$61,175,000 FLORENCE COUNTY, SOUTH CAROLINA Refunding Hospital Revenue Bonds (McLeod Regional Medical Center Project), Series 2014

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1 NEW ISSUE Book-Entry Only RATINGS: (See RATINGS herein.) Fitch: AA- Standard & Poor s: AA- In the opinion of Bond Counsel, assuming continuing compliance by the Issuer and Borrower with certain covenants, interest on the 2014 Bonds is excludable from gross income for federal income tax purposes under existing statutes, regulations and judicial decisions. Interest on the 2014 Bonds is not an item of tax preference in computing the alternative minimum taxable income of individuals or corporations. Interest on the 2014 Bonds will be included in the computation of certain taxes including alternative minimum tax for corporations. See TAX EXEMPTION for a brief description of alternative minimum tax treatment and certain other federal income tax consequences to certain recipients of interest on the 2014 Bonds. The 2014 Bonds and the interest thereon will also be exempt from all State, county, municipal and school district and other taxes or assessments imposed within the State of South Carolina, except estate, transfer and certain franchise taxes. $61,175,000 FLORENCE COUNTY, SOUTH CAROLINA Refunding Hospital Revenue Bonds (McLeod Regional Medical Center Project), Series 2014 Dated: Date of Delivery Due: November 1, as shown on inside cover The above-captioned Bonds (the 2014 Bonds ) will be issued by Florence County, South Carolina (the Issuer ), at the request of the Board of Trustees of McLeod Health, sole member of McLeod Regional Medical Center of the Pee Dee, Inc. (the Borrower ). The 2014 Bonds will be issued and secured pursuant to a Trust Agreement dated as of August 1, 2014 (the Trust Agreement ), between the Issuer and U.S. Bank National Association (the Bond Trustee ). The proceeds from the sale of the 2014 Bonds will be applied, together with other moneys, to refund the outstanding principal amount of the Issuer s Hospital Revenue Bonds (McLeod Regional Medical Center Project), Series 2004A, and to pay certain costs of issuance of the 2014 Bonds. The 2014 Bonds will be issued as fully registered bonds and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ), which will act as securities depository for the 2014 Bonds. Individual purchases may be made in book-entry form only, in denominations of $5,000 or any integral multiple thereof. Purchasers will not receive physical delivery of bond certificates. Interest on the 2014 Bonds is payable on November 1, 2014, and semiannually thereafter on each May 1 and November 1, at the rates per annum set forth on the inside cover. The 2014 Bonds are subject to optional and extraordinary redemption prior to maturity as described herein. THE 2014 BONDS ARE LIMITED OBLIGATIONS OF THE ISSUER PAYABLE BY THE ISSUER SOLELY FROM THE FUNDS, ACCOUNTS AND OTHER SOURCES PLEDGED UNDER THE TRUST AGREEMENT. NEITHER THE GENERAL CREDIT NOR THE TAXING POWER OF THE STATE OF SOUTH CAROLINA OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED FOR THE PAYMENT OF THE 2014 BONDS. THE 2014 BONDS AND PAYMENTS THEREON ARE NOT AND SHALL NEVER CONSTITUTE AN INDEBTEDNESS OF THE ISSUER OR THE STATE OF SOUTH CAROLINA WITHIN THE MEANING OF ANY CONSTITUTIONAL PROVISION OR STATUTORY LIMITATION AND SHALL NEVER CONSTITUTE NOR GIVE RISE TO A PECUNIARY LIABILITY OF THE ISSUER, THE STATE OF SOUTH CAROLINA OR ANY POLITICAL SUBDIVISION THEREOF, OR A CHARGE AGAINST THEIR GENERAL CREDIT OR TAXING POWERS. An investment in the 2014 Bonds is subject to certain risks. See BONDHOLDERS RISKS herein. The 2014 Bonds are offered when, as and if issued by the Issuer and received by the Underwriter, subject to prior sale, withdrawal or modification of the offer without notice, and subject to approval of legality by Haynsworth Sinkler Boyd, P.A., Florence, South Carolina, Bond Counsel. Certain legal matters will be passed upon for the Borrower by Aiken, Bridges, Elliot, Tyler & Saleeby, P.A., Florence, South Carolina and Moore & Van Allen, PLLC, Charleston, South Carolina; for the Issuer by D. Malloy McEachin, Jr., County Attorney, Florence, South Carolina; and for the Underwriter by Ballard Spahr LLP, Philadelphia, Pennsylvania. Kaufman, Hall & Associates, Inc., Skokie, Illinois, has acted as financial advisor to the Borrower. Delivery of the 2014 Bonds through the facilities of DTC in New York, New York, is expected on or about August 7, July 29, 2014

2 $61,175,000 FLORENCE COUNTY, SOUTH CAROLINA Refunding Hospital Revenue Bonds (McLeod Regional Medical Center Project), Series 2014 MATURITY SCHEDULE Maturity Date (November 1) Principal Amount Interest Rate Yield CUSIP No $395, % 0.44% KN , KP , KQ , KR , KS ,030, KT ,125, KU ,230, KV ,330, KW ,445, KX ,550, KY ,675, KZ ,295, LA ,540, LB ,800, LD ,070, LE ,355, LF ,645, LG ,950, LC2 Copyright 2010, American Bankers Association. CUSIP data herein are provided by Standard & Poor s CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. The CUSIP numbers listed above are being provided solely for the convenience of Bondholders only at the time of issuance of the 2014 Bonds, and neither the Issuer nor the Borrower makes any representation with respect to such numbers or undertakes any responsibility for their accuracy now or at any time in the future. The CUSIP number for a specific maturity is subject to being changed after the issuance of the 2014 Bonds as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the 2014 Bonds.

3 This Official Statement speaks only as of its date, and the information contained herein is subject to change. This Official Statement contains forecasts, projections and estimates that are based on current expectations but are not intended as representations of fact or guarantees of results. If and when included in this Official Statement, the words expects, forecasts, projects, intends, anticipates, estimates and analogous expressions are intended to identify forward-looking statements as defined in the Securities Act of 1933, as amended, and any such statements inherently are subject to a variety of risks and uncertainties, including, without limitation, those risks identified in BONDHOLDERS RISKS herein, which could cause actual results to differ materially from those contemplated in such forward-looking statements. These forward-looking statements speak only as of the date of this Official Statement. The Issuer and the Borrower disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Issuer s or the Borrower s expectations with regard thereto or any change in events, conditions, or circumstances on which any such statement is based. This Official Statement does not constitute an offering of any security other than the original offering of the 2014 Bonds identified on the cover. No dealer, broker, salesman or other person has been authorized by the Issuer, the Borrower or the Underwriter named on the cover of this Official Statement (the Underwriter ), to give any information or to make any representations other than those contained in this Official Statement and, if given or made, such other information or representations must not be relied upon as having been authorized by the Issuer, the Borrower or the Underwriter. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, and there shall not be any sale of the 2014 Bonds by any person in any jurisdiction in which it is unlawful to make such offer, solicitation or sale. Except where otherwise indicated, all information contained in this Official Statement has been provided by the Issuer and the Borrower. Information in this Official Statement has been obtained by the Issuer and the Borrower from sources believed to be reliable. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities under the federal securities laws as applied to the facts and circumstances of this transaction; however, the Underwriter does not guarantee the accuracy or completeness of such information. The Bond Trustee has not provided, or undertaken to determine the accuracy of, any of the information contained in this Official Statement and makes no representation or warranty, express or implied, as to (i) the accuracy or completeness of such information; (ii) the validity of the 2014 Bonds or Obligation No. 14; or (iii) the tax-exempt status of the interest on the 2014 Bonds. Upon execution and delivery, the 2014 Bonds will not be registered under the Securities Act of 1933, as amended, or any state securities law and will not be listed on any stock or other securities exchange, and no indenture will be qualified with respect to the 2014 Bonds under the Trust Indenture Act of 1939, as amended. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the 2014 Bonds or passed upon the adequacy or accuracy of this Official Statement. 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 2014 BONDS AT OR ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET, AND SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. i

4 THE INFORMATION AND EXPRESSIONS OF OPINION IN THIS OFFICIAL STATEMENT ARE SUBJECT TO CHANGE WITHOUT NOTICE, AND NEITHER THE DELIVERY OF THIS OFFICIAL STATEMENT NOR ANY SALE MADE UNDER SUCH DOCUMENT SHALL CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUER OR THE BORROWER, OR IN THE OTHER MATTERS DESCRIBED HEREIN SINCE THE DATE HEREOF OR THE EARLIER DATES SET FORTH HEREIN AS OF WHICH CERTAIN INFORMATION CONTAINED HEREIN IS GIVEN. The information in the section THE 2014 BONDS - Book-Entry Only System herein has been obtained from The Depository Trust Company, and no representation is made by the Issuer, the Borrower or the Underwriter as to the completeness or accuracy of such information. References herein to laws, rules, regulations, resolutions, agreements, reports, and other documents do not purport to be comprehensive or definitive. All references to such documents are qualified in their entirety by reference to the particular document, the full text of which may contain qualifications of and exceptions to statements made herein. Where full texts have not been included as appendices to this Official Statement, they will be furnished on request. ii

5 TABLE OF CONTENTS INTRODUCTORY STATEMENT... 1 General... 1 The Borrower... 1 McLeod Health System... 1 Security and Sources of Payment... 3 THE 2014 BONDS... 4 General... 4 Redemption Provisions... 4 Book-Entry Only System... 5 PLAN OF FINANCE... 8 ESTIMATED SOURCES AND USES OF FUNDS... 8 SECURITY AND SOURCES OF PAYMENT FOR THE 2014 BONDS... 9 Limited Obligations... 9 Loan Agreement and 2014 Obligation... 9 Security Interest in Pledged Assets... 9 Mortgage Outstanding Obligations Enforceability of Remedies Debt Service Requirements THE ISSUER BONDHOLDERS RISKS General Tax Exemption Factors That Could Affect the Future Financial Condition of the Borrower Impact of Market Turmoil Health Care Industry Factors Affecting the Borrower Patient Protection and PPAC Act and Healthcare Reform Initiatives Overview of Medicare and Medicaid Programs Medicare Reimbursement Medicaid Reimbursement State Children s Health Insurance Program Third-Party Reimbursement Uncompensated Care Regulatory Environment Regulatory Inquiries Corporate Compliance Tax Exemption for Nonprofit Corporations Intermediate Sanctions Antitrust Other Legislative and Regulatory Actions Licensing, Surveys and Accreditations State Tax Exemptions for Nonprofit Corporations Malpractice Lawsuits and Medical Professional Liability Insurance Market Nationwide Nursing Shortage Competition Page iii

6 Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures Physician Relations Technology and Services Affiliation, Merger, Acquisition and Divestiture Impact of Disruptions in the Credit Markets and General Economic Factors Potential Effects of Bankruptcy Risks Related to Borrower Indenture Financings and Fraudulent Transfer or Conveyance Statutes Enforceability of Certain Covenants Other Factors THE BOND TRUSTEE CONTINUING DISCLOSURE UNDERWRITING LEGAL MATTERS CERTAIN RELATIONSHIPS TAX EXEMPTION Federal Income Tax Generally Collateral Federal Tax Considerations Original Issue Premium State Tax Exemption RATINGS FINANCIAL ADVISOR FINANCIAL STATEMENTS Independent Auditors Representation of the Borrower VERIFICATION OF MATHEMATICAL ACCURACY LITIGATION MISCELLANEOUS Appendix A Information Concerning the Borrower, the McLeod Health Obligated Group and the System Appendix B McLeod Health Audited Consolidated Financial Statements as of and for the Fiscal Years Ended September 30, 2013 and 2012, and Independent Auditor s Report Appendix C Definitions of Certain Terms and Summaries of the Master Trust Indenture and Supplements, the Trust Agreement and the Loan Agreement Appendix D Form of Bond Counsel Opinion iv

