$165,490,000. (Daytona Beach, Florida) Hospital Revenue Refunding and Improvement Bonds, Series 2016

Transcription

1 NEW ISSUE full book ENTRY Rating: See RatingS herein In the opinion of Bond Counsel, assuming compliance by the District and the Obligated Group with certain covenants, under existing statutes, regulations, and judicial decisions, the interest on the Series 2016 Bonds will be excluded from gross income for federal income tax purposes of the holders thereof and will not be an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations. However, interest on the Series 2016 Bonds shall be taken into account in determining adjusted current earnings for purposes of computing the alternative minimum tax on corporations. See TAX MATTERS herein for a description of other tax consequences to the Holders of the Series 2016 Bonds. $165,490,000 HALIFAX HOSPITAL MEDICAL CENTER (Daytona Beach, Florida) Hospital Revenue Refunding and Improvement Bonds, Series 2016 Dated: Date of Delivery Due: June 1, as shown on the inside cover The Halifax Hospital Medical Center (the District ) will issue its Hospital Revenue Refunding and Improvement Bonds, Series 2016 (the Series 2016 Bonds ) in denominations of $5,000 or any integral multiples thereof. Interest on the Series 2016 Bonds will be payable on June 1 and December 1 of each year, commencing on June 1, The Series 2016 Bonds, when initially issued, will be registered to Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ) which will be the sole Holder of the Series 2016 Bonds and will act as securities depository for the Series 2016 Bonds. Purchases of beneficial interests in the Series 2016 Bonds will be in book-entry only. Purchasers of beneficial interests in the Series 2016 Bonds will not receive certificates representing their beneficial ownership interest in the Series 2016 Bonds. So long as DTC or its nominee is the registered owner of the Series 2016 Bonds, payments of the principal of, premium, if any, and interest on such Series 2016 Bonds will be made directly to DTC, and such payments will in turn be disbursed to the beneficial owners through their nominees. Transfers of ownership interests in the Series 2016 Bonds are to be accomplished by entries made on the books of the Direct and Indirect Participants, as such terms are defined herein. See DESCRIPTION OF THE SERIES 2016 BONDS -- Book-Entry Only System herein. The Series 2016 Bonds will be issued by the District pursuant to a Trust Indenture dated as of March 1, 2016 (the Bond Indenture ) between the District and Wells Fargo Bank, National Association, Jacksonville, Florida, as the Trustee thereunder (the Bond Trustee ). The net proceeds of the Series 2016 Bonds will be loaned by the District to the Obligated Group, pursuant to a Financing Agreement dated as of March 1, 2016 between the District and the Obligated Group, and together with other legally available funds, will be used to (i) refund all of the outstanding Hospital Revenue Refunding and Improvement Bonds, Series 2006A, all of the outstanding Hospital Revenue Bonds, Series 2006B-1 and all of the outstanding Hospital Revenue Bonds, Series 2006B-2, (ii) finance a portion of the 2016 Project (as herein defined), and (iii) pay certain costs and expenses related to the issuance of the Series 2016 Bonds. See PLAN OF FINANCE herein. To secure and provide for the payment of the Series 2016 Bonds, the Obligated Group will issue Obligation No. 10 (as herein defined) under and pursuant to the Master Trust Indenture dated as of June 1, 2006, (the Master Indenture ) between the Obligated Group and Wells Fargo Bank, National Association, Jacksonville, Florida, as the Trustee thereunder (the Master Trustee ), as supplemented and amended from time to time, including as particularly supplemented by the Eighth Supplemental Indenture for Obligation No. 10 and First Amendment to Master Indenture dated as of March 1, 2016 (the 2016 Supplement ). The District and H.H. Holdings, Inc., a Florida not-for-profit corporation, are presently the only Members of the Obligated Group under the Master Indenture. All Obligations issued pursuant to the Master Indenture, including the 2016 Obligation, are secured equally and ratably without preference or priority as to lien or source of payment of any one Obligation over any other Obligation, by a lien on and security interest in all Net Revenues of the Obligated Group, the funds and accounts created under the Master Indenture and all other property or collateral held by or pledged to the Master Trustee thereunder, and all proceeds and products of the foregoing (collectively, the Pledged Funds ). As to the District and any other Members of the Obligated Group with ad valorem taxing powers, all Obligations are limited obligations payable solely from and secured by such Pledged Funds. As to all other Members, including H.H. Holdings, all Obligations are general obligations secured by such Pledged Funds. NEITHER THE SERIES 2016 BONDS NOR THE 2016 Obligation WILL BE DEEMED TO CONSTITUTE A GENERAL DEBT, LIABILITY OR OBLIGATION OF THE DISTRICT, OR A DEBT, LIABILITY OR OBLIGATION OF VOLUSIA COUNTY, FLORIDA, THE STATE OF FLORIDA, OR ANY POLITICAL SUBDIVISION THEREOF, OR A PLEDGE OF THE FAITH AND CREDIT OR TAXING POWER OF THE DISTRICT, VOLUSIA COUNTY, FLORIDA, THE STATE OF FLORIDA OR ANY POLITICAL SUBDIVISION THEREOF. THE DISTRICT WILL NOT BE OBLIGATED TO PAY THE SERIES 2016 BONDS, ANY INTEREST THEREON, OR ANY OTHER OBLIGATIONS WITH RESPECT THERETO EXCEPT FROM PAYMENTS PURSUANT TO THE 2016 Obligation AND AMOUNTS HELD BY THE MASTER TRUSTEE AND THE BOND TRUSTEE IN THE FUNDS PLEDGED UNDER THE MASTER INDENTURE AND THE BOND INDENTURE, RESPECTIVELY, THEREFOR IN THE MANNER PROVIDED THEREIN. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE DISTRICT, VOLUSIA COUNTY, FLORIDA, THE STATE OF FLORIDA, NOR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR INTEREST ON THE SERIES 2016 BONDS, THE 2016 Obligation OR ANY OTHER OBLIGATIONS OF THE DISTRICT WITH RESPECT THERETO. NEITHER THE DISTRICT, NOR VOLUSIA COUNTY, FLORIDA, NOR THE STATE OF FLORIDA, NOR ANY POLITICAL SUBDIVISION THEREOF WILL BE DIRECTLY, INDIRECTLY OR CONTINGENTLY OBLIGATED TO LEVY ANY FORM OF TAXATION WHATSOEVER FOR THE PAYMENT OF THE DISTRICT S OBLIGATIONS UNDER THE MASTER INDENTURE OR THE BOND INDENTURE, INCLUDING, WITHOUT LIMITATION, THE SERIES 2016 BONDS AND THE 2016 Obligation OR ANY OTHER OBLIGATIONS OF THE DISTRICT. The Series 2016 Bonds are subject to redemption and purchase in lieu of redemption prior to maturity as more fully described herein. By purchasing the Series 2016 Bonds, the holders of the Series 2016 Bonds will be deemed to consent to, and direct the Bond Trustee to consent to, amendments to the Master Indenture contained in the 2016 Supplement that are intended to (i) clarify the treatment of puts and tenders under the Master Indenture and (ii) modify the test for the incurrence of additional debt, as more fully described herein. This cover page contains certain information for quick reference only. It is not, and is not intended to be, a summary of the issue. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. The Series 2016 Bonds are offered when, as and if issued by the District and accepted by the Underwriter subject to prior sale, withdrawal or modification of the offer without notice, and to approval of the legality of the Series 2016 Bonds by Bryant Miller Olive P.A., Orlando, Florida, Bond Counsel. Certain legal matters will be passed upon for the District by its Senior Vice President and General Counsel, Vivian M. Gallo, Esquire. Certain legal matters will be passed on for the Underwriter by Squire Patton Boggs (US) LLP, Tampa, Florida. Kaufman, Hall & Associates, LLC, Skokie, Illinois, is serving as Financial Advisor to the Obligated Group. It is expected that the Series 2016 Bonds, in definitive form, will be available for delivery in New York, New York through the facilities of DTC, on or about March 29, J.P. Morgan Dated: March 15, 2016

2 $165,490,000 HALIFAX HOSPITAL MEDICAL CENTER Hospital Revenue Refunding and Improvement Bonds, Series 2016 Principal Amounts, Maturities, Interest Rates, Prices, Yields and Initial CUSIP Numbers $48,430,000 Serial Bonds Maturity (June 1) Principal Amount Interest Rate Price Yield Initial CUSIP Numbers** 2017 $1,595, % % KR ,590, KS ,170, KT ,225, KU ,305, KV ,365, KW ,425, KX ,490, KY ,580, KZ ,650, LA ,165, * 2.960* LB ,460, * 3.070* LC ,790, * 3.150* LD ,130, * 3.210* LE ,490, LF6 $42,775, % Term Bonds due June 1, 2036 Price * Yield 3.480%* Initial CUSIP Number LG4** $39,440, % Term Bonds due June 1, 2041 Price Yield 4.000% Initial CUSIP Number LH2** $34,845, % Term Bonds due June 1, 2046 Price Yield 4.050% Initial CUSIP Number LJ8** * Price and yield to first optional call date of June 1, ** Copyright 2016, American Bankers Association. CUSIP data herein is provided by Standard & Poor s, CUSIP Service Bureau, a division of McGraw-Hill Companies, Inc. This data is not intended to create a data base and does not serve in any way as a substitute for the CUSIP Services. Neither the District nor the Obligated Group assume responsibility for the use of CUSIP numbers, nor is any representation made as to their correctness. The CUSIP numbers are included solely for the convenience of the readers of this Official Statement.

3 NO DEALER, BROKER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED BY THE DISTRICT, THE OBLIGATED GROUP OR THE UNDERWRITER TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS WITH RESPECT TO THE SERIES 2016 BONDS, OTHER THAN THOSE 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 ANY OFFER TO BUY, AND THERE SHALL NOT BE ANY SALE OF THE SERIES 2016 BONDS, BY ANY PERSON IN ANY STATE IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER, SOLICITATION OR SALE. THE UNDERWRITER HAS REVIEWED THE INFORMATION IN THIS OFFICIAL STATEMENT IN ACCORDANCE WITH AND AS PART OF, ITS RESPONSIBILITIES TO INVESTORS UNDER THE UNITED STATES FEDERAL SECURITIES LAWS AS APPLIED TO THE FACTS AND CIRCUMSTANCES OF THIS TRANSACTION. THE INFORMATION SET FORTH HEREIN HAS BEEN OBTAINED FROM THE DISTRICT AND THE OBLIGATED GROUP, DTC AND OTHER SOURCES THAT ARE BELIEVED TO BE RELIABLE, BUT THE UNDERWRITER DOES NOT GUARANTEE THE ACCURACY OR COMPLETENESS OF THE INFORMATION AND SUCH INFORMATION IS NOT TO BE CONSTRUED AS A REPRESENTATION BY THE UNDERWRITER. 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 DISTRICT SINCE THE DATE HEREOF. THE SERIES 2016 BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, NOR HAS THE BOND INDENTURE, THE MASTER INDENTURE, OR ANY SUPPLEMENTAL INDENTURE BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS. THE REGISTRATION OR QUALIFICATION OF THE SERIES 2016 BONDS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF THE SECURITIES LAWS OF THE STATE OF FLORIDA, IF ANY, IN WHICH THE SERIES 2016 BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN CERTAIN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE STATES NOR ANY OF THEIR AGENCIES HAVE PASSED UPON THE MERITS OF THE SERIES 2016 BONDS OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE. NO REGISTRATION STATEMENT RELATING TO THE SERIES 2016 BONDS HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION OR WITH ANY STATE SECURITIES COMMISSION. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY UPON THEIR OWN EXAMINATION OF THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES

4 COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2016 BONDS AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ALL SUMMARIES HEREIN OF DOCUMENTS AND AGREEMENTS ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO SUCH DOCUMENTS AND AGREEMENTS, AND ALL SUMMARIES HEREIN OF THE SERIES 2016 BONDS ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE FORM THEREOF INCLUDED IN THE AFORESAID DOCUMENTS AND AGREEMENTS. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT: CERTAIN STATEMENTS INCLUDED OR INCORPORATED BY REFERENCE IN THIS OFFICIAL STATEMENT CONSTITUTE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS GENERALLY ARE IDENTIFIABLE BY THE TERMINOLOGY USED, SUCH AS PLAN, EXPECT, ESTIMATE, BUDGET OR OTHER SIMILAR WORDS. SUCH FORWARD-LOOKING STATEMENTS INCLUDE BUT ARE NOT LIMITED TO CERTAIN STATEMENTS CONTAINED IN THE INFORMATION UNDER THE CAPTIONS ESTIMATED SOURCES AND USES OF FUNDS, BONDHOLDERS RISKS AND REGULATION OF THE HEALTH CARE INDUSTRY IN THE FOREPART OF THIS OFFICIAL STATEMENT AND CERTAIN STATEMENTS CONTAINED IN APPENDIX A TO THIS OFFICIAL STATEMENT. THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE DISTRICT DOES NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN ITS EXPECTATIONS CHANGE OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED DO NOT OCCUR.

5 TABLE OF CONTENTS Page INTRODUCTORY STATEMENT... 1 THE DISTRICT... 3 PLAN OF FINANCE... 5 General... 5 Refunding Plan Project... 6 DESCRIPTION OF SERIES 2016 BONDS... 7 General... 7 Redemption Provisions... 7 BOOK-ENTRY ONLY SYSTEM SECURITY FOR THE SERIES 2016 BONDS Limited Obligations Interest Account and Principal Account No Debt Service Reserve Fund Redemption Account Master Indenture Substitution of 2016 Obligation PROPOSED AMENDMENTS TO MASTER INDENTURE ESTIMATED SOURCES AND USES OF FUNDS ESTIMATED DEBT SERVICE REQUIREMENTS BONDHOLDER S RISKS General Economic Recovery and Disruptions to Credit Market Government Regulation of the Health Care Industry Licenses, Certificates and Accreditations Commercial Insurance and Managed Care Managed Care Organizations Increased Competition Uncompensated Care Physician Relationships Inpatient Psychiatric Services Audits, Exclusions, Fines, Withholds and Enforcement Actions Compliance Monitoring Antitrust Possible Staffing Shortages Malpractice and General Liability Insurance Property and Casualty Insurance Changes Due to Technology and Services Environmental Laws and Regulations Risks Related to Obligations Issued under the Master Indenture... 36

6 TABLE OF CONTENTS (continued) Page Enforceability of Remedies Enforceability of Lien on Revenues Matters Relating to Security for the Series 2016 Bonds Interest Rate Swap Risk Risks Related to Outstanding Variable Rate Bonds Enforceability of Security Interests and Remedies Reliance on Ad Valorem Taxes Other Bondholders Risks REGULATION OF THE HEALTH CARE INDUSTRY General Health Care Industry Factors Federal and State Legislation; National Health Care Reform State Regulation LEGAL MATTERS LITIGATION General Information Regarding 2014 Settlements in Qui Tam Action ENFORCEABILITY OF REMEDIES TAX MATTERS General Information Reporting and Backup Withholding Other Tax Matters Tax Treatment of Original Issue Discount Tax Treatment of Bond Premium RATINGS FINANCIAL ADVISOR UNDERWRITING CONTINGENT FEES VERIFICATION OF MATHEMATICAL COMPUTATIONS FINANCIAL STATEMENTS DISCLOSURE REQUIRED BY FLORIDA BLUE SKY REGULATIONS CONTINUING DISCLOSURE ACCURACY AND COMPLETENESS OF OFFICIAL STATEMENT AUTHORIZATION OF OFFICIAL STATEMENT ii

7 TABLE OF CONTENTS (continued) Page APPENDIX A APPENDIX B APPENDIX C APPENDIX D APPENDIX E INFORMATION CONCERNING THE OBLIGATED GROUP AUDITED FINANCIAL STATEMENTS OF HALIFAX HOSPITAL MEDICAL CENTER FOR THE YEAR ENDED SEPTEMBER 30, 2015 SUMMARIES OF BASIC DOCUMENTS PROPOSED FORM OF BOND COUNSEL OPINION FORM OF DISCLOSURE DISSEMINATION AGENT AGREEMENT iii

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9 OFFICIAL STATEMENT relating to $165,490,000 HALIFAX HOSPITAL MEDICAL CENTER (Daytona Beach, Florida) Hospital Revenue Refunding and Improvement Bonds, Series 2016 INTRODUCTORY STATEMENT General. The purpose of this Official Statement, including the cover page and appendices, is to furnish certain information in connection with the issuance and sale by the Halifax Hospital Medical Center (the District ) of its Hospital Revenue Refunding and Improvement Bonds, Series 2016 (the Series 2016 Bonds ). All capitalized terms used in this Official Statement and not otherwise defined herein shall have the meanings set forth in SUMMARIES OF BASIC DOCUMENTS in APPENDIX C attached hereto. The District is an independent special taxing district of the State of Florida (the State ) with all the powers of a body corporate. Its geographic territory is located in northeastern Volusia County, Florida, primarily including the cities of Daytona Beach, Ormond Beach, Holly Hill and parts of Port Orange. The seven members of the Board of Commissioners (the Board ) of the District are residents of the District and are appointed by the Governor for four-year terms. The Board is responsible for the management and operation of the District. See THE DISTRICT herein and INFORMATION CONCERNING THE OBLIGATED GROUP in APPENDIX A attached hereto. Purpose. The Series 2016 Bonds will be issued by the District pursuant to a Trust Indenture dated as of March 1, 2016 (the Bond Indenture ) between the District and Wells Fargo Bank, National Association, Jacksonville, Florida, as the Trustee thereunder (the Bond Trustee ). The net proceeds of the Series 2016 Bonds will be loaned by the District to the Obligated Group pursuant to a Financing Agreement dated March 1, 2016 (the Financing Agreement ) between the District and the Obligated Group, and together with other legally available funds, will be used to (i) refund all of the outstanding Hospital Revenue Refunding and Improvement Bonds, Series 2006A (the Refunded Series 2006A Bonds ), all of the outstanding Hospital Revenue Bonds, Series 2006B-1 and all of the outstanding Hospital Revenue Bonds, Series 2006B-2 (collectively, the Refunded Series 2006B Bonds and, together with the Refunded Series 2006A Bonds, the Refunded Bonds ), (ii) finance a portion of the 2016 Project (as herein defined), and (iii) pay certain costs and expenses related to the issuance of the Series 2016 Bonds. See PLAN OF FINANCE and ESTIMATED SOURCES AND USES OF FUNDS herein. Security. To secure and provide for the payment of the Series 2016 Bonds, the Obligated Group, presently comprised of the District and H.H. Holdings, Inc. (formerly known as Florida Health Care Plan, Inc.), a Florida not-for-profit corporation of which the District is the sole Member ( Holdings ), will issue Obligation No. 10 (herein defined) under and pursuant to the Master Trust Indenture dated as of June 1, 2006 (the Master Indenture ) between the Obligated Group and Wells Fargo Bank, National Association, Jacksonville, Florida, as the Trustee

10 thereunder (the Master Trustee ), as amended and supplemented from time to time, and as particularly supplemented by the Eighth Supplemental Indenture for Obligation No. 10 and First Amendment to Master Indenture dated as of March 1, 2016 (the 2016 Supplement ). The Members of the Obligated Group under the Master Indenture currently include only the District and Holdings. To secure and provide for the payment of the Series 2016 Bonds, the Obligated Group will issue Obligation No. 10 (the 2016 Obligation or Obligation No. 10 ) pursuant to the Master Indenture. All Obligations issued pursuant to the Master Indenture, including the 2016 Obligation, are secured equally and ratably without preference or priority as to lien or source of payment of any one Obligation over any other Obligation, by a lien on and security interest in all Net Revenues of the Obligated Group, the funds and accounts created under the Master Indenture and all other property or collateral held by or pledged to the Master Trustee thereunder, and all proceeds and products of the foregoing (collectively, the Pledged Funds ). As to the District and any other Members of the Obligated Group with ad valorem taxing powers, all Obligations are limited obligations payable solely from and secured by such Pledged Funds. As to all other Members, including H.H. Holdings, all Obligations are general obligations secured by such Pledged Funds. NEITHER THE SERIES 2016 BONDS NOR THE 2016 OBLIGATION WILL BE DEEMED TO CONSTITUTE A GENERAL DEBT, LIABILITY OR OBLIGATION OF THE DISTRICT, OR A DEBT, LIABILITY OR OBLIGATION OF VOLUSIA COUNTY, FLORIDA, THE STATE OF FLORIDA, OR ANY POLITICAL SUBDIVISION THEREOF, OR A PLEDGE OF THE FAITH AND CREDIT OR TAXING POWER OF THE DISTRICT, VOLUSIA COUNTY, FLORIDA, THE STATE OF FLORIDA OR ANY POLITICAL SUBDIVISION THEREOF. THE DISTRICT WILL NOT BE OBLIGATED TO PAY THE SERIES 2016 BONDS, ANY INTEREST THEREON, OR ANY OTHER OBLIGATIONS WITH RESPECT THERETO EXCEPT FROM PAYMENTS PURSUANT TO THE 2016 OBLIGATION AND AMOUNTS HELD BY THE MASTER TRUSTEE AND THE BOND TRUSTEE IN THE FUNDS PLEDGED UNDER THE MASTER INDENTURE AND THE BOND INDENTURE, RESPECTIVELY, THEREFOR IN THE MANNER PROVIDED THEREIN. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE DISTRICT, VOLUSIA COUNTY, FLORIDA, THE STATE OF FLORIDA, NOR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR INTEREST ON THE SERIES 2016 BONDS, THE 2016 OBLIGATION OR ANY OTHER OBLIGATIONS OF THE DISTRICT WITH RESPECT THERETO. NEITHER THE DISTRICT, NOR VOLUSIA COUNTY, FLORIDA, NOR THE STATE OF FLORIDA, NOR ANY POLITICAL SUBDIVISION THEREOF WILL BE DIRECTLY, INDIRECTLY OR CONTINGENTLY OBLIGATED TO LEVY ANY FORM OF TAXATION WHATSOEVER FOR THE PAYMENT OF THE DISTRICT S OBLIGATIONS UNDER THE MASTER INDENTURE OR THE BOND INDENTURE, INCLUDING, WITHOUT LIMITATION, THE SERIES 2016 BONDS AND THE 2016 OBLIGATION OR ANY OTHER OBLIGATIONS OF THE DISTRICT. Redemption. The Series 2016 Bonds are subject to redemption and purchase in lieu of redemption prior to maturity as more fully described herein. 2

11 Facilities. For a description of the facilities and services provided by the District, see INFORMATION CONCERNING THE OBLIGATED GROUP in APPENDIX A attached hereto. Financial Statements. The audited financial statements of Halifax Hospital Medical Center (which includes the District and Holdings as the Members of the Obligated Group, and certain affiliated entities) for the year ended September 30, 2015 are contained in AUDITED FINANCIAL STATEMENTS OF HALIFAX HOSPITAL MEDICAL CENTER FOR THE YEAR ENDED SEPTEMBER 30, 2015 in APPENDIX B attached hereto. Certain unaudited financial information and operating data of the Obligated Group for the quarters ended December 31, 2014 and 2015 are included within INFORMATION CONCERNING THE OBLIGATED GROUP in APPENDIX A attached hereto. Consent to Master Indenture Amendments. By purchasing the Series 2016 Bonds, the holders of the Series 2016 Bonds will be deemed to consent to, and direct the Bond Trustee to consent to, amendments to the Master Indenture contained in the 2016 Supplement that are intended to (i) clarify the treatment of puts and tenders under the Master Indenture and (ii) modify the test for the incurrence of additional debt, as more fully described herein. See PROPOSED AMENDMENTS TO MASTER INDENTURE herein for a description of the amendment. Bondholder Risks. An investment in the Series 2016 Bonds involves the assumption of certain risks that primarily relate, directly or indirectly, to the ability of the Obligated Group, of which the District and Holdings are currently the only Members, to generate Net Revenues from its operations sufficient to enable it to meet the debt service requirements on all Obligations under the Master Indenture. See BONDHOLDER RISKS herein. Miscellaneous. This Official Statement speaks only as of its date, and the information contained herein is subject to change. This Official Statement contains certain information concerning The Depository Trust Company, New York, New York ( DTC ), and its book-entryonly system of registration. Such information has been obtained from DTC and the District makes no representation as to the accuracy and sufficiency of such information. This Official Statement and the appendices attached hereto contain descriptions of the Series 2016 Bonds, the Master Indenture, the Bond Indenture, the District and the Obligated Group. Such information, descriptions and summaries do not purport to be complete or definitive, and reference is made to each such document for the complete details of all the terms and conditions thereof. All references herein to the Series 2016 Bonds, the Master Indenture, and the Bond Indenture are qualified in their entirety by such documents, copies of which may be obtained from Halifax Hospital Medical Center, 303 North Clyde Morris Boulevard, Daytona Beach, Florida , attention: Executive Vice President and Chief Financial Officer at telephone (386) prior to the delivery of the Series 2016 Bonds and will be available for inspection at the offices of the Bond Trustee after delivery of the Series 2016 Bonds at Wells Fargo Bank, National Association, 7077 Bonneval Road, Suite 400, Jacksonville, Florida THE DISTRICT The District is an independent special taxing district of the State with all the powers of a body corporate. Its geographic territory is located in northeastern Volusia County, Florida, and 3

12 primarily includes the cities of Daytona Beach, Ormond Beach, Holly Hill and parts of Port Orange. The seven members of the Board are residents of the District and are appointed by the Governor of the State for four-year terms. The Board is responsible for the management and operation of the District. The District is empowered under its enabling act to levy ad valorem taxes for various purposes up to 4.0 mills, but cannot be compelled to do so by the Series 2016 Bondholders or the Master Trustee. Currently, the District and Holdings are the only Members of the Obligated Group under the Master Indenture. As used herein, Obligated Group means the District and other entities, if any, that, in accordance with the terms of the Master Indenture, become Members of the Obligated Group (and hence jointly and severally liable on all Obligations issued or to be issued under the Master Indenture) unless and until any such Member is released from the Obligated Group in the manner permitted in the Master Indenture. The District owns and operates three hospital facilities (under one license) and several ambulatory and other facilities (collectively, the Hospital Facilities ). The main campus of the District on Clyde Morris Boulevard in Daytona Beach, Florida is the inpatient referral center, providing services in trauma, open-heart surgery, neurosurgery, neonatal, and other specialty inpatient and outpatient services. The Port Orange Campus (HHPO) located ten miles south of the main campus is a community hospital providing a broad range of services to the residents of Port Orange and Southeast Volusia County. HHPO is an 80-bed facility, which includes an eight-bed intensive care unit. The Halifax Behavioral Services campus (three miles to the north of the main campus) provides inpatient and outpatient child and adolescent psychiatric services and includes a 30-bed inpatient unit. The District operates outpatient centers in Port Orange (ten miles south of the main campus) and Ormond Beach (ten miles north of the main campus). The total licensed bed capacity of the District s facilities is 678 beds. The current enabling act of the District was passed by special act of the Florida Legislature as Chapter , Laws of Florida (the Act ), which codified all prior laws that established the District in 1925 under the name Halifax Hospital District as a special taxing district, a public body corporate and politic of the State. Pursuant to the Act, the District has all powers of a body corporate, including, but not limited to, the power to establish, construct, operate and maintain such hospitals, medical facilities and healthcare facilities and services for the preservation of the public health, for the public good and for the use of the public of the District, the power to enter into contracts, borrow money, establish for-profit and not-for-profit corporations, the power to acquire, purchase, hold, lease and convey real and personal property, and the power of eminent domain. The District has established not-for-profit corporations ( Affiliates or Affiliated Corporations ) to assist in carrying out its purpose to provide healthcare and related services to its communities. The Affiliates are each controlled by the District through sole membership and/or the power to appoint and remove a majority of the members of the respective governing body of such Affiliate. The District, together with the Affiliates, conduct business under the name Halifax Health ( Halifax Health ). Such Affiliates, other than Holdings, are not Members of the Obligated Group and are not obligated to pay operating expenses of the Obligated Group or to make any payments with respect to the Series 2016 Bonds or the 2016 Obligation. 4

13 For more information about the District, Holdings and the other Affiliates, see INFORMATION CONCERNING THE OBLIGATED GROUP in APPENDIX A attached hereto. General PLAN OF FINANCE The Series 2016 Bonds are expected to be issued, for the primary purpose, together with other legally available funds of the District, of (i) refunding the Refunded Bonds, (ii) financing a portion of the 2016 Project and (iii) paying certain costs and expenses related to the issuance of the Series 2016 Bonds. Refunding Plan The Refunded Bonds consist of the following as detailed below: Refunded Series 2006A Bonds Maturity Date (June 1) Principal Amount 2016 $ 3,205, ,015, ,065, ,765, ,860, ,950, * 11,420, * 13,515, * 14,750,000 Maturity Date (June 1) Refunded Series 2006B Bonds Sub-series 2006B-1 Principal Amount 2038 * $70,925,000 Maturity Date (June 1) Sub-series 2006B-2 Principal Amount 2031 * $34,075,000 * Term Bond. 5

14 The moneys required to refund the Refunded Series 2006A Bonds will be derived from a portion of the proceeds of the Series 2016 Bonds and other legally available funds made available upon the issuance of the Series 2016 Bonds and the defeasance of the Refunded Series 2006A Bonds. Conditioned on the issuance of the Series 2016 Bonds, the Refunded Series 2006A Bonds, maturing on and after June 1, 2016, will be called for redemption on June 1, 2016 (the Series 2006A Redemption Date ) at a redemption price equal to 100% of the principal amount of the Refunded Bonds to be redeemed. The moneys required to refund the Refunded Series 2006B Bonds will be derived from a portion of the proceeds of the Series 2016 Bonds and other legally available funds made available upon the issuance of the Series 2016 Bonds and the defeasance of the Refunded Series 2006B Bonds. Conditioned on the issuance of the Series 2016 Bonds, the Refunded Series 2006B Bonds will be called for redemption on June 1, 2018 (the Series 2006B Redemption Date ) at a redemption price equal to 100% of the principal amount of the Refunded Bonds to be redeemed. A portion of the proceeds of the Series 2016 Bonds, together with other legally available funds, will be placed in irrevocable escrow (the Escrow Deposit Trust Fund ) with Wells Fargo Bank, National Association, Jacksonville, Florida (the Escrow Agent ) pursuant to an escrow deposit agreement (the Escrow Agreement ) and, other than initial cash balances, applied to purchase non-callable direct obligations of the United States of America ( Federal Securities ). Such Federal Securities will mature at such times and bear interest in such amounts so that sufficient moneys will be available from the maturing principal and interest thereof, together with any initial cash balances, to pay the principal of and accrued interest on the Refunded Series 2006A Bonds and the Refunded Series 2006B Bonds through the Series 2006A Redemption Date and the Series 2006B Redemption Date, respectively. By deposit of the Federal Securities and uninvested cash with the Escrow Agent pursuant to the Escrow Agreement as described above, it is the opinion of Bond Counsel (rendered in reliance upon the verifications of Causey Demgen & Moore P.C., described under VERIFICATION OF MATHEMATICAL COMPUTATIONS herein) that all pledges and liens created pursuant to the Master Indenture securing the Refunded Bonds will cease and become void. The maturing principal of and interest on the Federal Securities and uninvested cash held by the Escrow Agent will not be available to pay the Series 2016 Bonds Project The 2016 Project includes the acquisition, construction and equipping of renovations and improvements to the health care facilities of the Obligated Group. Additionally, the District may use proceeds of the Series 2016 Bonds to reimburse itself for the cost of the acquisition of land within the City of Deltona ( Deltona ) to be used for future capital projects. The District has entered into an interlocal agreement with Deltona in January 4, 2016, allowing it to establish healthcare facilities within the jurisdiction of Deltona and outside the geographic territory of the District. 6

15 DESCRIPTION OF SERIES 2016 BONDS General The Series 2016 Bonds will be issued in denominations of $5,000 or any integral multiples thereof, and will bear interest at the rates and mature on the dates on the page which faces the inside cover page hereof in the manner described in the Bond Indenture. Interest on the Series 2016 Bonds will be payable on June 1 and December 1 of each year, commencing on June 1, Interest on the Series 2016 Bonds will be computed on the basis of a 360-day year of twelve 30-day months. See APPENDIX C SUMMARIES OF BASIC DOCUMENTS attached hereto. Redemption Provisions Optional Redemption. The Series 2016 Bonds maturing on or after June 1, 2027 will be subject to redemption prior to stated maturity at the option of the District, on or after June 1, 2026, in whole or in part at any time, in such manner as may be designated by the District and by lot within a maturity, at the redemption price of 100% of the principal amount of the Series 2016 Bonds to be redeemed, plus accrued interest thereon to the date fixed for such redemption. Extraordinary Optional Redemption. The Series 2016 Bonds will be redeemed in whole or in part by the District at any time, at a redemption price equal to 100% of the principal amount thereof plus accrued interest thereon to the redemption date, without premium, in the event that (i) in the judgment of the District, unreasonable burdens or excessive liabilities will have been imposed on the Obligated Group, including, without limitation, federal, state or other ad valorem, property, income or other taxes not being imposed on the date of issuance of the Series 2016 Bonds or the Obligated Group is required or ordered by legislative, judicial or administrative action to operate its facilities in a manner inconsistent with the stated goals, purposes and policies of the Obligated Group, including medical treatment and surgical procedures, and such legislative, judicial or administrative actions are applicable to the Obligated Group, or (ii) the Operating Assets or any material portion of the Operating Assets will have been damaged, taken or condemned so as to render the Operating Assets or such material portion thereof, in the judgment of the District, unsatisfactory for its intended use for a period of time longer than one year. Mandatory Sinking Fund Redemption. The following requirements of mandatory sinking fund redemption are subject to the provisions that any partial redemption of the Series 2016 Bonds of the applicable maturity under --Optional Redemption above or under -- Extraordinary Optional Redemption above will reduce the mandatory scheduled redemption requirements as provided in the Bond Indenture. In addition, as provided in the Bond Indenture, the District may satisfy mandatory sinking fund redemption requirements by tendering Series 2016 Bonds of the applicable maturity purchased in the open market to the Bond Trustee for cancellation. 7

