. The IRS has taken the position that hospitals which are in violation of the Anti-kickback Law may also be subject to revocation of their tax-exempt status. As a result, the Obligated Group Members which have, and will continue to have, extensive transactions with physicians are subject to a heightened degree of scrutiny and enforcement by the IRS. Tax-exempt organizations are subject to scrutiny from and face the potential for sanction and monetary penalties imposed by the IRS. One primary penalty available to the IRS under the Code with respect to a tax-exempt entity engaged in inurement or unlawful private benefit is the revocation of tax-exempt status. Loss of tax-exempt status by the Obligated Group could result in loss of tax exemption of the Bonds and defaults in covenants regarding the Bonds and other obligations would likely be triggered. Loss of tax-exempt status by the Obligated Group Members also would result in substantial tax liabilities on their income. For these reasons, loss of tax-exempt status of the Obligated Group Members would have material adverse consequences on the financial condition of the Obligated Group and could adversely affect the Obligated Group s access to future tax-exempt financing. With increasing frequency, the IRS has imposed substantial monetary penalties and future charity care or public benefit obligations on tax-exempt hospitals in lieu of revoking tax-exempt status, as well as requiring that certain transactions be altered, terminated or avoided in the future and/or requiring governance or management changes. These penalties and obligations typically are imposed on the tax-exempt organization pursuant to a closing agreement. Given the exemption risks involved in certain transactions, the Obligated Group Members may be at risk for incurring monetary and other liabilities imposed by the IRS. These liabilities could be materially adverse for the Obligated Group Members. Less onerous sanctions (sometimes referred to as intermediate sanctions ) have been enacted, which sanctions focus enforcement on private persons who transact business with an exempt organization rather than the exempt organization itself, but these sanctions do not replace the other remedies available to the IRS, as mentioned above. The Health Care Reform Law places additional requirements on tax-exempt hospitals for them to receive and maintain their Section 501(c)(3) federal tax-exempt status. One significant new requirement is that tax-exempt hospitals must perform a community health needs assessment every three years and develop an implementation 52

65 strategy to meet the identified needs. Requirements relating to community health needs assessments are effective for taxable years beginning after March 23, 2012, while other requirements are effective for taxable years beginning after March 23, Any tax-exempt hospital that fails to satisfy the community health needs assessment requirement for any taxable year will be subject to an excise tax penalty of $50,000. Furthermore, the United States Secretary of the Treasury or that individual's delegate is to review the community benefit activities of each tax-exempt hospital at least every three years. Another major element of the Health Care Reform Law relating to tax-exempt status of hospitals involves charges. A hospital must limit the amounts charged for emergency room or other medically necessary care provided to patients eligible for assistance under the hospital's financial assistance policy to no more than the amounts generally billed to patients who have insurance covering such care. In other words, hospitals cannot charge persons eligible for financial assistance higher rates than the amounts generally billed to patients who have insurance covering such care. The Health Care Reform Law also requires that tax-exempt hospitals have a written financial assistance policy in place. Finally, the Health Care Reform Law prohibits a hospital from engaging in extraordinary collection actions (which may include, among other things, a restriction on filing suit) before it has made reasonable efforts to determine whether the subject individual is eligible for financial assistance. Regulations interpreting various portions of these new requirements have not yet been finalized by the IRS. The Obligated Group Members may be audited by the IRS. Because of the complexity of the tax laws and the presence of issues about which reasonable persons can differ, an IRS audit could result in additional taxes, interest and penalties. An IRS audit ultimately could affect the tax-exempt status of the Obligated Group Members, as well as the exclusion from gross income for federal income tax purposes of the interest on the Bonds and any other tax-exempt debt issued for the Obligated Group Members. Internal Revenue Service Form 990. The Internal Revenue Service Form 990 is used by 501(c)(3) not-forprofit organizations to submit information required by the federal government for tax-exemption. The Form 990 now requires detailed disclosure of compensation practices, corporate governance, loans to management and others, joint ventures and other types of transactions, political campaign activities, and other areas the IRS deems to be compliance risk areas. The Form 990 also requires the disclosure of information on community benefit as well as reporting of information related to tax-exempt bonds, including compliance with the arbitrage rules and rules limiting private-use of bond-financed facilities, including compliance with the safe harbor guidance in connection with management contracts and research contracts. The Form 990 is intended to provide enhanced transparency as to the operations of exempt organizations. It is likely that the IRS will use the detailed information to assist in its enhanced enforcement efforts. IRS Examination of Compensation Practices. In August 2004, the IRS initiated an enforcement effort to identify and halt abuses by tax-exempt organizations that pay excessive compensation and benefits to their officers and other insiders. Nearly 2,000 charities and foundations were contacted by the IRS regarding their compensation practices and procedures. Management of the System believes that its compensation practices and procedures are consistent with IRS guidelines and regulations. State and Local Tax Exemption. Louisiana has not been as active as the IRS in scrutinizing the tax-exempt status of hospitals. It is possible that legislation may be proposed to strengthen the role of the Louisiana Attorney General in supervising nonprofit health systems. It is likely that the loss by the Obligated Group of federal tax exemption also would trigger a challenge to the state or local tax exemption of the Obligated Group Members and their facilities. Depending on the circumstances, such event could be adverse and material. The majority of the real and personal property of the Obligated Group is currently exempt from property taxes. Although the facilities of Obligated Group Members have not been the subject of review by property tax assessors in the parishes where these facilities are located, investigations or audits could lead to challenges of the property tax exemption with respect to these facilities that, if successful, could adversely and materially affect the property tax exemption with respect to certain of the facilities or property of the System. 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 53

66 federal, state or local governments will not materially adversely affect the operations and financial condition of the Obligated Group by requiring the Obligated Group Members to pay income or local property taxes. Unrelated Business Income. The IRS and state, parish and local taxing authorities may undertake audits and reviews of the operations of tax-exempt hospitals with respect to the generation of unrelated business taxable income ( UBTI ). The Obligated Group Members participate in activities that may generate UBTI. However, the level of these activities is immaterial to the Obligated Group as a whole. An investigation or audit could lead to a challenge that could result in taxes, interest and penalties with respect to UBTI and, in some cases, ultimately could affect the tax-exempt status of the Obligated Group Members as well as the exclusion from gross income for federal income tax purposes of the interest payable on the Bonds. Matters Relating to Enforceability of the Master Indenture The obligations of the Obligated Group and any future Credit Group Members under the Note are limited to the same extent as the obligations of debtors typically are affected by bankruptcy, insolvency and the application of general principles of creditors rights and as additionally described below. The accounts of the Obligated Group and any future Credit Group Members will be combined for financial reporting purposes and will be used in determining whether the test relating to debt service coverage contained in the Master Indenture is met, notwithstanding the uncertainties as to the enforceability of certain obligations of the Credit Group Members contained in the Master Indenture which bear on the availability of the assets and revenues of the Credit Group Members to pay debt service on the Note, including the Note pledged under the Indenture as security for the Bonds. The joint and several obligations described herein of the Obligated Group and any future Credit Group Members to make payments of debt service on the Note issued under the Master Indenture (including transfers in connection with voluntary dissolution or liquidation) may not be enforceable to the extent that (1) enforceability may be limited by applicable bankruptcy, moratorium, reorganization or similar laws affecting the enforcement of creditors rights and by general equitable principles and (2) such payments (i) are requested to be made on any Obligations which are issued for a purpose which is not consistent with the charitable purposes of the Credit Group Member from which such payments are requested or which are issued for the benefit of any entity other than a taxexempt organization; (ii) are requested to be made from any moneys or assets which are donor-restricted or which are subject to a direct or express trust which does not permit the use of such moneys or assets for such a payment; (iii) would result in the cessation or discontinuation of any material portion of the health care or related services previously provided by the Credit Group Member from which such payment is requested; or (iv) are requested to be made pursuant to any loan violating applicable usury laws. A Credit Group Member may not be required to make any payment to provide for the payment of the Note, or portion thereof, the proceeds of which were not loaned or otherwise disbursed to such Credit Group Member to the extent that such transfer would render the Credit Group Member insolvent or which would conflict with, not be permitted by or which is subject to recovery for the benefit of other creditors of such Credit Group Member under applicable fraudulent conveyance, bankruptcy or moratorium laws. There is no clear precedent in the law as to whether such transfers from a Credit Group Member in order to pay debt service on the Note may be voided by a trustee in bankruptcy in the event of bankruptcy of the Credit Group Member or by third-party creditors in an action brought pursuant to state fraudulent transfer or fraudulent conveyance statutes. Under the United States Bankruptcy Code, a trustee in bankruptcy and, under state fraudulent transfer or fraudulent conveyance statutes and common law, a creditor of a related guarantor, may avoid any obligation incurred by a related guarantor if, among other basis therefor, (1) the guarantor has not received fair consideration or reasonably equivalent value in exchange for the guaranty and (2) the guaranty renders the guarantor insolvent, as defined in the United States Bankruptcy Code or applicable state fraudulent transfer or fraudulent conveyance statutes, or the guarantor is undercapitalized. Application by courts of the tests of insolvency, reasonably equivalent value and fair consideration has resulted in a conflicting body of case law. It is possible that, in an action to force a Credit Group Member to pay debt service on a Obligation for which it was not the direct beneficiary, a court might not enforce such a payment in the event it is determined that any Credit Group Member is analogous to a guarantor of the debt of the Credit Group 54

67 Member who directly benefitted from the borrowing and that sufficient consideration for the guaranty of the Credit Group Member was not received and that the incurrence of such obligation has rendered or will render the Credit Group Member insolvent or the Credit Group Member is or will thereby become undercapitalized. There exist, in addition to the foregoing, common law authority and authority under state statutes pursuant to which the courts may terminate the existence of a not-for-profit corporation or undertake supervision of its affairs on various grounds, including a finding that such corporation has insufficient assets to carry out its stated charitable purposes or has taken some action which renders it unable to carry out such purposes. Such court action may arise on the court s own motion pursuant to a petition of the Attorney General or such other persons who have interests different from those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to see to the application of their funds to their intended charitable uses. Issues Related to the Health Care Markets and the Credit Group Members Risks Related to Variable Rate Indebtedness. As of June 30, 2012, indebtedness outstanding under the Master Indenture in the principal amount of $186,535,000 is subject to variable interest rate exposure. Such interest rates vary from time to time and may be converted to fixed interest rates, and a portion of such indebtedness is hedged with fixed rate interest rate swaps. The protection provided by an interest rate hedge against rising interest rates is limited. In 2008, the Corporation executed a debt restructuring plan (the Debt Restructuring Plan ) to convert certain of its outstanding auction rate bonds to variable rate demand bonds and to refund certain outstanding bonds through the issuance of variable rate bonds. In accordance with the Debt Restructuring Plan, the Corporation converted the Series 2005B Bonds and the Series 2005D Bonds (the Converted Bonds ) from auction rate bonds to variable rate demand bonds and issued the Series 2008A Bonds as variable rate bonds to refund certain outstanding bonds. In 2009, the Corporation converted the Series 1998B Bonds and the Series 2005C Bonds to fixed rates. The Converted Bonds and the Series 2008A Bonds are supported by letters of credit and are subject to support facility renewal risk. Recent declines and disruption in the financial markets (see Impact of Disruptions in the Credit Markets and General Economic Factors herein) which have affected and continue to affect the municipal bond market and the bond insurance and banking business, including, but not limited to, the liquidity enhancers of the Obligated Group's existing variable rate indebtedness, have had a serious adverse effect on the financial condition of a number of financial institutions, weakening their credit status as reflected in their credit ratings. These developments may weaken the existing liquidity providers' ability to pay claims. Weakening of the financial condition and/or credit ratings of the existing liquidity providers may result in higher interest rates paid by the Obligated Group with respect to the Obligated Group's existing variable rate indebtedness and, therefore, have a financial impact on the Obligated Group. Further, deterioration of the financial condition of the existing liquidity providers may also lead to rating downgrades or adverse rating actions concerning the Obligated Group's variable rate indebtedness that could also affect interest rates paid by the Obligated Group. Finally, variable rate bonds of the Obligated Group which are tendered for purchase and not remarketed will be purchased by various liquidity providers. Bonds, if any, held by liquidity providers typically bear interest at a rate significantly higher than bonds held by other bondholders and are also subject to a more rapid amortization of principal than publicly held bonds. No assurance can be given that a market will exist for the Converted Bonds and the Series 2008A Bonds in the case of a downgrade in the ratings of the letter of credit providers for such bonds. Debt Service Reserve Funds. There is no debt service reserve fund established for or securing the Series 1998B Bonds, the Series 2005A Bonds, the Series 2005B Bonds, the Series 2005D Bonds, the Series 2008A Bonds, the Series 2012A Bonds and the Bonds; however, the loan agreement relating the Series 2009A Bonds and the loan agreement relating to the Series 1998A Bonds require the funding of a debt service reserve fund under the trust indenture for each series of bonds upon the occurrence of the conditions set forth therein. Such debt service reserve funds can be released to the Corporation upon subsequent compliance by the Corporation with the financial ratios as described in SECURITY FOR THE BONDS - Master Indenture herein. There is no assurance that the Obligated Group will be able to fund such debt service reserve funds, however, if funded, the debt service reserve funds will be held solely for the benefit of the holders of the Series 2009A Bonds and the Series 1998A Bonds, respectively, as the case may be. 55

68 Interest Rate Swap Risks. The Corporation is utilizing interest rate swap transactions to manage its capital structure and currently has four interest rate hedge agreements outstanding, in connection with the Series 2005D Bonds and the Series 2008A Bonds (collectively, the Swap Agreements ). Two of the Swap Agreements are fixed rate payor swaps where the Corporation pays a fixed rate of interest and receives a payment based on a percentage of one-month LIBOR from the swap counterparty. The fixed rate payor swap counterparties are Merrill Lynch Capital Services, Inc. and Goldman Sachs Capital Markets, L.P. The other two Swap Agreements are constant maturity swaps where the Corporation pays a percentage of one-month LIBOR and receives a payment based on a percentage of tenyear International Swaps and Derivatives Association Inc. ( ISDA ) swap rate. The swap counterparty for the constant maturity swaps is Merrill Lynch Capital Services, Inc. The Corporation is not currently required to post collateral on its outstanding swaps. Should the Corporation elect to terminate either of the Swap Agreements prior to its termination date, the Corporation may be obligated to pay a termination fee. The amount of any such termination fee could be significant. Arrangements made in respect of the Swap Agreements do not alter the Obligated Group s obligation to pay principal of and interest on the Note, and the Swap Agreements do not provide a source of security or other credit for the Series 2005D Bonds and the Series 2008A Bonds. The Obligated Group s obligations represented by the Series 2005D Hedge Notes and the Series 2008A Hedge Notes under the Swap Agreements will be secured under the Master Indenture on a parity with all other obligations secured thereunder, relating to the Assignment; provided, however, the obligation of the Obligated Group thereunder to make termination payments is secured on a subordinated basis. In addition, there is no guaranty that the counterparties to the Swap Agreements will remain financially able to meet their respective payment obligations thereunder. Generally, interest rate swaps have experienced negative trading patterns, causing many to cease to function effectively to hedge interest rate exposure. Although the swap counterparties with whom the Corporation has contracted remain in business, some swap counterparties have ceased to exist and others have suffered repeated rating downgrades and negative market perception. Further, certain swap arrangements may not be terminable except upon the payment of potentially significant termination payments by the borrowing party, as mentioned above. In the interim, negative mark-to-market valuation of certain swap arrangements must be booked on such borrowing party s balance sheet. These factors may have a material adverse impact on hospitals and health systems involved in such financial arrangements. For a discussion of the Corporation s swap arrangements, see APPENDIX A - INFORMATION CONCERNING FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM FINANCIAL AND OPERATING INFORMATION - Outstanding Indebtedness of the System - Swap Agreements. Risk of Redemption or Acceleration. The Bonds are subject to redemption or acceleration prior to maturity in certain circumstances, including but not limited to the failure of the Obligated Group to make timely payments under the Note. Bondholders may not realize their anticipated yield on investment to maturity because the Bonds may be redeemed or accelerated prior to maturity at par or at a redemption price that results in the realization of less than the anticipated yield to maturity. Certain Covenants for the Benefit of FSA. The Series 1998A Bonds (the Insured Bonds ) are entitled to the benefits of a bond insurance policy issued by Financial Security Assurance, Inc. ( FSA ). The Loan Agreement for the Insured Bonds, the Insurance Agreement relating to Insured Bonds and the Master Indenture contains certain additional financial and operating covenants of the Obligated Group which are solely for the benefit of FSA relating to the Insured Bonds. Failure to comply with these provisions of the Loan Agreement for the Insured Bonds, the Insurance Agreement and the Master Indenture will constitute an Event of Default under the Loan Agreement and the Master Indenture. FSA is entitled to waive in its sole discretion any noncompliance with such covenants. Construction and Relocation Risks. The Project is subject to risks associated with construction projects including but not limited to delays in the issuance of required building permits or other necessary approvals or 56

69 permits, strikes, terrorism, vandalism, shortages or material and adverse weather conditions. Such events could result in delaying occupancy and completion of the Project and thus increase the level of expenditures of the Lake and reduce the hospital s anticipated revenues. It is anticipated that the proceeds from the sale of the Bonds, and other available moneys, will be sufficient to complete the acquisition, construction and equipping of Project. Furthermore, cost overruns may occur due to change orders, delays in the construction schedule and other factors. The Lake has executed a guaranteed maximum price construction contract for the construction of the Project. Cost overruns not subject to the lump sum guaranteed price contract could cause the cost of each project to exceed expected costs. Possible sources of additional funds could include an equity contribution of the Corporation, proceeds of additional bonds or conventional bank financing. Hurricanes. South Louisiana is generally susceptible to hurricanes wherein winds and flooding have from time to time caused damage to electric utility systems, including transformers, substations and major power lines. The Lake, Lourdes and St. Elizabeth are located in South Louisiana. Recent hurricanes, specifically Hurricane Katrina in 2005 and Hurricane Gustav in 2008, caused electrical power outages of approximately one week in duration at one or more of the facilities referred to above. During such electrical power outages, each of the facilities was able to perform emergency services based on its then existing emergency backup electrical power systems. However, elective procedures at each facility were deferred until electrical power was restored, resulting in a temporary loss of revenues during such time periods. In response, the Lake has constructed an emergency generator building and purchased multiple emergency backup generators that will enable the Lake to operate at near full capacity in the event of an extended electrical power outage. The Lourdes' Replacement Facility includes an emergency backup electric power system that enables Lourdes to operate at near full capacity in the event of an extended electrical power outage. In late August 2012, Hurricane Isaac struck the Gulf Coast and impacted the service areas of the Lake and St. Elizabeth. Hurricane Isaac caused electrical power outages and flooding in the region. However, neither the Lake nor St. Elizabeth were significantly impacted and operated at full capacity during and after the storm. Bond Rating. There is no assurance that any rating assigned to the Bonds at the time of issuance will not be lowered or withdrawn at any time, the effect of which could adversely affect the market price for and marketability of the Bonds. The ratings assigned to the Bonds in RATINGS below are based upon the creditworthiness of the Corporation. A change in the creditworthiness of the Corporation could result in a change in the ratings on the Bonds. Other Factors Generally Affecting Health Care Providers Unemployment, decreased insurance coverage provided by employers or other adverse economic conditions could increase the proportion of patients who are uninsured or who are otherwise unable to pay fully for the cost of their care, and increased numbers of patients suffering from uninsured and extended illness could adversely affect the results of operation of the Obligated Group. Other potential risk factors may also affect the operation, and therefore revenues, of the Obligated Group including, among others: (i) the cost and availability of energy; (ii) the cost and availability of insurance, such as fire and general comprehensive liability and professional liability insurance, that hospitals of similar size and type generally carry; (iii) uninsured acts of God or punitive damage judgments as to which insurance is not available; (iv) imposition of wage and price controls for the health care industry; (v) a decrease in population or change in demographics in the System s service area; and (vi) an increase in the rate of inflation and difficulties in increasing service charges and other fees, while at the same time maintaining the amount and quality of health care services, may affect the ability of the Obligated Group to maintain sufficient operating margins. 57

70 TAX EXEMPTION General In the opinion of Foley & Judell, L.L.P., to be delivered simultaneously with the delivery of the Bonds, under existing law, interest on the Bonds is excluded from gross income for federal tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, for the purpose of computing the federal alternative minimum tax imposed on certain corporations, such interest is taken into account in determining adjusted current earnings. It is the further opinion of Bond Counsel that, pursuant to the Act, the Bonds and the income thereof are exempt from all taxation in the State of Louisiana. The opinion to be rendered by Bond Counsel on the date of delivery of the Bonds is expected to be in substantially the form of APPENDIX D hereto. The Code imposes a number of requirements that must be satisfied for interest on state and local obligations to be excludable from gross income for federal income tax purposes. The Authority and the Obligated Group Members have covenanted that they will, to the extent permitted by the laws of the State, comply with the requirements of the Code in order to maintain the exclusion from gross income of interest on the Bonds for federal income tax purposes. The opinion of Bond Counsel assumes continuing compliance by the Authority and the Obligated Group Members with the covenants of the Indenture, the Loan Agreement and the Tax Regulatory Agreement pertaining to those sections of the Code which affect the exclusion from gross income of all amounts treated as interest on the Bonds for federal income tax purposes. If the Obligated Group Members or the Authority should fail to comply with the covenants in the Indenture, the Loan Agreement or the Tax Regulatory Agreement, all amounts treated as interest on the Bonds could become taxable from the date of delivery thereof, regardless of the date on which the event causing such taxability occurs. Although Bond Counsel will render an opinion that interest on the Bonds is excluded from gross income for federal income tax purposes, the accrual or receipt of interest on the Bonds may otherwise affect a Bondholders federal tax liability. For example, ownership of tax-exempt obligations may result in collateral federal income tax consequences to certain taxpayers, including without limitation, financial institutions, property and casualty insurance companies, certain S corporations, individual recipients of Social Security or Railroad Retirement benefits and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations. The nature and extent of these and any other tax consequences will depend upon the Bondholder s particular tax status and the Bondholder s other items of income or deduction. Bond Counsel expresses no opinion regarding such 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 Bonds. Tax Treatment of Original Issue Discount * A portion of the Bonds are expected to be sold at an original issue discount (for purposes of this section, the "OID Bonds"). The difference between the initial public offering price, as set forth on the front cover page hereof, of the OID Bonds and their stated principal amount payable at maturity constitutes original issue discount treated as interest which is excluded from gross income for federal income tax purposes and which is exempt from all taxation in the State of Louisiana subject to the caveats and provisions described above under "General." In the case of an owner of an OID Bond, the amount of original issue discount which is treated as having accrued with respect to such OID Bond, is added to the cost basis of the owner in determining, for federal income tax purposes, gain or loss upon disposition of such OID Bond (including its sale, redemption or payment at maturity). * Preliminary, subject to change. 58

71 Amounts received upon disposition of such an OID Bond which are attributable to accrued original issue discount will be treated as tax-exempt interest, rather than as taxable gain, for federal income tax purposes. Original issue discount is treated as compounding semiannually, at a rate determined by reference to the yield to maturity of each individual OID Bond, on days which are determined by reference to the maturity date of such OID Bond. The amount treated as original issue discount on such OID Bond for a particular semiannual period is equal to (i) the product of (a) the yield to maturity for such OID Bond and (b) the amount which would have been the tax basis of such OID Bond at the beginning of the particular semiannual period if held by the original purchaser, (ii) less the amount of any payments on such OID Bond during the semiannual period. The tax basis is determined by adding to the initial public offering price on such OID Bond the sum of the amounts which would have been treated as original issue discount for such purposes during all prior periods. If such an OID Bond is sold between compounding dates, original issue discount which would have accrued for that semiannual compounding period for federal income tax purposes is to be apportioned in equal amounts among the days in such compounding period. Owners of OID Bonds should consult their own tax advisors with respect to the determination for federal income tax purposes of original issue discount accrued with respect to such OID Bonds as of any date, with respect to the accrual of original issue discount for such OID Bonds purchased on the secondary markets and with respect to the state and local tax consequences of owning such OID Bonds. Tax Treatment of Premium * The Bonds maturing are collectively referred to as the Premium Bonds. The Premium Bonds are offered and sold to the public at a premium. The premium is the excess of the issue price over the stated redemption price at maturity and must be amortized on an actuarial basis by the owner of the Premium Bonds from the date of acquisition of the Premium Bonds through the maturity date thereof. The premium is not deductible for federal income tax purposes, and owners of the Premium Bonds are required to reduce their basis in the Premium Bonds by the amount of premium that accrued while they owned such Premium Bonds. Owners of the Premium Bonds (including owners that purchase a Premium Bond other than pursuant to the initial public offering) should consult their own tax advisors as to the determination for federal income tax purposes of the amount of premium amortized each year with respect to the Premium Bonds, the adjusted basis of the Premium Bonds for purposes of determining the taxable gain or loss upon the sale or other disposition of the Premium Bonds (prior to maturity and at maturity) and all other federal tax consequences and any state and local tax aspects of owning the Premium Bonds. Changes in Federal and State Tax Law From time to time, there are legislative proposals in the Congress or in the various states that, if enacted, could alter or amend the federal and state tax matters referred to herein or adversely affect the market value of the Bonds. Prospective purchasers of the Bonds are encouraged to consult their own tax advisors regarding any pending or proposed federal legislation, regulatory initiatives or litigation as to which Bond Counsel expresses no view. It cannot be predicted with certainty whether or in what form any proposed legislation might be enacted or whether if enacted it would apply to bonds issued prior to enactment. In addition, regulatory actions are from time to time announced or proposed and litigation is threatened or commenced which, if implemented or concluded in a particular manner, could adversely affect the market value of the Bonds. It cannot be predicted whether any such regulatory action will be implemented, how any particular litigation or judicial action will be resolved, or whether the Bonds or the market value thereof would be impacted thereby. 59

72 LEGAL MATTERS Certain legal matters incident to the authorization and issuance of the Bonds by the Authority are subject to the approval of Foley & Judell, L.L.P., New Orleans, Louisiana, Bond Counsel, whose approving opinion with respect to the Bonds, the proposed form of which is attached hereto as APPENDIX D, will be delivered with the Bonds. Certain legal matters will be passed upon for the Obligated Group by its counsel, Breazeale, Sachse & Wilson, L.L.P., Baton Rouge, Louisiana; for the Authority by its counsel, Jacob S. Capraro, Esq., New Orleans, Louisiana; for the Trustee and Master Trustee by their counsel, Gregory A. Pletsch & Associates, Baton Rouge, Louisiana; and for the Underwriters by their counsel, Adams and Reese LLP, Baton Rouge, Louisiana. RATINGS Moody s Investors Service Inc. ( Moody s ) and Standard & Poor s Ratings Service, a division of The McGraw-Hill Companies, Inc. ( S&P ), have assigned their municipal bond ratings of A2 and A+, respectively, to the Bonds based on the creditworthiness of the Corporation. Such ratings reflect only the view of the respective rating agency, and any desired explanation of the significance of such ratings may be obtained from Moody s, 7 World Trade Center at 250 Greenwich Street, New York, New York 10007, and from S&P, 55 Water Street, New York, New York 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 and materials so furnished and on investigations, studies and assumptions by the rating agencies. There is no assurance that a particular rating will be maintained for any given period of time or that it will not be lowered or withdrawn entirely if, in the judgment of the agency originally establishing the rating, circumstances so warrant. Any such change in or withdrawal of such ratings could have an adverse effect on the market price of the Bonds. The Authority, the Obligated Group and the Underwriters have not undertaken the responsibility of taking any action with respect to possible changes in such ratings or of bringing any such changes to the attention of holders of the Bonds. FINANCIAL ADVISOR Hammond Hanlon Camp LLC (the Financial Advisor ) has served as financial advisor to the Obligated Group for purposes of assisting with the structuring of the 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 capital advisory firm and has not been engaged in the underwriting or distribution of the Bonds. INDEPENDENT AUDITORS The consolidated financial statements and supplemental schedules as of and for the years ended June 30, 2012 and 2011 of the Corporation and Affiliated Organizations, included in APPENDIX B to this Official Statement have been audited by KPMG, independent auditors, as stated in their report thereon appearing in APPENDIX B to this Official Statement. CONTINUING DISCLOSURE The Corporation, as Obligated Group Agent, will enter into an undertaking (an Undertaking ) for the benefit of the holders of the Bonds to send certain financial information and operating data of the Obligated Group annually and quarterly and to provide notice of certain events to the Municipal Securities Rulemaking Board (the MSRB ) electronically through its Electronic Municipal Market Access ( EMMA ) system, pursuant to the requirements of Section (b)(5)(i) of Securities and Exchange Commission Rule 15c2-12 (17 C.F.R. Part c2-12) (the Rule ). 60

73 See FORM OF CONTINUING DISCLOSURE AGREEMENT OF THE OBLIGATED GROUP in APPENDIX E. A failure by the Obligated Group Agent to comply with its Undertaking will not constitute an event of default under the Loan Agreement (although holders of the Bonds will have any available remedy at law or in equity). Nevertheless, such a failure must be reported in accordance with the Rule and must be considered by any broker, dealer or municipal Bonds dealer before recommending the purchase or sale of the Bonds in the secondary market. Consequently, such a failure may adversely affect the transferability and liquidity of the Bonds and their market price. In connection with prior Outstanding Bonds issued for the benefit of the Obligated Group, the Obligated Group entered into continuing disclosure agreements with covenants to provide certain quarterly and annual financial information and operating data. All required reports have been filed and are currently available at However, on three occasions since 2007, one annual report and two quarterly reports were posted not more than four days later than required by the respective continuing disclosure agreement. UNDERWRITING The Bonds are being purchased for reoffering by J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith, Incorporated, and Morgan Stanley & Co. LLC (the Underwriters ) at an aggregate purchase price of $ (which represents the principal amount of the Bonds, plus or minus net original issue premium or discount, less an underwriting discount of $ ). The Contract of Purchase with respect to the Bonds, to be dated the date of the sale of the Bonds (the Contract of Purchase ) among the Underwriters, the Authority and the Corporation provides that the Underwriters will purchase all of the Bonds, if any are purchased. The obligation of the Underwriters to accept delivery of the Bonds is subject to various conditions contained in the Contract of Purchase. Pursuant to the Contract of Purchase for the Bonds, the Corporation will indemnify the Underwriters and the Authority against losses, claims and liabilities arising out of any untrue statement of a material fact contained in this Official Statement or the omission therefrom of any material fact in connection with the transactions contemplated by this Official Statement. Merrill Lynch, Pierce, Fenner & Smith, Incorporated or its affiliate has entered into certain Swap Agreements with the Corporation and serves as remarketing agent on certain series of Outstanding Bonds of the Authority issued on behalf of the System. J.P. Morgan Securities LLC, one of the underwriters of the Bonds, has entered into negotiated dealer agreements (each a Dealer Agreement ) with each of UBS Financial Services Inc. and Charles Schwab & Co., Inc. for the retail distribution of certain municipal securities offerings, including the Bonds, at the original issue prices. Pursuant to each Dealer Agreement (if applicable for this transaction), each of UBS Financial Services Inc. and Charles Schwab & Co., Inc. will purchase Bonds from J.P. Morgan Securities LLC at the original issue price less a negotiated portion of the selling concession applicable to any Bonds such firm sells. J.P. Morgan Securities LLC also serves as remarketing agent on certain series of Outstanding Bonds of the Authority issued on behalf of the System, and an affiliate of J.P. Morgan Securities LLC provides letter of credits through reimbursement agreements to the Corporation. Morgan Stanley, parent company of Morgan Stanley & Co. LLC, an underwriter of the Bonds, has entered into a retail brokerage joint venture with Citigroup Inc. As part of the joint venture, Morgan Stanley & Co. LLC will distribute municipal securities to retail investors through the financial advisor network of a new broker-dealer, Morgan Stanley Smith Barney LLC. This distribution arrangement became effective on June 1, As part of this arrangement, Morgan Stanley & Co. LLC will compensate Morgan Stanley Smith Barney LLC for its selling efforts with respect to the Bonds. 61

74 J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith, Incorporated, Morgan Stanley & Co. LLC and/or any of their affiliates may from time to time enter into financial transactions with the Corporation related to the Bonds or other transactions involving the Corporation in which they could earn additional compensation. The Authority ABSENCE OF LITIGATION There is not now pending or, to the knowledge of the Authority, threatened, any litigation restraining or enjoining the issuance, sale or delivery of the Bonds or questioning or affecting the validity of the Bonds or the proceedings or authority under which the Bonds are to be issued. There is no litigation pending or, to the Authority s knowledge, threatened which in any manner questions the right of the Authority to enter into the Loan Agreement with the Obligated Group or to secure the Bonds in the manner provided in the Indenture. The Obligated Group There is not now pending or, to the knowledge of the Obligated Group Agent, threatened, any litigation or any proceeding before any governmental agency against or affecting the Obligated Group which questions the right of the Obligated Group Agent or the Obligated Group to execute, deliver and perform their obligations under the Loan Agreement or the Note. No litigation, proceedings or investigations are pending or, to the knowledge of the Obligated Group Agent, threatened against the Obligated Group except: (i) litigation being defended by insurance companies on behalf of the Obligated Group in which the recoveries, if any, should be within the Obligated Group s applicable insurance policy limits or litigation for which adequate self insurance is provided and (ii) litigation, proceedings and investigations which, in the opinion of the Obligated Group Agent and its various attorneys, are either unlikely to be adversely determined or will not materially adversely affect the operations or financial condition of the Obligated Group. MISCELLANEOUS The Obligated Group has furnished all information in this Official Statement, except in the sections captioned SUMMARY STATEMENT, THE AUTHORITY, DESCRIPTION OF THE BONDS - Book-Entry Only System, TAX EXEMPTION, LEGAL MATTERS, FINANCIAL ADVISOR, UNDERWRITING, ABSENCE OF LITIGATION - The Authority, and has furnished the information in the Appendices, except APPENDIX D. The Authority assumes no responsibility for the accuracy or completeness of the information in this Official Statement except in the sections THE AUTHORITY and ABSENCE OF LITIGATION - The Authority. The references herein to the Act, the Indenture, the Loan Agreement, the Note, the Master Indenture, the Assignment and other documents referred to in this Official Statement are brief summaries of certain provisions thereof and do not purport to be complete. For full and complete statements of such provisions, reference is made to the Act and such documents. The agreement of the Authority and the Trustee with the owners of the Bonds and of the Obligated Group and the Master Trustee, as holder of the Note, is fully set forth in the Indenture and the Master Indenture, as applicable, and neither any advertisement of the Bonds nor this Official Statement is to be construed as constituting an agreement with the purchasers of the Bonds. So far as any statements are made in this Official Statement involving matters of opinion, estimates or projections, whether or not expressly stated as such, they are not to be construed as representations of fact. 62

75 The execution and delivery of this Official Statement has been duly authorized by the Authority and the Corporation, as the Obligated Group Agent. LOUISIANA PUBLIC FACILITIES AUTHORITY Chairman FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC., as Obligated Group Agent Senior Vice President and Chief Financial Officer 63

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77 APPENDIX A INFORMATION CONCERNING FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM

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79 APPENDIX A INFORMATION CONCERNING THE FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM HISTORY Franciscan Missionaries of Our Lady Health System, Inc. (the System ), a Louisiana nonprofit corporation, controls a diversified, integrated healthcare delivery system with facilities located throughout the State of Louisiana. The System is headquartered in Baton Rouge, Louisiana, with its administrative offices located at 4200 Essen Lane, Baton Rouge, Louisiana. The System oversees the health care facilities affiliated with and sponsored by the Franciscan Missionaries of Our Lady, North American Province (the Province ), the North American branch of a worldwide Roman Catholic order of Sisters. Among the System s functions is to ensure that the Catholic mission of the Province is carried out by its affiliated entities. The System provides treasury functions, insurance and risk management services, centralized purchasing and materials management, strategic planning, internal audit, information systems security, advocacy services, and a variety of other healthcare services designed to meet the needs of the residents of Baton Rouge, Monroe, Lafayette and Gonzales, Louisiana, and the surrounding areas. The System was formed in September 1984, but the System traces its history of serving Louisiana residents to 1911, when six Franciscan Sisters arrived in Louisiana. The Franciscan Missionaries of Our Lady (formerly known as the Franciscans of Calais) were organized in 1854 in Calais, France. The System is the sole member of the following Louisiana nonprofit corporations: Our Lady of the Lake Hospital, Inc. (the Lake Corporation ), which owns and operates an acute care hospital and related healthcare facilities known as Our Lady of the Lake Regional Medical Center (the Lake ) located in Baton Rouge, Louisiana; St. Francis Medical Center, Inc. (the St. Francis Corporation ), which owns and operates two acute care hospitals and related healthcare facilities known as St. Francis Medical Center ( St. Francis ) located in Monroe, Louisiana; Our Lady of Lourdes Regional Medical Center, Inc. (the Lourdes Corporation ), which owns and operates an acute care hospital and related healthcare facilities known as Our Lady of Lourdes Regional Medical Center ( Lourdes ) located in Lafayette, Louisiana; and Our Lady of the Lake Ascension Community Hospital, Inc., d/b/a St. Elizabeth Hospital (the St. Elizabeth Corporation ), which owns and operates an acute care hospital and related healthcare facilities known as St. Elizabeth Hospital ( St. Elizabeth ) located in Gonzales, Louisiana. The Lake Corporation, St. Francis Corporation, Lourdes Corporation and St. Elizabeth Corporation are collectively herein defined as the Hospitals. The System s Hospitals currently include a combined licensed bed complement of approximately 1,621 beds. With a significant presence in Baton Rouge (located in southeast Louisiana), Monroe (located in northeast Louisiana), Lafayette (located in south central Louisiana) and Gonzales (located in southeast Louisiana), the System s operations are well dispersed throughout the State of Louisiana. As of Fiscal Year ended June 30, 2012, the System had total operating revenues of $1.42 billion and total assets of $2.26 billion. The System and the Hospitals comprise the Obligated Group. As of and for the Fiscal Year ended June 30, 2012, the Obligated Group Members collectively accounted for 89.0% of the System's total operating revenue and 91.4% of the total assets of the System. A-1

80 CORPORATE STRUCTURE The System The sole members of the System are the leader of the Province (the Provincial ) and the members of the Provincial Council of the Franciscan Missionaries of Our Lady, North American Province (the Provincial Council ). The System and the Hospitals are currently the only Obligated Group Members and are the only entities that are obligated with respect to the Bonds and the obligations of the Obligated Group under the Master Indenture. The Master Indenture permits the admission of additional Obligated Group Members upon satisfaction of certain conditions set forth therein. The obligations of the Obligated Group under the Master Indenture are not obligations of the Province or the members of the Provincial Council. The chart below illustrates the organization of the System. FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. SUBSIDIARIES CHART (as of September, 2012) FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. OUR LADY OF THE LAKE HOSPITAL, INC. ST. ELIZABETH HOSPITAL OUR LADY OF LOURDES REGIONAL MEDICAL CENTER, INC. ST. FRANCIS MEDICAL CENTER, INC. FRANCISCAN HEALTH & WELLNESS SENIOR SERVICES Assisi Village, Inc. BRPT Lake Rehabilitation Centers, LLC St. Elizabeth Mary Bird Perkins Cancer Center, L.L.C. Our Lady of the Lake Ascension, L.L.C. d/b/a St. Elizabeth Physicians Heart Hospital of Acadiana, L.L.C. d/b/a Heart Hospital of Lafayette Lourdes After Hours, L.L.C. St. Francis Ambulatory Services, Inc. St. Francis Insurance Agency, Inc. Calais House, Inc. Chateau Louise, Inc. Capital Area Shared Service Organization, L.L.C. St. Elizabeth Imaging Center, L.L.C. Lourdes Foundation, Inc. Lourdes Imaging Development, L.L.C. St. Francis Pediatric After Hours, L.L.C. Northeast Louisiana Physician Hospital Organization, Inc. Convenient Care, LLC d/b/a Lake After Hours Nuclear Imaging, LLC d/b/a Lake P.E.T. Imaging Center BRPT Lake Rehabilitation Centers, LLC Lourdes Surgery Center, LLC Park Place Surgery Center d/b/a Park Place Hospital Northeast Louisiana Cancer Institute, L.L.C. P&S Surgery Center, L.L.C. d/b/a P&S Surgery Hospital Ollie Steele Burden Manor, Inc. d/b/a St. Clare Manor Our Lady of the Lake Assumption Community Hospital, Inc. d/b/a Assumption Community Hospital Health Partners Network of South Louisiana, Inc. LHCG VIII, LLC d/b/a Homecare of Lafayette Lincoln Health System, Inc. Louisiana Homecare of Monroe Our Lady of the Lake College, Inc. Our Lady of the Lake Foundation Lourdes Physician Group, L.L.C. St. Francis Medical Group, L.L.C. St. Francis Pet Imaging, LLC Perkins Plaza Ambulatory Surgery Center, LLC d/b/a Lake Surgery Center Perkins Plaza Medical Arts Development, LLC St. Francis Medical Center Foundation, Inc. Perkins Plaza Imaging Development, LLC Professional Education and Credentialing, Inc. Regional Eye Surgery Center, LLC St. Bernard Health Center, Inc. Villa St. Francis, Inc. Capital Area Shared Service Organization, L.L.C. Surgical Specialty Center of Baton Rouge, LLC Our Lady of the Lake Physician Group, L.L.C. Obligated Group Members Non-Obligated Group Participants Health Care Centers In Schools, Inc. A-2

81 The map below shows the statewide service area of the System: St. Elizabeth Service Area Lourdes Lake St. Francis North St. Francis Downtown 5 St. Elizabeth Source: Microsoft MapPoint North America A-3

82 GOVERNANCE OF THE SYSTEM Provincial Council of Franciscan Missionaries of Our Lady The Provincial and the members of the Provincial Council are the sole members of the System. The members of the Provincial Council are members of the Catholic Order of the Franciscan Missionaries of Our Lady and are elected by the members of the Province to serve on the Provincial Council. The Provincial Council appoints the members of the Board of Trustees of the System, described below. In addition, the Provincial and the Provincial Council have the following powers with respect to the System: change objectives, philosophy and purposes; alter articles of incorporation and bylaws; authorize mergers, joint ventures or affiliations; dissolve and distribute assets; appoint and terminate the Chief Executive Officer of the System and the Hospitals; acquire, lease and encumber real estate; and add to or incur long term debt of the System in excess of $5 million. Board of Trustees The System is governed by a Board of Trustees (the Board ). The Bylaws of the System provide that all corporate powers of the System and its business and affairs shall be managed under the direction of the Board. The Bylaws provide that the Board shall consist of not less than three or more than eighteen persons, at least three of whom must be Sisters who are members of the Province. The trustees serve an initial two-year term and may be appointed for no more than two consecutive three year terms. The President of the System serves as an ex-officio member of the Board while holding the office of President. The Board accomplishes much of its oversight through active committees including: Executive, Mission Performance and Excellence, Finance, Audit, Investment, and Human Resources and Compensation. The System has the following powers with respect to the Hospitals: change the philosophy objectives and purposes; appoint and remove members of the Board of Directors; amend bylaws and articles of incorporation; appoint a fiscal auditor; authorize mergers, consolidations, joint ventures or affiliations; dissolve affiliated corporations and distribute assets; appoint and terminate the President and Chief Executive Officer, Chairman and Vice Chairman; acquire, purchase, sell, lease, transfer or encumber immovable property; add to or incur long term debt of the Hospitals in excess of $5 million; approve addition or increment to capital debt; approve operating and capital budgets; and approve strategic business plan. Listed below are the current members of the Board (excluding the three Sisters who are members of the Province as such members have not been appointed as of the date hereof) with the corporate offices they hold: Name of Trustee/FMOL Position Term Expires Remaining Eligible Terms* Richard M. Dearman, M.D. 12/ Cardiovascular Surgeon Mr. John J. Finan, Jr., President & CEO Position Ex-officio Ex-Officio President and Chief Executive Officer, Franciscan Missionaries of Our Lady Health System, Inc. Mr. Claude Harbarger 12/ President, St. Dominic Hospital, Jackson, Mississippi Mr. Howard Harvill 12/ Retired, Chief Financial Officer, Franciscan Missionaries of Our Lady Health System, Inc. A-4

83 Name of Trustee/FMOL Position Term Expires Remaining Eligible Terms* Position Mr. John S. Lore 12/ Senior Consultant for Corporate Development, Detroit Medical Center C. W. Bill Lovell, II, M.D./Chairman 12/ Family Practice Physician Mr. James W. Moore, Jr. 6/ Business Executive and hotel developer/owner Mr. Jim Prince 12/ Retired Stone Energy Corporation Archbishop Gregory M. Aymond 6/ Archdiocese of New Orleans Sr. Brendan Ronayne, O.S.F. Unlimited Franciscan Missionaries of Our Lady, North American Province Mr. Kevin Schexnayder 12/ Senior Vice President, Whitney Bank Karen Williams, M.D. 9/ Family Practice Physician *Reappoint term of 3 years Executive Management The day-to-day management of the System is delegated to the President and Chief Executive Officer. Selected biographical information for the President and Chief Executive Officer and for other key management personnel of the System and the Hospitals are set forth below: John J. Finan, Jr. (President and Chief Executive Officer of the System). Mr. Finan, age 65, joined the System as President and Chief Executive Officer in July Prior to joining the System, Mr. Finan served as Senior Executive Officer of BJC Health System and at Barnes Hospital of BJC Health System, St. Louis, Missouri. Mr. Finan served in various positions at Barnes Hospital, including from 1984 to 1986 as Vice President, from 1986 to 1992 as Executive Vice President and from 1992 to 1996 as President. Mr. Finan served as Vice President at Good Samaritan Hospital, Mt. Vernon, Illinois from 1976 to 1984 and as Assistant Administrator at Hotel Dieu Hospital, New Orleans, Louisiana, from 1971 to He earned a Bachelor of Science degree in Economics from Louisiana State University at New Orleans, and a Master s Degree in Business Administration from Loyola University, New Orleans, Louisiana. Mr. Finan is a Fellow in the American College of Healthcare Executives, former Chair of the Board of the Catholic Health Association, chairs the Board of VHA Health Foundation, and is a member of the Board of VHA. He is a member of the Board of Marian Health System, former Chairman of the Board of Governors of the Warren Grant Magnuson Clinical Center of the National Institutes of Health, a member of the American Hospital Association House of Delegates and Regional Policy Board, a member of the Healthcare Finance Management Association, and is active in other professional, civic and service organizations. Robert Bob D. Ramsey (Senior Vice President and Chief Financial Officer of the System). Mr. Ramsey, age 55, became Senior Vice President and Chief Financial Officer of the System in the first calendar quarter of Prior to joining the System, Mr. Ramsey served as Controller of the Lake Corporation from 1999 to 2000 and was promoted to Chief Financial Officer in June Prior to joining the Lake Corporation, he served as Chief Financial Officer at Doctor s Hospital in Springfield, Illinois. Mr. Ramsey A-5

84 served as Director of Reimbursement of St. John s Mercy Health System in St. Louis, Missouri from 1993 to 1995, Director of Reimbursement of ASC Health System in O Fallon, Illinois from 1990 to 1993, Internal Audit Manager of Memorial Health System in Springfield, Illinois from 1987 to 1990, Senior Medicare Auditor of Blue Cross/Blue Shield from 1983 to 1987 and an Accountant at Southern Illinois University in Carbondale, Illinois from 1980 to He earned a Bachelor of Science degree in Accounting from Southern Illinois University, Carbondale, Illinois and in 1993, completed course work for his Master s Degree in Business Administration in Accounting at University of Illinois, Springfield, Illinois. He is a Fellow in Healthcare Financial Management, a Certified Public Accountant and a Certified Internal Auditor. Mr. Ramsey is a member of the Healthcare Financial Management Association, the American Institute of Certified Public Accountants, Institute of Internal Auditors and other professional, civic and service organizations. W.J. Tony Gordon, III (Vice President - Strategic Planning of the System). Mr. Gordon, age 64, joined the System in Prior to that time Mr. Gordon spent 32 years with Conoco, Inc. where he served in various positions including President of Dubai Petroleum Company of the United Arab Emirates in the Middle East, President of Conoco Norway, Inc. in Stavanger, Norway, and a member of Conoco s European Management Team. Prior to his overseas service, Mr. Gordon was Regional Production Manager for Conoco s Gulf of Mexico and Gulf Coast Region. He retired from Conoco in He currently serves on the Boards of Directors for the Greater Lafayette Chamber of Commerce, PetroQuest Energy, Inc., The Community Foundation of Acadiana and the Iberia Bank Advisory Board. He served two terms as Chairman of the American Chamber of Commerce in Norway. He is a Cum Laude graduate of Southern University, Baton Rouge, Louisiana with a Bachelor s degree in Physics and completed the Executive Development Program at the Johnson School of Management at Cornell University, Ithaca, New York. Jolee Hancock Bollinger (General Counsel to the System). Ms. Bollinger, age 41, joined the System as General Counsel in June Prior to joining the System, Ms. Bollinger was Associate General Counsel for HealthSouth Corporation from 2004 to She served as Associate General Counsel for Baptist Health Systems in Birmingham, Alabama from 2000 to 2004 and was an Associate, Health Law with two Birmingham law firms from 1996 to Ms. Bollinger earned a Bachelor of Science degree in Psychology from Louisiana State University in Baton Rouge, Louisiana in 1992 and Master of Public Health degree from the University of Alabama at Birmingham in She received her Law degree (magna cum laude) from the Cumberland School of Law, Samford University, Birmingham, Alabama in She is a member of the Alabama and Louisiana State Bar Associations, the American Health Lawyers Association, and is active in other civic and service organizations. Stephanie Mills, M.D. (President and Chief Executive Officer of the Franciscan Health and Wellness Services, Inc.). Dr. Mills, age 42, currently serves as President and Chief Executive Officer of Franciscan Health and Wellness Services, Inc. Dr. Mills previously served as Chief Information Officer of the System, as Chief Medical Information Officer at the Lake Corporation and practiced pediatric emergency medicine and served as the Medical Director of the Pediatric Emergency Department at the Lake starting in Dr. Mills earned a Bachelor of Science Degree from Louisiana State University. She completed her M.D. at Johns Hopkins University School of Medicine in 1995, and her residency training in pediatrics at Baylor College of Medicine and Texas Children s Hospital in Houston. She received a Masters of Health Care Management Degree from Harvard University in Dr. Mills was a founding board member of the Louisiana Health Care Quality Forum and has served on the Southern Governors Association Gulf Coast Task Force for Health IT, the Catholic Health Association Physician Committee and the Health Centers for Schools Board of Directors. Dr. Mills is invited to speak nationally regarding her experiences in health care IT, clinical transformation and population management. A-6