7 OFFICIAL STATEMENT $61,175,000 FLORENCE COUNTY, SOUTH CAROLINA REFUNDING HOSPITAL REVENUE BONDS (McLEOD REGIONAL MEDICAL CENTER PROJECT) SERIES 2014 INTRODUCTORY STATEMENT General This Official Statement, including the cover page and the Appendices, is provided to set forth information in connection with the offering by Florence County, South Carolina (the Issuer ) of $61,175,000 aggregate principal amount of Refunding Hospital Revenue Bonds (McLeod Regional Medical Center Project), Series 2014 (the 2014 Bonds ). The 2014 Bonds will be issued and secured pursuant to the provisions of a Trust Agreement dated as of August 1, 2014 (the Trust Agreement ), between the Issuer and U.S. Bank National Association, as trustee (the Bond Trustee ). Concurrently with the issuance of the 2014 Bonds, the Issuer will enter into a Loan Agreement dated as of August 1, 2014 (the Loan Agreement ) with McLeod Regional Medical Center of the Pee Dee, Inc., doing business as McLeod Regional Medical Center (the Borrower ). Pursuant to the terms of the Loan Agreement, the Issuer will loan the proceeds of the 2014 Bonds to the Borrower to (i) refund the outstanding principal amount of the Issuer s Hospital Revenue Bonds (McLeod Regional Medical Center Project), Series 2004A (the Refunded Bonds ) and (ii) pay costs of issuance of the 2014 Bonds. The Borrower The Borrower is a South Carolina nonprofit corporation and an organization described under Sections 501(c)(3) and 509(a)(1) of the Internal Revenue Code of 1986, as amended (the Code ), located in the City of Florence, South Carolina. The Borrower owns and operates McLeod Regional Medical Center, which consists of a 453-bed tertiary care facility, together with other hospital, surgical, health and fitness, behavioral health, hospice and urgent care facilities located in Florence and Darlington Counties, South Carolina. In addition, the Borrower is majority owner in a joint venture, McLeod Medical Partners, LLC, which owns and operates three medical office buildings on the McLeod Regional Medical Center campus. McLeod Health System The Borrower is a member of a system of health care providers that offers a broad array of advanced tertiary, secondary, general acute, ancillary, physician and other related services to a 12-county area in the northeast quadrant of South Carolina, known as the Pee Dee region. McLeod Regional Medical Center is the main hospital campus for the McLeod Health System (hereafter defined). McLeod Health, a South Carolina nonprofit corporation and an organization described under Sections 501(c)(3) and 509(a)(3) of the Internal Revenue Code of 1986, as amended (the Code ), is the parent corporation and sole member of the Borrower, as well as: McLeod Medical Center-Dillon, a South Carolina nonprofit corporation and an organization described under Sections 501(c)(3) and 509(a)(1) of the Code, that owns and operates a 79- bed community hospital located in the City of Dillon, South Carolina.

8 McLeod Loris Seacoast Hospital ( Loris Seacoast ), a South Carolina nonprofit corporation and an organization described under Sections 501(c)(3) and 509(a)(1) of the Code, that owns and operates the following organizations, which operate as divisions: McLeod Loris (formerly Loris Community Hospital), a 105-bed community hospital located in Loris, South Carolina; McLeod Seacoast (formerly Seacoast Medical Center), a 50-bed community hospital located in Little River, South Carolina; Loris Extended Care Center, an 88-bed long-term care facility located in Loris, South Carolina; Center for Health and Fitness, a health and fitness center located in Loris, South Carolina; and Seacoast Medical Office Building, a facility which contains multiple physician practices in Little River, South Carolina. McLeod Physician Associates II ( Physician Associates ), a South Carolina nonprofit corporation and an organization described under Sections 501(c)(3) and 501(a)(2) of the Code, that operates a multi-specialty physician group practice that provides primary and specialty care services in six South Carolina counties. McLeod Health Foundation (the Foundation ), a South Carolina nonprofit corporation and organization described under Sections 501(c)(3) and 509(a)(3) of the Code, that is principally engaged in fundraising activities for the System (hereafter defined). McLeod Health also is the sole shareholder of McLeod Physician Associates, Inc., a South Carolina for-profit corporation that formerly operated a multi-specialty physician group practice that is now inactive. McLeod Health, the Borrower, McLeod Medical Center-Dillon, Loris Seacoast, Physician Associates, the Foundation and McLeod Physician Associates, Inc. are collectively referred to as the System or McLeod Health System herein. For additional information about the System, see Appendix A to this Official Statement. Obligated Group McLeod Health, the Borrower, McLeod Medical Center-Dillon and Physician Associates comprise all of the members of the McLeod Health Obligated Group (the Obligated Group ) established under an Amended and Restated Master Trust Indenture dated as of January 15, 1998, as amended and supplemented (the Master Trust Indenture ) between the Borrower and U.S. Bank National Association, as successor master trustee (the Master Trustee ). Any member of the Obligated Group may secure debt through Obligations issued under the Master Trust Indenture; and all members of the Obligated Group are jointly and severally liable for all Obligations issued. No member of the Obligated Group may withdraw from the Obligated Group unless all of the Obligations issued by such member are no longer outstanding or are fully defeased and there is delivered to the Master Trustee evidence that certain financial conditions with respect to the Obligated Group after the withdrawal of such member are met. See Appendix C THE MASTER TRUST INDENTURE Withdrawal from the Obligated Group. 2

9 Pursuant to the Master Trust Indenture, each member of the Obligated Group has pledged, assigned and granted to the Master Trustee a security interest in its Accounts and all proceeds thereof and in its Gross Receipts (collectively, the Pledged Assets ) to secure the prompt payment of the principal of, redemption premium, if any, and interest on the Obligations and the performance by each member of the Obligated Group of its other obligations under the Master Trust Indenture. Under the Master Trust Indenture, Accounts includes any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance. Gross Receipts means all Accounts and all revenues, income, receipts and money (other than proceeds of borrowing) received in any period by or on behalf of any member of the Obligated Group, including, but without limiting the generality of the foregoing, (a) revenues derived from its operations, (b) gifts, grants, bequests, donations and contributions and the income therefrom, exclusive of any gifts, grants, bequests, donations and contributions to the extent specifically restricted by the donor to a particular purpose inconsistent with their use for the payment of Obligations, (c) proceeds derived from (i) insurance, except to the extent otherwise required by this Indenture, (ii) Accounts, (iii) securities and other investments, (iv) inventory and other tangible and intangible property, (v) medical or hospital insurance, indemnity or reimbursement programs or agreements and (vi) contract rights and other rights and assets now or hereafter owned, held or possessed by any member of the Obligated Group, and (d) rentals received from the leasing of real or tangible personal property. Security and Sources of Payment In order to secure its obligations under the Loan Agreement, the Borrower will agree to issue Obligation No. 14 (the 2014 Obligation ) under the Master Trust Indenture, as supplemented by a Supplemental Master Indenture for Obligation No. 14 dated as of August 1, 2014 (the Series 2014 Supplemental Master Indenture ), between the Borrower and the Master Trustee. Payments on the 2014 Obligation will be required to be sufficient to pay the principal of, redemption premium, if any, and interest on the 2014 Bonds as they become due and payable. The Master Trust Indenture, as supplemented by the Series 2014 Supplemental Master Indenture, is referred to herein as the Master Indenture. There currently are three Obligations outstanding under the Master Trust Indenture: Obligations Nos. 10, 12 and 13 (the Outstanding Obligations ). Prior to the issuance of the 2014 Bonds, the aggregate principal amount of the Outstanding Obligations is $237,140,000. Subsequent to the issuance of the 2014 Bonds, the aggregate principal amount of Obligations outstanding under the Master Indenture, which will include the 2014 Obligations and Obligations Nos. 12 and 13, will be $223,425,000. See SECURITY AND SOURCES OF PAYMENT FOR THE 2014 BONDS Outstanding Obligations herein for a listing of the Outstanding Obligations and the indebtedness secured thereby. The Borrower previously granted to the Master Trustee a mortgage dated as of April 1, 2004 (the Mortgage ) with regard to certain real property and interests therein as security for the payment of the Obligations. At the time of the delivery of the Mortgage, numerous Obligations were outstanding and secured by the Mortgage. Upon the issuance of the 2014 Bonds, Obligation No. 10 will be paid in full and cancelled, and only Obligations Nos. 12 and 13 will remain outstanding under the Master Indenture, together with the 2014 Obligation. In accepting Obligations Nos. 12 and 13, the Master Trustee has previously consented to the cancellation of the Mortgage upon (a) delivery to the Master Trustee of an opinion of bond counsel that Obligation No. 10 has been paid or defeased, and the lien of the supplemental indenture under which Obligation No. 10 was issued has been discharged, or (b) direction by the holders of the bonds secured by Obligation No. 10, in accordance with the requirements of the Master Indenture. A similar consent to cancellation of the Mortgage will be given by the Master Trustee in accepting the 2014 Obligation, and the 3

10 Master Trustee will execute a cancellation of the Mortgage. Accordingly, the Mortgage will be cancelled upon issuance of the 2014 Bonds, and upon such cancellation Obligations Nos. 12 and 13, along with the 2014 Obligation, will not be secured by the Mortgage. The Issuer will assign and pledge to the Bond Trustee all of its interest in the Loan Agreement and the 2014 Obligation, as holder of the 2014 Obligation, except for its rights to indemnification and payment of certain expenses, its right to give certain consents and its right to receive certain notices (the retained rights ), to secure the payment of the 2014 Bonds. See SECURITY AND SOURCES OF PAYMENT FOR THE 2014 BONDS herein and Appendix C to this Official Statement. General THE 2014 BONDS The 2014 Bonds will be dated as of their date of initial delivery and will mature, subject to the redemption provisions set forth below, in the amounts and on the dates set forth on the inside cover page. The 2014 Bonds will be issued as fully registered bonds and initially in book-entry only form in denominations of $5,000 and integral multiples thereof ( Authorized Denominations ). Interest on the 2014 Bonds will be payable commencing on November 1, 2014, semi-annually on May 1 and November 1 at the rates set forth on the inside cover page, and will be computed on the basis of a 360-day year consisting of twelve 30-day months. Capitalized terms used but not defined in this front part of the Official Statement have the meanings set forth in Appendix C. Redemption Provisions Optional Redemption. The 2014 Bonds maturing on and after November 1, 2025, are subject to redemption by the Issuer, upon the direction of the Borrower, on or after November 1, 2024, in whole or in part on any date, upon payment of the redemption price equal to 100% of the principal amount of the 2014 Bonds to be redeemed, plus interest accrued to the redemption date, all in the manner provided in the Trust Agreement. Extraordinary Redemption. The 2014 Bonds are subject to redemption, in whole, or in part (by lot), on any date at a redemption price equal to 100% of the principal amount of the 2014 Bonds to be redeemed, plus accrued interest to the redemption date, in the event that the Borrower exercises its option to prepay all or any portion of the unpaid amounts due under the Loan Agreement upon the occurrence of one of the following events: (a) Damage or destruction of all or any part of the Operating Assets by fire or casualty, or loss of title to or use of substantially all of the Operating Assets as a result of the failure of title or as a result of eminent domain proceedings or proceedings in lieu thereof; or (b) Changes in the Constitution of the United States of America or of the State of South Carolina or in legislation or administrative action, or failure of administrative action by the United States or the State of South Carolina or any agency or political subdivision of either thereof, or by reason of any judicial decision; in either event, to such extent that in the opinions of the Board of Trustees of the Borrower (expressed in a resolution) and an independent architect, engineer or management consultant (as appropriate for the particular event), both filed with the Issuer and the Bond Trustee (i) the Loan Agreement has become impossible to 4