16 The Series 2016 Bonds maturing on June 1, 2036 will be redeemed in part on June 1 in each year listed below, commencing June 1, 2032, at a redemption price equal to 100% of the principal amount redeemed, plus accrued interest thereon to the redemption date, in the principal amount set forth below next to such year: Year Principal Amount 2032 $7,740, ,135, ,540, ,960, * 9,400,000 *Final Maturity The Series 2016 Bonds maturing on June 1, 2041 will be redeemed in part on June 1 in each year listed below, commencing June 1, 2037, at a redemption price equal to 100% of the principal amount plus accrued interest thereon to the redemption date, in the principal amount set forth below next to such year: Principal Year Amount 2037 $ 9,885, ,245, ,240, ,410, * 6,660,000 *Final Maturity The Series 2016 Bonds maturing on June 1, 2046 will be redeemed in part on June 1 in each year listed below, commencing June 1, 2042, at a redemption price equal to 100% of the principal amount plus accrued interest thereon to the redemption date, in the principal amount set forth below next to such year: Principal Year Amount 2042 $5,745, ,045, ,400, ,670, * 7,985,000 *Final Maturity 8

17 Selection of Series 2016 Bonds for Redemption. In the case of any redemption in part of the Series 2016 Bonds, the Series 2016 Bonds to be redeemed will be selected by the Bond Trustee, subject to the requirements of the Bond Indenture. There will be no partial redemption of less than $5,000 for any Series 2016 Bonds. If less than all of the Series 2016 Bonds outstanding are called for redemption under any provision of the Bond Indenture permitting partial redemption, the particular Series 2016 Bonds to be redeemed will be selected by the Bond Trustee, in such a manner as the Bond Trustee in its discretion may deem fair and appropriate. Notice of Redemption. In the event any of the Series 2016 Bonds are called for redemption, the Bond Trustee will give notice, in the name of the District, of the redemption of such Series 2016 Bonds, which notice will (i) specify the Series 2016 Bonds to be redeemed, the redemption date, the redemption price, and the place or places where amounts due upon such redemption will be payable (which will be the designated corporate trust office of the Bond Trustee) and, if less than all of the Series 2016 Bonds are to be redeemed, the numbers of the Series 2016 Bonds, and the portions of the Series 2016 Bonds, to be redeemed, (ii) state any condition to such redemption, and (iii) state that on the redemption date, and upon the satisfaction of any such condition, the Series 2016 Bonds to be redeemed will cease to bear interest. CUSIP number identification will accompany all redemption notices. Such notice may set forth any additional information relating to such redemption. Such notice will be given by mail, postage prepaid, at least 30 days (or, in the case of acceleration of the Series 2016 Bonds pursuant to the Bond Indenture, seven days), but not more than 60 days prior to the date fixed for redemption to each Holder of the Series 2016 Bonds to be redeemed at its address shown on the registration books kept by the Bond Trustee; provided, however, that failure to give such notice to any Series 2016 Bondholder or any defect in such notice will not affect the validity of the proceedings for the redemption of any of the other Series 2016 Bonds. The Bond Trustee will send a second notice of redemption by certified mail return receipt requested to any registered Holder who has not submitted the Series 2016 Bonds called for redemption 30 days after the redemption date, provided, however, that the failure to give any second notice by mailing, or any defect in such notice, will not affect the validity of any proceedings for the redemption of the Series 2016 Bonds and the Bond Trustee will not be liable for any failure by the Bond Trustee to send any second notice. Any Series 2016 Bonds or portions thereof which have been selected for redemption and for which the Bond Trustee holds sufficient funds to pay the redemption price will cease to bear interest on the specified redemption date in accordance with the Bond Indenture. Purchase in Lieu of Redemption. In lieu of the optional redemption and cancellation of the Series 2016 Bonds, Series 2016 Bonds may be called for purchase by the Obligated Group in lieu of optional redemption on the same dates and at the same purchase price as Series 2016 Bonds may be called for and redeemed pursuant to the optional redemption provisions. Series 2016 Bonds so purchased by the Obligated Group in lieu of redemption may be either (i) delivered to the Trustee and cancelled or (ii) held by the Obligated Group and, upon receipt of an opinion of Bond Counsel to the effect that such sale will not adversely affect the exclusion from gross income for federal income tax purposes of interest on such Series 2016 Bonds, subsequently sold by the Obligated Group. Notice of purchase and selection of Series 2016 Bonds for purchase pursuant to these will be given or made and have the same effect as provided for notice and selection of Series 2016 Bonds for optional redemption; provided, that the notice 9

18 will be modified as necessary to reflect the purchase of Series 2016 Bonds in lieu of optional redemption. BOOK-ENTRY ONLY SYSTEM THE FOLLOWING INFORMATION CONCERNING DTC AND DTC S BOOK- ENTRY ONLY SYSTEM HAS BEEN OBTAINED FROM SOURCES THAT THE DISTRICT BELIEVES TO BE RELIABLE, BUT THE DISTRICT TAKES NO RESPONSIBILITY FOR THE ACCURACY THEREOF. The Depository Trust Company ( DTC ), New York, New York, will act as securities depository for the Series 2016 Bonds. The Series 2016 Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered security certificate will be issued for each maturity of the Series 2016 Bonds, set forth in the inside cover page of this Official Statement, in the aggregate principal amount of such Series 2016 Bonds, and will be deposited with DTC. DTC, the world s largest securities depository, is a limited purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity, corporate and municipal debt issues and money market instruments (from over 100 countries) that its 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 Standard & Poor s highest rating: AAA. The DTC rules applicable to its Direct and Indirect Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchases of Series 2016 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2016 Bonds on DTC s records. The ownership interest of each actual purchaser of each Series 2016 Bond ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic 10

19 statements of their holdings, from the Direct or Indirect Participants through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2016 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their beneficial ownership interests in the Series 2016 Bonds, except in the event that use of the book-entry system for the Series 2016 Bonds is discontinued. To facilitate subsequent transfers, all Series 2016 Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of Series 2016 Bonds with DTC and their registration in the name of Cede & Co., or such other DTC nominee, do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2016 Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Series 2016 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 Series 2016 Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Series 2016 Bonds, such as redemptions, tenders, defaults and proposed amendments to the bond documents. For example, Beneficial Owners of the Series 2016 Bonds may wish to ascertain that the nominee holding the Series 2016 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Bond Registrar and request that copies of notices are provided directly to them. Redemption notices shall be sent to DTC. If less than all of a Series of Series 2016 Bonds are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant of such Series to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Series 2016 Bonds unless authorized by a Direct Participant in accordance with DTC s procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts the Series 2016 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions, and dividend payments on the Series 2016 Bonds will be made to Cede & Co., or to 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 District or Bond Trustee on a payment date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or 11

20 registered in street name, and will be the responsibility of such Participant and not of DTC, its nominee, the Bond Trustee or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of the redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the District or Bond Trustee. Disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be the responsibility of the Direct and Indirect Participants. NEITHER THE DISTRICT NOR THE BOND TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DTC, THE PARTICIPANTS OR THE PERSON FOR WHOM THEY ACT AS NOMINEES WITH RESPECT TO THE PAYMENTS TO OR THE PROVIDING OF NOTICE FOR THE PARTICIPANTS OR THE BENEFICIAL OWNERS OF THE SERIES 2016 BONDS. THE DISTRICT WILL NOT GIVE ANY ASSURANCES THAT DTC, PARTICIPANTS OR OTHERS WILL DISTRIBUTE PAYMENTS OF PRINCIPAL OF, PREMIUM, IF ANY, OR INTEREST ON THE SERIES 2016 BONDS PAID TO DTC OR ITS NOMINEE, AS THE REGISTERED OWNER, OR ANY NOTICES TO THE BENEFICIAL OWNERS OR THAT THEY WILL DO SO ON A TIMELY BASIS, OR THAT DTC WILL ACT IN THE MANNER DESCRIBED IN THIS OFFICIAL STATEMENT OR FOR THE SELECTION BY DTC OR ANY PARTICIPANT OR ANY PERSON TO RECEIVE PAYMENT IN THE EVENT OF A PARTIAL REDEMPTION OF THE SERIES 2016 BONDS; OR ANY OTHER ACTION TAKEN BY DTC AS BONDHOLDER. DTC may discontinue providing its services as securities depository with respect to the Series 2016 Bonds at any time by giving reasonable notice to the District or the Bond Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Series 2016 Bond certificates are required to be printed and delivered. The District may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Series 2016 Bond certificates will be printed and delivered to DTC. So long as Cede & Co., as nominee of DTC is the registered owner of the Series 2016 Bonds, references herein to the owners or Holders of the Series 2016 Bonds (other than under the caption TAX MATTERS herein) shall mean Cede & Co. and will not mean the Beneficial Owners of the Series 2016 Bonds. For every transfer of ownership interests in the Series 2016 Bonds, the Beneficial Owner may be charged a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. Limited Obligations SECURITY FOR THE SERIES 2016 BONDS The Series 2016 Bonds will be issued by the District pursuant to the Bond Indenture. To secure the obligations of the Obligated Group under the Financing Agreement and provide for 12

21 the payment of the Series 2016 Bonds, the Obligated Group will issue the 2016 Obligation under and pursuant to the Master Indenture. The District and Holdings are currently the only Members of the Obligated Group under the Master Indenture. The 2016 Obligation is secured equally and ratably with all other Obligations issued under the Master Indenture without preference or priority as to lien or source of payment of any one Obligation over any other Obligation, by a lien on and security interest in all Net Revenues of the Obligated Group, the funds and accounts created under the Master Indenture and all other property or collateral held by or pledged to the Master Trustee thereunder, and all proceeds and products of the foregoing (collectively, the Pledged Funds ). As to the District and any other Members of the Obligated Group with ad valorem taxing powers, all Obligations are limited obligations secured by such Pledged Funds. As to all other Members, including H.H. Holdings, all Obligations are general obligations secured by such Pledged Funds. THE SERIES 2016 BONDS AND THE 2016 OBLIGATION WILL NOT BE DEEMED TO CONSTITUTE A GENERAL DEBT, LIABILITY OR OBLIGATION OF THE DISTRICT, OR A DEBT, LIABILITY OR OBLIGATION OF VOLUSIA COUNTY, FLORIDA, THE STATE OF FLORIDA, OR ANY POLITICAL SUBDIVISION THEREOF, OR A PLEDGE OF THE FAITH AND CREDIT OR TAXING POWER OF THE DISTRICT, VOLUSIA COUNTY, FLORIDA, THE STATE OF FLORIDA OR ANY POLITICAL SUBDIVISION THEREOF. THE DISTRICT WILL NOT BE OBLIGATED TO PAY THE SERIES 2016 BONDS, ANY INTEREST THEREON, OR ANY OTHER OBLIGATIONS WITH RESPECT THERETO EXCEPT FROM PAYMENTS PURSUANT TO THE 2016 OBLIGATION AND AMOUNTS HELD BY THE MASTER TRUSTEE AND THE BOND TRUSTEE IN THE FUNDS PLEDGED UNDER THE MASTER INDENTURE AND THE BOND INDENTURE, RESPECTIVELY, THEREFOR IN THE MANNER PROVIDED THEREIN. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE DISTRICT, VOLUSIA COUNTY, FLORIDA, THE STATE OF FLORIDA, NOR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR INTEREST ON THE SERIES 2016 BONDS, THE 2016 OBLIGATION OR ANY OTHER OBLIGATIONS OF THE DISTRICT WITH RESPECT THERETO. NEITHER THE DISTRICT, NOR VOLUSIA COUNTY, FLORIDA, NOR THE STATE OF FLORIDA, NOR ANY POLITICAL SUBDIVISION THEREOF WILL BE DIRECTLY, INDIRECTLY OR CONTINGENTLY OBLIGATED TO LEVY ANY FORM OF TAXATION WHATSOEVER FOR THE PAYMENT OF THE DISTRICT S OBLIGATIONS UNDER THE MASTER INDENTURE OR THE BOND INDENTURE, INCLUDING, WITHOUT LIMITATION, THE SERIES 2016 BONDS AND THE 2016 OBLIGATION OR ANY OTHER OBLIGATIONS OF THE DISTRICT. Interest Account and Principal Account Moneys on deposit in the Interest Account established under the Bond Indenture will be used solely for the payment of interest on the Series 2016 Bonds, and moneys on deposit in the Principal Account established under the Bond Indenture will be used solely for the payment of maturing principal of the Series 2016 Bonds. At the maturity date of each Series 2016 Bond and at the due date of each mandatory sinking fund redemption requirement and installment of interest on each Series 2016 Bond, the Trustee will transfer from the Interest and Principal 13

22 Accounts and the Redemption Account established under the Bond Indenture set aside for such purpose as provided in the Bond Indenture to a special account sufficient moneys to pay all principal of and interest then due and payable with respect to each such Series 2016 Bond. Moneys so transferred into the special accounts will not thereafter be invested in any manner but will be held by the Trustee without liability on the part of the Trustee or the Obligated Group for interest thereon until actually paid out for the purposes intended. No Debt Service Reserve Fund No debt service reserve fund will be established for the Series 2016 Bonds. Redemption Account Moneys held for the credit of the Redemption Account in the Bond Fund established under the Bond Indenture will be applied with reasonable diligence first to make up any deficiency in the Interest Account and the Principal Account and then to the retirement of the Series 2016 Bonds issued under the provisions of the Bond Indenture and then outstanding in the following order: (a) The Bond Trustee will first purchase outstanding Term Bonds redeemable pursuant to mandatory sinking fund redemptions which are presented by the Obligated Group. If no such Term Bonds are outstanding, the Bond Trustee will purchase Serial Bonds which are presented by the Obligated Group, whether or not such Series 2016 Bonds are then subject to redemption. The Bond Trustee will purchase the Series 2016 Bonds only to the extent moneys are available therefor, at the most advantageous price reasonably obtainable, such price not to exceed the principal of such Series 2016 Bonds plus accrued interest, plus the redemption premium, if any, applicable to the next permitted optional redemption date. The Bond Trustee will pay the interest accrued on such Series 2016 Bonds to the date of redemption thereof from the Interest Account, the purchase price from the Redemption Account and all expenses in connection with such purchase from moneys deposited for that purpose in the Redemption Account, but no such purchase will be made by the Bond Trustee within a period of thirty days next preceding any interest payment date on which such Series 2016 Bonds are subject to call for redemption under the provisions of the Bond Indenture. (b) To the extent moneys remain on deposit in the Redemption Account, the Bond Trustee will call for redemption on each interest payment date on which Series 2016 Bonds are subject to redemption from such moneys such amount of Term Bonds then subject to redemption or, if no such Term Bonds are outstanding and subject to redemption, Serial Bonds, then subject to redemption as will exhaust the money then held for the credit of the Redemption Account as nearly as may be possible. Such redemption will be made pursuant to the provisions the Bond Indenture. On the redemption date, the Bond Trustee will withdraw from the Interest Account and from the Redemption Account and set aside in separate accounts the respective amounts required for paying the interest on, and the principal of, the Series 2016 Bonds or portions of Series 2016 Bonds so called for redemption, and will pay from moneys deposited for that purpose in the Redemption Account all expenses in connection with such redemption. 14

23 (c) If the Series 2016 Bonds will not then be subject to redemption from moneys in the Redemption Account and if the Bond Trustee will at any time be unable to exhaust the moneys in the purchase of Series 2016 Bonds under the provisions of paragraph (a) of this Section, such moneys or the balance of such moneys, as the case may be, will be retained in the Redemption Account and, as soon as it is feasible, applied to the retirement of the Series 2016 Bonds. (d) Notwithstanding the foregoing, no funds in the Redemption Account will be used to purchase or redeem Serial Bonds until all Term Bonds required to be redeemed pursuant to a mandatory sinking fund redemption for that Bond Year are redeemed. If Term Bonds are purchased and cancelled or redeemed pursuant to this Section in excess of the mandatory sinking fund installment for such Bond Year, such excess principal amount of such Term Bonds so purchased and cancelled or redeemed will be credited against subsequent mandatory sinking fund installments in subsequent years, in the order established by the Obligated Group by written notice to the Bond Trustee at the time of such redemption or, if no notice is specified, in inverse chronological order. In the event the balance in the Redemption Account on June 1 in any year is insufficient for the payment of the mandatory sinking fund installments on the Series 2016 Bonds on such June 1, the Bond Trustee will notify the Obligated Group of the amount of such deficiency. Upon notification, the Obligated Group will immediately deliver to the Bond Trustee an amount sufficient to cure the same. If, in any Bond Year, by the application of money in the Redemption Account, the Trustee should purchase and cancel the Series 2016 Bonds in excess of the aggregate mandatory sinking fund installments for such Bond Year, the Bond Trustee will file with the Obligated Group not later than the twentieth (20th) day prior to the next June 1 on which the Series 2016 Bonds are to be redeemed a statement identifying the Series 2016 Bonds purchased or delivered during such Bond Year and the amount of such excess. The Obligated Group Representative will thereafter cause an Officer s Certificate to be filed with the Bond Trustee not later than the tenth (10th) day prior to such June 1, setting forth with respect to the amount of such excess the years in which the mandatory sinking fund installments with respect to Series 2016 Bonds are to be reduced and the amount by which the mandatory sinking fund installments so determined are to be reduced. Upon the retirement of any Series 2016 Bonds by purchase and cancellation or redemption pursuant to the provisions of this Section, the Bond Trustee will file with the Obligated Group Representative a statement identifying such Series 2016 Bonds and setting forth the date of purchase or redemption, the amount of the purchase price or the Redemption Price of such Series 2016 Bonds and the amount paid as interest thereon. The expenses incurred in connection with the purchase or redemption of any such Series 2016 Bonds are required to be paid by the Obligated Group as part of the required payments under the 2016 Obligation. Master Indenture General. As to the District and any other Member of the Obligated Group with ad valorem taxing power, all Obligations issued pursuant to the Master Indenture will be limited 15

24 obligations payable from and secured solely by a lien upon and pledge of the Net Revenues in the manner set forth in the Master Indenture. As to all Members of the Obligated Group, other than the District and any other Member with ad valorem taxing powers, all Obligations issued pursuant to the Master Indenture will be a general obligation of each such Member of the Obligated Group, secured by the Net Revenues in the manner set forth in the Master Indenture. Each Member of the Obligated Group, so long as it is a Member, jointly and severally, covenants and agrees that it will promptly pay the principal of, redemption premium, if any, and interest on all Obligations issued and outstanding under the Master Indenture at the place, on the dates and in the manner provided therein and in said Obligations according to the true intent and meaning thereof. Any one or more series of Obligations issued under the Master Indenture may, so long as any Liens created in connection therewith constitute Permitted Liens, be secured by security interests in or liens on other Property of the Obligated Group or any Member. Such security need not extend to any other indebtedness including Obligations. Consequently, the Supplement pursuant to which any one or more series of Obligations is issued may provide for such supplements or amendments to the provisions of the Master Indenture as are necessary to provide for such security and to permit realization upon such security solely for the benefit of the Obligations entitled thereto. To the extent that any Indebtedness which is permitted or required to be issued pursuant to the Master Indenture is not in the form of a promissory note, an Obligation in the form of a promissory note may be issued under the Master Indenture and pledged as security for the payment of such Indebtedness in lieu of directly issuing such Indebtedness as an Obligation under the Master Indenture. Nevertheless the parties to the Master Indenture agree that Obligations may be issued to evidence any type of Indebtedness (other than Non-Recourse Indebtedness, Subordinated Indebtedness and Ad Valorem Tax Secured Indebtedness), including without limitation any Indebtedness in a form other than a promissory note. Consequently, the Supplement pursuant to which any Obligation is issued may provide for such supplements or amendments to the provisions of the Master Indenture as are necessary to permit the issuance of such Obligation and as are not inconsistent with the intent of the Master Indenture that, except as otherwise expressly provided in the Master Indenture, all obligations issued under the Master Indenture will be equally and ratably secured by any Lien created under the Master Indenture. Each Member of the Obligated Group covenants in the Master Indenture that it will not pledge or grant a security interest in any of its Property, except for Permitted Liens. Pledge of Net Revenues. To secure the prompt payment of the principal of, redemption premium, if any, and the interest on the Obligations and the performance by each Member of the Obligated Group of its other obligations under the Master Indenture, each Member of the Obligated Group, pledges, assigns and grants to the Master Trustee, for the benefit of the Holders of the Obligations, equally and ratably without preference or priority as to lien or source of payment of any one Obligation over any other Obligation, a lien on and security interest in: (i) All Net Revenues of the Obligated Group; 16

25 (ii) The funds and accounts created under the Master Indenture and all other property or collateral held by or assigned or pledged to the Master Trustee under the Master Indenture; and (iii) All proceeds and products of any of the foregoing. Prior to any Event of Default, any Member of the Obligated Group may sell accounts receivable or incur Indebtedness secured by all or any part of its accounts receivable free of such pledge and lien to the extent permitted by the provisions of the Master Indenture. In the event of such sale or incurrence of Indebtedness, upon written request of a Member of the Obligated Group, the Master Trustee will execute a release of its lien with respect to the accounts receivable so sold or pledged as security for such Indebtedness. Each new Member of the Obligated Group will, upon becoming a Member pursuant to the Master Indenture, execute and deliver to the Master Trustee from time to time such amendments or supplements to the Master Indenture as may be necessary or appropriate to include as security thereunder its Net Revenues, as the case may be as described above. Limitations on Indebtedness. Each Member of the Obligated Group agrees that it will not incur any Additional Indebtedness if, after giving effect to all other Indebtedness incurred by the Obligated Group, such Indebtedness could not be incurred pursuant to the Master Indenture. Additional Indebtedness means any Indebtedness incurred or assumed by any Member of the Obligated Group subsequent to the issuance of Obligations Nos. 1 through 5 under the Master Indenture or incurred or assumed by any other Member of the Obligated Group subsequent to or contemporaneously with its becoming a Member of the Obligated Group. Indebtedness may be incurred only in the manner and pursuant to the terms set forth in the Master Indenture. Each Member of the Obligated Group will further covenant that it will not incur any Additional Indebtedness without the written consent of the Obligated Group Representative, as evidenced by an Officer s Certificate or a copy of the resolution of the Obligated Group Representative to be delivered to the Master Trustee prior to the incurrence of such Additional Indebtedness. (a) Long-Term Indebtedness may be incurred if prior to incurrence of the Long-Term Indebtedness there is delivered to the Master Trustee: (i) An Officer s Certificate of the Obligated Group Representative certifying that the Long-Term Maximum Annual Debt Service Coverage Ratio for the two most recent Fiscal Years 1 preceding the date of delivery of the certificate of the Obligated Group Representative for which there are Audited Financial Statements available taking all Long-Term Indebtedness incurred after the end of such period and the proposed Long-Term Indebtedness into account as if such proposed Long-Term Indebtedness had been incurred at the beginning of such period, is not less than 1.15; or 1 The Obligated Group is in the process of obtaining the required consent to an amendment to the Master Indenture that changes two most recent Fiscal Years to the most recent Fiscal Year. See PROPOSED AMENDMENTS TO MASTER INDENTURE herein. 17

26 (ii) An Officer s Certificate of the Obligated Group Representative demonstrating that the Long-Term Maximum Annual Debt Service Coverage Ratio for the periods mentioned in (a)(i) above, excluding the proposed Long-Term Indebtedness, is at least 1.25 and (B) a report of a Consultant (or in the case of a Long-Term Maximum Annual Debt Service Coverage Ratio calculated in (ii)(a) above is greater than 1.50, a certificate of the Obligated Group Representative) demonstrating that the forecasted Long-Term Maximum Annual Debt Service Coverage Ratio, calculated taking into account the Outstanding Long-Term Indebtedness and the Long-Term Indebtedness proposed to be issued is not less than 1.15 for (x) in the case of Long-Term Indebtedness (other than a Guaranty) to finance capital improvements, each of the two full Fiscal Years succeeding the date on which such capital improvements are forecasted to be in operation, or (y) in the case of Long-Term Indebtedness not financing capital improvements or in the case of a Guaranty, each of the two full Fiscal Years succeeding the date on which the Indebtedness is incurred, as shown by projected financial statements for the Obligated Group for each such period, accompanied by a statement of the relevant assumptions upon which such projected financial statements for the Obligated Group are based; provided, however, that if a report of a Consultant states that Governmental Restrictions have been imposed which make it impossible for the coverage requirements of the Master Indenture to be met, then such coverage requirements will be reduced to the maximum coverage permitted by such Governmental Restrictions but in no event less than (b) In addition to, and not in lieu of, Long-Term Indebtedness permitted to be incurred under clause (a) above, Long-Term Indebtedness may be incurred provided that immediately after giving effect to any Long-Term Indebtedness incurred pursuant to this clause (b), the aggregate of Long-Term Indebtedness incurred under this clause (b) and the aggregate principal amount of Indebtedness incurred pursuant to clause (d)(i) below and then outstanding will not exceed 25% of Operating Revenues calculated in accordance with the Accounting Principles for the most recent Fiscal Year for which Audited Financial Statements are available. (c) Long-Term Indebtedness may be incurred for the purpose of refunding any Outstanding Long-Term Indebtedness if, prior to the incurrence of such Long-Term Indebtedness, (i) if the Long-Term Indebtedness to be incurred does not constitute Cross-over Refunding Indebtedness there is delivered to the Master Trustee (A) an Officer s Certificate of the Obligated Group Representative demonstrating that the Maximum Annual Debt Service will not increase by more than 10% after the incurrence of such proposed refunding Long-Term Indebtedness and after giving effect to the disposition of the proceeds thereof and (B) an Opinion of Counsel stating that upon the incurrence of such Proposed Long-Term Indebtedness and application of the proceeds thereof, the Outstanding Long-Term Indebtedness to be refunded thereby will no longer be Outstanding; or (ii), if the Indebtedness proposed to be issued is Crossover Refunding Indebtedness, there is delivered to the Master Trustee an Officer s Certificate of the Obligated Group Representative stating that the total Maximum Annual Debt Service immediately following the Cross-over Date will not exceed the Maximum Annual Debt Service immediately prior to the issuance of the Cross-over Refunding Indebtedness by more than 10% assuming for the purpose of the test only that no other Additional Indebtedness is incurred between the date of issuance of the Cross-over Refunding Indebtedness and the Cross-over Date. 18

27 (d) (i) Short-Term Indebtedness may be incurred subject to the limitation that immediately after giving the effect to any Short-Term Indebtedness incurred pursuant to this clause (d)(i), the aggregate of all Indebtedness Outstanding under this clause (d)(i) and clause (b) above will not exceed 25% of Operating Revenues, calculated in accordance with the Accounting Principles, for the most recent Fiscal Year for which Audited Financial Statements are available. (ii) Short-Term Indebtedness may also be incurred if the tests set forth in clauses (a)(i) or (a)(ii) above are met with respect to the incurrence of such Short-Term Indebtedness. For the purpose of calculating compliance with the Long-Term Indebtedness coverage tests set forth in clauses (a)(i) or (a)(ii) above, the Short-Term Indebtedness to be incurred as described in this clause (d)(ii) will be deemed to be Long-Term Indebtedness. (e) Non-Recourse Indebtedness may be incurred for the purposes of acquiring Property and improving the Property acquired, either simultaneously or subsequent to the acquisition of such Property with Non-recourse Indebtedness, without limit. (f) Completion Indebtedness may be incurred without limitation; provided, however, that prior to the incurrence of Completion Indebtedness in a principal amount in excess of ten percent (10%) of the principal amount of the Long-Term Indebtedness originally incurred to finance the costs of construction or acquisition of the facilities with respect to which such Completion Indebtedness is to be incurred, the Obligated Group Representative will furnish to the Master Trustee a certificate of an architect estimating the costs of completing the facilities for which Completion Indebtedness is to be incurred, and an Officer s Certificate of the Chief Financial Officer of the Member of the Obligated Group for which Completion Indebtedness is to be incurred certifying that the amount of Completion Indebtedness to be incurred will be sufficient, together with other available funds to complete construction of the facilities in respect of which Completion Indebtedness is to be incurred. (g) Subordinated Debt may be incurred without limit. (h) Indebtedness under a Credit Facility (including a Guaranty of indebtedness under a Credit Facility) may be incurred without limit. (i) Indebtedness secured by Accounts may be incurred in any amount not to exceed 25% of the carrying value of the Accounts, determined in accordance with generally accepted accounting principles. (j) Derivative Indebtedness pursuant to a Derivative Agreement relating to Indebtedness issued or to be issued under the Master Indenture may be incurred without limit. Derivative Indebtedness means payments for which a Member of the Obligated Group shall have become obligated under a Derivative Agreement, excluding any termination or other payments under such Derivative Agreement not determined by reference to the application of an interest rate or index to the notional amount. (k) Ad Valorem Tax Secured Indebtedness may be issued without limit. 19

28 (l) Indebtedness may be incurred in connection with the sale of Accounts to the extent Accounts are permitted to be sold pursuant to the Master Indenture. Indebtedness incurred pursuant to any of the subsection (b), (d)(i) or (d)(ii) above may be reclassified as indebtedness incurred pursuant to any other of such subsections if the tests set forth in the subsection to which such Indebtedness is to be reclassified are met at the time of such reclassification. Indebtedness containing a put or tender provision pursuant to which the holder of such Indebtedness may require that such Indebtedness be purchased prior to its maturity will not be considered Balloon Long-Term Indebtedness solely by reason of such put or tender provision, and the put or tender provision will not be taken into account in testing compliance with any debt incurrence test pursuant to the Master Indenture provided there is a Credit Facility in place to provide liquidity for the purchase of such Indebtedness pursuant to a put or tender 1. Limitations on Creations of Liens. Each Member of the Obligated Group has agreed that it will not create or suffer to be created or permit the existence of any Lien on Property now owned or hereafter acquired by it other than Permitted Liens. This will not, however, prohibit the Obligated Group from pledging revenues that do not constitute Gross Revenues. Long-Term Maximum Annual Debt Service Coverage Ratio; Rate Covenant. Each Member of the Obligated Group will covenant to set rates and charges for its facilities, services and products such that (i) the Long-Term Maximum Annual Debt Service Coverage Ratio, calculated at the end of each Fiscal Year, will not be less than 1.15 and (ii) the Actual Long- Term Debt Service Coverage Ratio, calculated at the end of each Fiscal Year, will not be less than 1.00; provided, however, that in any case where Long-Term Indebtedness has been incurred to acquire or construct capital improvements, the Long-Term Debt Service Requirement with respect thereto will not be taken into account in making the foregoing calculation until the first full Fiscal Year commencing after the occupation or utilization of such capital improvements to the extent proceeds of such Long-Term Indebtedness are available to pay debt service on such Long-Term Indebtedness prior to such Fiscal Year. Compliance with the foregoing rate covenant will be preliminarily reviewed based upon unaudited financial statements of the Obligated Group within sixty (60) days of the end of each Fiscal Year and will be definitely determined based on the Audited Financial Statements when available (but no later than 120 days after the end of each Fiscal Year). If at the end of any Fiscal Year the Long-Term Maximum Annual Debt Service Coverage Ratio required by the Master Indenture, is not met, the District covenants to retain a Consultant within 30 days of the receipt of the Audited Financial Statements for such Fiscal Year to make recommendations to increase such Long-Term Maximum Annual Debt Service Coverage Ratio in the following Fiscal Year to the required level. Any Consultant so retained will be required to submit such recommendations within 45 days after being so retained. So long as a Consultant is 1 The Obligated Group is in the process of obtaining the required consent to an amendment to the Master Indenture that removes the requirement that a Credit Facility be in place to provide liquidity for the purchase of such Indebtedness pursuant to a put or tender in order for this provision to apply. See PROPOSED AMENDMENTS TO MASTER INDENTURE herein for additional information regarding the amendments and amendment process. See also APPENDIX C Summaries of Basic Documents. 20

29 retained and each Member of the Obligated Group follows such Consultant s recommendations to the extent permitted by law, the rate covenant will be deemed to have been complied with even if the Long-Term Maximum Annual Debt Service Coverage Ratio for the following Fiscal Year is below the required level so long as sufficient Net Revenues and Other Available Revenues are generated to pay the actual debt service payable in such Fiscal Year. The Obligated Group is not required to retain a Consultant to make recommendations more frequently than biennially. If a report of a Consultant is delivered to the Master Trustee that states that Governmental Restrictions have been imposed which make it impossible for the coverage requirement in the Master Indenture to be met, then such coverage requirement will be reduced temporarily to the maximum coverage taking into consideration such Governmental Restrictions, but in no event less than 1.00, and thereafter, for so long as such Governmental Restrictions are in effect, a report of a Consultant stating that Governmental Restrictions which make it impossible for the coverage requirement in the Master Indenture to be met are still in effect is delivered to the Master Trustee biennially. The foregoing covenant with respect to rates and charges is not to be construed to prohibit the Members from serving indigent patients or from serving any other class or classes of patients at reduced rates or free of any charge so long as such service does not prevent the Members from satisfying the other requirements of the covenants described in this section. Nothing provided in the Master Indenture or in the report of the Consultant will obligate or require the District or any other Member of the Obligated Group with taxing powers to levy ad valorem taxes. As a result of the payment of amounts due under the Settlement Agreements described under LITIGATION Information Regarding 2014 Settlements in Qui Tam Action, the District did not meet the coverage requirement described above for the Fiscal Year ended September 30, Waivers were obtained from or on behalf of holders representing a majority of Outstanding Obligations and related Bonds. See also HISTORICAL COVERAGE OF PRO FORMA DEBT SERVICE in Appendix A hereto. Sale, Lease or Other Disposition of Assets, Programs or Services; Disposition of Cash and Investments; Sale of Accounts. Each Member of the Obligated Group will agree that it will not sell, lease or otherwise transfer Property, Plant and Equipment in any Fiscal Year having a net book value in excess of five percent (5%) of the net book value of its Property, Plant and Equipment or sell, lease or otherwise dispose of any programs or services in any Fiscal Year that account for more than five percent (5%) of net patient service revenues (as reflected in the most recent Audited Financial Statements) (referred to in the Master Indenture as a Disposition ) except for Dispositions: (A) To any Person if prior to such Disposition there is delivered to the Master Trustee an Officer s Certificate of the Obligated Group Representative stating that such asset, program or service is inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary and the Disposition will not impair the structural soundness, efficiency or economic value of the remaining assets, programs or services. 21