85 Karen B. Allen (President Senior Services). Ms. Allen, age 46, joined the System in 2008 serving as the Executive Director of Franciscan PACE, Inc. and since 2010 has been serving as President of the Senior Services Division. She began her professional career in 1990 at the Lake Corporation and served in numerous administrative positions during her 18 years of service at the Lake Corporation. Ms. Allen earned a Bachelor of Arts degree in Secondary Education 1990, a Masters of Science degree in Vocational Education Training and Development from Louisiana State University in Baton Rouge, Louisiana. She obtained her Nursing Facility Administrator license from the State of Louisiana Board of Examiners in Ms. Allen is a member in the American College of Healthcare Executives, serves as the Vice Chair of St. Joseph's Academy Board of Directors, and serves on various community and professional services organizations. K. Scott Wester (President and Chief Executive Officer of the Lake Corporation). Mr. Wester, age 44, is the President and Chief Executive Officer of the Lake Corporation since March, He was President and Chief Executive Officer of the St. Francis Corporation from 2004 to He began his professional career in 1993 with the Lake Corporation and remained with the Lake Corporation holding numerous management level positions until joining St. Francis Corporation. From 1999 to 2004 he was the Lake s Administrator Partner/Related Organizations while serving concurrently as President and Chief Executive Officer of the Lake s subsidiaries, St. Elizabeth, Gonzales, Louisiana (2000 to 2004) and Assumption Community Hospital, Napoleonville, Louisiana (2001 to 2004). Mr. Wester received a Bachelor of Science degree in Chemistry and a Bachelor of Arts degree in Classical Humanities at St. Louis University in 1990, and a Master s in Health Administration degree from Xavier University in Cincinnati, Ohio in He is a Fellow of the American College of Health Care Executives and serves on numerous boards of professional, civic and service organizations. Louis H. Bremer, Jr. FACHE(President and Chief Executive Officer of the St. Francis Corporation). Mr. Bremer, age 61, joined the St. Francis Corporation on November 3, Prior to joining the St. Francis Corporation, he was employed by Quorum Health Resources as a hospital CEO in various communities. He has served as a hospital CEO for over twenty years in hospitals ranging in size from a 25- bed rural critical access hospital to a 544-bed regional tertiary teaching hospital. His experience includes notfor-profit, for-profit, public and teaching hospitals, as well as integrated healthcare systems. Mr. Bremer received a Bachelor s Degree in Biology from Baylor University and a Master s Degree in Healthcare Administration from Texas Woman s University. He is a fellow in the American College of Healthcare Executives. He is locally active in various civic organizations. William F. Barrow, II (President and Chief Executive Officer of the Lourdes Corporation). Mr. Barrow, age 58, joined the Lourdes Corporation in March 2006 as President and Chief Executive Officer. Prior to joining the Lourdes Corporation, Mr. Barrow served as President and Chief Executive Officer for Opelousas General Health System from 2002 to 2006; President and Chief Executive Officer at DeSoto Regional Health System in Mansfield, Louisiana from 1996 to 2002; Consultant at Willis-Knighton Health Systems at Shreveport, Louisiana from 1999 to 2002; Executive Vice President and Chief Executive Officer at Medical Media/Lifewise, Inc. in Shreveport, Louisiana from 1993 to 1996, Vice President of Corporate Development at Schumpert Medical Center in Shreveport, Louisiana from 1990 to 1993; President of Corporate Development/Director of Physical Services at Franciscan Health System of Cincinnati, Inc. from 1988 to 1990; Manager, Health Care Consulting at Deloitte, Haskins and Sells from 1986 to 1988; other Consulting Positions include Hewlett Packard Company from 1985 to 1987 and McDonnell Douglas Health Services from 1980 to Mr. Barrow received a B.A. in History and Political Science (Pre-Law) from the University of Richmond in Richmond, Virginia in 1976 and his Masters Degree in Public Administration (Hospital Administration) from Brigham Young University in Provo, Utah in Mr. Barrow is a Member of the Louisiana Hospital Association Board and AHA Regional Policy Board, and has served on numerous civic and professional organization boards. A-7

86 Robert Burgess (President and Chief Executive Officer of the St. Elizabeth Corporation). Mr. Burgess, age 63, joined St. Elizabeth Corporation as President and Chief Executive Officer on July 1, Prior to joining St. Elizabeth Corporation, Mr. Burgess worked for nearly 40 years in the telecommunications industry beginning with South Central Bell in 1972 and for the past 12 years has served as President and Chief Operating Officer of Gulf Coast Wireless and East Ascension Telephone Company/EATEL. Mr. Burgess earned a Bachelor of Science degree from University of Louisiana, Lafayette, and a Masters of Business Administration from NOVA Southeast University in Fort Lauderdale, Florida. He also served in active duty as a Naval Officer. Mr. Burgess is a member of the Baton Rouge Area Chamber for which he served as Chair in Mr. Burgess also served as Chair of the River Parishes Community College Foundation in 2009/2010, and as Vice Chair of the St. Elizabeth Hospital Board of Directors in 2011 and Mr. Burgess has also served on the board of trustees for Blueprint Louisiana, Education s Next Horizon, and as an advisory board member of the Council for a Better Louisiana. SYSTEM FACILITIES AND SERVICES The System is comprised of four hospitals: Lake, St. Francis, Lourdes and St. Elizabeth. The Lake is an acute care hospital currently licensed for 730 beds and is located in Baton, Rouge, Louisiana, the state capital, located in southeast Louisiana. St. Francis is an acute care hospital currently licensed for 550 beds and is located in Monroe, Louisiana, a city in northeast Louisiana. Lourdes is an acute care hospital currently licensed for 186 beds and is located in Lafayette, Louisiana, a city/parish located in southwest Louisiana. St. Elizabeth is an acute care hospital currently licensed for 78 beds and is located in Gonzales, Louisiana, a city located in the southeastern Louisiana. [remainder of page intentionally left blank] A-8

87 Services provided by the System s Hospitals and the Hospital within the System providing such services are identified below: Lake Lourdes St. Francis St. Elizabeth Anesthesiology x x x x Bariatrics x x x Brachytherapy x Burn Unit x Comprehensive Cardiovascular Care x x x Comprehensive Radiology Services x x x x Chemical Dependency Treatment x Children s Hospital x Ear, Nose, and Throat x x Electrocardiology x x x Emergency Medicine x x x x Extended Care Services x x Fitness Center x x Gastroenterology x x x x General Surgery x x x x Geriatric Assessment x x x Gynecology x x Hyperbaric Oxygen Therapy x x Intensive Care x x x x Laboratory/Blood Bank x x x x Lithotripsy x x Neurology x x x x Neurosurgery x x Neonatal Intensive Care x Occupational Therapy x x x Oncology x x x Orthopedics x x x x Pain Management x x x x Pediatrics x x x Perinatology x Pharmacy x x x x Physical Medicine/Rehabilitation x x x Physical Therapy x x x x Plastic Surgery x Primary Care Clinics x x x Psychiatric Services x x Pulmonary Medicine x x Radiation Therapy x Respiratory Therapy x x x x Rheumatology x Robotic Surgery x x Sleep Center x x x Speech Therapy x x x Trauma Surgery x Urology x x x Wound Care x x x A-9

88 NON-OBLIGATED SYSTEM PARTICIPANTS There are certain affiliated entities and participants of the System that are not Obligated Group Members (the Non-Obligated System Participants ). The only participants of the System that have any liability with respect to the Bonds or the obligations of the Obligated Group under the Master Indenture are Lake Corporation, Lourdes Corporation, St. Francis Corporation and St. Elizabeth Corporation. However, the revenues of the Non-Obligated System Participants are included in the consolidated financials of the System. The Non-Obligated System Participants collectively account for 11.0% of the total revenues of the System and 8.6% of the total assets of the System. MISSION, AWARDS AND DISTINCTIONS The System and its Hospitals have received many prestigious honors, awards and notable achievements detailed below. Recently, the White House Business Council and the National Business Group on Health invited the System to participate in a Health Disparities Roundtable with Surgeon General Regina Benjamin, MD, MBA, and share the work the System has done to end health disparities. The System was asked to participate in this discussion after the National Business Group on Health, a non-profit association of large United States employers, named the System as a 2012 Best Employer for Healthy Lifestyles for its commitment and dedication to promoting a healthy workplace and encouraging its workers and families to support and maintain healthy lifestyles. The System was among 66 United States employers that received the 2012 Best Employers for Healthy Lifestyles award at the Leadership Summit sponsored by the National Business Group on Health s Institute on Innovation in Workforce Well-being. The System received a Platinum Award for measurable success and outcomes achieved through Healthy Lives, its employee health and wellness program. The System was also recently listed in the Top 20% of Health Systems as published in Thomson Reuters s fourth annual list of the 100 Top Hospitals: 15 Top Health Systems. Further, in 2012, the System was recognized by VHA Hospital Engagement Network under its Blueprint for Meaningful Use. In 2012 and 2011, the System earned a spot on InformationWeek 500 an annual listing of the nation s most innovative users of technology. Further, all four of the System s Hospitals have been recognized for quality and commitment to ongoing care of the elderly, as each has earned the NICHE (Nurses Improving Care for Health System Elders) designation from The Hartford Institute for Geriatric Nursing at New York University College of Nursing. The System s Hospitals have also been recognized for quality by the Louisiana Quality Foundation. The Louisiana Quality Foundation gives Performance Excellence Awards based on the National Malcolm Baldrige criteria. The Lake and St. Elizabeth received the Level III Performance Excellence Award, and Lourdes and St. Francis received the Level II Performance Excellence Award. In addition to the above recognitions and awards, the Lake has been ranked as the Best Regional Hospital by U.S. News and World Report for excellence in the Ear, Nose, and Throat Specialty and in Orthopedics, and U.S. News and World Report ranked St. Francis number four in Orthopedics in the State. The Lake, St. Francis and Lourdes or affiliates thereof have been recognized as a Bariatric Surgery Centers of Excellence by the American Society for Metabolic & Bariatric Surgery. Thomson Reuters has named the Heart Hospital of Lafayette, an affiliate of Lourdes, as a Top 50 Cardiovascular Hospital in the nation. St. Elizabeth was selected as one of Modern Healthcare s Best Places to Work in Healthcare for 2011 and SYSTEM S STRATEGIC OBJECTIVES The healthcare industry continues to experience increasing competition, stringent regulatory constraints, increasing labor and pharmaceutical and supply costs, and payment reductions from Medicare and A-10

89 Medicaid. The deterioration of the economy and loss of jobs, as well as the continued pressure on employers to share more of the costs of health insurance with their employees, has resulted in a reduction in those electing coverage with their employer and larger amounts of hospital bills due from patients. This has translated into an increase in amounts due from self-pay and Medicaid accounts and increased charity and bad debt write-offs. To meet these challenges, the System continues to focus on its core hospital operations and has increased the hiring of physicians to complement this focus. As described in more detail in INVESTMENT CONSIDERATIONS in the body of this Official Statement, some of the significant future risks to the operations of the System and its Hospitals include, but are not limited to, continued pressures from federal and state healthcare reimbursement, ultimate effects of the Health Care Reform Law (for more information on the Health Care Reform Law see INVESTMENT CONSIDERATIONS Healthcare Reform and Other Governmental Initiatives in the body of this Official Statement), unknown effects of possible modifications to the Health Care Reform Law, pressures from managed care companies for reduced rates, shortage of skilled health care professionals, un-reimbursed charity care losses and increases in uninsured and underinsured population and possible significant changes in the charity care system in the State (for more information see INVESTMENT CONSIDERATIONS Risks in Health Care Delivery Indigent Care in the body of this Official Statement) and increases in malpractice losses and insurance premiums. Further, over the course of the last several years, the State of Louisiana has significantly reduced the payment rates under the Medicaid program for hospital services for nearly all hospitals in the State. See INVESTMENT CONSIDERATIONS - The Medicaid Program -State Medicaid Program Expenditures in the body of this Official Statement. Management of the System has and is implementing plans to increase revenue from other sources and reduce costs by enough to allow it to continue to operate at a similar operating margin as in prior years. No assurance can be given that Medicaid rates will not be reduced again in the future. These challenges are significantly impacting all healthcare providers. To date, management of the System has successfully implemented strategies to deal with bottom line pressures. In Fiscal Year 2012, the System underwent a organizational review process to identify opportunities to prepare for health care reform. As a result the System developed a strategic plan to implement the opportunities identified by the organizational review, which include the following focus areas: clinical variation, labor productivity and operations, purchasing and materials management, revenue cycle management, shared services and strategic growth. The plan intends to (i) address financial pressures associated with healthcare reform, (ii) work on becoming a more efficient organization with well coordinated care management, (iii) be adaptable to changes as effects of healthcare reform become clear and (iv) include rigorous examinations of the focus areas both internally and externally. The System s future strategy also includes transformational initiatives to lower cost structure and prepare for different reimbursement models, physician alignment to improve quality and patient satisfaction, expanding service offerings and alternatives for providing care in more cost effective environments, continued development of robust IT platform and other initiatives to adapt to the evolving effects of healthcare reform. The System has been proactively pursuing strategies to further develop its delivery network and has invested in joint venture strategies over the past several years to capture patients migrating to new sites of care and expand the System s brand and market presence. The System is also currently in discussions with the City of New Orleans and Daughters of Charity Services in New Orleans to develop an affiliation at the former Methodist Hospital site and has entered into a Cooperative Endeavor Agreement with the Hospital Service District to provide management services to the hospital. Additionally, the System is committed to expanding its senior care services to include a robust offering of cost-effective alternatives to a skilled nursing facility A-11

90 setting, including investment in its Program for All Inclusive Care for the Elderly (PACE), its Senior Companion Program, primary care services for seniors and other senior services initiatives. The System has also implemented the Healthy Lives tm Program, which is an innovative project designed to effectively manage the health of a population, improve the value of healthcare delivery and build a healthier workforce and communities. The Lake continues to prepare to become LSU s teaching hospital in the Baton Rouge market. (for more information see INVESTMENT CONSIDERATIONS Risks in Health Care Delivery Indigent Care in the body of this Official Statement). A new psychiatric residency was started and the existing residencies (internal medicine and emergency medicine) will transfer in Additionally, LSU- New Orleans based residencies continue to expand their presence at the Lake. By 2016 approximately 150 residents will be based at the Lake. Additional bed capacity, a Level 1 Trauma Center, and the LSU Health Medical Education and Innovation Center are integral components of this partnership. The planning of these new and renovated facilities incorporates state of the art technology and design which will enhance patient safety as well as create an environment conducive to medical and clinical education. The Lake is working in partnership with its medical staff and LSU to develop models for a community clinically integrated network. A joint venture between OLOL Physician Group, St. Elizabeth Physicians, and the Baton Rouge Clinic (100- person multispecialty group) for a shared community medical record for ambulatory patients is underway. The opening of the OLOL Livingston Facility (see OUR LADY OF THE LAKE REGIONAL MEDICAL CENTER, INC. below) serves the fastest growing area of the State. COMMUNITY BENEFIT The System is committed to offering access to quality health care through its Hospitals and affiliated health care providers. As part of its charitable mission, the System's nonprofit hospitals provided community benefits of approximately $195,642,000 in Fiscal Year 2012 which includes the unreimbursed cost of charity care, Medicaid, Medicare, and other community benefits. OTHER SYSTEM INFORMATION Liability Coverage As a healthcare system, the System is subject to material malpractice and liability claims arising from services provided to patients in the past. However, the System has not experienced material losses from malpractice claims in the past. The Obligated Group covenants in the Master Indenture to maintain insurance coverage in such amounts and against such risks as are customarily maintained by persons in similar circumstances having facilities of a comparable type and size and offering comparable services as those of the Hospitals. The Hospitals and their related physician practices participate in the State of Louisiana professional liability program and, therefore, obtain professional liability coverage through the Louisiana Patient s Compensation Fund (the Fund ) for losses between $100,000 and $500,000 per occurrence. As participants in the Fund, these affiliates have a statutory limitation of liability which provides that no award can be rendered against them in excess of $500,000 (exclusive of additional amounts for future medical expense provided by law). The Hospitals are self-insured for claims up to $100,000 and claims over $500,000, should the statutory limit be declared unconstitutional by a court of law. The Hospitals participate in a captive insurance company, Louise Insurance Co., Ltd. ( Louise ), which is wholly-owned by the System. Louise underwrites A-12

91 the self-insured portion of the professional liability claims on a claims made basis. In addition, the Hospitals accrue additional amounts for incurred but not yet reported claims liabilities at each fiscal year-end. Premiums are retrospectively determined by Louise relying on actuarial estimates and actual claims experience for the Hospitals. An umbrella excess liability policy is shared among all the Hospitals which provide additional excess coverage of $50,000,000 per claim and $50,000,000 aggregate, on a claims made basis. In addition to professional and general liability coverage on claims made basis, the $50,000,000/50,000,000 annual policy limits also provide automobile, helipad and employers liability coverage, all on an occurrence basis. The Hospitals, like other hospitals throughout Louisiana, are defendants in cases where the plaintiff has developed Hepatitis C allegedly through blood transfusions administered at the Hospitals prior to the 1976 Malpractice Act. Thus, there is no $500,000 statutory cap relating to these claims and damages could be significant. The Hospitals and the insurer who was in place during the period the transfusions occurred continue to closely monitor the progress of these cases. Management has assessed the risk associated with these cases and believes the probable resolution of this contingency will not exceed each Hospital s selfinsurance reserves or insurance coverage, and would not materially affect the operations or financial condition of the Obligated Group. Litigation There is not now pending or threatened any proceeding or litigation contesting the System or the Obligated Group Member s ability to enter into the documents relating to the issuance of the Bonds, or wherein an unfavorable decision would materially and adversely affect the System or Obligated Group Member s ability to carry out their obligations in connection with such agreements and transaction. No litigation or proceedings are pending or, to the knowledge of the System or the Hospitals, threatened against the System or the Hospitals except (i) litigation and proceedings involving claims for hospital professional liability in which the probable recoveries and estimated costs and expenses of defense, according to the System s and Hospitals current expectations, are anticipated to be fully recoverable from its self-insurance trust fund or are entirely within the System s or Hospitals applicable insurance limits; and (ii) litigation and proceedings other than those described in (i) above which, if adversely determined, would not, in the opinion of management of the System and the Hospitals, materially adversely affect the financial condition or operation of the System or the Hospitals. Hurricane Preparedness South Louisiana is generally susceptible to hurricanes wherein winds and flooding have from time to time caused damage to electric utility systems, including transformers, substations and major power lines. The Lake, Lourdes and St. Elizabeth are located in South Louisiana. Recent hurricanes, specifically Hurricane Katrina in 2005 and Hurricane Gustav in 2008, caused electrical power outages of approximately one week in duration at one or more of the facilities referred to above. During such electrical power outages, each of the facilities was able to perform emergency services based on its then existing emergency backup electrical power systems. However, elective procedures at each facility were deferred until electrical power was restored, resulting in a temporary loss of revenues during such time periods. In response, the Lake has constructed an emergency generator building and purchased multiple emergency backup generators that will enable the Lake to operate at near full capacity in the event of an extended electrical power outage. The Lourdes Replacement Facility (as hereinafter defined) includes an emergency backup electric power system that enables Lourdes to operate at near full capacity in the event of an extended electrical power outage. A-13

92 In late August 2012, Hurricane Isaac struck the Gulf Coast and impacted the service areas of the Lake and St. Elizabeth. Hurricane Isaac caused electrical power outages and flooding in the region. However, neither the Lake nor St. Elizabeth were significantly impacted and operated at full capacity during and after the storm. Personnel and Employee Relations As of June 30, 2012, the System employed 8,345 full-time employees and 2,173 part-time employees for a total of 10,518 employees representing 8,850 full-time equivalent employees. There are no collective bargaining agreements with employees of the System and management is not aware of any union-organizing activities being conducted at this time. Management considers that it maintains a satisfactory relationship with employees of the System. Licensure, Accreditation and Memberships Each of the System s Hospitals is currently accredited by the Joint Commission (the Joint Commission ), formerly the Joint Commission on Accreditation of Healthcare Organizations, a non-profit organization that accredits more than 19,000 health care organizations and programs in the United States. Each of the System s Hospitals is licensed by the State of Louisiana Department of Health and Hospitals and is certified to participate in the Medicare and Medicaid programs by the United States Department of Health and Human Services. Additionally, the laboratories at St. Francis and St. Elizabeth are accredited by the College of American Pathologists. Memberships include the American Hospital Association, the Louisiana Hospital Association, the Catholic Health Association, the Louisiana Catholic Health Association and Voluntary Hospitals of America. OUR LADY OF THE LAKE REGIONAL MEDICAL CENTER, INC. The Lake Corporation owns and operates the Lake, an acute care hospital currently licensed for 730 beds. The Lake is located in Baton Rouge, Louisiana, the state capital of Louisiana, located in southeast Louisiana. The Lake is a leading healthcare provider for the south Louisiana region and the largest acute care hospital in the State of Louisiana. The Lake cares for approximately 33,000 inpatients each year with over 98,000 emergency room visits and over 310,000 outpatient visits from the surrounding community, and is recognized as a regional leader in cardiology, oncology, pediatric services, and orthopedics. The Lake was initially opened in 1923 as a 100-bed hospital located in downtown Baton Rouge. In 1978, it was relocated to the present six-story, 483,000 square foot hospital building which houses patient beds, ancillary services, support services and administrative services on 120 acres of land approximately five miles from downtown Baton Rouge. Additions include St. Mary's Tower built in 1984 and five Medical Plaza office buildings (a seven-story building constructed in 1987, a ten-story building constructed in 1992, a four-story building constructed in 1999 with additions completed in 2008, a three-story building constructed in 2006, and a five-story building completed in 2010). The Lake is approximately 65 miles from New Orleans International Airport and approximately 15 miles from Baton Rouge Metro Airport, with emergency cases being served by the heliport landing pad adjacent to the Lake s Emergency Center. The Lake operates a 58-bed adult intensive care unit segmented by a clinical focus. These include the Cardiovascular Intensive Care Unit, the Medical Intensive Care Unit, the Surgical Intensive Care Unit, the Medical-Surgical Critical Care Unit, and the Trauma-Neuro Critical Care Unit. Within its Children s Hospital, A-14

93 the Lake also operates a 14-bed Pediatric Intensive Care Unit dedicated to the care of seriously ill or injured children seventeen years of age or younger. In 2006, the Lake embarked on a five-year comprehensive facilities master plan to help update and modernize the hospital in order to maintain its competitive position in the Baton Rouge market. Since then two-hundred seven (207) all private patient rooms have been renovated to comply with current standards and consumer demand. Each room was enlarged by approximately 100 square feet and is now ADA compliant and features room amenities such as wireless connectivity. Additionally, the Radiology holding area, thirtyfive Neurology rooms, the Endoscopy pre-op area, and two Endoscopy suites were remodeled while one new Special Procedures room and four new Operating Rooms were constructed. A major upgrade to the elevators and air conditioning units and the installation of a hospital-wide generator in preparation for emergency related extended power outages were also included in the renovations. Projects currently in progress include the construction of a 170,000 square foot medical complex in Livingston Parish ( OLOL Livingston Facility ). The OLOL Livingston Facility includes a free-standing emergency department and outpatient services such as a laboratory and imaging services. The emergency department of the OLOL Livingston Facility opened in September 2012, and the remainder of the OLOL Livingston Facility is anticipated to open in December Additionally, in the Spring of 2012, the Lake began construction of a 330,000 square foot, nine-story bed tower on its campus (a portion of the cost of such project will funded with a portion of the proceeds of the Bonds see PLAN OF FINANCE The Project in the body of the Official Statement). Additionally, the Lake is expanding its emergency department to a Level 1 Trauma Center. Of its licensed complement of 730 beds, as of June 30, 2012, the Lake staffed 652 beds as shown in the table below: Staffed Beds as of June 30, 2012 Service Number of Beds Medical/Surgical Cardiac Care Intensive Care Pediatric Intensive Care Telemetry Rehabilitation Psychiatric Pediatric Total The Lake Medical Staff Source: Lake Records. As of June 30, 2012, the Lake had a total medical staff of 910 physicians. Of these physicians, 844 were on the active staff with admitting privileges and 66 were consulting members. Of the active staff, 89% are board-certified. No physician with admitting privileges accounted for more than 3.0% of the Lake s admissions. The top ten admitting physicians comprise 1.1% of the total number of physicians and accounted for 19.1% of the Lake s admissions. As of June 30, 2012, the average age of the active staff was 47 years of age. A-15

94 The Lake Service Area The Lake serves an eleven parish area in southeast Louisiana with a population of 955,429. Seventyfive percent (75%) of the Lake s inpatient population resides in the primary market area with 54% in East Baton Rouge Parish. The total eleven parish market covers 93% of the Lake s inpatient population; 7% live outside of the market. The primary market includes the parishes of East Baton Rouge, Ascension, and Livingston. These three parishes have a combined population of 679,847. The secondary market includes eight parishes with a combined population of 275,582. The eight parishes include: Assumption, East Feliciana, Iberville, Point Coupee, St. Helena, Tangipahoa, West Baton Rouge and West Feliciana. The map below shows the Lake s primary and secondary market areas. Lake Primary Service Area Secondary Service Area Source: Microsoft MapPoint North America A-16

95 The Lake Competitors The Lake is the largest acute care provider in its service area with a leading market share. By service line, the Lake maintains a leading market share in cardiology, hematology/oncology, neurosurgery, neurology, general surgery, orthopedics, pediatric services, trauma, urology, vascular, endocrinology, dermatology, ophthalmology, dental, otolaryngology, gastroenterology, nephrology, pulmonology, rheumatology, thoracic and mental and behavioral health services. The Lake competes with five acute care hospitals located in its service area. These hospitals and their sizes are listed in the table below. In addition to these hospitals, Earl K. Long Medical Center, which is a part of the State of Louisiana's charity care hospital system and is operated by the Health Care Services Division of Louisiana State University (the LSU Health System ), is located in the Lake s service area. LSU Health System has announced its plans to close Earl K. Long Medical Center; however, the LSU Health System will continue to operate outpatient facilities in the Baton Rouge area. See INVESTMENT CONSIDERATIONS Risks in Healthcare Delivery Indigent Care in the body of this Official Statement and the discussion of Earl K. Long Medical Center under Competitive Development in the Marketplace in this section of Appendix A. Distance from the Lake (miles) Number of Staffed Beds Number of Admissions Calendar Year Acute Care Hospitals Primary Competitors Our Lady of the Lake Regional Medical Center ,351 33,144 31,725 Baton Rouge General Medical System ,547 15,038 14,165 Woman s Hospital ,167 2,698 2,438 Ochsner Hospital of Baton Rouge ,597 5,238 4,879 Secondary Competitors North Oaks Health System ,220 11,398 11,335 Lane Regional Medical Center ,752 4,394 4,042 Total 73,634 71,910 68,584 Sources: Lake Records; LHIN Inpatient Database. Excludes Newborns, OB and Rehabilitation patients. CY11 based upon January-Sept annualized data. Competitive Developments in the Marketplace In recent years, the Baton Rouge area has experienced growth of the population and growth and expansion of medical facilities in the area, including, but not limited to, the following: Surgical Specialty Centre ( SSC ) - SSC is located on Bluebonnet Boulevard in Baton Rouge and is jointly owned by a multi-specialty group of 43 physician investors and the Lake Corporation, which bought a A-17

96 49% ownership share in July, This 14 bed, 8 operating room facility opened in April 2003 with approximately 50 physicians, primarily Orthopedists, Otolaryngologists and Urologists, utilizing the facility. SSC offers ambulatory services as well as short stay inpatient services. Baton Rouge General Medical Center ( BRGMC ) - BRGMC operates two acute-care hospitals in the primary service area of the Lake. BRGMC s Bluebonnet facility is located approximately one mile from the campus of the Lake. A recent construction project added approximately 100 beds bringing the Bluebonnet facility s complement of beds to approximately 201 beds. This increased capacity could impact the admissions and revenues of the Lake. The Lake is responding with several general strategic initiatives to mitigate that impact. Earl K. Long Medical Center The Health LSU Health System, Louisiana Department of Health and Hospitals ( DHH ) and the Lake have entered into a Cooperative Endeavor Agreement (the CEA ) commencing in the Fall of 2013 for the expansion of Graduate Medical Education services at the Lake, moving certain inpatient operations (exclusive of prisoner care and obstetrical services) and the residents that practice at the Earl K. Long Medical Center in Baton Rouge to the Lake. To accommodate the proposed affiliation, the Lake will expand its facility by adding medical/surgical beds, to expand trauma services, and construct the LSU Health Medical Education and Innovation Center at the Lake. The LSU Health System has announced its plans to close Earl K. Long Medical Center; however, the LSU Health System will continue to operate outpatient facilities in the Baton Rouge area. Upon implementation of the CEA, the Lake will become Louisiana State University Agricultural and Mechanical College s ( LSU ) primary teaching hospital in the Baton Rouge region. See INVESTMENT CONSIDERATIONS Risks in Healthcare Delivery Indigent Care in the body of this Official Statement. Woman s Hospital ( Woman s ) Woman s opened a replacement hospital in August While the Lake does not compete with Woman s for obstetric volume, Woman s does offer other services such as bariatric surgery, laparoscopic surgery, and breast surgery, and expectations are that Woman s will attempt to expand these services in the future. Ochsner Hospital of Baton Rouge ( Ochsner ) Ochsner is located near the Livingston Parish line and recently added new specialties and physicians to provide more comprehensive care. The Lake is responding by opening the OLOL Livingston Facility in Livingston Parish, which will be located approximately 11 miles from the Oschner facility. North Oaks Health System ( North Oaks ) North Oaks recently opened a Medical Complex in Livingston Parish. Services offered include a walk-in clinic and physician clinics for primary care, cardiology, otorhinolaryngology, general surgery, neurosurgery, obstetrics and gynecology, orthopedics, and rheumatology. Diagnostics, rehabilitation, and laboratory services are also offered at this location. The Lake is responding with the opening of the OLOL Livingston Facility. [remainder of the page intentionally left blank] A-18

97 Lake Selected Operating Statistics Fiscal Year Ended June 30, Admissions 35,786 35,177 32,948 Patient Days 172, , ,216 Average Length of Stay Average Daily Census Weighted Average Number of Available Beds Occupancy Percentage of Available Beds 73.5% 69.9% 66.6% Emergency Room Visits 98,790 99, ,598 Operating Room Procedures 18,993 19,867 19,561 Outpatient Surgery 7,742 8,118 8,140 Net Patient Revenue ($ in 000s) $667,146 $691,520 (1) $726,762 Adjusted Operating Income (2) ($ in 000s) $82,653 $78,852 (1) $76,591 (1) Fiscal Year ended June 30, 2011 excludes Department of Health and Hospital payments of $129 million to the Lake pursuant to the CEA. The Adjusted Operating Income for Fiscal Year ended June 30, 2011 is adjusted to exclude $19 million in expenses related to the CEA. See INVESTMENT CONSIDERATIONS Risks in Healthcare Delivery Indigent Care in the body of this Official Statement. (2) Adjusted Operating Income is defined as a non-gaap performance measure that is defined as operating income plus depreciation expense, amortization expense, interest expense and income tax expense. Management believes that this measure is a useful operating performance indicator of the System s provision of health care services and its ability to service its debt obligations. The measure also assists stakeholders, governance and management in assessing the operating performance of the System from period to period and for comparison with other health care organizations, because the impact of the System s capital structure (interest expense) and asset base (depreciation and amortization expense) is excluded from the measure. Additionally, transactions that are reported as nonoperating gains and losses, are excluded from this measure as they are not deemed central to the System s operations. Source: Lake Records. Sources of Lake Patient Revenues Approximately 59% of the Lake s gross patient revenue was derived from the Medicare and Medicaid programs for the Fiscal Year ended June 30, The table below shows the percentages of the Lake s gross patient service revenues by source of payment for the Fiscal Year ended June 30, Sources of Gross Patient Revenues 2012 Medicare Medicaid Managed Care Blue Cross/Blue Shield Commercial Insurance Self-Pay Total 44.1% % Source: Lake Records. A-19

98 ST. FRANCIS MEDICAL CENTER, INC. St. Francis Corporation owns and operates St. Francis, an acute care hospital, which is situated on two inpatient and outpatient campuses and a third ambulatory services campus, licensed for 550 beds. St. Francis is located in Monroe, Louisiana, a city in Northeast Louisiana. Originally known as St. Francis Sanitarium, St. Francis is Monroe s oldest hospital. It was incorporated and commenced operations in 1913 with an initial complement of 75 beds. St. Francis currently occupies 790,716 square feet of hospital and office space in various buildings on its downtown campus (the Downtown Campus ). Included in the expansion efforts over the life of St. Francis was the expansion of Reginald Hall in 1936, a chapel in 1949, and additional beds in 1955, 1964, 1976, 1982, and The acquisition of the facility formerly known as North Monroe Medical Center, now known as St. Francis-North (the North Campus ), occurred on November 1, The North Campus facilities currently occupy 366,397 square feet of hospital and medical office space. In addition, the St. Francis Corporation operates a 69,757 square foot outpatient care center, known as the Community Health Center ( CHC ). CHC is located approximately midway between the Downtown Campus and the North Campus. In February 2012, St. Francis purchased 12 acres of land on Tower Drive in Monroe, Louisiana to serve as the site for a replacement CHC. The expected completion date of the first phase of the replacement CHC is December Of its licensed complement of 550 beds, as of June 30, 2012, St. Francis staffed 331 beds (including a 35-bed NICU) as shown in the table below: Staffed Beds as of June 30, 2012 Service Medical/Surgical Neonatal Intensive Care Pediatric/Pediatric Intensive Care/Obstetrics Skilled Nursing Facility Psychiatric Care Total Source: St. Francis Records Number of Beds St. Francis Medical Staff As of June 30, 2012, St. Francis s medical staff was composed of 335 physicians (excluding Honorary Staff) of whom approximately 189 or 56% regularly admit patients. Of the 189 active physicians on staff, approximately 79% are board certified in their specialties. As of June 30, 2012, no physician with admitting privileges accounted for more than 3.1% of St. Francis admissions, and the top ten admitting physicians accounted for 21.9% of St. Francis admissions. As of June 30, 2012, the average age of the active staff was 51 years of age. St. Francis Service Area St. Francis is located within the City of Monroe, Louisiana, Ouachita Parish, in northeastern Louisiana. According to the U.S. Census Bureau as of 2010, Ouachita Parish has a population of approximately 153,913, which includes approximately 48,815 in Monroe and approximately 13,065 in West Monroe. St. Francis services a large geographic area that spans 17 northeast Louisiana parishes and three A-20

99 counties in southeast Arkansas, with a total population of almost 520,000. The primary market area for St. Francis is concentrated in Ouachita Parish and also consists of the Parishes of Caldwell, Franklin, Jackson, Lincoln, Morehouse, Richland, Union and West Carroll. The secondary market area includes the Parishes of Catahoula, Claiborne, Concordia, East Carroll, LaSalle, Madison, Tensas and Winn and the southern Arkansas Counties of Ashley, Ouachita and Union. [remainder of page intentionally left blank] A-21

100 The map below shows St. Francis primary and secondary market areas. St. Francis North St. Francis Downtown Primary Service Area Secondary Service Area Source: Microsoft MapPoint North America A-22

101 St. Francis Competitors St. Francis has the leading market share in it service area. St. Francis major competitors are Glenwood Regional Medical Center (owned by Iasis Healthcare, a privately-held owner and operator of community-focused hospitals (herein Iasis )) and Monroe Surgical Hospital. On February 1, 2007, ownership interest of Glenwood Regional Medical Center was transferred to Iasis. Glenwood Regional Medical Center is located in West Monroe, Louisiana, which has a growing population. Monroe Surgical Hospital, a short-stay surgical hospital, is located in Monroe, Louisiana at approximately the mid-point between the Downtown and North Campuses of St. Francis. Monroe Surgical Hospital was constructed and began operating in Additional providers in the primary market include an outpatient diagnostic imaging center, Ouachita Imaging located in Monroe, Louisiana, and a short-stay surgical hospital, Ouachita Community Hospital (formerly known as Ouachita Surgical Hospital), located in West Monroe, Louisiana, of which Iasis currently holds a 90% ownership interest. Both of these facilities began operating in In addition to these hospitals, E. A. Conway Medical Center, which is a part of the State of Louisiana's charity care hospital system and is operated by the LSU Health System, is located in St. Francis service area. E.A. Conway Medical Center is currently not considered by St. Francis to be a major competitor, inasmuch as E. A. Conway Medical Center serves primarily indigent and Medicaid patients. See INVESTMENT CONSIDERATIONS Risks in Healthcare Delivery Indigent Care in the body of this Official Statement. St. Francis provides more services than its competitors, including pediatric and neonatal intensive care services and neurological surgery. St. Francis also is recognized as the hospital best equipped to serve the most acutely ill patients in the market, as evidenced by its case mix index. St. Francis leads its competitors in general acute discharges, open heart discharges, OB discharges, medical discharges and surgical discharges. Distance from St. Francis Downtown (miles) Number of Staffed Beds Number of Admissions Calendar Year Acute Care Hospitals Primary Competitors St. Francis ,865 16,510 16,670 Glenwood Regional ,965 7,851 9,137 Secondary Competitors Northern Louisiana Medical Center ,376 6,362 6,355 Richardson Medical Center , Citizens Medical Center Franklin Medical Center ,207 1,397 1,391 Total 32,163 33,659 34,807 Sources: St. Francis Records; LHIN Inpatient Database; AHA Guidebook, 2012; ShareCor. A-23

102 Competitive Developments in the Marketplace In the past few years, the following developments have occurred in St. Francis service area: Glenwood Regional Medical Center ( Glenwood ). In 2010, Glenwood opened its Wound Healing Center and, in March 2011, Glenwood opened its Imaging Center and Urgent Care Center North area. Additionally, Glenwood Medical Group currently employs 35 physicians. P&S Surgery Center, LLC ( P&S Surgical Hospital ). In 2010, P&S Surgical Hospital opened its new catheterization laboratory and two new surgery rooms. Ouachita Community Hospital ( OCH ). In 2011, OCH opened its Weight Loss Center in West Monroe, Louisiana. Affinity Health ( Affinity ). Recently, Vantage Health Plan, through its subsidiary Affinity, opened a new urgent care center adjacent to Monroe Surgical Hospital and currently employs over 27 physicians and nurse practitioners. St. Francis Selected Operating Statistics Fiscal Year Ended June 30, Admissions 18,206 17,511 17,707 Patient Days 93,973 91,980 94,783 Average Length of Stay Average Daily Census Weighted Average Number of Available Beds Occupancy Percentage of Available Beds 70.3% 73.5% 75.5% Emergency Room Visits 53,902 52,554 57,600 Operating Room Procedures 7,006 6,091 5,409 Outpatient Surgery 3,354 2,914 2,395 Net Patient Revenue ($ in 000s) $237,195 $236,066 $247,055 Adjusted Operating Income (1) ($ in 000s) $20,362 $23,465 $24,446 (1) Adjusted Operating Income is defined as a non-gaap performance measure that is defined as operating income plus depreciation expense, amortization expense, interest expense and income tax expense. Management believes that this measure is a useful operating performance indicator of the System s provision of health care services and its ability to service its debt obligations. The measure also assists stakeholders, governance and management in assessing the operating performance of the System from period to period and for comparison with other health care organizations, because the impact of the System s capital structure (interest expense) and asset base (depreciation and amortization expense) is excluded from the measure. Additionally, transactions that are reported as nonoperating gains and losses, are excluded from this measure as they are not deemed central to the System s operations. Source: St. Francis Records. A-24

103 Sources of St. Francis Patient Revenues Approximately 69% of St. Francis gross patient revenue was derived from the Medicare and Medicaid programs for the Fiscal Year ended June 30, The table below shows the percentages of St. Francis gross patient service revenues by source of payment for the Fiscal Year ended June 30, Sources of Gross Patient Revenues 2012 Medicare Medicaid Managed Care Blue Cross/Blue Shield Commercial Insurance Self-Pay Total 50.0% % Source: St. Francis Records. OUR LADY OF LOURDES REGIONAL MEDICAL CENTER, INC. The Lourdes Corporation owns and operates Lourdes, an acute care hospital licensed for 186 beds located in Lafayette, Louisiana, a city/parish situated in the heart of Acadiana (see Lourdes Service Area herein for a description of Acadiana), approximately 57 miles west of Baton Rouge, Louisiana and 132 miles west from New Orleans, Louisiana. Lourdes opened in 1949 with initial complement of 50 beds. In June 2011, after over 60 years at its original location (the Lourdes Original Site ), Lourdes opened a 396,000 square foot state-of-the-art replacement facility (the Replacement Facility ) on a new 45 acre main campus located at 4801 Ambassador Caffery Parkway in Lafayette, Louisiana. The Replacement Facility has been designed such that the capacity can be expanded to 332 inpatient beds if conditions so warrant. Lourdes also operates several services on the main campus from a 104,000 square foot medical office building located adjacent to the Replacement Facility, including, but not limited to, outpatient infusion, blood donor center, outpatient lab testing, imaging and pre-admit testing Currently, Lourdes is offering the Lourdes Original Site for sale. The Lourdes Original Site includes the seven-story, 434,142 square foot, 263-bed acute care main hospital building, two modern medical office buildings (comprising a total of 168,905 square feet), three parking towers, numerous support buildings and a convent. Lourdes currently anticipates that all or a portion of such buildings and structures may be demolished to assist with the sale of the Lourdes Original Site. [remainder of page intentionally left blank] A-25

104 Of its licensed complement of 186 beds, as of June 30, 2012, Lourdes staffed 186 beds as shown in the table below: Staffed Beds as of June 30, 2012 Service Medical Surgical Intensive Care Total Source: Lourdes Records. Number of Beds Lourdes Medical Staff The categories of Lourdes medical staff are active, active provisional, active interim, consulting, consulting provisional, consulting interim, honorary and emergency medicine. As of June 30, 2012, Lourdes medical staff was composed of 488 physicians of whom approximately 59% or 286 are considered active physicians who regularly admit patients. Of the 286 active physicians, approximately 92% are board-certified in their specialties and sub-specialties. As of June 30, 2012, no physician with admitting privileges accounted for more than 3.2% of Lourdes admissions, and the top ten admitting physicians accounted for 36.7% of Lourdes admissions. As of June 30, 2012, the average age of the active staff was 51 years of age. [remainder of page intentionally left blank] A-26

105 Lourdes Service Area Lourdes services a nine parish area in south central Louisiana halfway between New Orleans and Houston. The nine parish area, with a population of approximately 674,000, is also known as Acadiana. Lourdes primary market consists of Lafayette Parish, and the secondary market is comprised of the eight surrounding parishes including: Acadia, Evangeline, Iberia, Jefferson Davis, St. Landry, St. Martin, St. Mary and Vermilion. Ninety-eight percent (98%) of Lourdes inpatients reside in the Acadiana area. Lourdes Primary Service Area Secondary Service Area Source: Microsoft MapPoint North America A-27

106 Lourdes Competitors Lourdes and Lafayette General Medical Center are the largest full service tertiary care hospitals in Acadiana. HCA owns two hospitals in Lafayette, the Regional Medical Center of Acadiana (formerly known as the Medical Center of Southwest Louisiana) and Women s and Children s Hospital. Lourdes holds leading market share in oncology. In addition to the hospitals described above, University Medical Center, which is operated by the LSU Health System, providing care primarily to indigent and Medicaid patients, is located in Lourdes service area. University Medical Center currently staffs 117 beds, and is not considered by Lourdes to be a major competitor of Lourdes, inasmuch as University Medical Center serves primarily indigent and Medicaid patients. See INVESTMENT CONSIDERATIONS Risks in Healthcare Delivery Indigent Care in the body of this Official Statement. Distance from Lourdes (miles) Number of Staffed Beds Number of Admissions Calendar Year Acute Care Hospitals Primary Competitor Lourdes ,616 7,857 8,324 Lafayette General Medical Center ,698 13,168 13,610 Women s and Children s Hospital ,850 8,106 7,439 Regional Medical Center of Acadiana ,767 4,811 4,626 Secondary Competitors Opelousas General Hospital ,035 8,890 8,862 Crowley American Legion Hospital ,912 4,318 3,775 Opelousas General Hospital (South) (1) Columbia Dauterive Hospital ,486 3,062 3,058 Savoy Medical Center ,224 3,219 2,960 Iberia General Hospital ,058 4,770 3,754 Jennings American Legion Hospital ,599 3,252 3,504 Abbeville General ,383 2,007 1,599 Acadian Medical Center ,736 2,630 2,585 Franklin Foundation Hospital Total 70,733 66,890 64,999 (1) On April 30, 2009, Opelousas General Hospital acquired Columbia Doctor s Hospital of Opelousas as its South Campus location. Sources: Lourdes Records; LHIN/Solucient Polaris Suite; AHA. A-28

107 Competitive Developments in the Marketplace The investment in the Lourdes Replacement Facility changed the health care market in Lourdes primary service area. Major players in the market reacted with renovations and rebranding to compete with the new state-of-the-art Replacement Facility. Additionally, due to joint venture activities, physician employment strategies and/or location of the new campus in the fastest growing segment of Lourdes primary service area, there has been a notable shift of provider alignment to Lourdes. Historically, practitioners divided their time and business between Lourdes and Lafayette General Medical Center; however, as a result of the construction of the Replacement Facility and relocation to Lourdes new campus, more than 60 physician practices relocated either on Lourdes new campus or in neighboring complexes in the new medical corridor. Lafayette General Medical Center ( LGMC ) LGMC is a 353-bed acute care medical center completed construction on a 10-story patient tower renovation in Fall of Recently, in the Summer of 2012, LGMC began work on a second phase construction project to revitalize and expand surgery suites and emergency room departments and build an additional parking garage. Lourdes Selected Operating Statistics Fiscal Year Ended June 30, Admissions 10,546 10,159 11,121 Patient Days 50,609 48,182 53,203 Average Length of Stay Average Daily Census Weighted Average Number of Available Beds Occupancy Percentage of Available Beds 52.3% 49.4% 66.7% Emergency Room Visits 32,613 27,743 34,614 Operating Room Procedures 5,812 5,006 6,657 Outpatient Surgery 2,236 2,425 2,677 Net Patient Revenue ($ in 000s) $205,645 $211,129 $240,652 Adjusted Operating Income (1) ($ in 000s) $18,846 $12,677 $32,362 (1) Adjusted Operating Income is defined as a non-gaap performance measure that is defined as operating income plus depreciation expense, amortization expense, interest expense and income tax expense. Management believes that this measure is a useful operating performance indicator of the System s provision of health care services and its ability to service its debt obligations. The measure also assists stakeholders, governance and management in assessing the operating performance of the System from period to period and for comparison with other health care organizations, because the impact of the System s capital structure (interest expense) and asset base (depreciation and amortization expense) is excluded from the measure. Additionally, transactions that are reported as nonoperating gains and losses, are excluded from this measure as they are not deemed central to the System s operations. Source: Lourdes Records. A-29

108 Sources of Lourdes Patient Revenues Approximately 59% of Lourdes gross patient revenue was derived from the Medicare and Medicaid programs for the Fiscal Year ended June 30, The table below shows the percentages of Lourdes gross patient services revenues by source of payment for the Fiscal Year ended June 30, Sources of Gross Patient Revenues 2012 Medicare 48.5% Medicaid 10.7 Managed Care 15.0 Blue Cross/Blue Shield 16.5 Commercial Insurance 5.0 Self-Pay 4.3 Total 100.0% Source: Lourdes Records. OUR LADY OF THE LAKE ASCENSION COMMUNITY HOSPITAL, INC. d/b/a ST. ELIZABETH HOSPITAL St. Elizabeth, a nonprofit acute care community hospital, is licensed for 78 beds and is located in Gonzales, Louisiana, a city in the southeastern part of the Louisiana between Baton Rouge and New Orleans and approximately 18 miles from the Lake s facility. St. Elizabeth provides healthcare services to residents of Ascension, Assumption, St. James, Iberville, and Livingston Parishes. See St. Elizabeth Service Area herein. St. Elizabeth s and its medical office buildings occupy 243,536 square feet situated on 30 acres of land. Additionally, St. Elizabeth has a 29,794 square foot medical office building in Prairieville, Louisiana (located approximately ten miles from St. Elizabeth s main campus) and a 6,716 square foot medical office building in Dutchtown, Louisiana (located approximately five miles from St. Elizabeth s main campus). Completed in 1986, the hospital was opened by American Medical International (AMI) as Riverview Medical Center, a for-profit hospital. In 2000, St. Elizabeth was acquired by the Lake Corporation. Effective July 2004, ownership of the hospital was transferred to the System. In 2010, St. Elizabeth completed its three phase expansion program to better serve the community and promote its mission. This expansion program was initiated in September 2006 and included increasing the emergency room from 10 to 18 beds, upgrading its telemetry unit, upgrading all semi-private rooms to private and allowing for nurse substations in each corridor, moving the lab and pharmacy closer to patient care areas, redesigning patient access areas to allow for improved patient convenience and staffing efficiencies, upgrades to the exterior of the main hospital and construction of a connector walkway between the hospital and an existing medical office building. [remainder of page intentionally left blank] A-30

109 below: Of its licensed complement of 78 beds, St. Elizabeth currently staffs 48, as set forth in the table Service Staffed Beds as of June 30, 2012 Number of Beds Medical & Surgical Telemetry Intensive Care Unit Total St. Elizabeth Medical Staff Source: St. Elizabeth Records. The categories of St. Elizabeth s medical staff are active, associate active, courtesy, associate courtesy, and affiliate. As of June 30, 2012, St. Elizabeth s medical staff was composed of 249 physicians of whom 163 are considered active physicians who regularly admit patients. Of the 163 active physicians, approximately 91% are board-certified in their specialties. As of June 30, 2012, no physician with admitting privileges accounted for more than 20% of St. Elizabeth s admissions, and the top ten admitting physicians accounted for 88% of St. Elizabeth s admissions. As of June 30, 2012, the average age of the active staff was 45 years of age. [remainder of page intentionally left blank] A-31