11 perform without unreasonable delay or (ii) unreasonable burdens or excessive liabilities not being imposed as of the date of the Loan Agreement have been imposed on the Borrower. Selection of 2014 Bonds to be Redeemed. The Bonds shall be redeemed only in whole multiples of $5,000 and in a principal amount equal to at least $50,000. The Bond Trustee shall select the Bonds to be redeemed in accordance with the terms and provisions of the Trust Agreement. If less than all of the 2014 Bonds are to be redeemed, the Bond Trustee shall redeem Bonds in the order of the maturities determined by the Borrower. If a book-entry system of registration of the Bonds is not being used and less than all of the 2014 Bonds of any maturity are to be redeemed, the 2014 Bonds of such maturity to be redeemed shall be selected by the Bond Trustee by lot in any manner in which the Bond Trustee may determine. If less than all of the beneficial interests of a Bond of a single maturity held by Cede & Co., as nominee of The Depository Trust Company ( DTC ), are to be redeemed, the beneficial interests to be redeemed shall be selected by lot by DTC. In either case, each $5,000 portion of principal of a 2014 Bond will be counted as one Bond for this purpose. Interest on the 2014 Bonds so called for redemption shall cease to accrue from and after the redemption date if money or Defeasance Obligations, or a combination of both, sufficient to pay the redemption price of the 2014 Bonds to be redeemed, are on deposit with the Bond Trustee. Said Bonds shall cease to be entitled to any benefits or security under the Trust Agreement and the holders of said Bonds shall have no rights with respect thereto except to receive payment of the redemption price plus accrued interest to the redemption date. Notice of Redemption. Notice of redemption will be mailed to each registered owner of Bonds called for redemption at the address shown on the registration books not less than 20 days or more than 60 days prior to the redemption date. Failure to give notice in the manner described with respect to any Bond, or any defect in such notice, will not affect the validity of the proceedings for redemption of any Bond with respect to which notice was properly given. So long as a book-entry system is used for determining beneficial ownership of Bonds, the Bond Trustee shall send such notice to DTC or Cede & Co., its nominee. Any failure of DTC or Cede & Co. to notify any DTC Participant, or of any DTC Participant or Indirect Participant to notify the beneficial owner of any Bond of any such notice, will not affect the validity of the redemption of the 2014 Bonds. In the case of an optional redemption, the redemption notice may state that (a) it is conditioned upon the deposit of moneys by the Borrower, in an amount equal to the amount necessary to effect the redemption, with the Bond Trustee no later than the scheduled redemption date or (b) the Borrower retains the right to rescind such notice on or prior to the scheduled redemption date (in either case, a Conditional Redemption ), and such notice and optional redemption shall be of no effect if such moneys are not so deposited or if the notice is rescinded. If a Conditional Redemption for which notice has been sent to Holders does not occur, the Bond Trustee will give notice to DTC or Cede & Co., its nominee, or the affected Holders of any 2014 Bonds that are not held by DTC or Cede & Co., as its nominee, that the redemption did not occur and that the 2014 Bonds called for redemption and not so paid remain Outstanding. Purchases in Lieu of Redemption. Purchases of 2014 Bonds Outstanding and called for redemption as described herein may be made by the Borrower in lieu of redemption at any time with money available to it from any source. Book-Entry Only System Unless and until the book-entry only system has been discontinued as to the 2014 Bonds, the 2014 Bonds will be available only in book-entry form in Authorized Denominations. DTC or its successor will act 5

12 as securities depository for the 2014 Bonds. The 2014 Bonds will be issued initially as fully registered bonds registered in the name of Cede & Co., DTC s partnership nominee, or such other name as may be requested by an authorized representative of DTC. One fully registered bond will be issued for each maturity of 2014 Bonds and will be deposited with DTC or its designee. Beneficial ownership interests in the 2014 Bonds will be available only in book-entry only form. Beneficial Owners will not receive physical bond certificates representing their interests in the 2014 Bonds purchased. So long as DTC or its nominee is the registered owner of the 2014 Bonds, references in this Official Statement to the Holders of the 2014 Bonds shall mean DTC or its nominee and shall not mean the Beneficial Owners. THE FOLLOWING DESCRIPTION OF DTC, ITS PROCEDURES AND RECORD KEEPING OF BENEFICIAL OWNERSHIP INTERESTS IN THE 2014 BONDS, PAYMENT OF INTEREST AND OTHER PAYMENTS ON THE 2014 BONDS TO DTC PARTICIPANTS OR TO BENEFICIAL OWNERS, CONFIRMATION AND TRANSFER OF BENEFICIAL OWNERSHIP INTERESTS IN THE 2014 BONDS AND OF OTHER TRANSACTIONS BY AND BETWEEN DTC, DTC PARTICIPANTS AND BENEFICIAL OWNERS IS BASED ON INFORMATION FURNISHED BY DTC. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of certificated bonds. 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. 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 rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchases of the 2014 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the 2014 Bonds on DTC s records. The ownership interest of each Beneficial Owner is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 2014 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the 2014 Bonds, except in the event that unless the use of the book-entry system for the 2014 Bonds is discontinued. To facilitate subsequent transfers, all of the 2014 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 6

13 requested by an authorized representative of DTC. The deposit of the 2014 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the 2014 Bonds. DTC s records reflect only the identity of the Direct Participants to whose accounts such 2014 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 2014 Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the 2014 Bonds, such as redemptions, tenders, defaults, and proposed amendments to the documents relating to the 2014 Bonds. For example, Beneficial Owners of 2014 Bonds may wish to ascertain that the nominee holding the 2014 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Bond Trustee and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of a maturity of the 2014 Bonds are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in the 2014 Bonds to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the 2014 Bonds unless authorized by a Direct Participant in accordance with DTC s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Borrower 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 2014 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Payments of principal, interest and any redemption premiums on the 2014 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the Bond Trustee, acting as registrar and paying agent, on the payable date in accordance with their respective holdings shown on DTC s records. Payments by DTC Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such DTC Participant and not of DTC (nor its nominee), the Bond Trustee, the Borrower or the Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, premium, if any, and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the Bond Trustee s responsibility, disbursement of such payments to Direct Participants is DTC s responsibility, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. THE BORROWER AND THE ISSUER CAN GIVE NO ASSURANCE THAT DIRECT AND INDIRECT PARTICIPANTS WILL PROMPTLY TRANSFER PAYMENTS TO BENEFICIAL OWNERS. DTC may discontinue providing its services as depository for the 2014 Bonds at any time by giving reasonable notice to the Bond Trustee, the Borrower or the Issuer. The Borrower and the Issuer also may determine that DTC is incapable of discharging its duties or that continuation of the book-entry only system is not in the Beneficial Owners best interests. In either situation, if the Borrower and the Issuer fail to identify another qualified securities depository to replace DTC, physical 2014 Bonds will be delivered to each Beneficial Owner. 7

14 SO LONG AS CEDE & CO., AS NOMINEE FOR DTC, IS THE SOLE HOLDER OF THE 2014 BONDS, THE BORROWER AND THE ISSUER SHALL TREAT CEDE & CO. AS THE ONLY HOLDER OF THE 2014 BONDS FOR ALL PURPOSES, INCLUDING RECEIPT OF ALL PRINCIPAL AND PREMIUM OF AND INTEREST ON THE 2014 BONDS, RECEIPT OF NOTICES, VOTING, AND REQUESTING OR DIRECTING THE BORROWER AND THE ISSUER TO TAKE OR NOT TO TAKE, OR CONSENTING TO, CERTAIN ACTIONS. THE BORROWER, THE ISSUER AND THE BOND TRUSTEE HAVE NO RESPONSIBILITY OR OBLIGATION TO THE DTC PARTICIPANTS OR THE BENEFICIAL OWNERS WITH RESPECT TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DTC PARTICIPANT, OR THE MAINTENANCE OF ANY RECORDS; (2) THE PAYMENT BY DTC OR ANY DTC PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE 2014 BONDS, OR THE SENDING OF ANY TRANSACTION STATEMENTS; (3) THE DELIVERY OR TIMELINESS OF DELIVERY BY DTC OR ANY DTC PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE APPLICABLE TRUST AGREEMENT TO BE GIVEN TO BENEFICIAL OWNERS; (4) THE SELECTION OF THE BENEFICIAL OWNERS TO RECEIVE PAYMENTS UPON ANY PARTIAL REDEMPTION OF THE 2014 BONDS; OR (5) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC OR ITS NOMINEE AS THE REGISTERED OWNER OF THE 2014 BONDS, INCLUDING ANY ACTION TAKEN PURSUANT TO AN OMNIBUS PROXY. The information in this section concerning DTC and DTC s book-entry system has been obtained from sources the Issuer and the Borrower believe to be reliable, but the Issuer and the Borrower take no responsibility for the accuracy thereof. PLAN OF FINANCE The 2014 Bond proceeds will be used to (i) refund the Refunded Bonds, and (ii) pay costs of issuance of the 2014 Bonds. ESTIMATED SOURCES AND USES OF FUNDS The proceeds to be received from the sale of the 2014 Bonds, together with other funds, are expected to be applied as shown below: Estimated Sources Principal Amount of 2014 Bonds... $61,175, Plus Original Issue Premium... 9,047, Certain Available Moneys ,539, Total Sources... $77,761, Estimated Uses Refunding of Refunded Bonds... $76,808, Costs of Issuance , Total Uses... $77,761, These moneys represent certain available amounts currently on deposit with the trustee for the Refunded Bonds in the debt service fund and the debt service reserve fund. 2 Includes Underwriter s discount and estimated fees and expenses of Bond Counsel, financial advisor, Underwriter s counsel, Bond Trustee, verification agent, printer, rating services, certain expenses of the Borrower and a rounding amount. 8

15 Limited Obligations SECURITY AND SOURCES OF PAYMENT FOR THE 2014 BONDS The 2014 Bonds are limited obligations of the Issuer payable solely from money to be received by the Bond Trustee from the Borrower pursuant to the Loan Agreement and the 2014 Obligation (except to the extent paid out of, under certain circumstances, proceeds of the 2014 Bonds and proceeds from insurance and condemnation awards). The 2014 Bonds are not secured by a pledge of the faith and credit of the State of South Carolina or of any political subdivision thereof, including the Issuer, and do not create an indebtedness of the State or of any political subdivision thereof, including the Issuer. Loan Agreement and 2014 Obligation In order to secure its obligations under the Loan Agreement, the Borrower will agree to issue the 2014 Obligation under the Master Indenture. Payments on the 2014 Obligation will be required to be sufficient to pay the principal of, redemption premium, if any, and interest on the 2014 Bonds as they become due and payable. The Master Indenture provides that each member of the Obligated Group is jointly and severally liable with respect to the payment of each Obligation, including the 2014 Obligation, issued under the Master Indenture. As security for the 2014 Bonds, the Issuer will assign to the Bond Trustee, pursuant to Trust Agreement, the 2014 Obligation and substantially all of its right, title and interest in the Loan Agreement, in each case except for certain retained rights. The 2014 Bonds also are secured by the money and securities held in the funds and accounts established under the Trust Agreement. Security Interest in Pledged Assets Pursuant to the Master Indenture, as security for the payment of the principal of, redemption premium, if any, and interest on all Obligations, including the 2014 Obligation, the members of the Obligated Group have pledged, assigned and granted a security interest in the Pledged Assets to the Master Trustee. The 2014 Obligation will be secured on a parity basis with the Outstanding Obligations. The Borrower, or any other member of the Obligated Group under the Master Indenture, may incur indebtedness secured by additional Obligations issued thereunder on a parity with Outstanding Obligations. Each member of the Obligated Group has agreed in the Master Indenture that it will not create or suffer to be created or exist any Lien other than Permitted Liens (as defined in THE MASTER TRUST INDENTURE Limitations on Creation of Liens in Appendix C) upon its Pledged Assets or on other Property now owned or hereafter acquired. In addition, the members of the Obligated Group are subject to covenants under the Master Indenture containing restrictions or limitations with respect to the incurrence of indebtedness, consolidation and merger, and transfers of assets, among others. See THE MASTER INDENTURE in Appendix C hereto. The security interest in Pledged Assets will be perfected to the extent, and only to the extent, that such security interest may be perfected by filing under the Uniform Commercial Code of the State. Such pledge may be subordinated to the interest and claims of others in several instances. Examples of cases of subordinated or prior claims are (i) statutory liens, (ii) rights arising in favor of the United States of America or any agency thereof, (iii) present or future prohibitions against assignment in any federal or State 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 or State fraudulent conveyance laws that may affect the enforceability of the Master Indenture or the security interest in Pledged 9