30 (B) To another Member of the Obligated Group without limit. (C) To any Person if such Disposition is for fair market value and such Disposition is not treated as an extraordinary item in accordance with Accounting Principles and will not impair the structural soundness, efficiency or economic value of the remaining assets, programs or services. (D) To any Person, provided there will be delivered to the Master Trustee prior to such Disposition, an Officer s Certificate certifying that no default or Event of Default under the Master Indenture has occurred and is continuing and that immediately after such Disposition, the conditions to the issuance of at least $1.00 of additional Long- Term Indebtedness pursuant to the Master Indenture would be met. (E) To any Person if the aggregate Book Value of the Operating Assets transferred pursuant to the Master Indenture in the current Fiscal Year does not exceed 10% of the Book Value of all Property of the Obligated Group as shown in the Audited Financial Statements for the most recent Fiscal Year. (F) To any Person any Property, Plant and Equipment received subsequent to the date of the Master Indenture and restricted by the donor thereof to a particular use inconsistent with the business and obligations of the Obligated Group Member. In addition to other Transfers permitted under the Master Indenture, any Member of the Obligated Group may dispose of, transfer, loan or invest in other than marketable or liquid securities Unrestricted Cash and Investments to: (A) another Member of the Obligated Group without limit, (B) any Person provided that Member of the Obligated Group will receive as consideration for such Transfer services or Property, the fair market value of which is at least equal to the amount of the unrestricted cash or marketable securities so transferred, such fair market value to be determined in good faith by the Obligated Group Representative, or (C) any Person, provided that after giving effect to such Transfer, Unrestricted Cash and Investments will, (A) not be less than 60 Days Operating Expenses, or (B) not decline by more than twenty percent (20%) of the lesser of Unrestricted Cash and Investments as of the end of most recent Fiscal Year for which Audited Financial Statements are available and Unrestricted Cash and Investments reflected in the most recent month-end unaudited financial statements, unless after giving effect to such Transfer, Unrestricted Cash and Investments equal at least 150 Days of Operating Expenses. Each Member of the Obligated Group will agree that it will not sell, lease, donate or otherwise dispose of Property which could reasonably be expected at the time of such sale, lease, donation or disposition to result in a violation of the rate covenant provided in the Master Indenture. 22

31 Substitution of 2016 Obligation Pursuant to the Bond Indenture, the Bond Trustee is authorized and directed to accept a substitute obligation issued under a different master trust indenture (the Substitute Obligation ) in substitution for the 2016 Obligation, which Substitute Obligation must provide for the full and timely repayment of the Series 2016 Bonds on substantially the same repayment terms of the existing 2016 Obligation and must be executed and delivered to the Bond Trustee by an entity or a group of entities of which the Members of the Obligated Group are a part, upon receipt of: (i) the written request of the Obligated Group Representative; (ii) an opinion of Bond Counsel to the effect that the substitution of the Substitute Obligation for the 2016 Obligation complies with the terms of this Indenture and will not cause the interest on the Series 2016 Bonds to become includable in the gross income of the owners thereof for federal tax purposes; (iii) an opinion of Counsel to the effect that the New Master Indenture and Substitute Obligation are valid and binding obligations of the obligor or obligors thereunder; and (iv) either (A) written confirmation that, upon consummation of the proposed substitution of such Substitute Obligation, the Series 2016 Bonds will be rated no less than A or A2 or its equivalent by at least two of Fitch, S&P or Moody s Investor Services, Inc., or its successors and assigns; or (B) written confirmation from each Rating Agency that, upon consummation of the proposed substitution of such Substitute Obligation, the Series 2016 Bonds will be rated no lower than they are rated immediately prior to such substitution and the new master indenture contains a pledge of net revenues substantially similar to the pledge of Net Revenues established under the Master Indenture or a pledge of gross revenues securing payment of such Substitute Obligation on a parity with other obligations issued under such master indenture. The Bond Trustee will mail written notice of the proposed substitution of the Substitute Obligation to the registered owners of all Series 2016 Bonds Outstanding not less than thirty (30) days prior to the effective date of such substitution. Upon satisfaction of the conditions set forth above, the Bond Trustee will accept the Substitute Obligation and cancel and return the 2016 Obligation and, upon such acceptance and substitution, there will be made such amendments to the Bond Indenture as shall be appropriate to implement such substitution, including, without limitation, conforming amendments to ensure consistency between the Bond Indenture and the new master trust indenture and to entitle the Bond Trustee to all benefits available under the new master trust indenture under which such Substitute Obligation is issued. 23

32 PROPOSED AMENDMENTS TO MASTER INDENTURE The 2016 Supplement includes certain amendments to the Master Indenture. The amendments will not become effective until the Holders of not less than a majority of the principal amount of the Obligations Outstanding have consented to them. By purchasing the Series 2016 Bonds, the holders of the Series 2016 Bonds will be deemed to consent to and direct the Bond Trustee to consent to the amendments to the provisions of the Master Indenture described in the 2016 Supplement. The consent of the holders of the Series 2016 Bonds, together with the consent of J.P. Morgan Chase as the Credit Facility Provider of the Outstanding Series 2008 Bonds (as herein defined), will be sufficient to meet the amendment requirements under the Master Indenture. The following is a summary of the proposed amendments. (i) Subsection 3.06(a) of the Master Indenture will be amended to modify one of the tests for Long-Term Indebtedness by requiring satisfaction of the historical coverage test for one year instead of two years. The amended provision will read as follows: (a) Long-Term Indebtedness may be incurred if prior to incurrence of the Long-Term Indebtedness there is delivered to the Master Trustee: (1) An Officer's Certificate of the Obligated Group Representative certifying that the Long-Term Maximum Annual Debt Service Coverage Ratio for the most recent Fiscal Year preceding the date of delivery of the certificate of the Obligated Group Representative for which there are Audited Financial Statements available taking all Long- Term Indebtedness incurred after the end of such period and the proposed Long-Term Indebtedness into account as if such proposed Long-Term Indebtedness had been incurred at the beginning of such period, is not less than 1.15; or (2) (A) an Officer's Certificate of the Obligated Group Representative demonstrating that the Long-Term Maximum Annual Debt Service Coverage Ratio for the period mentioned in subsection (a)(i) above, excluding the proposed Long-Term Indebtedness, is at least 1.25 and (B) a report of a Consultant (or in the case of a Long-Term Maximum Annual Debt Service Coverage Ratio calculated in (ii)(a) above is greater than 1.50, a certificate of the Obligated Group Representative) demonstrating that the forecasted Long-Term Maximum Annual Debt Service Coverage Ratio, calculated taking into account the Outstanding Long-Term Indebtedness and the Long-Term Indebtedness proposed to be issued is not less than 1.15 for (x) in the case of Long-Term Indebtedness (other than a Guaranty) to finance capital improvements, each of the two full Fiscal Years succeeding the date on which such capital improvements are forecasted to be in operation, or (y) in the case of Long-Term Indebtedness not financing capital improvements or in the case of a Guaranty, each of the two full Fiscal Years succeeding the date on which 24

33 the Indebtedness is incurred, as shown by projected financial statements for the Obligated Group for each such period, accompanied by a statement of the relevant assumptions upon which such projected financial statements for the Obligated Group are based; provided, however, that if a report of a Consultant states that Governmental Restrictions have been imposed which make it impossible for the coverage requirements to be met, then such coverage requirements shall be reduced to the maximum coverage permitted by such Governmental Restrictions but in no event less than (b) The last paragraph of Section 3.06 of the Master Indenture will be amended to remove reference to any requirement for a credit facility and the new amended provision will read as follows: Indebtedness containing a put or tender provision pursuant to which the holder of such Indebtedness may require that such Indebtedness be purchased prior to its maturity shall not be considered Balloon Long-Term Indebtedness solely by reason of such put or tender provision, and the put or tender provision shall not be taken into account in testing compliance with any debt incurrence test pursuant to Section (c) Pursuant to the consent of the registered owners of the Series 2016 Bonds and direction to the Bond Trustee provided in Section 9.08(b) of the Bond Indenture, the Bond Trustee, as the Owner of Obligation No. 10, by acceptance of Obligation No. 10,will be deemed to have irrevocably consented to the amendments to the Master Indenture. [Remainder of page intentionally left blank] 25

34 ESTIMATED SOURCES AND USES OF FUNDS The proceeds of the Series 2016 Bonds, together with other legally available funds of the District, are expected to be applied substantially as follows: ESTIMATED SOURCES OF FUNDS: Par Amount of Series 2016 Bonds $165,490, Net Original Issue Premium 9,934, Other Legally Available Funds (1) 20,829, Total $196,253, ESTIMATED USE OF FUNDS: Deposit to Escrow Deposit Trust Fund $168,733, Deposit to 2016 Project Fund 25,746, Costs of Issuance for Series 2016 Bonds (2) 1,774, Total $196,253, (1) Represents interest and principal account funds allocable to the Refunded Bonds and amounts on deposit in the debt service reserve funds for the Refunded Bonds. (2) Includes underwriting discount, fees and expenses of counsel, the financial advisor and the auditor, as well as other costs of issuance. [Remainder of page intentionally left blank] 26

35 ESTIMATED DEBT SERVICE REQUIREMENTS The estimated annual debt service requirements and outstanding long-term debt service after the issuance of the Series 2016 Bonds are as follows: Total Estimated Year Ended Outstanding Long-Term Series 2016 Bonds Aggregate Annual September 30 Debt Service (1) Principal Interest Total Debt Service Debt Service 2016 $ 8,114,126 $ - $ 1,250,943 $ 1,250,943 $ 9,365, ,672,974 1,595,000 7,263,538 8,858,538 20,531, ,724,100 1,590,000 7,215,688 8,805,688 20,529, ,205,300 1,170,000 7,152,088 8,322,088 20,527, ,210,876 1,225,000 7,093,588 8,318,588 20,529, ,191,224 1,305,000 7,032,338 8,337,338 20,528, ,195,050 1,365,000 6,967,088 8,332,088 20,527, ,203,800 1,425,000 6,898,838 8,323,838 20,527, ,212,626 1,490,000 6,827,588 8,317,588 20,530, ,193,724 1,580,000 6,753,088 8,333,088 20,526, ,205,800 1,650,000 6,674,088 8,324,088 20,529, ,774,800 6,165,000 6,591,588 12,756,588 20,531, ,788,076 6,460,000 6,283,338 12,743,338 20,531, ,777,674 6,790,000 5,960,338 12,750,338 20,528, ,776,500 7,130,000 5,620,838 12,750,838 20,527, ,777,000 7,490,000 5,264,338 12,754,338 20,531, ,779,826 7,740,000 5,011,550 12,751,550 20,531, ,767,424 8,135,000 4,624,550 12,759,550 20,526, ,773,250 8,540,000 4,217,800 12,757,800 20,531, ,779,250 8,960,000 3,790,800 12,750,800 20,530, ,786,076 9,400,000 3,342,800 12,742,800 20,528, ,771,924 9,885,000 2,872,800 12,757,800 20,529, ,782,400 10,245,000 2,502,113 12,747,113 20,529, ,171,508 6,240,000 2,117,925 8,357,925 20,529, ,233,869 6,410,000 1,883,925 8,293,925 20,527, ,223,659 6,660,000 1,643,550 8,303,550 20,527, ,389,251 5,745,000 1,393,800 7,138,800 20,528, ,321,923 6,045,000 1,164,000 7,209,000 20,530, ,205,258 7,400, ,200 8,322,200 20,527, ,231,463 7,670, ,200 8,296,200 20,527, ,223,763 7,985, ,400 8,304,400 20,528, ,131, ,131, ,143, ,143,480 Total $ 352,739,151 $ 165,490,000 $ 137,282,718 $ 302,772,718 $ 655,511,871 (1) Excludes debt service on the Refunded Bonds. Debt service for the variable rate Series 2008 Bonds is calculated based on a principal amount of $70,000,000 and an assumed synthetic swap fixed payor rate of 3.837%. See Interest Rate Swap Risk and Risks Relating to Outstanding Variable Rate Bonds under the heading BONDHOLDER RISKS, herein. 27

36 BONDHOLDER S RISKS The purchase of the Series 2016 Bonds involves certain investment risks that are discussed throughout this Official Statement. Accordingly, each prospective purchaser of the Series 2016 Bonds should make an independent evaluation of all of the information presented in this Official Statement in order to make an informed investment decision. Certain of these risks are described below. Some of the identifiable risks which should be considered when making an investment decision regarding the Series 2016 Bonds are discussed below. Such discussion is not, and is not intended to be, exhaustive. General As set forth under SECURITY FOR THE SERIES 2016 BONDS the principal of, premium, if any, and interest on the Series 2016 Bonds are payable solely from the Net Revenues of the Obligated Group. The revenues and expenses of the Obligated Group are subject to, among other things, future economic, political and other conditions, including demand and payment for healthcare services, the ability of the Obligated Group to provide the services required by patients, the capabilities of the management of the Obligated Group, physicians' confidence in the Obligated Group, economic developments in the Obligated Group's service area, malpractice and other litigation, competition, changes in the rates and methods of thirdparty reimbursement and governmental regulations that may adversely affect the financial condition of the Obligated Group and other conditions which are unpredictable and may not be quantifiable or determinable at this time. No representation or assurance can be made or given that Net Revenues will be realized by the Obligated Group (or any future Member of the Obligated Group), in amounts sufficient to make payments under the Master Indenture to pay the principal of, premium, if any, and interest on the Series 2016 Bonds. Economic Recovery and Disruptions to Credit Market 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 recent economic recession in 2008 and Economic conditions are adversely affecting revenue available to the State. This has been compounded by increasing expenses associated with various state programs, including Medicaid. Stresses on the state budget have resulted in delays of payments due under Medicaid and other state programs and may result in future delays, reductions in payments or changes in eligibility for Medicaid or other state programs. The current economic climate has adversely affected the health care sector generally. Patient service revenues and inpatient volumes have not increased as historic trends would otherwise indicate. Until recently, unemployment rates were increasing nationally, which resulted in increases in self-pay admissions, increased levels of bad debt and uncompensated care, reduced demand for elective procedures, and reduced availability and affordability of health insurance. The economic climate also increased stresses on state budgets, potentially resulting in reductions in Medicaid payment rates or Medicaid eligibility standards and delays in payment of 28

37 amounts due under Medicaid and other state or local payment programs. Any similar economic recession in the future could have similar or worse effects. 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 requirement that states promptly reimburse healthcare providers. ARRA also established a framework for the implementation of a nationally-based information technology platform, including incentive payments that commenced in 2011 to eligible healthcare providers to encourage implementation of health information technology and meaningful use of electronic medical records. The incentive payments will be payable annually for up to four years to eligible providers that demonstrate meaningful use of electronic health records, assuming federal funding exists. Beginning in 2015, Medicare eligible providers that do not demonstrate meaningful use of electronic health records will receive a downward adjustment in federal reimbursement. Government Regulation of the Health Care Industry A significant portion of the revenues of the Obligated Group is derived from government reimbursement programs including, in particular, the Medicare and Medicaid programs. During fiscal years ended September 30, 2014 and 2015, Medicare accounted for 39.9% and 39.7%, respectively, of the Obligated Group s net patient service revenue. In fiscal years ended September 30, 2014 and 2015, Medicaid accounted for 16.4% and 13.3%, respectively of the Obligated Group s net patient service revenue. Medicare is a federal program of insurance which, in general, provides for payment of hospital and certain other medical costs of persons who are 65 years of age and older, are disabled or who have end-stage renal (kidney) disease. Medicaid is the commonly accepted name for the hospital reimbursement program created by certain provisions of the federal Social Security Act to benefit indigent persons who are aged, blind or disabled, or members of families who are eligible for Florida s Temporary Cash Assistance program. Medicaid is a combined federal and state program. In addition to the Medicare and Medicaid programs, the Obligated Group and the health care industry in general are subject to regulation by a number of governmental agencies which affect the provision, administration and payment of health care services on both a national and local basis. Health care providers, including the Obligated Group (and any future Member of the Obligated Group), have been and will be affected significantly by changes that have occurred in the last several years in federal and state health care laws and regulations, particularly those pertaining to Medicare and Medicaid. See REGULATION OF THE HEALTH CARE INDUSTRY. Licenses, Certificates and Accreditations The health care facilities of the Obligated Group are subject to regulatory action and policy changes by governmental and private agencies that administer Medicare, Medicaid and third-party payment programs, as well as action by, among others, the Florida Public Employee Relations Commission, The Joint Commission (previously, the Joint Commission on Accreditation of Healthcare Organizations) ( TJC ) and other federal, state and local government agencies. The Obligated Group currently anticipates no difficulty in renewing or maintaining currently held licenses, certifications or accreditations, and does not anticipate a reduction in third-party payments that would materially and adversely affect its operations or 29

38 financial condition where the reduction is due to licensing, certification or accreditation difficulties. Nevertheless, actions in any of these areas could result in a reduction in utilization, revenues or both, or the inability of the Obligated Group (and any future Member of the Obligated Group) to operate all or a portion of such facilities, and, consequently, could adversely affect the financial condition of the Obligated Group (and any future Member of the Obligated Group). Commercial Insurance and Managed Care During the fiscal years ended September 30, 2014 and 2015, the Obligated Group s commercial and managed care insurance programs accounted for 43.2% and 46.5%, respectively of the Obligated Group s net patient revenue. In each of the fiscal years ended September 30, 2014 and 2015, the managed care programs involved approximately 50 managed care contracts which provide for reimbursement under several methodologies. Commercial insurers and managed care programs may in the future revise their payment methodology to reduce the amounts paid to hospitals or to reduce the rate of increase in payments. No assurance can be given that the number of patients using the services of the Obligated Group (and any future Member of the Obligated Group) which participate in managed care programs will remain unchanged. An increase in the use of such plans or the loss of managed care contracts could adversely impact the Obligated Group s (and any future Member of the Obligated Group) patient service revenues. Managed Care Organizations Health maintenance organizations, preferred provider organizations and other managed health care systems (collectively, Managed Care Organizations ) are providers of health care coverage significantly different from traditional commercial insurers. Managed Care Organizations represent a broad continuum of systems generally designed to favorably affect the cost, the site and/or the utilization of health care services from a patient standpoint. As such, they include health maintenance organizations, which generally accept uniform per-employee payments from employers and/or employees with fees based on the number of enrollees and in return agree to provide all, or substantially all, of an enrollee s health care needs, and preferred provider organizations, which generally negotiate favorable prices with providers and thus create preferred provider arrangements. Managed Care Organizations often rely upon case management analysis to reduce utilization of health care services, including discouraging an enrollee s admission to a hospital unless determined to be absolutely necessary. As Managed Care Organizations enrollment increases, such entities also become significant purchasers of health care services from hospitals and other providers enabling them to negotiate separate pricing terms and select health providers offering the most cost-effective services. Such case and cost management efforts on behalf of Managed Care Organizations may adversely affect utilization of the Hospital Facilities and/or patient revenues. Most Managed Care Organizations pay health care facilities on a discounted fee-forservice basis or on a discounted fixed rate per day of care. The discounts offered to Managed Care Organizations may result in payment at less than actual cost and the volume of patients directed to a health care facility under a Managed Care Organization s contract may vary significantly from projections. In cases where a Managed Care Organization is a major 30

39 purchaser of services from a particular health care facility operated by the Obligated Group (or any future Member of the Obligated Group), a contract rate reduction, contract cancellations, inability to pay, failure to make prompt payment, difficulty in meeting solvency thresholds, business failure or bankruptcy of the Managed Care Organization may have a substantial negative effect on the Obligated Group s (or any future Member of the Obligated Group) financial condition. In recent years, a number of Managed Care Organizations have become insolvent or experienced financial pressure or cash flow issues. Such plans range in size from smaller local provider-based plans to some of the largest plans in the United States. These plans include traditional commercial insurers, as well as health maintenance organizations and preferred provider organizations. Managed Care Organizations that experience financial pressure may slow payment to providers, withhold pay entirely, or utilize claims payment methodology that systematically reduces compensation on a per claim basis. Managed Care Organizations that become insolvent may seek either federal bankruptcy or state insurance insolvency protection. Such bankruptcy or insurance insolvency protection may require that providers repay certain claims to the Managed Care Organization, or result in certain claims becoming uncollectible. It is not possible at this time to predict the future of the managed care industry in general or of specific Managed Care Organizations, or to predict what impact the state of the financial health of such organizations might have on the Obligated Group (or any future Member of the Obligated Group). Increased Competition The Obligated Group (and any future Member of the Obligated Group) will likely face increased competition from other providers of health care that offer health care services to the population which the Obligated Group (and any future Member of the Obligated Group) services. This could include the construction of new, or the renovation of existing, hospitals, Managed Care Organization facilities, ambulatory surgical centers and other ambulatory care facilities, free standing emergency facilities, and private laboratory and radiological services. Limitations on, or the elimination of, the State s existing certificate of need program could result in the entry of additional providers of health care in the Obligated Group s (and any future Member of the Obligated Group) service area and affect its ability to attract physicians and patients. For example, there has been an ongoing effort to eliminate or relax many of Florida s certificate of need requirements for many years, with limited success. Lawmakers have introduced bills in the State s 2016 legislative session to revise the certificate of need program. A reduction in the application of certificate of need requirements could increase competition for the Obligated Group (and any future Member of the Obligated Group). There are some services that could be provided by others which could be substituted for some of the revenue generating services offered by the Obligated Group (and any future Member of the Obligated Group). For example, home care, intermediate nursing care, preventive care, ambulatory care and drug and alcohol abuse programs are services that could serve as substitutes for hospital treatment. Uncompensated Care Hospital providers across the country continue to see a rise in uncompensated care as a result of increased unemployment or other adverse economic conditions that further increase the 31

40 proportion of patients who are unable to pay fully for their cost of care. The Obligated Group, like many other hospital systems in Florida, has seen a marked increase in the amounts of uncompensated care. With respect to the Obligated Group, the cost of uncompensated care has generally been absorbed by a combination of tax revenues and margins generated by contracts with Managed Care Organizations. Increases in contracted reimbursement rates may not be sufficient to fully offset the increased cost of uncompensated care. Physician Relationships The primary relationship between a hospital and physicians practicing in such hospital is through the hospital s organized medical staff. Medical staff bylaws, rules, and policies establish the criteria and procedures by which a physician may have his or her privileges or membership curtailed, denied or revoked. Physicians who are denied medical staff membership or certain clinical privileges, or who have such membership or privileges curtailed, denied or revoked may file legal actions against hospitals and medical staffs. Such actions may include a wide variety of claims, some of which could result in substantial uninsured damages to a hospital. In addition, failure of the hospital governing body to adequately oversee the conduct of its medical staff may result in hospital liability to third parties. All hospitals, including the Hospital Facilities, are subject to such risks. Inpatient Psychiatric Services On November 15, 2004, the Centers for Medicare and Medicaid Services ( CMS ) issued its final rule regarding the implementation of a prospective payment system for Medicare payment of inpatient hospital services provided by psychiatric hospitals and psychiatric units of acute care hospitals. Payments under this prospective payment system are based on per diem payments. The rule went into effect on January 1, This prospective payment system has caused a psychiatric unit with costs above the prospective payment rate to incur losses on those services provided by Medicare. The Obligated Group s psychiatric unit has not been materially impacted by this rule. Audits, Exclusions, Fines, Withholds and Enforcement Actions Health care providers participating in Medicare and Medicaid are subject to audits and retroactive audit adjustments by fiscal intermediaries under the Medicare and Medicaid programs. From an audit, a fiscal intermediary may conclude that services may not have been provided under the direct supervision of a physician (to the extent so required), that a patient should not have been characterized as an inpatient, that certain services provided prior to admission as an inpatient should not have been billed as outpatient services, or that certain required procedures or processes were not satisfied, or that certain costs were unreasonable, not allowable, not incurred or incorrectly classified. As a consequence, payments may be retroactively disallowed. Regulations also provide for withholding of payments in certain circumstances, and such withholdings could have a substantial adverse effect on the financial condition of the health care provider, including, the Obligated Group (or any future Member of the Obligated Group). Under certain circumstances, payments made may be determined to have been made as a consequence of improper claims subject to the federal and state False Claims Act or other federal statutes, subjecting the health care provider to civil or criminal sanctions. The 32

41 Obligated Group, as a health care provider is subject to all such risks. See the information under the heading REGULATION OF THE HEALTHCARE INDUSTRY. Compliance Monitoring On March 10, 2014, the District and the U.S. Government entered into a settlement agreement related to litigation in a qui tam action to resolve a dispute with Medicare related to the federal Stark Law and billing inconsistencies by physicians of the District. The District has agreed to operate under a five-year Corporate Integrity Agreement, which provides for oversight of physician contracts and federal healthcare law compliance. The District has implemented internal controls and procedures to ensure that similar violations do not occur in the future. The District could be subject to additional penalties for any future noncompliance under the monitoring program. See the information under the heading REGULATION OF THE HEALTHCARE INDUSTRY FEDERAL AND STATE LEGISLATION; -- NATIONAL HEALTH CARE REFORM -- Medicare/Medicaid Anti-Referral Laws and LITIGATION Information Regarding the 2014 Settlements in Qui Tam Action for additional information related to the settlements of the qui tam action. Antitrust Antitrust liability may arise in a wide variety of circumstances, including medical staff privilege disputes, contracting with commercial insurers, Managed Care Organizations and other third party payors, 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. 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 instances. At various times, the Obligated Group (and any future Member of the Obligated Group) may be subject to an investigation or inquiry by a governmental agency charged with the enforcement of the antitrust laws, or may be subject to administrative or judicial action by a federal or state agency or a private party. Common areas of potential liability are joint action among providers with respect to third party payor contracting and medical staff credentialing. With respect to third party payor contracting, the Obligated Group (and any future Member of the Obligated Group) may, from time to time, 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 seek treble damages. Health care providers, including the Obligated Group (and any future Member of the Obligated Group), regularly have disputes regarding credentialing and peer review, and therefore may be subject to liability in this area. In addition, health care providers occasionally indemnify medical staff members who are involved in such credentialing or peer review activities, and may, therefore, also be liable with respect to such indemnity. In recent years, the Federal Trade Commission ( FTC ) has aggressively pursued many actions against physician networks and physician-hospital organizations, which have resulted in settlements in most cases. The FTC also recently announced that it would focus on examining 33

42 hospital mergers to determine whether such mergers have produced the promised benefits. The FTC has indicated that it may attempt, and in fact has attempted, to undo hospital mergers that have not produced the benefits that justified the merger (e.g., clinical integration, improved quality, assumption of financial risk, lowered costs, and/or increased competition). On October 25, 1999, the State of Florida, Office of the Attorney General ( Florida Attorney General ) entered into a Settlement Agreement with the Obligated Group and Columbia/HCA (the Settlement Agreement ). The Settlement Agreement marked the culmination of an investigation by the Florida Attorney General regarding the proposed acquisition by the Obligated Group of certain assets of Columbia/HCA, including Atlantic Medical Center-Daytona ( Daytona Hospital ) as well as Columbia Medical Center-Peninsula d/b/a Atlantic Medical Center-Ormond. Under the Settlement Agreement, the Obligated Group was permitted by the Florida Attorney General to proceed with the acquisition of Daytona Hospital, and in fact acquired the Daytona Hospital in November, The Settlement Agreement also contained various restrictions on the Obligated Group acting in concert, combining, or communicating with Southeast Volusia Hospital District or any of its affiliates with respect to the pricing, reimbursement, negotiation or contracting for inpatient acute care hospital services. Possible Staffing Shortages In recent years, the healthcare industry has suffered from a scarcity of nursing and other qualified health care technicians and personnel. Factors underlying this trend include a decrease in the number of persons entering the nursing profession and other qualified health care positions, and the aging of the workforce generally. Any of these factors may be expected to intensify in the future, aggravating the shortage of nursing personnel or other qualified health care technicians and personnel. This trend could force the Obligated Group (and any future Member of the Obligated Group) to pay higher than anticipated salaries to nursing and other qualified health care technicians and personnel as competition for such employees intensifies and, in an extreme situation, could lead to difficulty in the Hospital Facilities maintaining licenses to provide nursing and other healthcare services, and, thus, maintaining eligibility for reimbursement under Medicare and the various state Medicaid programs. Malpractice and General Liability Insurance In recent years, the number of malpractice and general liability suits and the dollar amount of damage recoveries have increased nationwide, resulting in substantial increases in insurance premiums. Actions alleging wrongful conduct and seeking punitive damages are often filed against hospitals. Insurance does not provide coverage for judgments for punitive damages. As a political subdivision of the State, the Obligated Group enjoys sovereign immunity with respect to tort liability. A state statute provides a limited waiver of this immunity relating to tort claims, including, without limitation, medical malpractice claims. The limited waiver permits up to $200,000 per claim and $300,000 per occurrence. In order to recover a judgment for a tort claim greater than the statutory limit, a claimant must petition the Legislature of the State of Florida and obtain special legislation known as a Claim Bill (or sometimes called a relief act). The Obligated Group is self-insured for various risks of loss, including professional and general 34

43 liability losses, workers compensation claims, and employees health claims. Self-insurance funds are held by a trustee bank and recorded as assets whose use is limited. Professional and general liability losses are recorded when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. Should judgments or settlements exceed insurance coverages or self-insurance reserves, it could have a material adverse effect on the financial condition of the Obligated Group. Moreover, the Obligated Group is unable to predict the cost or availability of any such insurance in the future. Property and Casualty Insurance Under the Master Indenture, the Obligated Group is required to maintain, or cause to be maintained, insurance (that may include one or more self-insurance programs considered to be adequate) covering property and casualty risks, in such amounts and with such deductibles and co-insurance provisions as in the judgment of the Obligated Group are adequate to protect it and the Hospital Facilities and Obligated Group operations. The Obligated Group purchases property and casualty insurance, including windstorm coverage, for all of its facilities at deductibles and limits that in its judgment are adequate. From time to time, active hurricane seasons can reduce the capacity of the insurance industry in general and can lead to increased premiums and reduced coverage for purchasers of insurance. The Obligated Group believes that the current coverage limits provide reasonable coverage under the circumstances to protect the property of the Obligated Group. Nevertheless, should losses exceed insurance coverage it could have a material adverse effect on the financial condition of the Obligated Group. Moreover, the Obligated Group is unable to predict the cost or availability of any such property and casualty insurance when its current coverage expires. Changes Due to Technology and Services Scientific and technological advances, new procedures, drugs and appliances, 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 software, equipment and services for diagnosis and treatment. The acquisition and operation of certain software, equipment or services may continue to be a significant factor in hospital utilization, but the ability of the Obligated Group to offer such equipment or services may be subject to the availability of software, equipment or specialists, governmental approval or the ability to finance such acquisitions or operations. Environmental Laws and Regulations Healthcare providers are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations which address, among other things, hospital operations, facilities and properties owned or operated by hospitals. Among the type of regulatory requirements faced by hospitals are (a) air and water quality control requirements, (b) waste management requirements, (c) specific regulatory requirements applicable to asbestos, polychlorinated biphenyls and radioactive substances, (d) requirements for providing notice to employees and members of the public about hazardous materials handled 35

44 by or located at hospitals and (e) requirements for training employees in the proper handling and management of hazardous materials and wastes. In their role as the owners and operators of properties and facilities, the Obligated Group may be subject to liability for hazardous substances that may have migrated off their properties, including remediation thereof. Typical hospital operations include, but are not limited to, in various combinations, the handling, use, storage, transportation, disposal and discharge of hazardous, infectious, toxic, radioactive, flammable and other materials, wastes, pollutants or contaminants. As such, hospital operations are particularly susceptible to the practical, financial and legal risks associated with compliance with such laws and regulations. Such risks may (a) result in damage to individuals, property or the environment, (b) interrupt operations and increase their cost, (c) result in legal liability, damages, injunctions or fines and (d) result in investigations, administrative proceedings, penalties or other governmental agency actions. There is no assurance that the Obligated Group will not encounter such risks in the future, and such risks may result in material adverse consequences to the future operations or financial condition of the Obligated Group (or any future Member of the Obligated Group). At the present time, management of the Obligated Group is not aware of any pending or threatened claim, investigation or enforcement action regarding such environmental issues that, if determined adversely to the Obligated Group, would have a material adverse effect on the Obligated Group s operations or financial condition. Risks Related to Obligations Issued under the Master Indenture The obligations of the Members of the Obligated Group under the Obligations issued under the Master Indenture will be 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. Currently, the District and Holdings are the Members of the Obligated Group, but additional Members may be admitted as described in APPENDIX C SUMMARY OF BASIC DOCUMENTS SUMMARY OF MASTER TRUST INDENTURE Parties Becoming Members of the Obligated Group. Enforceability of Remedies The remedies granted to the Master Trustee and the Bond Trustee or to the owners of the bonds upon an Event of Default under the Bond Indenture and the Master Indenture could be dependent upon judicial actions, which are often subject to discretion and delay. Under existing laws, the remedies specified in the Bond Indenture and in the Master Indenture may not be readily available or may be limited. The various legal opinions delivered concurrently with the delivery of the Series 2016 Bonds will be qualified as to the enforceability of the provisions of the Bond Indenture and of the Master Indenture by limitations imposed by state and federal laws, by rulings and decisions affecting equitable remedies regardless of whether enforceability is sought in a proceeding at law or in equity and by bankruptcy, reorganization, insolvency, receivership or other similar laws affecting the rights of creditors generally. The state of insolvency, fraudulent conveyance and bankruptcy laws relating to the enforceability of guaranties or obligations issued by a governmental entity (such as the District) 36