110 St. Elizabeth Service Area St. Elizabeth is located in the City of Gonzales, Ascension Parish, Louisiana. According to the United States Census Bureau State and Country Quick Facts, Ascension Parish has an estimated population of 109,985 as of The service area for St. Elizabeth consists of Ascension, Assumption, St. James, Iberville, and Livingston Parishes. Ascension Parish is located in southeastern Louisiana, and the City of Donaldsonville, Louisiana is the parish seat. Ascension Parish has an area of approximately 292 square miles and supports both commercial and agricultural interests. St. Elizabeth Primary Service Area Secondary Service Area Source: Microsoft MapPoint North America A-32

111 St. Elizabeth Competitors St. Elizabeth s major competitors are the larger hospitals in the other parishes of its service area. St. Elizabeth s challenge is to prevent out migration of patients to the other larger tertiary facilities. St. Elizabeth is the largest acute care hospital in Ascension Parish, and acts as a referral source of tertiary care patients to the Lake. See INVESTMENT CONSIDERATIONS in the body of this Official Statement. Competitive Developments in the Marketplace St. Elizabeth s service area overlaps with the Lake. See discussion of competitive developments in the Lake section and Management s Discussion and Analysis of Recent Financial Performance in this Appendix A. St. Elizabeth Selected Operating Statistics Fiscal Year Ended June 30, Admissions 3,237 2,885 2,634 Patient Days 11,779 10,700 10,551 Average Length of Stay Average Daily Census Weighted Average Number of Available Beds Occupancy Percentage of Available Beds 58.7% 57.5% 58.8% Emergency Room Visits 33,279 31,712 32,452 Operating Room Procedures 1, ,026 Outpatient Surgery 5,170 5,495 6,136 Net Patient Revenue ($ in 000s) $97,137 $95,207 $105,066 Adjusted Operating Income ($ in 000s) (1) $13,333 $10,262 $12,401 (1) Adjusted Operating Income is defined as a non-gaap performance measure that is defined as operating income plus depreciation expense, amortization expense, interest expense and income tax expense. Management believes that this measure is a useful operating performance indicator of the System s provision of health care services and its ability to service its debt obligations. The measure also assists stakeholders, governance and management in assessing the operating performance of the System from period to period and for comparison with other health care organizations, because the impact of the System s capital structure (interest expense) and asset base (depreciation and amortization expense) is excluded from the measure. Additionally, transactions that are reported as nonoperating gains and losses, are excluded from this measure as they are not deemed central to the System s operations. Source: St. Elizabeth Records. [remainder of page intentionally left blank] A-33

112 Sources of St. Elizabeth Patient Revenues Approximately 46% of the St. Elizabeth s gross patient revenues were derived from the Medicare and Medicaid programs for the Fiscal Year ended June 30, The table below shows the percentages of St. Elizabeth s gross patient services revenues by source of payment for the Fiscal Year ended June 30, Sources of Gross Patient Revenues 2012 Medicare 32.3% Medicaid 13.5 Managed Care 25.3 Blue Cross/Blue Shield 20.3 Self-Pay 0.0 Other 8.8 Total 100.0% Source: St. Elizabeth Records. FINANCIAL AND OPERATING INFORMATION Summary of Operations of the System The following selected financial data for the three fiscal years ended June 30, 2012 is derived from the audited consolidated financial statements of the System. The data should be read in conjunction with the consolidated audited financial statements, related notes and other financial information included as Appendix B to this Official Statement. Note that the Net patient service revenues and the Adjusted operating income included in the Consolidated Statement of Operations and the Operating Statistics below for Fiscal Year ended June 30, 2011 includes the Department of Health and Hospital payments of $129 million to the Lake pursuant to the CEA. Additionally, the Adjusted operating income for Fiscal Year ended June 30, 2011 includes $19 million in expenses related to the CEA. For more information see INVESTMENT CONSIDERATIONS Risks in Healthcare Delivery Indigent Care in the body of this Official Statement. [remainder of the page intentionally left blank] A-34

113 Consolidated Balance Sheets As of June 30, 2010, 2011 and 2012 (in thousands) Assets Current assets: Cash and cash equivalents $ 78, , ,006 Short-term investments 21,780 21,254 17,538 Patient receivables, net of allowance for uncollectible accounts of $56,088, $64,441 and $73,144 in 2010, 2011 and 2012, respectively 169, , ,752 Other current assets 95,086 88,980 81,714 Total current assets 365, , ,010 Assets limited as to use, net of current portion 642, , ,512 Property and equipment, net 839, , ,262 Property and equipment, held for sale 15,055 Other assets 97, , ,761 Total $ 1,945,612 2,260,408 2,261,545 Liabilities and Net Assets Current liabilities: Lines of credit $ 5,158 4,650 5,996 Current installments of long-term debt 66,069 17,585 19,027 Current portion of capital lease obligations 3,573 4,649 5,103 Accounts payable 72,325 75,487 53,435 Other current liabilities 126, , ,200 Total current liabilities 273, , ,761 Professional and general liabilities 26,354 25,587 28,472 Long-term debt, excluding current installments 479, , ,390 Capital lease obligations, excluding current portion 5,122 16,843 12,174 Accrued pension cost 242, , ,591 Other long-term liabilities 37,314 52,782 62,200 Total liabilities 1,063,962 1,045,786 1,162,588 Net assets: Unrestricted 848,125 1,180,209 1,065,480 Temporarily restricted 18,877 18,609 20,802 Permanently restricted 5,505 5,516 5,510 Total net assets attributable to Franciscan Missionaries of Our Lady Health System, Inc. 872,507 1,204,334 1,091,792 Noncontrolling interests 9,143 10,288 7,165 Total net assets 881,650 1,214,622 1,098,957 Commitments and contingencies Total liabilities and net assets $ 1,945,612 2,260,408 2,261,545 A-35

114 Consolidated Statements of Operations For the Three Fiscal Years ended June 30, 2010, 2011 and 2012 (in thousands) Changes in unrestricted net assets: Unrestricted revenues: Net patient service revenue $ 1,207,123 1,362,922 1,319,535 Other revenue 83,821 86,317 89,943 Equity in income from equity investees, net 10,190 10,951 12,033 Total unrestricted revenues 1,301,134 1,460,190 1,421,511 Net assets released from restrictions used for operations: Satisfaction of program restrictions 6,354 5,364 2,780 Expiration of time restrictions Total net assets released from restrictions used for operations 6,472 5,489 2,913 Total unrestricted revenues and other support 1,307,606 1,465,679 1,424,424 Operating expenses: Salaries and wages 454, , ,767 Employee benefits 131, , ,761 Total salaries, wages, and employee benefits 585, , ,528 Provision for uncollectible accounts 102, , ,500 Physician fees 25,226 28,189 30,570 Professional services 21,376 14,817 15,973 Other services 144, , ,469 Leases, insurance, and utilities 43,124 44,103 46,384 Supplies and other 252, , ,758 Depreciation and amortization 76,530 68,478 79,153 Interest 20,663 21,942 26,537 Other ,352 3,133 Total operating expenses 1,272,405 1,319,374 1,386,005 Operating income 35, ,305 38,419 Nonoperating gains (losses): Investment return 76, ,270 (5,332) Other (2,644) (4,695) (3,743) Loss on early extinguishment of debt (542) Change in fair value of interest rate swap agreements (5,412) 4,676 (14,118) Total nonoperating gains (losses), net 67, ,251 (23,193) Unrestricted revenues, gains and other support is excess of expenses and losses before noncontrolling interest 115, ,556 15,226 Noncontrolling interests (2,329) (3,145) (3,126) Unrestricted revenues, gains, and other support in excess of expenses and losses attributable to Franciscan Missionaries of Our Lady Health System, Inc. 100, ,411 12,100 Pension-related changes other than net periodic pension cost (49,441) 69,673 (124,981) Acquired net assets (1,848) Increase (decrease) in unrestricted net assets $ 51, ,084 (114,729) A-36

115 Consolidated Statements of Changes in Net Assets For the Three Years ended June 30, 2010, 2011 and 2012 (in thousands) Net assets, beginning of year $ 819, ,650 1,214,622 Adjustment to present noncontrolling interests as required by new accounting standard 9,591 Net assets, beginning of year (as adjusted) 829, ,650 1,214,622 Change in unrestricted net assets: Unrestricted revenues, gains, and other support in excess of expenses and losses attributable to Franciscan Missionaries of Our Lady Health System, Inc. 100, ,411 12,100 Pension-related changes other than net periodic pension cost (49,441) 69,673 (124,981) Acquired net assets (1,848) Increase (decrease) in unrestricted net assets 51, ,084 (114,729) Changes in temporarily restricted net assets: Contributions 7,140 5,185 5,062 Income from long-term investments, net Net unrealized and realized gains on investments, net Net assets released from restrictions (6,472) (5,489) (2,913) Acquired net assets 28 Transfer from unrestricted net assets due to clarification of donor intent 48 Increase (decrease) in temporarily restricted net assets 735 (268) 2,193 Changes in permanently restricted net assets (6) Changes in noncontrolling interests: Unrestricted revenues, gains, and other support in excess of expenses and losses 2,329 3,145 3,126 Distributions (3,426) (3,207) (5,183) Acquired noncontrolling interests (1,066) Sale of noncontrolling interests 649 1,207 Changes in noncontrolling interest (448) 1,145 (3,123) Increase (decrease) in net assets 52, ,972 (115,665) Net assets, end of year $ 881,650 1,214,622 1,098,957 [remainder of page intentionally left blank] A-37

116 Operating Statistics For the Three Fiscal Years Ended June 30, 2010, 2011 and Admissions 67,775 65,732 64,410 Patient Days 329, , ,753 Average Length of Stay Average Daily Census Weighted Average Number of Available Beds 1,331 1,323 1,275 Occupancy Percentage of Available Beds 67.8% 66.2% 68.7% Emergency Room Visits 218, , ,264 Operating Room Procedures 32,924 31,960 32,653 Outpatient Surgery 18,502 18,952 19,348 Net Patient Revenue ($ in 000s) $1,207,123 $1,362,922 $1,319,535 Adjusted Operating Income (1) ($ in 000s) $132,394 $236,725 $144,926 (1) Adjusted Operating Income is defined as a non-gaap performance measure that is defined as operating income plus depreciation expense, amortization expense, interest expense and income tax expense. Management believes that this measure is a useful operating performance indicator of the System s provision of health care services and its ability to service its debt obligations. The measure also assists stakeholders, governance and management in assessing the operating performance of the System from period to period and for comparison with other health care organizations, because the impact of the System s capital structure (interest expense) and asset base (depreciation and amortization expense) is excluded from the measure. Additionally, transactions that are reported as nonoperating gains and losses, are excluded from this measure as they are not deemed central to the System s operations. Sources of Gross Patient Revenue of the System For the Fiscal Year Ended June 30, 2012 Sources of Gross Patient Revenues 2012 Medicare (1) 45.6% Medicaid (1) 15.0 Managed Care 14.9 Blue Cross/Blue Shield 16.0 Commercial Insurance 2.5 Self-Pay 6.0 Total 100.0% (1) See INVESTMENT CONSIDERATIONS Healthcare Reform and other Governmental Initiatives - Health Care Reform and - Risks in Healthcare Delivery Indigent Care in the body of this Official Statement for a discussion of the potential impact of changes in the Medicare and Medicaid program and treatment of indigent patients. A-38

117 Outstanding Indebtedness of the System The following table sets forth the Outstanding Bonds (as defined in the body of this Official Statement) issued under the Master Indenture and the principal outstanding as of the date of delivery of the Bonds, including the Bonds: Principal Outstanding (Proforma) Series 1998A $ 40,700,000 Series 1998B 18,500,000 Series 2005A 80,000,000 Series 2005B 50,000,000 Series 2005D 76,275,000 Series 2008A 46,310,000 Series 2009A 125,000,000 Series 2012A 56,530,000 Series 2012B 100,000,000 * Total $ * Preliminary, subject to change. On October 3, 2012, the Authority issued the Series 2012A Bonds on behalf of the Corporation. The proceeds from the sale of the Series 2012A Bonds, together with other available funds of the Corporation, were used to advance refund the Series 2005C Bonds and pay the costs of issuance of the Series 2012A Bonds. The Series 2012A Bonds were issued as tax-exempt, fixed rate bonds and privately placed with Capital One Public Funding, LLC. Capital One Public Funding, LLC may elect to have the Series 2012A Bonds redeemed on November 1, Upon such election, no assurances can be given that the Corporation will be able to refinance the Series 2012A Bonds. The Series 2012A Bonds are subject to optional redemption at the direction of the Corporation at any time at a redemption price equal to the principal amount thereof plus accrued interest to the redemption date, plus a prepayment premium. Interest is payable semiannually on January 1 and July 1 of each year. As of June 30, 2012, the System and the Hospitals have outstanding, in addition to the Outstanding Bonds, certain long term indebtedness and unsecured working capital lines of credit as described in the consolidated financial statements and supplemental schedules as of and for the years ended June 30, 2012 and 2011 of the Corporation and Affiliated Organizations, included in APPENDIX B to this Official Statement, in Note (7) and Note (9) under Notes to Consolidated Financial Statements therein. Swap Agreements. The Corporation currently has four interest rate hedge agreements (the Swap Agreements ) outstanding in connection with the Swap Transactions (as defined in the body of this Official Statement). Two of the Swap Agreements are fixed payor swaps where the Corporation pays a fixed rate of interest and receives a payment based on a percentage of one-month LIBOR from the swap counterparty. The fixed payor swap counterparties are Merrill Lynch Capital Services, Inc. and Goldman Sachs Capital Markets, L.P. The other two Swap Agreements are constant maturity swaps wherein the Corporation pays a percentage of one-month LIBOR and receives a payment based on a percentage of ten-year International Swaps and Derivatives Association Inc. (ISDA) swap rate. The swap counterparty for the constant maturity swaps is Merrill Lynch Capital Services, Inc. The Corporation is not currently required to post collateral on its outstanding swaps. The Swap Transactions were in a liability position of $20.1 million as of June 30, A-39

118 Pro Forma Debt-to-Capitalization, Pro Forma Debt Service Coverage and Days Cash on Hand of the System* The following tables set forth the Pro Forma Debt-to-Capitalization, Pro Forma Debt Service Coverage Ratio and Days Cash on Hand for the System: Fiscal Year Ended June 30, (in thousands) Pro Forma Debt-to-Capitalization Ratio Long Term Debt (1) $559,359 $562,436 $544,690 Series 2012B Bonds N/A N/A 100,000 Pro Forma Long Term Debt N/A N/A 644,690 Unrestricted & Temporarily Restricted Net Assets 867,002 1,198,818 1,086,282 Historical Percent Debt-to-Capitalization (2) 39.2% 31.9% 33.4% Pro Forma Percent Debt-to-Capitalization (2) N/A N/A 37.2% Pro Forma Debt Service Coverage Ratio Net Income Available for Debt Service (3) $127,421 $228,885 $137,240 Historical Maximum Annual Debt Service (4) $45,087 $47,894 $50,699 Historical Debt Service Coverage Ratio 2.8x 4.8x 2.7x Pro Forma Maximum Annual Debt Service (5) 49,429 49,429 49,429 Pro Forma Debt Service Coverage Ratio 2.6x 4.6x 2.8x Days Cash on Hand Unrestricted Cash and Investments $700,453 $904,096 $842,770 Operating Expenses Less Depreciation & Amortization $1,195,875 $1,250,896 $1,306,852 Historical Days Cash on Hand (6) (1) Excludes Unamortized Premium (Discount). Includes capital lease obligations. (2) Debt-to-Capitalization Ratio is defined as Long-Term Debt divided by the sum of Long-Term Debt, Unrestricted Net Assets and Temporarily Restricted Net Assets. (3) Per definition of Net Income Available for Debt Service in APPENDIX C attached to this Official Statement. Fiscal Year ended June 30, 2011 includes Department of Health and Hospital payments of $129 million to the Lake pursuant to the CEA. See INVESTMENT CONSIDERATIONS Risks in Healthcare Delivery Indigent Care in the body of this Official Statement. (4) Includes debt service on the Outstanding Bonds but does not include the refunding of the Series 2005C Bonds nor the issuance of the Series 2012A Bonds and the Bonds. Historical Maximum Annual Debt Service calculations include capital lease obligations. (5) Includes debt service on the Bonds and the Outstanding Bonds. The interest on the Series 2005B Bonds, the Series 2005D Bonds, the Series 2008A Bonds and the Series 2012A Bonds has been calculated using at the assumed interest rates set forth in the footnote of the table in DEBT SERVICE REQUIREMENTS in the body of this Official Statement. Debt service on Series 2012A Bonds is calculated using the amortization schedule set forth in the trust indenture with respect to the Series 2012A Bonds. Capital One Public Funding, LLC may elect to have the Series 2012A Bonds redeemed on November 1, See PLAN OF FINANCE - Series 2012A Bonds in the body of this Official Statement and FINANCIAL AND OPERATING INFORMATION - Outstanding Indebtedness of the System in this APPENDIX A. Pro Forma Maximum Annual Debt Service calculations include capital lease obligations. (6) Historical Days Cash on Hand is unrestricted cash and investments divided by operating expenses less depreciation and amortization. * Preliminary, subject to change. A-40

119 Retirement Plans The Lake, Lourdes, and St. Francis sponsor defined benefit pension plans and defined contribution plans. System and St. Elizabeth employees are covered under the Lake plans. The defined benefit plans were closed to new entrants in June of 2006 and all new employees since that time are covered under the defined contribution plans. The defined benefit plans are governed under a Church Plan Exemption and as such are not subject to ERISA funding requirements. The defined benefit plans cover substantially all System employees employed prior to June 2006 who meet age and service requirements. Retirement costs and obligations are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, expected return on plan assets, rates of compensation increases and other factors. In accordance with accounting principles generally accepted in the United States of America, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore generally affect expenses and recorded obligations in future periods. While management believes that the assumptions used are appropriate and the liabilities fairly stated, differences in actual experience or changes in assumptions may impact future obligations and expenses. For Fiscal Year 2012, the System utilized the following assumptions to determine benefit obligations and net periodic benefit cost: Discount Rate benefit obligation 4.85% Discount Rate net periodic benefit cost 5.75% Rate of Compensation Increase % Expected Rate of Return on Plan Assets 8.00% The System provides investment oversight for all the defined benefit plans. For Fiscal Year 2012, the asset allocation was as follows: U.S. Equity 17% Global Equity 13% Real Assets 8% Fixed Income &Cash 33% Emerging Markets 4% Alternative Investments - Hedge Funds 21% Alternative Investments Private Equity Funds 4% As of June 30, 2012, the funded status of the defined benefit plans was 58% of the projected benefit obligation. At the end of Fiscal Year 2012, the projected benefit obligation was approximately $724,658,000. For more information on the defined benefit plans see the consolidated financial statements and supplemental schedules as of and for the years ended June 30, 2012 and 2011 of the Corporation and Affiliated Organizations, included in APPENDIX B to this Official Statement, in Note (15)(a) under Notes to Consolidated Financial Statements therein. The defined contribution plans are fully funded by the System s affiliates and no contributions are made by the employees. The funding is determined annually by each of the affiliates. During Fiscal Year 2012, the annual contribution to these plans was $4,915,247. System Investment Policy and Allocations The System maintains a long-term investment program that pools the investments of the Hospitals and related subsidiaries into a fund managed by the System. The Investment Committee, a sub-committee of the Finance Committee, is responsible for oversight of the investment pool, selection of investment advisor, A-41

120 determination of asset allocation, and selection of investment managers. Asset allocation is reviewed quarterly by the Investment Committee. As of June 30, 2012, the asset allocations of the System were as follows: U.S. Equity 17% Global Equity 13% Real Assets 8% Fixed Income & Cash 33% Emerging Markets 4% Hedge Funds 21% Private Equity Funds 4% The System reviews capital needs on a quarterly basis and believes the investment portfolio contains ample liquidity for capital needs. Approximately 41% of the portfolio has immediate liquidity. Approximately 14% is liquid within one month. Approximately 22% is liquid in two months to six months. Approximately 8% is liquid in six months to one year. Approximately 15% is liquid in greater than one year. All investments are treated as trading assets and are marked to market on a monthly basis. Management s Discussion and Analysis of Recent Financial Performance Overview. Management of the System believes that its healing ministry can be achieved only if the financial condition of its facilities remains strong. To that end, the System s goals include being the provider of choice in each market served, providing high quality services, and having the lowest cost base when compared to competitors in each market. The philosophy of the System is to maintain a small corporate staff and utilize the talent of each sponsored facility to assist in accomplishing its objectives. This is done through various System-wide task forces in the areas of Mission Performance and Excellence, Finance, Information Systems, Insurance, and Human Resources. These task forces have been instrumental in helping the System establish System-wide best practice in each of the areas. In addition, certain functions have been centralized such as materials management, insurance, investments, information systems, legal, internal audit, payor relations, compliance, senior services, and some treasury functions. Over the years, the System has experienced continual growth and has strategically invested in new facilities, programs and services which include: St. Francis PET Imaging (2005); Park Place Surgical Hospital (2006); St. Francis Pediatric After Hours (2006); St. Elizabeth Mary Bird Perkins Cancer Center (2007); Heart Hospital of Acadiana dba Heart Hospital of Lafayette (2007), Franciscan PACE (2007),St. Elizabeth Physicians (2008) and Surgical Specialty Centre (2008). Park Place Surgery Center is a joint venture with physicians in the Lourdes market in a short stay hospital, which is 45% owned by Lourdes. St. Francis Pediatric After Hours is a joint venture with local physicians to provide evening and weekend pediatric services and is 50% owned by St. Francis. St. Elizabeth Mary Bird Perkins Cancer Center is a joint venture with the premier cancer center in south Louisiana which provides a full array of cancer diagnostic and treatment services and the venture is 35% owned by St. Elizabeth. Franciscan PACE is a wholly-owned venture of FMOL Health System and provides services to the communities of all FMOLHS facilities under the federal Program for All-inclusive Care for the Elderly. Heart Hospital of Acadiana is a 32-bed cardiovascular facility and is a joint venture with cardiologists and cardiovascular surgeons and Lourdes, which is 60% owned by Lourdes. St. Elizabeth Physicians is a wholly-owned subsidiary of St. Elizabeth and is a multi-specialty practice comprised of 34 physicians. Surgical Specialty Centre is a short stay hospital in which the Lake owns a 49% interest in partnership with 43 physicians. Each market continues to strengthen physician relationships either through employment or contract. A-42

121 Twelve Months Ending June 30, 2012, Compared to Twelve Months Ending June 30, Net Patient Revenue generated from patient care activities, which comprised 92.6% of total revenue for the twelve month period ended June 30, 2012 was $1.32 billion, down 3.2% from the annual period ended June 30, This decrease is due to the $129 million of LSU Cooperative Endeavor Agreement payments received in Fiscal Year Patient volumes for the System as represented by inpatient admissions were down 2.0%. Unrestricted revenues, gains, and other support in excess of expenses (total net income) for the twelve month period ended June 30, 2012 was $12.1 million which was a decrease from $262.4 million in the comparable period in fiscal year The decrease was a result of investment return declining by $124.6 million. Also fiscal year 2011 included $129 million of LSU Cooperative Endeavor Agreement payments. Operating income for the annual period ending June 30, 2012 was $38.4 million, which decreased from $146.3 million in the comparable period in fiscal year Operating Expenses for the twelve months ending June 30, 2012 were 5.1% higher than the same period last year. Balance Sheet Discussion for Fiscal Year Ending June 30, Cash, investments and funded depreciation totaled $842 million at June 30, 2012, compared to $897 million at June 30, Days Cash on Hand dropped to 235 days, from 262 days at June 30, Twelve Months Ending June 30, 2011, Compared to Twelve Months Ending June 30, Net Patient Revenue was $1.36 billion for the twelve months ended June 30, 2011 compared to $1.2 billion for the twelve months ended June 30, 2010, or an increase of 12.9%. Most of the increase was attributable to quarterly transition payments to Our Lady of the Lake pursuant to the LSU Cooperative Endeavor Agreement. Investment Income for the Fiscal Year 2011 was $119.3 million, an increase of $42.7 million over the same period in the prior year. Operating Expenses for the twelve months ended June 30, 2011 were 3.7% higher than the twelve months ended June 30, Operating margins increased for the twelve month period from $35.2 million in Fiscal Year 2010 to $146.3 million in Fiscal Year Other Discussion. St. Francis, the Lake and Lourdes received notice that each are included in a national investigation conducted by the Department of Justice concerning implantable cardioverter defibrillators. Each Hospital is cooperating fully in the investigation. St. Elizabeth has announced that Robert Burgess has been appointed as its new President and Chief Executive Officer. Mr. Burgess replaces outgoing President and CEO, Dolores Dee LeJeune, who announced her retirement in March. A-43

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123 APPENDIX B CONSOLIDATED AUDITED FINANCIAL STATEMENTS OF THE OBLIGATED GROUP

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125 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Consolidated Financial Statements and Supplemental Schedules June 30, 2012 and 2011 (With Independent Auditors Report Thereon)

126 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Table of Contents Page(s) Independent Auditors Report 1 Consolidated Financial Statements: Consolidated Balance Sheets, June 30, 2012 and Consolidated Statements of Operations, Years ended June 30, 2012 and Consolidated Statements of Changes in Net Assets, Years ended June 30, 2012 and Consolidated Statements of Cash Flows, Years ended June 30, 2012 and Notes to Consolidated Financial Statements 9 55 Supplemental Schedules 1 Consolidating Schedule Balance Sheet Information 56 2 Consolidating Schedule Statement of Operations Information Consolidating Schedule Statement of Changes in Net Assets Information 59 4 Service to the Community (Unaudited) 60 61

127 KPMG LLP Suite Laurel Street, Suite 1700 Baton Rouge, LA Independent Auditors Report The Board of Trustees Franciscan Missionaries of Our Lady Health System, Inc.: We have audited the accompanying consolidated balance sheets of Franciscan Missionaries of Our Lady Health System, Inc. and affiliated organizations (the System) as of June 30, 2012 and 2011, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the System s management. 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 financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the System s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Franciscan Missionaries of Our Lady Health System, Inc. and affiliated organizations as of June 30, 2012 and 2011, and the results of their operations, changes in their net assets, and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary information included in Schedules 1 through 3 is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

128 Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary information included in Schedule 4 is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information has not been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, accordingly, we do not express an opinion or provide any assurance on it. October 9,

129 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Consolidated Balance Sheets June 30, 2012 and 2011 (In thousands) Assets Current assets: Cash and cash equivalents $ 190, ,195 Short-term investments 17,538 21,254 Patient receivables, net of allowance for uncollectible accounts of $73,144 and $64,441 in 2012 and 2011, respectively 191, ,784 Other current assets 81,714 88,980 Total current assets 481, ,213 Assets limited as to use, net of current portion 668, ,785 Property and equipment, net 999, ,292 Property and equipment, held for sale 15,055 Other assets 112, ,063 Total assets $ 2,261,545 2,260,408 Liabilities and Net Assets Current liabilities: Lines of credit $ 5,996 4,650 Current installments of long-term debt 19,027 17,585 Current portion of capital lease obligations 5,103 4,649 Accounts payable 53,435 75,487 Other current liabilities 169, ,491 Total current liabilities 252, ,862 Professional and general liabilities 28,472 25,587 Long-term debt, excluding current installments 502, ,709 Capital lease obligations, excluding current portion 12,174 16,843 Accrued pension cost 304, ,003 Other long-term liabilities 62,200 52,782 Total liabilities 1,162,588 1,045,786 Net assets: Unrestricted 1,065,480 1,180,209 Temporarily restricted 20,802 18,609 Permanently restricted 5,510 5,516 Total net assets attributable to Franciscan Missionaries of Our Lady Health System, Inc. 1,091,792 1,204,334 Noncontrolling interests 7,165 10,288 Total net assets 1,098,957 1,214,622 Commitments and contingencies Total liabilities and net assets $ 2,261,545 2,260,408 See accompanying notes to consolidated financial statements. 3

130 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Consolidated Statements of Operations Years ended June 30, 2012 and 2011 (In thousands) Changes in unrestricted net assets: Unrestricted revenues: Net patient service revenue $ 1,319,535 1,362,922 Other revenue 89,943 86,317 Equity in income from equity investees, net 12,033 10,951 Total unrestricted revenues 1,421,511 1,460,190 Net assets released from restrictions used for operations: Satisfaction of program restrictions 2,780 5,364 Expiration of time restrictions Total net assets released from restrictions used for operations 2,913 5,489 Total unrestricted revenues and other support 1,424,424 1,465,679 Operating expenses: Salaries and wages 519, ,515 Employee benefits 111, ,264 Total salaries, wages, and employee benefits 631, ,779 Provision for uncollectible accounts 123, ,238 Physician fees 30,570 28,189 Professional services 15,973 14,817 Other services 171, ,997 Leases, insurance, and utilities 46,384 44,103 Supplies and other 257, ,479 Depreciation and amortization 79,153 68,478 Interest 26,537 21,942 Other 3,133 21,352 Total operating expenses 1,386,005 1,319,374 Operating income 38, ,305 4 (Continued)

131 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Consolidated Statements of Operations Years ended June 30, 2012 and 2011 (In thousands) Nonoperating gains (losses): Investment return $ (5,332) 119,270 Other (3,743) (4,695) Change in fair value of interest rate swap agreements (14,118) 4,676 Total nonoperating gains (losses), net (23,193) 119,251 Unrestricted revenues, gains, and other support in excess of expenses and losses before nonontrolling interest 15, ,556 Noncontrolling interests (3,126) (3,145) Unrestricted revenues, gains, and other support in excess of expenses and losses attributable to Franciscan Missionaries of Our Lady Health System, Inc. 12, ,411 Pension-related changes other than net periodic pension cost (124,981) 69,673 Other (1,848) Increase (decrease) in unrestricted net assets $ (114,729) 332,084 See accompanying notes to consolidated financial statements. 5

132 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Consolidated Statements of Changes in Net Assets Years ended June 30, 2012 and 2011 (In thousands) Change in unrestricted net assets: Unrestricted revenues, gains, and other support in excess of expenses and losses attributable to Franciscan Missionaries of Our Lady Health System, Inc. $ 12, ,411 Pension-related changes other than net periodic pension cost (124,981) 69,673 Other (1,848) Increase (decrease) in unrestricted net assets (114,729) 332,084 Changes in temporarily restricted net assets: Contributions 5,062 5,185 Income from long-term investments, net 1 1 Net unrealized and realized gains on investments, net Net assets released from restrictions (2,913) (5,489) Acquired net assets 28 Increase (decrease) in temporarily restricted net assets 2,193 (268) Changes in permanently restricted net assets (6) 11 Changes in noncontrolling interests: Unrestricted revenues, gains, and other support in excess of expenses and losses 3,126 3,145 Distributions (5,183) (3,207) Sale of noncontrolling interests 1,207 Acquired noncontrolling interest (1,066) Changes in noncontrolling interest (3,123) 1,145 Increase (decrease) in net assets (115,665) 332,972 Net assets, beginning of year 1,214, ,650 Net assets, end of year $ 1,098,957 1,214,622 See accompanying notes to consolidated financial statements. 6

133 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Consolidated Statements of Cash Flows Years ended June 30, 2012 and 2011 (In thousands) Cash flows from operating activities: (Decrease) increase in net assets $ (115,665) 332,972 Adjustments to reconcile (decrease) increase in net assets to net cash provided by operating activities: Depreciation and amortization 79,153 68,478 Provision for uncollectible accounts 123, ,238 Loss on sale of property and equipment, net 2,827 2,240 Net realized and unrealized (gains) losses on assets limited as to use and investment securities 11,107 (114,438) Income from equity investees, net of distributions (12,033) (10,951) Change in value of interest rate swap agreement 14,119 (4,676) Amortization of net premium on bond issues (38) (35) Pension-related changes other than net periodic pension cost 124,981 (69,673) Sale of noncontrolling interest (1,207) Purchase of noncontrolling interest 985 Distributions to noncontrolling interest 5,183 3,207 Changes in operating assets and liabilities: Short-term investments, net 1, Receivables (138,914) (109,622) Inventories (187) (752) Prepaid expenses and other assets (6,688) (1,207) Accounts payable, accrued expenses, and other liabilities (3,688) 60,368 Professional and general liabilities 2,518 (767) Net cash provided by operating activities 88, ,957 7 (Continued)

134 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Consolidated Statements of Cash Flows Years ended June 30, 2012 and 2011 (In thousands) Cash flows from investing activities: Capital expenditures $ (121,208) (181,048) Change in assets limited as to use 19,679 68,212 Decrease in cash and government securities held as collateral under securities lending transaction 154 Proceeds from sales of property and equipment 1, Distributions of investment in equity investees 7,660 9,158 Acquisition of additional interest in equity investees (6,084) Net cash used in investing activities (92,602) (109,160) Cash flows from financing activities: Decrease in liability held under securities lending transaction (154) Repayment of long-term debt (18,124) (16,708) Repayment of capital lease obligations (4,216) (2,300) Proceeds from issuance of note payable 3,200 2,614 Payment of bond issuance costs (163) Payments on line of credit, net 1,347 4,418 Proceeds from sale of noncontrolling interest 1,207 Purchase of noncontrolling interest (985) Distributions to noncontrolling interest (5,183) (3,207) Net cash used in financing activities (23,961) (14,293) Increase (decrease) in cash and cash equivalents (28,189) 139,504 Cash and cash equivalents, beginning of year 218,195 78,691 Cash and cash equivalents, end of year $ 190, ,195 See accompanying notes to consolidated financial statements. 8

135 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) (1) Organization and Summary of Significant Accounting Policies Franciscan Missionaries of Our Lady Health System, Inc. (FMOLHS or the System) is a not-for-profit, nonstock membership corporation and is a wholly owned subsidiary of Franciscan Missionaries of Our Lady in Baton Rouge, Louisiana (FMOL). The members of FMOL are the Provincial and the members of the Council of the Franciscan Missionaries of Our Lady North American Province. FMOLHS is the sole member and has sole voting control of four medical centers and their affiliates (FMOLHS Affiliates). All of these entities are not-for-profit, nonstock membership corporations. The medical centers are as follows: Our Lady of the Lake Regional Medical Center (the Lake) Baton Rouge, Louisiana Our Lady of the Lake Ascension Community Hospital (d.b.a. St. Elizabeth Hospital) Gonzales, Louisiana. Our Lady of Lourdes Regional Medical Center (Lourdes) Lafayette, Louisiana St. Francis Medical Center (St. Francis) Monroe, Louisiana The FMOLHS Affiliates participate together in a captive insurance company, Louise Insurance Co., Ltd. (Louise), which is wholly owned by FMOLHS (see note 18). The following are other wholly owned affiliates of FMOLHS: Calais Health, LLC (Calais), a limited liability Louisiana company formed to provide occupational medicine services in Louisiana, is also wholly owned by FMOLHS. Franciscan PACE, Inc. (PACE), a corporation formed to provide nonprofit health and supportive services designed to assist seniors who desire an alternative to nursing home care, is also wholly owned by FMOLHS. Franciscan Missionaries of Our Lady Health System Management Services, L.L.C., a limited liability Louisiana company formed for the purpose of providing Management services to healthcare facilities, is also wholly owned by FMOLHS. Franciscan Missionaries of Our Lady Health System Holdings, Inc. is a Louisiana taxable not-forprofit subsidiary of FMOLHS formed for the purpose to hold an ownership interest in Resource Optimization and Innovation, L.L.C. The significant accounting policies used by FMOLHS in preparing and presenting its consolidated financial statements follow: (a) Principles of Consolidation The consolidated financial statements include the accounts of FMOLHS, its wholly owned subsidiaries, and the FMOLHS Affiliates. All significant intercompany balances and transactions have been eliminated in consolidation. Third party equity interest in the consolidated subsidiaries are reflected as noncontrolling interest in the FMOLHS s consolidated financial statements. For 9 (Continued)

136 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) subsidiaries in which FMOLHS does not have a controlling interest, FMOLHS records such investments under the equity method of accounting. (b) Use of Estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions. Significant items subject to such estimates and assumptions include the determination of the allowances for uncollectible accounts and contractual adjustments, reserves for general and professional liability claims, reserves for workers compensation claims, reserves for employee healthcare claims, estimated third-party payor settlements, certain investments in alternative funds, valuation of derivatives, useful lives of property and equipment, and the actuarially determined benefit liability related to FMOLHS s pension plans and postretirement health plans. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions. In addition, 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 related to these programs will change by a material amount in the near term. (c) (d) Cash Equivalents Cash and cash equivalents include investments in highly liquid debt instruments with an original maturity of three months or less when purchased, excluding amounts included in assets limited as to use. Investments and Investment Return Investments in equity securities with readily determinable fair values and all investments in debt securities, except for investments in the common stock of equity investees accounted for using the equity method, are recorded at fair value. The estimated fair value of these investments is based on quoted market prices. FMOLHS also invests in alternative assets such as hedge funds, private equity funds, and commingled funds. When FMOLHS s investment in alternative assets represents investments organized as corporations, or trusts with legal structures similar to a corporation, with ownership less than 20%, and transacts frequently (at least quarterly), FMOLHS accounts for these investments at net asset value as a practical expedient to fair value. When FMOLHS s investment in alternative assets represents investments organized as limited partnerships, or limited liability companies with specific ownership accounts or trusts with legal structures similar to a partnership, FMOLHS accounts for these investments using the equity method, which generally approximates net asset value. 10 (Continued)

137 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) The net asset value for alternative assets for which quoted market prices are not available is based on the most recent valuations provided by the external investment managers, adjusted for receipts and disbursements through June 30. FMOLHS reviews and evaluates the values provided by the managers and agrees with the valuation methods and assumptions used to determine those values. Therefore, FMOLHS believes the carrying amount of these financial instruments is a reasonable estimate of fair value. Because alternative assets are not readily marketable, their estimated value is subject to uncertainty and, therefore, may differ from the value that would have been used had a ready market for such investments existed. Realized and unrealized gains and losses on investments recorded at fair value and on alternative assets recorded at net asset value, and changes in the carrying value of alternative assets recorded on the equity method, are included in the consolidated statements of operations as increases or decreases in unrestricted net assets unless their use is temporarily or permanently restricted by explicit donor stipulations or law. Dividend, interest, and other investment income are recorded as increases in unrestricted net assets unless the use is restricted by donor. Donated investments are recorded at fair value at the date of receipt. (e) (f) Inventories Inventories, consisting primarily of medical supplies and pharmaceuticals, are stated at the lower of cost (average cost method) or market. Assets Limited as to Use Assets limited as to use include the following: Assets set aside by the Board of Directors for future capital acquisitions, capital improvements, securities lending, and debt service, over which the Board of Directors retains control and may at its discretion subsequently use for other purposes. Assets held by trustees under indenture agreements, self-insurance trust arrangements, and terms of donor restrictions. Amounts required to satisfy current requirements for the payment of current construction costs and debt service costs are classified as current assets in the accompanying consolidated balance sheets. (g) Components of Net Assets Net assets, revenues, and other support and expenses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, the net assets of FMOLHS and changes therein are classified and reported as follows: Unrestricted Net Assets Unrestricted net assets are net assets whose use is not restricted by donors, even though their use may be limited in other respects, such as by contracts or by board designation. 11 (Continued)

138 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) Temporarily Restricted Net Assets Temporarily restricted net assets are net assets subject to donor-imposed stipulations that may or will be met either by actions of FMOLHS and/or the passage of time. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statements of operations as net assets released from restrictions. Permanently Restricted Net Assets Permanently restricted net assets are net assets subject to donor-imposed stipulations that are maintained permanently by FMOLHS. Generally, the donors of these assets permit FMOLHS to use all or part of the income earned on related investments for specific or general purposes. Unrealized gains and losses are recorded as temporarily restricted net assets if the terms of the gift restrict the use of the income. Permanently restricted net assets are increased if the term of the gift that gave rise to the investment requires the unrealized gain be added to the principal of a permanent endowment. Generally, losses on the investments of restricted endowments reduce temporarily restricted net assets to the extent donor-imposed temporary restrictions on net appreciation of investments have not been met before the loss occurs. Any remaining losses reduce unrestricted net assets, but can be restored through subsequent investment gains. (h) (i) Bond Issuance Costs Bond issuance costs, premiums, and discounts, costs of letters of credit and standby purchase agreements are being amortized over the terms of the related bond issues using a method that approximates the effective interest method. Accumulated amortization was approximately $5,019 and $4,532 at June 30, 2012 and 2011, respectively. Property and Equipment Property and equipment, including leasehold improvements, are stated at cost upon acquisition or fair value if donated. Depreciation is computed primarily on the straight-line method based upon the shorter of the estimated useful lives of the assets or the lease term. Equipment under capital lease is amortized using the straight-line method over the shorter of the lease term of the equipment or its useful life. Such amortization is included in depreciation and amortization expense in the accompanying consolidated financial statements. Gifts of long-lived assets, such as land, buildings, or equipment, are reported as unrestricted support, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor time 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. Contributions restricted for the purchase of property and equipment for which 12 (Continued)

139 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) restrictions are met within the same year as the contributions are received are reported as increases in unrestricted net assets in the accompanying consolidated financial statements. (j) Cost in Excess of Net Assets Acquired Cost in excess of net assets acquired, or goodwill, included in other assets, is the amount by which purchase price exceeds the fair value of assets acquired. Accumulated amortization for all costs in excess of net assets acquired was $15,846 at both June 30, 2012 and Cost in excess of net assets acquired is reviewed for impairment at least annually. The cost in excess of net assets acquired impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including cost in excess of net assets acquired). If the fair value of the reporting unit is less than its carrying value, an indication of cost in excess of net assets acquired impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit s cost in excess of net assets acquired over the implied fair value of that cost in excess of net assets acquired. The implied fair value of cost in excess of net assets acquired is determined by allocating the fair value of the reporting unit in a manner similar to a purchased price allocation and the residual fair value after this allocation is the implied fair value of the reporting units cost in excess of net assets acquired. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. No impairment loss was required to be recognized in either 2012 or The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) , Testing Goodwill for Impairment, in September ASU permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit s fair value is less than its carrying amount before applying the two-step test for impairment of goodwill as described above. If an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step impairment test for that reporting unit. FMOLHS expects to adopt this ASU in fiscal year (k) (l) Capitalization of Interest FMOLHS capitalizes the interest costs of borrowings, net of related investment income on the unexpended funds, during the construction period of major projects as a component of the asset. Net interest expense capitalized was $325 and $4,917 for the years ended June 30, 2012 and 2011, respectively. Impairment of Long-Lived Assets Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If 13 (Continued)

140 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) circumstances require a long-lived asset to be tested for possible impairment, FMOLHS first compares the undiscounted future cash flows expected to be generated by the assets to its carrying value. If the carrying amount of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment charge is recognized to the extent the carrying amount of the asset exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party appraisals, as considered necessary. Assets to be disposed of are separately presented in the accompanying consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale are presented separately in the asset and liability sections of the accompanying consolidated balance sheets. (m) (n) Estimated Workers Compensation, Professional Liability, and Employee Health Claims The provisions for estimated workers compensation, professional liability, and employee health claims include estimates of the ultimate costs for both reported claims and claims incurred but not reported. These estimates incorporate FMOLHS s past experience, as well as other considerations, including the nature of claims, industry data, relevant trends, and/or the use of actuarial information. Consolidated Statements of Operations Transactions deemed to be ongoing, major, or central to the provision of healthcare services are reported as operating revenues and expenses. Peripheral or incidental transactions are reported as nonoperating gains and losses. Investment return, consisting of dividends and interest earned on investments, as well as realized and unrealized gains and losses on the investment portfolio, medical office building rental income, the change in value of interest rate swap agreement, and gains and losses on asset disposals are reported as nonoperating gains or losses. The consolidated statements of operations include unrestricted revenues, gains, and other support in excess of expenses and losses, which is an indicator of financial performance. Changes in unrestricted net assets that are excluded from unrestricted revenues, gains, and other support in excess of expenses and losses include permanent transfers of assets to and from affiliates for other than goods and services, pension-related changes other than net periodic pension cost, and contributions of long-lived assets (including assets acquired using contributions that by donor restriction were to be used for the purpose of acquiring such assets). (o) Net Patient Service Revenue Net patient service revenue is recognized as services are performed and is 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. Retroactively calculated contractual adjustments arising under reimbursement agreements with thirdparty payors are accrued on an estimated basis in the period the related services are rendered and are adjusted as final settlements are determined. 14 (Continued)

141 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) (p) Charity Care The FMOLHS Affiliates provide care to patients who meet certain criteria under their charity care policies without charge or at amounts less than its established rates. Because the FMOLHS Affiliates do not pursue collection of amounts determined to qualify as charity care, such amounts are not reported as revenue. The FMOLHS Affiliates maintain records to identify and monitor the level of charges forgone that are associated with the charity care they provide. Charges forgone, based on established rates, totaled approximately $30,305 and $32,084 for the years ended June 30, 2012 and 2011, respectively. The FMOLHS Affiliates do not include charity care in net patient service revenue. The cost of charity care provided in 2012 and 2011 approximated $11,216 and $12,140, respectively. FMOLHS Affiliates estimated these costs by calculating a ratio of cost to gross charges and then multiplying that ratio by the gross charity charges associated with providing care to charity patients. (q) (r) Electronic Health Record Incentive Program The Centers for Medicare & Medicaid Services (CMS) have implemented provisions of the American Recovery and Reinvestment Act of 2009 that provide incentive payments beginning in 2011 for the meaningful use of certified electronic health record (EHR) technology. CMS has defined meaningful use as meeting certain objectives and clinical quality measures based on current and updated technology capabilities over predetermined reporting periods as established by CMS. The Medicare EHR incentive program provides annual incentive payments to eligible professionals, eligible hospitals, and critical access hospitals, as defined, that are meaningful users of certified EHR technology. The Medicaid EHR incentive program provides annual incentive payments to eligible professionals and hospitals for efforts to adopt, implement, and meaningfully use certified EHR technology. FMOLHS utilizes a contingency accounting model to recognize EHR incentive revenues. FMOLHS records EHR incentive revenue when FMOLHS has actually complied with the meaningful use criteria for a full reporting period and when all uncertainties and contingencies are resolved prior to the recognition of income. In fiscal 2012, FMOLHS recorded EHR incentive revenues of $15,372 comprised of $8,361 of Medicare revenues and $7,011 of Medicaid revenues. EHR incentive revenues are included in net patient service revenue in the accompanying consolidated statements of operations. There were no EHR incentive receivables from Medicare and Medicaid at June 30, FMOLHS did not recognize any EHR incentive revenues for the year ended June 30, Income Taxes FMOLHS and the FMOLHS Affiliates are exempt from federal income taxes under Section 501(a) of the Internal Revenue Code (IRC) as organizations described in IRC Section 501(c)(3). Certain of the FMOLHS Affiliates subsidiaries are subject to federal and state income taxes, provisions for which have been reflected in the accompanying consolidated financial statements. The amounts of such provisions are not material. 15 (Continued)

142 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) FMOLHS recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. No reserves for uncertain tax positions have been recorded. (s) (t) Asset Retirement Obligations FMOLHS recognizes the fair value of a liability for legal obligations associated with asset retirements in the period in which it is incurred, if a reasonable estimate of the fair value of the obligation can be made. When the liability is initially recorded, FMOLHS capitalizes the cost of the asset retirement obligation by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost associated with the retirement obligation is depreciated over the useful life of the related asset. Upon settlement of the obligation, any difference between the cost to settle the asset retirement obligation and the liability recorded is recognized as a gain or loss in the consolidated statements of operations. Fair Value Measurements FMOLHS applies Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes an enhanced framework for measuring fair value, and expands disclosures about fair value measurements, including those required for certain investments in funds that do not have readily determinable fair values including private equity investments, hedge funds, real estate, and other funds. ASC Topic 820 permits, as a practical expedient, the estimation of the fair value of investments in investment companies for which the investment does not have a readily determinable fair value using net asset value per share or its equivalent. Net asset value, in many instances, may not equal fair value that would be calculated pursuant to other related requirements of ASC Topic 820. FMOLHS also follows FASB ASU , Improving Disclosures about Fair Value Measurements, which amended Topic 820. ASU requires that FMOLHS provide additional enhanced disclosures related to its fair value measurements. FMOLHS utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. FMOLHS determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. 16 (Continued)

143 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. (u) (v) Fair Value Option ASC SubTopic , Financial Instruments Overall gives FMOLHS the irrevocable option to report most financial assets and financial liabilities at fair value on an instrument-by-instrument basis, with changes in fair value reported in earnings. FMOLHS has not elected to apply the fair value option to any assets or liabilities. New Accounting Pronouncements Recently Adopted The FASB issued ASU , Health Care Entities (Topic 954): Measuring Charity Care for Disclosure in August ASU amends ASC SubTopic , Health Care Entities- Revenue Recognition, to require that cost be used as the measurement basis for charity care disclosure purposes. The method used to estimate such costs as well as any funds received to offset or subsidize charity services provided should also be disclosed. FMOLHS s adoption of this ASU in fiscal year 2012 did not have any impact on its consolidated financial statements. The FASB issued ASU , Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries in August ASU amends ASC SubTopic , Health Care Entities-Contingencies, to clarify that a healthcare entity should not net insurance recoveries against a related liability and the claim liability should be determined without consideration of insurance recoveries. The FMOLHS s adoption of this ASU in fiscal year 2012 did not have a significant impact on its consolidated financial statements. Recently Issued In July 2011, the FASB issued ASU , Health Care Entities: Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. This ASU will change FMOLHS presentation of provision for uncollectible accounts in the consolidated statements of operations from operating expenses to a deduction from net patient service revenue. It also expands disclosures regarding policies for recognizing revenue, assessing contra revenue line items, and activity in the allowance for uncollectible accounts. The ASU is effective for FMOLHS s fiscal year In May 2011, the FASB issued ASU , Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The new standard does not extend the use of fair value but, rather, provides guidance about how fair 17 (Continued)