16 Assets, and (vi) rights of third parties in Pledged Assets not in the possession or control (as defined in the Uniform Commercial Code of the State) of the Master Trustee. Mortgage As additional security for the payment of the principal of and interest on the Outstanding Obligations, the Borrower previously granted to the Master Trustee (i) a leasehold mortgage on the Borrower s main hospital tower facility with adjacent parking and landscape improvements which comprises approximately 24.5 acres (the Leased Land ) and a security interest in the structures, fixtures and personal property located on the Leased Land, and (ii) a mortgage on the McLeod Regional Medical Center s Pavilion with adjacent parking and landscape improvements comprising approximately 9.3 acres, and a security interest in all personal property and fixtures located thereon (collectively, the Mortgage ). At the time of the delivery of the Mortgage, numerous Obligations were outstanding and secured by the Mortgage. Upon the issuance of the 2014 Bonds, Obligation No. 10 will be paid in full and cancelled, and only Obligations Nos. 12 and 13 will remain outstanding under the Master Indenture, together with the 2014 Obligation. In accepting Obligations Nos. 12 and 13, the Master Trustee has previously consented to the cancellation of the Mortgage upon (a) delivery to the Master Trustee of an opinion of bond counsel that Obligation No. 10 has been paid or defeased, and the lien of the supplemental indenture under which Obligation No. 10 was issued has been discharged, or (b) direction by the holders of the bonds secured by Obligation No. 10, in accordance with the requirements of the Master Indenture. A similar consent to cancellation of the Mortgage will be given by the Master Trustee in accepting the 2014 Obligation, and the Master Trustee will execute a cancellation of the Mortgage. Accordingly, the Mortgage will be cancelled upon issuance of the 2014 Bonds, and upon such cancellation Obligations No. 12 and 13, along with the 2014 Obligation, will not be secured by the Mortgage. Outstanding Obligations The 2014 Obligations when issued will be on parity with Obligations Nos. 12 and 13 listed below. Master Indenture Principal Amount Outstanding as of Obligation Issuance Date Bonds Outstanding Securing Debt April 30, 2014 of 2014 Bonds Hospital Revenue Bonds McLeod Regional Medical Center Project), Series 2010A, final maturity November 1, 2037 Obligation No. 12 $115,480,000 $115,480,000 Hospital Revenue Bonds McLeod Regional Medical Center Project), Series 2010B, final maturity November 1, 2040 Amended and Restated Obligation No ,770,000 46,770,000 TOTAL $162,250,000 $162,250,000 As of April 30, 2014, the members of the Obligated Group have aggregate indebtedness of $16,816,330 that is not secured by a Master Indenture Obligation, including a guarantee issued by the Borrower in respect of a commercial loan to McLeod Medical Partners, LLC outstanding in the amount of $11,266,177. The Borrower also has guaranteed the amounts payable by McLeod Medical Partners, LLC under the terms of a variable-to-fixed interest rate swap agreement related to such commercial loan. See 10

17 FINANCIAL PERFORMANCE Current Indebtedness of the Obligated Group Long-term Debt in Appendix A, and Appendix B for additional information concerning indebtedness of McLeod Health and the Obligated Group. Enforceability of Remedies The actual realization of amounts to be derived upon the enforcement of any security interest or mortgage securing the Obligations will depend upon the exercise of various remedies specified by the Loan Agreement, the Trust Agreement, the Master Indenture and the mortgages. These and other remedies may, in many respects, require judicial action of a nature which is often subject to discretion and delay. Under existing law, the remedies specified by the Loan Agreement, the Trust Agreement, the Master Indenture and the mortgages may not be readily available or may be limited. A court may decide not to order the specific performance of the covenants contained in those documents. The various legal opinions to be delivered concurrently with the delivery of the 2014 Bonds will be qualified as to the enforceability of the various legal instruments by limitations imposed by the State and federal laws, rulings and decisions affecting remedies and by bankruptcy, fraudulent conveyance, reorganization or other laws affecting the enforcement of creditors rights. [Remainder of Page Intentionally Left Blank] 11

18 Debt Service Requirements The following table sets forth, as of the date of delivery of the 2014 Bonds, the total debt service requirements for the Obligated Group. Fiscal Year Ending Sept. 30 Outstanding 2014 Debt Service (1) Principal 2014 Interest Aggregate Annual Debt Service (2) 2015 $11,074,407 - $2,222,110 $13,296, ,192,837-3,030,150 13,222, ,686,876 $395,000 3,026,200 13,108, ,522, ,000 3,016,175 12,943, ,539, ,000 3,001,700 12,961, ,506, ,000 2,984,400 12,935, ,497, ,000 2,963,750 12,931, ,998,174 2,030,000 2,901,250 10,929, ,008,974 2,125,000 2,797,375 10,931, ,021,538 2,230,000 2,688,500 10,940, ,037,685 2,330,000 2,574,500 10,942, ,047,124 2,445,000 2,455,125 10,947, ,102,624 2,550,000 2,330,250 10,982, ,113,563 2,675,000 2,199,625 10,988, ,190,560 5,295,000 2,000,375 14,485, ,211,999 5,540,000 1,729,500 14,481, ,237,749 5,800,000 1,446,000 14,483, ,228,188 6,070,000 1,149,250 14,447, ,252,560 6,355, ,625 14,446, ,289,499 6,645, ,625 14,448, ,322,874 6,950, ,750 14,446, ,649, ,649, ,648, ,648, ,651, ,651, ,415, ,415, ,612, ,612, ,808, ,808,161 TOTAL $255,868,920 $61,175,000 $46,042,235 $363,086,155 (1) Outstanding debt service excludes debt service on the Refunded Bonds but includes debt service for the Series 2010A Bonds, Series 2010B Bonds, notes payable to Wells Fargo and capital leases. Assumes an interest rate of 0.12% for the Series 2010B Bonds and 1.00% for the notes payable to Wells Fargo. Assumes capital leases are paid in full in FY (2) Totals may not add due to rounding. 12

19 THE ISSUER The Issuer is a body corporate and politic, duly created and existing as a political subdivision under the Constitution and Laws of the State of South Carolina (the State ) and is authorized pursuant to Title 44, Chapter 7, Article 11, Code of Laws of South Carolina 1976, as amended (the Act ) to issue its revenue bonds for the purpose of financing or refinancing hospital facilities (as defined in the Act). The Issuer is governed by a nine-member County Council which employs a County Administrator who is responsible for administration. K.G. Smith, Jr. serves as County Administrator. The present members of the Florence County Council and the dates their current terms end are as follows: Name Term Ends James Schofield, Chairman December 31, 2014 Waymon Mumford, Vice Chairman December 31, 2014 Mitchell Kirby, Secretary/Chaplain December 31, 2016 Alphonso Bradley December 31, 2014 Kent C. Caudle December 31, 2016 Russell W. Culberson December 31, 2014 Willard Dorriety, Jr. December 31, 2016 Roger M. Poston December 31, 2016 Jason Springs December 31, 2014 BONDHOLDERS RISKS The purchase of the 2014 Bonds involves certain investment risks that are discussed throughout this Official Statement. Accordingly, each prospective purchaser of the 2014 Bonds should make an independent evaluation of all the information presented in this Official Statement (including the Appendices) in order to make an informed investment decision. Certain of these risks are described below. The descriptions set forth below of certain governmental policies affecting health care and other matters are not intended as a complete discussion of all aspects of laws and regulations and such matters which may affect the financial performance of health care providers such as the Borrower. Healthcare providers operate in a complicated regulatory environment, many aspects of which may adversely affect the revenues and operations of such providers. General Payment of the 2014 Bonds ultimately will depend upon the ability of the Borrower to generate revenues sufficient to provide for payment of the 2014 Bonds and other outstanding indebtedness while paying operating and other expenses. No representation or assurance can be made that revenues will be realized in amounts sufficient to pay maturing principal of and interest on the 2014 Bonds. The ability to generate sufficient revenues is subject, among other things, to the capabilities of management and future economic and other conditions which are unpredictable, and may be adversely affected by a wide variety of future events and conditions, including the ability of the Borrower to provide services required or expected by patients, physicians confidence in and utilization of the facilities of the Borrower, competition, changes in the economic conditions of or demand for medical treatment in the Borrower s service area, rising costs, governmental regulation and control by third-party payors, both governmental and private. Currently both the federal and State governments have extensive powers to regulate the operations of the Borrower, control the flow of revenues thereto, limit expansion and even control and restrict the services now being provided by the Borrower. As discussed below, these powers may be expanded in the future. 13

20 Tax Exemption The Code establishes certain requirements (the Federal Tax Requirements ) that must be met by the Borrower and the Issuer subsequent to the issuance of the 2014 Bonds in order that interest on the 2014 Bonds not be included in gross income for federal income tax purposes. Non-compliance with the Federal Tax Requirements may cause interest on the 2014 Bonds to become subject to federal income tax retroactive to its date of issue, irrespective of the date on which such noncompliance occurs or is ascertained. However, if such an event occurs, there are no provisions in the 2014 Bonds which would increase the interest payable thereon, or which would cause the 2014 Bonds to become subject to redemption. See TAX EXEMPTION herein. Factors That Could Affect the Future Financial Condition of the Borrower The Borrower is a health care provider that derives significant portions of its revenues from Medicare, Medicaid, HMOs and other third-party payor programs. The Borrower is subject to governmental regulation applicable to health care providers and the receipt of future revenues by the Borrower is subject to, among other factors, federal and state policies affecting the health care industry and other conditions which are impossible to predict. Such conditions may include limits on increasing charges and fees charged by the Borrower, changes in federal and state laws and regulations affecting payments for health services, the continued increase in managed care or development of new third-party payment policies which reduce revenues, unanticipated competition from other health care providers, and changes in demand for health services. The Borrower s revenues and expenses may be adversely affected by the current economic environment and future economic conditions, which may include an inability to control expenses in periods of inflation. The receipt of future revenues by the Borrower is also subject to demand for services, the ability to provide the services required by patients, physicians relationships with the Borrower, management capabilities, the ability of the Borrower to control expenses, maintenance by the Borrower of relationships with HMOs and other third-party payor programs, competition, rates, costs, third-party reimbursement, legislation and governmental regulation, receipt of private contributions, general economic conditions, economic developments in the service areas and other conditions which are impossible to predict. No assurances can be given that patient utilization or revenues available to the Borrower from its operations will remain stable or increase. The Borrower expects that it will experience increases in operating costs due to inflation and other factors. There is no assurance that cost increases will be matched by increased patient revenue in amounts sufficient to generate an excess of revenues over expenses. The risk factors discussed below should be considered in evaluating the ability of the Borrower to make payments in amounts sufficient to meet its respective obligations under the Loan Agreement and the Master Indenture. This discussion is not, and is not intended to be, exhaustive. Impact of Market Turmoil Over the past five years, the economies of the United States and other countries have experienced severe disruption, prompting a number of banks and other financial institutions to seek additional capital, including capital provided through the federal government, to merge, and, in some cases, to cease operations. These events collectively have led to significant reductions in lending capacity and the extension of credit, erosion of investor confidence in the financial sector, and historically aberrant fluctuations in interest rates. This disruption of the credit and financial markets has led to volatility in the securities markets, significant losses in investment portfolios, increased business failures and consumer and business bankruptcies, and is a major cause of the current economic environment. 14