45 or a corporation (such as Holdings) in favor of the creditors of another, or the obligation of a Member of the Obligated Group to make debt service payments on behalf of another Member of the Obligated Group, is unsettled. The ability to enforce an Obligation issued under the Master Indenture or the nature of such joint and several obligations under the Master Indenture against any Member of the Obligated Group which would be rendered insolvent thereby could be subject to challenge. Treatment of the security for the Series 2016 Bonds under Chapter 9 of the federal bankruptcy code (with respect to the District) is not well-settled and the ability of a bondholder to seek and obtain a writ of mandamus may be limited if a Chapter 9 proceeding was instituted by the District, which in Florida requires the approval of the Governor. A Member of the Obligated Group may not be required to make any payment or to provide for the payment of any guaranty, or portion thereof, the proceeds of which were not loaned or otherwise disbursed to such Member of the Obligated Group, to the extent that such transfer would render such Member insolvent or which would conflict with, not be permitted by or is subject to recovery for the benefit of other creditors of such Member under applicable laws. In particular, such obligations may be voidable under the United States Bankruptcy Code or applicable state fraudulent conveyance statutes if the obligation is incurred without fair or fairly equivalent consideration to the obligor and if the incurrence of the obligation thereby renders a Member of the Obligated Group insolvent. The standards for determining the fairness of consideration and the manner of determining insolvency are not clear and may vary under the United States Bankruptcy Code, state fraudulent conveyance statutes and applicable judicial decisions. Under the United States Bankruptcy Code, a trustee in bankruptcy and, under state fraudulent conveyance statutes and common law, a creditor of a related guarantor, may avoid any obligation incurred by a related guarantor if, among other bases therefore, (i) the guarantor has not received fair consideration or reasonably equivalent value in exchange for the guaranty and (ii) the guaranty renders the guarantor insolvent, as provided in the United States Bankruptcy Code or state fraudulent conveyance statutes, or the guarantor is undercapitalized. There is no clear precedent in the law as to whether such payments from a Member of the Obligated Group in order to make a payment pursuant to the Obligation issued to secure the Series 2016 Bonds may be voided by a trustee in bankruptcy in the event of bankruptcy of such Member, or by third party creditors in an action brought pursuant to state fraudulent conveyance statutes. 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 enforce the covenant of a Member of the Obligated Group to make payment under the Obligation issued to secure the Series 2016 Bonds, a court might not enforce such a covenant in the event it is determined that sufficient consideration for such Obligation was not received or that the incurrence of such Obligation has rendered or will render such Member insolvent or at the time of incurrence of any Obligation under the Master Indenture, such Member was undercapitalized. In addition, a court could determine, in the event of the bankruptcy of a Member of the Obligated Group, that payments made on the Obligation issued to secure the Series 2016 Bonds by any Member of the Obligated Group could constitute payments to or for the benefit of an insider, within the meaning of Section 547(b) of the United States Bankruptcy Code, which 37

46 payments, if made during the one year period prior to the date of the filing of the petition in bankruptcy with respect to the bankrupt Member of the Obligated Group could be recovered by the trustee in bankruptcy from the Holders of the Series 2016 Bonds. The accounts of the Obligated Group and any future Member of the Obligated Group will be combined for purposes of determining whether certain covenants and tests contained in the Master Indenture (including tests relating to the incurrence of additional Indebtedness under the Master Indenture) are met, notwithstanding uncertainties, discussed above, as to the enforceability of certain Obligations of the Members of the Obligated Group contained in the Master Indenture which bear on the availability of the assets and revenues of the Members of the Obligated Group for payment of debt service on the Obligation issued to secure the Series 2016 Bonds or other indebtedness. Enforceability of Lien on Revenues The Master Indenture and the Obligations provide that the Members of the Obligated Group will make the payments required to be made under the Bond Indenture as the same become due. The obligation of the Members of the Obligated Group to make such payments is secured in part by a lien granted to the Master Trustee by each Member of the Obligated Group on its Net Revenues. This lien may become subordinate to certain Permitted Liens under the Master Indenture. Net Revenues paid by the Members of the Obligated Group to other parties in the ordinary course of business might no longer be subject to the lien of the Master Indenture and might therefore be unavailable to the Master Trustee. Further, enforcement by the Master Trustee or the Bond Trustee of any right to receive directly payments under the Medicare and Medicaid programs may be subject to restrictions under federal and state statutes and regulations concerning the assignability of such payments. Because the District is a governmental entity the specific remedies under Florida s Uniform Commercial Code would not be available to enforce the obligations of the District under the Master Indenture. However, the Master Indenture provides that upon the occurrence of any Event of Default, the Master Trustee is entitled as a matter of right to the appointment of a receiver. In the event of bankruptcy of the Members of the Obligated Group, pursuant to the Bankruptcy Code, any receivable coming into existence and any Net Revenues received on or after the date that is 90 days (or, in some circumstances, one year) prior to the commencement of the case in bankruptcy court might not be subject to the lien of the Master Indenture, and under certain circumstances a bankruptcy court or a court of equity may have power to direct the use of Net Revenues to meet other expenses of the Members of the Obligated Group before paying debt service. With respect to receivables and Net Revenues not subject to the lien, the Bond Trustee would occupy the position of an unsecured creditor. The value of the security interest in Gross Revenues could also be diluted by the issuance of additional Obligations. Matters Relating to Security for the Series 2016 Bonds Although Net Revenues of the Obligated Group do not include ad valorem tax receipts of the Obligated Group and the District has not pledged its taxing power to the repayment of the Series 2016 Bonds, the ad valorem tax receipts of the District are taken into account in determining the Obligated Group s compliance with various financial covenants set forth in the 38

47 Master Indenture. The District cannot be compelled to levy ad valorem taxes to pay operating expenses, debt service or any other obligations under the Master Indenture. The Bond Trustee, as assignee of the 2016 Obligation, is entitled to vote the 2016 Obligation or the indebtedness represented thereby in connection with any proposed amendment, change, modification, waiver or consent (collectively, referred to as an amendment ) to or in respect of the Master Indenture. The realization of any rights upon a default under the Master Indenture or the Bond Indenture will depend upon the exercise of various remedies specified in the Master Indenture and the Bond Indenture, respectively. Any attempt by the Master Trustee or the Bond Trustee to enforce such remedies may require judicial action, which is often subject to discretion and delay. Under existing law, certain of the legal and equitable remedies specified in the Master Indenture and the Bond Indenture may not be readily available. Most of the Obligated Group s facilities are designed as healthcare facilities and are not composed of general purpose buildings and equipment. Consequently, it could be difficult to find a buyer or lessee for such facilities, other than one engaged in providing health care, if it were necessary to proceed against such facilities pursuant to a judgment. In addition, certain of the Obligated Group s property is subject to deed, subdivision and zoning restrictions and may also be considered essential public property that is not subject to forced sale. Interest Rate Swap Risk The District has a fixed payor swap agreement in place and may periodically enter into other interest rate swap agreements to hedge interest rate risk. The District s swap agreement may be subject to early termination upon the occurrence of certain specified events. See INFORMATION REGARDING THE OBLIGATED GROUP Interest Rate Swap Policy in Appendix A hereto. If either the District or the counterparty terminates such an agreement when the agreement has a negative value to the District, the District could be obligated to make a termination payment to the counterparty in the amount of such negative value, and such payment could be substantial and potentially materially adverse to the District s financial condition. A Member of the Obligated Group may periodically enter into interest rate swap agreements that require such Member to post collateral to secure its obligations in certain circumstances. The Member s ability to post collateral consisting of cash and securities and thereby place a lien thereon to secure its payment obligations under interest rate swap agreements is subject to certain limitations under the Master Indenture. If a Member of the Obligated Group is unable to post sufficient collateral, the swap counterparty to such swap agreement may have the right to terminate the swap agreement. The Member could be required to make a termination payment to the swap counterparty, the amount of which could be substantial. Risks Related to Outstanding Variable Rate Bonds The Halifax Hospital Medical Center Hospital Revenue Refunding and Improvement Bonds, Series 2008 (the Series 2008 Bonds ) are outstanding variable rate obligations secured by the Master Indenture, the interest rates on which could rise significantly. Such interest rates 39

48 vary on a periodic basis and may be converted to a fixed interest rate prior to maturity. This protection against rising interest rates is limited, however, because the Obligated Group would be required to continue to pay interest at the variable rate until it is permitted to convert the obligations to a fixed rate pursuant to the terms of the applicable transaction documents. Credit market turmoil and dislocation among various bond insurers have each in the past triggered sudden significant increases in variable rate interest costs to many health care organizations. Additionally, the Series 2008 Bonds are subject to purchase from time to time at the option of the owners thereof and are required to be purchased in certain circumstances. As such, the bonds are supported by a remarketing agreement and an irrevocable direct pay letter of credit with a bank. The remarketing agreement generally provides the District the option to market the obligations at the then-prevailing short-term rate, as determined by the remarketing agent. The letter of credit is secured by an interest in any bonds purchased with draws on the letter of credit and amounts payable under the Master Indenture. In the event that all of the Series 2008 Bonds are called for redemption or tendered without being remarketed due to credit or market circumstances, the Obligated Group would be required to draw on the letter of credit. Repayments of principal and interest would begin 367 days after the date of the draw, and be made in 12 equal quarterly installments and any amounts outstanding at the termination date of the letter of credit would be due and payable at that date. Therefore, the entire outstanding amount drawn on the letter of credit would become due on the earliest of the date on which (i) any bonds purchased with funds disbursed under the letter of credit in connection with such draw and held by, or on behalf of, the District are redeemed or cancelled pursuant to the Indenture, (ii) the date on which any Series 2008 Bonds purchased with funds disbursed under the letter of credit are remarketed pursuant to the Indenture, (iii) the date on which the letter of credit is replaced by a substitute letter of credit pursuant to the Indenture, (iv) November 17, 2020 (as may be extended from time to time) or (v) the termination date. Pursuant to the terms of the letter of credit, the Obligated Group is required to comply with certain provisions regarding additional borrowings, capital expenditures, and the maintenance of certain financial ratios. The term of the letter of credit, originally scheduled to expire on November 17, 2015 was extended to November 17, Enforceability of Security Interests and Remedies The enforceability of the Obligated Group s pledge to the Master Trustee of the Net Revenues and other rights of the Obligated Group may be limited by a number of factors, including (i) the provisions prohibiting the direct payment of amounts due to healthcare providers from Medicaid and Medicare programs to persons other than such providers; (ii) the absence of an express provision permitting assignment of receivables due under the contracts between the Obligated Group and third-party payors, and present or future legal prohibitions against such assignment; (iii) certain judicial decisions which cast doubt on the right of the Master Trustee, in the event of the bankruptcy of the Obligated Group, to collect and retain accounts receivable from Medicare, Medicaid and other governmental programs; (iv) commingling of proceeds of accounts receivable with other moneys of the Obligated Group not so pledged under the Master Indenture; and (v) the absence of a statutorily provided methodology for perfecting a lien on Net Revenues granted by a special taxing district. In the event of any default by the Obligated Group under the Master Indenture, the Master Trustee may not be able to require Medicare, Medicaid, or other third-party payors to make payments directly to the Master Trustee. Under current law, such security interest may be further limited by the following, among other factors: (i) statutory liens; (ii) rights arising in favor of the United States 40

49 of America or any agency thereof; (iii) present or future prohibitions against assignment contained in any federal statutes or regulations; (iv) constructive trusts, equitable liens or other rights impressed or conferred by any state or federal court in the exercise of its equitable jurisdiction; (v) federal bankruptcy laws and other laws affecting the rights of creditors generally; (vi) federal and state laws governing fraudulent transfers; (viii) federal bankruptcy laws which may affect the enforceability of the Master Indenture or the security interest in the Net Revenues which are earned by the Obligated Group within 90 days preceding the commencement of bankruptcy proceedings by or against the Obligated Group and during the pendency of such proceedings; (ix) rights of third parties in Net Revenues converted to cash and not in the possession of the Master Trustee; and (x) actions by third party creditors pursuant to the State s fraudulent conveyance statute. Because the District is a governmental entity, it is not subject to any involuntary proceedings initiated against the District. Reliance on Ad Valorem Taxes Subject to certain statutory requirements, ad valorem taxes levied and received by the District are designated by law to fund operating expenses, including maintenance, construction, improvements and repairs to the Medical Center, or fund other expenses in carrying out the business of the District. The District is required by Florida law to use ad valorem tax proceeds to pay for the costs of collection and appraisal services rendered by Volusia County, contribute to various downtown redevelopment districts created by the cities within the District, and reimburse Volusia County for its costs of Medicaid services to various out-of-county healthcare facilities. For the fiscal year ending September 30, 2016, the Board adopted a rate of mill, which is slightly less than the 1.0 mill rate in the prior year, but is estimated to generate substantially the same amount of revenue. Ad valorem tax revenues could be materially adversely affected in the future if the District reduces the millage rate and/or if property values decrease. Other Bondholders Risks The following factors, among others, may also affect the operations or financial performance of the Obligated Group (and any future Member of the Obligated Group): (a) (b) (c) (d) Development of Managed Care Organizations, legislation, regulations or employers encouraging or requiring the use of such organizations as an alternative to the use of the Obligated Group (or any future Member of the Obligated Group) and like institutions for the delivery of health care services; Medical and other scientific advances resulting in decreased usage of hospital facilities or services, including those of the Obligated Group (or any future Member of the Obligated Group); Limitations on the availability of physician, nursing and other qualified health care technicians and personnel; The rising costs of emergency room call coverage by medical specialists; 41

50 (e) (f) (g) (h) (i) (j) (k) (l) (m) Decreases in, or changes to, the demographics of the population within the service area of the Obligated Group (or any future Member of the Obligated Group); The effect of any future unionization of the Obligated Group s employees (or the employees of any future Member of the Obligated Group), strikes and other related work actions, contract disputes, discrimination claims, personal tort actions, work-related injuries, exposure to hazardous materials, interpersonal torts (such as between employees, between physicians or management and employees, or between employees and patients), and other risks that may flow from the relationships between employer and employee or between physicians, patients and employees; Increased unemployment, underinsurance, total loss of insurance, or other adverse economic conditions which could increase the proportion of patients who are unable to pay fully for the cost of their care; Increased efforts by commercial insurers, governmental agencies and other thirdparty payors to limit the cost of hospital services (including, without limitation, the implementation of a system of prospective review of hospital rate changes), to reduce the number of hospital beds and to reduce utilization of hospital facilities by such means as preventive medicine, improved occupational health and safety, and outpatient care; Imposition of wage and price controls for the health care industry, such as those that were imposed in the early 1970s which adversely affected many health care institutions; The ability of, and the cost to, the Obligated Group (and any future Member of the Obligated Group) to continue to insure or otherwise protect itself against malpractice, property utilization, fire, automobile and general comprehensive liability claims; Loss of, or change in, accreditation from TJC or other accrediting agencies; Legislation or changes in revenue rulings governing the not-for-profit or taxexempt status of charitable organizations, including without limitation, requirements to provide increased indigent care at reduced rates or without charge, restrictions on physician recruitment activities, physician compensation relationships, and rules governing physicians and other interested parties serving on the board of directors of a tax-exempt health care entity; Future developments in the spread and treatment of Acquired Immune Deficiency Syndrome ( AIDS ), Ebola Virus Disease or other diseases which could increase the Obligated Group s (or any future Member s) operating costs and the incidence of bad debts, particularly if effective prevention or treatment methods are not promptly developed; 42

51 (n) (o) (p) (q) Other increases in the level of uncompensated services required to be provided by the Obligated Group (and any future Member of the Obligated Group); The ability of the Obligated Group (and any future Member of the Obligated Group) to be included in networks of providers for purposes of selling hospital services to payors that wish to deal with a limited group of providers; The occurrences of hurricanes and other natural or man-made disasters may damage some or all of the facilities, interrupt utility service to some or all of the facilities or otherwise impair the operation of some or all of the facilities operated by the Obligated Group or the generation of revenues from some or all of such facilities; and The dependence on non-operating income, such as investment income, to supplement income from operations. The occurrence of one or more of the foregoing, or the occurrence of other unanticipated events, could adversely affect the Obligated Group s occupancy percentage and/or financial performance. REGULATION OF THE HEALTH CARE INDUSTRY General Health Care Industry Factors The Obligated Group (and any future Member of the Obligated Group) and the health care industry in general are subject to regulation by a number of governmental agencies, including those which administer the Medicare and Medicaid programs, federal, state and local agencies responsible for administration of health planning programs and other federal, state and local governmental agencies. The health care industry is also affected by federal, state and local policies developed to regulate the manner in which health care is provided, administered and paid for nationally and locally. As a result, the health care industry is sensitive to legislative and regulatory changes in such programs and is affected by reductions and limitations in government spending for such programs as well as changing health care policies. The pressure to curb the rate of increase in federal spending in health care programs overall and on a per beneficiary basis is expected to increase as the U.S. population ages. Among other effects, this pressure may result in further reductions in payment rates for hospital services and increased utilization of managed care in the Medicare and Medicaid programs. In addition, Congress and other governmental agencies have focused on the provision of care to indigent and uninsured or underinsured patients, the prevention of dumping such patients on other hospitals in order to avoid provision of unreimbursed care and other issues. Adoption of additional regulations in these areas could have an adverse effect on the results of operations of the Obligated Group (and any future Member of the Obligated Group). Furthermore, laws promulgated by Congress and state legislatures, which regulate the manner in which health care services are provided and billed for, are increasing. As a result, the costs of complying with these laws and regulations are increasing. Some of the legislation and regulations affecting the health care industry are discussed in this section. 43

52 Federal and State Legislation; National Health Care Reform General. A significant portion of the revenues of the Obligated Group are derived from Medicare, Medicaid and other third-party payors. For a breakdown of the sources of payment for services provided by the Obligated Group, see APPENDIX A hereto. Medicare is a federal program administered by CMS, an agency of the United States Department of Health and Human Services ( HHS ), through fiscal intermediaries and carriers. Medicare provides certain health care benefits to beneficiaries who are 65 years of age or older and other classes of individuals. Medicare Part B covers outpatient services, certain physician services, medical supplies and durable medical equipment. Medicaid is a federal/state medical assistance program administered by the various states. Medical benefits are available under each participating state s Medicaid program, within prescribed limits, to persons meeting certain minimum income or other need requirements. Significant changes have been and may continue to be made in certain of these programs, which changes could have an adverse impact on the financial condition of the Obligated Group (and any future Member of the Obligated Group). In addition, bills have been and may be introduced in the Congress of the United States of America which, if enacted, could adversely affect the operations of the Obligated Group (and any future Member of the Obligated Group) by, for example, decreasing payment by Medicare and Medicaid and other third-party payors or limiting the ability of the physicians on the medical staff of the Obligated Group (and any future Member of the Obligated Group) to provide services or increase services provided to patients. Affordable Care Act. In March 2010 Congress enacted major health care legislation, the Patient Protection and Affordable Care Act, which was signed into law on March 23, 2010, and the Health Care and Education Reconciliation Act of 2010, which was signed into law on March 30, 2010 (collectively, the Affordable Care Act ). The Affordable Care Act is extremely complex, and as a result additional legislation is likely to be considered and enacted over time. The Affordable Care Act will also require the promulgation of substantial regulations, with significant effect on the health care industry. Thus, the health care industry will be subjected to significant new statutory and regulatory requirements and consequently to structural and operational changes and challenges for a substantial period of time, assuming the Affordable Care Act survives any further court challenges or is not significantly modified by future legislation or court action. Management of the Obligated Group has and will continue to analyze the Affordable Care Act to assess the effect of the legislation, related regulations and the results of court challenges on their current and projected operations, financial performance and financial condition. Management cannot predict with any reasonable degree of certainty or reliability any interim or ultimate effects of the Affordable Care Act. A significant component of the Affordable Care Act is 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 and, as a consequence, expansion of the base of consumers of health care services covered by some form of third-party insurance. One of the primary drivers of the Affordable Care Act is to provide or 44

53 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 Affordable Care Act intends to accomplish that objective through various provisions, including the following: (i) creating active state-based 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) establishing insurance reforms that expand coverage generally through such provisions as prohibiting the denial of coverage for pre-existing conditions and eliminating lifetime or annual insurance caps; and (v) expanding existing public programs, including Medicaid and the Children s Health Insurance Program, to cover more individuals and families. To the extent any or all of these provisions achieve the intended result, an increase in the 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. The Affordable Care Act is highly politicized. Initiatives to repeal it in whole or in part, to delay elements of implementation or funding, and to offer amendments or supplements to modify its provisions have been proposed. Lawsuits were filed in federal courts challenging, among other things, the constitutionality of the mandate under the Affordable Care Act requiring individuals to purchase health care insurance. Two of the cases were decided by the United States Supreme Court (the Court ) in 2012, in which the Court concluded, among other things, that the mandate and the other parts of the Affordable Care Act are constitutional, except that the states have the option as to whether or not to expand coverage under their respective Medicaid programs with substantial financial assistance from the federal government. Lawsuits were also filed in federal courts challenging, among other things, whether the Internal Revenue Service (the IRS ) may permissibly promulgate regulations to extend tax-credit subsidies to coverage purchased through exchanges established by the federal government. King v. Burwell was decided by the Court on June 25, 2015, in which the Court concluded, among other things, that the tax-credit subsidies were available to individuals who purchased coverage from federallyfacilitated exchanges. At this time it is unclear what further action, if any, Congress, any future presidential administration or the federal courts may take with respect to the Affordable Care Act. In this volatile context, no projections can be made as to the future implementation or content of the Affordable Care Act. Based upon all of the above, it is more difficult for the Obligated Group to project future performance than it has been in the past. Some of the specific provisions of the Affordable Care Act that have and will continue to affect the hospital operations of the Obligated Group (and any future Member of the Obligated Group), their financial performance or their financial condition are described below. This listing is not intended to be, nor should be considered by the reader as comprehensive. The Affordable Care Act is complex and comprehensive, and includes a myriad of new programs and initiatives and changes to existing programs, policies, practices and laws. 45

54 With varying effective dates, the annual Medicare market basket updates for many providers, including hospitals, will be reduced through federal fiscal year 2019 and adjustments to payment for expected productivity gains will also be implemented. Commencing in federal fiscal year 2014, the Medicare disproportionate share hospital ( DSH ) payments were reduced to account for reductions in the national rate of consumers without health care insurance who receive uncompensated care. Commencing in federal fiscal year 2016, a states Medicaid DSH allotment from federal funds will also be reduced in accordance with the health form methodology set forth in the Affordable Care Act. Option to expand the Medicaid programs to a broader population with incomes up to 133% of federal poverty levels. Commencing in federal fiscal year 2013, Medicare payments that would otherwise have been made to hospitals were reduced by specified percentages to account for excess and preventable hospital readmissions. Commencing in federal fiscal year 2015, Medicare payments to certain hospitals for hospital-acquired conditions will be reduced by 1%. Prohibition of federal payments to states for Medicaid service related to health care-acquired conditions commenced in Federal fiscal year Commencing in federal fiscal year 2013, a value-based purchasing program was established under the Medicare program designed to pay hospitals based on performance on quality measures related to common and high cost conditions. With varying effective dates, the Affordable Care Act mandates a reduction of waste, fraud and abuse in public programs by allowing provider enrollment screening, enhanced oversight period for new providers and suppliers, and enrollment moratoria in areas identified as being at elevated risk of fraud in all public programs, and by requiring all Medicare and Medicaid program providers and suppliers to establish compliance programs. A database will be developed to capture and share health care provider data across federal health care programs. There are increased penalties for fraud and abuse violations, significant amendments to existing criminal, civil and administrative anti-fraud and abuse statutes, the imposition of many program integrity provisions that will compel updates and enhancements to business operations and compliance policies, and increased funding for anti-fraud activities. The enforcement provisions could greatly increase potential legal exposure of providers. Establish an Independent Payment Advisory Board ( Advisory Board ) to develop proposals to improve the quality of care and to limit cost increases. Beginning January 15, 2019, if the Medicare growth rate exceeds the target growth rate as determined by the CMS Office of the Actuary, the Advisory Board is required to develop proposals to reduce the growth rate and require the Secretary of HHS to implement those proposals, unless Congress enacts legislation related to the proposals. 46

55 Prohibit new or expanded physician ownership of hospitals. The Affordable Care Act provides for the implementation of various demonstration programs and pilot projects under both the Medicare and Medicaid programs 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. The demonstration projects include an initiative to develop alternatives to current tort litigations for resolving disputes over injuries caused by health care providers or health care organizations. Other provisions encourage the creation of new health care delivery programs, such as accountable care organizations, or combinations of provider organizations, that voluntarily meet quality thresholds to share in the cost savings to the Medicare program for a targeted population of Medicare beneficiaries. The projects and programs are designed in part to move Medicare away from a fee-for-service payment system. The outcomes of these projects and programs, including the effect of such projects and programs on payments to providers and the financial performance of health care providers, cannot be predicted. Based on the foregoing, it is more difficult to project future performance than it has been in the past. There are many unresolved issues in the Affordable Care Act and it is likely that there will be the continued enactment of additional laws and promulgation of new regulations and guidelines for an indefinite, but lengthy, period of time in the future. Investors are encouraged to review legislative, legal and regulatory developments as they occur and to assess the elements and potential effects of health care reform initiative as it evolves. The ARRA; the HITECH Act and Electronic Health Records. Provisions in the Health Information Technology for Economic and Clinical Health Act (the HITECH Act ), enacted as ARRA amend the Health Insurance Portability and Accountability Act of 1996 ( HIPAA ) by (i) increasing the maximum civil monetary penalties for violations of HIPAA, (ii) granting enforcement authority of HIPAA to state attorneys general, (iii) extending the reach of HIPAA beyond covered entities, (iv) imposing a breach notification requirement on HIPAA covered entities, (v) limiting certain uses and disclosures of individually identifiable health information, (vi) restricting covered entities marketing communications, and (vii) permitting the imposition of civil monetary penalties for a HIPAA violation even if an entity did not know and would not, by exercising reasonable diligence, have known of a violation. Civil monetary penalties for violations of HIPAA now range from $100 to a maximum $50,000 per violation and/or imprisonment, depending on the violator s degree of intent and the extent of the harm resulting from the violation. The maximum civil monetary penalty for violations of the same HIPAA provision in a calendar year cannot exceed $1,500,000. Further, a state attorney general may now bring a civil action to protect the interests of one or more residents of the state who has been or is threatened or adversely affected by any person who violates HIPAA. Finally, a state attorney general may also enjoin further violations by a defendant or obtain damages of up to $25,000, in addition to an award of attorney fees. 47

56 Medicare Reimbursement. The Obligated Group depends significantly on Medicare as a source of revenue. Because of this dependence, changes in the Medicare program may have a material effect on the Obligated Group s financial performance. For example, Medicare program changes resulting from the Balanced Budget Act of 1997, as subsequently amended and modified, have limited increases in Medicare payments that were otherwise provided by law, and/or reduced Medicare payment or reimbursement for certain health care services provided to Medicare beneficiaries. The Balanced Budget Act of 1997 has had and will continue to have a significant negative effect on acute care hospitals and other Medicare providers. Future reductions in Medicare reimbursement, or increases in Medicare reimbursement in amounts less than increases in the costs of providing care, may have a material adverse financial effect on the Obligated Group (and any future Member of the Obligated Group). A substantial portion of the Medicare revenues of the Obligated Group is derived from payments made for services rendered to Medicare beneficiaries under a prospective payment system, or PPS. Under a prospective payment system, the amount paid to the provider for an episode of care is established by federal regulation and is not related to the provider s charges or costs of providing that care. Presently, inpatient and outpatient services, skilled nursing care, and home health care are paid on the basis of a prospective payment system ( PPS ). Under inpatient PPS, fixed payment amounts per inpatient discharge are established based on the patient s assigned diagnosis related group, or DRG. DRGs classify treatments for illnesses according to the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis. All services paid under the PPS for hospital outpatient services are classified into groups called ambulatory payment classifications, or APCs. Services in each APC are similar clinically and in terms of the resources they require. A payment rate is established for each APC. The capital component of care is paid on a fully prospective basis. PPS-exempt hospitals and units are currently reimbursed for their reasonable costs, subject to a cost per discharge target. These limits are updated annually by an index generally based upon inflationary increases in costs of providing health care services. From time to time, the factors used in calculating the prospective payments for units of service are modified by CMS, which may reduce revenues for particular services. Additionally, as part of the federal budgetary process, Congress has regularly amended the Medicare law to reduce increases in payments that are otherwise scheduled to occur, or to provide for reductions in payments for particular services. These actions could adversely affect the revenues of the Obligated Group (and any future Member of the Obligated Group). Additional payments may be made to individual providers. As modified by the Affordable Care Act, hospitals that treat a disproportionately large number of low-income patients (Medicaid and Medicare patients eligible to receive supplemental Social Security income) currently receive additional payments in the form of disproportionate share payments. Further, additional payments are made to hospitals that treat patients who are costlier to treat than the average patient; these additional payments are referred to as outlier payments. Also, hospitals are paid for a portion of their direct and indirect medical education costs. These additional payments are also subject to reductions and modifications in otherwise scheduled increases as a result of amendments to relevant statutory provisions. 48

57 The costs of providing a unit of care may exceed the revenues realized from Medicare for providing that service. Additionally, a provider s aggregate costs for providing care to Medicare beneficiaries may exceed aggregate Medicare revenues received during the relevant fiscal period. Medicaid Reimbursement. Medicaid is a federally assisted, state administered program that provides reimbursement for a portion of the cost of caring for certain indigent persons including: parents and caretakers, relatives of children, children, pregnant women, former foster care individuals, non-citizens with medical emergencies, aged or disabled individuals not currently receiving Supplemental Security Income, and individuals who receive Florida s Temporary Cash Assistance. The Medicaid program provides payments for medical items and services for any person who is determined to be eligible for Medicaid assistance on the date of service. Federal and State funds support the Medicaid program. Medicaid benefits are available, within prescribed limits, to persons meeting certain minimum income or other need requirements. Payments under the Medicaid program represented a significant portion of the Obligated Group s net patient revenue for recent fiscal years. See APPENDIX A hereto. The Florida Medicaid Program is administered by the Agency for Health Care Administration ( AHCA ) and is funded by federal and state appropriations. The financial condition of and budgetary factors facing the State may affect the absolute level of Medicaid revenues. Payments made to health care providers under the Medicaid program are subject to changes as a result of federal or State legislative and administrative actions, including further changes in the methods for calculating payments, the amount of payments that will be made for covered services and the types of services that will be covered under the program. Such changes have occurred in the past and may continue to occur in the future, particularly in response to federal and state budgetary constraints coupled with increased costs for covered services. Hospitals participating in the Medicaid program are subject to numerous requirements and regulations under the program. Failure to remain in compliance with any program requirements may subject the Medicaid provider to civil and/or criminal penalties, including fines and suspension or expulsion from the program, preventing the provider from receiving any funds under the Medicaid program. Noncompliance with Medicaid requirements, and suspension or exclusion from the Medicaid program, can also be a basis for mandatory or permissive suspension or exclusion from the Medicare program. Significant changes have been and may be made in the Medicaid program which could have a material adverse impact on the financial condition of the Obligated Group (and any future Member of the Obligated Group). Health care providers have been affected significantly in the last several years by changes to federal and state health care laws and regulations, particularly those pertaining to Medicaid. The purpose of much of this statutory and regulatory activity has been to contain the rate of increase in health care costs, particularly costs paid under the Medicaid program. Diverse and complex mechanisms to limit the amount of money paid to health care providers under the Medicaid program have been enacted, and it is possible that such limitations may have a material adverse effect on the operations or financial condition of the Obligated Group Members. 49

58 Medicare/Medicaid Conditions of Participation. Certain health care facilities must comply with standards called Conditions of Participation in order to be eligible for Medicare and Medicaid reimbursement. Under the Medicare rules, hospitals accredited by TJC are deemed to meet most of the Conditions of Participation ( Deemed Status ). However, CMS may request that the state agency responsible for licensing hospitals, on behalf of CMS, conduct a sample validation survey of a hospital to determine whether it is complying with the Medicare or Medicaid Conditions of Participation. Failure to maintain TJC accreditation or to otherwise comply with the Conditions of Participation could materially adversely affect the revenues of the Obligated Group (and any future Member of the Obligated Group). Billing Practices. The United States Department of Justice, the Federal Bureau of Investigation and the Office of the Inspector General of HHS have been conducting investigations and audits of the billing practices of many health care providers. The Obligated Group (and any future Member of the Obligated Group) may be required to undergo such audits by one or more of these agencies and may be required to make payments to resolve any such audits. It is possible that any such payments may be substantial and could have a material adverse effect on the operations or condition, financial or otherwise, of the Obligated Group (and any future Member of the Obligated Group). In addition, HIPAA also added provisions that outlaw certain types of manipulative Medicare billing practices. These include improperly coding (for billing purposes) services rendered in order to claim a higher level of reimbursement and billing for the provision of services or items that were not medically necessary. HIPAA also created two new crimes that are based on the traditional crimes of fraud and theft but are applied specifically to health benefit programs. This law increases the legal risk of provider billing and increases the risk that a Medicare provider will be the subject of a fraud investigation. RAC Audits. In accordance with the Medicare Prescription Drug, Improvement and Modernization Act of 2003 and the Tax Relief and Health Care Act of 2006 (the 2006 Tax Act ), CMS designated the use of private companies known as recovery audit contractors ( RAC ) to search for improper Medicare payments made to healthcare providers in prior years that were not detected through existing CMS program integrity efforts. The RACs use their own software and independent knowledge of Medicare to determine areas to review. Once a RAC identifies a potentially improper claim as a result of an audit, it makes an assessment from the provider s Medicare reimbursement in an amount estimated to equal the overpayment from the provider pending resolution of the audit. The Affordable Care Act expanded the RAC program to Medicare Part C (Medicare Advantage plans), Medicare Part D (prescription drug coverage) and Medicaid. CMS published a final rule on September 16, 2011, detailing plans for Medicaid RAC program implementation, which final rule was effective on January 1, CMS approved a time-limited exception allowing the State to implement a Medicaid RAC program in Under the initial RAC demonstration program, the Obligated Group experienced retractions of approximately $5.7 million and recovered approximately $3.9 million, an appeal success rate of approximately 68%. 50