144 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) value should be applied where it already is required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS. A nonpublic entity is required to apply the ASU prospectively for annual periods beginning after December 15, FMOLHS expects that the adoption of ASU in 2013 is not expected to have a material impact on its consolidated financial statements. (w) Current Economic Environment In light of the current sluggish recovery of the U.S. economy, FMOLHS monitors economic conditions closely, both with respect to potential impacts on the healthcare provider industry and from a more general business perspective. Management recognizes that economic conditions may continue to impact FMOLHS in a number of ways, including (but not limited to) uncertainties associated with U.S. financial system reform and rising self-pay patient volumes and corresponding increases in uncompensated care. Additionally, the general healthcare industry environment is increasingly uncertain, especially with respect to the impacts of the federal healthcare reform legislation, which was passed in the spring of Potential impacts of ongoing healthcare industry transformation include, but are not limited to: Significant (and potentially unprecedented) capital investment in healthcare information technology (HCIT); Continuing volatility in the state and federal government reimbursement programs; Lack of clarity related to the health benefit exchange framework mandated by reform legislation, including important open questions regarding exchange reimbursement levels, changes in combined state/federal disproportionate share payments, and impact on the healthcare demand curve as the previously uninsured enter the insurance system; Effective management of multiple major regulatory mandates, including achievement of meaningful use of HCIT and the transition to ICD-10; and Significant potential business model changes throughout the healthcare ecosystem, including within the healthcare commercial payor industry. The business of healthcare in the current economic, legislative, and regulatory environment is volatile. Any of the above factors, along with others both currently in existence and which may or may not arise in the future, could have a material adverse impact on FMOLHS s financial position and operating results. 18 (Continued)

145 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) (2) Short-Term Investments and Assets Limited as to Use Short-term investments consist of the following: Asset category: Cash $ 640 1,108 Equity securities: U.S. companies 4,361 2,656 International companies 1,689 2,297 Real assets 1,160 1,716 Fixed income securities: U.S. government guaranteed U.S. agency Corporate 670 2,275 Municipal Other 1,876 2,838 Emerging markets Alternative asset funds: Hedge funds 4,149 5,141 Private equity funds 1,794 1,937 Total $ 17,538 21, (Continued)

146 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) The composition of assets limited as to use at June 30, 2012 and 2011 is as follows: 2012 Board- Trusted Selfdesignated bond insurance for capital funds trust funds Other Total Asset category: Cash $ 32,846 23, ,725 60,383 Equity securities: U.S. companies 92,345 2,917 4,652 99,914 International companies 70, ,012 Real assets 48,469 48,469 Fixed income securities: U.S. government guaranteed 2,758 3,228 5,986 U.S. agency 15,982 17,176 33,158 Corporate 27,984 1,834 29,818 Municipal 1,185 1,185 Other 64,195 1,031 65,226 Emerging markets 30,163 30,163 Alternative asset funds: Hedge funds 173, ,366 Private equity funds 74,968 74,968 Accrued interest ,226 23,997 24,136 10, ,015 Less amounts classified as current assets , ,503 Noncurrent portion $ 634,313 24,136 10, , (Continued)

147 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) 2011 Board- Trusted Selfdesignated bond insurance for capital funds trust funds Other Total Asset category: Cash $ 88,676 25,351 2,156 3, ,235 Equity securities: U.S. companies 87,941 3,124 4,437 95,502 International companies 76, ,267 Real assets 56,862 56,862 Fixed income securities: U.S. government guaranteed 1,411 4,682 6,093 U.S. agency 11,145 10, ,204 Corporate 29,931 1,519 31,450 Municipal 1,347 1,347 Other 58,223 1,264 59,487 Emerging markets 18,065 18,065 Alternative asset funds: Hedge funds 170, ,439 Private equity funds 64,189 64,189 Accrued interest ,647 25,351 20,699 10, ,546 Less amounts classified as current assets 6,946 23, ,761 Noncurrent portion $ 657,701 2,117 20,699 10, ,785 (a) Board-Designated for Capital In accordance with Board approval, the FMOLHS Affiliates have designated assets to fund future capital acquisitions and capital improvements. The FMOLHS Affiliates invest their board-designated for capital funds together within FMOLHS in a capital reserve investment fund held in a JP Morgan Chase Bank custodial account. Through usage of unitized accounting, these investments are segregated for each FMOLHS Affiliate. Investments held as board-designated for capital are managed by several money managers, which focus on different investment strategies and provide diversity to the investments. 21 (Continued)

148 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) (b) Alternative Assets Alternative assets (included in short-term investments and assets limited as to use) include limited partnerships and offshore investment funds. These funds invest in certain types of financial instruments, including, among others, futures and forward contracts, options, and securities sold not yet purchased, intended to hedge against changes in the market value of investments. These financial instruments, which involve varying degrees of risk, may result in loss due to changes in the market (market risk). Alternative assets by strategy type are as follows: Alternative assets: Hedge funds $ 177, ,580 Private equity 76,762 66,126 Total alternative assets $ 254, ,706 At June 30, 2012, FMOLHS s remaining outstanding commitments to private equity interests totaled $37,502. The projected capital call amounts for the next five fiscal years and thereafter are summarized in the table below: Projected capital calls Fiscal year: 2012 $ 17, , , Thereafter 69 $ 37,502 Private equity interests have 10-year terms, with extensions of 1 to 4 years. As of June 30, 2012, the average remaining life of the private equity interests is approximately 8.1 years. At June 30, 2012 and 2011, FMOLHS had hedge fund investments of $177,515 and $175,580, respectively, which were restricted from redemption for lock-up periods. Some of the hedge fund investments with redemption restrictions allow early redemption for specified fees. The terms and conditions upon which an investor may redeem an investment vary, usually requiring 30 to 180 days notice after the initial lock-up period. 22 (Continued)

149 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) Based upon the terms and conditions in effect at June 30, 2012, FMOLHS s hedge fund investments can be redeemed or sold as follows: Amount Fiscal year: 2013 $ 161, , Thereafter 7,527 Total $ 177,515 (c) Trusteed Bond Funds Certain trusteed bond funds have been established in accordance with the requirements of indentures related to various bond obligations. The consolidated trusteed bond funds as of June 30, 2012 and 2011 consist of the following categories: Construction funds $ 1,755 Principal and interest funds 23,997 23,596 23,997 25,351 Less amounts classified as current 23,997 23,234 Noncurrent portion $ 2,117 The above funds were established in accordance with related indentures to secure the payment of principal and interest on the related obligations, and to pay or reimburse the FMOLHS Affiliates for payment of the costs of the acquisition, construction, and installation of certain extensions and improvements to their facilities. Amounts classified as current represent funds deposited to pay current costs of construction projects and to pay related debt service costs classified as current liabilities. Information regarding FMOLHS s debt obligations is included in note 9. (d) Self-insurance Trust Funds The self-insurance trust funds represent amounts designated to pay certain self-insured losses (see note 18). 23 (Continued)

150 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) (e) Other Other assets limited at to use as of June 30, 2012 and 2011 consist of the following: Scholarships limited by donor $ Healthcare services limited by donor 9,167 9,361 Resident deposits Escrow, security deposits, and surplus cash Capital improvement limited by grantor agency ,656 10,849 Less amounts classified as current $ 10,063 10,268 All investments are considered trading for accounting purposes. All unrestricted investment income, including both realized and unrealized gains and losses, is included in the reported total of unrestricted revenues, gains, and other support in excess of expenses and losses. The following schedule for the years ended June 30, 2012 and 2011 summarizes the investment return and its classification in the consolidated statements of operations: Temporarily Unrestricted restricted Total 2012: Dividends and interest, net of expenses of $2,088 $ 5, ,791 Realized and unrealized gains (losses), net (11,122) 15 (11,107) Investment return $ (5,332) 16 (5,316) 2011: Dividends and interest, net of expenses of $2,299 $ 4, ,368 Realized and unrealized gains, net 114, ,938 Investment return $ 119, ,306 Investments, in general, are exposed to various risks such as interest rate, credit, and overall market volatility. As such, it is reasonably possible that changes in the values of investments will occur in the near term and that such changes could materially affect the amounts reported in the consolidated balance sheets, statements of operations, and statements of changes in net assets. 24 (Continued)

151 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) (3) Other Current Assets The composition of other current assets at June 30, 2012 and 2011 follows: Due from third-party payors $ 730 Other receivables 13,005 13,028 Inventories 23,007 22,820 Prepaid expenses and other current assets 20,199 21,641 Assets limited as to use required for current liabilities 25,503 30,761 $ 81,714 88,980 (4) Property and Equipment A summary of property and equipment as of June 30, 2012 and 2011 is as follows: Estimated useful lives Land $ 123, ,319 Land improvements 15,520 15, years Buildings and building improvements 931, , years Fixed equipment 109, , years Movable equipment 535, , years Leasehold improvements 7,188 7, years Building and building improvements held for lease 3,543 3, years Construction in progress 92,146 29,306 1,817,214 1,655,275 Less accumulated depreciation 817, ,983 $ 999, ,292 At June 30, 2012, the FMOLHS Affiliates were obligated under purchase commitments of $177,864 relating to the completion of various construction projects and purchases of equipment. Approximately $4,374 and $6,606 related to such projects and other property additions are included in accounts payable at June 30, 2012 and 2011, respectively. In 2011, Lourdes placed a new hospital and related facilities in service. In June 2011, Lourdes reclassified depreciated assets related to its former operating facility and the surrounding medical office buildings and parking towers as assets held-for-sale on the consolidated financial statements. At June 30, 2011, Lourdes 25 (Continued)

152 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) had $15,055 classified as held-for-sale. During 2012, Lourdes reclassified these assets from held for sale as they no longer met requirements for held for sale accounting. (5) Other Assets The composition of other assets at June 30, 2012 and 2011 follows: Unamortized bond issuance costs, net of accumulated amortization $ 6,839 7,262 Investments in equity investees 64,956 64,034 Cost in excess of net assets acquired 13,236 13,236 Fair value of interest rate swap agreements 5,573 8,478 Other 22,157 13,053 $ 112, , (Continued)

153 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) (6) Investment in Equity Investees A summary of the FMOLHS Affiliates investment in equity investees at June 30, 2012 and 2011 included in other assets in the consolidated balance sheets, and its income from equity investees for the years ended June 30, 2012 and 2011 are as follows: Investment Equity Ownership in income (loss) interest investees of investees 2012: Convenient Care, LLC 50% $ 1, Capital Area Shared Service Organization (126) Surgical Specialty Center of Baton Rouge, LLC 49 24,702 4,599 Regional Eye Surgery Center Baton Rouge Physical Therapy-Lake Baton Rouge Physical Therapy-STE Perkins Plaza ASC P&S Surgery Center, LLC 50 12,783 2,091 Northeast Louisiana Cancer Institute, LLC 50 2, Northeast Louisiana Physician Hospital Organization (13) Louisiana Home Care of Monroe, LLC Lourdes After Hours, LLC Louisiana Health Care Group, LLC Park Place Surgery Center 45 17,074 3,858 Capital Area Shared Services (50) Mary Bird Perkins Cancer Center 35 2,961 (54) $ 64,956 12, (Continued)

154 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) Investment Equity Ownership in income (loss) interest investees of investees 2011: Convenient Care, LLC 50% $ 2, Capital Area Shared Services (15) Regional Eye Surgery Center Baton Rouge Physical Therapy-Lake Baton Rouge Physical Therapy-STE Surgical Specialty Center of Baton Rouge, LLC 49 24,028 3,186 Perkins Plaza ASC P&S Surgery Center, LLC 50 12,368 2,039 Northeast Louisiana Cancer Institute, LLC 50 3, Northeast Louisiana Physician Hospital Organization St. Francis Pediatric After Hours Clinic, LLC Louisiana Home Care of Monroe, LLC Lourdes After Hours, LLC Louisiana Health Care Group, LLC Park Place Surgery Center 45 16,334 3,500 Capital Area Shared Services Mary Bird Perkins Cancer Center 35 3, $ 64,034 10,951 (7) Lines of Credit At June 30, 2012, FMOLHS affiliates had various unsecured working capital lines of credit with banks in the aggregate amount of $20,500, bearing interest at variable rates expiring at various dates through December Outstanding amounts at June 30, 2012 and 2011 were $5,996 and $4,650, respectively. FMOLHS affiliates expect to renew the lines of credit at expiration under substantially the same terms and conditions. 28 (Continued)

155 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) (8) Other Current Liabilities The composition of other current liabilities at June 30, 2012 and 2011 follows: Accrued salaries and related expenses $ 61,856 58,466 Accrued interest 9,730 9,899 Accrued expenses and other current liabilities 97,614 85,126 $ 169, ,491 (9) Long-Term Debt A summary of long-term debt at June 30, 2012 and 2011 is as follows: Obligated Group bonds: Louisiana Public Facilities Authority Hospital Revenue and Refunding Bonds Series 1998A, $72,560 tax-exempt bonds; due in varying installments through 2026 with interest fixed at rates ranging from 5.50% to 5.75% $ 49,505 57,620 Louisiana Public Facilities Authority Hospital Revenue and Refunding Bonds Series 1998B, $31,050 tax-exempt bonds; due in varying installments through fiscal year 2017, with interest fixed at rates ranging from 3.375% to 5.000%, respectively), due in varying installments through ,800 27,050 Louisiana Public Facilities Authority Hospital Bonds Series 2005A, $80,000 tax-exempt bonds; due in varying installments from 2032 through 2037, with interest fixed at rates ranging from 5.00% to 5.25% 80,000 80,000 Louisiana Public Facilities Authority Hospital Bonds Series 2005B, $50,000 tax-exempt bonds; due in varying installments from fiscal year 2014 through 2031, which bear interest at a variable rate (0.17% at June 30, 2012) 50,000 50,000 Louisiana Public Facilities Authority Hospital Bonds Series 2005C, $50,000 tax-exempt bonds; due in varying installments from fiscal year 2014 through 2031, with interest fixed at a rates ranging from 4.00% to 6.75% 50,000 50,000 Louisiana Public Facilities Authority Hospital Bonds Series 2005D, $88,325 bonds due in varying installments through 2029, which bear interest at a variable rate (0.17% at June 30, 2012) 79,450 82, (Continued)

156 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) Louisiana Public Facilities Authority Hospital Bonds Series 2008A, $47,185 bonds; due in varying installments through fiscal year 2026, which bear interest at a variable rate (0.20% at June 30, 2012) $ 46,480 46,650 Louisiana Public Facilities Authority Hospital Revenue Bonds Series 2009A, $125,000 bonds; due in varying installments from fiscal year 2029 through 2040, with interest fixed at rates ranging from 6.63% to 6.75% 125, , , ,846 Add unamortized premium Total Obligated Group bonds 503, ,257 Other debt Our Lady of the Lake Regional Medical Center: Mortgage payable in monthly installments of $23, including interest at 9.00%, through May 1, 2033, secured by land, building and equipment 2,569 2,609 Mortgage payable in monthly installments of $33, including interest at 6.80%, through December 2012, secured by land, building and equipment 2,950 3,209 Mortgage payable in monthly installments of $29, including interest at 6.90% through April 2016 with a lump sum due at this time, secured by land and building 3,060 3,167 Other debt Our Lady of Lourdes Regional Medical Center: Note payable, payable upon demand, including interest at 5.50%, maturing April 2013, secured by equipment, inventory and accounts receivable Note payable, due in monthly installments of $7, including interest at 5.75%, through January secured by 1.1 acres of property Note payable, payable upon demand, including interest at 3.25% maturing October 2016, secured by equipment 2,787 Note payable, payable upon demand, including interest at 3.25% maturing April 2016, secured by equipment Note payable, payable upon demand, including interest at 4.42%, maturing December 2014, secured by equipment 1,080 1, (Continued)

157 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) Other debt St. Elizabeth: Note payable in monthly installments of $51, including interest at 5.15%, through October 15, secured by land, building and equipment $ 4,203 4,587 Total long-term debt for FMOLHS 521, ,294 Less current installments of long-term debt 19,027 17,585 $ 502, ,709 FMOLHS and its affiliates participate in an Obligated Group Master Trust Indenture whereby the obligated issuers have agreed to be jointly and severally liable for timely payments due and for the performance and observance of all covenants and agreements pursuant to the trust indenture. FMOLHS directs the proceeds of the borrowed funds to the particular affiliate benefiting therefrom and separate escrow funds are maintained by the trustee for each of the affiliates to support each affiliate s allocated portion of the bonds (see note 2). The total debt subject to the Obligated Group guarantee and Master Trust Indenture amounted to $503,569 and $519,257 as of June 30, 2012 and 2011, respectively. The Master Trust Indenture covering the bond issues contains numerous covenants typical of such agreements, including a liquidity ratio, debt service coverage ratio, and leverage ratio. In addition, the Obligated Group members are subject to restrictions on maintenance of revenue, incurrence of additional debt, disposition of assets, maintenance of insurance, and other restrictions. Obligations of the Obligated Group under the Master Trust Indenture are general obligations secured by the full faith and credit of the Obligated Group. None of the bonds is secured by a mortgage on, or security interest in, any real or personal property of FMOLHS or its affiliates. In 2005, FMOLHS completed a system-wide refinancing for the purposes of advance refunding certain 1998A and 1998C bonds and providing additional capital by issuing four series of revenue bonds. The following bond series were issued by the Louisiana Public Facilities Authority (the Authority): $80,000 fixed rate Revenue Bonds (Series 2005A), $100,000 variable rate Revenue Bonds (Series 2005B and 2005C in the amounts of $50,000 each), and $89,325 in variable rate Revenue and Refunding bonds (Series 2005D). The variable rate bonds were issued as auction rate securities. The four bond issues total $269,325, of which approximately $83,000 represents refunding of existing bonds and the remainder of approximately $186,000 was designated for capital improvements, including facility modifications and additions and new equipment acquisitions. In May 2008, FMOLHS tendered its 2005B and 2005C auction rate bonds and reissued 2005B and 2005C bonds at weekly variable interest modes. In July and August 2008, the 2005D and 1998B auction rate bonds were tendered by FMOLHS and reissued at daily variable interest modes. In August 2008, the 2008A bonds, which were preapproved by the Authority, were issued by FMOLHS. These bonds, issued in 31 (Continued)

158 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) the amount of $47,185, bear interest at a variable rate based upon a weekly index rate and are due in These bonds refunded $42,735 of the 1998A bonds and $3,225 of the 1998C bonds. In 2009, FMOLHS completed a systemwide issuance of $125,000 of Hospital Revenue Bonds Series 2009 (the 2009 Series). The proceeds for the 2009 Series were used for (i) acquiring, constructing, and equipping a replacement hospital for Lourdes, (ii) acquiring, constructing, and equipping improvement and renovations to the existing Lake facilities, to accommodate modern demands for space and utility and building a satellite outpatient facility in Livingston Parish, Louisiana, and (iii) paying the costs of issuance of the bonds. In addition to the issuance of the 2009 Series, FMOLHS (i) converted the interest rate from the daily variable interest modes to a fixed rate on the Series 1998B and (ii) converted the interest rate from the weekly variable interest modes top a fixed rate on the Series 2005C. FMOLHS and FMOLHS Affiliates made cash payments for interest of $26,203 and $25,424 during the years ended June 30, 2012 and 2011, respectively. Aggregate maturities of long-term debt at June 30, 2012 follow: Year ending June 30: 2013 $ 19, , , , ,908 Thereafter 439,665 $ 521,083 In fiscal 2013, FMOLHS anticipates borrowing approximately $142,825 through the Authority to refinance existing bonds totaling approximately $57,175. The new bonds will fund capital projects at the Lake and refinance Series 2005C bonds. There can be no assurance that the anticipated borrowing as described will occur. (10) Interest Rate Swaps FMOLHS uses interest rate related derivative instruments to manage its exposure related to changes in interest rates on its variable rate debt instruments. FMOLHS does not enter into derivative instruments for any purpose other than cash flow hedging. FMOLHS does not speculate using derivative instruments. By using derivative financial instruments to hedge exposures to changes in interest rates, FMOLHS 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 FMOLHS, which creates credit risk for FMOLHS. When the fair value of a derivative 32 (Continued)

159 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) contract is negative, FMOLHS owes the counterparty, and therefore, FMOLHS is not exposed to the counterparty s credit risk in those circumstances. FMOLHS minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties. Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. Such risk associated with interest rate changes is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. FMOLHS entered into an interest rate swap agreement with Merrill Lynch Capital Services with respect to the 2005D refunding series. Such agreement is intended to reduce the impact of changes in interest rates on the variable rate debt. The swap agreement effectively changes FMOLHS s interest rate exposure on the 2005D variable rate debt to a fixed rate of 3.53%. In 2005, FMOLHS also obtained preapproval from the Louisiana Public Facilities Authority for the issuance of revenue refunding bonds in 2008 to advance refund the approximately $48,000 of 1998A and 1998C bonds. In 2005, FMOLHS entered into a forward starting interest rate swap agreement with Goldman Sachs Capital Markets to effectively change FMOLHS s interest rate exposure on the 2008 bonds once issued from a variable rate to a fixed rate of 3.66%. In June 2007, FMOLHS entered into two Constant Maturity Swaps (CMS) with Merrill Lynch. Under these swap agreements, FMOLHS receives variable rate payments based on the ten-year International Swaps and Derivatives Association Inc. (ISDA) swap rate and makes variable rate payments based on onemonth LIBOR. The total notional amount of the first swap is $88,325, with an effective date of July 1, 2008, and the total notional amount of the second swap is $49,075, with an effective date of May 29, The interest rate swap agreements are not afforded hedge accounting treatment in the consolidated financial statements and are marked to fair value through the consolidated statements of operations. The net unrealized gain (loss) on the interest rate swaps for the years ended June 30, 2012 and 2011 was $(14,119) and $4,676, respectively, and is included in nonoperating gains in the accompanying consolidated statements of operations. The following is a summary of the contracts outstanding at June 30, 2012 and 2011 and are recorded, as applicable, in either other assets or other long-term liabilities: June 30, 2012 (Decrease) increase in Related bond Notional Maturity Average rate Average rate interest Swap issuance amount date paid received expense fair value 2005D $ 79,450 7/1/ % 0.17% $ 2,669 (15,482) 2005D 79,450 7/1/ (823) 3, A 48,375 7/1/ ,687 (10,219) 2008A 48,375 7/1/ (500) 2, (Continued)

160 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) June 30, 2011 (Decrease) increase in Related bond Notional Maturity Average rate Average rate interest Swap issuance amount date paid received expense fair value 2005D $ 82,525 7/1/ % 0.18% $ 2,763 (8,589) 2005D 82,525 7/1/ (1,370) 5, A 48,625 7/1/ ,690 (5,898) 2008A 48,625 7/1/ (807) 3,331 (11) Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets restricted by time and purpose at June 30, 2012 and 2011 are available for the following purposes: Healthcare services $ 8,525 7,893 Elderly housing 9,428 8,039 Building and equipment acquisitions Educational services 2,612 2,392 Other $ 20,802 18,609 Permanently restricted net assets at June 30, 2012 and 2011 totaled $5,510 and $5,516, respectively, the income from which is restricted for educational services. Net assets released from restrictions for the years ended June 30, 2012 and 2011 are as follows: Healthcare services $ 2,474 4,785 Elderly housing Building and equipment acquisitions 16 Educational services and other $ 2,913 5,489 (12) Net Patient Service Revenue The FMOLHS Affiliates have agreements with governmental and other third-party payors that provide for reimbursement to the FMOLHS Affiliates at amounts different from their established rates. Contractual adjustments under third-party reimbursement programs represent the difference between billings at 34 (Continued)

161 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) established rates for services and amounts reimbursed by third-party payors. A summary of the basis of reimbursement with major third-party payors follows: (a) (b) (c) (d) Medicare Substantially all 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. Certain types of exempt services and other defined payments related to Medicare beneficiaries are paid based on cost reimbursement or other retroactive determination methodologies. The FMOLHS Affiliates are paid for retroactively determined items at tentative rates with final settlement determined after submission of annual cost reports by FMOLHS Affiliates and audits by the Medicare fiscal intermediary. The FMOLHS Affiliates Medicare cost reports have been audited by the Medicare fiscal intermediary through varying years ranging from June 30, 2004 to June 30, Revenue from the Medicare program accounted for approximately 34% and 26% of FMOLHS s net patient service revenue for the years ended June 30, 2012 and 2011, respectively. Medicaid Inpatient services rendered to Medicaid program beneficiaries are paid at prospectively determined per diem rates. These rates vary according to a hospital classification system that is based on bed size, teaching status, and other factors. Additional outlier payments are made for neonatal intensive care patients with extended lengths of stay. Outpatient services rendered to Medicaid program beneficiaries are reimbursed based upon a cost reimbursement methodology. The FMOLHS Affiliates are paid at a tentative rate with final settlement determined after submission of annual cost reports by FMOLHS Affiliates and audits by the Medicaid fiscal intermediary. The FMOLHS Affiliates Medicaid cost reports have been audited by the Medicaid fiscal intermediary through varying years ranging from June 30, 2004 to June 30, Revenue from the Medicaid program accounted for approximately 6% of FMOLHS s net patient service revenue for both the years ended June 30, 2012 and 2011, respectively. Blue Cross Inpatient services rendered to Blue Cross subscribers are paid at prospectively determined per diem rates. Outpatient services are paid based on a fee schedule. Revenue from the Blue Cross program accounted for approximately 28% and 22% of FMOLHS s net patient service revenue for the years ended June 30, 2012 and 2011, respectively. Certain Commercial Insurance Carriers, Health Maintenance Organizations, and Preferred Provider Organizations Payment methodologies under these agreements include prospectively determined rates per discharge, discounts from established charges, prospectively determined per diem rates, and fee schedules. 35 (Continued)

162 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) The FMOLHS Affiliates net patient service revenue for the years ended June 30, 2012 and 2011 decreased $8,523 and $6,485, respectively, due to changes in previously estimated allowances as a result of final settlements, closure on years that are no longer subject to audits, resolution of reviews and investigations, and prior year retroactive adjustments. Presented below is a summary of amounts comprising net patient service revenue for the years ended June 30, 2012 and 2011: Inpatient revenue $ 1,674,709 1,588,224 Outpatient revenue 1,465,374 1,281,776 Gross patient service revenue 3,140,083 2,870,000 Less provisions for contractual and other adjustments 1,820,548 1,507,078 Net patient service revenue $ 1,319,535 1,362,922 In the spring of 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively, the Health Care Acts) were signed into law by President Obama. The impact of the Health Care Acts is complicated and difficult to predict, but FMOLHS anticipates its reimbursement in the future will be affected by major elements of the Health Care Acts designed to (1) increase insurance coverage, (2) change provider and payor behavior, and (3) encourage alternative delivery models. Many healthcare reform variables remain unknown and are, among other things, dependent on implementation by federal and state governments and reactions by providers, payors, employers, and individuals. FMOLHS continues to monitor developments in healthcare reform and participates actively in contemplating and designing new programs that are encouraged and/or required by the Health Care Acts. The Health Information Technology for Economic and Clinical Health (HITECH) Act was enacted as part of the American Recovery and Reinvestment Act of 2009 and signed into law in February In the context of the HITECH Act, FMOLHS must implement a certified Electronic Health Record (EHR) in an effort to promote the adoption and meaningful use of health information technology (HIT). The HITECH Act includes significant monetary incentives and payment penalties meant to encourage the adoption of EHR technology. FMOLHS anticipates that its current efforts at implementing an enterprise-wide EHR will enable its compliance with Meaningful Use objectives mandated in the HITECH legislation. (13) Business and Credit Concentrations The FMOLHS Affiliates grant credit to their patients, substantially all of whom are local residents. The FMOLHS Affiliates generally do not require collateral or other security in extending credit to patients; however, they routinely obtain assignment of (or are otherwise entitled to receive) patients benefits payable under their health insurance programs, plans, or policies (e.g., Medicare, Medicaid, Blue Cross, health maintenance organizations, preferred provider arrangements, and commercial insurance policies). 36 (Continued)

163 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) The mix of accounts receivable from patients and third-party payors at June 30, 2012 and 2011 is as follows: Medicare 28% 21% Medicaid Blue Cross Self-pay Managed care/other % 100% (14) Related-Party Transactions The FMOL Sisters formed the Franciscan Fund (Fund) to support community programs in the operating areas of the FMOLHS hospitals. Each FMOLHS hospital makes contributions to the Fund based on a percentage of earnings determined by the Fund, then can submit grant applications to the Fund to receive moneys back for supporting its community programs. Grant making decisions are made by the FMOL Sisters and no guarantee is provided that each hospital will receive back their specific contribution amounts in the form of a formal grant from the Fund. During 2012 and 2011, FMOLHS made no contributions to the Fund. During 2011, FMOLHS Affiliates entered into an Operating Agreement with Capital Area Shared Services Organization, a related party. The agreement has an initial term expiring December The Operating Agreement requires FMOLHS Affiliates to commit to pay certain sublicense fees relating to its use of the services made available to the related third party and to pay certain implementation and system build costs and other costs contemplated under an information system contract for a period through December 31, At June 30, 2012, FMOLHS has approximately $6,600 included in other assets related to these agreements. 37 (Continued)

164 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) (15) Retirement Plans (a) Defined Benefit Plans FMOLHS Affiliates sponsor various defined benefit plans (the Plans). The following table at June 30, 2012 and 2011 sets forth, in the aggregate, the plans changes in benefit obligations, changes in plan assets, and the funded status of the Plans: Change in benefit obligation: Projected benefit obligation, beginning of year $ 588, ,008 Service cost 22,064 23,847 Interest cost 33,411 31,394 Actuarial losses 95,491 (35,715) Merger of Specialty Plan 4,191 Benefits paid (14,943) (13,090) Projected benefit obligation, end of year 724, ,635 Change in plan assets: Fair value of plan assets, beginning of year 412, ,853 Actual return on plan assets (1,652) 55,705 Contributions made 24,030 36,352 Merger of Specialty Plan 3,986 Adjustments for prior benefits paid (6,174) Benefits paid (14,943) (13,090) Fair value of plan assets, end of year 420, ,632 Funded status $ (304,591) (176,003) Amounts recognized in the consolidated balance sheets consist of: Accrued pension cost $ (304,591) (176,003) Unrestricted net assets 218,079 93,413 Amounts recognized in unrestricted net assets: Prior service cost $ (1,781) (2,019) Net actuarial loss 220,490 95,432 $ 218,709 93, (Continued)

165 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) Weighted average assumptions used to determine the projected benefit obligations at June 30, 2012 and 2011 were as follows: Weighted average discount rate 4.85% 5.75% Rate of compensation increase Net periodic pension cost for the years ended June 30, 2012 and 2011 includes the following components: Service cost, benefits earned during the year $ 22,064 23,847 Interest cost on projected benefit obligation 33,411 31,394 Expected return on plan assets (32,674) (26,585) Amortization of actuarial losses 5,074 11,451 Amortization of prior service cost (236) (236) Net periodic pension cost 27,639 39,871 Other changes in plan assets and benefit obligations recognized in unrestricted net assets: Net actuarial loss 129,818 (64,633) Amortization of net actuarial losses (5,074) (11,451) Amortization of prior service cost Prior service credit Other 6, ,981 (69,673) Total recognized in net periodic benefit costs and unrestricted net assets $ 152,620 (29,802) Weighted average assumptions used to determine net periodic pension cost for the years ended June 30, 2012 and 2011 were as follows: Weighted average discount rate 5.75% 5.50% Expected return on plan assets Rate of compensation increase (Continued)

166 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) The defined benefit pension plan asset allocation as of the measurement date (June 30, 2012 and 2011) and the target asset allocation, presented as a percentage of total plan assets, were as follows: Target allocation U.S. Equity 17% 17% 15% 25% Global equity Real assets Fixed income and cash Emerging markets Alternative investments hedge funds Alternative investments private equity funds FMOLHS overall expected long-term rate of return on assets is 8.0%. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The return is based on historical returns, without adjustments. FMOLHS provides investment oversight for all of the FMOLHS Affiliates defined benefit plans. Asset allocations and investment performance are formally reviewed quarterly by the FMOLHS Investment Committee (Investment Committee). FMOLHS utilizes an investment advisor, multiple managers for different asset classes, and a separate custodian in managing the pooled funds. The asset allocation is designed to provide a diversified mix of asset classes, including U.S. and foreign equity securities, fixed income securities, hedge funds, real estate investment trusts, and cash. The investment goals for the pooled funds are to achieve returns in the top half of a representative universe of professionally managed funds with a percentage of equity, fixed income, and alternate investments to be indicative of the asset mix policy of the fund; to exceed the return of a balanced market index weighted to replicate the asset allocation policy of the plan; to exceed the rate of inflation as measured by the consumer price index (CPI) by at least 500 basis points on an annualized basis; to achieve a positive risk-adjusted return; and to achieve a rate of return above the current actuarial assumption. Risk management practices include various criteria for each asset class, including measurement against various benchmarks, achievement of a positive risk-adjusted return, and investment guidelines for each class of assets that enumerate types of investments allowed in each category. The Company s retirement plan assets are reported at fair value. Level 1 assets include investments in publicly traded equity securities and mutual funds. These securities (or the underlying investments of the funds) are actively traded and valued using quoted prices for identical securities from the market exchanges. Level 2 assets consist of fixed-income securities and comingled funds that are not actively traded or whose underlying investments are valued using observable marketplace inputs. The fair value of plan assets invested in fixed-income securities is generally determined using valuation models that use observable inputs such as interest rates, bond yields, low-volume market 40 (Continued)

167 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) quotes and quoted prices for similar assets. Plan assets that are invested in comingled funds are valued using a unit price or net asset value (NAV) that is based on the underlying investments of the fund. Level 3 assets include investments in private equities and hedge funds valued using significant un-observable inputs. The following is a summary of the levels within the fair value hierarchy of plan assets as of June 30, 2012 and 2011: June 30, 2012 Level 1 Level 2 Level 3 Total Asset category: Cash $ 32,597 32,597 Equity securities: U.S. companies 45,831 11,668 15,758 73,257 International companies 39,480 13,078 52,558 Real assets 17,468 13,965 31,433 Fixed income securities: U.S. government guaranteed 7,881 7,881 U.S. agency 11,805 11,805 Corporate 17,521 17,521 Municipal 1,252 1,252 Other 11,742 53,645 2,678 68,065 Emerging markets 7,424 8,866 16,290 Alternative asset funds: Hedge funds 89,843 89,843 Private equity funds 17,565 17,565 Total $ 154, , , , (Continued)

168 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) June 30, 2011 Level 1 Level 2 Level 3 Total Asset category: Cash $ 48,935 48,935 Equity securities: U.S. companies 41,265 12,601 14,288 68,154 International companies 39,765 12,157 51,922 Real assets 16,798 14,684 31,482 Fixed income securities: U.S. government guaranteed 1,511 1,511 U.S. agency 10,061 10,061 Corporate 28,396 28,396 Municipal 1,179 1,179 Other 11,282 41,443 1,576 54,301 Emerging markets 11,008 11,008 Alternative asset funds: Hedge funds 90,056 90,056 Private equity funds 15,627 15,627 Total $ 159, , , ,632 The following tables present a roll-forward of the fair value of Level 3 (significant unobservable inputs) plan assets for the years ended June 30, 2012 and 2011: June 30, 2012 Hedge Private Emerging Fixed Fund Equity Markets Equity Income Total Beginning balance as of June 30, 2011 $ 90,056 15,627 11,008 14,288 1, ,555 Transfers into Level 3 Transfers out of Level 3 Total gains or losses: Realized and unrealized gains and losses: Relating to assets held at end of year (881) 1,119 (2,142) 1,470 4 (430) Relating to assets sold during the year Purchases, issuances, sales, and settlements: Purchases 9,135 2,226 1,760 13,121 Sales (8,689) (1,407) (662) (10,758) Ending balance as of June 30, 2012 $ 89,843 17,565 8,866 15,758 2, , (Continued)

169 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) June 30, 2011 Hedge Private Emerging Fixed Fund Equity Markets Equity Income Total Beginning balance as of June 30, 2010 $ 64,878 10,551 9,845 10,772 96,046 Transfers into Level 3 Transfers out of Level 3 Total gains or losses: Realized and unrealized gains and losses: Relating to assets held at year end 5,699 1,716 2,663 3, ,596 Relating to assets sold during the year Purchases, issuances, sales, and settlements: Purchases 25,100 3,449 1,574 30,123 Sales (5,621) (89) (1,500) (7,210) Ending balance as of June 30, 2011 $ 90,056 15,627 11,008 14,288 1, ,555 The asset allocation policy provides for a range of minimum and maximum investments in each asset class to allow flexibility in achieving expected long-term rate of return. Historical return patterns and correlations, consensus return forecast, and other relevant financial factors are analyzed to check for reasonableness and appropriateness of the asset allocation to ensure that the probability of meeting actuarial assumptions is reasonable. The Investment Committee monitors manager performance, rate of return, and risk factors on a quarterly basis and makes required adjustments to achieve expected returns. As of June 30, 2012 and 2011, the plans had accumulated benefit obligations (ABO) of $637,633 and $517,259, respectively. At June 30, 2012 and 2011, the fair value of plan assets falls short of the ABO by $217,506 and $104,627, respectively. The FMOLHS Affiliates expects to contribute approximately $29,000 to the defined benefit pension plans in fiscal year The estimated net gain (loss) and prior service cost that will be amortized from unrestricted net assets into net periodic benefit cost over the next fiscal year is $(20,733) and $(13,452), respectively. 43 (Continued)

170 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) Future benefit payments expected to be paid in each of the next five fiscal years and five years thereafter as of June 30, 2012 are as follows: Year ending June 30: 2013 $ 17, , , , , ,032 (b) Defined Contribution Plans The FMOLHS Affiliates also sponsor 403(b) and 401(k) plans. These defined contribution plans are available to substantially all employees. No contributions are made to the plans by the FMOLHS Affiliates. The defined benefit pension plan was closed to new entrants in 2006 and a new defined contribution plan was created for those hired after June 30, 2006, the FMOL Health System Retirement Plan (FMOL Plan). Substantially all employees of the FMOLHS Affiliates meeting eligibility requirements may participate in the FMOL Plan. The FMOLHS Affiliates may annually elect to make a contribution on behalf of those participants in an amount determined by the FMOLHS Affiliates. Contribution expense of $4,085 and $6,013 was recorded for the years ended June 30, 2012 and 2011, respectively. (c) Retiree Medical Plan Lourdes offers partially subsidized healthcare benefits to employees who retired before June 30, Costs are accrued for this plan during the service lives of covered employees. Retirees contribute a portion of the self-funded cost of healthcare benefits and Lourdes contributes the remainder. The healthcare plan is funded on a pay-as-you-go basis. Lourdes retains the right to modify or terminate the benefits and/or cost sharing provisions. The accrued liability for such benefits was approximately $819 and $1,022 at June 30, 2012 and 2011, respectively, and is included in other long-term liabilities. 44 (Continued)

171 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) (16) Functional Expenses The FMOLHS Affiliates provide healthcare and other services to residents within its service area. Expenses related to providing these services for the years ended June 30, 2012 and 2011 are as follows: Healthcare services $ 968, ,411 General and administrative 394, ,157 Educational services 20,350 21,639 Fund-raising 2,930 2,167 $ 1,386,005 1,319,374 (17) Fair Value of Financial Instruments (a) Fair Value of Financial Instruments The carrying amounts of all applicable asset and liability financial instruments reported in the consolidated balance sheets, except for long-term debt, approximate their estimated fair values, in all significant respects, at June 30, 2012 and FMOLHS s financial instruments for which estimated fair values differ from their carrying amounts at June 30, 2012 and 2011 are summarized as follows: Estimated Estimated Carrying fair Carrying fair amount value amount value Liabilities long-term debt $ 521, , , ,203 The fair value of long-term debt which is a Level 2 estimate is determined by discounting the future cash flows of each instrument at rates that reflect rates currently observed in publicly trade debt markets for debt of similar terms to companies with comparable credit risk. 45 (Continued)

172 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) (b) Fair Value Hierarchy The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2012 and 2011: June 30, 2012 Level 1 Level 2 Level 3 Total Assets category: Equity securities: U.S. companies $ 63,948 63,948 International companies 59,610 59,610 Real assets 28,977 28,977 Fixed income securities: U.S. government guaranteed 3,620 3,620 U.S. agency 40,712 40,712 Corporate 34,717 34,717 Municipal 1,392 1,392 Other 46,894 6,503 53,397 Comingled funds: Equity funds Interest rate swaps 5,573 5,573 Total categorized $ 203,049 88, ,046 Assets limited as to use and short-term investments accounted for using the equity method cash and interest accrued uncategorized 425,080 $ 717,126 Liabilities: Interest rate swaps $ 25,701 25, (Continued)

173 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) June 30, 2011 Level 1 Level 2 Level 3 Total Assets category: Equity securities: U.S. companies $ 55,062 55,062 International companies 59,365 59,365 Real assets 31,046 31,046 Fixed income securities: U.S. government guaranteed 6,136 6,136 U.S. agency 22,422 22,422 Municipal 1,502 1,502 Other 46,052 39,248 85,300 Alternative asset funds: Hedge funds Interest rate swaps 8,478 8,478 Total categorized $ 197,661 71, ,414 Assets limited as to use and short-term investments accounted for using the equity method cash and accrued interest uncategorized 481,864 $ 751,278 Liabilities: Interest rate swaps $ 14,487 14,487 FMOLHS s accounting 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. There were no significant transfers into or out of Level 1, Level 2, or Level 3 for the years ended June 30, 2012 or The investments classified as Level 2 are as follows: Shares or units in investment funds as opposed to direct interests in the funds underlying holdings, which may be marketable. Because the net asset value reported by each fund is used as a practical expedient to estimate the fair value of FMOLHS s interest therein, its classification in Level 2 is based on FMOLHS s ability to redeem its interest at or near the date of the consolidated balance sheets. If the interest can be redeemed in the near term, the investment is classified in Level 2. The classification of investments in the fair value hierarchy is not necessarily an indication of the risks, liquidity, or degree of difficulty in estimating the fair value of each investment s underlying assets and liabilities. 47 (Continued)

174 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) Bonds whose fair values are determined by independent vendors. The vendors compile prices from various sources and may apply matrix pricing for similar bonds or loans where no price is observable in an actively traded market. If available, the vendor may also use quoted prices for recent trading activity of assets with similar characteristics to the bond being valued. (c) Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (18) Insurance Programs The FMOLHS Affiliates are qualified under the State of Louisiana medical malpractice program and are self-insured for the first $100 of professional liability per occurrence; additional coverage is provided by the Louisiana Patients Compensation Fund for the next $400 of professional liability up to the present statutory maximum of $500 per claim (exclusive of additional amounts for future medical expense provided by law). FMOLHS s professional and general liability insurance program is managed through Louise, its wholly owned captive insurer. As of June 30, 2012, FMOLHS has significant excess insurance coverage in place for general and professional liability risks, with a $2,000 layer of self-insurance retention for professional liability and $1,000 layer of self-insurance retention for general liability, with a $6,000 aggregate. Incurred losses identified under FMOLHS s incident reporting system and incurred but not reported losses are accrued based on estimates that incorporate FMOLHS s past experience, as well as other considerations such as the nature of each claim or incident, relevant trend factors, and advice from consulting actuaries. The reserve for estimated professional and general liability costs is approximately $29,754 and $27,075 as of June 30, 2012 and 2011, respectively. Claims liabilities are estimated at the present value of future claims payments using a discount rate of 3% at June 30, FMOLHS has established a self-insurance trust fund for payment of liability claims and makes deposits to the fund in amounts determined by consulting actuaries. FMOLHS also has substantial excess liability coverage available under the provisions of certain claims-made policies, currently expiring on June 30, To the extent that any claims-made coverage is not renewed or replaced with equivalent insurance, claims based on occurrences during the term of such coverage, but reported subsequently, would be uninsured. Management believes, based on incidents identified through FMOLHS s incident reporting system, that any such claims would not have a material effect on FMOLHS s results of operations or financial position. In any event, management anticipates that the claims-made coverage currently in place will be renewed or replaced with equivalent insurance as the term of such coverage expires. FMOLHS is also self-insured with respect to employee health coverage (up to a $500 limit per claim) and workers compensation (up to a limit of $350 per individual claim). Substantial coverage with a third-party carrier is maintained for potential excess losses under the workers compensation program. The employee health self-insured reserves are approximately $7,428 and $10,022 as of June 30, 2012 and 2011, respectively, and are included in other current liabilities in the consolidated balance sheets. The workers 48 (Continued)

175 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) compensation reserves are approximately $10,908 and $11,438 as of June 30, 2012 and 2011, respectively, and are included in other current liabilities in the consolidated balance sheets. (19) Leases Lessor FMOLHS Affiliates lease office space and clinical facilities, generally to medical staff members, under operating leases. The terms of these leases range from month-to-month to 10 years. Assets held for lease at June 30, 2012 and 2011 consist of buildings and improvements with an original cost of $181,641 and $166,186, respectively, and fixed equipment with an original cost of $11,813 and $11,758, respectively. Total accumulated depreciation is $68,048 and $61,273 at June 30, 2012 and 2011, respectively. Future minimum lease payments to be received at June 30, 2012 are as follows: Year ending June 30: 2013 $ 8, , , , ,197 Thereafter 29,141 $ 65,383 (20) Commitments and Contingencies (a) Investments As it relates to alternative assets, FMOLHS is obligated under certain limited partnership agreements to provide advance funding up to specific levels upon the request of the general partner. See note 2(b). 49 (Continued)

176 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) (b) Capital leases As of June 30, 2012, the Lake, St. Francis, Lourdes, and St. Elizabeth were obligated under various capital leases, each with noncancelable terms in excess of one year. Future minimum lease payments as of June 30, 2012 are as follows: Year ending June 30: 2013 $ 5, , , , Total minimum lease payments 18,601 Less amounts representing interest (rates ranging from 6.0% to 14.5%) 1,324 Present value of future minimum lease payments 17,277 Less current portion of capital lease obligations 5,103 Capital lease obligations excluding current portion $ 12,174 The net book value of assets under capital lease as of June 30, 2012 and 2011 was $22,630 and $25,169, respectively. For the years ended June 30, 2012 and 2011, FMOLHS entered into new capital leases for equipment in the amount of $7,693 and $14,817, respectively. In late 2010, the FASB issued for comment Proposed Accounting Standards Update-Leases (Topic 840). After receiving and considering significant feedback, the FABS intends to issue a related final ASU in calendar year This new guidance is expected to require FMOLHS to recognize virtually all of its leases in the consolidated balance sheet. Assuming the ASU is in fact issued; adoption will cause considerable changes in the presentation of FMOLHS s debt and interest expense in its consolidated financial statements (among other things). Management is reviewing the implications of the proposed ASU for FMOLHS, including potential implications for many complex agreements and arrangements which might be impacted by this potential major accounting change. While that work is ongoing, management is optimistic that there will not be material issues associated with important related matters, such as overall FMOLHS credit ratings or future debt covenant compliance. 50 (Continued)

177 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) (c) Operating Leases Lessor Rental expense for all operating leases totaled $11,376 and $8,210 for the years ended June 30, 2012 and 2011, respectively. Future minimum rental payments under operating leases that have initial or remaining noncancelable terms in excess of one year as of June 30, 2012 follow: Year ending June 30: 2013 $ 4, , , , ,675 Thereafter 9,165 $ 23,503 (d) (e) (f) St. Francis Specialty Hospital During the years ended June 30, 2012 and 2011, St. Francis had a leasing arrangement with St. Specialty Extended Care Hospital of Monroe, LLC (Extended Care), a distinct and separate longterm care hospital, with rates based on square footage. In addition to the lease arrangement, a separate services agreement existed for the provision of ancillary, clinical and support services, based on fair market value rates. This lease and services agreement was effective November 1, 2009 between St. Francis and St. Francis Specialty Hospital (Specialty), and was subsequently assigned to Extended Care as a result of an asset purchase agreement between Specialty and Extended Care. The initial term was for five years, with automatic renewal of the lease for subsequent one-year terms unless written notice is given. Rental income and income related to the services agreement with Extended Care totaled $2,594 and $2,905 for the years ended June 30, 2012 and 2011, respectively. Amounts due from Extended Care at June 30, 2012 and 2011 were $506 and $585, respectively. Community Health Center Lease An amended lease was executed by St. Francis for the Community Health Center (CHC) space during the year ended June 30, The amended lease provided for an expansion of the leased premises through construction of an addition to the CHC building by St. Francis Ambulatory Services, Inc. (SFASI) at the leased site. The building was completed during the year ended June 30, 1999, and SFASI took occupancy of the building. Concurrently, the lease term was extended through August 31, 2014, and annual rentals increased to $449 through September 2008 and the greater of $601 annually, or an increase based upon the CPI through termination of the lease. Perkins Plaza ASC The Lake s subsidiary, Perkins Plaza Medical Arts Development (PPMAD), has a lease with Perkins Plaza ASC, an equity investment, whereby PPMAD receives minimum rent of $815 per year subject 51 (Continued)

178 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) to annual adjustments. Monthly rental installments were $67 from January 2010 through December 2010 and $68 beginning in January The lease expires in January (g) (h) Asset Retirement Obligations FMOLHS recognizes obligations associated with the future retirement of long-lived assets. Estimated asset retirement obligations of $3,462 and $3,386 for the years ended June 30, 2012 and 2011, respectively, are classified as a long-term liability. Contingent Liabilities FMOLHS and the FMOLHS Affiliates have certain pending and threatened litigation and claims incurred in the ordinary course of business; however, management believes that the probable resolution of such contingencies will not exceed the self-insurance reserves or insurance coverage, and will not materially affect the financial position or the results of operations. FMOLHS Affiliates, like other hospitals throughout Louisiana, is a defendant in cases where the plaintiff has developed Hepatitis C allegedly through blood transfusions administered at the hospital prior to the 1976 Medical Malpractice Act. Thus, no $500 statutory cap exists relating to these claims, and damages could be significant. Lourdes and the insurer that were in place during the period the transfusions occurred continue to closely monitor the progress of these cases. Management has assessed the risk associated with these cases and believes that the probable resolution of this contingency will not exceed the hospital s self-insurance reserves or insurance coverage and will not materially affect the financial position or results of operations of the hospital. During the fall of 2003, the Chief Executive Officer of Lourdes was advised by a physician with privileges at Lourdes that another physician with privileges at Lourdes, as well as other area hospitals, may have performed medically unnecessary procedures at Lourdes. Based on its internal investigation, management at Lourdes concluded that the allegations were credible and on November 11, 2003 (the Self-Reporting Date), reported the matter to the Office of the Inspector General (OIG) and the United States Attorney s Office in Lafayette, Louisiana (the Justice Department). On August 16, 2006, Lourdes, without admitting or denying fault, agreed to pay $3,800 in full settlement of all claims by the federal and state governments relating to alleged violations of the False Claims Act. As a component of this settlement, Lourdes also entered into a Corporate Integrity Agreement (CIA) with the OIG to promote compliance with statutes, regulations, and written directives for Federal Health Care Programs. The Corporate Integrity Agreement (CIA) covered a period of five years and expired during While the settlement agreement and CIA resolved this matter with respect to government regulatory authorities, it did not conclude the matter with respect to individual claimants. Lourdes agreed to pay a total of $7,400 as part of a global settlement agreement with all current and future individual claimants. On May 11, 2007, Lourdes settled with all but three of the individual claimants, who opted out of the global settlement agreement. The cost of the global settlement was paid by Louise. 52 (Continued)