21 In 2008 and 2009, federal legislation was enacted and regulatory and other initiatives were implemented by agencies of the Federal government and the Federal Reserve Board with the objective of stabilizing the financial markets by enhancing liquidity, providing additional capital to the financial sector and improving the performance and efficiency of credit markets. Other legislation is pending or under active consideration by Congress, and additional regulatory action is being considered by various Federal agencies and the Federal Reserve Board and foreign governments are implementing actions, all of which are intended to continue and strengthen efforts to restore the domestic and global credit markets. It is unclear whether these legislative, regulatory and other governmental actions will have the positive effect that is intended. The health care sector has been adversely affected by these developments. The consequences of these developments have generally included realized and unrealized investment portfolio losses, reduced investment income, limitations on access to the credit markets, and difficulties in remarketing revenue bonds subject to tender. The lingering economic uncertainty may also adversely affect the operations of the Borrower as a result of, among other factors, increases in the amount of uncollectible accounts, the number of uninsured patients or if persons that would otherwise use their facilities and services choose to defer elective medical procedures. Economic conditions are also adversely affecting revenue available to states and increasing expenses under various state programs, including Medicaid. Health Care Industry Factors Affecting the Borrower The health care industry is highly dependent on a number of factors that may limit the Borrower s ability to pay its obligations under the Loan Agreement and the Borrower s ability to pay its obligations under the Master Trust Indenture, several of which are beyond its control. Among other things, participants in the health care industry (such as the Borrower) are subject to significant regulatory requirements of federal, state and local governmental agencies and independent professional organizations and accrediting bodies, technological advances and changes in treatment modes, various competitive factors and changes in thirdparty reimbursement programs. Discussed below are certain of these factors which could have a significant impact on the future operations and financial condition of the Obligated Group. The Borrower s ability to pay its obligations under the Loan Agreement and the Obligated Group s ability to pay its obligations under the Master Trust Indenture could be affected adversely by, among other things, legislation, regulatory actions, economic conditions, increased competition from other health care providers, changes in the demand for health care services, government and third-party payor reimbursement changes, demographic changes and malpractice claims and other litigation. The Underwriter and the Issuer have not made any independent investigation of the extent to which any such factors may have an adverse impact on the financial condition of the Borrower. Patient Protection and PPAC Act and Healthcare Reform Initiatives On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act (together with the Reconciliation Agreement referred to below, as the PPAC Act ). The PPAC Act is intended to address disparities in the cost and delivery of healthcare to United States residents. Certain of the provisions of the PPAC Act are contained in a subsequent law, the Health Care and Education Reconciliation Act, passed by the House of Representatives and the Senate on March 25, 2010 and signed by the President on March 30, 2010 (the Reconciliation Agreement ). The changes to various aspects of the healthcare system in the PPAC Act are far-reaching and include, among many others, substantial adjustments to Medicare reimbursement, establishment of individual mandates for healthcare coverage, extension of coverage to certain populations, provision of incentives for employer-provided healthcare insurance, restrictions on physician-owned hospitals, additional requirements for charitable hospitals, and increased 15

22 efficiency and oversight provisions. In addition, implementation of the various provisions of the PPAC Act are subject to delay, either pursuant to the terms of the provisions themselves (including required regulatory rulemaking),, or court challenges from opponents to the PPAC Act. Broadly speaking, the provisions of the PPAC Act that encourage or mandate healthcare coverage for individuals can be expected to reduce the amount of uncompensated care the Borrower provides. However, revisions to the Medicare reimbursement program could reduce revenues. Therefore, the impact of the PPAC Act on the operations of the Borrower cannot be currently ascertained, and it may have a material impact, either positive or negative, on the Borrower s operations. Some of the provisions of the PPAC Act are in effect now, while others will be phased in over time, ranging from one year to several years. Because of the complexity of the PPAC Act generally, additional legislation is likely to be considered and enacted over time. The PPAC Act also requires the promulgation of substantial regulations with significant effects on the healthcare industry. Thus, the healthcare 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. Management of the Borrower is analyzing the PPAC Act and will continue to do so in order to assess the effects of the legislation on current and projected operations, financial performance and financial condition. However, management cannot predict with any reasonable degree of certainty or reliability any interim or ultimate effects of the legislation. A significant component of the PPAC Act is reformation of the sources and methods by which consumers will pay for healthcare 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 healthcare services. One of the primary drivers of the PPAC Act is to provide or make available, or subsidize the premium costs of, healthcare insurance for consumers who are currently uninsured (or underinsured) and who fall below certain income levels. The PPAC Act proposes to accomplish that objective through various provisions, summarized as follows: (i) creating active markets (referred to as exchanges) in which individuals and employers can purchase healthcare insurance for themselves and their families or their employees and dependents, (ii) providing subsidies for premium costs to individuals and families based upon their incomes relative to federal poverty levels, (iii) mandating that individual consumers obtain and certain employers provide a minimum level of healthcare 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 prohibitions on denials of coverage for pre-existing conditions and elimination of lifetime or annual cost caps, and (v) expanding existing public programs, including Medicaid for individuals and families. To the extent all or any of those provisions produce the intended result, an increase in utilization of healthcare services by those who are currently avoiding or rationing their healthcare can be expected and bad debt expenses may be reduced. Some of the specific provisions of the PPAC Act that may affect hospital operations, financial performance or financial conditions are described below. This listing is not, is not intended to be, and should not be considered by the reader as, comprehensive. The PPAC Act is complex and comprehensive, and includes a myriad of new programs and initiatives and changes to existing programs, policies, practices and laws. With varying effective dates, the annual Medicare market basket updates for many providers, including hospitals, would be reduced, and adjustments to payment for expected productivity gains would be implemented. Commencing in federal fiscal year 2014 (ending September 30, 2014), Medicare disproportionate share hospital (DSH) payments will be reduced initially by 75% and 16

23 adjusted thereafter under several measures, including an adjustment taking into account consumers who do not have healthcare insurance and are provided uncompensated care. Commencing in 2014, a state s Medicaid DSH allotment from federal funds will also be reduced. Expansion of 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 be made to hospitals will be reduced by specified percentages to account for excess and preventable hospital readmissions. This provision adjusts hospitals with high readmission rates by up to 3 percent of their regular Medicare reimbursements. During the program's first year, penalty limits were capped at 1%. Commencing in federal fiscal year 2015, Medicare payments to certain hospitals that fall into the top 25% of national risk-adjusted hospital acquired conditions rates will be reduced by 1%. Effective July 1, 2011, the PPAC Act prohibited the use of federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat hospital-acquired admissions. In 2013, Medicare commenced the value-based purchasing program. This program provides incentive payments to hospitals based on their performance on certain quality and efficiency measures. This program is funded with 1% reductions in base operating diagnosis-related group (MS-DRG) payments for fiscal year 2013 (increasing to 2% by fiscal year 2017). In order to reduce waste, fraud, and abuse in public programs the PPAC Act provides for provider enrollment screening, enhanced oversight periods 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 Medicare and Medicaid program providers and suppliers to establish compliance programs (certain implementing regulations are pending). The PPAC Act requires the development of a database to capture and share healthcare provider data across federal healthcare programs and provides for increased penalties for fraud and abuse violations, known retention of certain overpayments and increased funding for anti-fraud activities. Effective for tax years commencing immediately after approval, additional requirements for tax-exemption will be imposed upon tax-exempt hospitals, including obligations to adopt and publicize a financial assistance policy; limit charges to patients who qualify for financial assistance to the amount generally billed to insured patients; and control the billing and collection processes. The Borrower intends to comply with these requirements for tax year 2010 and thereafter. Additionally, effective for tax years commencing January 1, 2013, taxexempt hospitals must conduct periodically a community needs assessment and adopt an implementation strategy to meet those identified needs. Failure to satisfy these conditions may result in the imposition of fines and the loss of tax-exempt status. The PPAC Act establishes an Independent Payment Advisory Board to develop proposals to improve the quality of care and to recommend proposals to limit Medicare spending growth. Beginning January 15, 2019, if the Medicare spending growth rate exceeds the target recommended by the Independent Payment Advisory Board, then the Independent Payment 17

24 Advisory Board is required to develop proposals to reduce the growth rate and require the Secretary of Health and Human Services (HHS) to implement those proposals, unless Congress enacts legislation related to the proposals. The Board must also submit recommendations every other year aimed at slowing the growth in national health expenditures while preserving quality of care. The PPAC Act imposes substantial new data reporting obligations on hospital initiatives to improve the quality of care, reduce errors and improve health outcomes. Health care insurers now are required to include quality improvement covenants in their contracts with hospital providers, and will be required to report their progress on such actions to HHS. Commencing January 1, 2015, health care insurers participating in the health insurance exchanges will be allowed to contract only with hospitals that have implemented programs designed to ensure patient safety and enhance quality of care. The PPAC Act also provides for the implementation of various demonstration programs and pilot projects to test, evaluate, encourage and expand new payment structures and methodologies to reduce healthcare 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. Other provisions encourage the creation of new healthcare delivery programs, such as accountable care organizations or combinations of provider organizations that voluntarily meet quality thresholds to share in the cost savings they achieve for the Medicare program. The outcomes of these projects and programs, including their effect on payments to providers and financial performance, cannot be predicted. Broadly speaking, the provisions of the PPAC Act that encourage or mandate healthcare coverage for individuals can be expected to increase demand for health care and reduce the amount of uncompensated care that the Borrower provides. However, revisions to the Medicare reimbursement program could reduce revenues. Therefore, the impact of the PPAC Act on the operations of the Borrower cannot be currently ascertained, and it may have a material impact, either positive or negative, on the Borrower s operations. On June 28, 2012, the Supreme Court of the United States issued its opinion regarding several challenges to the PPAC Act and specifically addressed: (i) the constitutionality of the mandate on individuals to obtain health insurance; (ii) the constitutionality of the Medicaid expansion; and (iii) whether the Anti- Injunction Act, which requires a tax to be assessed and collected before it can legally be challenged, bars the Supreme Court from hearing the case until a penalty for violation of the individual health insurance mandate is imposed. The Supreme Court held that the Anti-Injunction Act did not preclude the Court from hearing challenges to the PPAC Act. The Court further held that the individual mandate for individuals to buy health insurance is a constitutional exercise of Congress s power to levy taxes. However, the Court found that the provision of the PPAC Act that requires states to expand Medicaid to all people with income below 133% of the poverty level or lose the states existing Medicaid funds, is an improper exercise of Congress spending powers under the Constitution and amounted to coercion. The Court held that this requirement was severable from the rest of the law; therefore the additional Medicaid funds may still be made available to states which agree to the expansion of their Medicaid programs, but Congress cannot withhold all Medicaid funds from those states that opt out of the expansion. Thereafter, South Carolina elected not to expand Medicaid under the PPAC Act, citing the program s high costs and inefficiency, which results in large numbers of individuals in South Carolina remaining uninsured. Efforts to repeal or delay the implementation of the PPAC Act continue in Congress. The ultimate outcomes of legislative attempts to repeal or amend the PPAC Act and other legal challenges to the PPAC Act are unknown and their impact on the Borrower s operations cannot be determined. 18

25 Overview of Medicare and Medicaid Programs Medicare and Medicaid are the commonly used names for health care reimbursement or payment programs governed by certain provisions of the federal Social Security Act Amendments of The federal government, as the country s largest payor of health care services, uses reimbursement as a key tool to implement health care policies, to allocate health care resources and to control utilization, facility and provider development and expansion, and technology use and development. The health care reform legislation continues those practices. These laws reflect the national policy that persons who are aged and/or disabled and persons who are poor should have access to coverage for medical care regardless of ability to pay. The Borrower serves this population and requires adequate compensation for its services. It is unlikely that the Borrower could attract sufficient numbers of private pay patients to their facilities to become selfsufficient without reimbursement from governmental sources. Medicare provides certain health care benefits to beneficiaries who are 65 years of age or older, disabled or qualify for the End Stage Renal Disease Program. Medicare Part A covers inpatient hospital, home health, nursing home care and certain other services, and Medicare Part B covers certain physicians services, medical supplies and durable medical equipment. Medicare Part C, the Medicare Advantage program, enables Medicare beneficiaries to choose to obtain their benefits through a variety of private, managed care, risk-based plans. Medicare Part D, established by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 ( MMA ), makes outpatient prescription drug benefits available to Medicare beneficiaries. The private Medicare Part D plans are funded through premium payments from enrolled Medicare beneficiaries and subsidies from the federal government. Enrollment is available on an ongoing and intermittent basis. While participation in the program is voluntary, those who wait to enroll beyond their initial point of eligibility are penalized with additional surcharges which increase over time. The PPAC Act includes changes to the Medicare Part D program, including the gradual reduction of the cost-sharing burden on beneficiaries under Medicare Part D (the so-called donut hole ). Although Medicare Part D reimbursement does not cover inpatient prescriptions, changes in enrollment or program administration could affect the Borrower s revenue. Going forward, an expansion of coverage for outpatient pharmaceutical therapy may reduce the Borrower s admissions or shift the characteristics of those patients that are admitted. Medicaid is designed to pay providers for care given to the indigent and other persons who qualify based on certain conditions. Medicaid is funded by federal and state appropriations and is administered by an agency of the applicable state. Under the PPAC Act, eligibility for Medicaid is expanded to cover individuals with income under 133% of the Federal Poverty Level ( FPL ). Current federal Medicaid participation is capped at 100% of FPL. Medicare and Medicaid Conditions of Participation. Hospitals must comply with standards called Conditions of Participation in order to be eligible for Medicare and Medicaid reimbursement. Centers for Medicare and Medicaid Services ( CMS ) of the U.S. Department of HHS is the federal agency responsible for ensuring that hospitals meet the regulatory Conditions of Participation. Generally, under Medicare rules, hospitals accredited by the Joint Commission (a private nonprofit corporation that accredits health care programs and providers in the United States) are deemed to meet the Conditions of Participation. Failure to maintain Joint Commission accreditation or to otherwise comply with the Conditions of Participation could have a materially adverse effect on the continued participation in the Medicare and Medicaid programs, and ultimately on the revenues of the Borrower. 19