59 Exclusions from Medicare or Medicaid Participation. The government may exclude from Medicare/Medicaid program participation a hospital that is convicted of a criminal offense relating to the delivery of any item or service reimbursed under Medicare or a state health care program, any criminal offense relating to patient neglect or abuse in connection with the delivery of health care, fraud against any federal, state or locally financed health care program or an offense relating to the illegal manufacture, distribution, prescription or dispensing of a controlled substance. The government also may exclude individuals or entities under certain other circumstances, such as an unrelated conviction of fraud or other financial misconduct relating either to the delivery of health care in general or to participation in a federal, state or local government program. Exclusion from the Medicare/Medicaid program means that a hospital would be decertified and no program payments can be made. Any hospital exclusion could be a materially adverse event, even within a large hospital system. Administrative Enforcement. Administrative regulations may require less proof of a violation than do criminal laws and thus, health care providers may have a higher risk of imposition of monetary penalties as a result of an administrative enforcement action. Enforcement Activity. Enforcement activity against health care providers has increased and enforcement authorities have adopted aggressive approaches. In the current regulatory climate, it is anticipated that many hospitals and physician groups will be subject to an audit, investigation or other enforcement action regarding the health care fraud laws mentioned above. Enforcement authorities are often in a position to compel settlements by providers charged with or being investigated for false claims violations by withholding or threatening to withhold Medicare, Medicaid and/or similar payments and/or by instituting criminal action. In addition, the cost of defending such an action, the time and management attention consumed, and the facts of a case may dictate settlement. Therefore, regardless of the merits of a particular case, a hospital could experience materially adverse settlement costs, as well as materially adverse costs associated with implementation of any settlement agreement. Prolonged and publicized investigations could be damaging to the reputation and business of a hospital, regardless of outcome. Certain acts or transactions may result in violation or alleged violation of a number of the federal health care fraud laws described above and therefore, penalties or settlement amounts often are compounded. Generally these risks are not covered by insurance. Enforcement actions may involve multiple hospitals in a health system, as the government often extends enforcement actions regarding health care fraud to other hospitals in the same organization. Therefore, Medicare fraud related risks identified as being materially adverse as to a hospital could have materially adverse consequences to a health system taken as a whole. Review of Outlier Payments. CMS is reviewing health care providers that are receiving large proportions of their Medicare revenues from outlier payments. Health care providers found to have obtained inappropriately high outlier payments will be subject to further investigation by the CMS Program Integrity Unit and potentially the Office of Inspector General. Management of the Obligated Group does not believe that any potential review of the Obligated Group would materially adversely affect the Obligated Group s results of operations. 51

60 HIPAA. HIPAA protects the privacy and security of individually identifiable health information. Violations of HIPAA can result in civil monetary penalties and criminal penalties. Provisions of the HITECH Act amend HIPAA by (i) increasing the maximum civil monetary penalties for violations of HIPAA, (ii) granting enforcement authority of HIPAA to state attorneys general, (iii) extending the reach of HIPAA beyond covered entities, (iv) imposing a breach notification requirement on HIPAA covered entities, (v) limiting certain uses and disclosures of individually identifiable health information, (vi) restricting covered entities marketing communications, and (vii) permitting the imposition of civil monetary penalties for a HIPAA violation even if an entity did not know and would not, by exercising reasonable diligence, have known of a violation. Civil monetary penalties for violations of HIPAA now range from $100 to a maximum $50,000 per violation and/or imprisonment, depending on the violator s degree of intent and the extent of the harm resulting from the violation. The maximum civil monetary penalty for violations of the same HIPAA provision in a calendar year cannot exceed $1,500,000. A state attorney general may bring civil action to protect the interests of one or more of residents of the state who has or is threatened or adversely affected by any person who violates HIPAA. A state attorney general may enjoin further violations by a defendant or obtain damages up to $25,000, in addition to an award of attorney fees. Security Breaches and Unauthorized Releases of Personal Information. Federal, state and local authorities are increasingly focused on the importance of protecting the confidentiality of individuals personal information, including patient health information. In addition to the data breach disclosure requirements of HIPAA, many states, including Florida, have enacted laws requiring businesses to notify individuals of security breaches that result in the unauthorized release of personal information. In some states, notification requirements may be triggered even where information has not been used or disclosed, but rather has been inappropriately accessed. State consumer protection laws may also provide the basis for legal action for privacy and security breaches and frequently, unlike HIPAA, authorize a private right of action. In particular, the public nature of security breaches exposes health organizations to increased risk of individual or class action lawsuits from patients or other affected persons, in addition to government enforcement. Failure to comply with restrictions on patient privacy or to maintain robust information security safeguards, including taking steps to ensure that contractors who have access to sensitive patient information maintain the confidentiality of such information, could consequently damage a health care provider s reputation and materially adversely affect business operations. Red Flags Rule. On November 9, 2007, six federal agencies, including the Federal Trade Commission ( FTC ), published what has come to be known as the Red Flags Rule. This rule, promulgated pursuant to the Fair and Accurate Credit Transactions Act of 2003, requires financial institutions and creditors to develop and implement written identity theft prevention programs. The programs must be developed for the identification, detection and response to patterns, practices, or specific activities known as red flags that could indicate identity theft. The FTC has interpreted the definition of creditors to include health care providers. However, The Red Flag Program Clarification Act of 2010, Public Law amends the definition of the term creditor and may exclude certain service providers, including hospitals, from the requirements of the Red Flags Rule, based on how a service provider uses credit reporting agencies. It is not known whether the Obligated Group is subject to the Red Flags Rule as amended. Failure to comply with the rule could result in penalties of $2,500 per violation 52

61 under the Fair Credit Reporting Act. Enforcement of the rule commenced on December 31, Physician Payment. Certain physician services are reimbursed on the basis of a national fee schedule called the resource based relative value scale ( RB-RVS ). The RB-RVS fee schedule establishes payment amounts for all physician services, including services of providerbased physicians, and is subject to annual updates. The Balanced Budget Act of 1997 established a limit on the growth of Medicare payments for physician s services based on changes in the U.S. Gross Domestic Product. The previous system was linked to growth in medical inflation. As such, the revised system has resulted in lower Medicare expenditures for physicians services, which could have an adverse effect on the financial condition of the Obligated Group (and any future Member of the Obligated Group). Medicaid physician payments are driven by this same federal RB-RVS system in terms of the relative relationship of one physician payment to another. However, Florida Medicaid physician payments are only about 60 percent (on average) of the amount Medicare would pay for the same service. This relationship is subject to potential change at each session of the Florida legislature, and may increase (or decrease) depending on the availability of state appropriations and legislative priorities. False Claims Act and Civil Monetary Penalties Law. The Medicaid and Medicare Programs require that extensive financial information be reported on a periodic basis and in a specific format or content. These requirements are numerous, technical and complex and may not be fully understood or properly implemented by billing or reporting personnel. With respect to certain types of classifications of information, the False Claims Act and other similar laws may be violated merely by reason of inaccurate or incomplete reports, if it is determined that the entity submitting such claims or reports knew or should have known that they were incorrect. As a consequence, ordinary course errors or omissions may also result in liability. New billing systems, new medical procedures and procedures for which there is not clear guidance from CMS or other regulatory authorities may all result in liability under federal false claim prohibitions including the False Claims Act and other similar laws. The penalties for violation include criminal and civil monetary liability and may include, for serious or repeated violations, exclusion from participation in the Medicare and Medicaid programs. Under the Civil Monetary Penalties Law of the Social Security Act (the CMP Law ), civil monetary penalties may be imposed against any person who knowingly presents or causes to be presented a claim (i) for items or services not provided as claimed (including upcoding), (ii) that is false or fraudulent, (iii) for services provided by an unlicensed or uncertified physician, (iv) for items or services provided by an excluded person, or (v) for items or services that are not medically necessary. Penalties include up to $11,000 for each item or service claimed plus an assessment of up to three times the amount claimed for each such item of service. The CMP Law applies to all federal health care programs. The Balanced Budget Act of 1997 provided for the imposition of civil monetary penalties under the CMP Law when a person commits an act described in the Anti-Kickback Law. Enforcement activity in this area is increasing and enforcement authorities are adopting more aggressive approaches. It can be expected that many hospitals and physician groups will be subject to investigation or inquiry regarding billing practices and false claims. Enforcement 53

62 authorities are in a position to encourage settlements by providers charged with false claims violations by withholding or threatening to withhold Medicare, Medicaid and/or similar payments, and/or by threatening criminal action. The cost of defending such an action, the time and management attention consumed thereby and the facts of a particular case may influence a settlement decision. Therefore, regardless of the merits of a particular case, the Obligated Group (and any future Member of the Obligated Group) could experience materially adverse settlement costs. Prolonged and publicized investigations could be damaging to the reputation, business and credit of the Obligated Group (and any future Member of the Obligated Group), regardless of their outcome. The management of the Obligated Group believes the Obligated Group is in substantial compliance with the False Claims Acts and the CMP law. Gramm-Rudman Act. Limits imposed on federal spending under the Gramm-Rudman Act adopted by Congress in 1985 affected health care reimbursement programs. The availability of funds were limited as Congress tried to meet the budget targets in the Gramm-Rudman Act, and actual payments were reduced by the Gramm-Rudman Act s sequestration provisions. Medicare/Medicaid Anti-Kickback Laws. Section 1128B(b) of the Social Security Act (42 U.S.C B(b)) and related sections form the Medicare and Medicaid Anti-Kickback Laws. These laws generally prohibit paying or receiving remuneration of any kind in exchange for referring a person for services or goods that are paid for by Medicare, Medicaid, TRICARE (formerly known as CHAMPUS) and certain state health care programs. Violators are subject to civil penalties, criminal penalties and exclusion from Medicare and Medicaid. On July 29, 1989, the Department of Health and Human Services issued Safe Harbor exceptions to the Anti-Kickback Laws. Currently, no specific safe harbor exists for arrangements merely because they are undertaken by hospitals or other health care facilities. However, certain activities typical of hospitals can be covered by certain specific safe harbors, and these activities have, over the past several years, required careful analysis to ensure compliance with the Anti-Kickback Laws: personal services arrangements, office space leases, joint ventures with health care providers, physician recruitment and medical practice acquisition and certain hospital incentives to physicians. The Obligated Group (and any future Member of the Obligated Group) will continue to carefully analyze matters, which may be subject to enforcement in this area of the law to minimize its exposure to the risk of enforcement activity. The Obligated Group believes that its contracts with physicians and other referral sources are in material compliance with the Anti-Kickback Law. However, because of the narrowness of the safe harbor regulations and the scarcity of case law interpreting the Anti-Kickback Law, there can be no assurance that the Obligated Group (and any future Member of the Obligated Group) will not be found to have violated the Anti-Kickback Law, and if so, whether any sanction imposed would have a material adverse effect upon the operations and financial condition of the Obligated Group (and any future Member of the Obligated Group). Medicare/Medicaid Anti-Referral Laws. The Stark Law (42 U.S.C. 1395nn) prohibits a physician from making referrals for designated health services ( DHS ), which may be paid for by Medicare to an entity with which the physician (or his or her immediate family member) has a 54

63 financial relationship, and prohibits the entity from billing Medicare, Medicaid, the patient or a third party payor for the services or goods provided as a result of such a referral. A referral is broadly defined to include a request by a physician for an item or service payable under Medicare (including the request by a physician for consultation with another physician and any test or procedure ordered or performed by such other physician), or a request by a physician for the establishment of a plan of care that includes the provision of a DHS. A referral does not include DHS personally performed or provided by a physician; however, a service is not personally performed or provided by a physician if it is performed by any other person, including, but not limited to, the referring physician s employees, independent contractors or group practice members. CMS has refused the request to exclude from the definition of referral services that are performed incident to a physician s personally performed services and has indicated that such referrals may fit within the in-office ancillary exception. If the financial relationship or certain referrals between the physician and the entity do not fall within one of the statutory or the regulatory exceptions, and the physician refers patients in contravention of the prohibition, the entity receiving the referral may be liable for repayment of the claims for the services provided, as well as a civil monetary penalty of up to $15,000 for each improper claim. In addition, both the physician and the entity could be subject to an additional civil monetary penalty of up to $100,000 for attempting to circumvent the self-referral prohibition, and may be barred from participating in Medicare and Medicaid. Pursuant to the recently enacted Affordable Care Act, overpayments by Medicare, including overpayments as a result of Stark Law violations, must be repaid within sixty (60) days after the date the overpayment was identified. As previously disclosed, the District was a party to a qui tam action filed in federal court for the Middle District of Florida by a relator (the Relator ). The Department of Justice (DOJ) partially intervened in the lawsuit. The court ruled that the District violated the Federal Stark Law in relation to its medical oncologists agreement (the Stark Violation ). The District and DOJ entered into a settlement agreement dated March 10, 2014 (the DOJ Settlement Agreement ) with respect to the DOJ intervened claims. The District, the Relator, the Relator s Counsel and DOJ entered into a settlement agreement dated July 22, 2014 (the Second Settlement Agreement and, together with the DOJ Settlement Agreement, the Settlement Agreements ) with respect to the Relator s remaining claims. The Court s ruling that the District violated the Federal Stark Law was a covenant breach under the Master Indenture. The costs incurred by the Obligated Group, as a result of the Settlement Agreements, caused a covenant breach under the Master Indenture related to the Obligated Group s debt service coverage ratios and rates for the fiscal year ended September 30, The Obligated Group requested and received a waiver from Assured Guaranty Municipal Corp., the bond insurer of the Series 2006B Bonds, of the covenant breaches referenced in this paragraph and related Events of Default under the Master Indenture. J.P. Morgan Chase Bank, N.A., the Credit Facility provider with respect to the Series 2008 Bonds, also waived such covenant breaches and related Events of Default. See LITIGATION Information Regarding 2014 Settlements in Qui Tam Action. Because of the lack of regulatory guidance and the scarcity of case law interpreting the Stark Law, there can be no assurances that the Obligated Group (and any future Member of the 55

64 Obligated Group) will not be found to have violated the Stark Law in the future, and if so, whether any sanctions imposed would have a material adverse effect upon the operations and financial condition of the Obligated Group (and any future Member of the Obligated Group). Various states, including Florida, also have statutes designed to prevent or regulate certain types of referrals, whether Medicare, Medicaid or a private payor. These restrictions, like the federal restrictions, may be vague with respect to coverage and effect. Generally, state referral laws have less onerous penalties, but, as a practical matter, could be materially adverse to subject facilities in certain circumstances. EMTALA. The Emergency Medical Treatment and Active Labor Act, or EMTALA, is a federal civil statute that requires hospitals to treat or conduct a medical screening for emergency conditions and to stabilize a patient s emergency medical condition before releasing, discharging or transferring the patient. A hospital that violates EMTALA is subject to civil penalties of up to $50,000 per offense and exclusion from Medicare and Medicaid programs. In addition, the hospital may be liable for any claim by an individual who has suffered harm as a result of a violation. The Obligated Group believes its policies and procedures are in material compliance with EMTALA, but no assurance can be given that a violation of EMTALA will not be found. Any sanctions imposed as a result of an EMTALA violation could have a material adverse effect on the future operations or financial condition of the Obligated Group (and any future Member of the Obligated Group). Increased Enforcement Affecting Academic Research. In addition to increasing enforcement of laws governing payment and reimbursement, the federal government has also stepped up enforcement of laws and regulations governing the conduct of clinical trials at hospitals. The Department of Health and Human Services ( DHHS ) elevated and strengthened its Office of Human Research Protection, one of the agencies with the responsibility for monitoring federally funded research. The Food and Drug Administration ( FDA ) also has authority over the conduct of clinical trials performed in hospitals when these trials are conducted on behalf of sponsors seeking FDA approval to market the drug or device that is the subject of the research. Moreover, the Office of Inspector General ( OIG ), in its Work Plans, has included several enforcement initiatives related to reimbursement for experimental drugs and devices (including kickback concerns). The OIG placed clinical trial-related services on its 2004 Work Plan. Thus, any health care system participating in clinical trials must possess a strong understanding of how clinical trials are conducted, which regulations control the clinical trial and what coding and billing rules apply to the clinical trials and services. These agencies enforcement powers range from substantial fines and penalties to exclusion of researchers and suspension or termination of entire research programs. IRS Examination of Compensation Practices. In 2004, the IRS began a new compliance program to measure compliance by tax-exempt organizations with requirements that they not pay excessive compensation and benefits to their officers and other insiders. In February 2009, the IRS issued its Hospital Compliance Project Final Report (the IRS Final Report ) that examined tax-exempt organizations practices and procedures with regard to compensation and benefits paid to their officers and other defined insiders. The IRS Final Report indicates that the IRS (i) 56

65 will continue to heavily scrutinize executive compensation arrangements, practices and procedures and (ii) in certain circumstances, may conduct further investigations or impose fines on tax-exempt organizations. The Obligated Group has not been contacted by the IRS in connection with this enforcement effort. Excess Benefit Transactions. For transactions occurring on or after September 14, 1995, Section 4958 of the Code imposes excise taxes on excess benefit transactions between disqualified persons and tax-exempt organizations such as the Obligated Group. According to the legislative history and regulations associated with Section 4958, these excise taxes may be imposed by the IRS either in lieu of or in addition to revocation of exemption. The legislation is potentially favorable to taxpayers because it provides the IRS with a punitive option short of exemption revocation to deal with incidents of private inurement. However, the standards for tax exemption have not been changed, including the requirement that no part of the net earnings of an exempt entity inure to the benefit of any private individual. Consequently, although the IRS has only infrequently revoked the tax exemption of nonprofit healthcare corporations in the past, the risk of revocation remains and there can be no assurance that the IRS will not direct enforcement activities against the Obligated Group. Litigation Relating to Billing and Collection Practices. Lawsuits have been filed in both federal and state courts alleging, among other things, that the defendant hospitals have failed to fulfill their obligations to provide charity care to uninsured patients and have overcharged uninsured patients. For the past 15 years, no such lawsuits have been filed against the Obligated Group. State Regulation Florida Medicaid. Medicaid is a federally assisted, state administered program that provides reimbursement for a portion of the cost of caring for certain indigent persons including: parents and caretakers, relatives of children, children, pregnant women, former foster care individuals, non-citizens with medical emergencies, aged or disabled individuals not currently receiving Supplemental Security Income, and individuals who receive Florida s Temporary Cash Assistance. The AHCA administers the Florida Medicaid Program which is funded by federal and state appropriations. Medicaid benefits are available, within prescribed limits, to persons meeting certain minimum income or other need requirements. Effective July 1, 2013, Medicaid reimburses hospitals for inpatient services under a prospective payment system where the amount paid to the provider for an episode of care is established by state regulation and is not related to the provider s charges or costs of providing that care. Over the past several years, health care providers, including the Obligated Group, have been affected significantly by federal and state health care laws and regulations that limit the amount of money paid under the Medicaid program. The purpose of much of this statutory and regulatory activity has been to contain the rate of increase in health care costs. During Florida s 2015 legislative session (Special Session A), the AHCA was directed to contract with a vendor to develop a plan to convert to a prospective payment system for outpatient hospital reimbursement. Significant changes may be made to the Medicaid program which could have a material adverse impact on the financial condition of the Obligated Group (and any future Member of the Obligated Group). 57

66 Florida Certificate of Need. The Health Facilities and Health Services Planning Act of the State of Florida provide for a certificate of need program which applies to, among other matters, the offering or development of new institutional health services. The certificate of need program in Florida is administered by the AHCA. Florida s certificate of need program requires, among other things, the AHCA s review of new construction or establishment of additional health care facilities, including a replacement health care facility, conversion from one type of health care facility to another, an increase in the total licensed bed capacity for comprehensive rehabilitation, the establishment of a hospice or hospice inpatient facility, or the establishment of inpatient tertiary health services by a health care facility. The program does not regulate outpatient services, home health services, purchases of major medical equipment or assisted living facilities. Florida s certificate of need requirements may restrict the Obligated Group (and any future Member of the Obligated Group) from adding or changing facilities and services as necessary to respond to competitive and market forces. Failure to obtain a certificate of need in order to carry out any future capital plans or initiate new services could adversely affect the financial condition of the Obligated Group (and any future Member of the Obligated Group). Further, changes to existing certificate of need requirements or elimination of certificate of need requirements entirely could adversely affect the Obligated Group (and any future Member of the Obligated Group) by making it easier for competitors to expand or new competitors to enter the market without the need for the regulatory approval now required by the certificate of need program. The Obligated Group either already has or is not required to obtain certificates of need. The 2016 Project will not require the application of a certificate of need. In the future, the Obligated Group may need to obtain a certificate of need for additional facilities. Florida Indigent Assistance. The Public Medical Assistance Act (the Assistance Act ), which was created by the Florida legislature in 1984 and included in section of the Florida Statutes, provides a mechanism for the funding of health care services to indigent persons. The Assistance Act imposes upon each hospital in Florida an assessment in an amount equal to one and one-half percent (1.5%) of each hospital s annual net operating revenue for inpatient services and one percent (1%) of the annual net operating revenue for outpatient services each fiscal year, with the exception of outpatient radiation therapy services. AHCA determines such revenues based on a hospital s actual experience reported to AHCA and certifies the amount of the assessment for each hospital within six (6) months after the end of each hospital fiscal year. The assessment is payable to and collected by AHCA in equal quarterly amounts, on or before the first day of each calendar quarter beginning with the first full calendar quarter that occurs after AHCA certifies the amount of assessment for each hospital. All moneys collected pursuant to the Assistance Act are to be deposited into the Public Medical Assistance Trust Fund. AHCA may impose administrative fines for the failure of any hospital to timely pay its quarterly assessment. Purchasers, successors or assignees of a facility, which are subject to AHCA s jurisdiction, are liable for any assessments, fines or penalties incurred by a facility or its employees, regardless of when it was identified. Florida Patient Self-Referral Act. In 1992, the Florida legislature enacted the Patient Self-Referral Act. This law contains provisions that are similar to those of the Anti-Kickback Statute, the Anti-Fraud and Abuse Law and the Stark Law. In addition, in 1996, the Florida Legislature adopted a patient brokering law that contains certain expansions of the prohibitions. Unlike the federal laws, the Florida laws apply to all patients regardless of payer class. Although the Obligated Group believes that it is in compliance with these laws and regulations, there can 58

67 be no assurance that federal or state regulatory authorities will not challenge past, current or future activities under these laws, and there can be no assurance that the Obligated Group will not be found to have violated these laws, and if so, whether any enforcement activity would have a material adverse effect on the operations and financial condition of the Obligated Group (and any future Member of the Obligated Group). Florida False Claims Act. Florida also has a false claims act known as the Florida False Claims Act. Under that Act, the Medicaid Fraud Control Unit of the Department of Legal Affairs of the Office of the Attorney General may bring an action against any person who knowingly presents a false claim for payment or approval. No proof of specific intent to defraud is required. Actions also may be brought by the Florida Department of Financial Services and by a private person. If found liable under this statute, the individual or facility may be liable for a civil penalty of $5,500 to $11,000 for each violation, as well as for treble the government s damages. Florida KidCare Program. Florida KidCare is the state s children s health insurance program for uninsured children under the age of 19. Florida KidCare is a federally funded insurance program for families whose income levels preclude them from being eligible for Medicaid, but cannot afford commercial health insurance. It is made up of four parts: MediKids, Healthy Kids, the Children s Medical Services Network for children with special health care needs, and Medicaid for Children (KidCare Medicaid). The first three require participating families to make monthly payments that usually range between $15 and $20. The fourth, Medicaid for Children, is free. The program is administered by CMS, but each state creates its own program based upon minimum federal guidelines. Moreover, each state must periodically submit its 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 its program. While generally considered to be beneficial for both patients and providers by reducing the number of uninsured children, it is difficult to assess the fiscal impact of Florida KidCare on the payments to the Obligated Group because the program is relatively new. Florida s No-Fault Automobile Insurance. Florida s no-fault automobile insurance law, which requires drivers to purchase Personal Injury Protection ( PIP ) insurance expired in October 2007 and was reinstated January 1, 2008 with significant changes including reduced payment for certain hospital services, and priority of payments to physicians before hospitals. The modification and/or expiration of the no-fault law could materially adversely affect the revenues of the Obligated Group. Florida s Low Income Pool. Section 1115 of the Social Security Act gives the Secretary of HHS broad authority to waive provisions of major health and welfare programs authorized under the Social Security Act, including certain requirements of Medicaid. Under Section 1115, the Secretary can allow states to use federal Medicaid funds in ways that are not otherwise allowed under federal rules, as long as the Secretary determines the initiative is a research and demonstration project that furthers the purposes of the program. On October 19, 2005, Florida s Section 1115 Research and Demonstration Waiver named Medicaid Reform was approved by CMS for the period July 1, 2006 through June 30, The intent of Medicaid Reform was to provide financial stability to health care providers during a transition from a traditional fee-for-service payment system to a managed care program. A three-year 59

68 waiver extension was granted on December 15, 2011 to continue the program for the period July 1, 2011 through June 30, On June 14, 2013, CMS approved an amendment to the waiver to implement the Managed Medical Assistance program. On July 31, 2014, CMS approved an extension of the Managed Medical Assistance program for three years from July 31, 2014 through June 30, As a part of this extension, CMS limited the remaining duration of the Low Income Pool (LIP) program, a feature of the waiver which provided funds to mitigate unreimbursed Medicaid costs and provide coverage for uninsured and underinsured patients, through the end of June 30, Building upon an earlier agreement in principal between CMS and the State, on October 15, 2015, CMS approved, among other things, the extension of the LIP program through the remainder of the demonstration period ending June 30, 2017, but capping the total dollar limit in demonstration year 10 ( ) and again in demonstration year 11 ( ). The LIP program has historically provided approximately $10 million of additional net Medicaid payments each year to the Obligated Group. As a result of the 2016 State legislative session, the Obligated Group anticipates receiving approximately $7.0 million from the LIP and DSH programs during the State's fiscal year beginning July 1, This represents a $2.4 million net reduction from the State s fiscal year ending on June 30, 2016, including certain additional reimbursements of $1.6 million for high severity pediatric and neonatal patients. It is possible that funding for the LIP program will again be considered for reduction or elimination by the State and federal lawmakers in the future. It is not possible at this time to predict the outcome of such action. The financial condition of the Obligated Group (and any future Member of the Obligated Group) could be adversely affected by any future reduction or elimination of the LIP program. LEGAL MATTERS Certain legal matters incident to the issuance of the Series 2016 Bonds and with regard to the tax status of the interest on the Series 2016 Bonds (see TAX MATTERS ) are subject to the legal opinion of Bryant Miller Olive P.A., Orlando, Florida, Bond Counsel. The signed legal opinion dated and premised on law in effect as of the date of original delivery of the Series 2016 Bonds, will be delivered to the Underwriter at the time of original delivery. The proposed text of the legal opinion is set forth as Appendix D. The actual legal opinion to be delivered may vary from that text as necessary to reflect facts and law on the date of delivery. The opinion will speak only as of its date, and subsequent distribution of it by recirculation of the Official Statement or otherwise shall create no implication that Bond Counsel has reviewed or expresses any opinion concerning any of the matters referenced in the opinion subsequent to its date. While Bond Counsel has participated in the preparation of certain portions of this Official Statement, it has not been engaged by the District to confirm or verify and, except as may be set forth in an opinion of Bond Counsel delivered to the Underwriter, relating to the accuracy of certain summaries relating to the terms of the Series 2016 Bonds, the Master Indenture and the Bond Indenture and of the information under the caption TAX MATTERS and upon which only the Underwriter may rely, Bond Counsel, expresses and will express no opinion as to, the accuracy, completeness or fairness of any statements in this Official Statement, or in any other reports, financial information, offering or disclosure documents or other information pertaining 60

69 to the District, the Obligated Group or the Series 2016 Bonds that may be prepared or made available to the Holders of the Series 2016 Bonds or other parties. Certain legal matters will be passed upon for the District by its Senior Vice President and General Counsel, Vivian M. Gallo, Esquire. Certain legal matters will be passed on for the Underwriter by Squire Patton Boggs (US) LLP, Tampa, Florida. General LITIGATION There is no litigation pending or, to the knowledge of the Obligated Group, threatened litigation against the Obligated Group of any nature whatsoever which in any way questions or affects the validity of the Series 2016 Bonds, or any proceedings or transactions relating to their issuance, sale, execution, or delivery, or the execution of the Master Indenture or the Bond Indenture or the pledge of the security in favor of the Holders of the Series 2016 Bonds. Neither the creation, organization or existence, nor the title of the present members of the Board or other officers of the Obligated Group is being contested. The Obligated Group experiences other claims, litigation, and various legal proceedings which individually are not expected to have a material adverse effect on the operations or financial condition of the Obligated Group, but may, in the aggregate, have a material impact thereon. In the opinion of the General Counsel to the Obligated Group, however, the Obligated Group will either successfully defend such actions or otherwise resolve such matters without any material adverse consequences on the financial condition of the Obligated Group. Information Regarding 2014 Settlements in Qui Tam Action As previously disclosed in the District s financial statements and in voluntary filings posted to the Municipal Securities Rulemaking Board s Electronic Municipal Market Access (EMMA), in 2014 the District settled all claims relating to a qui tam action that began in Under the terms of the settlement with the federal government, the District made a settlement payment in the amount of $85 million to the federal government on March 14, 2014 and agreed to operate under a five-year Corporate Integrity Agreement which provides for oversight of all physician contracts and compliance with federal healthcare laws, rules and regulations. In addition, the District paid $5.4 million in statutory attorney s fees and costs for claims subject to the federal settlement. In July 2014 the District, the qui tam relator, the relator s counsel and the federal government entered into a settlement agreement for the non-intervened claims, pursuant to which the District made a final settlement payment in the amount of $1 million to the federal government and paid $4.5 million in attorney s fees. By entering into the settlements, the District did not make any admissions of guilt, but determined that continued litigation risk and legal expense were not in the best interest of the District. By way of background, in December 2009, the Office of Inspector General (OIG), U.S. Department of Health and Human Services (the Government ) informed the District that it was conducting an investigation of the District concerning certain claims that were submitted to Medicare. The District subsequently learned that the Government s request arose from a qui tam action, for which the Government filed its formal complaint on November 4, 2011, intervening 61

70 in some of the qui tam whistleblower s allegations but not others. The Government s complaint alleged that the District violated the Stark Law in its compensation of certain neurosurgeons and medical oncologists. The qui tam whistleblower independently pursued the non-intervened claims. The action was filed in federal court in the Middle District of Florida, which later determined that the District had violated the Federal Stark Law in relation to its medical oncologist contracts and that there were no violations of federal anti-kickback statute by the District. The settlement costs and attorney s fees paid in accordance with both settlement agreements, together with the District s defense costs, were recorded as settlements and related costs on the statement of revenues, expenses and changes in net position accompanying the District s financial statements for the Fiscal Year ended September 30, A violation of the federal Stark Law is a covenant violation under the District s Master Indenture, and the settlements and related costs caused a violation of certain requirements related to the District s debt service coverage ratios for the fiscal year ended September 30, 2014, under a reimbursement agreement with a letter of credit provider relating to the Series 2008 Bonds and the Master Indenture. The District received waivers for both covenant violations from the letter of credit provider and a majority of holders of the outstanding obligations and related bonds (by virtue of the waivers obtained from credit facility issuers with respect to such bonds). ENFORCEABILITY OF REMEDIES The remedies available to the owners of the Series 2016 Bonds upon an Event of Default under the Bond Indenture and the Master Indenture are in many respects dependent upon judicial actions which are often subject to discretion and delay. Under existing constitutional and statutory law and judicial decisions, including specifically the federal bankruptcy code, the remedies specified by the Series 2016 Bonds, the Bond Indenture and the Master Indenture may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the Series 2016 Bonds, including Bond Counsel s approving opinion, will be qualified (as to the enforceability of the remedies provided in the various legal instruments) by limitations imposed by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors enacted before or after such delivery. General TAX MATTERS The Internal Revenue Code of 1986 (the Code ) establishes certain requirements which must be met subsequent to the issuance of the Series 2016 Bonds in order that interest on the Series 2016 Bonds be and remain excluded from gross income for purposes of federal income taxation. Non-compliance may cause interest on the Series 2016 Bonds to be included in federal gross income retroactive to the date of issuance of the Series 2016 Bonds, regardless of the date on which such non-compliance occurs or is ascertained. These requirements include, but are not limited to, provisions which prescribe yield and other limits within which the proceeds of the Series 2016 Bonds and the other amounts are to be invested and require that certain investment earnings on the foregoing must be rebated on a periodic basis to the Treasury Department of the 62