179 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) As of June 30, 2012, the three remaining claimants are awaiting evaluation by a Medical Review Panel. Under the laws of the State of Louisiana, any claim for damages resulting from medical malpractice must be reviewed by a Medical Review Panel unless waived by all parties. A Medical Review Panel is charged with determining whether there has been a breach of the standard of care by a healthcare provider, as well as determining whether such breach caused damage to a claimant. A Medical Review Panel does not establish the Level of damages and is not the tier of fact. All determinations made by the Medical Review Panel may be used in related lawsuits for evidentiary purposes only. Under the laws of the State of Louisiana, damages for negligence by qualified healthcare providers, such as Lourdes, relating to claims for medical malpractice are limited to $100; punitive damages are not recoverable in the State of Louisiana. Any damages in excess of $100 for medical malpractice claims are payable from the Patients Compensation Fund created and established pursuant to the laws of the State of Louisiana, but in no event shall the amounts paid therefrom exceed $400 per claim. Damages for claims for intentional acts by qualified healthcare providers relating to medical malpractice have no limitation. In addition, damages for claims for negligent credentialing of a physician by a qualified healthcare provider have no limitation. Management at Lourdes has denied that its actions or failure to act in connection with these matters were negligent or intentional, or that the credentialing of the physician was negligent. Management at Lourdes has been advised by legal counsel that at this stage of litigation, it is not possible to estimate the extent of potential liability with respect to the remaining individual claimants. (i) Regulatory Compliance The U.S. Department of Justice and other federal agencies are increasing resources dedicated to regulatory investigations and compliance audits of healthcare providers. The FMOLHS Affiliates are subject to these regulatory efforts and have corporate compliance committees that monitor and respond to regulatory changes and any issues that may arise. In consultation with legal counsel, management is not aware of any issues that could have a material adverse effect on the FMOLHS Affiliates financial position or results of operations. (j) Information Technology Contract During fiscal year 2009, FMOLHS entered into a variety of contracts with a major information technology vendor. The agreements are generally for terms of seven years. The contracts generally commit FMOLHS to the purchase of a variety of information technology products and services from this vendor for defined payment streams over the terms of the contracts. Certain software license and related implicit maintenance costs were capitalized at the inception of the agreements in the amount of $17,621, with recognition of an associated liability related to FMOLHS s acquisition of these intangible assets. Capitalized software and implied maintenance costs are being amortized over the 53 (Continued)

180 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) estimated useful life of the software licenses (generally seven years) and the implicit maintenance period (which varies depending on first date of productive use), respectively. Other contract costs are evaluated for capitalization or expense recognition under relevant accounting literature as associated products and/or services are provided. The following table summarizes FMOLHS s future payment commitments under the contract as of June 30, 2012: Capitalized software obligation Other 2013 $ 3,137 7, ,137 7, ,137 7, ,047 7,245 Total 10,458 $ 28,980 Less amounts representing interest at 6.74% 1,163 Long-term obligation (included in other long-term liabilities) $ 9,295 (21) Cooperative Endeavor Agreement As part of its mission to ensure an appropriate supply of medical professionals in its service area and improve graduate medical education in the region, the Lake entered into an agreement with the State of Louisiana Department of Health and Hospitals (DHH) and Louisiana State University Health Sciences (LSU) in February The parties received associated governmental approval of the agreement from the Center for Medicare and Medicaid Services (CMS) on July 13, Major components of the agreement follow: The Lake will construct a medical education building (MEB) to house LSU training programs (to be donated by the Lake to LSU at completion of construction), expand its clinical capacity by 60 licensed beds, and implement a Trauma Center. The Lake has recorded $19,000 in other long-term liabilities in the consolidated balance sheets as of June 30, 2012 and 2011 and an associated other expense was recorded in the consolidated statement of operations for the year ended June 30, 2011 to reflect its promise to give in accordance with relevant accounting literature, related to the MEB. DHH will provide payments under a new reimbursement structure to the Lake, which are intended to compensate the Lake for incremental costs associated with higher Medicaid and uninsured patient volumes that are generally expected to accompany the Lake s increased role in LSU s graduate medical education program. 54 (Continued)

181 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Notes to Consolidated Financial Statements June 30, 2012 and 2011 (in thousands) During the year ended June 30, 2011, DHH submitted a State Plan Amendment that obligated itself to make supplemental Medicaid payments to the Lake equal to a total of $129,000 for the period October 1, 2009 through June 30, These amounts were received by the Lake during its fiscal year 2011 and were included in net patient services revenue for the year ended June 30, 2011 as a reduction in related contractual and other adjustments. (22) Subsequent Events FMOLHS has evaluated subsequent events from the consolidated balance sheet date through October 9, 2012, the date the consolidated financial statements were issued. On October 3, 2012, the Authority issued its Hospital Revenue Refunding Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2012A in the original principal amount of $56,530 (the Series 2012A Bonds ) for the purpose of advance refunding its Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2005C (the Series 2005C bonds ) and paying the costs of issuance of the Series 2012A Bonds. A portion of the proceeds of the Series 2012A Bonds and other monies available to the FMOLHS were deposited in an Escrow Fund created pursuant to an Escrow Deposit Agreement dated the date of delivery of the Series 2012A Bonds for the purpose of defeasing and advance refunding the Series 2005C Bonds. 55

182 SUPPLEMENTAL SCHEDULES

183 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Consolidating Schedule Balance Sheet Information June 30, 2012 (with comparative totals as of June 30, 2011) (In thousands) Schedule 1 Our Lady of the Lake Our Lady of Regional Lourdes Franciscan Medical St. Francis Regional Missionaries Center, Medical Medical of Our Inc. and St. Center Center, Lady Health affiliated Elizabeth Inc. and Inc. and Total Assets System, Inc. organizations Hospital subsidiaries subsidiaries Others Eliminations Current assets: Cash and cash equivalents $ 11, ,126 15,696 13,321 9,425 18, , ,195 Short-term investments 2,150 15, ,538 21,254 Receivables: Patients 145,244 19,662 46,234 52,741 1, , ,225 Less allowance for uncollectible accounts (39,795) (8,358) (11,853) (13,138) (73,144) (64,441) Net patient receivables 105,449 11,304 34,381 39,603 1, , ,784 Other current assets 7,303 44,061 2,590 19,229 14,768 1,411 (7,648) 81,714 88,980 Total current assets 20, ,679 29,590 66,932 63,796 21,192 (7,648) 481, ,213 Noncurrent assets limited as to use 465,975 4, ,069 20,272 23, , ,785 Property and equipment, net 46, ,172 54, , , , ,292 Property and equipment, held for sale 15,055 Other assets 9,184 53,363 7,122 29,319 34,239 4,817 (25,283) 112, ,063 Total assets $ 76,544 1,314,189 96, , ,191 49,702 (32,931) 2,261,545 2,260,408 Liabilities and Net Assets Current liabilities: Lines of credit $ 805 5,191 5,996 4,650 Current installments of long-term debt 9, ,567 4,426 19,027 17,585 Current portion of capital lease obligations 1, ,104 5,103 4,649 Accounts payable 4,925 27,233 2,413 8,521 9, (91) 53,435 75,487 Other current liabilities 15,178 95,048 11,049 21,009 14,227 20,246 (7,557) 169, ,491 Total current liabilities 20, ,052 15,064 34,562 36,684 20,944 (7,648) 252, ,862 Professional and general liabilities, excluding current portion 1,175 15,614 2,226 5,436 3,466 24,065 (23,510) 28,472 25,587 Long-term debt, excluding current installments 201,586 15, , , , ,709 Capital lease obligations, excluding current portion ,966 12,174 16,843 Accrued pension cost 188,003 49,764 66, , ,003 Other long-term liabilities 34,995 19,597 2,447 3,134 2,027 62,200 52,782 Total liabilities 56, ,811 33, , ,853 47,036 (31,158) 1,162,588 1,045,786 Net assets: Unrestricted 20, ,251 62, , ,460 2,597 (1,773) 1,065,480 1,180,209 Temporarily restricted 19, , ,802 18,609 Permanently restricted 5, ,510 5,516 Total net assets attributable to Franciscan Missionaries of Our Lady Health System, Inc. 20, ,804 63, , ,670 2,666 (1,773) 1,091,792 1,204,334 Noncontrolling interests 2,574 (77) 4,668 7,165 10,288 Total net assets 20, ,378 62, , ,338 2,666 (1,773) 1,098,957 1,214,622 Total liabilities and net assets $ 76,544 1,314,189 96, , ,191 49,702 (32,931) 2,261,545 2,260,408 See accompanying independent auditors report. 56

184 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Consolidating Schedule Statement of Operations Information Year ended June 30, 2012 (with comparative totals for the year ended June 30, 2011) (In thousands) Schedule 2 Our Lady of the Lake Our Lady of Regional Lourdes Franciscan Medical St. Francis Regional Missionaries Center, Medical Medical of Our Inc. and St. Center Center, Lady Health affiliated Elizabeth Inc. and Inc. and Total System, Inc. organizations Hospital subsidiaries subsidiaries Others Eliminations Changes in unrestricted net assets: Unrestricted revenues: Net patient service revenue $ 726, , , ,652 1,319,535 1,362,922 Other revenue 86,189 67,207 1,334 10,939 9,025 15,027 (99,778) 89,943 86,317 Equity in income from equity investees, net 5,183 (87) 2,775 4,162 12,033 10,951 Total unrestricted revenues 86, , , , ,839 15,027 (99,778) 1,421,511 1,460,190 Net assets released from restrictions used for operations: Satisfaction of program restrictions 2, ,780 5,364 Expiration of time restrictions Total net assets released from restrictions 2, ,913 5,489 Total unrestricted revenues and other support 86, , , , ,839 15,075 (99,778) 1,424,424 1,465,679 Operating expenses: Salaries and wages 36, ,457 40,468 98,016 71,433 2, , ,515 Employee benefits 8,368 56,938 8,277 22,624 15, , ,264 Total salaries, wages, and benefits 44, ,395 48, ,640 86,679 3, , ,779 Provision for uncollectible accounts 77,342 15,381 8,937 21, , ,238 Physician fees 14, ,222 11,515 30,570 28,189 Professional services 430 9, ,819 1, ,973 14,817 Other services 37, ,460 15,349 43,801 36,818 4,671 (92,501) 171, ,997 Leases, insurance, and utilities 3,150 20,952 3,225 9,564 10,289 6,481 (7,277) 46,384 44,103 Supplies and other ,701 10,922 44,930 51, , ,479 Depreciation and amortization 14,810 29,307 4,801 13,324 16, ,153 68,478 Interest , ,615 8,179 26,537 21,942 Other 89 1, , ,133 21,352 Total operating expenses 102, ,986 99, , ,879 14,950 (99,778) 1,386,005 1,319,374 Operating income (loss) (16,775) 36,747 6,879 4,483 6, , , (Continued)

185 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Consolidating Schedule Statement of Operations Information Year ended June 30, 2012 (with comparative totals for the year ended June 30, 2011) (In thousands) Schedule 2 Our Lady of the Lake Our Lady of Regional Lourdes Franciscan Medical St. Francis Regional Missionaries Center, Medical Medical of Our Inc. and St. Center Center, Lady Health affiliated Elizabeth Inc. and Inc. and Total System, Inc. organizations Hospital subsidiaries subsidiaries Others Eliminations Nonoperating gains (losses): Investment return $ 95 (4,312) 15 (1,706) (5,332) 119,270 Other (3,150) (492) (59) (42) (3,743) (4,695) Change in fair value of interest rate swap agreement (14,118) (14,118) 4,676 Total nonoperating gains (losses), net (14,023) (7,462) 15 (1,706) (389) 414 (42) (23,193) 119,251 Unrestricted revenues, gains, and other support in excess (less than) expenses and losses (30,798) 29,285 6,894 2,777 6, (42) 15, ,556 Noncontrolling interests (832) 77 (2,371) (3,126) (3,145) Unrestricted revenues, gains, and other support in excess of (less than) expenses and losses attributable to FMOLHS (30,798) 28,453 6,971 2,777 4, (42) 12, ,411 Capital transfers (to) from FMOLHS 26,338 (11,148) (3,602) (5,845) (5,785) 42 Other (1,848) (1,848) Pension-related changes other than net periodic pension cost (78,825) (18,251) (27,905) (124,981) 69,673 Increase (decrease) in unrestricted net assets $ (4,460) (63,368) 3,369 (21,319) (29,490) 539 (114,729) 332,084 See accompanying independent auditors report. 58

186 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Consolidating Schedule Statement of Changes in Net Assets Information Year ended June 30, 2012 (with comparative totals for the year ended June 30, 2011) (In thousands) Schedule 3 Our Lady of Our Lady of Lourdes Franciscan the Lake St. Francis Regional Missionaries Hospital, Medical Medical of Our Inc. and St. Center Center, Lady Health Affiliated Elizabeth Inc. and Inc. and Total System, Inc. Organizations Hospital subsidiaries subsidiaries Others Eliminations Unrestricted revenues, gains, and other support in excess of (less than) expenses and losses attributable to FMOLHS $ (30,798) 28,453 6,971 2,777 4, (42) 12, ,411 Capital transfers (to) from FMOLHS 26,338 (11,148) (3,602) (5,845) (5,785) 42 Other (1,848) (1,848) Pension-related changes other than net periodic pension cost (78,825) (18,251) (27,905) (124,981) 69,673 Increase (decrease) in unrestricted net assets (4,460) (63,368) 3,369 (21,319) (29,490) 539 (114,729) 332,084 Changes in temporarily restricted net assets: Contributions 4, (1) 5,062 5,185 Income from long-term investments, net Net unrealized and realized loss on investments, net Net assets released from restrictions (2,581) (285) (47) (2,913) (5,489) Acquired net assets Increase (decrease) in temporarily restricted net assets 2, (48) 2,193 (268) Changes in permanently restricted net assets (6) (6) 11 Changes in noncontrolling interest: Unrestricted revenues, gains, and other support in excess of expenses and losses attributable to FMOLHS 832 (77) 2,371 3,126 3,145 Distributions (1,708) (3,475) (5,183) (3,207) Sale of noncontrolling interests 1,207 Acquired non-controlling interest (1,066) (1,066) Changes in noncontrolling interest (876) (77) (2,170) (3,123) 1,145 Increase (decrease) in net assets (4,460) (62,135) 3,408 (21,303) (31,666) 491 (115,665) 332,972 Net assets, beginning of year (as adjusted) 24, ,513 59, , ,004 2,175 (1,773) 1,214, ,650 Net assets, end of year $ 20, ,378 62, , ,338 2,666 (1,773) 1,098,957 1,214,622 See accompanying independent auditors report. 59

187 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Service to the Community (Unaudited) June 30, 2012 and 2011 Schedule 4 FMOLHS and the FMOLHS Affiliates are active, caring members of the communities they serve. In carrying out its mission of meeting the health needs of the people of God, the Board of Directors has established a policy under which FMOLHS Affiliates provide care to needy members of their communities. Following that policy, healthcare services costing $11,216 and $12,140 were provided without charge during the years ended June 30, 2012 and 2011, respectively. Charges foregone, based on established rates, totaled $30,305 and $32,084 for the years ended June 30, 2012 and 2011, respectively. The FMOLHS Affiliates also participate in government programs including Medicare, Medicaid, and the TriCare program. Under these programs, the FMOLHS Affiliates provide care to patients at payment rates that are determined by the federal and state governments, regardless of actual cost. In some cases, these programs pay the FMOLHS Affiliates at amounts, which are less than their cost of providing services. The following table summarizes the amount of charges foregone (i.e., contractual adjustments) and the estimated losses incurred by the FMOLHS Affiliates due to inadequate payments by these programs and for charity for the years ended June 30, 2012 and 2011: Estimated Estimated Charges unreimbursed Charges unreimbursed foregone costs foregone costs Medicare $ 804,845 82, ,773 62,772 Medicaid 316,398 59, ,971 54,813 Other 6,713 1,544 5,629 1,216 Charity 30,305 11,216 32,084 12,140 $ 1,158, ,048 1,040, ,941 In addition to community services directly associated with providing hospital-based care, FMOLHS Affiliates serve their communities in numerous other ways. Although the FMOLHS Affiliates have estimated the cost of each of these efforts to serve their communities, management and the Boards of Directors believe that such costs represent only some of the many ways FMOLHS Affiliates serve their communities. The estimated costs for the years ended June 30, 2012 and 2011 are as follows: Net community benefit expense Subsidized health services $ 27,985 17,709 Community health improvement services 3,504 3,669 Health professions education 7,474 11,827 Community building activities 1,212 20,517 Donations or in-kind contributions 1,419 1,221 Total $ 41,594 54, (Continued)

188 FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. AND AFFILIATED ORGANIZATIONS Service to the Community (Unaudited) June 30, 2012 and 2011 Schedule 4 Subsidized health services Includes the discount provided, at cost, to all patients that have no form of insurance coverage. Programs such as St. Elizabeth Community Clinic, Scott Family Clinic, St. Bernadette s Clinic, Scotlandville Clinic, Kid-Med Clinic which serves the underinsured or uninsured. Mental health services and palliative care are also provided to the community, Community health improvement services Includes activities carried out to improve community health and costs, which are underwritten by FMOLHS Affiliates. These services include Camp Bluebird, Lafayette Community Healthcare Clinic, a medication program, Congregational Health Services, Northside High School Health Center, community seminars, immunological support, parish nurse program, LakeLine Direct, St. Martha Activity Center, elderly services, and elderly housing. Health professions education Includes assistance to future healthcare professionals, nursing students and pharmacy students. Clinical setting for undergraduate, vocational training, internships, clerkships, and residencies. Collaboration with local colleges for supervision and clinical training in pharmacy, respiratory therapy, health information management, and medical technology. Registered nurse recruitment activities, OLOL College, and participation in Medicare s Graduate Medical Education through affiliation with Louisiana Medical School and Medical Center of Louisiana at New Orleans; will continue to support availability of future healthcare professionals. Community building activities Includes leadership development and training for community members such as emergency preparedness programs; community health education such as classes on breast feeding, childbirth basics, sibling class, and ABC s of childcare; community support with Meals on Wheels; community-based clinical services, including health screenings, discounted services provided to Louisiana Baptist Children s Home, Veteran's Administration, Rural Hospitals, ULM Athletic Department, MDA, Wellspring, and Handicap Children; workforce development; and provides community clinics, St. Vincent DePaul Charitable Pharmacy and Mary Bird Perkins use of land and buildings. Donations and in kind contributions Includes donations to various area community organizations such as United Way. Families Helping Families, Children s Coalition, Wellspring, YMCA, Haiti Project, Prevent Child Abuse, Komen Foundation, Alzheimer s Foundation, March of Dimes, Junior Achievement, Cystic Fibrosis, Community Fund for the Arts and American Heart Association. Provides office space for The Family Tree Parenting Center, as well as employee costs associated with board and community involvement in various community organizations. 61

189 APPENDIX C DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS

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191 APPENDIX C DEFINITIONS AND SUMMARY OF PRINCIPAL DOCUMENTS DEFINITIONS The following words and terms as used in this Official Statement have the following meanings, unless some other meaning is plainly intended, which meanings are provided in the Indenture, the Loan Agreement, the Assignment, or the Master Indenture, as applicable. For purposes of this Summary, the Credit Group is comprised solely of the Obligated Group Members. There are presently no Restricted Affiliates. "Act" means the Louisiana Public Trust Act, constituting Chapter 2-A of Title 9, being Louisiana Revised Statutes 9: , inclusive, of 1950, as amended and supplemented. "Accountant" means a firm of independent certified public accountants selected by the Corporation. "Affiliate" means any corporation, partnership, joint venture, association, business trust or similar entity organized under the laws of the United States of America or any state thereof that (a) directly or indirectly controls or is controlled by, or is under common control by the same person or entity as, the Corporation, or (b) directly or indirectly controls or is controlled by, or is under common control by the same person or entity as, any entity referred to in clause (a) of this sentence. For purposes of this definition, "control" means with respect to: (i) a corporation having stock, ownership, directly or indirectly, of more than 50% of the securities (as defined in Section 2(1) of the Securities Act of 1933, as amended) of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the members of the board of directors or other governing body of such corporation; (ii) a nonprofit corporation not having stock, having the power to elect or appoint, directly or indirectly, a majority of the board of directors, trustees or other governing body of such corporation; and (iii) any other entity, the power to direct the management of such entity through the ownership of at least a majority of its voting securities or the right to designate or elect a majority of the members of the board of directors or other governing body of such entity. "Applicant" means (i) in the case of any admissions to the Obligated Group, the entity proposing to become an Obligated Group Member, and (ii) in the case of any merger, consolidation or transfer of assets, the entity with which any Credit Group Member proposes to merge or consolidate or to which it proposes to transfer all or substantially all of its assets. "Assignment" means the Assignment of Receipts and Security Agreement dated as of July 1, 2005, as amended by Amendment No. 1 to Assignment of Receipts and Security Agreement dated as of May 1, 2007, Amendment No. 2 to Assignment of Receipts and Security Agreement dated as of May 1, 2008, Amendment No. 3 to Assignment of Receipts and Security Agreement dated as of May 1, 2008, Amendment No. 4 to Assignment of Receipts and Security Agreement dated as of July 1, 2008, Amendment No. 5 to Assignment of Receipts and Security Agreement dated as of August 1, 2008, Amendment No. 6 to Assignment of Receipts and Security Agreement dated as of June 1, 2009, Amendment No. 7 to the Assignment dated as of February 1, 2011, Amendment No. 8 to the Assignment dated as of October 1, 2012, and Amendment No. 9 to the Assignment dated as of November 1, 2012, each by the Obligated Group Members in favor of The Bank of New York Mellon Trust Company, N.A., as Master Trustee and as agent for the secured parties named therein. "Authority" means the Louisiana Public Facilities Authority, a public trust and public corporation established for the benefit of the State by a certain Indenture of Trust dated August 21, "Balloon Long-Term Indebtedness" means Long-Term Indebtedness, 25% or more of the principal amount of which matures in the same 12-month period, which portion of such principal amount is not required by the documents governing such Long-Term Indebtedness to be amortized by redemption prior to such period. "Bond Counsel" means Foley & Judell, L.L.P. or any other law firm reasonably acceptable to the Authority and the Master Trustee having a national reputation in the field of municipal law, whose legal opinions are generally accepted by purchasers of municipal bonds. C-1

192 "Bonds" means the Authority's Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2012B. "Book Value," when used with respect to any property or interest therein, means the value of such property or interest, net of accumulated depreciation and amortization, as it is carried on the books of its owner or its lessee in conformity with generally accepted accounting principles and shall be determined in such a manner that no portion of such property is included more than once. "Business Day" means a day other than (i) a Saturday, Sunday or legal holiday in the city in which the Principal Office of the Obligated Group Agent or the Trustee is located or (ii) a day on which the New York Stock Exchange is closed. "Capital Improvements" means any capital project, including (without limitation) land, easements, rights-of-way, leaseholds and other interests in real property and any improvement, addition or betterment to or any construction, replacement, remodeling or equipping of any Operating Assets. "Certificate," "Notice," "Opinion," "Order," "Request" and "Statement" mean, respectively, a written certificate, notice, opinion, order, request or statement, in form and substance satisfactory to the Master Trustee, signed (i) when used with respect to the Corporation, any other Credit Group Member, the Obligated Group or the Obligated Group Agent, by the President, any Vice President or any other person authorized by the bylaws or a resolution of the governing body of the Obligated Group Agent, Credit Group Member or the Obligated Group, and (ii) when used with respect to any other person, by an authorized officer thereof. Any such instrument and supporting opinions or representations, if any, may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the instruments so combined shall be read and construed as a single instrument. "Code" means the Internal Revenue Code of 1986, as amended from time to time. Each reference to a section of the Code in the Indenture shall be deemed to include the final or temporary United States Treasury Regulations and applied to the Bonds or the use of proceeds thereof, and also includes all amendments and successor provisions unless the context clearly requires otherwise. "Completion Date" means the date specified in the certificate required by the Loan Agreement. "Continuing Disclosure Agreement" means the Continuing Disclosure Agreement dated the date of issuance of the Bonds, between the Corporation and the Trustee, as the same may be amended or supplemented from time to time in accordance with its terms. "Corporation" means Franciscan Missionaries of Our Lady Health System, Inc., a Louisiana nonprofit corporation, duly incorporated and existing under the laws of the State, and its successors and assigns. "Corporation Representative" means the President or Vice President of the Corporation, or any other person designated as such by an instrument in writing delivered to the Authority and the Trustee by the President of the Corporation, containing the specimen signature of such person and signed on behalf of the Corporation by any of its officers. The certificate may designate an alternate or alternates. "Counsel," as used in the Master Indenture, means an attorney duly admitted to practice law before the highest court of any state or the District of Columbia selected by the Obligated Group and reasonably acceptable to the Trustee, who may be (without limitation) an officer or employee of a Credit Group Member, and as used in the Indenture, means an attorney or firm of attorneys. "Counterparty" shall mean the entity entering into a Hedging Transaction. "Credit Facility" as used in the Master Indenture means any liquidity facility, letter of credit, bond insurance policy, bond purchase agreement, guaranty, line of credit, surety bond or similar credit or liquidity facility securing any Obligation or other Indebtedness of any Credit Group Member. C-2

193 "Credit Facility Agreement" as used in the Master Indenture means the agreement pursuant to which any Credit Facility is issued. effect. "Credit Facility Provider" as used in the Master Indenture means the issuer of any Credit Facility then in "Credit Group" and "Credit Group Members" mean, collectively, the Obligated Group Members and the Restricted Affiliates. "Current Value" means, when used with respect to any property as of any particular date, the fair market value of such property as shown on a written appraisal reasonably acceptable to the Master Trustee made by an M.A.I. appraiser or other appraiser reasonably acceptable to the Master Trustee not more than 12 months prior to such date and delivered to the Master Trustee or a bona fide offer for the purchase of such property made on an arm's length basis within twelve (12) months of the date of determination, as established by a Certificate of the Corporation. "Debt Service Coverage Ratio" means, when used with respect to any Fiscal Year, the quotient obtained by dividing (i) the aggregate of the Net Income Available for Debt Service of the Credit Group for such Fiscal Year by (ii) the Maximum Annual Debt Service on all Outstanding Long-Term Indebtedness of the Credit Group as of the last day of such Fiscal Year. "Debt Service Requirements" means, when used with respect to any Long-Term Indebtedness for any Fiscal Year as of any particular date of calculation the amount required to pay the sum of (a) the interest on such Long-Term Indebtedness payable during such Fiscal Year, and (b) the principal of and any amount required to effect any mandatory redemption of such Long-Term Indebtedness, if any, during such Fiscal Year, less any amount of such interest or principal for the payment of which moneys or investment obligations the principal of and interest on which when due will provide for such payment, are held in trust (including defeased obligations, capitalized interest and debt service reserve funds). For the purpose of calculating the Debt Service Requirements: (i) with respect to any Variable Rate Indebtedness: (A) for the purpose of calculating the principal amount of Balloon Long-Term Indebtedness constituting Variable Rate Indebtedness payable in any Fiscal Year under clause (ii)(c) below and for the purpose of calculating the interest on any such Indebtedness for any period after the date of calculation, at the option of the Obligated Group Agent, such Indebtedness shall be deemed to bear interest at either (1) The Bond Buyer Revenue Bond Index for a term equal to the shorter of (a) 120% of the weighted average economic life of the facilities financed or refinanced thereby or (b) 30 years, or (2) an annual rate equal to the weighted average interest rate per annum borne by such Indebtedness during the 12-month period ending on the date of calculation or, in the case of any Variable Rate Indebtedness to be issued or issued during the immediately preceding 12-month period, the weighted average interest rate per annum borne by other outstanding Indebtedness having comparable terms and issued by, or secured by agreements issued by, entities of comparable creditworthiness as the obligors with respect to such Variable Rate Indebtedness during the immediately preceding 12-month period. In addition, if there is a Hedging Transaction, the interest payable on such Variable Rate Indebtedness for which the notional principal amount relates shall be calculated, for the Fiscal Years during which the Hedging Transaction is in effect, at the effective rate payable thereunder, provided the Counterparty, at the time the calculation is made, is rated in one of the three highest rating categories by the Rating Agencies, and any fixed rate Indebtedness which has been synthetically made variable through the use of a Hedging Transaction shall be deemed to bear interest at such variable rate for the Fiscal Years during which the Hedging Transaction is in effect to the extent of the notional principal amount of the Hedging Transaction, provided the Counterparty, at the time the calculation is made, is rated in one of the three highest rating categories by the Rating Agencies; (ii) with respect to any Balloon Long-Term Indebtedness, at the option of the Obligated Group Agent: (A) if a liquidity facility is then in effect with respect to such Indebtedness, the principal amount of such Indebtedness payable in each Fiscal Year as of any date of calculation may be deemed to be the amount that would be payable during such Fiscal Year if such liquidity facility was used or drawn upon to purchase C-3

194 or retire such Indebtedness on the stated maturity date thereof or on any date established for the mandatory redemption thereof, less the aggregate amount required to be on deposit in any irrevocable sinking fund established to provide for the payment of such Indebtedness in accordance with clause (B) below during such Fiscal Year; (B) if (1) pursuant to a resolution duly adopted by the governing body of the Credit Group Member that shall have issued or incurred such Indebtedness, an irrevocable sinking fund shall have been established to provide for the payment of such Indebtedness when due, and (2) deposits to such sinking fund are current and timely, then the principal amount of such Indebtedness payable in each Fiscal Year may be deemed to be the amount required to be deposited in such sinking fund for such Fiscal Year; and (C) the principal amount of such Indebtedness payable in each Fiscal Year may be deemed to be the amount that would have been payable during such Fiscal Year if such Indebtedness were required to be amortized in full from the date of its issuance or, in the case of any such Indebtedness issued to finance or refinance any Capital Improvement, at the option of the Obligated Group Agent, a later date on or before the expected date of completion of such Capital Improvement, in substantially equal annual installments of principal (such principal to be rounded to the nearest $5,000) and interest over a term equal to the shorter of (a) 30 years and (b) 120% of the weighted average economic life of the property financed or refinanced thereby; provided that if a liquidity facility is not in effect with respect to any Balloon Long-Term Indebtedness and such Balloon Long-Term Indebtedness matures within 12 months of a calculation, then the full amount of the maturing Balloon Long- Term Indebtedness shall be included in the calculation. (iii) with respect to any Optional Tender Indebtedness, the option of the holder thereof to require the redemption or purchase thereof or any required purchase or redemption thereof in connection with any termination of any liquidity facility securing such Optional Tender Indebtedness prior to the stated maturity thereof shall be disregarded; (iv) with respect to any Guaranty of any Indebtedness that would constitute Long-Term Indebtedness if incurred directly by a Credit Group Member: (A) for the purposes of determining whether the additional indebtedness requirements of the Master Indenture for the issuance of any Guaranty have been met, 100% of the debt service requirements of the guaranteed Indebtedness shall be taken into account; (B) in any other case: (1) so long as no default shall have occurred with respect to such Indebtedness and no demand for payment shall have been made under such Guaranty as described in (2) below, there shall be excluded 80% of the debt service requirements of such guaranteed Indebtedness; and (2) if during the immediately preceding one-year period a default shall have occurred with respect to such Indebtedness or a demand for payment shall have been made under such Guaranty, 100% of the debt service requirements of such Indebtedness shall be taken into account; and (C) such Indebtedness shall be taken into account only once in calculating the Debt Service Requirements of all Long-Term Indebtedness; (v) with respect to any Credit Facility Agreement, except as provided in clause (ii)(a) above, so long as no demand for payment under the Credit Facility issued under such Credit Facility Agreement shall have been made, the debt service requirements of such Credit Facility Agreement shall be excluded from such calculation; and (vi) with respect to any Joint Indebtedness, the amount of the debt service requirements of such Joint Indebtedness that, pursuant to the agreement between or among the primary obligors with respect to such Indebtedness, is required to be paid by persons that are not Credit Group Members shall be excluded to the extent of the amount of such debt service requirements that would be excluded if a Guaranty of such amount of such Joint Indebtedness were C-4

195 delivered by a Credit Group Member, determined in accordance with clause (iv) above, as if such persons were the only primary obligors with respect to such amount. In addition, for the purpose of computing Debt Service Requirements, there shall be excluded intercompany notes among Credit Group Members, cash advances among Credit Group Members, and funded depreciation borrowings among Credit Group Members. "Debt to Capitalization Ratio" means, as of any particular date, the quotient obtained by dividing (a) the total outstanding principal amount of Long-Term Indebtedness of the Credit Group as of such date by (b) the sum of (i) the total outstanding principal amount of Long-Term Indebtedness of the Credit Group and (ii) the total of the unrestricted fund balance, unrestricted and temporarily restricted net assets and equity accounts (as the case may be) of the Credit Group as of such date, determined in accordance with generally accepted accounting principles, but excluding in the calculation any amount of principal of or interest on Long-Term Indebtedness, the payment of which moneys or investment obligations, the principal of and interest on which when due, will provide for such payment, are held in trust. "Facilities" means the health care facilities of the Obligated Group Members as more particularly described in the Loan Agreement, and all additions, enlargements, improvements, extensions, alterations, fixtures and appurtenances thereto and equipment therein or thereon and all other facilities for hospitals or medical or other facilities financed or refinanced from the proceeds of obligations issued by governmental issuers. "Favorable Opinion of Bond Counsel," when used in the Master Indenture, means, when used with respect to or in connection with any action, an Opinion of Bond Counsel to the effect that such action will not adversely affect the excludability from gross income for federal income tax purposes of interest paid on any Tax-Exempt Bonds theretofore issued, and when used in the Indenture, means with respect to any action the occurrence of which requires such an opinion, an unqualified Opinion of Counsel, which shall be a Bond Counsel, to the effect that such action is permitted under the Act and the Indenture and will not adversely affect the exclusion of interest on the Bonds from gross income for purposes of Federal income taxation (subject to the inclusion of any exceptions contained in the opinion delivered upon original issuance of the Bonds). "Fiscal Year" means the period of 12 consecutive months beginning on July 1 in any calendar year and ending on June 30 of the succeeding calendar year, or such other fiscal year as the System, upon at least 30 days' prior Notice to the Master Trustee, shall establish as the fiscal year of the System. When used with respect to any Participant or Affiliate thereof having a different fiscal year from the Corporation, "Fiscal Year" shall be deemed to refer to the fiscal year of such Participant or Affiliate ended on the most recent date prior to the date as of which any determination is required to be made under the Master Indenture. "Fitch" shall mean Fitch, Inc., and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "Fitch" shall be deemed to refer to any other nationally recognized securities rating agency selected by the Corporation. "Government Obligations" means direct obligations of, or obligations the timely payment of the principal of and the interest on which are unconditionally guaranteed by, the United States of America. "Governmental Restriction" means federal, state or other governmental laws or regulations affecting any Credit Group Member or its facilities, including (without limitation) laws or regulations placing restrictions and limitations on (i) the fees rentals, rates and other charges to be fixed, charged and collected by any Credit Group Member or (ii) the timing of the receipt of such revenues. "Guaranty" means any guaranty, loan commitment or other obligation of any Credit Group Member guaranteeing in any manner, whether directly or indirectly, any Indebtedness of any other person (other than another Credit Group Member). "Hedging Transaction" means an agreement, expressly identified in an Officer's Certificate delivered to the Master Trustee as being entered into in order to hedge the interest payable on all or a portion of any Indebtedness, which agreement may include, without limitation, an interest rate swap, a forward or futures contract or an option (e.g., a call, C-5

196 put, cap, floor or collar), which agreement does not constitute an obligation to repay money borrowed, credit extended or the equivalent thereof. "Holder" or "holder" or any similar term, when used with respect to any Obligation, means the registered owner of such Obligation or such other person as shall be deemed to constitute the holder or owner thereof in accordance with the Master Indenture. "Immaterial Affiliate" means a Person (whether or not a Restricted Affiliate) who meets both of the following tests: (i) a Person whose total net assets, as shown on its financial statements for the most recently completed fiscal year, were less than 10% of the combined or consolidated net assets of the Credit Group as set forth on the combined financial statements for the most recently completed Fiscal Year for which audited financial statements have been prepared and (ii) a Person whose Total Operating Revenues as set forth on its financial statements for the most recently completed Fiscal Year for which audited financial statements have been prepared did not exceed ten percent of the combined Total Operating Revenues of the Credit Group as set forth on the combined financial statements for the most recently completed Fiscal Year for which audited financial statements have been prepared. "Indebtedness" means any indebtedness or liability for borrowed money, any installment sale obligation or any obligation under any lease that is capitalized under generally accepted accounting principles and any Guaranty of any of the foregoing. Indebtedness shall not include any obligation of any Credit Group Member to any other Credit Group Member. "Indenture" means the Trust Indenture (Series 2012B) dated as of November 1, 2012 between the Authority and the Trustee, and any amendments or supplements thereto. "Independent Public Accountant" means any nationally recognized certified public accountant or firm of accountants reasonably acceptable to the Master Trustee engaged in the accounting profession, either entitled to practice, or having members or officers entitled to practice, as a certified public accountant and in fact independent, employed by the Obligated Group from time to time to pass upon those matters required by the Master Indenture to be passed upon by an Independent Public Accountant. The current Independent Public Accountant is KPMG LLP. "Interest Payment Date" means each January 1 and July 1, commencing July 1, "Joint Indebtedness" means any Indebtedness for which one or more Credit Group Members and one or more persons that are not Credit Group Members are jointly and severally liable. "Loan" means the loan made by the Authority in the total original principal amount of the Bonds for the purpose of financing the cost of the Project. "Loan Agreement" means the Loan Agreement (Series 2012B) dated as of November 1, 2012, by and between the Authority and the Corporation, as the same may be further amended from time to time. "Loan Repayments" means the payments of principal of and interest on the Loan and any other amounts payable by the Corporation pursuant to the provisions of the Loan Agreement or the Series 2012B Note. "Loan Term" means the term provided for in the Loan Agreement. "Long-Term Indebtedness" means all of the following Indebtedness incurred or assumed by any Credit Group Member: (i) any obligation for the payment of principal and interest with respect to money borrowed for an original term, or renewable at the option of the borrower for a period from the date originally incurred longer than one year; (ii) any obligation for the payment of money under leases that are required to be capitalized under generally accepted accounting principles; C-6

197 (iii) any obligation for the payment of money under installment purchase contracts having an original term in excess of one year; and (iv) any Guaranty of any Indebtedness that would be described in item (i), (ii) or (iii) above if such Indebtedness were incurred directly. "Management Consultant" means an independent professional management consultant having a favorable national reputation for skill and experience in hospital consulting work, selected by the Corporation and acceptable to the Master Trustee, who may be (without limitation) the Independent Public Accountant if the Independent Public Accountant otherwise meets the criteria set forth in this definition. "Master Indenture" means the Master Trust Indenture dated as of May 1, 1998 by and between the Corporation and the Master Trustee, as amended and supplemented to the date hereof, including by Supplemental Master Trust Indenture No. 14, and as the same may be amended and supplemented in the future. "Master Trustee" means The Bank of New York Mellon Trust Company, N.A. (successor to The Bank of New York), a national banking association duly organized and existing under the laws of the United States of America, and any other corporation that may at any time be substituted in its place pursuant to the Master Indenture, and their successors. "Material Credit Group Member" means any Credit Group Member who meets either of the following tests: (i) any Credit Group Member whose Total Operating Revenues as set forth on its financial statements for the most recently completed Fiscal Year for which audited financial statements have been prepared exceed ten percent of the combined Total Operating Revenues of the Credit Group or (ii) any Credit Group Member whose total net assets as set forth on its financial statements for the most recently completed Fiscal Year for which audited financial statements have been prepared were equal to or greater than 10% of the combined or consolidated net assets of the Credit Group Members as set forth on the combined financial statements for the most recently completed Fiscal Year for which audited financial statements have been prepared. "Maximum Annual Debt Service" means, when used with reference to any Long-Term Indebtedness, as of any particular date of computation, the greatest amount required in the then-current or any future Fiscal Year to pay the Debt Service Requirements of such Long-Term Indebtedness. "Moody's" shall mean Moody s Investors Service, a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "Moody s" shall be deemed to refer to any other nationally recognized securities rating agency selected by the Corporation. "Net Income Available for Debt Service", means, when used with reference to any Credit Group Member, for any period, an amount determined in accordance with generally accepted accounting principles by deducting (a) the operating expenses of such Credit Group Member, exclusive of depreciation, interest and amortization of financing expenses from (b) the sum of all operating and nonoperating revenues of such Credit Group Member; provided, however, that there shall be excluded from such calculation any nonoperating gains or losses on the sale or disposition of any asset or on the extinguishment of debt or unrealized gains or losses on assets including investments of the Credit Group Members, or other non-operating realized or unrealized gains or losses relating to Hedging Transactions. "Non-Recourse Indebtedness" means Indebtedness that does not constitute a general obligation of any Credit Group Member and that is payable solely from (a) property of a Credit Group Member, or the revenues of property (i) the purchase or improvement of which was financed by such Indebtedness or (ii) in the case of any property of any Credit Group Member, that could be disposed of by such Credit Group Member (See "THE MASTER INDENTURE Disposition of Assets" below), (b) payments made to any Credit Group Member pursuant to pledges or contributions to such Credit Group Member; or (c) guarantees or payments from a person other than a Credit Group Member. "Obligated Group Agent" means the Corporation or such other Credit Group Member as shall be designated as such by Notice to the Master Trustee executed by all of the Obligated Group Members. C-7

198 "Obligated Group Members" means, collectively, the Corporation, Our Lady of the Lake Hospital, Inc., St. Francis Medical Center, Inc., Our Lady of the Lake Ascension Community Hospital, Inc. and Our Lady of Lourdes Regional Medical Center, Inc. "Officer's Certificate" means a Certificate of the Obligated Group Agent. "Operating Assets" means any land, building, machinery, equipment, hardware, inventory or other property or any interest therein (except cash, accounts receivable, investment securities and other property held for investment purposes) of any Credit Group Member used in its trade or business. "Optional Tender Indebtedness" means any Indebtedness the due date for the payment of any principal amount of which may be accelerated as a result of (i) any exercise by the holder thereof of its right or obligation to tender such Indebtedness for purchase or redemption prior to the stated maturity date thereof or (ii) any expiration of any Credit Facility securing such Indebtedness on the stated expiration date of such Credit Facility. "Outstanding" and "Outstanding Bonds," when used in the Indenture, means, as of any particular time, all Bonds which have been duly authenticated and delivered by the Trustee under the Indenture, except: (a) Bonds theretofore cancelled by the Trustee or delivered to the Trustee for cancellation after purchase or because of payment at or redemption prior to maturity; (b) Bonds for the payment or redemption of which cash funds (or securities to the extent described in the Indenture) shall have been theretofore deposited with the Trustee (whether upon or prior to the maturity or redemption date of any such Bonds); provided that if such Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given or arrangements satisfactory to the Trustee shall have been made therefor, or waiver of such notice satisfactory in form to the Trustee, shall have been filed with the Trustee; and (c) Bonds in lieu of which other Bonds have been authenticated under the Indenture. When used in the Master Indenture, "Outstanding" or "outstanding" means, as of any particular date, (a) when used with reference to Obligations, all Obligations authenticated and delivered under the Master Indenture except (i) any Obligation canceled by the Master Trustee (or delivered to the Master Trustee for cancellation) at or before such date, (ii) any Obligation for the payment of the principal of and interest and premium, if any, on which provision shall have been made as provided in the Master Indenture and (iii) any Obligation in lieu of or in substitution for which a new Obligation shall have been authenticated and delivered pursuant to the Master Indenture; and (b) when used with reference to any other Indebtedness, all Indebtedness theretofore issued or incurred other than any such Indebtedness that is deemed to have been paid and discharged under generally accepted accounting principles. "Participant" means a person designated by the Obligated Group Agent with whom an Obligated Group Member or any other Restricted Affiliate has entered into an contract or other agreement, enforceable against such person, under which such person is obligated to make all the payments required by the Master Indenture with respect to all Obligations issued on behalf of such person or any Affiliate thereof and perform all of the other obligations of a Restricted Affiliate under the Master Indenture, provided that prior to such designation there shall have been delivered to the Master Trustee (i) a fully executed copy of such contract or other agreement and (ii) an Opinion of Counsel to the effect that such contract or other agreement is a valid and binding obligation of such person enforceable in accordance with its terms. The Obligated Group Members shall provide to the Master Trustee an Opinion of Counsel reaffirming the matters referred to in clause (ii) from time to time upon the reasonable request of the Master Trustee. "Permitted Encumbrance" means: (a) any lien arising by reason of any good faith deposit in connection with any lease of real estate, bid or contract (other than any contract for the payment of money), any deposit to secure any public or statutory obligation, or to secure, or in lieu of, any surety, stay or appeal bond, and any deposit as security for the payment of taxes or assessments or other similar charges; C-8

199 (b) any lien arising by reason of any deposit with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulation for any purpose at any time as required by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege or license or to enable any Credit Group Member to maintain self-insurance or to participate in any funds established to cover any insurance risk or in connection with workers' compensation, unemployment insurance, any pension or profit sharing plan or other social security, or to share in the privileges or benefits required for the participation in such arrangements; (c) any judgment lien, so long as such judgment is being contested in good faith and is fully bonded or covered by insurance; (d) any right 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; any lien on any property for taxes, assessments, levies, fees, water and sewer rents or charges and other governmental and similar charges and any lien of any mechanic, materialman, laborer, supplier or vendor for work or services performed or materials furnished in connection with such property that is not due and payable or that is not delinquent or the amount or validity of which is being contested and execution thereon stayed; (e) the Master Indenture and any lien or encumbrance described in Appendix C thereto in existence on the date thereof, provided that such lien or encumbrance is not extended, renewed or modified to apply to any property of any Credit Group Member not subject to such lien or encumbrance on such date, unless the lien or encumbrance, as so extended, renewed or modified, otherwise qualifies as a Permitted Encumbrance without reference to this clause; (f) any lien with respect to moneys deposited by patients or others as security for, or as prepayment of, the cost of patient or other client care and any lien arising under law or by contract with respect to initial deposits made under life care contracts; (g) any lien on property received through any gift, grant or bequest constituting a restriction imposed by the donor, grantor or testator on such gift, grant or bequest or the income therefrom; (h) (i) any lien of any third-party payor for recoupment of amounts paid for patient care; any lien or encumbrance on inventory that does not exceed 25% of the Book Value thereof, (j) statutory reverters under Hill-Burton grants (42 U.S.C. Section 291, et seq.) and similar federal or state legislation; (k) (l) (m) any lien securing any Non-Recourse Indebtedness; any lien granted for the benefit of holders of all outstanding Obligations; the lessor's interest under any lease of any Operating Assets; (n) any lien placed upon any tangible real or personal property being acquired by any Credit Group Member to secure all or a portion of the purchase price thereof, provided that the Value of all property subject to any lien described in this clause (n) shall not exceed 10% of the Value of all of the total assets of the Credit Group; (o) any lien or encumbrance on any property of any Credit Group Member existing on the date of the Master Indenture or on the date on which such property was acquired by a Credit Group Member, or, in the case of any person that is not an initial Credit Group Member, the date on which such person becomes an Affiliate of a Credit Group Member or a Participant, including (without limitation) any acquisition as a result of a merger or consolidation permitted by the Master Indenture involving the owner of such property, provided that (i) such lien was not created to avoid the limitations on the creation of liens contained in the Master Indenture, and (ii) such lien is not extended, renewed or modified to apply to any property of any Credit Group C-9

200 Member not subject to such lien on such date, unless the lien, as so extended, renewed or modified, otherwise qualifies as a Permitted Encumbrance without reference to this clause; (p) other liens, easements, rights-of-way, servitudes, restrictions and other defects, liens and encumbrances created or incurred in the ordinary course of business which do not secure Indebtedness and which do not materially impair the use of the Operating Assets for their intended purposes or the value of the Operating Assets; (q) liens, charges, mortgages, pledges or encumbrances or other security interests on assets (but excluding accounts receivables which are covered by clause (r) below) of the Credit Group provided that the Value of all property of the Credit Group subjected to such lien, charge, mortgage, pledge, encumbrance or security interest does not exceed 25% of the Value of all property of the Credit Group; and (r) liens on accounts receivables of the Credit Group arising out of the sale, factoring or securitization of accounts receivables provided that the amount of accounts receivables subject to the lien shall not exceed 25% of such accounts receivables so sold, factored or securitized. "Permitted Investments" means (a) Direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury) or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America. (b) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): (1) U.S. Export-Import Bank (Eximbank) -Direct obligations or fully guaranteed certificates of beneficial ownership; (2) Farmers Home Administration - (FmHA) Certificates of beneficial ownership; (3) Federal Financing Bank; (4) Federal Housing Administration Debentures (FHA); (5) General Services Administration - Participation certificates; (6) Government National Mortgage Association (GNMA or "Ginnie Mae") - GNMA - guaranteed mortgage-backed bonds; GNMA - guaranteed pass-through obligations (not acceptable for certain cash-flow sensitive issues); (7) U.S. Maritime Administration - Guaranteed Title XI financing; (8) U.S. Department of Housing and Urban Development (HUD) - Project Notes; Local Authority Bonds; New Communities Debentures - U.S. government guaranteed debentures; U.S. Public Housing Notes and Bonds - U.S. government guaranteed public housing notes and bonds. (c) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies (stripped securities are only permitted if they have been stripped by the agency itself): (1) Federal Home Loan Bank System - Senior debt obligations; (2) Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac") - Participation Certificates; Senior debt obligations; (3) Federal National Mortgage Association (FNMA or "Fannie Mae") - Mortgage-backed securities and senior debt obligations; (4) Resolution Funding Corp. (REFCORP) obligations; (5) Farm Credit System - Consolidated systemwide bonds and notes. (d) Investments in money-market funds (including those for which the Trustee or an affiliate of the Trustee serves as investment manager, administrator, shareholder servicing agent, and/or custodian or subcustodian, notwithstanding that (i) the Trustee or an affiliate of the Trustee receives fees from such funds for services rendered, (ii) the Trustee charges and collects fees for services rendered pursuant to the Indenture, which fees are separate from the fees received from such funds, and (iii) services performed for such funds and pursuant to the Indenture may at times duplicate those provided to such funds by the Trustee or its affiliates) registered under the Federal Investment Company Act of 1940, as amended, whose shares are registered under the Federal Securities Act of 1933, as amended, rated, at the time of purchase, "AAAm," "AAAm-G" or "AAm" or the equivalent by Moody s or S&P. (e) Certificates of deposit secured at all times by collateral described in (a) and/or (b) above. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks. C-10