26 Medicare Reimbursement Overview. The Borrower received substantial revenues from reimbursement for services rendered to patients covered by the Medicare program, with approximately 47.1% of gross patients charges attributable to Medicare patients in the Fiscal Year ended September 30, Medicare is administered by CMS, which delegates to the states the process for certifying those organizations to which CMS will make payment. The HHS rule-making authority is substantial and the rules are extensive and complex. Substantial deference is given by courts to rules promulgated by HHS. Medicare claims are processed by non-government organizations or agencies that contract to serve as the fiscal agent between providers and the federal government to locally process Medicare s Part A and Part B claims. These claims processors are known as Medicare Administrative Contractors or MACs. They apply the Medicare coverage rules to determine the appropriateness of claims. CMS selects organizations (generally insurance companies) to act as MACs in various states or regions, and enters into a prime contract with each. Most Medicare hospital services are provided through a fixed rate per case program under the reimbursement methods described below. Some Medicare recipients, however, enroll in Medicare Advantage (i.e., Part C) managed care plans, which reimburse providers on a contractually determined basis. Health care providers that participate in the Medicare program must agree to be bound by the terms and conditions of the program such as meeting the quality standards for rendering covered services and adopting and enforcing policies to protect patients from certain discriminatory practices. The PPAC Act introduces changes to the Medicare program that are estimated to reduce the cost of the program over ten years by approximately $455 billion. The PPAC Act expands the types of services that are covered under Medicare, including preventive services and some long-term care. In addition, the law includes programs to link Medicare payments for hospitals and physicians with quality outcomes and the development of new patient care models that stress primary care and community-based care. The objective of these programs is to reduce inpatient admissions and other high cost care at health care facilities. The law reduces the maximum period to file a claim for reimbursement to twelve months and increases government auditing and enforcement activities. While additional governmental reporting, oversight and audits are a certainty, it is difficult to determine, what effect, positive or negative, the legislation and its eventual implementation will ultimately have on the financial or operating condition of the Borrower or its competitors in the future. On March 1, 2013, CMS announced that reductions in Medicare provider rates would begin with services provided on or after April 1, 2013 as a result of the federal government s sequestration order required by the Budget Control Act of The cut is capped at 2% for payments made for services provided by physicians and hospitals under Parts A and B of Medicare, as well as monthly payments to Medicare private insurers and Part D prescription drug plans for each year of sequestration. The Borrower received substantial revenues from reimbursement for services rendered to patients covered by the Medicare program, and as a result, a 2% reduction in Medicare payments in fiscal year 2014 is approximately $2.5 million. Inpatient Services. Medicare payments for operating expenses incurred in the delivery of inpatient hospital services are based on a prospective payment system ( PPS ) which essentially pays hospitals a fixed amount for each Medicare inpatient discharge based upon patient diagnosis and certain other factors used to classify each patient into a Diagnosis Related Group ( MS-DRG ) or more recently Medical Severity MS- DRGs or MS-DRGs. MS-DRG rates are adjusted annually by the use of an update factor based on the projected increase in a market basket inflation index which measures changes in the costs of goods and services purchased by hospitals, but the adjustments historically have not kept pace with inflation. Inpatient psychiatric services are also reimbursed on a case-mix adjusted prospective payment methodology. 20

27 With limited exceptions, such payments are not adjusted for actual costs, variations in intensity of illness, or length of stay. If a hospital treats a patient and incurs less cost than the applicable MS-DRG-based payment, the Borrower is entitled to retain the difference. Conversely, if a hospital s cost for treating the patient exceeds the MS-DRG-based payment, the Borrower generally will not be entitled to any additional payment. If a case is unusually complex or expensive, it may qualify for an outlier payment, which is added to the MS-DRG-adjusted base rate payment. There can be no assurance that payments under PPS will be sufficient to cover all actual costs of providing inpatient hospital services to Medicare patients. Medicare and Medicaid currently make additional payments to hospitals that serve a disproportionate share of low income patients. Based on the assumption that the new coverage access provisions of the PPAC Act would substantially reduce uncompensated care provided by hospitals, beginning in 2014, over a 10 year period, the PPAC Act incrementally decreases the Medicare and Medicaid payments for disproportionate share hospitals by $36 billion dollars based on an assumption that the law s new individual coverage and Medicaid expansion provisions will substantially reduce uncompensated care provided by hospitals. Such payment decreases would occur even if a state fails to opt in to the expanded Medicaid program, in which event certain hospitals may receive lower reimbursements without the benefit of additional insured adults under an expanded Medicaid program. Medicare also makes additional payments to hospitals engaged in graduate medical education residency training programs. The PPAC Act includes some changes to funding for primary care residency programs and provides grants to establish teaching health centers, which are community based ambulatory patient care centers, and other programs to encourage the training and development of more primary care residents (including family medicine, internal medicine, pediatrics, obstetrics and gynecology, psychiatry and geriatrics) and the primary care workforce. The PPAC Act continues and expands earlier Congressional measures taken to address the growing cost of the Medicare and Medicaid programs. CMS promulgates regulations such as the annual inpatient PPS rules published by CMS to adjust the rates paid to hospitals based on its continuing experience with hospital operating and capital costs and to implement various quality improvement, patient safety and fraud and abuse provisions authorized by these laws. For example, the final inpatient PPS rules for federal fiscal years 2008 and 2009 included, and then expanded, a list of preventable conditions or consequences (so-called never events ) for a patient for which Medicare would not pay the additional cost of treatment. CMS also reduces payments to hospitals that do not successfully report quality measures adopted under the program by two percent from the percentage increase that would otherwise apply to their payment rates. The PPAC Act expands Medicare s ongoing programs to improve the quality of care with reductions in reimbursements in future years for excessive readmissions, medical errors and preventable conditions such as hospital acquired infections. Depending on the mix of future services delivered, the overall result of these changes to the inpatient PPS reimbursement may be to reduce Medicare reimbursement to the Borrower. The final inpatient PPS rule effective October 1, 2013, clarified that an inpatient Medicare Part A stay will be presumed to be appropriate if the length of stay is greater than two-midnights, among other criteria. There is a great deal of uncertainty regarding the two-midnights rule and as such, CMS has stated that it will not begin enforcing the rule until October 1, It is unclear what effect this rule will have on Borrower s inpatient revenues. In general, under this two-midnights rule, surgical procedures, diagnostic tests and other treatments (in addition to services designated as inpatient-only), are generally appropriate for inpatient hospital admission and payment under Medicare Part A when (1) the physician expects the beneficiary to require a stay that crosses at least two midnights and (2) admits the beneficiary to the hospital based upon that expectation. The Borrower received substantial revenues from reimbursement for services rendered to patients covered by the Medicare program, and as a result, if CMS implements this rule, the Borrower s revenues will be negatively impacted. Notwithstanding the foregoing, the Borrower does not anticipate that a reduction will have a material adverse effect on its operations. 21

28 The PPAC Act funds numerous demonstration projects, studies and other programs to develop new clinical care models (particularly for chronic diseases) and payment methodologies that emphasize valuebased payment, coordination of care, quality of outcomes, efficiency and productivity in the delivery of health care. The PPAC Act also funds pilot projects to test the efficacy of reimbursing for episodes of care for certain medical conditions with a bundled payment methodology covering inpatient, outpatient, physician and other care. These programs shift some of the financial risk to the providers, who have the direct ability to control utilization. If these pilot programs are adopted more broadly, they could adversely impact the Borrower s revenues, as well as expenses that would be incurred to manage such bundled payments.. The PPAC Act also establishes an Independent Payment Advisory Board that, beginning in 2015, will make recommendations to Congress on how to reduce the per capita rate of growth in Medicare and report biannually on proposals to slow the growth of non-federal health care program spending. Over the next decade, it is anticipated that new Medicare-driven care delivery programs, reimbursement models and reporting obligations authorized by the PPAC Act will produce substantial changes to current clinical care and reimbursement practices. The overall financial impact of these changes on the Borrower cannot be reasonably projected at this time. Outpatient Services. Medicare payments for hospital outpatient services also are established through a PPS methodology. Under outpatient PPS, procedures, evaluations, management services, drugs and devices in outpatient departments are classified into one of approximately 750 groups called Ambulatory Payment Classifications ( APCs ). Services provided within an APC are similar clinically and in terms of the resources they require. Each APC has been assigned a weight derived from the median hospital cost of the services in the group relative to the median hospital cost of the services included in the APC for mid-level clinic visits, adjusted to account for variations in hospital labor costs across geographic regions. Payment rates for each APC are then calculated by multiplying the relative weight for an APC by a conversion factor to arrive at a dollar figure. Outpatient PPS includes additional adjustments for transitional pass-through payments and outlier payments. Transitional pass-through payments are costs associated with new technology items (drugs, biologicals and medical devices) that were not reflected in the data that CMS used to calculate outpatient PPS payment rates, and are intended to allow for adequate payment of new and innovative technology until there is enough data to incorporate the costs for these items into the base APC group. APCs include payment for related ancillary services provided in conjunction with a procedure or medical visit. Although hospitals receive payment for more than one APC for an encounter, payment for multiple surgical APC procedures are subject to substantial discounting, including diagnostic radiologic procedures. CMS makes annual changes to its policies and payment structure with respect to outpatient services in response to an increase in amounts paid for outpatient services delivered to Medicare patients. For example, CMS adjusted the market basket update in 2007 and tied rate increases to additional quality measure reporting requirements applicable to outpatient services beginning in CMS also revised the APC structure, expanding a hospital s ability to be reimbursed for infusion services. In exchange, CMS reduced per diem payments to hospital outpatient departments for the delivery of partial hospitalization services. Additionally, CMS adjusted the reimbursement rates for Ambulatory Surgery Centers to reflect the reimbursement for equivalent procedures being delivered in hospital outpatient departments. Overall, these changes to the outpatient prospective payment system may result in decreased reimbursement for services, depending on the service mix that the Borrower can expect to deliver in the future. 22