71 United States. The District has covenanted in the Bond Indenture and the Obligated Group has covenanted in the Master Indenture to comply with such requirements in order to maintain the exclusion from federal gross income of the interest on the Series 2016 Bonds. In the opinion of Bond Counsel, assuming compliance with certain covenants, under existing laws, regulations, judicial decisions and rulings, interest on the Series 2016 Bonds is excluded from gross income for purposes of federal income taxation. Interest on the Series 2016 Bonds is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals or corporations; however, interest on the Series 2016 Bonds may be subject to the federal alternative minimum tax when any Series 2016 Bond is held by a corporation. The federal alternative minimum taxable income of a corporation must be increased by seventy-five percent (75%) of the excess of such corporation s adjusted current earnings over its alternative minimum taxable income (before this adjustment and the alternative tax net operating loss deduction). Adjusted Current Earnings will include interest on the Series 2016 Bonds. Except as described above, Bond Counsel will express no opinion regarding other federal income tax consequences resulting from the ownership of, receipt or accrual of interest on, or disposition of Series 2016 Bonds. Prospective purchasers of Series 2016 Bonds should be aware that the ownership of Series 2016 Bonds may result in collateral federal income tax consequences, including (i) the denial of a deduction for interest on indebtedness incurred or continued to purchase or carry Series 2016 Bonds; (ii) the reduction of the loss reserve deduction for property and casualty insurance companies by fifteen percent (15%) of certain items, including interest on Series 2016 Bonds; (iii) the inclusion of interest on Series 2016 Bonds in earnings of certain foreign corporations doing business in the United States for purposes of the branch profits tax; (iv) the inclusion of interest on Series 2016 Bonds in passive income subject to federal income taxation of certain Subchapter S corporations with Subchapter C earnings and profits at the close of the taxable year; and (v) the inclusion of interest on Series 2016 Bonds in modified adjusted gross income by recipients of certain Social Security and Railroad Retirement benefits for the purposes of determining whether such benefits are included in gross income for federal income tax purposes. As to questions of fact material to the opinion of Bond Counsel, Bond Counsel will rely upon representations and covenants made on behalf of the District and the Obligated Group, certificates of appropriate officers and certificates of public officials (including certifications as to the use of proceeds of the Series 2016 Bonds and of the property financed or refinanced thereby), without undertaking to verify the same by independent investigation. PURCHASE, OWNERSHIP, SALE OR DISPOSITION OF THE SERIES 2016 BONDS AND THE RECEIPT OR ACCRUAL OF THE INTEREST THEREON MAY HAVE ADVERSE FEDERAL TAX CONSEQUENCES FOR CERTAIN INDIVIDUAL AND CORPORATE BONDHOLDERS, INCLUDING, BUT NOT LIMITED TO, THE CONSEQUENCES DESCRIBED ABOVE. PROSPECTIVE BONDHOLDERS SHOULD CONSULT WITH THEIR TAX SPECIALISTS FOR INFORMATION IN THAT REGARD. 63

72 Information Reporting and Backup Withholding Interest paid on tax-exempt bonds such as the Series 2016 Bonds is subject to information reporting to the IRS in a manner similar to interest paid on taxable obligations. This reporting requirement does not affect the excludability of interest on the Series 2016 Bonds from gross income for federal income tax purposes. However, in conjunction with that information reporting requirement, the Code subjects certain non-corporate owners of Series 2016 Bonds, under certain circumstances, to "backup withholding" at the rate specified in the Code with respect to payments on the Series 2016 Bonds and proceeds from the sale of Series 2016 Bonds. Any amount so withheld would be refunded or allowed as a credit against the federal income tax of such owner of Series 2016 Bonds. This withholding generally applies if the owner of Series 2016 Bonds (i) fails to furnish the payor such owner's social security number or other taxpayer identification number ("TIN"), (ii) furnished the payor an incorrect TIN, (iii) fails to properly report interest, dividends, or other "reportable payments" as defined in the Code, or (iv) under certain circumstances, fails to provide the payor or such owner's securities broker with a certified statement, signed under penalty of perjury, that the TIN provided is correct and that such owner is not subject to backup withholding. Prospective purchasers of the Series 2016 Bonds may also wish to consult with their tax advisors with respect to the need to furnish certain taxpayer information in order to avoid backup withholding. Other Tax Matters During recent years, legislative proposals have been introduced in Congress, and in some cases enacted, that altered certain federal tax consequences resulting from the ownership of obligations that are similar to the Series 2016 Bonds. In some cases, these proposals have contained provisions that altered these consequences on a retroactive basis. Such alteration of federal tax consequences may have affected the market value of obligations similar to the Series 2016 Bonds. From time to time, legislative proposals are pending which could have an effect on both the federal tax consequences resulting from ownership of the Series 2016 Bonds and their market value. No assurance can be given that legislative proposals will not be enacted that would apply to, or have an adverse effect upon, the Series 2016 Bonds. For example, in connection with federal deficit reduction, job creation and tax law reform efforts, proposals have been and others are likely to be made that could significantly reduce the benefit of, or otherwise affect, the exclusion from gross income of interest on obligations like the Series 2016 Bonds. There can be no assurance that any such legislation or proposal will be enacted, and if enacted, what form it may take. The introduction or enactment of any such legislative proposals may affect, perhaps significantly, the market price for, or marketability of, the Series 2016 Bonds. Prospective purchasers of the Series 2016 Bonds should consult their own tax advisors as to the tax consequences of owning the Series 2016 Bonds in their particular state or local jurisdiction and regarding any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel expresses no opinion. Tax Treatment of Original Issue Discount Under the Code, the difference between the maturity amount of the Series 2016 Bonds maturing on June 1, 2031, 2041 and 2046 (collectively, the Discount Bonds ), and the initial 64

73 offering price to the public, excluding bond houses, brokers or similar persons or organizations acting in the capacity of underwriters or wholesalers, at which price a substantial amount of the Discount Bonds of the same maturity and, if applicable, interest rate, was sold is original issue discount. Original issue discount will accrue over the term of the Discount Bonds at a constant interest rate compounded periodically. A purchaser who acquires the Discount Bonds in the initial offering at a price equal to the initial offering price thereof to the public will be treated as receiving an amount of interest excludable from gross income for federal income tax purposes equal to the original issue discount accruing during the period he or she holds the Discount Bonds, and will increase his or her adjusted basis in the Discount Bonds by the amount of such accruing discount for purposes of determining taxable gain or loss on the sale or disposition of the Discount Bonds. The federal income tax consequences of the purchase, ownership and redemption, sale or other disposition of the Discount Bonds which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those above. Bondholders of the Discount Bonds should consult their own tax advisors with respect to the precise determination for federal income tax purposes of interest accrued upon sale, redemption or other disposition of the Discount Bonds and with respect to the state and local tax consequences of owning and disposing of the Discount Bonds. Tax Treatment of Bond Premium The difference between the principal amount of the Series 2016 Bonds maturing on June 1, 2017 through 2030, inclusive, and 2036 (collectively, the Premium Bonds ), and the initial offering price to the public (excluding bond houses, brokers or similar persons or organizations acting in the capacity of underwriters or wholesalers) at which price a substantial amount of such Premium Bonds of the same maturity and, if applicable, interest rate, was sold constitutes to an initial purchaser amortizable bond premium which is not deductible from gross income for federal income tax purposes. The amount of amortizable bond premium for a taxable year is determined actuarially on a constant interest rate basis over the term of each of the Premium Bonds, which ends on the earlier of the maturity or call date for each of the Premium Bonds which minimizes the yield on such Premium Bonds to the purchaser. For purposes of determining gain or loss on the sale or other disposition of a Premium Bond, an initial purchaser who acquires such obligation in the initial offering is required to decrease such purchaser s adjusted basis in such Premium Bond annually by the amount of amortizable bond premium for the taxable year. The amortization of bond premium may be taken into account as a reduction in the amount of tax-exempt income for purposes of determining various other tax consequences of owning such Premium Bonds. Bondholders of the Premium Bonds are advised that they should consult with their own tax advisors with respect to the state and local tax consequences of owning such Premium Bonds. RATINGS Fitch Ratings and Standard & Poor s Ratings Services have assigned their municipal bond ratings of BBB+ and A-, respectively, to the Series 2016 Bonds. The ratings of the Series 2016 Bonds reflect only the views of the respective rating agency. There is no assurance that such ratings will continue for any given period of time or that they will not be lowered or withdrawn entirely by either or both of such rating agencies, if in the judgment of either or both, circumstances so warrant. A downward change in or withdrawal of either or both ratings may 65

74 have an adverse effect on the market price of the Series 2016 Bonds. An explanation of the significance of the ratings can be received from Fitch Ratings, One State Street Plaza, New York, New York and from Standard & Poor s Ratings Services, 225 Franklin Street, 15 th Floor, Boston, Massachusetts FINANCIAL ADVISOR Kaufman, Hall & Associates, LLC ( Kaufman, Hall ), Skokie, Illinois, has provided financial advisory services to the Obligated Group in connection with the development and implementation of the financing plan leading to the issuance of the Series 2016 Bonds. Kaufman, Hall is a national consulting firm that acts as capital advisor to healthcare organizations, particularly in the areas of short and long-term debt financing, mergers, acquisitions, joint ventures and strategic/financial planning. Kaufman, Hall is not obligated to and has not undertaken to make an independent verification or to assume responsibility for the accuracy, completeness, or fairness of the information contained in the Official Statement. Kaufman, Hall did not participate in the underwriting of the Series 2016 Bonds. UNDERWRITING The Series 2016 Bonds are being purchased by J.P. Morgan Securities LLC (the Underwriter ) at an aggregate purchase price of $174,325, (which equals the principal amount of the Series 2016 Bonds, less Underwriter s discount of $1,098,115.43, plus net original issue premium of $9,934,092.20). The Underwriter s obligations are subject to certain conditions precedent contained in a contract of purchase which was entered into between the Obligated Group and the Underwriter and they will be obligated to purchase all of the Series 2016 Bonds if any Series 2016 Bonds are purchased. The Series 2016 Bonds may be offered and sold to certain dealers (including dealers depositing such Series 2016 Bonds into investment trusts) at prices lower than such public offering prices, and such public offering prices may be changed, from time to time, by the Underwriter. The Underwriter has entered into negotiated dealer agreements (each, a Dealer Agreement ) with each of Charles Schwab & Co., Inc. ( CS&Co. ) and LPL Financial LLC ( LPL ) for the retail distribution of certain securities offerings, including the Series 2016 Bonds, at the original issue prices. Pursuant to each Dealer Agreement (if applicable to this transaction), each of CS&Co. and LPL will purchase Bonds from JPMS at the original issue price less a negotiated portion of the selling concession applicable to any Series 2016 Bonds that such firm sells. CONTINGENT FEES The Obligated Group has retained Bond Counsel with respect to the authorization, sale, execution and delivery of the Series 2016 Bonds. Payment of the fees of such professionals and the fees of the Underwriter and its counsel are each contingent upon the issuance of the Series 2016 Bonds. 66

75 VERIFICATION OF MATHEMATICAL COMPUTATIONS The accuracy of (a) the mathematical computations of the adequacy of the maturing principal of and interest earned on the Federal Securities, together with certain cash balances, under the Escrow Agreement, held by the Escrow Agent to pay, when due, the principal of, interest on and redemption prices of all of the Refunded Bonds; and (b) the mathematical computations supporting the conclusions of Bond Counsel that the Series 2016 Bonds are not arbitrage bonds under the Code, will be verified by Causey Demgen & Moore P.C. FINANCIAL STATEMENTS The audited financial statements for the fiscal year ended September 30, 2015, included in AUDITED FINANCIAL STATEMENTS OF HALIFAX HOSPITAL MEDICAL CENTER FOR THE YEAR ENDED SEPTEMBER 30, 2015 in APPENDIX B, have been audited by RSM US LLP, independent auditors, as stated in their report appearing in APPENDIX B. In addition to the District and Holdings, the only Members of the Obligated Group, Halifax Hospital Medical Center consists of affiliated not-for-profit corporations which assist the Obligated Group in carrying out its purpose to provide healthcare and related services to its community, which are treated as component units in accordance with standards issued by the Government Accounting Standards Board. Such Affiliates are not Members of the Obligated Group and are not obligated to pay operating expenses of the Obligated Group or to make any payments with respect to the Series 2016 Bonds or the 2016 Obligation. Pursuant to accounting principles generally accepted in the United States, the financial statements of the Obligated Group must be combined with the financial statements of such Affiliates and are presented in a combined format for Halifax Hospital Medical Center. As of September 30, 2015 and the fiscal year then ended, the District and Holdings (the only members of the Obligated Group) comprised 84% of the total assets and deferred outflows, excluding investments in Affiliates, and 90% of the total operating revenues of the combined total for the District and the blended and discretely presented component units. The financial statements of Halifax Hospital Medical Center are presented in APPENDIX B attached hereto for general purposes only. However, notwithstanding the presentation guidelines, certain of the revenues, expenses, assets, liabilities and net position included herein are not available as a source of security to, incurred by, or a part of those of the Obligated Group. For more information, see INFORMATION CONCERNING THE OBLIGATED GROUP in APPENDIX A attached hereto. DISCLOSURE REQUIRED BY FLORIDA BLUE SKY REGULATIONS Pursuant to Section , Florida Statutes, as amended, no person may directly or indirectly offer or sell securities of the Obligated Group except by an offering circular containing full and fair disclosure of all defaults as to principal or interest on its obligations since December 31, 1975, as provided by rule of the Florida Department of Banking and Finance (the Department ). Pursuant to Rule 3E , Florida Administrative Code, the Department has required the disclosure of the amounts and types of defaults, any legal proceedings resulting from such defaults, whether a trustee or receiver has been appointed over the assets of the Obligated Group, and certain additional financial information, unless the Obligated Group 67

76 believes in good faith that such information would not be considered material by a reasonable investor. The Obligated Group is not and has not been in default on any bond issued since December 31, 1975 which would be considered material by a reasonable investor. CONTINUING DISCLOSURE The Obligated Group has covenanted for the benefit of the Series 2016 Bondholders to provide certain financial information and operating data relating to the Obligated Group and the Series 2016 Bonds in each year, and to provide notices of the occurrence of certain enumerated events. The Obligated Group has agreed to file annual financial information and operating data and its audited financial statements with each entity authorized and approved by the Securities and Exchange Commission (the SEC ) to act as a repository ( Repository ) for purposes of complying with Rule 15c2-12 adopted by the SEC under the Securities Act of 1934 (the Rule ). Effective July 1, 2009, the sole Repository is the Municipal Securities Rulemaking Board. The Obligated Group has agreed to file notices of certain enumerated material events, when and if they occur, with the Repository. See APPENDIX E - DISCLOSURE DISSEMINATION AGENT AGREEMENT. The specific nature of the financial information, operating data, and of the type of events which trigger a disclosure obligation, and other details of the undertaking are described in FORM OF DISCLOSURE DISSEMINATION AGENT AGREEMENT in APPENDIX E attached hereto. The Disclosure Dissemination Agent Agreement shall be executed by the Obligated Group prior to the issuance of the Series 2016 Bonds. These covenants are made in order to assist the Underwriter in complying with the continuing disclosure requirements of the Rule. With respect to the Series 2016 Bonds, no party other than the Obligated Group is obligated to provide, nor is expected to provide, any continuing disclosure information with respect to the Rule. To the best knowledge of the Obligated Group, it is presently in compliance with its prior continuing disclosure undertakings entered into pursuant to the Rule in all material respects and within the last five years has complied in all material respects with its prior continuing disclosure undertakings entered into pursuant to the Rule. Digital Assurance Certification, LLC is serving as Dissemination Agent pursuant to the Disclosure Dissemination Agent Agreement. ACCURACY AND COMPLETENESS OF OFFICIAL STATEMENT The references, excerpts, and summaries of all documents, statutes, and information concerning the Obligated Group and the Obligated Group and certain reports and statistical data referred to herein do not purport to be complete, comprehensive and definitive and each such summary and reference is qualified in its entirety by reference to each such document for full and complete statements of all matters of fact relating to the Series 2016 Bonds, the security for the payment of the Series 2016 Bonds and the rights and obligations of the owners thereof and to each such statute, report or instrument. Copies of such documents may be obtained from the office of Halifax Health, 303 North Clyde Morris Boulevard, Daytona Beach, Florida

77 2700, attention: Executive Vice President and Chief Financial Officer at telephone (386) Any statements made in this Official Statement involving matters of opinion or of estimates, whether or not so expressly stated are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized. Neither this Official Statement nor any statement that may have been made verbally or in writing is to be construed as a contract with the owners of the Series 2016 Bonds. The appendices attached hereto are integral parts of this Official Statement and must be read in their entirety together with all foregoing statements. 69

78 AUTHORIZATION OF OFFICIAL STATEMENT The execution and delivery of this Official Statement has been duly authorized and approved by the District. At the time of delivery of the Series 2016 Bonds, the District will furnish a certificate to the effect that nothing has come to his attention which would lead it to believe that the Official Statement (other than information herein related to DTC, the book-entry only system of registration and the information contained under the caption TAX MATTERS as to which no opinion shall be expressed), as of its date and as of the date of delivery of the Series 2016 Bonds, contains an untrue statement of a material fact or omits to state a material fact which should be included therein for the purposes for which the Official Statement is intended to be used, or which is necessary to make the statements contained therein, in the light of the circumstances under which they were made, not misleading. HALIFAX HOSPITAL MEDICAL CENTER By: /s/ Glenn Ritchey Chairman 70

79 APPENDIX A INFORMATION CONCERNING THE OBLIGATED GROUP

80 [THIS PAGE INTENTIONALLY LEFT BLANK]

81 TABLE OF CONTENTS Page INFORMATION CONCERNING THE OBLIGATED GROUP... 1 General... 1 CORPORATE ORGANIZATION... 3 Obligated Group... 3 Other Affiliated Corporations/Organizations Not Members of the Obligated Group... 3 Accounting Treatment of Affiliates... 4 DISTRICT FACILITIES Tower Project Facilities Update... 5 JOINT VENTURES... 6 STRATEGIC INITIATIVES... 6 General... 6 Primary Market Initiatives... 6 Secondary Market Initiatives... 6 Physician Alignment Initiatives... 7 UF Health Physician Partnership... 7 Investments in Facilities and Technology... 7 SERVICES... 9 GOVERNANCE Board of Commissioners Senior Management MEDICAL STAFF SERVICE AREA General Demographic and Socioeconomic Information Major Employers Unemployment Economic Development Marketplace Competition UTILIZATION FINANCIAL PERFORMANCE General Sources of Payment Ad Valorem Tax Revenues MANAGEMENT DISCUSSION Summary of Utilization and Financial Performance of the Obligated Group FINANCIAL RATIOS OF HALIFAX HEALTH HISTORICAL COVERAGE OF PRO FORMA DEBT SERVICE INSURANCE AND SELF-INSURANCE i

82 TABLE OF CONTENTS (continued) General Medical Malpractice Claims Experience INSTITUTION FISCAL CONTROLS Budgetary Policies Management Controls INVESTMENT POLICIES INTEREST RATE SWAP POLICY EMPLOYEES PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS Pension Plans Other Post-Employment Benefits EDUCATIONAL AFFILIATIONS ACCREDITATION AND LICENSES Page ii

83 INFORMATION CONCERNING THE OBLIGATED GROUP General Halifax Hospital Medical Center (the District ) and H.H. Holdings, Inc. ( Holdings ) are presently the only Members of the Obligated Group. The District is an independent special taxing district of the State of Florida with all the powers of a body corporate. Its geographic territory is located in northeastern Volusia County, Florida, primarily including the cities of Daytona Beach, Ormond Beach, Holly Hill and parts of Port Orange. The seven members of the Board of Commissioners (the Board ) of the District are residents of the District and are appointed by the Governor for four-year terms. The Board is responsible for the management and operation of the District. The current enabling act of the District was passed by special act of the Florida Legislature as Chapter , Laws of Florida (the Act ), which codified all prior laws which established the District as a special taxing district, a public body corporate and politic of the State of Florida. The District was originally created in 1925 under the name Halifax Hospital District by Chapter 11272, Laws of Florida, Pursuant to the Act, the District has all powers of a body corporate, including, but not limited to, the power to establish, construct, operate and maintain such hospitals, medical facilities and healthcare facilities and services for the preservation of the public health, for the public good and for the use of the public of the District, the power to enter into contracts, borrow money, establish for-profit and not-for-profit corporations, the power to acquire, purchase, hold, lease and convey real and personal property, and the power of eminent domain. Pursuant to the Act, the District established Holdings as a not-for-profit corporation and an organization described in Section 501(c)(3) of the Internal Revenue Code. Holdings, formerly Florida Health Care Plans, Inc., holds and manages the sale proceeds and remaining net assets from the sale of the Florida Health Care Plan health maintenance organization to Blue Cross Blue Shield of Florida, Inc. in December Holdings is organized on a non-stock basis to assist the District in carrying out its essential governmental function of operating and maintaining hospitals, medical facilities and other healthcare facilities for the preservation of public health and the District s related duties and responsibilities under the Act. The District is the sole member of Holdings. The property, affairs and business operations of Holdings are managed by its Board of Directors. Pursuant to the Holdings corporate bylaws, the Board of Directors consists of not more than seven (7) Directors, each of whom must be a Commissioner of the District. Presently, the Board of Directors of Holdings is identical to the Board. The officers of the Board of Directors of Holdings are required to be identical to and have the same functions as the officers of the Board. The District has established other not-for-profit corporations (collectively, with Holdings, the Affiliates or Affiliated Organizations ) to assist in carrying out its purpose to provide healthcare and related services to its community. The Affiliates are each controlled by the District through sole membership and/or the power to appoint and remove a majority of the members of the respective governing body of such Affiliate. The District, together with the Affiliates, conduct business under the name Halifax Health. Other than Holdings, such Affiliates are not Members of the Obligated Group and are not obligated to pay operating expenses of the Obligated Group or to make any payments with respect to the Series 2016 Bonds or any Obligations issued pursuant to the Master Indenture. Appendix A-1

84 Appendix A-2

85 CORPORATE ORGANIZATION Obligated Group The District was established in 1925 and began healthcare operations in The District is now a 678 licensed bed, full service, accredited, acute care hospital and is the largest provider of tertiary inpatient services in the Primary Service Area (see THE SERVICE AREA below.) The District provides a continuum of healthcare services (see SERVICES below) to the residents of the east-central coast of Florida through a network of organizations. Included within the network are an acute care referral-center hospital, a psychiatric hospital, a community cancer treatment center with three outreach locations, a hospice company, a home health company and a preferred provider organization. AT THE TIME THE SERIES 2016 BONDS ARE ISSUED, THE DISTRICT AND HOLDINGS WILL BE THE ONLY MEMBERS OF THE OBLIGATED GROUP, AND AS SUCH, ARE THE ONLY OBLIGORS UNDER THE MASTER INDENTURE. Other Affiliated Corporations/Organizations Not Members of the Obligated Group The District is authorized under the Act to establish Florida not-for-profit corporations and organizations as are necessary to form an integrated system for the delivery of healthcare services. Other than Holdings, the Affiliates are not Members of the Obligated Group and are not obligated to pay operating expenses of the Obligated Group or to make any payments with respect to the Series 2016 Bonds or any Obligations issued under the Master Indenture. Likewise, the indebtedness of any of the Affiliates, other than Holdings, is not secured by a lien on the Net Revenues of the Obligated Group. A description of the Affiliates, other than Holdings, follows: Halifax Management System, Inc. ( HMS ). HMS was organized in 1984 as a Florida not-for-profit corporation which provides services to assist the District in carrying out its public purpose. HMS owns and leases to the District three health care facilities within the District s service area. These facilities consist of two ambulatory facilities that provide outpatient services and medical offices and one 80-bed acute care hospital (HHPO). One of the ambulatory facilities is located on the District s main medical center campus in Daytona Beach and the other is located in Ormond Beach. The acute care hospital is located in Port Orange. HMS s income is derived from the rental fees charged to the District and is sufficient to fund HMS operating expenses and debt service requirements. HMS is a controlled affiliate of the District. As of December 31, 2015, HMS had approximately $5.5 million of debt outstanding. Halifax Medical Center Foundation, Inc. ( Foundation ). The Foundation was organized in 1988 as a Florida not-for-profit, non-stock corporation. The Foundation was created to facilitate an organized effort to obtain community donations and contributions for the District and its Affiliates. The Foundation is a controlled affiliate of the District. Halifax Hospice, Inc. ( Hospice ). Hospice, which does business as Halifax Health Hospice of Volusia/Flagler, was organized in 1984 as a Florida not-for-profit, non-stock corporation. Hospice provides palliative medical care and treatment for patients who have less than six months to live. Hospice provides care at the patient s residence or at one of its inpatient care centers located as follows: Port Orange (16 beds), Orange City/West Volusia (18 beds), Edgewater/Southeast Volusia (12 beds), and Ormond Beach (12 beds). Hospice is a controlled affiliate of the District. As of December 31, 2015, Hospice had no debt outstanding. Volusia Health Ventures, Inc. ( VHN ). VHN, which does business as Volusia Health Network, was organized in 1984 as a Florida not-for-profit, non-stock corporation. VHN operates as a preferred provider organization and also provides utilization review services. VHN is a controlled affiliate of the District. Appendix A-3

86 Halifax Healthy Families Corp. ( Healthy Families ). Healthy Families was organized in 1993 as a Florida not-for-profit, non-stock corporation. Healthy Families assists the District in local coordination of the Florida Healthy Kids program and provides various community outreach services and programs. Healthy Families is a controlled affiliate of the District. Halifax Staffing, Inc. ( Staffing ). Staffing was organized in 1994 as a Florida not-for-profit, non-stock corporation. Staffing operates as an employee leasing company solely for the District and Affiliates. Staffing is a controlled affiliate of the District. Patient Business and Financial Services, Inc. ( PBFS ). PBFS, a Florida not-for-profit, non-stock corporation, was originally organized in 1987 as Halifax Home Health, Inc. but changed its name to PBFS in 2000 when it discontinued its home health services and changed its operations to management of the patient accounting services for the District. PBFS is a controlled affiliate of the District East Volusia Health Services, Inc. ( EVHS ). EVHS was organized in 2004 as a Florida not-for-profit corporation. The District is the sole member of EVHS. EVHS was organized for the purpose of entering into jointventure agreements to enhance the access and quality of patient care provided to the community (see JOINT VENTURES below.) Halifax Healthcare Systems, Inc. ( HHCSI ). HHCSI was organized in 1987, as a Florida not-for-profit, non-stock corporation. HHCSI was organized for the purpose of enhancing the access and quality of patient care provided to the community. Halifax Clinical Integration, Inc. ( HCI ). HCI was organized in December 2013, as a Florida not-forprofit, non-stock corporation. HCI is owned by HHCSI and was organized to facilitate the acquisition and consolidated operations of physician practices. HCI purchased Children s Medical Center, a multi-provider pediatric physician practice, in December For the fiscal year ended September 30, 2015, Children s Medical Center had net patient service revenues of $2.5 million and a net operating profit of $162,000. Accounting Treatment of Affiliates The financial statements of Halifax Hospital Medical Center included as APPENDIX B attached to the Official Statement, include the District and the Affiliated Organizations. Except for HMS, Foundation, Hospice and VHN, the Affiliated Organizations are combined with the District as blended component units because they have substantially the same governing body as the District, and management of the District has operational responsibility for them. HMS, Foundation, Hospice and VHN are reported as discrete component units and not combined with the District. As of September 30, 2015 and the fiscal year then ended, the District and Holdings (the only members of the Obligated Group) comprised 84% of the total assets and deferred outflows, excluding investments in Affiliates, and 90% of the total operating revenues of the combined total for the District and the blended and discretely presented component units. See the information under the heading FINANCIAL STATEMENTS in the forepart of this Official Statement. DISTRICT FACILITIES The District owns and operates three hospital facilities under one license and several ambulatory facilities. The main campus of the District is the inpatient referral center, which includes a Level II neonatal intensive care center, a Level II state-certified trauma center offering, open-heart surgery, neurosurgery, inpatient rehabilitation and other specialty inpatient and outpatient services. The Port Orange campus (HHPO), located ten miles south of the main campus, is a community hospital providing a broad range of services to the residents of Port Orange and southeast Volusia County. HHPO is an 80-bed facility, which includes an eight-bed intensive care unit. The Halifax Behavioral Services (HBS) campus, two miles north of the main campus, provides inpatient and outpatient child, adolescent, and adult psychiatric services including a 30-bed inpatient unit. Appendix A-4

87 The District is licensed by the Florida Agency for Health Care Administration ( AHCA ) to operate with 678 beds. Licensed beds classified by type of service as of December 31, 2015 are as follows: Type of Service Licensed Beds Beds in Operation Medical Surgical Intensive Care Rehab Psychiatric Obstetric Pediatric Neonatal Intensive Care 9 9 Total Source: Records of the District In addition, the District operates a three-story, 65,000 square foot ambulatory care facility located on the District s main campus, which also houses physician offices, outpatient rehabilitation, pain management and the District s Neuroscience Center. The District and Affiliated Organizations also own and operate other outpatient centers in Daytona Beach, Port Orange, Ormond Beach, Palm Coast, DeLand and Deltona Tower Project Facilities Update The Series 2006 Bonds and the Series 2008 Bonds of the Obligated Group financed a portion of the 2006 Project (the Tower Project ), which included the acquisition, construction, renovation, and improvement of healthcare facilities of the District and the acquisition and installation of equipment and furnishings, including, without limitation, the following components: improvement, renovation and equipping of HHPO; construction of the Halifax Vascular Institute; Radiology Special Procedures; Family Birth Place renovations; main campus renovations and improvements; new Inpatient Tower and Emergency Department; land for New Tower; Central Energy Plant for New Tower; Halifax Professional Center purchase; and LPGA land. As noted, the Tower Project included the acquisition of land and the development, acquisition, construction, renovation and installation of capital improvements and equipment consisting of a new inpatient tower, central energy plant and emergency department as well as the acquisition of medical equipment, information technology and furnishings. Construction of the Tower Project, which was intended to address market demands and facility infrastructure requirements, began in April 2007 and was completed on time and on budget in June The Tower Project added approximately 457,000 square feet of incremental new space to the District s main campus, significantly increasing the number of private rooms. The Tower Project included a new modern ten-story inpatient tower portion (the France Tower ) that is connected to the existing hospital facilities on the District s main campus. Currently, the top three floors of the France Tower are vacant space that can be used to accommodate future growth. The Tower Project also included construction of a new modern emergency department that quadrupled the size of the treatment area to approximately 89,000 square feet. The new emergency department houses over 100 new treatment rooms. This added size increased capacity and privacy as well as improved the ability to support fluctuations in patient volumes and strengthened the emergency department s overall capabilities. In connection with the Tower Project, the District also constructed a new central energy plant with 20,000 square feet. The central energy plant houses new emergency generators, air conditioning chillers, and a steam generation plant. The central energy plant was constructed with capacity for future expansion. Appendix A-5

88 JOINT VENTURES A description of the joint ventures of EVHS follows: East Central Florida Outpatient Imaging, LLC ( ECFOI ). EVHS and the District are the sole members of Atlantic East Coast Imaging, LLC, which has a fifty percent (50%) interest in ECFOI, a Florida limited liability company established to provide outpatient imaging services including MRI, CT, Nuclear Medicine, Mammography, Diagnostic X-ray and other radiological imaging services. At the end of ECFOI s fiscal year ended December 31, 2015, ECFOI had net patient service revenues of $41.5 million and net income before distributions of $4.4 million. Halifax Health Care at Home ( Care at Home ). EVHS has a fifty percent (50%) interest in Daytona Area Senior Services, Inc., a Florida corporation established to provide home health services, doing business as Halifax Health Care at Home ( Care at Home ). For the fiscal year ended September 30, 2015, Care at Home had net patient service revenues of $1.7 million and a net loss of $569,000. HB Rehabilitative Services, Inc. ( HB ). EVHS has a fifty percent (50%) interest in HB, a Georgia notfor-profit, non-stock corporation. HB was organized in 2012 for the purpose of facilitating the management of the Halifax Brooks Center for Inpatient Rehabilitation ( CIR ). CIR is a 40 inpatient rehabilitation facility located on two floors of the District s main campus, which opened in September General STRATEGIC INITIATIVES The District has recently updated a five-year strategic plan (the Plan ). The Plan reaffirms the mission, vision, values and service philosophy and defines the strategic focus of the District. Various opportunities and initiatives have been identified in the Plan. The District is open to considering additional alliances and relationships as part of its ongoing strategic planning process. below. The more significant strategic initiatives of the District and Affiliated Organizations are summarized Primary Market Initiatives Halifax Brooks Center for Inpatient Rehabilitation. CIR is a 40-bed inpatient rehabilitation unit located on two floors of the District s main campus, which opened in September Primary care expansion. The District operates adult and women s care locations branded under the name Primary Care in Ormond Beach. In addition, an affiliate of the District ( HHCI ) has begun operating pediatric care locations in Ormond Beach, Palm Coast and Port Orange. Hospice Care Center, Ormond Beach. The final survey for the new Hospice care center location has been completed. Hospice services commenced in April Secondary Market Initiatives Deltona. The District has opened a Primary Care location in Deltona, offering primary care and certain imaging services. In addition, the District and Holdings, working closely with the City of Deltona under an Interlocal Agreement between the District and the City of Deltona, are evaluating health care needs of this region and the necessary facilities and services. The Deltona market profile represents over 90,000 residents, with favorable employment and income demographics. Appendix A-6