201 The collateral must be held by a third party and the bondholders must have a perfected first security interest in the collateral. (f) Deposits of any bank or savings and loan association (including the Trustee and any bank affiliated with the Trustee) that has combined capital, surplus and undivided profits of not less than $100,000,000, provided that such deposits are continuously and fully insured by the Bank Insurance Fund or the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation, or to the extent uninsured, otherwise fully secured by obligations described in (a) or (b) above. (g) Investment agreements with, or which are guaranteed by, a financial institution which has an unsecured, uninsured and unguaranteed obligation rated, at the time such agreement is entered into, in one of the two highest rating categories by Moody s or S&P, or is the lead bank of a parent bank holding company with an uninsured, unsecured and unguaranteed obligation meeting such rating requirement, including the Trustee or any affiliate of the Trustee. (h) Domestic commercial paper (payable on demand or having original maturities of not more than 270 days) rated, at the time of purchase, "Prime - 1" or better by Moody's and "A-1" or better by S&P. (i) Bonds or notes issued by any state or municipality which are rated by Moody's and S&P in one of the two highest rating categories assigned by such agencies. (j) Federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of "Prime -1" or "A3" or better by Moody's and "A-1" or "A" or better by S&P. (k) Repurchase agreements for 30 days or less which provide for the transfer of securities from a dealer bank or securities firm (seller/borrower) to the Trustee, and the transfer of cash from the Trustee to the dealer bank or securities firm with an agreement that the dealer bank or securities firm will repay the cash plus a yield to the Trustee in exchange for the securities at a specified date, provided that the repurchase agreements must also satisfy the following criteria: (1) repurchase agreements must be between the Trustee and a dealer bank or securities firm which is (a) a primary dealer on the Federal Reserve reporting dealer list and are rated "A" or better by S&P and Moody's, or (b) a bank rated "A" or above by S&P and Moody's; (2) the written repurchase agreement must include the following provisions: (a) securities which are acceptable for transfer are: (y) direct U.S. governments, or (z) federal agencies backed by the full faith and credit of the United States of America (and FNMA and FHLMC); (b) the term of the repurchase agreement may be up to 30 days; ) the collateral must be delivered to the Trustee or third party acting as agent for the Trustee (if the Trustee is supplying the collateral) before or simultaneous with payment (perfection by possession of certificated securities); and (d) with respect to the valuation of collateral, the following will apply: (y) the securities must be valued weekly, marked-to-market at the current market price plus accrued interest; and (z) the value of collateral must be equal to 104% of the amount of cash transferred by the Trustee to the dealer bank or security firm under the repurchase agreement plus accrued interest. If the value of securities held as collateral slips below 104% of the value of the cash transferred by the Trustee, then additional cash and/or acceptable securities must be transferred. If, however, the securities used as collateral are FNMA or FHLMC, then the value of collateral must equal 105%. In addition, the legal opinion acceptable to the Trustee must be delivered regarding the repurchase agreement and the repurchase agreement must meet any guidelines under state law for legal investment of public funds. (l) Any state administered pool investment fund in which the Authority is statutorily permitted or required to invest will be deemed a permitted investment. (m) Build America Bonds which are rated by Moody s and S&P in one of the two highest rating categories assigned by such agencies. (n) Any other investment acceptable to the Corporation and the Trustee. C-11

202 "Person" shall mean an individual, a corporation, a partnership, an association, a joint venture, a trust, an unincorporated organization or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Principal Office" means, when used with respect to the Obligated Group Agent, the principal office of the Obligated Group Agent, and, when used with respect to the Master Trustee, the corporate trust office designated as such by the Master Trustee. "Project" means the property and equipment, a portion of the cost of which is financed by the Loan and described in the Loan Agreement. "Project Costs" means costs previously or hereafter incurred by the Corporation to finance, acquire, construct, equip and improve the Project, including: (a) the costs of architectural and engineering services related to the Project, including, without limitation, the costs of preparation of studies, surveys, reports, tests, plans and specifications; (b) the costs of legal, accounting, marketing and other special services related to the Project; (c) fees and charges incurred in connection with applications to federal, state and local governmental agencies for any requisite approvals or permits regarding the acquisition and construction of the Project; (d) costs incurred in connection with the acquisition of the site for the Project, including any necessary rights-of-way, easements or other interests in real or personal property; (e) costs incurred in connection with the acquisition, construction, improvement, rehabilitation or extension of the buildings, structures and facilities comprising the Project; (f) costs incurred in connection with the acquisition and installation of any machines, equipment, applications, fixtures, appurtenances or personal property of any kind or nature, which are to comprise a part of the Project; and (g) premiums for any necessary title, casualty and other insurance purchased in connection with the construction of the Project. "Property" means any and all right, title and interest in and to any and all assets whether real or personal, tangible or intangible and wherever situated, other than donor-restricted funds as determined in accordance with generally accepted accounting principles and, as applicable, any additions and accessions thereto, substitutions therefor and renewals or replacements thereof. "Rating Agency" shall mean any of Moody s, S&P or Fitch, which is then providing a rating on the Bonds. "Receipts" means receipts, revenues, rentals, income, insurance proceeds and other moneys received by or on behalf of any Credit Group Member, including (without limitation) revenues derived from (i) the ownership, operation or leasing of any Operating Assets and rights to receive the same, whether in the form of accounts receivable, contract rights, general intangibles or other rights, and the proceeds of such rights, 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 any Credit Group Member incurred in the financing, operation, maintenance or repair of any of the Operating Assets. "Record Date" shall mean the fifteenth day of the month next preceding each Interest Payment Date. "Related Bond Indenture", when used in connection with the Bonds, means the Trust Indenture (Series 2012B) dated as of November 1, 2012, between the Authority and The Bank of New York Mellon Trust Company, N.A., as the trustee. C-12

203 "Related Bonds" means the Outstanding Bonds and any other revenue bonds or similar obligations issued by or on behalf of any state, commonwealth or territory of the United States or any municipal corporation or other political subdivision thereof or any agency or instrumentality of any of the foregoing, the proceeds of which are loaned or otherwise made available to (a) any Credit Group Member in consideration of the execution, authentication and delivery of an Obligation to such governmental issuer, the holder of such bonds or obligations or the Related Bond Trustee or (b) any person other than a Credit Group Member in consideration of the execution, authentication and delivery of an Obligation to the holder of such bonds or obligations or the Related Bond Trustee guaranteeing in whole or in part the repayment of such loan and, when used with reference to any Obligation, means the bonds or obligations in consideration of the issuance of which such Obligation was issued. "Related Bond Trustee" means any trustee under any Related Bond Indenture and any successor trustee thereunder or, if no trustee is appointed under a Related Bond Indenture, the Related Issuer. "Related Issuer" means the Authority and any other issuer of Related Bonds. "Restricted Affiliate" means any Participant and any Affiliate of an Obligated Group Member or of any Participant, in each case to the extent that such entity has been designated as such in accordance with the Master Indenture so long as such person's status as such has not been terminated as provided therein. "Securities Depository" means The Depository Trust Company and its successors and assigns or if, (i) the then Securities Depository resigns from its functions as depository of the Bonds or (ii) the Authority discontinues use of the Securities Depository pursuant to Section 2.12 of the Indenture, any other securities depository which agrees to follow the procedures required to be followed by a securities depository in connection with the Bonds and which is selected by the Authority with the consent of the Corporation. "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended. "Series 2012B Note" means the promissory note designated "Franciscan Missionaries of Our Lady Health System, Inc. Series 2012B Note" dated, 2012, in the principal amount of $ executed and delivered to the Authority by the Obligated Group Agent, on behalf of the Obligated Group Members. "Short-Term Indebtedness," when used in connection with indebtedness, means indebtedness having an original maturity less than or equal to one year and not renewable at the option of the debtor for a term greater than one year beyond the date of original issuance; provided that Short-Term Indebtedness shall not be deemed to include the current portion of Long-Term Indebtedness even if so classified under generally accepted accounting principles. "S&P" or "Standard & Poor's Ratings Group" mean Standard & Poor's Ratings Group, a division of The McGraw Hill Companies, Inc., a New York corporation, its successors and assigns, and, if such corporation shall for any reason no longer perform the functions of a securities rating agency, "S&P" shall be deemed to refer to any other nationally recognized securities rating agency designated by the Authority with the approval of the Corporation. "State" means the State of Louisiana. "Supplemental Master Indenture" means any indenture between the Corporation or any other Obligated Group Member and the Master Trustee amending, modifying or supplementing the Master Indenture, any Supplemental Master Indenture or any Obligation, in accordance with the terms of the Master Indenture. "Supplemental Master Trust Indenture No. 14" means the Supplemental Master Trust Indenture No. 14, dated as of November 1, 2012, between the Corporation and the Master Trustee, amending and supplementing the Master Indenture. "System" and "System Affiliates" mean, collectively, the Corporation and each Affiliate of the Corporation. "Tax-Exempt Organization" means a Person which is either (i) a not-for-profit corporation organized and existing under the laws of one of the states of the United States of America which is an organization described in Section C-13

204 501(c)(3) of the Code, exempt from federal income taxes under Section 50l(a) of the Code or any successor provisions of similar import hereafter enacted, or (ii) a "governmental unit" as such term is used in Section 103 of the Code. "Tax Regulatory Agreement" means the Tax Regulatory Agreement dated as of November 1, 2012, by and among the Authority, the Trustee and the Corporation, including any amendments or supplements thereto. "Total Operating Revenues" means, when used with reference to any Credit Group Member for any period, the sum of all operating revenues of such Credit Group Member for such period, determined in accordance with generally accepted accounting principles consistently applied. "Trustee" means The Bank of New York Mellon Trust Company, N.A., a national banking association organized and existing under the laws of the United States of America, as trustee under the Indenture, and any of its successors and assigns. "Trust Estate" means the property pledged, assigned and mortgaged to the Trustee pursuant to the granting clauses of the Indenture. "United States Government Obligations" means noncallable direct obligations of the United States of America. "Value" means (i) at the option of the Obligated Group Agent when used in connection with any property other than any investment security, the Book Value or Current Value thereof and (ii) when used with respect to any investment, the current market value of such investment. "Variable Rate Indebtedness" means, as of any particular date, Long-Term Indebtedness the interest rate on which is not established at a fixed rate or rates for the remaining term thereof. THE MASTER INDENTURE In addition to the description of the provisions of the Master Indenture contained in the body of this Official Statement, the following is a limited summary of certain provisions of the Master Indenture. This summary is not a complete recital of the terms of the Indenture, and reference is made to the Master Indenture, and any supplements thereto, for the detailed provisions thereof. General The Master Indenture was entered into by and between the Corporation and the Master Trustee for the purpose of issuance from time to time of Obligations for any lawful corporate purpose of any Obligated Group Member. Additional Obligations may be issued from time to time under the Master Indenture by one or more of the Obligated Group members. The aggregate principal amount of Obligations that may be issued or outstanding under the Master Indenture at any one time is not limited, except as outlined below under "Covenants Additional Indebtedness." See also "SECURITY FOR THE BONDS Additional Indebtedness" in the body of this Official Statement. Obligations may consist of (without limitation) (i) bonds, notes, debentures, loan agreements, reimbursement agreements, capitalized leases, installment sale agreements, conditional purchase agreements and other Indebtedness, (ii) leases that are not capitalized, agreements entered into in connection with Hedging Transactions and other obligations and (iii) Guaranties of any of the foregoing. Obligated Group Each Obligated Group Member, as a co-obligor and not a guarantor, shall at all times be jointly and severally liable for each representation, warranty, covenant, agreement and other obligation of the Corporation, each other Obligated Group Member and the Obligated Group under the Master Indenture, including (without limitation) the obligation to pay the principal of and interest and premium, if any on, and the purchase price of, the Obligations when due. The Master Trustee may, in its discretion, look to any or all of such Obligated Group Members for performance of such covenants, agreements and other obligations. C-14

205 The Obligated Group is initially composed solely of the Corporation. Any person may be admitted to the Obligated Group, from time to time, upon Notice from the Obligated Group Agent to the Master Trustee, upon the satisfaction of certain conditions contained in the Master Indenture. Except as described below under "Covenants Merger, Consolidation and Transfer of Assets," no Obligated Group Member may withdraw from the Obligated Group unless Notice of the proposed withdrawal of such Obligated Group Member shall have been provided by the Obligated Group Agent to the Master Trustee and certain conditions contained in the Master Indenture have been satisfied. Upon the withdrawal of any person from the Obligated Group, such person shall have no further liability as obligor or guarantor under the Master Indenture. The Corporation may not withdraw from the Obligated Group. Addition to Obligated Group The Obligated Group, in accordance with the provisions of the Supplemental Master Trust Indenture No. 2, is composed of the Corporation, Our Lady of the Lake Hospital, Inc., St. Francis Medical Center, Inc., Our Lady of Lourdes Regional Medical Center, Inc., and Our Lady of the Lake Ascension Community Hospital, Inc. All references to "Obligated Group Member" or "Members of the Obligated Group" in the Master Indenture, as amended to the date hereof and as amended in the future, shall be to all of such entities and such additional Members of the Obligated Group as may be admitted in the future. The Members of the Obligated Group agree and acknowledge that they are obligated with respect to all Obligations issued under the Master Indenture and they constitute Members of the Obligated Group retroactive to the date of the Master Indenture. The Members of the Obligated Group agree and acknowledge that they are obligated to observe, perform and comply with all of the provisions of the Master Indenture. Covenants Payment of Obligations. (a) The Obligated Group Members unconditionally and irrevocably covenant in the Master Indenture that they will promptly pay the principal of and interest and premium, if any, on, and the purchase price of, the outstanding Obligations, including payments related to any Hedging Transaction (certain scheduled payments on the Hedging Transaction are secured on a parity basis with the Bonds and any termination payment is payable on a subordinate basis), and all other amounts payable by the Obligated Group Members under the Master Indenture, at the place, on the dates and in the manner provided therein and in such Obligations according to the true intent and meaning thereof. The obligation of each Obligated Group Member to pay or cause to be paid the amounts payable under the Master Indenture and the Obligations shall be absolute, irrevocable, complete and unconditional and the amount, manner and time of payment of such amounts shall not be decreased, abated, rebated, setoff, reduced, abrogated, waived, diminished or otherwise modified in any manner or to any extent whatsoever regardless of any right of setoff, recoupment or counterclaim that any Credit Group Member might otherwise have against the Master Trustee, the Holder of any Obligation, any Related Issuer or any other party and regardless of any contingency, force majeure, event or cause whatsoever. (b) The Obligated Group Members shall cause the Restricted Affiliates (subject, in the case of any Participant, to contractual limitations) to pay or otherwise transfer to the Obligated Group Agent such amounts as are necessary to duly and punctually pay the principal of and interest and premium, if any, on, and the purchase price of, the outstanding Obligations and all other amounts payable by the Obligated Group Members under the Master Indenture on the dates, at the times, at the places and in the manner provided therein and in such Obligations. (c) The Obligated Group Agent shall at all times maintain an accurate and complete list of all Restricted Affiliates. The Obligated Group Agent shall provide to the Master Trustee a list of the Participants and the other Restricted Affiliates concurrent with the delivery of the financial information required to be delivered as required by the Master Indenture. (d) The Obligated Group Agent may designate (i) any person as a Participant and (ii) any Affiliate of any Obligated Group Member or of any Participant as a Restricted Affiliate by Notice to the Master Trustee, and such person shall thereafter be deemed a Restricted Affiliate until such time as the Corporation shall declare that such person is no longer a Restricted Affiliate. So long as a person is designated as a Restricted Affiliate, the Obligated Group Members shall (A) maintain direct or indirect control of such person, including the power to direct the management, policies, disposition of assets, incurrence of Indebtedness and other actions of such person, to the extent necessary to cause such person to comply with the provisions of the Master Indenture, through the ownership of such person's voting securities, membership, the reservation of powers, the power to appoint the members of such person's governing body or otherwise C-15

206 or (B) maintain in effect such contracts or other agreements as shall be sufficient to permit it to cause such Restricted Affiliate to comply with the Master Indenture. (e) Each Notice designating any person as a Restricted Affiliate or terminating such status shall be accompanied by an Officer's Certificate to the effect that (i) in the case of the designation of a Restricted Affiliate such person meets the requirements of a Restricted Affiliate set forth in the Master Indenture, (ii) if such designation or termination (as the case may be) had occurred as of the first day of the most recently completed Fiscal Year for which audited financial statements have been prepared, the Debt Service Coverage Ratio for such Fiscal Year would have been not less than 1.10, (iii) after giving effect to such designation or termination (as the case may be), the Debt to Capitalization will not be greater than 0.70 and (iv) assuming such designation or termination (as the case may be) had occurred on the first day of the most recently completed Fiscal Year for which audited financial statements have been prepared, the Debt Service Coverage Ratio would not have been reduced by more than 20%. (f) The Corporation and all other Credit Group Members have covenanted that they will cause each Restricted Affiliate (i) to comply with the terms and conditions of the Master Indenture which are applicable to such Restricted Affiliate and of the Related Loan Documents which are applicable to such Restricted Affiliate; and (ii) to comply with the terms and provisions of the Contribution Agreement. (g) Notwithstanding the foregoing, Our Lady of the Lake Hospital, Inc. shall be a Member of the Obligated Group as long as there are any Obligations outstanding under the Master Indenture. Satisfaction of Debt. The Obligated Group Members shall cause the Credit Group Members to fix, charge and collect such fees, rentals, rates and other charges in connection with the operation of the Operating Assets and the products and services provided by the Credit Group Members that, together with the general funds of the Credit Group Members and any other moneys available to the Credit Group Members, shall provide moneys at least sufficient at all times to pay (i) all amounts payable on all Obligations, (ii) all expenses of operation, maintenance and repair of the Operating Assets and (iii) all other obligations of the Credit Group Members as they become due and payable. The Obligated Group Members shall cause the Credit Group Members, from time to time as often as necessary, to revise such fees, rentals, rates and other charges to the extent required to comply with the provisions of the Master Indenture outlined in this paragraph. Rate Covenant. The Master Indenture requires the Obligated Group Members to cause the Credit Group Members, on a combined basis, to fix, charge and collect such fees, rentals, rates and other charges in connection with the operations of the Credit Group Members and the products and services provided by the Credit Group as shall be sufficient to produce in each Fiscal Year a Debt Service Coverage Ratio of the Credit Group (on a combined basis) as of the last day of such Fiscal Year that is not less than Failure to maintain a Debt Service Coverage Ratio of the Credit Group (on a combined basis) of at least 1.00 shall be an Event of Default under the Master Indenture. See "SECURITY FOR THE BONDS Rate Covenant" in the body of this Official Statement. Assignment to Secure Obligations. Pursuant to the Assignment, the Members of the Obligated Group have assigned and granted to the Master Trustee, as assignee thereunder on behalf of itself as Master Trustee and as agent for the secured parties named therein, a continuing security interest in all of the presently existing and future Receipts (as defined therein) of the Members of the Obligated Group to the extent allowed by the UCC (as defined therein) in order to provide security for all Obligations issued pursuant to the Indenture and in accordance with the Assignment. Obligations Not to Be Impaired. While the covenants of the Obligated Group Members outlined above in "Satisfaction of Debt" and "Rate Covenant" are subject to applicable requirements imposed by law or lawfully imposed by federal, state or local regulatory authorities, nothing therein shall be construed or applied so as to permit any federal, state or local authority to impair the obligation of the Credit Group Members to fix, charge and collect fees, rentals, rates and other charges in the amounts required by the Master Indenture. The Obligated Group Members shall cause the Credit Group Members to make timely application for, and diligently pursue to a prompt conclusion, any proceedings required to obtain all regulatory approvals necessary to enable the Credit Group Members to perform in timely manner all of their obligations under the Master Indenture. Operation and Maintenance of the Operating Assets. The Obligated Group Members shall cause the Credit Group Members to operate the Operating Assets in a sound and economical manner and shall maintain, preserve and keep the Operating Assets in good condition and repair. The Obligated Group Members shall cause the Credit Group C-16

207 Members to make all necessary and proper repairs, replacements and renewals so as to conduct the operation of the Operating Assets in accordance with all applicable governmental operating standards. The Obligated Group Members shall cause the Credit Group Members to pay all extraordinary expenses of maintaining, repairing and replacing the Operating Assets to the extent necessary to permit the Credit Group Members to make the payments required by the Master Indenture and to perform their obligations under the Master Indenture. Compliance with Law; Accreditation. The Obligated Group Members shall cause the Credit Group Members to conduct their operations in accordance with all material laws, regulations, requirements or orders of any federal, state or local agency, court or other governmental body applicable from time to time to the ownership or operation of the property of the Credit Group Members. The Obligated Group Members shall cause the Credit Group Members to obtain and maintain all material permits, licenses and approvals necessary for the fulfillment of their obligations under the Master Indenture. Nothing contained in the Master Indenture shall be construed to prevent the Credit Group Members from contesting in good faith the validity of any such law, regulation, requirement or order, provided that such contest shall not materially adversely affect the ability of the Obligated Group Members to comply with the provisions of the Master Indenture or the effective use or operation of any material portion of the Operating Assets. The Obligated Group Members shall not permit any Credit Group Member to allow any permit, right, franchise or privilege necessary for the ownership or operation of any material portion of the Operating Assets to lapse or be forfeited. The Obligated Credit Group Members shall use their best efforts to ensure that each Credit Group Member that operates a hospital (a) remains accredited by the Joint Commission on Accreditation of Health Care Organizations or its successors and (b) remains fully qualified as a provider of services under and participates in the Medicare and Medicaid programs or any successor program to either or any program by a federal, state or local government providing for payment or reimbursement for services rendered for hospital and health care. Notwithstanding the foregoing, no Credit Group Member shall be required to retain such permits, rights, franchises or privileges, or to remain so accredited or qualified, as the case may be, if the governing body of the Obligated Group Agent determines that to do so is not in the best economic interest of such Credit Group Member. Federal Tax Exemptions. (a) The Obligated Group Members shall not permit any Credit Group Member to (i) perform any act or enter into any agreement that shall cause any revocation or adverse modification of the federal income tax status of any Tax-Exempt Credit Group Member or (ii) carry on or permit to be carried on in the facilities of any Tax-Exempt Credit Group Member or permit such facilities to be used in or for any trade or business, the conduct of which is not substantially related to the exercise or performance by such Tax-Exempt Credit Group Member of the purposes or functions constituting the basis for its tax-exempt status under the Code, if such use of such facilities would result in the loss by any Tax-Exempt Credit Group Member of its tax-exempt status under the Code. The Obligated Group Members shall cause the Credit Group Members immediately to take all steps necessary to restore the tax-exempt status under the Code of any Credit Group Member which shall lose that status for any reason. Notwithstanding the foregoing, no Tax-Exempt Credit Group Member shall be obligated to maintain its tax-exempt status as provided in the Master Indenture if there shall be delivered to the Master Trustee (i) in the case of any Credit Group Member that is not a Material Credit Group Member, an Officer's Certificate to the effect that, if the loss of such status had occurred as of the first day of the most recently completed Fiscal Year for which audited financial statements have been prepared the Debt Service Coverage Ratio for such Fiscal Year would have been not less than 1.10, (ii) in the case of any Material Credit Group Member, an Opinion of a Management Consultant to the effect that for each Fiscal Year during the period covered by projections prepared by such Management Consultant, which shall be a period of a least two full Fiscal Years after the loss by such Credit Group Member of its tax-exempt status, the Debt Service Coverage Ratio shall be not less than 1.10, (iii) a Favorable Opinion of Bond Counsel addressed to the Master Trustee and the Related Issuers, (iv) an Opinion of Counsel addressed to the Master Trustee and the Related Issuers to the effect that the failure of such Credit Group Member to maintain its tax-exempt status will not adversely affect any exemption of any Obligations or Related Bonds from the registration requirements of the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or the exemption of the Master Indenture or any Related Bond Indenture from qualification under the Trust Indenture Act of 1939, as amended, and (v) a written consent of the Bond Insurer to the loss by such Credit Group Member of its tax-exempt status; provided, however, that the consent of the Bond Insurer shall not be required if the interest on any Related Bonds remains excluded from gross income and such Related Bonds will not remain Outstanding after the date of the loss of the tax-exempt status of the Credit Group Member. C-17

208 (b) The Obligated Group Members covenant in the Master Indenture that (i) they will cause the Credit Group Members to take any and all action necessary to maintain the excludability from gross income for federal income tax purposes of the interest on all Tax-Exempt Bonds and (ii) they will not permit any Credit Group Member to perform any act or enter into any agreement, merger, consolidation or corporate reorganization, or use or permit the use of their facilities or any portion thereof in a manner that shall have the effect of terminating the excludability from gross income for federal income tax purposes of the interest paid on any Tax-Exempt Bonds. Merger, Consolidation and Transfer of Assets. The Obligated Group Members shall not permit any Credit Group Member to merge or consolidate with, or transfer all or substantially all of its assets to or acquire all or substantially all of the assets of, any other person, unless each of the following conditions is satisfied: (a) in the case of any merger, consolidation, transfer or acquisition involving an Obligated Group Member, the surviving, resulting or transferee corporation (the "Surviving Corporation") is a Credit Group Member or, as part of such transaction, becomes an Obligated Group Member and assumes in writing all of the Obligations of the Obligated Group Members under the Master Indenture; (b) in the case of any merger, consolidation, transfer or acquisition involving a Material Credit Group Member, there shall be delivered to the Master Trustee an Officer's Certificate to the effect that (i) if such merger, consolidation, transfer or acquisition had been effected as of the first day of the immediately preceding Fiscal Year for which audited financial statements have been prepared, the Debt Service Coverage Ratio for such Fiscal Year would not have been less than 1.10, (ii) after giving effect to such merger, consolidation, transfer or acquisition, the Debt to Capitalization Ratio will not be greater than 0.70, and (iii) assuming such merger, consolidation, transfer or acquisition had occurred on the first day of the most recently completed Fiscal Year for which audited financial statements have been prepared, the Debt Service Coverage Ratio would not have been reduced by more than 20%; (c) at least 30 days prior to effecting such merger, consolidation, transfer or acquisition, there shall be filed with the Master Trustee (i) a Favorable Opinion of Bond Counsel addressed to the Master Trustee and the Related Issuers, (ii) an Opinion of Counsel to the effect that each participant in such merger, consolidation, transfer or acquisition has obtained all necessary governmental, board and other consents and approvals for such consolidation, merger, transfer or acquisition, and (iii) any other opinion, report, document, evidence, undertaking or other action that the Master Trustee reasonably may require; and (d) immediately following such merger, consolidation or transfer, no Event of Default or event that, with notice or lapse of time or both, would constitute an Event of Default, shall have occurred and be continuing. Notwithstanding the foregoing and without complying with the provisions thereof, any Credit Group Member may merge or consolidate with, transfer assets to or acquire assets from any other Credit Group Member. Additional Indebtedness. The Obligated Group Members shall not permit any Credit Group Member to incur or permit to exist any Short-Term Indebtedness or Long-Term Indebtedness except as specifically provided by the Master Indenture. See "SECURITY FOR THE BONDS Additional Indebtedness" in the body of this Official Statement. Liens and Encumbrances; Further Assurances. Except as otherwise expressly permitted by the Master Indenture, the Obligated Group Members shall not permit any Credit Group Member to create any lien or encumbrance or allow any lien or encumbrance to remain against any portion of the Operating Assets or the Receipts except Permitted Encumbrances. Disposition of Assets. So long as no Event of Default under the Master Indenture shall have occurred and be continuing, the Obligated Group Member shall not permit any Credit Group Member to demolish, remove, sell, lease, loan, assign, transfer or otherwise dispose of any property, including (without limitation) cash, marketable securities, receivables or any property, structures, machinery or other improvements constituting a part of the Operating Assets, unless: (a) such disposition is made to another Credit Group Member; or C-18

209 (b) the aggregate fair market value of all property disposed of by the Credit Group Members in such Fiscal Year does not exceed (i) ten percent of the Value of all assets of the Credit Group, in the case of any disposition to any System Affiliate, or (ii) five percent of the aggregate Value of all of the assets of the Credit Group in any other case, in each case determined as of the last day of the most recent Fiscal Year for which audited financial statements have been prepared, and Notice of the disposition thereof is provided to the Master Trustee prior to the disposition thereof; (c) such Credit Group Member shall receive in consideration of the disposition of such property, which disposition shall be in the ordinary course of business, an amount at least equal to the fair market value of such property immediately prior to such disposition; or (d) the Master Trustee shall have received an Officer's Certificate to the effect that (i) if the disposition of such property had taken place on the first day of the most recently completed Fiscal Year for which audited financial statements have been prepared, the Debt Service Coverage Ratio would not have been less than 1.10, (ii) after giving effect to such disposition, the Debt to Capitalization Ratio will not be greater than 0.70, and (iii) assuming such disposition had occurred on the first day of the most recently completed Fiscal Year for which audited financial statements have been prepared, the Debt Service Coverage Ratio would not have been reduced by more than 20%. In the case of any disposition of property financed with the proceeds of Tax-Exempt Bonds (other than any such property that has been lost, stolen, destroyed or damaged beyond repair), prior to the disposition thereof the Master Trustee and the Related Issuer shall have received a Favorable Opinion of Bond Counsel. Nothing contained in the Master Indenture shall be construed to restrict the right of the Credit Group Members (i) to purchase or sell any property other than property financed or refinanced with Tax-Exempt Bonds in the ordinary course of business, or (ii) to transfer cash, securities or other investment properties in connection with ordinary investment transactions. Insurance. The Obligated Group Members shall cause the Credit Group Members to keep the Operating Assets adequately insured at all times and to maintain with respect to their facilities and operations insurance of such types, in such amounts and against such risks as are customarily maintained by persons in similar circumstances having facilities of a comparable type and size and offering comparable services as those of the Credit Group Members. If at any time the Credit Group Members fail to procure or maintain any insurance required by the Master Indenture, upon five days' notice to the Obligated Group Agent, the Master Trustee may (but shall not be obligated to) procure and maintain such insurance at the expense of the Obligated Group Members, and the Obligated Group Members shall reimburse the Master Trustee for all amounts expended in connection therewith. Maintenance of Corporate Existence. Each Obligated Group Member has covenanted: (a) To preserve its corporate existence as a corporation and all of its rights and licenses to the extent necessary or desirable in the operation of its business and affairs and to be and remain qualified to do business in each jurisdiction where its ownership of Operating Assets or the conduct of its business requires such qualification; provided, however, that an Obligated Group Member shall not be required to retain or preserve any of its rights or licenses no longer used or, in the judgment of its governing body, no longer useful in the conduct of its business. (b) To conduct its affairs and carry on its business and operations in such manner as to comply with any and all applicable laws of the United States of America and the several states thereof and duly to observe and conform to all valid orders, regulations or requirements of any governmental authority relative to the conduct of its business and the ownership of its Operating Assets; provided, nevertheless, that the Obligated Group Member shall not be required to comply with, observe and conform to any such law, order, regulation or requirement of any governmental authority so long as the validity thereof shall be contested in good faith. (c) At all times to comply with all terms, covenants and provisions contained in any liens, including Permitted Encumbrances, at such time existing upon its Operating Assets or any part thereof or securing any of its indebtedness, and to pay or cause to be paid, or to be renewed, refunded or extended or to C-19

210 be taken up, by it, all of its liens and Permitted Encumbrances, as and when the same shall become due and payable. above. (d) To cause the Credit Group Members to observe the covenants contained in (a), (b) and (c) Replacement Master Indenture. Each Holder of an Obligation evidencing and securing Indebtedness other than Related Bonds shall surrender such Obligation to the Master Trustee and each Related Bond Trustee for Related Bonds shall, with the prior written consent of the bond insurer or credit facility provider, if any, for such Related Bonds, surrender any Obligation issued to secure such Related Bonds to the Master Trustee upon presentation to the holder or the Related Bond Trustee, as the case may be, of the following: (a) an original replacement note or similar obligation (the "Substitute Obligation") duly authenticated and issued under and pursuant to an existing or new master trust indenture (the "Replacement Master Indenture") by which the Members of the Obligated Group and certain other parties named therein (the "New Group") have agreed to be bound; provided however, that the trustee serving as master trustee under such Replacement Master Indenture (the "New Trustee") shall be an independent corporate trustee (which may be the Master Trustee or the Related Bond Trustee) meeting the eligibility requirements of the Master Trustee as set forth in the Master Indenture; (b) the Replacement Master Indenture pursuant to which each member of the New Group has agreed (i) to become a member of the New Group and thereby to become subject to compliance with all provisions of the Replacement Master Indenture and (ii) unconditionally and irrevocably (subject to the right of such Person to cease its status as a member of the New Group pursuant to the terms and conditions of the Replacement Master Indenture) to jointly and severally make payments upon each note and obligation, including the Substitute Obligation, issued under the Replacement Master Indenture at the times and in the amounts provided in each such note or obligation; (c) an Opinion of Counsel addressed to the Holder of an Obligation evidencing and securing Indebtedness other than Related Bonds or to the Related Bond Trustee, as the case may be, and the Obligated Group to the effect that (i) the Replacement Master Indenture has been duly authorized, executed and delivered by each member of the New Group, the Substitute Obligation has been duly authorized, executed and delivered by the Obligated Group, and the Replacement Master Indenture and the Substitute Obligation are each a legal, valid and binding obligation of each member of the New Group, enforceable in accordance with their terms, subject in each case to customary exceptions for bankruptcy, insolvency, fraudulent conveyance and other laws generally affecting enforcement of creditors rights and application of general principles of equity; (ii) all requirements and conditions to the issuance of the Substitute Obligation set forth in the Replacement Master Indenture have been complied with and satisfied; and (iii) the registration of the Substitute Obligation under the Securities Act of 1933, as amended, and the qualification of the Replacement Master Indenture under the Trust Indenture Act of 1939, as amended, is not required, or, if such registration or qualification is required, that all applicable registration and qualification provisions of said Acts have been complied with; (d) an Opinion of Bond Counsel addressed to the Related Bond Trustee and the Obligated Group to the effect that the Replacement Master Indenture has been duly authorized, executed and delivered by each member of the New Group, the Substitute Obligation has been duly authorized, executed and delivered by the Obligated Group, and the Replacement Master Indenture and the Substitute Obligation are each a legal, valid and binding obligation of each member of the New Group, enforceable in accordance with their terms, subject in each case to customary exceptions for bankruptcy, insolvency, fraudulent conveyance and other laws generally affecting enforcement of creditors rights and application of general principles of equity; provided, that in rendering such opinion Bond Counsel may relay on the Opinion of Counsel required by subparagraph (c) above with respect to the due authorization, execution and delivery of the Replacement Master Indenture and the Substitute Obligation; (e) an Officer s Certificate certifying that (i) the New Group could, after giving effect to the Substitute Obligation, meet the conditions of the Master Indenture for the incurrence of one dollar of additional Long-Term Indebtedness under the Master Indenture, as demonstrated in such certificate, (ii) the unrestricted C-20

211 fund balance of the New Group is not less than ninety percent (90%) of the unrestricted fund balance of the Obligated Group, and (iii) the New Group would not be in default under the provisions of the Master Indenture; (f) an Opinion of Bond Counsel that the surrender of the Obligation and the acceptance by the Bond Trustee of the Substitute Obligation will not adversely affect the validity of the Related Bond or any exemption for the purposes of federal or state income taxation to which interest on the Related Bonds would otherwise be entitled; (g) an original executed counterpart of the Replacement Master Indenture; (h) evidence that (i) written notice of such substitution, together with a copy of such Replacement Master Indenture, has been given by the New Group to each rating agency then maintaining a rating on any Obligation or Related Bonds and (ii) the then current rating on the Obligation, if any, or Related Bonds shall not be withdrawn or reduced by any such rating agency as a result of such substitution; and (i) such other opinions and certificates as the Holder of an Obligation evidencing and securing Indebtedness or the Related Bond Trustee or the bond insurer or credit facility provider, if any, may reasonably require, together with such reasonable indemnities as the Holder of an Obligation evidencing and securing Indebtedness or the Related Bond Trustee or the bond insurer or credit facility provider, if any, may require. Notwithstanding the foregoing provisions, no Substitute Obligation may extend the stated maturity of or time for paying interest on any Obligation surrendered to the Master Trustee or reduce the principal amount of or the redemption premium or rate of interest payable on such Obligation without the consent of each Holder of such Obligation evidencing and securing Indebtedness or the registered owners of all Related Bonds then Outstanding, as the case may be. Events of Default and Remedies Events of Default. Each of the following events constitutes an event of default under the Master Indenture: (a) payment of the principal of any Obligation shall not be made when the same shall become due and payable, either at maturity or by proceedings for redemption or acceleration or otherwise, in accordance with the terms thereof; or payment of the purchase price of any Obligation required by its terms to be purchased from the Holder thereof by an Obligated Group Member on any date prior to its stated maturity shall not be made in accordance with the terms thereof on such date; or (b) payment of interest on any Obligation shall not be made when the same shall become due and payable in accordance with the terms thereof; or (c) failure by any Obligated Group Member to perform, observe or comply with any other of the terms, covenants, conditions or provisions contained in the Master Indenture, which failure shall continue for a period of 30 days after written notice, specifying such failure and requesting that it be remedied shall have been given to the Obligated Group Agent by the Master Trustee or the holders of not less than 25% of the Obligations Outstanding; provided, however, that if any such Obligated Group Member shall proceed to take any curative action that, if begun and prosecuted with due diligence, cannot be completed within a period of 30 days, then such period shall be increased to such extent as shall be necessary to enable such Obligated Group Member to complete such curative action through the exercise of due diligence; or default under any Related Loan Document which is not cured within any applicable grace period, which default permits the acceleration of the Obligation issued in connection therewith. (d) if any Material Credit Group Member, other than any Material Credit Group Member who could dispose of substantially all of its Operating Assets as provided in the Master Indenture (See subparagraph (d) under "Covenants Disposition of Assets" above), shall become insolvent or the subject of any insolvency proceeding or shall file a petition or other pleading seeking an "order for relief" within the meaning of the United States Bankruptcy Code or shall file any petition or other pleading seeking any reorganization, composition, readjustment, liquidation or similar relief for itself under any present or future law or regulation, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of such Material C-21

212 Credit Group Member, or of substantially all of the assets of such Material Credit Group Member, or shall make a general assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due; (e) if a petition or other pleading shall be filed against any Major Material Credit Group Member, other than any Material Credit Group Member who could dispose of substantially all of its Operating Assets pursuant to the provisions of the Master Indenture outlined in subparagraph (d) under "Covenants Disposition of Assets" above, seeking an "order for relief" within the meaning of the United States Bankruptcy Code or any reorganization, composition, readjustment, liquidation or similar relief under any present or future law or regulation and shall remain undismissed or unstayed for an aggregate period of 90 days (whether or not consecutive), or if, by an order or decree of a court of competent jurisdiction, any such Material Credit Group Member shall become the subject of an "order for relief" within the meaning of the United States Bankruptcy Code or relief shall be granted under or pursuant to any such petition or other pleading, and such order or decree continues unvacated or unstayed, on appeal or otherwise, and in effect for a period of 90 days; or if, by order or decree of such court, there shall be appointed, without the consent or acquiescence of any such Material Credit Group Member, a trustee in bankruptcy or reorganization or a receiver or liquidator of such Material Credit Group Member or of all or any substantial part of the property of such Material Credit Group Member and such order or decree continues unvacated or unstayed, on appeal or otherwise, and in effect for a period of 90 days; or (f) default in the payment of principal of or interest on any outstanding Indebtedness of any Credit Group Member in an amount exceeding one-half of one percent (½%) of the Total Operating Revenues of the Credit Group for the most recent Fiscal Year for which audited financial statements have been prepared, or default under any indenture, agreement or other similar instrument under which any such Indebtedness may be issued, which default permits the acceleration of the maturity of such Indebtedness. The provisions of paragraph (c) of above are subject to the following limitations: If by reason of acts of God; strikes, lockouts or other industrial disturbances; acts of public enemies; orders of any kind of the government of the United States of America or of any state, or any department, agency, political subdivision or official thereof or any civil or military authority; insurrections; riots; epidemics; landslides; lightning; earthquakes; fires; hurricanes; storms; floods; washouts; droughts; arrests; restraint of government and people; civil disturbances; explosions; breakage or accident to machinery; partial or entire failure of utilities; or any cause or event not reasonably within the control of any Credit Group Member, the Obligated Group Members are unable in whole or in part to carry out their agreements referred to in paragraph (c) above, the Obligated Group Members shall not be deemed in default during the continuance of such inability. The Obligated Group Members shall use their best efforts to remedy with all reasonable dispatch the cause or causes preventing them from carrying out their agreements; provided, however, that the settlement of strikes, lockouts and other industrial disturbances shall be entirely within the discretion of the Obligated Group Members, and the Obligated Group Members shall not be required to make settlement of strikes, lockouts and other industrial disturbances by acceding to the demands of the opposing party when such course is, in the judgment of the Obligated Group Members, unfavorable to the Obligated Group Members. Any failure of any Obligated Group Member to perform its payment obligations under the Master Indenture shall constitute an Event of Default regardless of the reason for such failure to perform. Acceleration of Maturity. Upon the happening and continuance of any Event of Default then and in every such case the Master Trustee may, and upon the written request of the Holders of not less than a majority of the Outstanding Obligations shall, by a notice in writing to the Obligated Group Agent, declare the principal of all of the Outstanding Obligations to be due and payable. Notwithstanding the foregoing, the Master Trustee may not declare the principal of the Series 2012B Note to be due and payable without the written direction of any person whose direction is required as a condition to such declaration under the terms of the Supplemental Master Indenture authorizing the issuance of such Obligation and the prior written consent of the applicable Bond Insurer. Upon the giving of notice of such declaration, such principal shall become and be immediately due and payable, anything in the Obligations or in the Master Indenture to the contrary notwithstanding. At any time after the principal of the Obligations shall have been so declared to be due and payable, and before the entry of final judgment or decree in any suit, action or proceeding instituted on account of such default, or before the completion of the enforcement of any other remedy under the Master Indenture, the Master Trustee may (but in the event that such declaration has been made upon the request of the Holders of the Obligations, only with the written consent of the holders of not less than C-22

213 25% of the Obligations), by written notice to the Obligated Group Agent, annul such declaration and its consequences if: (i) there shall have been deposited with the Master Trustee moneys sufficient to pay all arrears of interest, if any, upon all of the Outstanding Obligations (except the interest accrued on such Obligations since the last interest payment date) and the principal of all matured Obligations (except the principal of any Obligations due only as a result of such declaration); (ii) sufficient moneys shall have been deposited with Trustee and shall be available to pay the charges, compensation, expenses, disbursements, advances and liabilities of the Master Trustee; and (iii) every other default in the observance or performance of any covenant, condition or agreement contained in the Obligations or in the Master Indenture of which the Master Trustee has actual knowledge shall have been remedied to the satisfaction of the Master Trustee. No such annulment shall extend to or affect any subsequent default or impair any right consequent thereon. Nothing in the Master Indenture shall preclude the holder of any Obligation from accelerating the due date for the payment thereof in accordance with the terms of such Obligation or any Related Bond Indenture or Related Loan Document entered into in connection with the issuance thereof. Enforcement. Upon the happening and continuance of any Event of Default, then and in every such case the Master Trustee may proceed, and upon the written request of the Holders of not less than a majority of the Obligations shall proceed, to protect and enforce its rights and the rights of the holders of the Obligations under the Master Indenture by such suits, actions or special proceedings in equity or at law, either for the specific performance of any covenant contained in the Master Indenture, or in aid or execution of any power therein granted, or for the enforcement of any proper legal or equitable remedy as the Master Trustee shall deem most effectual to protect and enforce such rights. In the enforcement of any remedy under the Master Indenture, the Master Trustee shall be entitled to sue for, enforce payment of and receive any and all amounts then or during any default becoming, and at any time remaining due from the Obligated Group Members for principal of or interest on the Obligations, or otherwise under any of the provisions of the Master Indenture or of any Obligations, with interest on overdue payments of principal at the rate or rates of interest specified in the Obligations, together with any and all costs and expenses of collection and of all proceedings under the Master Indenture and the Obligations, without prejudice to any other right or remedy of the Master Trustee or of the holders of the Obligations, and to recover and enforce judgment or decree against any Obligated Group Member for any portion of such amounts remaining unpaid and to collect in any manner provided by law the moneys adjudged or decreed to be payable. Application of Moneys. If at any time there shall have occurred and be continuing an Event of Default, after payment of all amounts owing to the Master Trustee under the Master Indenture, any moneys available to the Master Trustee through exercise of the remedies provided in the Master Indenture or otherwise shall be applied as follows: (a) unless the principal of all Outstanding Obligations shall have become or shall have been declared due and payable, all such moneys shall be applied: FIRST: to the payment to the persons entitled thereto of all installments of interest then due on the Obligations Outstanding, in the order in which such installments became due and payable and, if the amount available shall not be sufficient to pay in full any particular installment, then to the payment of such installment, ratably, according to the amounts due on such installment, to the persons entitled thereto, without any discrimination or preference, except as to any difference in the respective rates of interest specified in such Obligations; SECOND: to the payment to the persons entitled thereto of the unpaid principal of any Outstanding Obligations that shall have become due and payable, in the order of their due dates, with interest upon the principal amount of such Obligations from the respective dates upon which such principal shall have become due and payable and, if the amount available shall not be sufficient to pay in full the principal of such Obligations due and payable on any particular date, together with such interest, then first to the payment of such interest, ratably, according to the amount of interest due on such date and then to the payment of such principal, ratably, according to the amount of principal due on such date, to the persons entitled thereto, without any discrimination or preference, except as to any difference in the respective rates of interest specified in such Obligations; and THIRD: to the payment of the interest on and the principal of the Obligations Outstanding as the same become due and payable; and C-23

214 (b) if the principal of all Outstanding Obligations shall have become due by their terms or the principal of all Outstanding Obligations subject to acceleration shall have become due and payable by a declaration of acceleration, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon such Obligations, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Obligation over any other Obligation, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto, without any discrimination or preference except as to any difference in the respective rates of interest specified in such Obligations; provided, however, that, notwithstanding anything to the contrary stated above, moneys received from draws under a Credit Facility securing an Obligation or a Related Bond shall only be applied to the payment of principal and interest on such Obligation or Related Bond (as the case may be). Whenever moneys are to be applied by the Master Trustee as outlined above, such moneys shall be applied by the Master Trustee at such times, and from time to time, as the Master Trustee in its sole discretion shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. The setting aside of such moneys in trust for the benefit of all holders of Obligations shall constitute proper application by the Master Trustee, and the Master Trustee shall incur no liability whatsoever to any Obligated Group Member, to any holder of any Obligations or to any other person for any delay in applying any such moneys, so long as the Master Trustee acts with reasonable diligence, having due regard to the circumstances, and ultimately applies the same in accordance with such provisions of the Master Indenture as may be applicable at the time of application by the Master Trustee. Whenever the Master Trustee shall exercise such discretion in applying such moneys, it shall fix the date upon which such application is to be made, and upon such date interest on the amounts of principal of the Obligations to be paid on such date shall cease to accrue. The Master Trustee shall give such notice as it may deem appropriate of the fixing of any such date, provided that the provisions of this paragraph shall be subject in all respects to the provisions of the Obligations with respect to the payment of defaulted interest on the Obligations. The Master Trustee shall not be required to make payment to the holder of any Obligation unless such Obligation shall be presented to the Master Trustee for appropriate endorsement. Majority of Holders May Control Proceedings. Anything in the Master Indenture to the contrary notwithstanding, the holders of a majority of the Obligations shall have the right, by an instrument in writing executed and delivered to the Master Trustee, to direct the method and place of conducting all remedial proceedings to be taken by the Master Trustee under the Master Indenture, provided that such direction shall not be otherwise than in accordance with law and the provisions of the Master Indenture, and that the Master Trustee shall have the right to decline to follow any such direction which in the opinion of the Master Trustee would be unjustly prejudicial to holders of Obligations not parties to such direction. Restrictions upon Action by Individual Holders. No Holder of any Obligations shall have any right to institute any suit, action or proceeding in equity or at law for the execution of any trust under the Master Indenture or for any other remedy under the Master Indenture unless (i) such holder previously shall have given to the Master Trustee written notice of the Event of Default on account of which such suit, action or proceeding is to be instituted, (ii) the Holders of not less than a majority of the Obligations shall have made Request to the Master Trustee after the right to exercise such powers or right of action, as the case may be, shall have accrued, and shall have afforded the Master Trustee a reasonable opportunity either to proceed to exercise the powers granted by the Master Indenture or to institute such action, suit or proceeding in its or their name, and (iii) there shall have been offered to the Master Trustee reasonable security and indemnity against the costs, expenses and liabilities to be incurred therein or thereby, and the Master Trustee shall have refused or neglected to comply with such request within a reasonable time. Such notification, request and offer of indemnity are declared by the Master Indenture in every such case, at the option of the Master Trustee, to be conditions precedent to the execution of the powers and trusts of the Master Indenture or to any other remedy thereunder, provided that, notwithstanding the foregoing provisions of this section and without complying therewith, the holders of not less than 10% of the Obligations may institute any such suit, action or proceeding in their own names for the benefit of all holders of Obligations. Nothing contained in the Master Indenture shall preclude the holder or any Obligation from enforcing any right or remedy thereunder or under the Related Bond Indenture or Related Loan Document in accordance with the terms thereof. C-24