29 Outpatient renal dialysis services are reimbursed on the basis of prospective reimbursement, though different rates are paid for hospital-based and free-standing facilities, and are adjusted for geographic differences in labor costs. This composite rate is the same regardless of whether the treatment is furnished in the facility or in the patient s home to incentivize home dialysis, and must be accepted by the facility as payment in full for covered outpatient dialysis. Under outpatient PPS, a hospital with costs exceeding the applicable payment rate would incur losses on such services provided to Medicare beneficiaries. There can be no assurance that outpatient PPS payments will be sufficient to cover all of the Borrower s actual costs of providing hospital outpatient services to Medicare patients. Physician Payments. Payment for physician fees is covered under Part B of Medicare (except for services paid under Part C). Under Part B, physician services are reimbursed in an amount equal to the lesser of actual charges or the amount determined under a fee schedule known as the resource-based relative value scale or RBRVS. RBRVS sets a relative value for each physician service; that value is then multiplied by a geographic adjustment factor and a nationally-uniform conversion factor to determine the amount Medicare will pay for each service. The relative values for physician services contained in the RBRVS are based on a work component intended to reflect the time and intensity of effort required to provide the service; a practice expense component which includes costs such as office rents, allied health support salaries, equipment and supplies; and a component for the cost of malpractice insurance. CMS uses a resource-based system of calculating practice expense relative value units ( RVUs ) based on actual practice expense data to replace the historical charge-based practice expense RVU system that was previously used. The methodology for computing practice expense RVUs provides for higher practice expense RVUs for services performed in a doctor s office, the patient s home, or a facility or institution other than a hospital, skilled nursing facility ( SNF ) or ambulatory surgical center ( ASC ). CMS also uses a resource-based system of calculating malpractice expense RVUs. The formulae used to calculate physician payments under the RBRVS methodology do not necessarily reflect the actual costs of such services. There can be no assurance that payments to the Borrower under the Medicare program will be adequate to cover their costs of providing physician services. The Borrower has a mix of entities that participate under Medicare Part B. Providers that are not reimbursed directly by Medicare for physician services ( Non-Participating Physicians ) may charge Medicare patients a fee for a covered service which is greater than the amount Medicare reimburses for that service, subject to several limitations. First, the patient pays the full amount of the bill, subject to the Medicare limiting charge requirement (see below) and is reimbursed by Medicare, but only at the fee scheduled amount established by Medicare for that service. As a result, the patient is responsible for paying the difference between the full amount billed by the physician for the service and the amount of Medicare reimbursement the patient receives. The collection of the difference is referred to as balance billing. Second, as described in greater detail below, the fees that Non-Participating Physicians may charge Medicare patients are subject to certain limitations. Medicare limits the total amount Non-Participating Physicians may charge Medicare patients through the establishment of a limiting charge, which now restricts the total amount a Non-Participating Physician may bill and recover from a Medicare patient for a procedure to 115% of the applicable Medicare reimbursement levels (the applicable Medicare reimbursement level for Non-Participating Physicians generally is 95% of the RBRVS fee schedule amount). Thus, the limiting charge is generally set at a level equal to approximately 109% of the RBRVS fee schedule amount (i.e., 115% of 95% of the participating Medicare fee schedule). 23

30 Medicare requires CMS to adjust the Medicare Physician Fee Schedule ( MPFS ) payment rates annually; the MPFS covers payments for more than 7,000 types of services in physician offices, hospitals, and other settings based on a formula. In each of the past several years, the annual adjustment formula (known as the sustainable growth rate or SGR) has yielded a reduction in physician payments but Congress has taken legislative action each year to prevent such reductions from taking effect. On April 2, 2014 President Obama signed the Protect Access to Medicare Act of 2014 ( PAMA ) which prevented a scheduled 24% reduction in the MPFS from taking effect and delayed the SGR adjustment for one year. PAMA also delayed the implementation of the conversion of diagnostic coding from ICD-9 to ICD-10 until October 1, Capital Expenditures. Medicare payments for capital costs are based upon a PPS system similar to that applicable to operating costs. Payment for capital related costs for all hospitals are determined based on a standardized amount referred to as the federal rate. Under PPS, payments for capital costs are calculated by multiplying the federal rate by the MS-DRG weight for each discharge and by a geographical adjustment factor. The payments are subject to further adjustment by a disproportionate share hospital factor that contemplates the increased capital costs associated with providing care to low income patients, and an indirect medical education factor that contemplates the increased capital costs associated with medical education programs. As noted above, the PPAC Act includes reductions over time to the disproportionate share payments. There can be no assurance that payments under the PPS inpatient capital regulations will be sufficient to fully reimburse the Borrower for its capital expenditures. Graduate Medical Education. Medicare also makes additional payments to hospitals engaged in graduate medical education residency training programs. The PPAC Act includes some changes to funding for primary care residency programs and provides grants to establish teaching health centers, which are community based ambulatory patient care centers, and other programs to encourage the training and development of more primary care residents (including family medicine, internal medicine, pediatrics, obstetrics and gynecology, psychiatry and geriatrics) and the primary care workforce. The Borrow operates the only community-based family-medicine training program in this area. As part of this training program, the Borrower incurs substantial costs to run the program. Medicare through its Direct Graduate Medical Education (DGME) payment system compensates the Borrower for Medicare s share of the costs directly related to training residents, which can be less than the cost of care. Medicare also makes payments to the Borrower through the Indirect Medical Education (IME) payment to help defray higher patient care costs associated in training programs. Without adequate support from Medicare, the Borrower s ability to operate the program could be threatened, which could lead to disruption of other services that rely on the program. Moreover, there can be no assurance that any future revisions to the formula for calculating graduate education payments by Medicare will not reduce the payments to the Borrower, or that any such reduction will not have an adverse impact on the Borrower. Outlier Payments. As noted above, hospitals are eligible to receive additional payments under the inpatient PPS for individual cases incurring extraordinarily high costs. Historically, the amount of an outlier payment was based, in part, on the Borrower charges for a particular case as compared to that hospital s costto-charge ratio. As the Borrower specific cost-to-charge ratio was calculated based on the most recently settled cost report, it was typically many months or years old and out of date. Following an audit of aggressive pricing strategies at one of the nation s largest hospital chains, and a determination that some hospitals might be manipulating current hospital charge data to maximize reimbursement from Medicare under the outlier payment provisions, the Office of the Inspector General of HHS ( OIG ) began investigating past outlier billing practices, and CMS amended the regulations on how outlier payments were to be calculated in the future. The methodology for calculating outlier payments is 24

31 designed to prevent hospitals from manipulating the outlier formula to maximize reimbursement and allows for recovery of overpayments in certain cases. The OIG continues to scrutinize outlier payments in an effort to determine whether outlier payments to providers were paid in accordance with Medicare regulations or whether such payments were the result of potentially abusive billing practices. While the Borrower believes that it has calculated its outlier payments appropriately, there can be no assurance that the Borrower will not become the subject of an investigation or audit with respect to its past outlier payments, or that such an audit would not have a material adverse impact on the Borrower. Moreover, there can be no assurance that any future revisions to the formula for calculating outlier payments will not reduce the payments to the Borrower, or that any such reduction will not have a material adverse impact on the Borrower. Medicare Managed Care Program. Every individual entitled to Medicare Part A benefits, and who is enrolled in Medicare Part B, with the exception of individuals who suffer from End Stage Renal Disease, may elect coverage under either the traditional Medicare fee for service program (Parts A and B) or a Medicare managed care (Part C) program, known as the Medicare Advantage Program. The Medicare Advantage program, established under MMA, is designed to expand the number and types of private regional plans available to beneficiaries as an alternative to traditional Parts A and B Medicare coverage. Payments for Medicare Advantage plans are based on competitive bids to the government rather than administered pricing. Public and private health maintenance organizations, preferred provider organizations, fee for service and medical savings account plans may qualify as authorized Medicare Advantage plans. With limited exceptions, Medicare Advantage plans are risk-bearing programs that accept a fixed annual amount in return for providing beneficiaries with a defined level of benefits (basic or basic plus supplemental), either directly or through arrangements with other providers. All Medicare Advantage plans are required to provide coverage, even if out of network, for emergency services, renal dialysis services provided while the enrollee was temporarily outside of the plan s service area, post-stabilization care services (under limited circumstances) and services for which coverage was denied but, following appeal by the enrollee, were determined to be covered services. Providers wishing to participate in Medicare Advantage plans are subject to specific requirements concerning enrollee protection and accountability. The shift of Medicare eligible beneficiaries from traditional Part A and Part B coverage to Part C Medicare Advantage programs is intended to increase competitive pressure to improve benefits, reduce premiums and generate cost reductions. However, because the cost to the Medicare Advantage program was on average 114% higher than traditional Medicare, the PPAC Act changed some of the Medicare Advantage payment methodologies and will begin paying bonuses to plans that achieve certain quality metrics in Reductions in the Medicare Part C program may have an impact on reimbursement from these insurance plans, which in turn may have a material negative impact upon the revenue of the Borrower and its affiliates. These changes may result in reduced utilization of health care services and have a material negative impact upon the revenue of the Borrower. The PPAC Act adjusts payments to insurance companies offering Medicare Advantage to be more in line with the per capita cost of the Medicare fee-for-service program. It is not certain whether these reductions will change the availability of Medicare Advantage plans or the type of coverage Medicare beneficiaries will elect in the future. New Models for Care Under Health Care Reform. Section 3022 of the PPAC Act directed the Secretary of HHS (the Secretary ) to establish a Medicare shared savings program that promotes accountability for the care of Medicare beneficiaries and encourages coordination of care and other efficiencies through entities called Accountable Care Organizations (ACOs). Under this shared savings program, Medicare providers are offered a financial incentive to band together in an ACO with the shared 25

32 goals of improving the quality of care provided to Medicare beneficiaries and coordinating care to achieve cost savings. If the ACO realizes savings in Medicare expenditures above an expenditure benchmark established by CMS for the group, and meets or exceeds quality performance standards established by the Secretary, it will be paid a share of Medicare s savings. ACOs that do not meet the quality performance thresholds for all proposed measures are not eligible for shared savings, regardless of how much costs were reduced. The shared savings program began operating January 1, The Secretary released the final regulations on ACOs on October 20, The regulations set forth governance standards for the ACOs, application requirements and acceptance standards, and options for sharing in any savings or losses. ACOs are required to enter into a three-year agreement with HHS that includes an estimated expenditure benchmark based on the per-beneficiary expenditures in the three years immediately prior to the agreement under Medicare Parts A and B for the beneficiaries assigned to the ACO. Each ACO will have a minimum of 5000 Medicare beneficiaries that are assigned to the ACO by the Secretary based on their utilization of primary care services rendered by ACO physicians. Beneficiaries will still have the freedom to seek care from providers outside of their assigned ACO. In the initial three-year term, the ACO may elect to operate under a one-sided shared savings model (Track 1) where the ACO is not responsible for any portion of losses for the first three years. Track Two is a two sided risk model where the ACO shares in both savings and losses throughout the three year term. Several other federal agencies announced guidance and regarding ACOs. CMS and the HHS OIG jointly outlined waivers of certain provisions of federal laws regarding the physician self-referral law, the anti-kickback statute, and certain provisions of the civil monetary penalty law-in connection with the shared savings program. The Federal Trade Commission (FTC) and the Department of Justice (DOJ) released a joint statement entitled Proposed Statement of Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program (the Antitrust Policy Statement) and the IRS also simultaneously released a notice assuring tax-exempt organizations that participation in an ACO with forprofit entities will not jeopardized the organization s tax-exempt status or result in unrelated business income tax if the certain requirements are met. If the ACO concept is adopted more broadly or required as a Medicare Condition of Participation, it could adversely impact the Borrower s revenues, as well as expenses that would be incurred to manage such program. Audits, Exclusions, Fines and Enforcement Actions. Hospitals participating in Medicare are subject to audits and retroactive audit adjustments under the Medicare program. From an audit, a Medicare contractor may conclude, among other reasons, that a patient discharge has been claimed under an incorrect MS-DRG, 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. As a consequence, payments may be disallowed retroactively. Under certain circumstances, payments made may be determined to have been made as a consequence of improper claims subject to the federal False Claims Act or other federal statutes, subjecting the Borrower to civil or criminal sanctions. The federal government uses a national recovery audit contractor ( RAC ) program to identify overpayments and underpayments to providers under the Medicare program. The RACs auditors are compensated on a contingent fee basis. Medicare contractors will recoup RAC identified overpayments unless appeals are filed timely. RAC assessments against the Obligated Group are anticipated; however, the outcome of such assessments are unknown and cannot be reasonably estimated. The PPAC Act expands the scope of the RAC program to include Medicare Parts C and D and Medicaid. 26