89 Orange and Osceola Counties. Hospice was awarded a certificate of need to provide hospice services in Orange and Osceola Counties. Clinical and other staff have been hired and administrative office space has been secured to conduct the services to be provided. Hospice services commenced in June Physician Alignment Initiatives The medical staff for District facilities consists of 538 physicians (see MEDICAL STAFF below). Representatives of the medical staff are engaged in decision making and planning activities of the District. Examples of medical staff involvement include: Representation as a non-voting participant at meetings of the District s Board of Commissioners Voting member of the District s Audit and Finance Committee Voting members (4 representatives) on the Capital Investment Committee, (also requests for clinical capital equipment/projects are ranked by the Medical Executive Committee to prioritize capital spending) Significant voting representation on the Physician Technology Advisory Committee and Technology Assessment Panel (for proposed new supply items) Significant representation on the Utilization Management Committee (focused on care coordination and length of stay) The District employs or exclusively contracts with 202 physicians. The District is actively engaged in alignment and governance activities with its employed physicians to foster enhanced collaboration and leadership in clinical quality, physician education, utilization management, and healthcare provider recruitment. A second strategy is being executed to develop an aligned network. The objective is to organize these two strategies to develop a single network to leverage payor contract opportunities, operating efficiencies, improve lines of communication and synergy among the physician members. The fully implemented network is expected to help facilitate physician recruitment, enhanced operating effectiveness and alignment to the system. The District has engaged a third-party to help implement these strategies, which has included hiring an administrative leader and support staff. UF Health Physician Partnership The District has developed and is planning additional clinical affiliations with University of Florida Health ( UF Health ). Contractually committed physician staffing arrangements have been made for neonatology, cardiothoracic and vascular surgery. Additionally, physician staffing arrangements are planned for pediatrics (including pediatric sub-specialties of cardiology and neurology) and pediatric hospitalists. Under these affiliations, which will be co-branded with the District and UF Health, the parties will work together to ensure consistent staffing of clinical areas, develop further enhancement in the quality of care and provide educational opportunities for UF Health resident physicians. Investments in Facilities and Technology The District has funded routine capital needs and replacement of new technologies through operating cash flow. A five-year capital needs assessment is conducted annually for each department/significant function of the District s facilities. Capital needs for the following year are evaluated and prioritized by the Capital Investment Committee, with the direction from the Medical Executive Committee regarding the priority assessments for clinically related equipment and projects. Projects with the highest priority are included in the capital budget for the following year. The capital expenditures budget for fiscal year 2016 is $20.0 million. For fiscal years 2006 through 2015, cumulative capital expenditures, including expenditures funded through bond proceeds, have totaled 211.2% of depreciation expense for the same period. Appendix A-7

90 Some of the more significant capital projects of the Obligated Group and Affiliated Organizations are summarized below. Recently Completed Information Technology Physician Office Integration (Magic Box) ($320k) ICD-10 Conversion ($446k) Network Switch Replacement ($406k) Medical Technology GI Lab Video System ($600k) Surgical Video System Upgrade Phase I ($575k) Surgical Instrument Sterilizer ($897k) Patient Monitor Upgrade Phase I ($875k) Facility/Service Improvements Planned or In-Progress Hospice Ormond Beach Care Center ($6.8 million) Heart and Vascular Institute Build-Out ($880k) Urology Suite Renovation ($290k) Security/ Lighting Upgrades ($409k) Land Acquisition Deltona SR 472 and I-4 ($4.6 million) Information Technology Meditech Web Ambulatory ($1.8 million) Meditech 6.1 upgrade ($5.5 million) Access Control System Upgrade ($543k) Meditech Critical Care Flow sheet ($333k) Medical Technology Surgical Power Equipment upgrade ($639k) Surgical Video System Upgrade Main Campus Phase II and Twin Lakes ($914k) CT Scanner upgrade ($2.0 million) Facility/Service Improvements Neonatal Intensive Care Unit Renovation ($1.8 million) Ophthalmology Physician Practice ($772k) Medical Psychology Expansion ($2.0 million) Boiler Replacement ($900k) The 2016 Project includes the acquisition, construction and equipping of renovations and improvements to the health care facilities of the Obligated Group, including, but not limited to, some of the more significant capital projects of the Obligated Group reflected above. The District has substantially implemented a multi-year plan to fully comply with Electronic Health Record ( EHR ) requirements, including the integration of hospital, ambulatory and physician office medical records. In order to be successful in this effort, the District has designed and deployed the infrastructure to have a reliable and secure electronic health record. The District obtained Healthcare Information and Management Systems Society Appendix A-8

91 (HIMSS), Electronic Medical Record Adoption Model (EMRAM) Stage 6 in 2010 and has attested for Meaningful Use Stages 1 and 2, including eligible employees. SERVICES The District offers the area s only Level II Trauma Center, Comprehensive Stroke Center, Neonatal and Pediatric Intensive Care Units, Pediatric Emergency Department, Child and Adolescent Behavioral Services. Additionally, the District is the only facility providing Kidney Transplant, Radiosurgery, Gynecological Oncology, and Neurological services to residents in the Service Area, as well as 24-hour, on-site hospitalist, intensivists and pediatric specialists. Additionally, the District operates a three-year family practice residency program with 24 resident positions and a one-year post-graduate fellowship in sports medicine. A summary of services provided by the District is as follows: Ancillary Services: Inpatient Services Computerized Tomography (CT) Diagnostic Cardiac Catheterization Electrophysiology (EP) Electrocardiography (EKG) Electroencephalography (EEG) Endoscopy Laboratory Nuclear Medicine Percutaneous Transluminal Coronary Angioplasty (PTCA) with/without Stent Pharmacy Magnetic Resonance Imaging (MRI) Radiology Respiratory Therapy Acute Care: Cardiology Cardiovascular/Open Heart Surgery Gynecology Kidney Transplant Nephrology Neurology Neurosurgery Inpatient Rehabilitation Bariatric Surgery Obstetrics Oncology Orthopedics Pediatrics Pulmonology Renal Dialysis Urology Cardiac Cryoablation Catheter Intensive Care: Adult Psychiatry Cardiovascular Intensive Care Child/Adolescent Psychiatry Medical/Surgical Intensive Care Pediatric/Neonatal Intensive Care Level II Neonatal Intensive Care Adult Psychiatric Partial Hospitalization Cardiac Rehabilitation Child/Adolescent Psychiatric Partial Hospitalization Comprehensive Medical/Radiation Oncology Emergency Services Endocrinology Endoscopy Interventional Pain Management Services Source: Records of the District Outpatient Services Lithotripsy Occupational Therapy Physical Therapy Primary Care Clinics Pulmonary Rehabilitation Same Day Surgery Speech Therapy Appendix A-9

92 GOVERNANCE Board of Commissioners The seven members of the Board are appointed by the Governor of the State of Florida for four-year staggered terms. Board members whose terms have expired continue to serve on the Board until a successor is appointed. The Board has four standing committees: Audit and Finance, Strategic Community Health and Facility Planning, By-Laws and Quality Assurance/Improvement. The present members of the Board, office held, occupation, initial appointment and expiration of current term are as follows: Glenn Ritchey Chairman Name Harold L. Goodemote II Vice Chairman Susan Schandel Treasurer Daniel G. Francati Member Tom McCall Member Ed Connor Member Carl W. Rick Lentz III, M.D. Member Occupation Automotive Industry Daytona Beach, Florida Construction Industry Daytona Beach, Florida Motorsports Industry Daytona Beach, Florida Pari-mutuel Industry Daytona Beach, Florida Construction Industry Daytona Beach, Florida Retired Business Executive Daytona Beach, Florida Physician Daytona Beach, Florida * These members continue to serve until successor appointed. Initial Appointment Expiration of Current Term June 16, 2000 May 23, 2016 August 25, 2011 May 23, 2017 June 21, 2011 May 23, 2015* August 25, 2011 May 23, 2015* June 27, 2014 May 23, 2017 December 4, 2015 May 23, 2018 December 4, 2015 May 23, 2018 The Board and the Audit and Finance Committees meet monthly. The Strategic Community Health and Facility Planning Committee meets at least quarterly, with the opportunity to present a report as part of every monthly Board meeting while the By-Laws and Quality Assurance/Improvement Committees meet as needed. The respective responsibilities and duties of the committees are set out in the Board By-Laws. As a public entity, the members of the Board are subject to the Florida public official ethics rules and laws, which govern conflicts of interest and other matters, as set out in Chapter 112, Florida Statutes and Article II, Section 8 of the Florida Constitution. Senior Management Key management personnel responsible for the daily operation of the District include the following: Jeff Feasel, President and Chief Executive Officer, age 54 Mr. Feasel joined the District as Vice President and President/CEO of Patient Business and Financial Services, Inc., an affiliate of the District, in April He was promoted to Chief Operating Officer of the District in February 2003 and appointed President and Chief Executive Officer of Halifax Health in January Prior to joining the District, Mr. Feasel was employed at the Medical College of Ohio Hospitals in Finance Administration as Director of Patient Financial Services from Additionally, he held financial positions at Wood County Hospital in Bowling Green, Ohio for nine years beginning in Mr. Feasel earned a Bachelor of Science in Business Administration from Bowling Green State University, Bowling Green, Ohio and a Master of Business Administration from the University of Findlay. He is a member of the American College of Healthcare Executives and Healthcare Financial Management Association. As a dedicated healthcare professional, Mr. Feasel has been actively involved in the governance of many industry associations including the Florida Hospital Association, VHA Southeast, America s Essential Hospitals, and the Safety Net Hospital Alliance of Florida. Appendix A-10

93 Eric M. Peburn, Executive Vice President and Chief Financial Officer, age 45 Mr. Peburn joined the District in 1996 as Controller. He was promoted to Director of Finance in September 2003 and to Assistant Administrator in October Mr. Peburn was appointed Chief Financial Officer in November 2007 and Executive Vice President in Prior to joining the District, he was an auditor for Ernst & Young LLP in Orlando, Florida. He holds Bachelors and Masters degrees in Accounting from the University of Florida, Gainesville, Florida. He is a Certified Public Accountant and a member of the Healthcare Financial Management Association, American Institute of Certified Public Accountants and Florida Institute of Certified Public Accountants. Ann Martorano, Executive Vice President and Chief Operating Officer, age 55 Ms. Martorano joined Halifax Health in 1985 as a public relations specialist and then served as director of administrative services and physician recruitment for 15 years. Ms. Martorano was promoted to executive director of Volusia Health Network an affiliate of the District, in In 2005, Ms. Martorano was appointed administrator of Halifax Health Medical Center Port Orange. She became the Chief Marketing Officer in In 2014, Ms. Martorano was appointed Executive Vice President and Chief Operating Officer. She completed her undergraduate degree at Stetson University and is a member of Phi Beta Kappa. She holds a Master s degree in communications and a Master s degree in Health Care Administration from the University of Central Florida. She is a Fellow in the American College of Healthcare Executives. Arvin Lewis, Senior Vice President and Chief Revenue Officer, age 52 Mr. Lewis joined Halifax Health in 2002 as the Vice President of Patient Business and Financial Services. Mr. Lewis was promoted to Chief Revenue Officer in 2010 and Senior Vice President in Prior to joining the District Mr. Lewis was involved in healthcare finance and operations management, holding numerous positions including: director of admissions, director of integration, controller, director of planning /operations and assistant administrator. Throughout his career, Mr. Lewis has focused on Revenue Cycle Management, Business Development, and Strategic Planning. Mr. Lewis holds a Bachelor s Degree in Accounting and an MBA from Valdosta State University, Valdosta, Georgia. Steven Miles, M.D., Senior Vice President and Chief Quality Officer, age 59 Dr. Miles joined the District as Senior Vice President and Chief Quality Officer in Dr. Miles served on the Halifax Health Board of Commissioners from He is a past president of the Halifax Health Medical Staff and has past and present membership on a multitude of quality and safety committees including the Risk Management Committee, Utilization Review Committee, Quality Council, Medical Care and Surgical Care Evaluation Committees, Quality Assurance/Performance Improvement Committee, Trauma Committee, Intensive Care Committee and Pharmacy and Therapeutics Committee. Dr. Miles is a graduate of the University of Florida College of Medicine and completed his residency and fellowship at Shands Hospital in Gainesville, Florida. Donald Stoner, M.D., Senior Vice President and Chief Medical Officer, age 74 Dr. Stoner joined the District as Chief Medical Officer in 2006 and was appointed Senior Vice President in He is board-certified in internal medicine and cardiovascular diseases. Dr. Stoner has been associated with the District since His previous roles included director of cardiovascular services, director of the cardiac catheterization lab, director of the chest pain center, director of medical intensive care, director of the heart center, and medical director of the health fitness program. Prior to joining Halifax Health, Dr. Stoner served as chief of staff at three different area hospitals. In addition, he was a certified and sworn law enforcement officer, serving as a forensic specialist and an active duty officer. Dr. Stoner completed medical school and residency at the University of Miami Medical School. He completed a fellowship in cardiology at the University of South Florida College of Medicine. Vivian Gallo, Senior Vice President and General Counsel, age 47 Ms. Gallo joined the District in 2015 as Senior Vice President and General Counsel. Ms. Gallo is a Florida Bar Board-certified Healthcare attorney, who received her Bachelor of Arts and Juris Doctorate degrees from the University of Florida. Prior to joining the District, Ms. Gallo served as General Counsel for Miami Children s Health System and as Deputy General Counsel for University of Florida Shands and Nemours Children s Health System. Ms. Gallo began her in-house health law career at Penn Medicine/University of Pennsylvania Health System after practicing medical malpractice and insurance-defense litigation in Florida and Pennsylvania. Appendix A-11

94 MEDICAL STAFF The medical staff of the District is appointed by the Board and is composed of physicians, dentists, podiatrists, and psychologists who are required to be graduates of recognized schools and training programs, and are licensed to practice in the State of Florida. As of December 31, 2015, the medical staff consisted of 534 such practitioners. There are several categories of membership. A brief description of each category follows. Active Staff consists of practitioners who regularly admit or are consistently involved in the care of patients. Active Staff members must take service call and be available for consultation assignments. As of December 31, 2015, there were 251 Active Staff members. Associate Staff consists of practitioners who are recently appointed to the medical staff. All medical staff members must serve on the Associate Staff for two years before being appointed to the Active Staff. As of December 31, 2015, there were 67 Associate Staff members. Courtesy Affiliate Staff consists of practitioners who have previously served as Active Staff. The Courtesy Affiliate Staff members do not take call and do not have voting privileges. They are permitted to remain on staff but may accumulate no more than 20 patient encounters per each 2-year credentialing period. As of December 31, 2015, there were 52 Courtesy Affiliate Associate Staff members. Courtesy Staff consists of practitioners who possess recognized professional ability and expertise which is not otherwise sufficiently available on the medical staff. As of December 31, 2015, there were 37 Courtesy Staff members. Courtesy Teaching Staff consists of practitioners who are otherwise qualified to be a member of the medical staff, but whose practice is not geographically close enough to the hospital for them to regularly admit patients. Their services are limited to assisting with the hospital s teaching program. As of December 31, 2015, there were 3 Courtesy Teaching Staff members. Leave of Absence Staff consists of practitioners who are otherwise in good standing on the medical staff, but who are unable to carry out their responsibilities for a period of time. As of December 31, 2015, there were 0 staff members on leaves of absence. Locum Tenens Staff consists of practitioners who are otherwise qualified to be a member of the medical staff, but who are granted privileges for only a temporary period of time. As of December 31, 2015, there were 44 Locum Tenens Staff members. Medical Affiliate Staff consists of practitioners who are either in a residency training program (Resident Affiliate) or are employed to render services under the direction of a department chief (House Physician). As of December 31, 2015, there were 7 Medical Affiliate Staff members. Active Staff Senior consists of practitioners who either have a physical disability, have been on the medical staff for 20 years, or have reached the age of 65 and have been on the medical staff for 10 consecutive years. As of December 31, 2015, there were 73 Active Staff - Senior members. The medical staff s by-laws require the physicians seeking appointment to the medical staff be board certified or eligible for the examination for such board certification. Of the 534 physicians, 435 are board certified. The average age of the medical staff members is 51. The following table summarizes selected information regarding the District s medical staff. Appendix A-12

95 Halifax Hospital Medical Center Medical Staff Average Age and Board Certification by Specialty Specialty Physician Count Board Certified % Board Certified Average Age Allergy Immunology % 62 Anesthesiology % 56 Cardiac Electrophysiology % 47 Cardiology % 58 Colon/Rectal Surgery % 58 Critical Care Medicine % 42 Dentistry 1 0 0% 34 Diagnostic Radiology % 51 Emergency Services % 46 Family Practice % 48 Gastroenterology % 52 General Surgery % 51 Gynecologic Oncology % 55 Gynecology % 59 Hand Surgery % 43 Hematology/Oncology % 55 Infectious Disease % 48 Internal Medicine % 49 Interventional Cardiology % 51 Maternal Fetal Medicine % 55 Nephrology % 51 Neuro Psychology 2 0 0% 53 Neurology % 45 Neurosurgery % 50 Obstetrics Gynecology % 51 Ophthalmology % 56 Oral Maxillofacial Surgery % 55 Orthopedics % 57 Otolaryngology % 53 Pain Management % 49 Palliative Care % 53 Pathology % 56 Pediatric Critical Care % 47 Pediatric Dentistry % 39 Pediatric Infec Disease % 52 Pediatrics % 58 Pediatrics, Cardiology % 48 Pediatrics, Gastroenterology % 61 Appendix A-13

96 Average Age and Board Certification by Specialty Specialty Physician Count Board Certified % Board Certified Average Age Pediatrics, Neonatology % 56 Physical Medicine % 43 Plastic Reconstructive Surgery % 58 Podiatry % 47 Psychiatry % 53 Psychology 4 0 0% 50 Pulmonology % 53 Radiation Oncology % 55 Radiology-Vascular Invention % 51 Reproductive Endocrinology % 46 Retina % 46 Surgery, Critical Care % 63 Thoracic & Cardiovascular Surgery % 54 Urology % 55 Vascular Surgery % 63 Total % 51 Source: Records of the District [Remainder of Page Intentionally Left Blank] Appendix A-14

97 For the three-month period ended December 31, 2015, the ten most active physicians on the medical staff of the District (based on inpatient charges) were as follows: Specialty Halifax Hospital Medical Center Ten Most Active Physicians (1) Age Percentage of Inpatient Charges Admissions General Surgery % 119 Family Practice % 127 Neurosurgery % 53 Internal Medicine % 102 General Surgery % 61 Family Practice % 94 Neurosurgery % 71 Internal Medicine % 110 Family Practice % 88 General Surgery % 39 Total 19.0% 864 (1) Excludes admissions by District Emergency Department and employed Hospitalist physicians which accounts for 2,009 admissions and 38% of the inpatient charges. Source: Records of the District The distribution of patients admitted by medical staff age group for the three-month period ended December 31, 2015 is found below. The age group with the largest portion of medical staff was This group accounted for approximately 25% of total medical staff and admitted approximately 34% of the total patients admitted during the first three months of fiscal year Age Group Halifax Hospital Medical Center Medical Staff Age Distribution Physician Count Percentage of Total Physicians Percentage of Total Patients Admitted Under % 27% 40 to % 34% 50 to % 21% 60 and Over % 18% Total % 100% Source: Records of the District Appendix A-15

98 SERVICE AREA General The general geographical boundaries of the taxing district are northeastern Volusia County, and primarily the cities of Daytona Beach, Ormond Beach, Holly Hill and parts of Port Orange. The District s service area includes all of Volusia County and portions of contiguous counties (Flagler, Putnam and Lake Counties). The primary service area, which accounts for 70% of the District s inpatient discharges, is defined by zip code and includes the cities of Daytona Beach, Ormond Beach, Holly Hill and Port Orange (the Primary Service Area ). The secondary service area, which accounts for approximately 24% of the District s inpatient discharges, includes the contiguous area surrounding the Primary Service Area and includes the cities of DeLand, DeLeon Springs, Oak Hill, Orange City, Osteen, Edgewater, New Smyrna Beach, Pierson, Seville, Debary, Deltona, Lake Helen, Palm Coast, Flagler Beach and Bunnell (the Secondary Service Area ). The remaining 6% of the District s inpatient discharges were from outside of the Primary and Secondary Service Areas and are partly attributable to area tourism. The map below illustrates the District s Primary and Secondary Service Areas: Halifax Hospital Medical Center Service Area Appendix A-16

99 Demographic and Socioeconomic Information Volusia County and Flagler Counties, which comprise the majority of the Primary Service Area and the Secondary Service Area, experienced population increases of 1.2% and 9.2%, respectively, from 2000 to Population estimates for 2014 and 2019 continue to reflect increases. The following table, based on U.S. Census Bureau information sets forth historical and estimated population growth for Volusia and Flagler Counties as well as the State of Florida. Population Trends for the Service Area and Florida Census 2000 Census 2010 Estimate 2016 Estimate Annual % Annual % Annual % Volusia County 443, , , , % 0.7% 0.9% Flagler County 49,833 95, , , % 1.5% 1.3% Florida 15,982,377 18,801,310 20,299,288 21,515, % 1.3% 1.2% Source: U.S. Bureau of Census, 2000, Census of population and housing : Nielsen projections based on 2010 US Census data. The estimated 2014 median household income based on Nielson 2014 information is $37,113 in Volusia County and $48,415 in Flagler County, compared to the State of Florida at $44,318. According to Nielson 2014 estimates, the racial diversity of both Volusia and Flagler Counties is estimated to be approximately 81.5% White/Caucasian, 11.0% African American, 1.8% Asian, and 5.7% other. Major Employers The following table identifies the major employers in Volusia County (the county in which the District is located) as of November, The District is a vital employer in Volusia County and the communities that it serves. Major Employers Volusia County Schools Education 7,742 Halifax Health Healthcare 4,294 Volusia County Government Government 3,333 Florida Hospital - All Divisions Healthcare 4,040 Publix Retail 3,241 Wal-Mart Retail 1,875 State of Florida Government 2,758 Daytona State College Education 1,711 Embry-Riddle Aeronautical University Education 1,483 U.S. Government Government 1,216 Source: Research Department, Volusia County Department of Economic Development. Personnel counts do not represent full time equivalents ( FTE ) and exclude contract and temporary employees. Appendix A-17

100 Unemployment The following table shows unemployment rates for Volusia and Flagler counties, the State of Florida, and the United States. Unemployment Rates for the Service Area, Florida, and the United States Dec 2011 Dec 2012 Dec 2013 Dec 2014 Oct 2015 Volusia County 10.2% 8.9% 7.0% 5.9% 5.3% Flagler County 10.6% 9.4% 7.5% 6.5% 5.9% Florida 8.9% 7.8% 6.5% 5.7% 5.1% United States 8.5% 7.9% 6.7% 5.6% 5.0% Source: University of Florida, Research and Economic Database Economic Development A variety of development projects have been completed or are planned in the primary market of the District. Some of the more significant projects and initiatives, including a reference for additional information, are summarized below: Daytona Rising (1) Major renovation of Daytona International Speedway, cost $400 million Completion date - January 2016 One Daytona (2) Multi-use development area (including retail/hospitality/industrial/commercial) across from Daytona International Speedway, phase one cost $289 million Scheduled to break ground late 2016 Hard Rock Hotel (3) 107 Condos, 250 seat restaurant, 360 space parking garage, four pools, cost $144 million Targeted completion date - late 2017 Westin Hotel (4) Planned renovation of existing landmark oceanfront hotel Protogroup s Oceanside Hotel (4) Large hotel, estimated cost $150 million Russian based company, Protogroup, to raise construction funds and perform construction Jet Blue (4) Daily nonstop service from New York City to Daytona Beach began in January 2016 Trader Joe s (4) 800,000 square foot regional distribution center for major retailer, cost $55 million Completed in 2015 Museum of Arts and Sciences (4) Cici & Hyatt Brown Art Gallery Opened February 2015 Appendix A-18

101 Embry-Riddle Aeronautical University (5) Aviation/Aerospace Research Park, including state of the art wind tunnel Additional Dormitories Beginning stages of planning Tanger Factory Outlet Mall(4) Multi-retail location facilities, estimated cost $100 million Targeted completion date by summer of 2016 Commercial permits (1) Calendar year 2014 permit values - $324 million Residential permits (1) Calendar year 2014 permit value - $377 million Sources: (1) Volusia County Division of Economic Development (2) (3) WKMG News and Hard Rock Hotels websites (4) News-JournalOnline.com (5) Embry-Riddle website Marketplace The District is the largest provider of acute care hospital services in east-central Florida. Additionally, due to tourism associated within the District s Service Area, the District also treats patients from diverse geographic origins. During the fiscal year ended September 30, 2015, 6.0% of patient discharges were patients that reside outside the Primary and Secondary Service Areas. The following chart compares the District to its closest competitors: District and Competitor Utilization Statistics Florida Hospital Memorial Florida Hospital Fish Florida Hospital DeLand Bert Fish Medical Center District Distance from District (miles) Licensed Beds Discharges 22,492 13,853 8,812 8,537 3,831 Patient Days 131,467 70,934 39,934 35,797 16,814 Source: Florida Agency for Healthcare Administration for fiscal years that ended in Appendix A-19

102 During the past four fiscal years the percentage of inpatient discharges (excluding newborns) for the medical-surgical hospitals within the District s Primary and Secondary Service areas are as follows: Market Share for Primary Service Area Percentage of Inpatient Discharges Fiscal Year Ended September 30, Hospital District 65% 63% 62% 60% Memorial Total 100% 100% 100% 100% Source: Florida Agency for Healthcare Administration. Market Share for Total Service Area Percentage of Inpatient Discharges Fiscal Year Ended September 30, Hospital District 40% 40% 40% 38% Memorial Florida Hospital DeLand Florida Hospital Fish BFMC Total 100% 100% 100% 100% Source: Florida Agency for Healthcare Administration and Health Planning Council of Northeast Florida, Inc. Competition Florida Hospital Memorial System, a member of the Adventist Health System, operates two hospitals, a 277-bed acute care hospital and a rehabilitation hospital, in the service area (north of the District s main campus). Additionally, the Southeast Volusia Hospital District ( SEVHD ) operates the 112-bed Bert Fish Medical Center ( BFMC ) located in New Smyrna Beach (south of the District s main campus and HHPO). According to the BFMC website, in November 2014, the SEVHD voted to enter into exclusive negotiations to affiliate with the Florida Hospital division of the Adventist Health System. BFMC continues to operate independently during the period of negotiations. [Remainder of page intentionally left blank] Appendix A-20

103 UTILIZATION Historical data summarizing the utilization of the District for fiscal years ended September 30, 2013 through and including 2015 and comparing the first three months of fiscal years 2015 and 2016 is presented below. Admissions, patient days, and occupancy statistics exclude newborn patients and bassinets. Halifax Hospital Medical Center Historical Utilization Three Months Ended Fiscal Year Ended September 30, December 31, Inpatient Activity: Admissions 22,321 22,381 22,492 5,624 5,683 Patient Days 119, , ,467 30,895 32,902 Available Beds Average Percent Occupancy 61.6% 64.7% 67.6% 63.8% 69.7% Average Length of Stay (Days) Average Daily Census Inpatient Admissions and Observation Patients 31,468 31,282 30,887 7,789 7,580 Outpatient Activity: Oncology Visits 49,684 48,891 50,080 11,250 12,984 Other Outpatient Visits 74,766 68,440 65,317 15,070 16,373 Community Clinic Visits 17,378 13,470 16,828 3,061 2,357 Primary Care and Children s Clinic Visits 0 16,375 28,180 6,734 7,952 Emergency Department 112, , ,026 29,052 28,628 Total 254, , ,431 65,167 68,294 Surgical Activity: Inpatient 5,253 4,995 5,148 1,231 1,323 Outpatient 10,628 10,065 10,319 2,507 2,576 Total 15,881 15,060 15,467 3,738 3,899 Source: Records of the District [Remainder of page intentionally left blank] Appendix A-21

104 FINANCIAL PERFORMANCE General Set forth below are the unaudited statements of net position and statements of revenue, expenses and changes in net position of the District and H.H. Holdings, the Members of Obligated Group, for each of the three fiscal years ended September 30, 2013, 2014 and 2015, and for the three-month periods ended December 31, 2014 and The Obligated Group unaudited financial information for the fiscal years ended September 30, 2013, 2014, and 2015 was derived from the audited financial statements of Halifax Hospital Medical Center. The following unaudited Obligated Group financial information should be read in conjunction with the financial statements and related notes of Halifax Hospital Medical Center included as APPENDIX B attached to the Official Statement. The historical statements of net position and statements of revenue, expenses and changes in net position of the Obligated Group set forth in the table below differ from the information shown in the audited financial statements of Halifax Hospital Medical Center that appear in Appendix B because that information includes certain affiliates of Halifax Hospital Medical Center that are not Members of the Obligated Group. The unaudited Obligated Group financial information for the three-month periods ended December 31, 2014 and 2015 is derived from unaudited financial statements prepared by District management. Those unaudited statements include all adjustments, consisting of normal recurring accruals, which management considers necessary for a fair presentation of the results of operations and changes in net position for those periods. Operating results for the three-months ended December 31, 2015, are not necessarily indicative of the results that may be expected for the entire fiscal year. In the financial information and Management Discussion which follows, the term EBIDA represents income (loss) from operations before depreciation and amortization expense. There are limitations associated with the use of non-gaap financial measures as compared to the use of the most directly comparable GAAP financial measure. Management uses EBIDA to evaluate performance. Management believes EBIDA provides investors with helpful supplemental information regarding underlying performance from period to period. This EBIDA measure may be inconsistent with measures presented by other similar organizations. [Remainder of page intentionally left blank] Appendix A-22

105 Halifax Hospital Medical Center (Obligated Group) Statements of Revenues, Expenses and Changes in Net Position ($ in thousands) (unaudited) Three-months Ended Year Ended September 30, December 31, Operating revenues: Net patient service revenue - before provision for bad debts $479,925 $501,464 $529,370 $125,464 $136,154 Provision for bad debts (93,727) (96,815) (104,540) (24,942) (27,886) Net patient service revenue 386, , , , ,268 Ad valorem tax revenue 15,273 12,465 13,149 3,287 3,313 Other revenue 17,555 17,386 17,909 4,141 4,285 Total operating revenues 419, , , , ,866 Operating expenses: Salaries and benefits 215, , ,520 50,786 56,605 Purchased services (2) 41,761 50,084 62,625 13,983 16,298 Supplies 82,235 80,437 84,282 19,956 21,511 Depreciation and amortization 19,863 21,119 22,136 5,350 5,713 Ad valorem tax related expenses 6,685 6,750 6,798 1,781 1,866 Leases and rentals 8,015 7,817 7,074 1,809 1,716 Other 25,251 24,809 23,960 6,040 6,129 Total operating expenses before Settlements and related costs 399, , ,395 99, ,838 Income from operations before Settlements and related costs 19,472 40,758 38,493 8,245 6,028 Settlements and related costs (2) (8,545) (106,435) Income (loss) from operations 10,927 (65,677) 38,493 8,245 6,028 Nonoperating revenues, expenses, and gains (losses): Interest expense (18,561) (18,325) (19,272) (4,575) (4,333) Investment income, net 472 5,730 4, (238) Donation revenue Nonoperating gains (losses), net (240) (1) 1 Income (loss) from affiliates 17,800 11,018 (3,337) 2,426 2,479 Total nonoperating revenues, expenses, and gains (losses) (154) (274) (18,654) (1,161) (2,085) Increase (decrease) in net position before other changes in net position 10,773 (65,951) 19,839 7,084 3,943 Other changes in net position: Change in accounting - pension (1) 0 (171,281) Change in accounting - bond issue costs (1) 0 (12,024) Total other changes in net position 0 (183,305) Increase (decrease) in net position $10,773 ($249,256) $19,839 $7,084 $3,943 (1) Halifax Hospital Medical Center implemented GASB 65 and GASB 68 as of October 1, (2) Litigation costs related to the Settlements for the fiscal year ended September 30, 2013 have been reclassified from purchased services to Settlements and related costs to conform with the fiscal year 2014 presentation. Appendix A-23

106 Halifax Hospital Medical Center (Obligated Group) Statements of Net Position ($ in thousands) (unaudited) As of December As of September 30, 31, Assets and Deferred Outflows Current Assets Cash and cash equivalents $ 35,765 $ 52,509 $ 53,896 $ 35,515 Investments 161, , , ,126 Current assets whose use is limited, trustee-held self insurance funds Accounts receivable-patients, net 43,514 48,528 54,027 49,891 Inventories 11,365 11,439 12,258 12,817 Other current assets 16,140 15,076 13,759 17,388 Total current assets 268, , , ,404 Restricted funds under indenture agreements for debt service 20,196 20,196 20,176 20,133 Noncurrent assets whose use is limited: Board-designated funded depreciation 147,258 41,105 41,842 41,694 Capital assets, net 340, , , ,197 Investment in affiliates 113, , , ,789 Other assets 7,110 7,363 6,788 6,817 Total assets 903, , , ,034 Deferred outflows: Interest rate swap 19,262 24,531 33,267 32,177 Pension plan (1) 0 18,970 14,434 29,631 Bond issue costs (1) 9, Goodwill, net 6,372 6,483 5,098 4,890 Loss on refunding of debt 4,664 2,078 6,705 6,624 Total deferred outflows 33,208 45,579 59,504 73,322 Total assets and deferred outflows $ 936,938 $ 859,930 $ 865,410 $ 864,356 Liabilities, Deferred Inflows and Net Position Current liabilities: Accounts payable and accrued liabilities $ 61,496 $ 65,617 $ 66,948 $ 60,329 Current portion of accrued self-insurance liability 5,001 4,786 4,833 4,725 Current portion of long-term debt 1,855 3,155 3,205 3,205 Other current liabilities 8,858 7,892 7,235 13,598 Total current liabilities 77,210 81,450 82,221 81,857 Long-term debt, less current portion 344, , , ,026 Accrued self-insurance liability, less current portion 8,268 8,792 7,876 8,315 Net pension liability (1) 0 113, , ,391 Other long-term liabilities 11,535 23,065 22,514 22,323 Long-term value of swap 19,262 24, ,177 Total liabilities 461, , , ,089 Deferred inflows related to pension (1) 0 40,176 19,102 0 Net position (1) 475, , , ,267 Total liabilities, deferred inflows and net position $ 936,938 $ 859,930 $ 865,410 $ 864,356 (1) Halifax Hospital Medical Center implemented GASB 65 and GASB 68 as of October 1, Appendix A-24