215 Modification or Amendment of Master Indenture Without notice to or the consent of the holders of the Obligations, the Obligated Group Agent and the Master Trustee may enter into Supplemental Master Indentures at any time or from time to time supplementing, modifying or amending the Master Indenture or any Supplemental Master Indenture for one or more of the following purposes: (a) to grant to or confer upon the Master Trustee for the benefit of the Holders of the Obligations any additional rights, remedies, powers, authority or security that may lawfully be granted to or conferred upon the Master Trustee for the benefit of such Holders; (b) to add to the covenants and agreements of the Obligated Group Members contained in the Master Indenture, other covenants and agreements thereafter to be observed relative to the acquisition, construction, equipping, operation, maintenance, development or administration of the Operating Assets, or relative to the application, custody, use or disposition of the proceeds of any Obligations; (c) to surrender any right, power or privilege reserved to or conferred upon the Obligated Group Members by the Master Indenture; (d) to cure any ambiguity or to cure or correct any defect or inconsistent provisions contained in the Master Indenture or to make such provisions in regard to matters or questions arising under the Master Indenture as may be necessary or desirable and not contrary to or inconsistent with the Master Indenture; (e) to authorize the issuance of Obligations; (f) to permit the qualification of the Master Indenture or any Supplemental Master Indenture under any federal statute now or hereafter in effect or under any state blue sky law and, in connection therewith, to add to the Master Indenture or any Supplemental Master Indenture such other terms, conditions and provisions as may be permitted or required by such federal statute or state blue sky law; (g) to obtain or to maintain any ratings on any Obligations or any Related Bonds from any nationally recognized securities rating agency; (h) upon compliance with the provisions of the Master Indenture, to provide for the admission of any person to the Obligated Group; (i) to preserve the excludability from gross income for federal income tax purposes of the interest paid on any Tax-Exempt Bonds theretofore issued; or (j) to make any other change in the Master Indenture which the Master Trustee determines shall not prejudice in any material respect the rights of the Holders of the Obligations Outstanding at the date as of which such change shall become effective. Supplemental Master Indentures Requiring Consent of Holders. In addition to Supplemental Master Indentures permitted above, with the prior written consent of the holders of a majority of the Obligations, the Obligated Group Agent and the Master Trustee may enter into at any time and from time to time Supplemental Master Indentures amending or supplementing the Master Indenture, any Supplemental Master Indenture or any Obligation to modify any of the provisions thereof or to release any Obligated Group Member from any of the obligations, covenants, agreements, limitations, conditions or restrictions therein contained; provided, however, that nothing contained in the Master Indenture shall permit (i) a change in any terms of redemption, prepayment or purchase of any Obligation, the due date for the payment of the principal of or interest on any Obligation or any reduction in the principal, prepayment or redemption price or purchase price of or interest rate on any Obligation without the consent of the Holder of such Obligation or (ii) a preference or priority of any Obligation over any other Obligation or a reduction in the percentage of Obligations the consent of the Holders of which is required for any modification of the Master Indenture without the unanimous consent of the holders of the Outstanding Obligations. C-25

216 Defeasance (a) If the Obligated Group Members shall pay or cause to be paid the principal of and interest and premium, if any, on all Obligations at the times and in the manner stipulated therein, in the Master Indenture and in any Supplemental Master Indenture, then all rights granted by the Master Indenture to the Obligations shall be discharged and satisfied. In such event, upon the Request of the Obligated Group Agent, the Master Trustee shall execute and deliver to the Obligated Group Agent all such instruments as may be desirable to evidence such discharge and satisfaction, and the Master Trustee shall pay or deliver to the Obligated Group Agent, or to such officer, board or body as may then be entitled by law to receive the same, all property held by it pursuant to the Master Indenture (other than any moneys and securities required for the payment or redemption of Obligations not theretofore surrendered for such payment or redemption). (b) Unless otherwise provided in the Supplemental Master Indenture authorizing the issuance of any Obligation, an Obligation shall be deemed to have been paid within the meaning of and with the effect expressed in this section if (i) money for the payment or redemption of such Obligation shall be held by the Master Trustee (through deposit by the Obligated Group Members of moneys for such payment or redemption or otherwise, regardless of the source of such moneys), whether at or prior to the maturity or the redemption date of such Obligation, or (ii) if the maturity or redemption date of such Obligation shall not have arrived, provision shall have been made by the Obligated Group Members for the payment of the principal of and interest and premium, if any, on such Obligation on the due dates for such payments by deposit with the Master Trustee (or other method satisfactory to the Master Trustee) of Government Obligations, the principal of and the interest on which when due will provide for such payment; provided, however, that if such Obligation is to be redeemed prior to the maturity thereof, the Obligated Group Members shall have taken all action necessary to redeem such Obligation and notice of such redemption shall have been duly given or provisions satisfactory to the Master Trustee shall have been made for the giving of such notice. (c) Anything in the Master Indenture to the contrary notwithstanding, at the Request of the Obligated Group Agent, any moneys held by the Master Trustee in trust for the payment of any of the Obligations which remain unclaimed for one year after the later of the date at which such Obligations became due and payable and the date of deposit of such moneys shall be repaid by the Master Trustee to the Obligated Group Agent, or to such officer, board or body as may then be entitled by law to receive such moneys, as its absolute property and free from trust, and the Master Trustee shall thereupon be released and discharged with respect thereto; provided, however, that before being required to make any such payment to the Obligated Group Agent, the Master Trustee may, at the expense of the Obligated Group Members, cause to be published in a newspaper or financial journal of general circulation in the Borough of Manhattan, City and State of New York and a newspaper of general circulation in Baton Rouge, Louisiana, a notice that such moneys remain unclaimed and that, after a date named in such notice, which date shall be not fewer than 40 nor more than 90 days after the date of publication of such notice, the balance of such moneys shall be returned to the Obligated Group Agent. THE LOAN AGREEMENT The Authority and the Corporation have entered into the Loan Agreement in connection with the loan of the proceeds of the Bonds to the Corporation by the Authority. Loan to the Corporation Initial Loan. The Authority under the Loan Agreement loans to the Corporation, and the Corporation borrows from the Authority, all of the proceeds of the Bonds for the purposes of financing a portion of the cost of the Project and paying the cost of issuance of the Bonds, in accordance with the provisions of the Loan Agreement. Pledge of Funds. The Series 2012B Note and all obligations of the Corporation under the Loan Agreement shall be secured by a lien on and security interest in any interest the Corporation may be deemed to have at any time in the amounts in the Funds (other than the Rebate Fund) held under the Indenture, and the Corporation grants a security interest in any interest the Corporation may be deemed to have at any time in the amounts in the Funds held under the Indenture to secure the Series 2012B Note and the Loan Agreement, and the Corporation shall grant no lien, pledge or security interest on such amounts to any other Person. C-26

217 The Project Acquisition and Construction of the Project. The Corporation and the other Obligated Group Members will diligently proceed to acquire and construct the Project and use their best efforts to complete the Project by, 2015, or as soon thereafter as may be practicable, delays caused by Force Majeure excepted only. Disbursements from Construction Fund. The Authority has, in the Indenture, authorized and directed the Trustee to make disbursements from the Construction Fund to pay Project Costs, or to reimburse the Corporation for Project Costs paid by the Corporation. It shall be a condition to the Trustee's disbursing any moneys to the Corporation from the Construction Fund that the Corporation submit to the Trustee a requisition, substantially in the form set forth in the Loan Agreement, signed by a Corporation Representative, which requisition shall state that to the Corporation's knowledge no event of default has occurred and is continuing under the Loan Agreement and with respect to each advance requested thereby: (i) the requisition number, (ii) the name and address of the person, firm or corporation to whom amounts to be provided to the Corporation are to be paid, (iii) the amount paid or to be paid, (iv) that each obligation, item, cost or expense mentioned therein has been properly incurred and has been paid or is then due and payable as a Project Cost, and has not been the basis of any previous payment from amounts deposited in the Construction Fund, (v) the expenditure of such disbursement is an expenditure authorized by the Act and (vi) the Corporation is in compliance with all provisions and requirements of the Loan Agreement. Tax Covenants (a) The Authority and the Corporation mutually covenant for the benefit of the purchasers of the Bonds and the Authority that the proceeds of the Bonds, the earnings thereon and any other moneys on deposit in any fund or account maintained in respect of the Bonds (whether such moneys were derived from the proceeds of the sale of the Bonds or from other sources) will not be used in a manner which would cause the Bonds to be "arbitrage bonds" within the meaning of Section 148 of the Code. (d) The Corporation will not take or permit to be taken any action, including the making of any changes in the design or function of the Project, which would have the effect, directly or indirectly, of including interest on any of the Bonds in gross income for purposes of federal income taxation. The Corporation covenants and agrees to comply with the provisions of the Tax Regulatory Agreement. Repayment of Loan The Corporation shall repay the full $ principal amount of the Loan made to it under the Loan Agreement together with interest thereon. The Corporation agrees to deposit, not less than five Business Days prior to each Interest Payment Date and principal payment date, the amount required to pay the interest payable on the Bonds on the next ensuing Interest Payment Date and to retire Bonds to be called by mandatory redemption or to be paid at maturity on such next ensuing July 1, in accordance with the Indenture. Each such payment shall be deemed made only when the Trustee has received good funds. If the Corporation defaults in any payment required by this Section, the Corporation will pay interest (to the extent allowed by law) on such amount until paid at the rate provided for in the Bonds. In furtherance of the foregoing, so long as any Bonds are Outstanding, the Corporation will pay all amounts required to prevent any deficiency or default with respect to the Bonds, including any deficiency caused by an act or failure to act by the Trustee, the Corporation or the Authority. Unconditional Obligation To Pay Loan Repayments The obligation of the Corporation to make payment of Loan Repayments or any other amounts required by the Loan Agreement, other Sections thereof and the Series 2012B Note and to perform and observe the other covenants and agreements contained therein shall be absolute and unconditional in all events except as otherwise expressly provided in the Loan Agreement. Notwithstanding any dispute between the Corporation and the Authority, the Trustee, any Owners of Bonds or any other person, the Corporation shall make all payments of Loan Repayments when due and shall not withhold any Loan Repayments pending final resolution of such dispute nor shall the Corporation assert any right of setoff or counterclaim against its obligation to make such payments required under the Loan Agreement. The C-27

218 Corporation's obligation to make payment of Loan Repayments during the Loan Term shall not be abated through accident or unforeseen circumstances. Events of Default and Remedies Whenever any Event of Default as defined in the Indenture shall have occurred and be continuing, the Trustee, or the Authority with the prior written consent of the Trustee, may exercise any remedy provided in the Indenture and may take any action at law or in equity to collect amounts then due and thereafter to become due, or to enforce performance and observance of any obligation, agreement or covenant of the Corporation under the Loan Agreement, and such payment and performance may be enforced by mandamus, to the extent permitted by law, or by the appointment of a receiver in equity with power to charge and collect Loan Repayments, and to apply such Loan Repayments in accordance with the Loan Agreement and the Indenture. Any amounts collected pursuant to action taken under this Section shall be applied in accordance with the provisions of the Indenture. The Trustee and any indemnified party, as applicable, may, with or without the consent of the Trustee, take such actions as it deems appropriate to enforce the observance and performance of the Corporation's covenants, conditions and agreements contained in the Loan Agreement. A waiver by the Trustee of any Event of Default shall also constitute a waiver of its consequences under the Loan Agreement. Acceleration of the Series 2012B Note Pursuant to the Master Indenture Under certain circumstances, pursuant to the provisions of and with the force and effect set forth in the Master Indenture, the maturity of each Series 2012B Note may be accelerated by the Master Trustee. Notwithstanding any other provisions of the Loan Agreement or the Series 2012B Note, nothing shall effect or impair the rights of the Authority or any successor in interest thereto, whether by assignment or otherwise, to enforce the payment of principal of or interest on the Series 2012B Note or the obligation of the Corporation to pay the principal of and interest on the Series 2012B Note to the Authority or any successor in interest thereto, whether by assignment or otherwise, at the times and place therein expressed, as the same becomes due and payable. THE INDENTURE Bonds. The Authority and the Trustee have entered into the Trust Indenture in connection with the issuance of the General Pursuant to the Indenture, the Trust Estate is pledged to secure the payment of the principal of, premium, if any, and interest on the Bonds. Establishment of Funds; Net Proceeds Fund The Authority, by the Indenture, establishes and creates the following Funds, which shall be special trust funds held by the Trustee for the benefit of the Owners of the Bonds: (a) (b) (c) (d) (e) (f) Net Proceeds Fund. Bond Principal Fund. Bond Interest Fund. Construction Fund. Issuance Expense Fund. Rebate Fund. C-28

219 Proceeds of the Bonds shall be deposited into the Net Proceeds Fund and a specified amount shall be transferred to the Issuance Expense Fund in an amount as shall be specified in the written order delivered pursuant to the Indenture; and the balance of the proceeds shall be transferred to the Construction Fund. Payments into the Bond Principal Fund and the Bond Interest Fund. There shall be deposited into the Bond Principal Fund or the Bond Interest Fund, as appropriate, and as and when received (i) all payments pursuant to the Loan Agreement and any payments on the Series 2012B Note, (ii) all moneys transferred to the Bond Interest Fund and the Bond Principal Fund from the Construction Fund,(iii) all moneys transferred to the Bond Principal Fund or Bond Interest Fund from the Issuance Expense Fund, (iv) all other moneys required or permitted to be deposited into the Bond Principal Fund or Bond Interest Fund pursuant to the Loan Agreement or the Indenture, including any supplements thereto and (v) all other moneys received by the Trustee when accompanied by directions not inconsistent with the Loan Agreement or the Indenture that such moneys are to be paid into the Bond Principal Fund or Bond Interest Fund. There shall also be retained in the Bond Principal Fund and Bond Interest Fund, respectively, interest and other income received on investment of moneys in the Bond Principal Fund and Bond Interest Fund to the extent provided in the Indenture. If the Trustee does not receive payments into the Bond Principal Fund and the Bond Interest Fund pursuant to the Loan Agreement when due, the Trustee will immediately notify the Authority and Corporation of such nonpayment. The Corporation shall receive a credit against the Corporation's obligation to make deposits in the Bond Principal Fund and Bond Interest Fund as a result of interest earnings in the Bond Principal Fund and Bond Interest Fund. Payments into and Use of Moneys Issuance Expense Fund. There shall be deposited into the Issuance Expense Fund $ from the proceeds of the Bonds. There shall also be retained in the Issuance Expense Fund interest and other income received on investments of Issuance Expense Fund moneys as provided in the Indenture. Such moneys shall be expended to pay costs of issuance and expenses in accordance with the provisions of the Loan Agreement and the Authority shall be furnished with all copies of requisitions received by the Trustee. The Trustee is thereby authorized and directed to issue its checks on the Issuance Expense Fund for each payment in accordance with the Loan Agreement. The Trustee shall keep and maintain adequate records pertaining to the Issuance Expense Fund and all payments therefrom, which shall be open to inspection by the Authority and the Corporation or their duly authorized agents during normal business hours of the Trustee. After all expenses incurred in connection with the issuance of the Bonds have been paid and a certificate of payment of all costs filed as provided in the Indenture, the Trustee shall file a statement of income and disbursements with respect thereto with the Authority and with the Corporation. Rebate Fund. The Indenture creates and establishes a Rebate Fund to be held by the Trustee in the name of the Authority and for the benefit of the United States of America which shall be expended in accordance with the provisions the Indenture, the Tax Regulatory Agreement and the Investment Instructions. The Trustee shall make deposits to and disbursements from the Rebate Fund based upon the instructions of a duly authorized officer of the Corporation pursuant to the Investment Instructions and the Tax Regulatory Agreement; such deposits shall be made with moneys furnished by the Corporation. The Corporation shall be responsible for making all such deposits to the Rebate Fund as required in the Tax Regulatory Agreement. The Trustee shall invest the Rebate Fund at the direction of a duly authorized officer of the Corporation pursuant to said Investment Instructions and shall deposit income from said investments immediately upon receipt thereof in the Rebate Fund, all as set forth in the Investment Instructions. The Investment Instructions and the Tax Regulatory Agreement may be superseded or amended by new Investment Instructions drafted by, and accompanied by an opinion of, nationally recognized municipal bond counsel addressed to the Corporation and the Trustee to the effect that the use of said new Investment Instructions will not cause the interest on the Bonds to be includable in the gross income of the recipients thereof for purposes of federal income taxation. The Authority shall select an arbitrage rebate analyst which shall be reasonably acceptable to the Corporation, (the fees of which shall be paid by the Corporation), and the Corporation shall not unreasonably withhold its consent thereto. Investments Investment of the Bond Principal Fund, the Bond Interest Fund, the Issuance Expense Fund, and the Construction Fund. Subject to provisions of the Indenture, any moneys held as part of the Bond Principal Fund, the Bond Interest Fund, the Issuance Expense Fund and the Construction Fund shall, on instructions signed by a Corporation Representative, be invested by the Trustee (i) with respect to the Construction Fund and the Issuance Expense Fund in Permitted Investments maturing in the amounts and at the times necessary to provide funds to make the payments to which such moneys are applicable as estimated in a certificate of a Corporation Representative filed with the Trustee, C-29

220 and (ii) with respect to the Bond Principal Fund and the Bond Interest Fund in obligations described in paragraphs (a), (b)(6), (c), (d) or (i) of the definition of Permitted Investments maturing in the amounts and at the times necessary to provide funds to make the payments to which such moneys are applicable as determined by the Trustee. All such Permitted Investments purchased shall mature or be redeemable on a date or dates prior to the time when the moneys so invested will be required for expenditure. The value of the investments in such Funds shall be determined monthly and shall be valued at the market value thereof, exclusive of accrued interest; where the market price is not readily available, the market value may be determined in such manner as the Trustee deems reasonable. The Trustee shall sell and reduce to cash a sufficient portion of such investments whenever the cash balance in a Fund is insufficient for the purposes of such Fund. The Trustee may make any and all investments permitted by the provisions of this Section through its trust or bond departments. Allocation and Transfers of Investment Income. Any investments shall be held by or under the control of the Trustee and shall be deemed at all times a part of the Fund from which the investment was made. Any loss resulting from such investments shall be charged to such Fund. Any interest or other gain from any Fund from any investment or reinvestment pursuant to the Indenture shall be allocated and transferred subject to the Tax Regulatory Agreement, as follows: (a) Any interest or other gain realized as a result of any investments or reinvestments of moneys in the Bond Principal Fund and the Bond Interest Fund shall be retained in the respective Fund. (b) Any interest or other gain realized as a result of any investments or reinvestments of moneys in the Construction Fund shall be retained in the Construction Fund. (c) Until the Completion Date, any interest or other gain realized as a result of any investments or reinvestments of moneys in the Bond Principal Fund and the Bond Interest Fund shall be credited to the Construction Fund, and thereafter shall be retained in the respective Fund or disbursed in accordance with the Indenture. (d) Any interest or other gain realized as a result of any investment or reinvestment of moneys in the Issuance Expense Fund shall be credited to the Construction Fund until the Completion Date, and thereafter shall be transferred to the Bond Interest Fund. (e) Notwithstanding the foregoing, any interest or other gain realized as a result of any investments or reinvestments of moneys in Funds pursuant to the Indenture shall first be deposited in the Rebate Fund to the extent amounts required to be deposited therein pursuant to the Indenture have not been so deposited. Investment of Rebate Fund. Moneys on deposit in the Rebate Fund shall be invested only in Permitted Investments, and otherwise in accordance with the provisions of the Indenture. Discharge of Indenture If, when the Bonds secured by the Indenture shall be paid in accordance with their terms (or payment of the Bonds has been provided for in the manner set forth in the following paragraph), together with the fees and expenses of the Trustee and the Authority due or to become due in connection with the payment of the Bonds, and all other sums payable under the Indenture, or payments due pursuant to the Agreement, and if the Trustee states that all such payments have been made, then the Indenture and the Trust Estate and all rights granted under the Indenture shall thereupon cease, terminate and become void and be discharged and satisfied. Also if all Outstanding Bonds secured by the Indenture shall have been purchased by the Corporation and delivered to the Trustee for cancellation, and all other sums payable under the Indenture have been paid, or provision shall have been made for the payment of the same, then the Indenture and the Trust Estate and all rights granted thereunder shall thereupon cease, terminate and become void and be discharged and satisfied. In such events, upon the request of the Authority, the Trustee shall assign and transfer to the Authority all property then held by the Trustee thereunder and shall execute such documents as may be reasonably required by the Authority (including undertakings by the Corporation to continue to comply with its covenants contained in the Loan Agreement until all Bonds are actually paid) and shall turn over any surplus in any Fund as a duly authorized officer of the Corporation shall direct in writing, other than the Rebate Fund. C-30

221 Payment of any Outstanding Bonds shall prior to the maturity or redemption date thereof be deemed to have been provided for within the meaning and with the effect expressed in this Section if (i) in case said Bonds are to be redeemed on any date prior to their maturity, the Corporation shall have given to the Trustee in form satisfactory to it irrevocable instructions to give on a date in accordance with the provisions of the Indenture regarding notice of redemption of such Bonds on said redemption date, such notice to be given in accordance with the provisions of the Indenture, (ii) there shall have been deposited with the Trustee either moneys in an amount which shall be sufficient, or United States Government Obligations acquired with moneys, which shall not contain provisions permitting the redemption thereof at the option of the issuer before the date the principal thereof will be required, the principal of and the interest on which when due, and without any reinvestment thereof, will provide moneys which, together with the moneys, if any, deposited with or held by the Trustee at the same time, shall be sufficient 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 redemption date or maturity date thereof, as the case may be, and (iii) in the event said Bonds are not by their terms subject to redemption within the next 45 days, the Corporation shall have given the Trustee in form satisfactory to it irrevocable instructions to give, as soon as practicable in the same manner as the notice of redemption is given pursuant to the Indenture, a notice to the owners of such Bonds that the deposit required by (ii) above has been made with the Trustee and that payment of said Bonds has been provided for in accordance with this Section and stating such maturity or redemption date upon which moneys are to be available for the payment of the principal of and premium, if any, and interest on said Bonds. At such time as payment of any Bonds has been provided for as aforesaid, such Bonds shall no longer be secured by or entitled to the benefits of the Indenture, except for the purpose of any payment from such moneys or securities deposited with the Trustee. In addition, to accomplish a defeasance under the Indenture, the Authority shall cause the Corporation (at its expense) to deliver (i) a report of an independent firm of nationally recognized certified public accountants ("Accountant") verifying the sufficiency of the escrow established to pay the Bonds in full on the maturing or redemption date ("Verification"), (ii) an Escrow Deposit Agreement, and (iii) an opinion of nationally recognized bond counsel to the effect that the Bonds are no longer "Outstanding" under the Indenture; each Verification and defeasance opinion shall be acceptable in form and substance, and addressed, to the Authority and the Trustee. The release of the obligations of the Authority under this Section shall be without prejudice to the right of the Trustee to be paid reasonable compensation for all services rendered by it under the Indenture and all its reasonable expenses, charges and other disbursements incurred on or about the administration of the trust created under the Indenture and the performance of its powers and duties thereunder. Events of Default Each of the following is defined as and shall be deemed an "Event of Default" under the Indenture: (a) Default by the Authority 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, on a sinking fund payment date, or upon proceedings for redemption, or by acceleration or otherwise. (b) Default by the Authority in the payment of any installment of interest on any Bond when the same shall become due and payable. (c) Default shall be made in the observance or performance of any covenant, contract or other provision in the Bonds or the Indenture contained (other than as referred to in (a) or (b) of this Section) and such default shall continue for a period of thirty days after written notice to the Authority and the Trustee from the owners of at least a majority in aggregate principal amount of the Bonds then Outstanding or to the Authority from the Trustee specifying such default and requiring the same to be remedied, provided, with respect to any such failure covered by this subsection (c), no Event of Default shall be deemed to have occurred so long as a course of action adequate to remedy such failure shall have been commenced within such 30 day period and shall thereafter be diligently prosecuted to completion and the failure shall be remedied thereby. (d) Default shall be made by the Corporation in the observance or performance of any covenant, contract or other provision in the Loan Agreement contained and such default shall continue for a period of thirty days after written notice to the Corporation and the Trustee from the owners of at least a majority in aggregate principal amount of the Bonds then Outstanding or to the Corporation from the Trustee specifying C-31

222 such default and requiring the same to be remedied, provided, with respect to any such failure covered by this subsection (d), no Event of Default shall be deemed to have occurred so long as a course of action adequate to remedy such failure shall have been commenced within such 30 day period and shall thereafter be diligently prosecuted to completion and the failure shall be remedied thereby. (e) A petition is filed against the Corporation under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect and such petition is not vacated, discharged or stayed on appeal within 90 days of entry thereof. (f) The Corporation files a petition in voluntary bankruptcy or seeking relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any petition against it under any such law. (g) The Corporation admits insolvency or bankruptcy or its inability to pay its debts as they become due or is generally not paying its debts as such debts become due, or becomes insolvent or bankrupt or makes an assignment for the benefit of creditors, or a custodian (including without limitation a receiver, liquidator or trustee) of the Corporation or any of its property is appointed by court order or takes possession thereof. (h) An Event of Default (as defined in Article VI of the Master Indenture) shall have occurred. See "THE MASTER INDENTURE Events of Default and Remedies." Remedies Upon Event of Default Upon the occurrence of an Event of Default, the Trustee shall have the following rights and remedies: (a) Acceleration. The Trustee shall, at the direction of the owners of not less than a majority in aggregate principal amount of Bonds then Outstanding, by notice in writing given to the Authority and the Corporation, declare the principal amount of all Bonds then Outstanding and the interest accrued thereon to be immediately due and payable and said principal and interest shall thereupon become immediately due and payable. If at any time after the principal of the Bonds then Outstanding shall have been so declared to be due and payable, and before the entry of final judgment or decree in any suit, action or proceeding instituted on account of such default, or before the completion of the enforcement of any other remedy under the Indenture, money shall have accumulated in the Bond Principal Fund and Bond Interest Fund sufficient to pay the principal of all matured Bonds and all arrears of interest, if any, upon all Bonds then Outstanding (except the principal of any Bond not then due and payable by its terms and the interest accrued on such since the last Interest Payment Date), and the charges, compensations, expenses, disbursements, advances and liabilities of the Trustee and all other amounts then payable by the Authority under the Indenture shall have been paid or a sum sufficient to pay the same shall have been deposited with the Trustee, and every other default known to the Trustee in the observance or performance of any covenant, condition or agreement contained in the Bonds or in the Indenture (other than a default in the payment of the principal of and interest on such Bonds then due only because of a declaration under this section) shall have been remedied to the satisfaction of the Trustee, then and in every such case the Trustee may, and upon the written request of the Owners of not less than a majority in aggregate principal amount of Bonds not then due and payable by their terms (Bonds then due and payable only because of a declaration under this paragraph shall not be deemed to be due and payable to be due and payable by their terms) and then Outstanding shall, by written notice to the Authority and the Corporation, rescind and annul such declaration and its consequences, but no such rescission or annulment shall extend to or affect any subsequent Event of Default or impair any right consequent thereon. Upon the occurrence of an acceleration by the Master Trustee of the Series 2012B Note in accordance with the terms and provisions of the Series 2012B Note and the Master Indenture, the principal of all Bonds then Outstanding shall automatically become and be immediately due and payable, and interest thereon shall cease to accrue, anything contained in the Bonds or the Indenture to the contrary notwithstanding; provided, however, that if at any time after the principal of the Bonds then Outstanding shall have so become due and payable, and before the entry of final judgment or decree in any suit, action or proceeding instituted on account of such acceleration or before the completion of the enforcement of any other remedy under the Indenture, the C-32

223 Master Trustee shall have annulled or rescinded the acceleration of the Series 2012B Note, then and in every case the acceleration of the Bonds then Outstanding and the consequences of such acceleration shall be annulled or rescinded, but no such annulment or rescission shall extend to or affect any subsequent acceleration of the Series 2012B Note and corresponding acceleration of the Bonds then Outstanding, or impair any right consequent hereon. (b) Legal Proceedings. The Trustee may, by mandamus, or other suit, action or proceeding at law or in equity, enforce the rights of the Bondholders, and require the Authority, the Corporation or any or all of them to carry out the agreements with or for the benefit of the Bondholders, and to perform its or their duties, under the Act, the Loan Agreement and the Indenture. The Trustee may also, by action or suit in equity, enjoin any acts or things which may be unlawful or in violation of the rights of the Bondholders. (c) Receivership. Upon the filing of a bill in equity or other commencement of judicial proceedings to enforce the rights of the Trustee and of the Bondholders, the Trustee shall be entitled as a matter of right to the appointment of a receiver or receivers of the Trust Estate, and of the rents, revenues, income, products and profits thereof, pending such proceedings, but, notwithstanding the appointment of any receiver, trustee or other custodian, the Trustee shall be entitled to the possession and control of any cash, securities or other instruments at the time held by, or payable or deliverable under the provisions of the Indenture to, the Trustee. (d) Suit for Judgment on the Bonds. The Trustee shall be entitled to sue for and recover judgment, either before or after or during the pendency of any proceedings for the enforcement of the lien of the Indenture, for the enforcement of any of its rights, or the rights of the Bondholders under the Indenture, but any such judgment against the Authority shall be enforceable only against the Trust Estate. The entry of any judgment in favor of the Trustee shall not in any manner or to any extent affect the lien of the Indenture or any rights, powers or remedies of the Trustee under the Indenture, or any lien, rights, powers or remedies of the owners of the Bonds, but such lien, rights, powers and remedies of the Trustee and of the Bondholders shall continue unimpaired as before. In the event written notice is given by the Bondholders or the Trustee under the Indenture, the Trustee shall immediately give notice with respect to such default to the Corporation. No right or remedy is intended to be exclusive of any other right or remedy, but each and every such right or remedy shall be cumulative and in addition to any other right or remedy given under the Indenture or now or hereafter existing at law or in equity or by statute. If any Event of Default shall have occurred and if requested by the owners of not less than a majority in aggregate principal amount of Bonds then Outstanding and indemnified as provided in the Indenture, the Trustee shall be obligated to exercise such one or more of the rights and powers conferred by this Section as the Trustee, being advised by counsel, shall deem most expedient in the interests of the Bondholders. Notwithstanding the foregoing, in the event of an acceleration of the Series 2012B Note by the Master Trustee and a corresponding acceleration of the Bonds, all remedial proceedings in respect of such occurrence shall be conducted in accordance with the terms and provisions of the Master Indenture. Majority of Bondholders May Control Proceedings The owners of a majority in aggregate principal amount of the Bonds then Outstanding shall have the right, at any time, to the extent permitted by law, by an instrument or instruments in writing executed and delivered to the Trustee, to direct the time, method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of the Indenture, or for the appointment of a receiver, or any other proceedings under the Indenture; provided that such direction shall not be otherwise than in accordance with the provisions thereof. The Trustee shall not be required to act on any direction given to it pursuant to this Section unless indemnified as provided in the Indenture. C-33

224 Rights and Remedies of Bondholders No owner of any Bond shall have any right to institute any suit, action or proceeding in equity or at law for the enforcement of the Indenture or for the execution of any trust hereof or for the appointment of a receiver or any other remedy under the Indenture, unless a default has occurred of which the Trustee has been notified as provided in the Indenture, or of which it is deemed to have notice, nor unless such default shall have become an Event of Default and the owners of not less than a majority in aggregate principal amount of Bonds then Outstanding shall have made written request to the Trustee and shall have offered reasonable opportunity to the Trustee either to proceed to exercise the powers hereinbefore granted or to institute such action, suit or proceeding in its own name, nor unless they have also offered to the Trustee indemnity as provided in the Indenture nor unless the Trustee shall thereafter fail or refuse to exercise the powers hereinbefore granted, or to institute such action, suit or proceeding in its own name; and such notification, request and offer of indemnity are hereby declared in every case at the option of the Trustee to be conditions precedent to the execution of the powers and trusts of the Indenture, and to any action or cause of action for the enforcement of the Indenture, or for the appointment of a receiver or for any other remedy under the Indenture; it being understood and intended that no one or more owners of the Bonds shall have the right in any manner whatsoever to affect, disturb or prejudice the lien of the Indenture by his, her or their action or to enforce any right under the Indenture except in the manner therein provided and that all proceedings at law or in equity shall be instituted, had and maintained in the manner therein provided and for the equal benefit of the owners of all Bonds then Outstanding. Nothing in the Indenture contained shall, however, affect or impair the right of any owner of Bonds to enforce the payment, by the institution of any suit, action or proceeding in equity or at law, of the principal of, premium, if any, or interest on any Bond at and after the maturity thereof, or the obligation of the Authority to pay the principal of, premium, if any, and interest on each of the Bonds to the respective owners of the Bonds at the time and place, from the source and in the manner therein and in the Bonds expressed. Application of Moneys All moneys received by the Trustee pursuant to any right given or action taken under the provisions of the Indenture shall, after payment of the costs and expenses of the proceedings resulting in the collection of such moneys and the expenses, liabilities and advances incurred or made by the Trustee, be deposited in the Bond Principal Fund and the Bond Interest Fund and all moneys so deposited in the Bond Principal Fund and the Bond Interest Fund and all moneys held or deposited in the Bond Principal Fund and the Bond Interest Fund during the continuance of an Event of Default shall be applied as follows: (a) Unless the principal of all the Bonds shall have become or shall have been declared due and payable, all such moneys shall be applied: FIRST--To the payment to the persons entitled thereto of all installments of interest then due on the Bonds, in the order of the maturity of the installments of such interest and, if the amount available shall not be sufficient to pay in full any particular installment, then to the payment ratably, according to the amounts due on such installment, to the persons entitled thereto, without any discrimination or privilege; and SECOND--To the payment to the persons entitled thereto of the unpaid principal of and premium, if any, on any of the Bonds which shall have become due (other than Bonds called for redemption for the payment of which moneys are held pursuant to the provisions of the Indenture), in the order of their due dates, with interest on the unpaid principal of and premium, if any, on such Bonds from the respective dates upon which they became due, at a rate borne by the Bonds and, if the amount available shall not be sufficient to pay in full Bonds due on any particular date, together with such interest, then to the payment ratably, according to the amount of principal due on such date, to the persons entitled thereto, without any discrimination or privilege. (b) If the principal of all the Bonds shall have become due or shall have been declared due and payable, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon all of the Bonds, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto without any discrimination or privilege. C-34

225 (c) If the principal of all the Bonds shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled under the Indenture then, subject to the provisions of paragraph (b) of this Section in the event that the principal of all the Bonds shall later become due or be declared due and payable, the moneys shall be applied in accordance with the provisions of paragraph (a) of this Section. In connection with the application of moneys pursuant to this section, the Trustee shall liquidate Permitted Investments in the Bond Principal Fund and the Bond Interest Fund. Whenever moneys are to be applied pursuant to the provisions of this Section, such moneys shall be applied at such times, and from time to time, as the Trustee shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Trustee shall apply such funds, it shall fix the date (which shall be an Interest Payment Date unless it shall deem another date more suitable) upon which such application is to be made and upon such date interest on the amounts of principal to be paid on such dates shall cease to accrue. The Trustee shall give such notice as it may deem appropriate of the deposit of any such moneys and of the fixing of any such date, and shall not be required to make payment to the owner of any Bond until such Bond shall be presented to the Trustee for appropriate endorsement or for cancellation if fully paid. Whenever all of the Bonds and interest thereon have been paid under the provisions of this Section and all expenses and fees of the Trustee and all other amounts to be paid to the Authority thereunder or under the Loan Agreement have been paid, any balance remaining in the Funds shall be paid as provided in the Indenture. THE ASSIGNMENT The following is a general summary of certain provisions of the Assignment. This summary does not purport to be complete and is qualified in its entirety by reference to the Assignment and is subject to the full text thereof. All references herein to the Series 1998B Bank Note, the 1998B Credit Agreement, the Series 1998C Bonds, the Series 1998C Note, the Trust Indenture (Series 1998C), the Loan Agreement (Series 1998C), the Series 1998C Insurer, the Series 2005C Bank Note, the Series 2005C Reimbursement Agreement, the Series 2005C Pledge Agreement, the Series 2005C Bonds, the Series 2005C Note, the Trust Indenture (Series 2005C) and the Loan Agreement (Series 2005C) shall be of no force and effect. As used in the Assignment, the following words and phrases shall have the following meanings, and all terms not otherwise defined herein shall have the same meanings as set forth in the Master Indenture, the Loan Agreement and the Indenture: "Assignee" means The Bank of New York Mellon Trust Company, N.A., Baton Rouge, Louisiana, and its successors and assigns, as agent for the holders of Secured Obligations. "Assignors" means Franciscan Missionaries of Our Lady Health System, Inc., Our Lady of the Lake Hospital, Inc., St. Francis Medical Center, Inc., Our Lady of Lourdes Regional Medical Center, Inc. and Our Lady of the Lake Ascension Community Hospital, Inc., all Louisiana nonprofit corporations and exempt organizations as described and defined in Section 501(c)(3) of the Code, and any successors or assigns, and any future Obligated Group Members under the Master Trust Indenture. "Authorized Representative" means the President or the Senior Vice President/Chief Financial Officer of the Corporation, or any other person designated as such by an instrument in writing delivered to the Authority and the Bond Trustee by the President or the Senior Vice President/Chief Financial Officer of the Corporation. "Business Day" means any day which is not a Saturday, Sunday or a legal holiday or a day on which banking institutions in New York, New York, or the city in which the principal corporate trust offices of the Assignee and the Bond Trustee are located are authorized by law or executive order to close. "Code" means the Internal Revenue Code of 1986, as amended. C-35

226 "Collateral" means all Receipts, whether now existing or arising hereafter. "Event of Default" means any occurrence, action or failure of action which would permit an acceleration of the Secured Obligations in accordance with the terms of any instrument governing any of the Secured Obligations. "Future Secured Obligations" means any one or more outstanding future indebtedness of the Assignors which is or are (a) expressly secured by the Security Agreement, (b) described in Section 3.1 of the Security Agreement and (c) specifically described in an amendment of the Security Agreement. "Hedging Transaction" shall have the meaning set forth in the Master Trust Indenture and includes the Series 2005D Swap and the Series 2008 Swap. "Indenture" means, collectively, the Trust Indenture (Series 1998A), Trust Indenture (Series 1998B), Trust Indenture (Series 2005A), Trust Indenture (Series 2005B), Trust Indenture (Series 2005C), Trust Indenture (Series 2005D), Trust Indenture (Series 2008A), Trust Indenture (Series 2009A), Trust Indenture (Series 2012A) and Trust Indenture (Series 2012B). "Loan Agreement" means, collectively, the Loan Agreement (Series 1998A), Loan Agreement (Series 1998B), Loan Agreement (Series 2005A), Loan Agreement (Series 2005B), Loan Agreement (Series 2005C), Loan Agreement (Series 2005D), Loan Agreement (Series 2008A), Loan Agreement (Series 2009A), Loan Agreement (Series 2012A) and Loan Agreement (Series 2012B). "Loan Agreement (Series 1998A)" means the Loan Agreement (Series 1998A) dated as of May 1, 1998, between the Corporation and the Authority, including any further amendments and supplements thereof and thereto as permitted thereunder. "Loan Agreement (Series 1998B)" means the Loan Agreement (Series 1998B) dated as of May 1, 1998, as amended and supplemented by the Supplemental Loan Agreement No. 1 (Series 1998B) dated as of August 1, 2008, as amended and supplemented by the Supplemental Loan Agreement No. 2 (Series 1998B) dated as of June 1, 2009, each between the Corporation and the Authority. "Loan Agreement (Series 1998C)" means the Loan Agreement (Series 1998C) dated as of May 1, 1998, between the Corporation and the Authority, including any further amendments and supplements thereof and thereto as permitted thereunder. "Loan Agreement (Series 2005A)" means the Loan Agreement (Series 2005A) dated as of July 1, 2005, between the Obligated Group Agent, on behalf of the Obligated Group Members, and the Authority, including any further amendments and supplements thereof and thereto as permitted thereunder. "Loan Agreement (Series 2005B)" means the Loan Agreement (Series 2005B) dated as of July 1, 2005, as amended and supplemented by Supplemental Loan Agreement No. 1 (Series 2005B) dated as of May 1, 2008, each between the Authority and the Corporation. "Loan Agreement (Series 2005C)" means the Loan Agreement (Series 2005C) dated as of July 1, 2005, as amended and supplemented by Supplemental Loan Agreement No. 1 (Series 2005C) dated as of May 1, 2008, as amended and supplemented by Supplemental Loan Agreement No. 2 (Series 2005C) dated as of June 1, 2009, each between the Authority and the Corporation. "Loan Agreement (Series 2005D)" means the Loan Agreement (Series 2005D) dated as of July 1, 2005, as amended and supplemented by Supplemental Loan Agreement No. 1 (Series 2005D) dated as of July 1, 2008, each between the Authority and the Corporation. "Loan Agreement (Series 2008A)" means the Loan Agreement dated as of August 1, 2008, by and between the Obligated Group Agent, on behalf of the Obligated Group Members, and the Authority, including any amendments and supplements thereof and thereto as permitted thereunder. C-36

227 "Loan Agreement (Series 2009A)" means the Loan Agreement (Series 2009A) dated as of June 1, 2009, by and between the Obligated Group Agent, on behalf of the Obligated Group Members, and the Authority, including any amendments and supplements thereof and thereto as permitted thereunder. "Loan Agreement (Series 2012A)" means the Loan Agreement (Series 2012A) dated as of October 1, 2012, by and between the Obligated Group Agent, on behalf of the Obligated Group Members, and the Authority, including any amendments and supplements thereof and thereto as permitted thereunder. "Loan Agreement (Series 2012B)" means the Loan Agreement (Series 2012B) dated as of November 1, 2012, by and between the Obligated Group Agent, on behalf of the Obligated Group Members, and the Authority, including any amendments and supplements thereof and thereto as permitted thereunder. "Master Trust Indenture" means, collectively, the Master Trust Indenture dated as of May 1, 1998, including any amendments or supplements thereto, or any Replacement Master Indenture delivered pursuant to the provisions of thereof. "Obligations" means the indebtedness of the Corporation incurred pursuant to and according to the terms of the Master Trust Indenture and shall include the indebtedness with respect to the Series 1998A Bonds represented by the Series 1998A Note, the Series 1998B Bonds represented by the Series 1998B Note, the Series 2005A Bonds represented by the Series 2005A Note, the Series 2005B Bonds represented by the Series 2005B Note, the Series 2005C Bonds represented by the Series 2005C Note, the Series 2005D Bonds represented by the Series 2005D Note, the Series 2008A Bonds represented by the Series 2008A Note, the Series 2005D Swap represented by the Series 2005D Hedge Note, the Series 2008 Swap represented by the Series 2008 Hedge Note, the Series 2012B Bonds represented by the Series 2012B Note, the 2005B Bank Note, the 2005D Bank Note, the 2008A Bank Note, the Series 2009A Bonds represented by the Series 2009A Note, the Series 2012A Bonds represented by the Series 2012A Note, the Series 2012B Bonds represented by the Series 2012B Note, and Future Secure Obligations, and shall include any Substitute Obligation delivered pursuant to the Master Trust Indenture. "Operating Assets" means any land, building, machinery, equipment, hardware, inventory or other property or any interest therein (except cash, accounts receivable, investment securities and other property held for investment purposes) of any Obligated Group Member used in its trade or business. "Receipts" shall mean receipts, revenues, rentals, income, insurance proceeds and other moneys received by or on behalf of any Obligated Group Member, including (without limitation) revenues derived from (i) the ownership, operation or leasing of any Operating Assets and rights to receive the same, whether in the form of accounts receivable, contract rights, general intangibles or other rights, and the proceeds of such rights, 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 any Obligated Group Member incurred in the financing, operation, maintenance or repair of any of the Operating Assets, but excluding, however, (a) gifts, grants, bequests, donations and contributions to the Assignors heretofore or hereafter made, and the income and gains derived therefrom, which are specifically restricted by the donor or grantor to a particular purpose which is inconsistent with their use for payments required under the applicable Indenture securing the Series 1998A Bonds, Series 1998B Bonds, Series 2005A Bonds, the Series 2005B Bonds, the Series 2005C Bonds, the Series 2005D Bonds, the Series 2008A Bonds, the Series 2009A Bonds, the Series 2012A Bonds and the Series 2012B Bonds or under the Series 2005D Hedge Note and the Series 2008 Hedge Note; provided that in the case of the proceeds of the items mentioned in (a), such proceeds are maintained in such a fashion as to be specifically identifiable as the proceeds of such items of (a) and are not commingled with other funds of the Assignors. "Secured Amounts" means, collectively, the following, each as certified by the respective Voting Representative: (a) with respect to the Series 1998A Bonds, the Series 1998B Bonds, the Series 1998C Bonds, the Series 2005A Bonds, the Series 2005B Bonds, the Series 2005C Bonds, the Series 2005D Bonds, the Series 2008A Bonds, the Series 2009A Bonds, the Series 2012A Bonds or the Series 2012B Bonds, the outstanding principal amount, plus any interest then due and owing, plus any premium and plus any fees owing to the Related Bond Trustee under the Related Bond Indenture in accordance therewith; C-37

228 (b) with respect to the Series 2005D Swap and the Series 2008 Swap, any amounts payable by the Assignors under the terms of and in accordance with the documents relating to such Hedging Transaction (except any payments which shall constitute Subordinated Secured Amounts); (c) with respect to any Future Secured Obligations, the outstanding principal amount thereof, plus any interest then due and owing, plus any premium and plus any fees owing to the Trustee under the document authorizing the same in accordance with said document; (d) with respect to any Future Secured Obligations, the outstanding principal amount thereof, plus any interest then due and owing, plus any premium and to the extent such Future Secured Obligations constitute a Hedging Transaction, any amounts payable by the Assignors under the terms of and in accordance with the documents relating to such Hedging Transaction (except any Subordinated Secured Amounts); and (e) with respect to the obligations of the Assignors to any person providing credit enhancement or liquidity with respect to the Series 1998A Bonds, the Series 1998B Bonds, the Series 2005A Bonds, the Series 2005B Bonds, the Series 2005C Bonds, the Series 2005D Bonds, the Series 2008A Bonds, the Series 2009A Bonds, the Series 2012A Bonds, the Series 2012B Bonds, the Series 2005D Swap, the Series 2008 Swap, including the Series 1998A Bond Insurer, the 2005B Bank under the 2005B Reimbursement Agreement and the 2005B Pledge Agreement, the 2005D Bank under the 2005D Reimbursement Agreement and the 2005D Pledge Agreement, the 2008A Bank under the 2008A Reimbursement Agreement and the 2008A Pledge Agreement, or any Future Secured Obligations any amounts due to said person under the instrument securing or evidencing the Assignors' obligations to reimburse such person for draws under such credit enhancement or liquidity facility. "Secured Obligations" means, collectively: (a) the obligations of the Assignors with respect to the payment of the Series 1998A Bonds, including without limitation its loan repayment obligation under the Loan Agreement (Series 1998A) and the Series 1998A Note, and any Related Bond Trustee fees owed in connection therewith; (b) the obligations of the Assignors with respect to the payment of the Series 1998B Bonds, including without limitation its loan repayment obligation under the Loan Agreement (Series 1998B) and the Series 1998B Note, and any Related Bond Trustee fees owed in connection therewith; (c) the obligations of the Assignors with respect to the payment of the Series 2005A Bonds, including without limitation its loan repayment obligation under the Loan Agreement (Series 2005A) and the Series 2005A Note, and any Related Bond Trustee fees owed in connection therewith; (d) the obligations of the Assignors with respect to the payment of the Series 2005B Bonds, including without limitation its loan repayment obligation under the Loan Agreement (Series 2005B) and the Series 2005B Note, and any Related Bond Trustee fees owed in connection therewith; (e) the obligations of the Assignors with respect to the payment of the Series 2005C Bonds, including without limitation its loan repayment obligation under the Loan Agreement (Series 2005C) and the Series 2005C Note, and any Related Bond Trustee fees owed in connection therewith; (f) the obligations of the Assignors with respect to the payment of the Series 2005D Bonds, including without limitation its loan repayment obligation under the Loan Agreement (Series 2005D) and the Series 2005D Note, and any Related Bond Trustee fees owed in connection therewith; (g) the obligations of the Assignors with respect to the payment of the Series 2008A Bonds, including without limitation its loan repayment obligation under the Loan Agreement (Series 2008A) and the Series 2008A Note, and any Related Bond Trustee fees owed in connection therewith; (h) the obligations of the Assignors with respect to the payment of the Series 2005D Hedge Note, but excluding any obligation to make payments which constitute Subordinated Secured Obligations; C-38

229 (i) the obligations of the Assignors with respect to the payment of the Series 2008 Hedge Note, but excluding any obligation to make payments which constitute Subordinated Secured Obligations; (j) the obligations of the Assignors with respect to the payment of the Series 2009A Bonds, including without limitation its loan repayment obligation under the Loan Agreement (Series 2009A) and the Series 2009A Note, and any Related Bond Trustee fees owed in connection therewith; (k) the obligations of the Assignors with respect to the payment of the Series 2012A Bonds, including without limitation its loan repayment obligation under the Loan Agreement (Series 2012A) and the Series 2012A Note, and any Related Bond Trustee fees owed in connection therewith; (l) the obligations of the Assignors with respect to the payment of the Series 2012B Bonds, including without limitation its loan repayment obligation under the Loan Agreement (Series 2012B) and the Series 2012B Note, and any Related Bond Trustee fees owed in connection therewith; (m) the obligations of the Assignors with respect to the payment of any Future Secured Obligations and any Related Bond Trustee fees owed in connection therewith; (n) the obligations of the Assignors with respect to any payment obligations, other than termination payments, under any Hedging Transaction which becomes a Future Secured Obligation thereunder; and (o) the obligations of the Assignors to reimburse any person providing credit enhancement or liquidity with respect to the Series 1998A Bonds, the Series 1998B Bonds, the Series 2005A Bonds, the Series 2005B Bonds, the Series 2005C Bonds, the Series 2005D Bonds, the Series 2008A Bonds, the Series 2009A Bonds, the Series 2012A Bonds, the Series 2012B Bonds, the Series 2005D Swap, the Series 2008 Swap, including the Series 1998A Bond Insurer, the 2005B Bank under the 2005B Reimbursement Agreement and the 2005B Pledge Agreement and the 2005D Bank under the 2005D Reimbursement Agreement and the 2005D Pledge Agreement, and the 2008A Bank under the 2008A Reimbursement Agreement and the 2008A Pledge Agreement, as applicable, or any Future Secured Obligations under the instrument securing or evidencing the Assignors obligations to reimburse such person for draws and other amounts due or to become due under or in respect of such credit enhancement or liquidity facility or instrument. "Series 1998A Bonds" means the Authority s $178,730,000 aggregate principal amount of Hospital Revenue and Refunding Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 1998A. "Series 1998A Note" means the promissory note designated "Franciscan Missionaries of Our Lady Health System, Inc. Series 1998A Note" dated July 1, 1998, in the principal amount of $178,730,000 executed and delivered to the Authority by the Corporation. "Series 1998B Bonds" means the Authority s $57,700,000 aggregate original principal amount of Tax-Exempt Hospital Revenue and Refunding Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 1998B. "Series 1998B Note" means the promissory note designated "Franciscan Missionaries of Our Lady Health System, Inc. Series 1998B Note" dated July 23, 1998, in the principal amount of $57,700,000 executed and delivered to the Authority by the Corporation. "Series 1998C Bonds" means the Authority s $95,615,000 aggregate principal amount of Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 1998C. "Series 1998C Note" means the promissory note designated "Franciscan Missionaries of Our Lady Health System, Inc. Series 1998C Note" dated July 1, 1998, in the principal amount of $95,615,000 executed and delivered to the Authority by the Corporation. "Series 2005A Bonds" means the Authority's $79,000,000 aggregate principal amount of Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2005A. C-39

230 "Series 2005A Note" means the promissory note designated "Franciscan Missionaries of Our Lady Health System, Inc. Series 2005A Note" dated October 25, 2005, in the principal amount of $79,000,000 executed and delivered to the Authority by the Obligated Group Agent, on behalf of the Obligated Group Members. "Series 2005B Bonds" means the Authority's $50,000,000 aggregate principal amount of Variable Rate Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2005B. "Series 2005B Note" means the promissory note designated "Franciscan Missionaries of Our Lady Health System, Inc. Series 2005B Note" dated October 4, 2005, in the principal amount of $50,000,000 executed and delivered to the Authority by the Obligated Group Agent, on behalf of the Obligated Group Members. "Series 2005C Bonds" means the Authority's $50,000,000 aggregate principal amount of Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2005C. "Series 2005C Note" means the promissory note designated "Franciscan Missionaries of Our Lady Health System, Inc. Series 2005C Note" dated October 4, 2005, in the principal amount of $50,000,000 executed and delivered to the Authority by the Obligated Group Agent, on behalf of the Obligated Group Members. "Series 2005D Bonds" means the Authority's $89,350,000 aggregate principal amount of Variable Rate Hospital Revenue and Refunding Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2005D. "Series 2005D Hedge Note" means, collectively, (i) "Franciscan Missionaries of Our Lady Health System, Inc. Series 2005D Hedge Note" dated October 4, 2005 and (ii) "Franciscan Missionaries of Our Lady Health System, Inc. Series 2005D Hedge Note No. 2" dated June 7, 2007, each executed and delivered to Merrill Lynch Capital Services Inc. by the Obligated Group Agent, on behalf of the Obligated Group Members. "Series 2005D Note" means the promissory note designated "Franciscan Missionaries of Our Lady Health System, Inc. Series 2005D Note" dated October 4, 2005, in the principal amount of $89,350,000 executed and delivered to the Authority by the Obligated Group Agent, on behalf of the Obligated Group Members. "Series 2005D Swap" means, collectively, (i) the ISDA Master Agreement dated August 9, 2005, the Schedule dated as of August 9, 2005, the Credit Support Annex dated August 9, 2005 and the confirmation dated August 9, 2005, as amended and restated on September 28, 2005, and (ii) the ISDA Master Agreement dated June 7, 2007, the Schedule dated June 7, 2007, the Credit Support Annex dated June 7, 2007 and the confirmation dated June 7, 2007, all between the Corporation and the Series 2005D Swap Provider. "Series 2005D Swap Provider" means Merrill Lynch Capital Services, Inc. "Series 2008 Hedge Note" means, collectively, (i) the promissory note designated "Franciscan Missionaries of Our Lady Health System, Inc. Series 2008 Hedge Note" dated October 4, 2005, executed and delivered to Goldman Sachs Capital Markets, L.P. by the Obligated Group Agent, on behalf of the Obligated Group Members, and (ii) the promissory note dated "Franciscan Missionaries of Our Lady Health System, Inc. Series 2008 Hedge Note No. 2" dated June 7, 2007, executed and delivered to Merrill Lynch Capital Services, Inc., by the Obligated Group Agent, on behalf of the Obligated Group Members. "Series 2008 Swap" means, collectively, (i) the ISDA Master Agreement dated August 4, 2005, the Schedule dated as of August 4, 2005, the Credit Support Annex dated August 4, 2005 and the confirmation dated August 9, 2005, all between the Corporation and Goldman Sachs Capital Markets, L.P. and (ii) the ISDA Master Agreement dated June 7, 2007, the Schedule dated June 7, 2007, the Credit Support Annex dated June 7, 2007, and the confirmation dated June 7, 2007, all between the Corporation and Merrill Lynch Capital Services, Inc. "Series 2008 Swap Provider" means, collectively, Goldman Sachs Capital Markets, L.P. and Merrill Lynch Capital Services, Inc. "Series 2008A Bonds" means the Authority's $47,185,000 Variable Rate Hospital Revenue Refunding Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2008A. C-40

231 "Series 2008A Note" means the promissory note designated "Franciscan Missionaries of Our Lady Health System, Inc. Series 2008A Note" dated August 7, 2008, in the principal amount of $47,185,000 executed and delivered to the Authority by the Obligated Group Agent, on behalf of the Obligated Group Members. "Series 2009A Bonds" means the Authority's $125,000,000 Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2009A. "Series 2009A Note" means the promissory note designated "Franciscan Missionaries of Our Lady Health System, Inc. Series 2009A Note" dated July 23, 2009, in the principal amount of $125,000,000 executed and delivered to the Authority by the Obligated Group Agent, on behalf of the Obligated Group Members. "Series 2012A Bonds" means the Authority's $56,530,000 Hospital Revenue Refunding Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2012A. "Series 2012A Note" means the promissory note designated "Franciscan Missionaries of Our Lady Health System, Inc. Series 2012A Note" dated October 3, 2012, in the principal amount of $56,530,000 executed and delivered to the Authority by the Obligated Group Agent, on behalf of the Obligated Group Members. "Series 2012B Bonds" means the Authority's $ Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2012B. "Series 2012B Note" means the promissory note designated "Franciscan Missionaries of Our Lady Health System, Inc. Series 2012B Note" dated November, 2012, in the principal amount of $ executed and delivered to the Authority by the Obligated Group Agent, on behalf of the Obligated Group Members. "Subordinated Secured Amounts" means, collectively, the following, each as certified by the respective Voting Representative: (a) with respect to the Series 2005 Hedge Note and the Series 2008 Hedge Note, any termination payments due thereunder, and (b) with respect to any Future Secured Obligations that are Hedging Transactions, any termination payments due thereunder. "Subordinated Secured Obligations" means, collectively, the obligations of the Assignors with respect to (a) any obligations to make any payments (including termination payments) other than scheduled payments under any Hedging Transaction which becomes a Future Secured Obligation under the Assignment; and (b) any obligation to reimburse any person providing credit enhancement with respect to any Future Secured Obligations under the instrument securing or evidencing the Assignor s obligations to reimburse such person for amounts due or to become due under or in respect of such credit enhancement. "Trust Indenture (Series 1998A)" means the Trust Indenture (Series 1998A) dated as of May 1, 1998, between the Authority and the Assignee, as Trustee, as it may be further amended or supplemented from time to time by supplemental indentures in accordance with the provisions thereof. "Trust Indenture (Series 1998B)" means the Trust Indenture (Series 1998B) dated as of May 1, 1998, as amended and restated by the Amended and Restated Trust Indenture (Series 1998B) dated as of August 1, 2008, as supplemented and amended by Supplement No. 1 to Amended and Restated Trust Indenture (Series 1998B) dated as of June 1, 2009, each between the Authority and the Trustee. "Trust Indenture (Series 1998C)" means the Trust Indenture (Series 1998C) dated as of May 1, 1998, between the Authority and the Assignee, as Trustee, as it may be further amended or supplemented from time to time by supplemental indentures in accordance with the provisions thereof. C-41

232 "Trust Indenture (Series 2005A)" means the Trust Indenture (Series 2005A) dated as of July 1, 2005, between the Authority and the Assignee, as Trustee, as it may be further amended or supplemented from time to time by supplemental indentures in accordance with the provisions thereof. "Trust Indenture (Series 2005B)" means the Trust Indenture (Series 2005B) dated as of July 1, 2005, as amended and restated by the Amended and Restated Trust Indenture (Series 2005B) dated as of May 1, 2008, each between the Authority and the Trustee. "Trust Indenture (Series 2005C)" means the Trust Indenture (Series 2005C) dated as of July 1, 2005, as amended and restated by the Amended and Restated Trust Indenture (Series 2005C) dated as of May 1, 2008, as supplemented and amended through Supplement No. 2 to Amended and Restated Trust Indenture (Series 2005C) dated as of June 1, 2009, each between the Authority and the Trustee. "Trust Indenture (Series 2005D)" means the Trust Indenture (Series 2005D) dated as of July 1, 2005, as amended and restated by the Amended and Restated Trust Indenture (Series 2005D) dated as of July 1, 2008, each between the Authority and the Trustee. "Trust Indenture (Series 2008A)" means the Trust Indenture dated as of August 1, 2008, by and between the Authority and Regions Bank, as it may be amended or supplemented from time to time by supplemental indentures in accordance with the provisions thereof. "Trust Indenture (Series 2009A)" means the Trust Indenture (Series 2009A) dated as of June 1, 2009, by and between the Authority and Trustee, as it may be amended or supplemented from time to time by supplemental indentures in accordance with the provisions thereof. "Trust Indenture (Series 2012A)" means the Trust Indenture (Series 2012A) dated as of October 1, 2012, by and between the Authority and Trustee, as it may be amended or supplemented from time to time by supplemental indentures in accordance with the provisions thereof. "Trust Indenture (Series 2012B)" means the Trust Indenture (Series 2012B) dated as of November 1, 2012, by and between the Authority and Trustee, as it may be amended or supplemented from time to time by supplemental indentures in accordance with the provisions thereof. "2008A Bank" means JPMorgan Chase Bank, N.A., as issuer of the 2008A Letter of Credit. "2008A Letter of Credit" means the Letter of Credit securing the Series 2008A Bonds, issued pursuant to the 2008A Reimbursement Agreement. "2008A Pledge Agreement" means the Pledge and Security Agreement dated as of August 1, 2008, by and among the Corporation, the 2008A Bank and Regions Bank, as trustee under the Trust Indenture (Series 2008A). "2008A Reimbursement Agreement" means the Reimbursement Agreement dated as of August 1, 2008, by and between the Corporation and the 2008A Bank. "UCC" means Chapter 9 of the Louisiana Commercial Laws (La. R.S. 10:9-101 et seq.), as amended. "Voting Representative" means: (a) the Related Bond Trustee for the Series 1998A Bonds, Series 1998B Bonds, Series 2005A Bonds, Series 2005B Bonds, Series 2005C Bonds, Series 2005D Bonds, Series 2008A Bonds, Series 2009A Bonds, Series 2012A Bonds and Series 2012B Bonds; (b) with respect to Future Secured Obligations not described in (c) below, the trustee for the holders of each respective Future Secured Obligation (or, if there is no trustee, the holder of such Future Secured Obligations); C-42

233 (c) with respect to the Series 1998A Bonds, the Series 1998B Bonds, the Series 2005A Bonds, the Series 2005B Bonds, the Series 2005C Bonds, the Series 2005D Bonds, the Series 2008A Bonds, the Series 2009A Bonds, the Series 2012A Bonds, the Series 2012B Bonds, the Series 2005D Swap, the Series 2008 Swap or any Future Secured Obligation which is secured by a credit enhancement facility or liquidity facility, the person or entity providing the credit enhancement or liquidity facility so long as such enhancement facility or liquidity facility is in effect and such person is not in default in its payment obligations thereunder; provided, however, that if the person providing the credit enhancement or liquidity facility shall be in default in its payment obligations thereunder, such person or entity shall nonetheless be the Voting Representative (i) with respect to any Series 1998A Bonds, the Series 1998B Bonds, the Series 2005A Bonds, the Series 2005B Bonds, the Series 2005C Bonds, the Series 2005D Bonds, the Series 2008A Bonds, the Series 2009A Bonds, the Series 2012A Bonds, the Series 2012B Bonds, the Series 2005D Swap, the Series 2008 Swap or Future Secured Obligation it owns or which are pledged to it and (ii) to the extent it has not been reimbursed for any amounts paid under the credit enhancement or liquidity facility on any Series 1998A Bonds, the Series 1998B Bonds, the Series 2005A Bonds, the Series 2005B Bonds, the Series 2005C Bonds, the Series 2005D Bonds, the Series 2008A Bonds, the Series 2009A Bonds, the Series 2012A Bonds, the Series 2012B Bonds, the Series 2005D Swap, the Series 2008 Swap or Future Secured Obligation, provided further that the person or entity providing the credit enhancement or liquidity facility may, in its sole discretion, designate the Assignee as the Voting Representative; (d) with respect to the Series 2005D Swap, the Series 2005D Swap Provider, and with respect to the Series 2008 Swap, the Series 2008 Swap Provider; and (e) Hedging Transaction. if such Future Secure Obligations constitute a Hedging Transaction, the provider of such General Pursuant to the Assignment, as security for the Secured Obligations and the Subordinated Secured Obligations, including the Series 1998A Bonds, the Series 1998B Bonds, the Series 1998C Bonds, the Series 2005A Bonds, the Series 2005B Bonds, the Series 2005C Bonds, the Series 2005D Bonds, the Series 2005D Swap, the Series 2008A Bonds, the Series 2008 Swap, the Series 2009A Bonds, the Series 2012A and the Series 2012B Bonds as provided in the Assignment, up to $5,000,000,000, the Assignors assign and grant a continuing security interest unto the Assignee in all of their presently existing and future Receipts to the extent allowed by the UCC and subject to any Permitted Encumbrances (as defined in the Master Trust Indenture). In addition to the foregoing, the Assignors shall be authorized from time to time to grant an Assignment ranking on a parity with the Assignment to secure its obligations with respect to any Future Secured Obligations which are permitted to be incurred by the Assignors pursuant the Assignment and secured thereby, and the Assignors and the Assignee shall cooperate in effecting such parity assignment with respect to Future Secured Obligations, by executing an appropriate supplement or amendment thereto to specify the Future Secured Obligation to be secured by the Assignment. Except for such parity assignment, the Assignors shall not grant to any other person or entity any security interest in any portion of the Collateral. Exercise of Rights Upon the Occurrence of an Event of Default (a) Unless an Event of Default has occurred, is continuing and has not been waived, the Assignors are granted the revocable license to receive payments of Receipts and to apply said payments according to their usual business practices, to the same extent as if the Security Agreement and the security interest granted therein were not in existence. (b) Upon the occurrence and continuance of an Event of Default which has not been waived, in addition to any rights and remedies now or hereafter granted under applicable law and not by way of limitation of any such rights and remedies, Assignee shall have all of the rights and remedies of a secured party under the UCC in addition to the rights and remedies provided in the Assignment. Upon the occurrence and continuance of an Event of Default, without in any way limiting the foregoing, upon the giving of notice to the Assignors of its intent to pursue any one or all of the following or any other remedies: The Assignee shall have the rights to the extent permitted by law, without further notice, to or assent by, the Assignors, in the name of the Assignors or in the name of the Assignee or otherwise: C-43

234 (i) part thereof; to ask for, demand, collect, receive, compound and give acquittance for the Collateral or any (ii) to extend the time of payment of, compromise or settle for cash, credit or otherwise, and upon any terms and conditions, any of the Collateral; (iii) to endorse the name of the Assignors on any checks, drafts or other orders or instruments for the payment of moneys payable to the Assignors which shall be issued in respect of any Collateral; (iv) to file any claims, commence, maintain or discontinue any actions, suits or other proceedings deemed by the Assignee necessary or advisable for the purpose of collecting or enforcing payment of any Collateral; (v) to make test verifications of the Collateral or any portion thereof; (vi) to notify any or all account debtors under any or all of the Collateral to make payment thereof directly to the Assignee for the account of the Assignee and to require the Assignors to forthwith give similar notice to the account debtors; (vii) to require the Assignors forthwith to account for and transmit to the Assignee in the same form as received all Collateral and, until so transmitted, to hold the same in trust for the Assignee and not commingle such proceeds with any other funds of the Assignors, and Assignors agree to transmit the same to Assignee to be deposited in a special account with Assignee in the name of, and under the sole control of, Assignee; (viii) to take possession of any or all of the Collateral and, for that purpose, to enter, with the aid and assistance of any person or persons and with legal process, any premises where the Collateral, or any part thereof, are, or may be, placed or assembled, and to remove any of such Collateral without a breach of the peace; (ix) to execute any instrument and do all other things necessary and proper to protect and preserve and realize upon the Collateral and the other rights contemplated by the Assignment; (x) upon notice to such effect, to require the Assignors to deliver, at the Assignors expense, any or all Collateral to the Assignee at a place designated by the Assignee and after delivery thereof the Assignors shall have no further claim to or interest in the Collateral; and (xi) without obligation to resort to other security, at any time and from time to time, to sell, re-sell, assign and deliver all or any of the Collateral, in one or more parcels at the same or different times, and all right, title and interest, claim and demand therein and right of redemption thereof, at public or private sale, for cash, upon credit or for future delivery, and at such price or prices and on such terms as the Assignee may determine. The procedures described in this clause (b) shall continue to be implemented so long as any Event of Default shall be continuing and shall not have been waived. After the occurrence of an Event of Default, if either (i) all of the Secured Obligations and Subordinated Secured Obligations have been paid, as provided below under "Application of Moneys," (ii) no Event of Default shall be continuing, (iii) all Events of Default under the Assignment shall have been waived, or (iv) the Security Agreement shall have terminated in accordance with the provisions thereof, then the Assignors shall be entitled thereafter to receive and retain payments of Receipts as provided in clause (a) above. Application of Moneys Upon the occurrence and continuance of an Event of Default which shall not have been waived, any amounts received by the Assignee pursuant to the provisions of the Security Agreement shall be applied in the following order: (a) to payment of all reasonable expenses, including attorneys' fees, incurred by the Assignee, and the representatives and agents of the Assignee, in collecting the Collateral and otherwise enforcing and performing the rights and obligations of the Assignee under the Assignment; C-44

235 (b) to the pro rata payment of Secured Obligations, on the basis of the Secured Amounts; (c) To the pro rata payment of Subordinated Secured Obligations, on the basis of the Subordinated Secured Amount; and (d) after payment in full of all Secured Obligations and Subordinated Secured Obligations, any remaining amounts shall be paid to the Assignors. Notwithstanding the foregoing, the Assignee shall apply any amounts received under the Assignment, after paying all amounts described in (a) above but before paying any amounts described in (b) above, to the payment of customary and ordinary operating and maintenance expenses of the Assignors, upon written consent of the Voting Representatives of at least 75% of the total outstanding principal amount of the Secured Obligations, and after the payment of all Secured Obligations, 75% of the total outstanding principal amount of the Subordinated Secured Obligations or the amount of any termination payment owed under a Hedging Transaction which is a Subordinate Secured Obligation. The principal amount of any Hedging Transaction shall be zero. Upon the occurrence and continuance of an Event of Default which has not been waived, the Assignee shall begin receiving deposits of Receipts into the special account established in the Assignment. As long as the Assignee is receiving such deposits, after paying the amounts described in (a) above and any ongoing customary and ordinary operating and maintenance expenses of the Assignors which may be paid pursuant to the preceding paragraph, the Assignee shall allocate the remaining funds, monthly, on the first Business Day of each month of each year, until the Event of Default described in (b) above under "Exercise of Rights Upon the Occurrence of an Event of Default" has been cured or all Secured Obligations and Subordinated Secured Obligations have been extinguished in full, by (i) ascertaining (based on information supplied by the Voting Representatives) the Secured Amount of each Secured Obligation and the Subordinated Secured Amount of the Secured Obligation as of such date, (ii) computing the pro rata share of each Secured Obligation and Subordinated Secured Obligation with respect to the amount of funds in the said special account, and (iii) transferring by wire transfer to the respective secured obligees of the Assignors the share of such amount due to each of them. Limitation on the Incurrence of Additional Debt by the Assignors It is the intent of the Security Agreement that certain obligations of the Assignors, defined therein as Future Secured Obligations, may be secured by the Assignment on a parity (or subordinated basis, as applicable) with the obligations of the Assignors with respect to the Series 1998A Bonds, the Series 1998B Bonds, the Series 1998C Bonds, the Series 2005A Bonds, the Series 2005B Bonds, the Series 2005C Bonds, the Series 2005D Bonds, the Series 2005D Swap, the Series 2008A Bonds, the Series 2008 Swap, the Series 2009A Bonds, the Series 2012A Bonds and the Series 2012B Bonds. Only obligations described in this paragraph and in the Master Trust Indenture may be secured by the Assignment on a parity with the foregoing. The Assignors shall not incur any additional indebtedness constituting a Future Secured Obligation unless it shall have first complied with the provisions of this paragraph. Prior to the incurrence by the Assignors of any additional indebtedness constituting a Future Secured Obligation, there shall be filed with the Assignee a certificate of an Authorized Corporation Representative (on which the Assignee may conclusively rely) to the effect that the indebtedness to be secured by the Assignment on a parity with the obligation of the Assignors with respect to the Series 1998A Bonds, the Series 1998B Bonds, the Series 1998C Bonds, the Series 2005A Bonds, the Series 2005B Bonds, the Series 2005C Bonds, the Series 2005D Bonds, the Series 2005D Swap, the Series 2008A Bonds, the Series 2008 Swap, the Series 2009A Bonds, the Series 2012A Bonds and the Series 2012B Bonds is indebtedness which is permitted under the Master Indenture or constitutes a Hedging Transaction permitted thereunder, the terms of which are incorporated in the Assignment by reference and shall have the same effect as if set forth in their entirety therein. Series 1998C Bonds. On the date of issuance of the Series 2008A Bonds, the Series 1998C Bonds were paid in full and are no longer deemed outstanding and therefore, all references to the Series 1998C Bonds, the Series 1998C Bond Insurer and the Series 1998C Insurance Policy in the Assignment and all other documents pertaining to the Series 1998C Bonds are null and void and are of no force and effect. Series 1998B Bonds and Series 2005C Bonds. Upon the execution and delivery of Amendment No. 6 to the Assignment, all references in the Assignment relating to the Series 1998B Bank Note and the 1998B Credit Agreement C-45

236 relating to the Series 1998B Bonds, and the Series 2005C Bank Note, the 2005C Reimbursement Agreement and the 2005C Pledge Agreement relating to the Series 2005C Bonds are of no force and effect. On the date of issuance of the Series 2012A Bonds, the Series 2005C Bonds were defeased and are no longer deemed outstanding and therefore, all references to the Series 2005C Bonds are null and void and are of no force and effect. C-46

237 APPENDIX D PROPOSED FORM OF OPINION OF BOND COUNSEL

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239 November, 2012 Louisiana Public Facilities Authority Baton Rouge, Louisiana $ LOUISIANA PUBLIC FACILITIES AUTHORITY HOSPITAL REVENUE BONDS (FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM PROJECT) SERIES 2012B We have acted as bond counsel to the Louisiana Public Facilities Authority (the "Authority"), a public trust and public corporation of the State of Louisiana (the "State"), organized and existing under and pursuant to the Indenture of Trust executed August 21, 1974 creating the Authority and the provisions of the Louisiana Public Trust Act, being Chapter 2-A of Title 9 of the Louisiana Revised Statutes of 1950, as amended (the "Act"), and other applicable law, in connection with the authorization and issuance by the Authority of the captioned bonds (the "Bonds"). The Bonds have been issued by the Authority pursuant to the provisions of the Act, and other constitutional and statutory authority, and a Trust Indenture (Series 2012B) dated as of November 1, 2012 (the "Indenture"), between the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"). Capitalized terms used herein which are not otherwise defined have the meanings given them in the Indenture. The Bonds are issuable as fully registered bonds, bear interest from the date thereof until paid at the rates per annum, mature in the principal amounts and on the dates, and are subject to redemption all as set forth in the Indenture and in the Bonds. The Bonds are issued under and are secured as to principal, redemption premium, if any, and interest by the Indenture which provides a description of the nature and extent of the security for the Bonds, the rights, duties and obligations of the Authority, the rights, duties and immunities of the Trustee and the rights of the owners of the Bonds. The Bonds are issued for the purpose of providing funds to Franciscan Missionaries of Our Lady Health System, Inc., a Louisiana nonprofit corporation (the "Corporation"), for the purpose of financing and reimbursing (i) the costs of acquiring, constructing and equipping a patient tower and other capital improvements at the campus of Our Lady of the Lake Regional Medical Center and capital improvements at St. Francis Medical Center, Our Lady of Lourdes Regional Medical Center and St. Elizabeth Hospital (the "Project") and (ii) paying costs of issuance of the Bonds. D-1

240 Louisiana Public Facilities Authority Page 2 November, 2012 The Authority and the Corporation have entered into a Loan Agreement (Series 2012B) dated as of November 1, 2012 (the "Loan Agreement"), pursuant to which the Authority will loan the proceeds from the sale of the Bonds to the Corporation for the foregoing purposes. Pursuant to the Loan Agreement and the Master Trust Indenture dated as of May 1, 1998, as amended and supplemented to the date hereof, to and including Supplemental Master Trust Indenture No. 14 dated as of November 1, 2012, each between the Master Trustee and the Corporation, on behalf of itself and the other Obligated Group Members, the Corporation will deliver the Master Indenture Note (Franciscan Missionaries of Our Lady Health System Project) Series 2012B (the "Note") to evidence their obligations to make loan repayments sufficient to pay the principal of, premium, if any, and interest on the Bonds. The rights of the Authority under the Loan Agreement (except for the rights of the Authority relating to exculpation, indemnification and payment of expenses) and the Note have been pledged and assigned by the Authority to the Trustee as security for the Bonds. The Bonds are also entitled to the benefits of an Assignment of Receipts and Security Agreement dated as of July 1, 2005, as amended and supplemented through and including Amendment No. 9 to the Assignment of Receipts and Security Agreement dated as of November 1, 2012 (collectively, the "Assignment"), pursuant to which the Obligated Group under the above-referenced Master Trust Indenture has granted a security interest in all of the presently existing and anticipated future Receipts of the Obligated Group (as therein defined), together with all proceeds derived therefrom, to The Bank of New York Mellon Trust Company, N.A., as assignee, for the benefit of the owners of the Bonds, among others, and the owners of certain obligations that may have been incurred and that may be incurred in the future. We have examined (i) the Constitution and statutes of the State, including the Act; (ii) a certified transcript of the proceedings of the Authority authorizing the issuance of the Bonds; (iii) the Indenture, the Loan Agreement, the Assignment and the Tax Regulatory Agreement dated as of November 1, 2012, among the Authority, the Corporation and the Trustee (the "Tax Regulatory Agreement"); and (iv) such other documents, instruments, proofs and matters of law as we have deemed relevant to the issuance of the Bonds and necessary for the purpose of this opinion. As to questions of fact material to our opinion, we have relied upon representations of the Authority and the Corporation contained in the Loan Agreement, the certified proceedings and other certifications of public officials and others furnished to us, including certifications furnished to us by or on behalf of the Corporation, without undertaking to verify the same by independent investigation. On the basis of the foregoing examinations, we are of the opinion, as of the date hereof and under existing law, that: 1. The Authority is a public trust and public corporation duly organized and existing under the Constitution and statutes of the State. 2. The Bonds are valid and binding special and limited obligations of the Authority secured by and entitled to the benefits of the Indenture and are payable solely from the Trust Estate, which includes payments from the Corporation pursuant to the Loan Agreement, and certain funds held by the Trustee under the Indenture. 3. The Loan Agreement and the Indenture have been duly authorized, executed and delivered by the Authority and constitute valid and binding agreements of the Authority, and all interest of the Authority under the Loan Agreement has been validly assigned, except with respect to certain rights of the D-2

241 Louisiana Public Facilities Authority Page 3 November, 2012 Authority relating to exculpation, indemnification and payment of expenses, to the Trustee under the Indenture. 4. The Bonds do not constitute or create an obligation, general or special, debt, liability or moral obligation of the State, or any political subdivision thereof, and neither the faith and credit nor the taxing power of the State, or any political subdivision thereof, is pledged to the payment of the principal of, premium, if any, or interest on the Bonds. 5. Interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, for the purpose of computing the federal alternative minimum tax imposed on certain corporations, such interest is taken into account in determining adjusted current earnings. 6. Pursuant to the Act, the Bonds and the income thereof are exempt from all taxation in the State of Louisiana. In rendering the opinion expressed in paragraph 5 above, we have relied on representations of the Authority and the Corporation with respect to matters solely within the knowledge of the Authority and the Corporation which we have not independently verified, and have assumed continuing compliance with the covenants in the Indenture, the Loan Agreement and the Tax Regulatory Agreement pertaining to those sections of the Internal Revenue Code of 1986, as amended, which affect the exclusion from gross income of interest on the Bonds for federal income tax purposes. In the event that such representations are determined to be inaccurate or incomplete or the Authority or the Corporation fails to comply with the foregoing covenants, interest on the Bonds could be includable in gross income for federal income tax purposes from the date of their original delivery, regardless of the date on which the event causing such inclusion occurs. It is to be understood that the rights of the owners of the Bonds and the enforceability of the Bonds, the Indenture, the Loan Agreement and the other documents enumerated above may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted to the extent constitutionally applicable, and that the enforcement may also be subject to the exercise of the sovereign police powers of the State or its governmental bodies and the exercise of judicial discretion in appropriate cases. In rendering this opinion, we have relied upon the opinion, of even date herewith, of Breazeale, Sachse & Wilson, L.L.P., Baton Rouge, Louisiana, counsel to the Obligated Group Members, with respect to (i) the due organization and good standing of the Obligated Group Members as nonprofit corporations duly organized and existing under the laws of the State and the status of Obligated Group Members as organizations described in Section 501(c)(3) of the Code, (ii) the corporate power of the Obligated Group Members to enter into and the due authorization, execution and delivery by the Obligated Group Members of the documents described above to which they are a party and that the same constitute legal, valid and binding obligations of the Obligated Group Members enforceable in accordance with their terms, and (iii) matters which might be disclosed as a result of an examination of the indentures, mortgages, deeds of trust and other agreements or instruments to which the Obligated Group Members are a party or by which they or their properties are bound. We are not passing upon title to or the description of the Obligated Group Members' facilities or the nature or extent of any liens thereon. We have also relied on the opinion of Gregory A. Pletsch & Associates, counsel to the Trustee, with respect to the corporate power of the Trustee to enter into and the due D-3

242 Louisiana Public Facilities Authority Page 4 November, 2012 authorization, execution and delivery by the Trustee of the documents described above to which it is a party and the binding effect thereof on the Trustee. We express no opinion herein as to the accuracy, adequacy or completeness of the Official Statement relating to the Bonds. For the purposes of this opinion, our services as bond counsel have not extended beyond the examinations and expressions of the conclusions referred to above. Except as stated above, no opinion is expressed as to any federal, state or local tax consequences resulting from the ownership of, receipt of interest on, or disposition of the Bonds. Respectfully submitted, D-4

243 APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT OF THE OBLIGATED GROUP

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245 APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT OF THE OBLIGATED GROUP $ LOUISIANA PUBLIC FACILITIES AUTHORITY HOSPITAL REVENUE BONDS (FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM PROJECT) SERIES 2012B CONTINUING DISCLOSURE AGREEMENT This Continuing Disclosure Agreement (the Disclosure Agreement ) is executed and delivered by FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC., a nonprofit organization organized and existing under the laws of the State of Louisiana, as Obligated Group Agent (the Obligated Group Agent ), on behalf of itself, Our Lady of the Lake Hospital, Inc. ( Lake ), St. Francis Medical Center, Inc. ( St. Francis ), Our Lady of Lourdes Regional Medical Center, Inc. ( Lourdes ) and Our Lady of the Lake Ascension Community Hospital, Inc. ( St. Elizabeth and, together with the Obligated Group Agent, Lake, St. Francis and Lourdes, the Obligated Group Members ) and THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., a national banking association (in its capacity herein, together with any successors in such capacity, called the Trustee ). W I T N E S S E T H : WHEREAS, the Louisiana Public Facilities Authority (the Authority ) is a public trust established for public purposes for the benefit of the State of Louisiana by a certain Indenture of Trust dated August 21, 1974 (the Indenture of Trust ) under and pursuant to the provisions of the Louisiana Public Trust Act (La. R.S. 9: , as amended) (the Act ); and WHEREAS, the Authority proposes to issue its $ of Hospital Revenue Bonds (Franciscan Missionaries of Our Lady of Health System Project) Series 2012B (the Bonds ), for the purpose of (i) financing or reimbursing a portion of the cost of acquiring, constructing and equipping a patient tower and other capital improvements at the campus of Our Lady of the Lake Regional Medical Center located in Baton Rouge, Louisiana (the Project ) and (ii) paying the costs of issuance of the Bonds, pursuant to a Trust Indenture (Series 2012B) (the Indenture ) by and between the Authority and the Trustee, to be dated as of November 1, 2012; and WHEREAS, concurrently with the issuance of the Bonds, the Authority and the Obligated Group Agent will enter into a Loan Agreement (Series 2012B) to be dated as of November 1, 2012 (the Loan Agreement ), pursuant to which the Authority will lend the proceeds of the Bonds to the Obligated Group Agent for the purpose described above, and the Authority's rights, duties and obligations under the Loan Agreement (except for certain rights of reimbursement of expenses, indemnification and exculpation, and rights to notices) are assigned by the Authority under the Indenture to the Trustee for the benefit and security of the present and future owners of the Bonds and any Additional Bonds hereafter issued under the Indenture; and WHEREAS, pursuant to the Contract of Purchase for the Bonds by and among the Authority, the Obligated Group Agent and the Participating Underwriter (as herein defined), and Section 2.3 of the Loan Agreement, the Obligated Group Agent and the Trustee covenant and agree as follows: E-1

246 SECTION 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the Obligated Group Agent and the Trustee for the benefit of the Holders of the Bonds and in order to assist the Participating Underwriter in complying with the Rule (as hereinafter defined). The Obligated Group Agent and the Trustee acknowledge that the Authority has undertaken no responsibility with respect to any reports, notices or disclosures provided or required under this Disclosure Agreement or the Rule, is not required under the Rule to undertake any such responsibility, and has no liability to any person, including any holder of the Bonds, with respect to any such reports, notices or disclosures. SECTION 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: Annual Report shall mean any Annual Report provided by the Obligated Group Agent pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement. "EMMA" means the MSRB's Electronic Municipal Market Access system, accessible at or such other information depository as may be designated by the Securities and Exchange Commission to receive final official statements, material event notices and annual financial information under the Rule. Holder shall mean any person who has or shares investment power with respect to the Bonds, but shall not include persons who have rights to acquire Bonds in the future. "MSRB" shall mean the Municipal Securities Rulemaking Board. As of the date of this Disclosure Agreement, the address and telephone number of the MSRB is as follows: 1900 Duke Street, Ste. 600 Alexandria, VA Tel: (703) Listed Events shall mean any of the events listed in Section 5(a) of this Disclosure Agreement Act shall mean the Securities Exchange Act of 1934, as the same may be amended from time to time. Official Statement shall mean the Official Statement with respect to the Bonds and the Authority dated the date of the sale of the Bonds. Participating Underwriter shall mean any of the original underwriters of the Bonds required to comply with the Rule in connection with an offering of the Bonds. Quarterly Financial Information shall mean (i) financial information, which shall be based on the Obligated Group Agent's quarterly unaudited consolidated financial statements (including a balance sheet, income statement and cash flow statement) and quarterly unaudited consolidating statement of revenues and expenses and balance sheet, (ii) Financial and Operating Information, (iii) Selected Historical Operating Statistics and (iv) Selected Historical Financial Statistics. Rule shall mean Rule 15c2-12 adopted by the Securities Exchange Commission under the 1934 Act, as the same may be amended from time to time. E-2

247 Tax-exempt shall mean that interest on the Bonds is excluded from gross income for United States federal income tax purposes, whether or not such interest is includable as an item of tax preference or otherwise includable directly or indirectly for purposes of calculating any other tax liability, including any alternative minimum tax or environmental tax. SECTION 3. Provision of Annual Reports. (a) The Obligated Group Agent shall, in each year no later than 180 days from the end of each of the Obligated Group Agent's Fiscal Years ending after issuance of the Bonds, provide to the MSRB, through EMMA, an Annual Report which is consistent with the requirements set forth below. The first report shall be due on or before December 30, The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as set forth below; provided that the audited financial statements of the Obligated Group Agent may be submitted separately from the balance of the Annual Report. The last date on which the Annual Report is due may be changed if the Obligated Group Agent changes its Fiscal Year and the Obligated Group Agent provides written notice of the change of Fiscal Year and the new last date on which successive Annual Reports will be provided to the MSRB, through EMMA, provided that a change in the date on which the Annual Report is due shall be no later than 180 days after the end of the new Fiscal Year, and provided further that the period between the final date the Annual Report was due for the preceding Fiscal Year and the new date on which the Annual Report is due for the new Fiscal Year shall not exceed one year in duration. (b) If the Obligated Group Agent is unable to provide to the MSRB, through EMMA, an Annual Report by the date required in (a) above, the Obligated Group Agent shall send a Notice of Failure to File Annual Report to the MSRB, through EMMA, in substantially the form attached as Exhibit A. SECTION 4. Content of Annual Reports. The Obligated Group Agent's Annual Report shall contain or incorporate by reference the following: (a) Audited financial statements of the Obligated Group Agent for the preceding Fiscal Year. If the Obligated Group Agent's audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) Basis of accounting used by the Obligated Group Agent in reporting their financial statements. The Obligated Group Agent follows generally accepted accounting principles ( GAAP ). In the event of any material change in such requirements the impact of such changes will be described in the Annual Report of the year such change occurs. (c) Updates of all tables included in Appendix A in the Official Statement (in substantially the same format originally presented in the Official Statement to the extent reasonably possible) under the following captions: Our Lady of the Lake Regional Medical Center, Inc.: Selected Operating Statistics (except the last three categories) Sources of Patient Revenues E-3

248 St. Francis Medical Center, Inc. Selected Operating Statistics (except the last three categories) Sources of Patient Revenues Our Lady of Lourdes Regional Medical Center, Inc.: Selected Operating Statistics (except the last three categories) Sources of Patient Revenues Our Lady of the Lake Ascension Community Hospital, Inc.: Selected Operating Statistics (except the last three categories) Sources of Patient Revenues With respect to the System: FINANCIAL AND OPERATING INFORMATION Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Changes in Net Assets and Operating Statistics Sources of Gross Patient Revenues of the System Pro-Forma Debt-to-Capitalization, Pro Forma Debt Service Coverage and Days Cash on Hand of the System Management's Discussion and Analysis of Recent Financial Performance Any or all of the items listed above may be incorporated by reference from other documents, including official statements of debt issues of the Obligated Group Agent or related public entities, which have been submitted to the MSRB, through EMMA. If the document incorporated by reference is deemed a final official statement, it shall be available from the MSRB. The Obligated Group Agent shall clearly identify each such other document so incorporated by reference. SECTION 5. Provision of Quarterly Financial Information. (a) The Obligated Group Agent shall, while any Bonds are Outstanding, provide the Quarterly Financial Information which is consistent with the requirements set forth below to the MSRB, through EMMA, on or before November 30, February 28, May 31 and August 31 of each year (each a "Quarterly Submission Date"), commencing November 30, The Obligated Group Agent shall, within 5 business days after the Quarterly Submission Date, provide the Quarterly Financial Information directly to the holders of one million dollars or more in principal amount of the Bonds requesting such information in writing. The Obligated Group Agent may amend the Quarterly Submission Dates to reflect a change in Fiscal Year. (b) If the Obligated Group Agent is unable to provide to the MSRB, through EMMA, the Quarterly Financial Information (including, without limitation, the required operating data) by the date(s) required in (a) above, the Obligated Group Agent shall send a notice to the MSRB, through EMMA, in substantially the form attached hereto as Exhibit B. E-4

249 SECTION 6. Content of Quarterly Financial Information. The Obligated Group Agent's Quarterly Financial Information shall contain or incorporate by reference the information described in the definition of "Quarterly Financial Information" contained in Section 1 hereof, as well as the accounting principles pursuant to which the unaudited consolidated financial statements were prepared. The Obligated Group Agent reserves the right to modify from time to time the specific types of information provided or the format of the presentation of such information, to the extent necessary or appropriate in the judgment of the Obligated Group Agent; provided that the Obligated Group Agent agrees that any such modification will be done in a manner consistent with the Rule as provided in Section 10 hereof. It shall be sufficient if the Obligated Group Agent provides to the MSRB, through EMMA, the Quarterly Financial Information by specific reference to documents previously provided to the MSRB or filed with the Securities and Exchange Commission and, if such document is a final official statement, available from the MSRB. The Obligated Group Agent shall clearly identify each such other document so incorporated by reference. SECTION 7. Reporting of Listed Events. (a) The Obligated Group Agent shall provide (i) to the MSRB, through EMMA, (ii) to the Authority, and (iii) to the Trustee, notice of the occurrence of any of the following events with respect to the Bonds not later than ten (10) business days of the occurrence of such event: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv) Principal and interest payment delinquencies; Nonpayment related defaults, if material; Unscheduled draws on debt service reserves, if any, reflecting financial difficulties; Unscheduled draws on credit enhancements, if any, reflecting financial difficulties; Substitution of credit or liquidity providers, if any, or their failure to perform; Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, notices of Proposed Issue (IRS Form 5701-TEB), or other material notices or determinations with respect to the tax exempt status of the Bonds or other material events affecting the tax exempt status of the Bonds; Modifications to rights of holders of the Bonds, if material; Bond calls, if material; Defeasances; Release, substitution, or sale of property, if any, securing repayment of the Bonds, if material; Rating changes; Tender offers; Bankruptcy, insolvency, receivership or similar event of the obligated person; Consummation of merger, consolidation or acquisition involving an obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or termination of a definitive agreement related to any such actions, other than pursuant to its terms, if material; or Appointment of successor or additional trustee, or the change of the name of a trustee, if material. (b) The Obligated Group Agent may from time to time choose to provide notice of the occurrence of certain other events, in addition to Listed Events, if, in the judgment of the Obligated Group Agent, such other event is material with respect to the Bonds, but the Obligated Group Agent does not undertake to commit to provide any such notice of the occurrence of any material event except those listed above. E-5

250 (c) Whenever the Obligated Group Agent obtains knowledge of the occurrence of a Listed Event, the Obligated Group Agent shall as soon as possible determine if such event would constitute material information for owners of Bonds, provided, that any event under (i), (iii), (iv), (v), (vi), (viii), (ix), (xi), (xii) or (xiii) will always be deemed to be material. (d) Notwithstanding the foregoing, notice of Listed Events described above in (viii) and (ix) need not be given under this paragraph (c) any earlier than the notice (if any) of the underlying event is given to owners of affected Bonds pursuant to the Indenture. SECTION 8. Management Discussion of Items Disclosed. If an item required to be disclosed as part of the Annual Report or the Listed Events would be misleading without discussion, the Obligated Group Agent shall additionally provide a statement clarifying the disclosure in order that the statement made will not be misleading in light of the circumstances in which it is made. SECTION 9. Termination of Reporting Obligation. The obligations of the Obligated Group Agent under this Disclosure Agreement shall terminate if the Obligated Group Agent is no longer an obligated person within the meaning of the Rule, including upon the legal defeasance, prior redemption or payment in full of all of the Bonds. The Obligated Group Agent may not assign or transfer its obligations under the Loan Agreement to any other person, corporation or entity, unless such person, corporation or entity assumes in writing the Obligated Group Agent's obligations and responsibilities for compliance with this Disclosure Agreement as an obligated person withing the meaning of the Rule in the same manner as if it were the Obligated Group Agent, and only thereafter shall the Obligated Group Agent have no further responsibility hereunder. SECTION 10. Amendment; Waiver. Notwithstanding any other provision hereof, the Obligated Group Agent and the Trustee may amend this Disclosure Agreement, and any provision hereof may be waived, if: (a) The amendment or waiver is made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of the Obligated Group Agent, or type of business conducted; (b) This Disclosure Agreement, as amended, or the provision, as waived, would have complied with the requirements of the Rule at the time of the primary offering, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) The amendment or waiver does not materially impair the interests of the beneficial owners of the Bonds, as determined either by an opinion of a nationally recognized bond counsel or by approving vote of the holders of the Bonds pursuant to the terms of the Indenture at the time of the amendment. In the event of any such amendment or waiver of a provision of this Disclosure Agreement, the Obligated Group Agent shall describe such amendment in the next Annual Report relating to the Obligated Group Agent and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by or in respect of the Obligated Group Agent. SECTION 11. Additional Information; Additional Recipients. (a) Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the Obligated Group Agent from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other E-6

251 means of communication, or including any other information in any Annual Report, Quarterly Financial Information or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the Obligated Group Agent chooses to include any information in any Annual Report, Quarterly Financial Information or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the Obligated Group Agent shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report, Quarterly Financial Information or notice of occurrence of a Listed Event. (b) Additional Recipients. The Obligated Group Agent shall, while any of the Bonds are Outstanding, also provide the information required by Sections 3, 4, 5, 6 and 7 directly to the Holders of $1,000,000 or more in aggregate principal amount of the Bonds who have provided a written request and certification (certifying that such Holder owns no less than $1,000,000 in principal amount of Bonds and the series of Bonds said Holder owns). Said report shall provide the Obligated Group Agent the applicable address for the delivery of such information. SECTION 12. Default. In the event of a failure by the Obligated Group Agent or the Trustee to comply with any provision of this Disclosure Agreement, the Trustee may (and, at the request of the holders of at least a majority in aggregate principal amount of outstanding Bonds, shall), upon being provided indemnity satisfactory to the Trustee, and any Holder may take such actions as may be necessary and appropriate, including mandate or specific performance by court order, to cause the Obligated Group Agent to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Indenture or the Loan Agreement, and the sole remedy under this Disclosure Agreement in the event of any failure of the Obligated Group Agent or the Trustee to comply with this Disclosure Agreement shall be an action to compel performance. SECTION 13. Duties, Immunities and Liabilities of the Trustee. The section of the Indenture entitled Duties of the Trustee is hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Indenture. SECTION 14. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the Authority, the Obligated Group Agent, the Trustee, the Participating Underwriter and Holders from time to time of the Bonds, and shall create no rights in any other person or entity. SECTION 15. Recordkeeping. The Obligated Group Agent shall maintain records of all Annual Financial Information Disclosure and Material Events Disclosure including the content of such disclosure, the names of the entities with whom such disclosure was filed and the date of filing such disclosure. SECTION 16. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. SECTION 17. Governing Law. This Disclosure Agreement shall be governed by the laws of the State of Louisiana. E-7

252 [Signature Page to Continuing Disclosure Agreement] IN FAITH WHEREOF, the undersigned have executed this Continuing Disclosure Agreement on this, the day of November, FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC., on behalf of itself and the other Members of the Obligated Group By: Title: Senior Vice President and Chief Financial Officer THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A. By: Title: Vice President E-8

253 NOTICE OF FAILURE TO FILE ANNUAL REPORT EXHIBIT A to Continuing Disclosure Agreement Name of Obligated Person: Name of Bond Issue: Franciscan Missionaries of Our Lady Health System, Inc. $ Louisiana Public Facilities Authority Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2012B Issue Date: November, 2012 NOTICE IS HEREBY GIVEN that Franciscan Missionaries of Our Lady Health System, Inc., a nonprofit corporation organized and existing under the laws of the State of Louisiana (the Obligated Group Agent ), has not provided an Annual Report as required by the Trust Indenture (Series 2012B) dated as of November 1, 2012, and between the Louisiana Public Facilities Authority and The Bank of New York Mellon Trust Company, N.A., as trustee. The Obligated Group Agent anticipates that its Annual Report will be filed by. Date: FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. By: Title: E-9

254 EXHIBIT B to Continuing Disclosure Agreement NOTICE OF FAILURE TO FILE QUARTERLY FINANCIAL INFORMATION Name of Obligated Person: Name of Bond Issue: Franciscan Missionaries of Our Lady Health System, Inc. $ Louisiana Public Facilities Authority Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2012B Issue Date: November, 2012 NOTICE IS HEREBY GIVEN that Franciscan Missionaries of Our Lady Health System, Inc., a nonprofit corporation organized and existing under the laws of the State of Louisiana (the Obligated Group Agent ), has not provided its Quarterly Financial Information as required by the Trust Indenture (Series 2012B) dated as of November 1, 2012, and between the Louisiana Public Facilities Authority and The Bank of New York Mellon Trust Company, N.A., as trustee. The Obligated Group Agent anticipates that its Quarterly Financial Information will be filed by. Date: FRANCISCAN MISSIONARIES OF OUR LADY HEALTH SYSTEM, INC. By: Title: E-10

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256 LOUISIANA PUBLIC FACILITIES AUTHORITY Hospital Revenue Bonds (Franciscan Missionaries of Our Lady Health System Project) Series 2012B