107 Sources of Payment The District receives payment for services from commercial insurers and other private payors, the federal government under the Medicare program, the State of Florida under the Medicaid program, and directly from patients. HMOs, preferred provider organizations ( PPOs ), and other managed care entities are also sources of patient reimbursement for the District. The following table illustrates historical composition by payor class of payments generated by the District s services, net of revenue deductions. Management does not believe that the mix of revenues has changed appreciably since December 31, For additional information concerning third-party payor programs see BONDHOLDERS RISKS in the forepart. Halifax Hospital Medical Center Sources of Payment Three-months ended Fiscal Year Ended September 30, December 31, Payment Source: HMO/PPO 18.8% 21.1% 23.4% 23.6% Medicare (1) 42.2% 39.9% 39.7% 41.6% Commercial/Other 23.4% 22.1% 23.1% 23.5% Medicaid (2) 14.9% 16.4% 13.3% 10.9% Uninsured 0.7% 0.5% 0.5% 0.4% Total 100.0% 100.0% 100.0% 100.0% (1) Includes Medicare/Medicare HMO reimbursement (2) Includes Medicaid/Medicaid HMO reimbursement Source: Records of the District Ad Valorem Tax Revenues Subject to certain statutory requirements, Ad Valorem taxes levied and received by the District are designated by law to fund operating expenses, including maintenance, construction, improvements and repairs to the District or fund other expenses in carrying out the business of the District. The District is required by Florida law to use Ad Valorem tax proceeds to pay for the costs of collection and appraisal services rendered by Volusia County, contribute to various downtown redevelopment districts created by the cities within the District, and reimburse Volusia County for its costs of Medicaid services to various out-of-county healthcare facilities. The Board is empowered under the Act, without voter referendum or any other approvals, to levy Ad Valorem taxes for various purposes up to 4.0 mills, but cannot be compelled to do so by the holders of the Series 2016 Bonds. The District receives over ninety percent (90%) of its revenue from patient service revenues. The resulting Ad Valorem tax information for fiscal years 2011 through and including 2015 is as follows: Appendix A-25

108 Halifax Hospital Medical Center Ad Valorem Taxes ($ in thousands) Fiscal Years Ended September 30, Budgeted 2016 Millage Rate Gross Tax Levy $26,807 21,934 $15,273 $12,465 $13,149 $13,252 Discount, uncollectibles, and amounts paid to Volusia County and Cities (4,975) (5,705) (4,602) (3,981) (4,359) (4,232) Net Taxes Available $21,771 $16,149 $11,176 $8,451 $8,790 $9,020 Source: Records of the District The Millage Rate is set annually by the Board based on the proposed budget for the upcoming fiscal year. At a public hearing on September 28, 2015, the Board of the District set the Ad Valorem tax millage rate for fiscal year 2016 at mills. The District expects the Ad Valorem tax levy for fiscal year 2016 to be approximately $13.3 million. The District is one of three independent hospital taxing districts located in Volusia County and has the lowest Millage Rate and tax levy. Ad Valorem tax revenues could be materially affected in the future if the Board reduces the millage rate and/or if property values decrease. Since June, 2007, there have been several constitutional, legislative, and other developments posing both real and potential impacts on the amount and rate of Ad Valorem taxes levied by local governments, including the District. See BONDHOLDERS RISKS Reliance on Ad Valorem Taxes in the forepart for more information. MANAGEMENT DISCUSSION Summary of Utilization and Financial Performance of the Obligated Group Three-Months Ended December 31, Admissions for the first three months of fiscal year 2016 were 5,683, a 1.0% increase from the same period in fiscal year Patient days increased by 6.5% for the same period in fiscal year Management attributes the increase in admissions and a greater increase in patient days to a longer average length of stay due to higher acuity. Surgeries increased by 4.3% from the same period in fiscal year 2015 primarily due to increases in orthopedic, neurosurgery, and gastroenterology surgery cases. Oncology visits increased by 15.4% from the same period in fiscal year 2015 due to an increased demand for services. Other outpatient visits increased by 8.6% from the same period in fiscal year 2015 due to an increased demand for services. Community clinic visits decreased by 23.0% from the same period in fiscal year 2015 due to decreased demand of services and the reduction of one physician provider. Primary care and children s clinic visits increased 18.1% due to the further development of volume at new locations in the District s service area. Emergency department visits decreased by 1.5% from the same period in fiscal year Net patient service revenue for the first three months of 2016 was $108.3 million; which represents an increase of 7.7% from the same period in fiscal year The increase in net patient service revenue is due to higher admissions, patient days and patient acuity, surgical volume increases, and charge and payment increases from third parties. Operating expenses increased by $10.1 million, or 10.2% from the same period in fiscal year The increase is primarily due to increases in salaries and benefits, purchased services, supplies, and depreciation and amortization expenses. Salaries and benefits increased 11.5% due to greater patient care volume, merit and market compensation increases and higher actuarially determined pension costs. Purchased services increased 16.6% due to a greater use of locum physician services and contract labor and higher inpatient rehabilitation unit management costs paid by the District to a third-party as a result of increased volume of the unit. Supply costs were 7.8% greater due to higher supply and drug utilization and cost inflation, offset by the results of supply cost savings initiatives. The increase in depreciation and amortization expense is due to purchased capital assets being placed in service. Appendix A-26

109 Operating income was $6.0 million for the three months ended December 31, 2015; this amount is $2.2 million less than the same period in fiscal year The decrease in operating income is due to the increases in operating expenses, described above, offset by the increase in net patient service revenue. Operating EBIDA was $11.7 million; this is $1.9 million less than the $13.6 million generated during the first three months of fiscal year The decrease in Operating EBIDA is due to the decrease in operating income offset by the increase in depreciation and amortization expense. Operating income for the three months ended December 31, 2015 is $233,000 less than the proportional fiscal year-to-date operating income from the 2016 fiscal year budget approved by the Board. The level of unrestricted cash and investments of the Obligated Group as of September 30, 2015, $262.1 million, declined by $18.7 million to the level as of December 31, 2015 of $243.3 million. This decline is primarily the result of a contribution to the pension plan in October 2015 of $18.5 million and the acquisitions of capital assets, offset by the excess cash flow from operations and investment income during the three-month period. Fiscal Year Ended September 30, Admissions for fiscal year 2015 were 22,492, a 0.5% increase from Patient days increased by 5.8% from fiscal year Management attributes the slight increase in admissions and a greater increase in patient days to a longer average length of stay due to higher acuity, an increase inpatient rehabilitation volume, which includes patients with a longer length of stay, and other factors delaying patient discharges. The District s market share in the primary and total service area remained relatively unchanged from 2014 to Surgeries increased by 2.7% from fiscal year 2014 due to increases in gastroenterology and various other surgery categories, offset by lower ophthalmology and orthopedic surgery cases. Oncology visits increased by 2.4% from fiscal year Other outpatient visits decreased by 4.6% from fiscal year 2014 due to a reduction in clinical lab volume. Community clinic visits increased by 24.9% from fiscal year 2015 due to resolving issues encountered in 2014 that lowered volume due to a limitation of available physician and physician extender provider coverage and initially longer visit treatment times due to the transition to the use of electronic health records. Primary care and children s clinic visits increased 72.1% due to the development of volume at new locations in the District s service area. Emergency department visits increased by 1.4% from fiscal year Net patient service revenue for fiscal year 2015 was $424.8 million; this represents an increase of $20.2 million or 5.0% from fiscal year This increase in net patient service revenue is primarily due to the increase in admissions and surgical volume identified above, and payment increases from third parties. Ad valorem tax revenue increased by $684,000 due to an increase in property values subject to the District s Millage Rate. The Millage Rate was 1.00 mill for fiscal years 2014 and Operating expenses increased by $23.7 million or 6.0% from fiscal year The increase is primarily due to increases in salaries and benefits, purchased services, supplies, and depreciation and amortization expenses. Salaries and benefits increased 3.8% primarily due to greater patient care volume, merit and market compensation increases, and health insurance cost increases, offset by a reduction in pension expense resulting from changes made to the pension plan. Purchased services increased 25.0% due to a greater use of locum physician services and thirdparty consultants, and higher inpatient rehabilitation unit management costs paid by the District to a third-party as a result of increased volume of the unit. Supply costs were 4.8% greater due to higher supply and drug utilization and cost inflation, offset by the results of supply cost savings initiatives. The increase in depreciation and amortization expense is due to purchased capital assets being placed in service. Operating income was $38.5 million for fiscal year 2015; this amount is $2.3 million less than fiscal year The decrease in operating income is due to the increases in operating expenses, described above, offset by increases in net patient service revenue, ad valorem tax revenue and other revenue. Operating EBIDA was $60.6 million; this is $1.2 million less than the $61.8 million generated for fiscal year The decrease in Operating EBIDA is due to the decrease in operating income offset by the increase in depreciation and amortization expense. The level of unrestricted cash and investments of the Obligated Group as of September 30, 2014, of $257.4 million, increased by $4.7 million to the level as of September 30, 2015 of $262.1 million. This increase is the result of the excess cash flow from operations and investment income during fiscal year 2015, offset by contributions to the pension plan in fiscal year 2015 of $14.4 million and acquisitions of capital assets. Days cash on hand decreased from 193 days for the fiscal year 2014 to 185 days for the fiscal year The decrease is a result Appendix A-27

110 of the increase in average daily operating expenses, excluding settlements and related costs, from $1.3 million for fiscal year 2014 to $1.4 million for fiscal year The net position of the Obligated Group as of September 30, 2014, of $226.5 million, increased by $19.8 million to the net position as of September 30, 2015 of $246.3 million. This increase is the result of income from operations and nonoperating revenues, expenses, and gains (losses) for fiscal year Fiscal Year Ended September 30, Admissions for the fiscal year 2014 were 22,381, a 0.3% increase from Patient days increased by 3.7% from fiscal year Management attributes the slight increase in admissions and a greater increase in patient days to a longer average length of stay due to higher acuity and other factors delaying patient discharges. The District s market share in the primary and total service area remained relatively unchanged from 2013 to Surgeries decreased by 5.2% from fiscal year 2013 due to decreases in vascular, orthopedic, dentistry and ophthalmology surgery cases. Oncology visits were the same as for fiscal year Other outpatient visits decreased by 8.5% from fiscal year 2013 due to a reduction in clinical lab volume. Community clinic visits decreased by 22.5% from fiscal year 2013 due to a limitation in available physician and physician extender provider coverage and initially longer visit treatment times due to the transition to the use of electronic health records. Primary care and children s clinic visits increased due to the opening of new locations in the District s service area. Emergency department visits increased by 0.8% from fiscal year Net patient service revenue for fiscal year 2014 was $404.6 million; this represents an increase of $18.5 million or 4.8% from fiscal year This increase in net patient service revenue is primarily due to the increase in admissions and patients days identified above, charge and payment increases from third parties and patients and the opening of: (1) an inpatient neurologic and orthopedic rehabilitation unit at the main campus of the District (in September 2013), (2) a multi-location pediatric practice, and (3) various walk-in outpatient care clinics. Ad valorem tax revenue decreased by $2.8 million due to a reduction in the Millage Rate from 1.25 mills for fiscal year 2013 to 1.00 mill for fiscal year Operating expenses decreased by $5.8 million or 1.5% from fiscal year The decrease is primarily due to decreases in salaries and benefits and supplies expenses offset by increases in purchased services and depreciation and amortization expenses. Salaries and benefits decreased 6.0% primarily due to a reduction in pension expense resulting from changes made to the pension plan and not as a result of any reductions in force. Supply costs were 2.2% lower due to the results of supply cost savings initiatives. The increase in purchased services is the result of a greater use of locum physician services and the higher inpatient rehabilitation unit management costs paid by the District to a third-party as a result of increased volume of the unit. The increase in depreciation and amortization expense is due to purchased capital assets being placed in service. Operating income, before settlements and related costs, was $40.8 million for fiscal year 2014; this amount is $21.3 million greater than fiscal year The increase in operating income is due to a combination of the increase in net patient service revenue and reductions in salary and benefits and supplies expenses offset by increases in purchased services and depreciation and amortization expenses, as described above. Operating EBIDA was $61.8 million; this is $22.5 million more than the $39.3 million generated for fiscal year The increase in operating income and operating EBIDA is due to the combination of the increase in net patient service revenue and reductions in salary and benefits and supplies expenses offset by increases in purchased services. The level of unrestricted cash and investments of the Obligated Group as of September 30, 2013, of $344.2 million, declined by $86.8 million to the level as of September 30, 2014 of $257.4 million. This decline is primarily the result of the payment of the settlements and related costs and a contribution to the pension plan in October 2013 of $20 million, offset by the excess cash flow from operations and investment income during fiscal year Days cash on hand decreased from 255 days for the fiscal year 2013 to 193 days for the fiscal year The net position of the Obligated Group as of September 30, 2013, of $475.7 million, declined by $249.2 million to the net position as of September 30, 2014 of $226.5 million. This decline is the result of the settlements and related costs incurred of $106.4 million and the combined net position reduction of $183.3 million from the adoption of GASB 65 (elimination of deferred bond issue costs) and GASB 68 (recording of unfunded pension liability) effective October 1, 2013, offset by income from operations before settlements and related costs of $40.7 million for fiscal year Appendix A-28

111 Fiscal Year Ended September 30, Admissions for the fiscal year 2013 were 22,321, a 2.0% decrease from Patient days increased by 2.0% from fiscal year Management attributes the decreases in admission to the continued movement of procedures from the inpatient setting to the outpatient setting. The increase in patient days is attributed to a longer average length of stay due to higher acuity and other factors delaying patient discharges. The District s market share in the primary and total service area remained relatively unchanged from 2012 to Surgeries decreased by 3.2% from fiscal year 2012 primarily due to decreases in cardiothoracic, dentistry and hand surgery cases. Oncology visits increased by 2.5% from fiscal year Other outpatient visits decreased 10.6% due to reductions in clinical lab and OB/GYN activity. Community clinic visits decreased by 9.0% from 2012 due to a limitation in available physician and physician extender provider coverage. Emergency department visits decreased by 3.7% from Net patient service revenue for fiscal year 2013 was $386.2 million; this amount is substantially unchanged from fiscal year Ad valorem tax revenue decreased by $6.7 million due to a reduction in the Millage Rate from 1.75 mills for fiscal year 2012 to 1.25 mills for fiscal year Other operating revenue is substantially unchanged from fiscal year Operating expenses, before settlement and related costs, decreased by $4.6 million or 1.1% from fiscal year The decrease is due to decreases in salaries and benefits and ad valorem tax related expenses, offset by increases in supplies and other expenses. Salaries and benefits decreased 3.0% primarily due to a reduction in pension expense resulting from changes made to the pension plan. The decrease in tax related expenses of 26.5% is primarily relates to lower tax discounts and uncollectibles and tax collector fees, and Medicaid match amounts paid to Volusia County. Supplies increased 3.5% primarily as a result of supply and pharmaceutical inflation. Other expenses increased 6.0% due to an increase in insurance related costs. Operating income, before settlements and related costs, was $19.5 million for fiscal year 2013 while operating EBIDA was $39.3 million, decreases from 2012 of $2.0 million and $1.5 million, respectively. The decrease in operating income and operating EBIDA is due to the net decrease in ad valorem tax revenue partially offset by decreases in operating expenses, as described above. The level of unrestricted cash and investments of the Obligated Group as of September 30, 2012, of $358.7 million, declined by $14.5 million to the level as of September 30, 2013 of $344.2 million. This decline is primarily the result of the payment of settlement related legal costs and the timing of capital expenditures, offset by the excess cash flow from operations and investment income during fiscal year Days cash on hand decreased from 261 days for the fiscal year 2012 to 255 days for the fiscal year [Remainder of page intentionally left blank] Appendix A-29

112 FINANCIAL RATIOS OF HALIFAX HEALTH Below is a table outlining certain financial ratios for fiscal years ended September 30, 2014 and Year Ended September 30, Days Cash on Hand (1) Debt to Capitalization Ratio (2) 60.3% 59.1% Proforma 2015 Debt to Capitalization Ratio (3) % (1) Calculated as total unrestricted cash and investments divided by total operating expenses per day. (2) Capitalization Ratio calculated as total long-term debt divided by total capitalization represented by the sum of total longterm debt and unrestricted net position. (3) Assumes issuance of Series 2016 Bonds and refunding of Refunded Bonds. The proforma ratio does not assume any change to unrestricted net position. The financial ratios above are computed based on the financial information of Halifax Health as a whole including the District and Affiliated Organizations. The financial ratio of Days Cash on Hand for the Obligated Group, as reflected in Managements Discussion, is derived under the basis of adding the provision for bad debts and total operating expense together to compute total expenses per day, as prescribed by the Master Indenture. The provision for bad debts is not included with total operating expenses in determining the Days Cash on Hand ratio of Halifax Health (including the District and Affiliated Organizations) presented above. [Remainder of Page Intentionally Left Blank] Appendix A-30

113 HISTORICAL COVERAGE OF PRO FORMA DEBT SERVICE The following table illustrates the Obligated Group s resources which are available to pay debt service on the Obligations issued pursuant to the Master Indenture for each of the last three fiscal years and its relationship to the Obligated Group s annual debt service requirements. Halifax Hospital Medical Center Obligated Group Debt Service Coverage Ratios Fiscal Years Ended September 30, ($ in thousands) (5) (Pro-Forma) Excess (deficiency) of revenues over expenses (1)(2) $(7,027) $(76,969) $23,176 $23,176 Depreciation and amortization 19,863 21,119 22,136 22,136 Interest expense 18,561 18,325 17,913 17,913 Bond issue costs (3) 0 0 1,359 1,359 Unrealized (gains)/losses on investments 9,033 (6,517) Income Available for Debt Service Plus Other Available Revenues $40,430 $(44,042) $64,740 $64,740 Maximum Annual Debt Service Requirement $22,826 $22,826 $22,204 $20,532 Maximum Annual Debt Service Coverage Ratio (4) 1.77x -1.93x 2.92x 3.15x (1) Includes Ad Valorem tax receipts of the District. Such Ad Valorem tax receipts are legally available to pay operating expenses and debt service of the District and constitute Other Available Revenues under the Master Indenture, but are not part of Gross Revenues or Net Revenues and are not pledged under the Master Indenture. The District cannot be compelled to levy Ad Valorem taxes to pay operating expenses, debt service or any other obligations under the Master Indenture. See SECURITY FOR THE BONDS in the forepart of this Official Statement. (2) Calculated as increase (decrease) in Net Position, less Income (loss) from Affiliates and for Fiscal Year 2014 less cumulative effect of changes in accounting principles. (3) Issue costs from 2015 bond issue. (4) Maximum Annual Debt Service for fiscal years 2013, 2014 and 2015 includes actual debt service on the Series 2006A Bonds, the Series 2006B Bonds, the Series 2015 Bonds (as applicable), and the Series 2008 Bonds (calculated based on a principal amount of $70,000,000 and an assumed synthetic fixed rate of 3.837%). Maximum Annual Debt Service for fiscal year 2015 (Pro-Forma) includes debt service on the Series 2016 Bonds, the Series 2015 Bonds and the Series 2008 Bonds (calculated based on a principal amount of $70,000,000 and an assumed synthetic fixed rate of 3.837%). Because of the negative coverage ratio for Fiscal Year 2014, the Series 2016 Bonds are being incurred under Section 3.06(c) of the Master Indenture for the refunding portion and under 3.06(b) for the new money portion, which section permits the issuance of Long-Term Indebtedness in a principal amount outstanding, together with certain Short-Term Indebtedness, not to exceed 25% of Operating Revenues for the most recent Fiscal Year for which Audited Financial Statements are available. See PLAN OF REFUNDING and BONDHOLDER RISKS in the forepart of this Official Statement. (5) The ratio computed for FY 2014 is less than the requirements under the Master Trust Indenture. The Obligated Group received waivers for such requirement from the applicable parties constituting more than a majority of the principal amount of the Related Bonds Outstanding under the Master Trust Indenture. The ratio for FY 2014 computed without the $106.4 million effect of the settlements and related costs is 2.73 times. Source: Records of the Obligated Group General INSURANCE AND SELF-INSURANCE The Obligated Group carries comprehensive all-risk insurance which provides coverage in the amount of $1 billion on all buildings and contents, boiler and machinery and business interruption coverage with an agreed amount endorsement of the insurer. The policy is subject to a $50,000 deductible, except for named storms where the deductible is set at 5% of the insured value. Also, the Obligated Group is insured for loss as a result of wind in the amount of $300 million and $250 million for earthquake and flood. In addition, the Obligated Group is insured under a non-owned aircraft liability insurance policy in the amount of $10 million, comprehensive automobile Appendix A-31

114 liability insurance covering automobiles owned by the Obligated Group in the amount of $1 million, with an additional $4 million in excess; and a blanket crime insurance policy in the amount of $2.5 million. Because of the liability limits applicable to governmental units, including governmental hospitals, the Obligated Group has determined to self-insure for medical malpractice liability, general liability, workers compensation, errors and omissions liability of officers and Commissioners and its employee and employee dependent medical benefit plan. The Obligated Group has been self-insured for medical malpractice and for general liability since 1977 and for workers compensation since Florida governmental units, including special taxing districts like the District, are afforded protection of sovereign immunity under Section , Florida Statutes. Currently, the maximum liability per incident or occurrence under the statute is $200,000. The District can be required to pay a judgment on a tort claim in excess of $200,000 only by special action of the Florida Legislature, and in fact, has only paid such a judgment one time in accordance with the settlement of a lawsuit. In 2010 the Florida Legislature revised the statutory waiver of sovereign immunity and raised the maximum amount of liability to $300,000, effective for claims accruing on or after October 1, Except for its employee medical benefits plan, the District has established a trust fund for its self-insured programs in the amount of $686,000 as of September 30, The annual estimates of losses are prepared by the participant s Insurance Consultant, The Mullin Agency, Inc., Daytona Beach, Florida, and an independent actuary. Medical Malpractice Claims Experience The District s medical malpractice loss experience has averaged $499,000 annually over the five years prior to and including September 30, Budgetary Policies INSTITUTION FISCAL CONTROLS In preparing the proposed annual budget, management of the Obligated Group is supplied with historical as well as forecasted data developed from a financial model. Management uses this information to finalize its projections of utilization statistics, personnel and other expenses. Departmental expense budgets are combined. Statistical forecasts and expense assumptions (e.g. inflationary factors, wage and salary assumptions, etc.) are made. Ad Valorem tax revenue is considered in developing the operating margin for budget projections. The enabling legislation authorizes the District to levy and collect up to 4.0 mills, subject to satisfying applicable legal requirements. The budget is reviewed by administration and the Board. Budget approval by the Audit and Finance Committee of the Board and then by the full Board at a public hearing is necessary before final adoption. The District s capital budget follows a similar developmental process, but also involves input from the Medical Staff committees. Prioritization of departmental budget items is made by the Obligated Group s administration. Management Controls Monthly statistical, revenue and expenses reports showing variances from budgeted figures are distributed to management and administration for identification of material differences. Justification and/or corrective action are proposed at this time. Volume adjusted budgets are also prepared using the Obligated Group s flexible budgeting system. To aid in planning and in evaluating past performance, administration has implemented a variety of sophisticated decision support systems, including clinical cost accounting and financial modeling. External resources are also available in connection with the monitoring of its performance. The Obligated Group participates in a data collection, compilation and reporting system offered by VHA, Inc. Through this participation, the Obligated Group receives quarterly reports which provide comparative information concerning utilization, staffing, revenues and expenses for the District and for other hospitals on a statewide, regional and national basis. Appendix A-32

115 INVESTMENT POLICIES The investment of certain assets of the Obligated Group is governed by the terms and provisions of its respective bond indentures. However, certain other cash assets are governed by investment policies adopted by the Board and amended from time to time. These policies state that investments cannot exceed an average term to maturity of ten years depending on the type of fund for the District and thirty years depending on the type of fund for Holdings. The investment policy may be revised by the Board as necessary. The assets covered by the investment policies include those of the District and Holdings. Investing these funds is the responsibility of the Board, and the Chief Financial Officer has direct responsibility for investment. Investments are limited to the following: Corporate Bonds, Direct U.S. Treasury Obligations; Federal Farm Credit Bank Obligations; Federal Home Loan Bank Obligations; Federal Home Loan Mortgage Corporation Obligations; Other Federal Agency Obligations; Repurchase Obligations (Direct U.S. Treasury or Federal Agency obligations valued at 102% of investment, delivered to safekeeping account(s)); Federally Insured Certificates of Deposit; Secured Certificates of Deposit (pledge of U.S. Treasury or Federal Agency obligations valued at 105% of investment); Long-term Government Bonds; Municipal Bonds; and Other Certificates of Deposit (limited to issuers with an investment-grade credit rating). INTEREST RATE SWAP POLICY On November 16, 2005, the District adopted an Interest Rate Swap Policy (the Policy ). The purpose of the Policy was to establish guidelines for the execution and management of the Obligated Group s use of interest rate and other swaps, caps, options, basis swaps, rate locks, total return swaps and other similar products (collectively, Swap Products ). The Policy confirms the commitment of the Board, management, the Audit and Finance Committee, staff, and advisors to adhere to sound financial and risk management practices. The Policy was formally approved by the Board and is expected to be updated periodically. Pursuant to the Policy, the Obligated Group will not enter into speculative transactions. The Policy sets forth the manner in which the Obligated Group shall enter into transactions involving Swap Products ( Swap Transactions ). The Obligated Group shall integrate Swap Transactions into its overall debt and investment management programs in a prudent manner in accordance with the parameters set forth in the Policy. The Policy sets standards for permitted instruments, risk analysis, risk limits, procurement, swap counterparties, execution and ongoing management, swap documentation, and reporting and disclosure. For more information regarding the Obligated Group s existing interest rate swap obligations, see Note 9 in the audited financial statements included in Appendix B. EMPLOYEES Halifax Health currently employs approximately 4,300 full and part-time employees as of December 31, 2015, representing approximately 3,700 FTEs, none of which are covered by collective bargaining agreements. Management considers employee relations to be good and has not experienced work stoppages due to strikes or labor problems and none are anticipated. Halifax Health is not operating under a contract with any labor union. Halifax Health has instituted recruitment methods for certain professionals including a competitive salary and benefits program and national and international advertising. Halifax Health has not experienced difficulty in hiring and retaining qualified personnel. Halifax Health s management believes that its wages and benefits are competitive with other similar institutions in the service area. Appendix A-33

116 PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS Pension Plans The District, through Halifax Staffing, Inc., participates in a non-contributory defined benefit pension plan (the Defined Benefit Pension Plan or Pension Plan ) covering all eligible employees who have attained the age of 21 and have more than one year of service. Employees are 100 percent vested after five years of service. The District assumed the unfunded portion of the liability for the District s employees who participated and were not vested in the District s prior pension benefit programs. Membership in the Pension Plan has been closed to all employees whose initial hire date is after October 1, 2000, and effective October 1, 2013 the Pension Plan was frozen. As such, participants of the Pension Plan no longer accrue credit for years of service and, upon eligibility, calculation of benefits will be made based on compensation information through October 1, Participants may elect to receive pension plan benefits as a monthly annuity or as one lump-sum payment for an amount equal to the present value of future benefits, as calculated by an actuary. Pension Plan benefits are based on years of service and the employee s highest three-year average annual compensation. Pension Plan assets consist of common stock, equity funds, fixed income funds and money market funds. Employees are also eligible to participate in the District sponsored 403(b) retirement plan (the Defined Contribution Retirement Program ). The District matches employee contributions dollar for dollar up to three percent of the employee s salary. Other Post-Employment Benefits In accordance with Section , Florida Statutes, the District allows retirees the opportunity to participate in the District s group employee health plan. Florida law does not require the District to pay any portion of participation in the District s health plan by retired District employees. While neither the Defined Benefit Pension Plan nor the Defined Contribution Retirement Program includes retiree health benefits as a vested part of the plans, the District has voluntarily provided a relatively small stipend to participants in the Defined Benefit Pension Plan to offset the cost of retiree s health insurance. The District s current policy is to pay to retired participants in the Defined Benefit Pension Plan a stipend of $5 per month per year of service up to 30 years. This provides a maximum annual benefit to eligible retirees with 30 years of service of $1,800. This stipend amount does not fluctuate with the cost of health insurance or health care and can be terminated, reduced, or increased by vote of the Board. All employees with a hire date before October 1, 2000 and with ten years of benefited service as a participant in the Defined Benefit Pension Plan, or the Florida Retirement System, currently are eligible to receive these benefits upon retirement. The participant must present, at the time of retirement, evidence of health insurance coverage either through the District s group health plan, a separate insurance company or through Medicare. There are approximately 320 retirees enrolled in the program receiving the stipend and 1,200 current employees who potentially would qualify for this program upon retirement. For more information regarding the Obligated Group s pension obligations, see Note 10 in the audited financial statements included in Appendix B. EDUCATIONAL AFFILIATIONS The District operates a Family Practice Residency program approved by the American Medical Association Council on Medical Education. The program began in 1971 and presently has a total of 24 residents in the threeyear program. A one-year fellowship in sports medicine was added to the training program in July, The Family Residency Program was the first such program to be started within a community hospital in the State and is currently affiliated with the Department of Family Medicine at the University of South Florida in Tampa. Any diagnostic or inpatient services required by patients who are treated by the family practice residency program are rendered by the District. Clinical training for registered nurses, licensed practical nurses, operating room technicians, emergency medical technicians, certified nursing assistants, social workers, physical therapists, respiratory therapists, radiology technicians, ultrasound technicians, sports medicine/fitness technicians, phlebotomists and medical record administrators is conducted in affiliation with Daytona Beach Community College, University of Florida, Florida State University, University of Central Florida, Jacksonville University, Bethune Cookman University, Keiser College and many other accredited colleges and universities. Additionally, the District conducts in-service training for most professional, allied health, and non-professional positions during the course of the fiscal year. The District Appendix A-34

117 recently affiliated with Florida State University, to provide for third and fourth-year medical student internships at the District. ACCREDITATION AND LICENSES The District voluntarily participates in the survey process of The Joint Commission on the Accreditation of Healthcare Organization. The District was most recently surveyed in May 2015, and received accreditation for a period of three years. The District is licensed by AHCA. See the information in the forepart of this Official Statement under the subheading BONDHOLDER S RISKS Licenses, Certificates and Accreditations. Appendix A-35

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119 APPENDIX B AUDITED FINANCIAL STATEMENTS OF HALIFAX HOSPITAL MEDICAL CENTER FOR THE YEAR ENDED SEPTEMBER 30, 2015 In addition to the District and Holdings, the current Members of the Obligated Group, Halifax Hospital Medical Center s audited financial statements include affiliated not-for-profit corporations ( Affiliates ) which assist the District in carrying out its purpose to provide healthcare and related services to its community, which are treated as component units in accordance with standards issued by the Government Accounting Standards Board. Such Affiliates are not members of the Obligated Group and are not obligated to pay operating expenses of the Obligated Group or to make any payments with respect to the Series 2016 Bonds and the 2016 Obligation. Pursuant to accounting principles generally accepted in the United States, the financial statements of the Obligated Group must be combined with the financial statements of such Affiliates and are presented in a combined format for Halifax Hospital Medical Center. As of September 30, 2015 and the fiscal year then ended, the District and Holdings (the only members of the Obligated Group) comprised 84% of the total assets and deferred outflows, excluding investments in Affiliates, and 90% of the total operating revenues of the combined total for the District and the blended and discretely presented component units. The audited financial statements of Halifax Hospital Medical Center are presented herein for general purposes only. However, notwithstanding the presentation guidelines, certain of the revenues, expenses, assets, liabilities and net position included herein are not available as a source of security to, incurred by, or a part of those of the Obligated Group. For more information, see INFORMATION CONCERNING THE OBLIGATED GROUP in APPENDIX A.

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121 Halifax Hospital Medical Center d/b/a Halifax Health Financial Report September 30, 2015

122 Contents Independent Auditor s Report 1 2 Management s Discussion and Analysis (Unaudited) 3 11 Financial Statements: Statement of Net Position Statement of Revenues, Expenses and Changes in Net Position 14 Statement of Cash Flows Statement of Fiduciary Net Position 17 Statement of Changes in Fiduciary Net Position 18 Notes to Financial Statements Required Supplementary Information (Unaudited): Schedule of Changes in Net Pension Liability Halifax Pension Plan 53 Schedule of Funding Progress Halifax Pension Plan 54 Schedule of Actuarially Determined Contributions Halifax Pension Plan 55 Notes to Required Supplementary Information Halifax Pension Plan 56 Schedule of Funding Progress Halifax Insurance Subsidy OPEB 57 Schedule of Funding Progress Halifax Implicit Rate Subsidy OPEB 58 Other Supplementary Information: Schedule of Net Position Obligated Group Schedule of Revenues, Expenses and Changes in Net Position Obligated Group 61 Note to Schedules Obligated Group 62

123 Independent Auditor s Report To the Honorable Commissioners of the Board Halifax Hospital Medical Center d/b/a Halifax Health Daytona Beach, Florida Report on the Financial Statements We have audited the accompanying financial statements of the business-type activities, the aggregate discretely presented component units, and the aggregate remaining fund information of Halifax Hospital Medical Center d/b/a Halifax Health ( Halifax Health ), as of and for the year ended September 30, 2015, and the related notes to the financial statements, which collectively comprise Halifax Health s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express opinions on these financial statements based on our audits. We did not audit the financial statements of Halifax Management System, Inc. ( HMS ), a discretely presented component unit, which statements reflect total assets and deferred outflows constituting approximately 13% of the aggregate discretely presented component units total assets and deferred outflows as of September 30, 2015, and total revenues constituting approximately 6% of the aggregate discretely presented component units total revenues for the year then ended. We also did not audit the basic financial statements of Halifax Health s fiduciary activities as of and for the year ended September 30, 2015, as presented on pages 17 18, which represent 100% of the total assets and additions of the aggregate remaining fund information. Those statements were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for HMS and Halifax Health s fiduciary activities, is based solely on the reports of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to Halifax Health s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Halifax Health s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 1