33 Provider-Based Designation. CMS regulations describe the criteria and procedures for determining whether a facility or organization is provider-based and thereby treated as part of another Medicare provider (with often higher reimbursement levels for certain services), rather than as a freestanding entity. In the event that a facility or department that bills for outpatient services as a provider-based entity is found to be out of compliance with the current provider-based regulations, the Borrower could be liable for Medicare overpayments. There is no guarantee that CMS will continue the practice of higher reimbursement for provider based organizations. Medicaid Reimbursement Medicaid is a joint federal-state reimbursement program that is administered in each state by that state s health or public welfare agency. Medicaid programs vary from state to state. In each state s program, Medicaid generally pays for covered health care services provided to certain categorically qualified or indigent individuals. In many states, reimbursement for operating costs is based on the federal PPS and Medicaid reimburses hospitals a fixed amount based on the patient s diagnosis regardless of the actual costs incurred for treatment. Pursuant to the Medicaid program, the federal government supplements funds provided by the various states for medical assistance to the medically indigent. Payment for such medical and health services is made to hospitals in an amount determined in accordance with procedures and standards established by state law under federal guidelines. The PPAC Act expands Medicaid program eligibility to cover individual with household income up to 133% of the FPL. South Carolina has opted not to expand Medicaid eligibility in The federal government is responsible for the cost of this coverage expansion in the initial years. Also, for Fiscal Year 2013 and 2014, the PPAC Act establishes a Medicaid payment floor for primary care physician reimbursement of 100 percent of Medicare rates. The Borrower receives substantial reimbursement from the program, with 16.8% of gross patient charges attributable to Medicaid patients in Fiscal Year The reimbursement currently paid by Medicaid programs is likely to be subject to restrictions in the future, and there can be no assurance that such payments will be adequate to cover the cost of care for Medicaid beneficiaries in the future. In South Carolina, funding for the State s portion of the program comes from various sources, portions of which funds are matched by the federal government. Currently, certain Medicaid beneficiaries participate in a Medicaid managed care program known as the Healthy Connections program. The State is exploring methods to expand coverage under these managed care programs. In addition, Florence County, the county in which the Borrower s primary facility is located, a Medical Home Network has been established and covers around 8% of the Medicaid population. The 2014 Medicaid budget currently includes Proviso 33.34, which-for the first time-provides funds that may only be accessed if hospitals and clinics serving the uninsured work together and adhere to health improvement initiatives outlined in it. In general, Proviso 33.34, the Medicaid Accountability & Quality Improvement Initiative, is a plan by the State to increase value and transparency in the current system, invest in hotspots of poor health, reduce per capita costs and improve health outcomes. The South Carolina Department of Health and Human Services (SCDHHS) has stated that the initiative will transform SCDHHS from being a payor of service claims to purchaser of health care. If these programs expand, the Borrower could suffer a loss in patients and revenues that could have a materially adverse effect on its financial condition, operations, revenues and expenses. It is uncertain if additional sources of revenue will be allocated by the State in the foreseeable future. State Children s Health Insurance Program SCHIP is a federally funded insurance program for children whose families earn too much money to be eligible for Medicaid, but cannot afford commercial health insurance. CMS administers SCHIP, but each 27

34 state creates its own program based on minimum federal guidelines. While generally considered to be beneficial for both patients and providers because it reduces the number of uninsured children, it is difficult to assess the fiscal impact of SCHIP payments on the Borrower. Moreover, each state must periodically submit its SCHIP plan to CMS for review to determine if it meets the federal requirements. If a state does not meet the federal requirements, it may lose its federal funding for its program. From time to time Congress and/or the President seek to expand or contract SCHIP. The loss of federal approval for a state s program or a reduction in the amounts available under SCHIP could have an adverse impact on the financial condition of the Borrower. PPAC Act authorized an extension of SCHIP through September 30, The PPAC Act may result in substantial changes to the SCHIP program once health care coverage becomes available for children through the expanded Medicaid program, the State-operated exchanges or employer-based health care coverage. The net financial impact of these changes is unknown at this time. Third-Party Reimbursement A significant portion of the net patient service revenue of the Borrower is received from commercial third-party payors and other non-governmental agencies, which provide third-party reimbursement for patient care on the basis of various formulae. Renegotiations of such formulae and changes in such reimbursement systems may reduce such third-party reimbursements to the Borrower. The reimbursement currently paid by third parties is likely to be subject to more restrictions in the future, and there can be no assurance that such payments will be adequate to cover the cost of care for the beneficiaries in the future. The PPAC Act includes insurance market reforms that, among other things, require insured individual and group health plans to guarantee issue and renewability of coverage, prohibit pre-existing conditions and lifetime and annual dollar limits for essential health benefits, require coverage of preventive health benefits without cost-sharing contributions by the covered individual, and prohibit discrimination on the basis of health status. Beginning in 2014, every individual will be required to enroll in a health plan through an employer, a federal government health program such as Medicare, Medicaid or Tricare, or purchase insurance through a health insurance exchange established by each state. Individuals who do not enroll for coverage, and large employers who do not offer affordable and adequate coverage, will be subject to tax penalties. It is unclear at this time whether the tax penalties will result in substantial compliance with the coverage mandate. The PPAC Act prescribes four levels of health insurance plans that must be made available under each state s exchange. The Act describes the minimum essential coverage that must be offered under each plan level and limits the variations in premiums that may be charged for exchange coverage on the basis of age and tobacco use to a ratio of 3:1 and 1.5:1, respectively. Premiums will be able to be underwritten on the basis of geography. Individuals with family income under 400% of the FPL will be eligible for subsidized premiums, deductibles and copays for exchange plan coverage. Initially, only individuals and small employers will be able to access coverage through the exchanges. By 2017, large employers will also be able to use the exchanges to provide employer-based coverage to their employees. Over the next ten years, it is anticipated that coverage through the exchanges will expand beyond the current individual insurance market today and some employers may change their current employer-based coverage in response to the availability of the exchange program and insurance market reforms. At this time, it is not possible to project what impact the exchanges will have on competition in the insurance markets, the cost of coverage for employers, reimbursement rates for hospitals and physicians or the number of uninsured patients that the Borrower will still need to treat. Currently, most private insurance companies contract with hospitals on an exclusive or a preferredprovider basis, and some insurers use plans known as preferred provider organizations ( PPOs ). Under these plans, there may be financial incentives for subscribers to use only those hospitals and physicians which 28

35 contract with the plans. Under an exclusive provider plan, an arrangement that includes most health maintenance organizations ( HMOs ), private payors limit coverage to those services provided by network hospitals and physicians. With this contracting authority, private payors may direct patients away from hospitals not in the network by denying coverage for services provided by them. Moreover, many health insurers are moving towards or have implemented substantially smaller (i.e., narrow networks) networks of hospitals and physicians, which often require providers who want to participate to agree to substantial reductions in reimbursement rates. Enrollees in such plans will have limited or no coverage if they seek care outside their plan network. In exchange, subscribers will enjoy lower premiums than they would pay for plans with broader networks. If the Borrower is excluded from a key narrow network or forced to accept rates that are lower than what it is receiving now, payment under such an arrangement may be insufficient to meet the Borrower s costs of care. Most PPOs and HMOs currently pay hospitals on a discounted fee-for-service basis or on a discounted fixed rate per day of care. The discounts offered to HMOs and PPOs may result in payment at less than actual cost, and the volume of patients directed to a hospital under an HMO or PPO contract may vary significantly from projections. Therefore, the financial consequences of such arrangements cannot be predicted with certainty and may be different from current or prior experience. Some HMOs offer or mandate a capitation payment method under which hospitals are paid a predetermined periodic rate for each enrollee in the HMO who is assigned to, or otherwise directed to receive care at, a particular hospital. In a capitation payment system, the Borrower assumes an insurance risk for the cost and scope of care given to the HMO s enrollees. If payment under an HMO or PPO contract is insufficient to meet the Borrower s costs of care, or if use by enrollees materially exceeds projections, the financial condition of the Borrower may be adversely affected. HMOs and other third-party payors that contract on a discounted fee-for-service or discounted fixed rate-per-day basis also exert strong controls over the utilization of health care resources. Strong utilization management by managed care plans has led to reduction in the number of hospitalizations and lengths of hospital stays, both of which may reduce patient service revenue to hospitals. Furthermore, shortened hospital lengths of stay have not necessarily been accompanied with a reduced demand for services while a patient is hospitalized and in fact may lead to more intensive hospital visits and correspondingly increased costs to hospital providers. The Borrower also may be affected by the financial instability of HMOs and other third-party payors with which the Borrower contracts and/or from which they receive reimbursement for furnishing health care services. For example, if regulators place a financially-troubled HMO into rehabilitation under state law, or if a third-party payor files for protection under the federal bankruptcy laws, it is unlikely that health care providers will be reimbursed in full for services furnished to enrollees of the HMO or the third-party payor. Health care providers also may be required by law or court order to continue furnishing health care services to the enrollees of an insolvent HMO or third-party payor, even though the providers may not be reimbursed in full for such services. Sponsors of employer-based coverage are also adopting health care benefits for their employees that create incentives for cost containment, preventive care and chronic disease management to reduce their costs of providing health care benefits and maintain a healthier workforce. Traditional health insurance programs, which pay for services on a fee-for-service basis and allow employees to elect which hospitals they utilize, are being supplemented or replaced by a wide range of health insurance programs being offered with economic incentives for employees to choose those plans which promise to be most cost efficient. These types of insurance programs are expected to cover an increasing share of health care services being provided in the future. 29

36 Per diem rates, other risk-based payment systems and discounts pose major challenges to hospital providers. In order to enter into such contracts, hospitals are required not only to anticipate the cost of rendering specific services to patients, but also to estimate the likelihood and severity of illness or injury within the population which the Borrower serves. If payment under a managed care plan contract is insufficient to meet a hospital s costs of caring for the needs of the population it serves, that hospital s financial condition may erode rapidly and significantly. Often, managed care plan contracts are enforceable for the stated term, regardless of provider losses. Furthermore, managed care plan contracts and insurance laws may require that a hospital continue to provide care for enrollees for a certain period of time irrespective of whether the managed care plan has funds to make payment to the Borrower. Increasingly, physician practice groups, independent practice associations and other physician management companies have become a part of the process of negotiating payment rates to hospitals by managed care plans. This involvement has taken many forms but typically increases the competition for limited payment resources from managed care plans. For example, it is increasingly common for managed care plans to enter into contracts with physicians that may give physicians incentives in patient care decisions which may result in reduced hospital admissions and procedures. Any new payment methods implemented by the Medicare and Medicaid programs in response to the PPAC Act provisions will drive similar changes in the private payor market. Programs designed to incent coordination of care, value-based purchasing and quality outcomes will evolve in the private payor market. The Independent Payment Advisory Council will report to Congress every other year on proposals for improvements to improve the efficiency and quality of care and reimbursement changes for non-governmental programs. There will also be increased transparency in the pricing of inpatient, outpatient and physician services. Most of these changes begin in There is no assurance that reimbursement contracts of the Borrower, or its physicians with HMOs, PPOs or other third-party payors will be maintained, that other similar contracts will be obtained in the future, or that payments from such payors will be sufficient to cover all of the costs the Borrower incurs in providing services to its beneficiaries. Failure to execute and maintain such contracts could have the effect of reducing the patient base or health care revenues of the Borrower. Conversely, participation may maintain or increase the patient base, but may result in reduced payments. Future changes in state and federal law may have the effect of affecting competition in the health care industry. In addition, managed care companies and insurers are becoming increasingly selective in contracting with health care providers. The revenues of the Borrower could decrease significantly with the loss of such third party payor contracts, thus affecting the ability of the Borrower to make debt service payments. Effect of Health Care Reform on the Insurance Market. The PPAC Act includes insurance market reforms that, among other things, require individual and group health insurance plans to offer coverage (including renewability) on a guaranteed basis. The PPAC Act prohibits pre-existing conditions limitations, certain coverage limitations, lifetime and annual dollar limits for essential health benefits, and requires coverage of certain preventive health benefits. Beginning in 2014, every individual will be required to enroll in a health plan through an employer, a federal government health program such as Medicare, Medicaid or Tricare, or purchase insurance through a health insurance exchange established by the state or run by the federal government, or pay a tax penalty. South Carolina has opted to allow the federal government to run its health insurance exchange. Individuals who do not enroll for coverage, and employers with over fifty full time employees who do not offer affordable and adequate coverage, will be subject to tax penalties beginning in The Obama administration announced in July of this year that it will delay enforcement of the employer mandate until It is unclear at this time what impact this delay will have on PPAC and whether the tax penalties will result in substantial compliance with the mandate to obtain insurance. 30

37 The PPAC Act establishes the criteria for new Qualified Health Plans ( QHPs ) that may participate in the exchanges. A QHP must meet certain minimum essential coverage requirements. Minimum essential coverage requirements may be offered at one of four levels of coverage: bronze, silver, gold or platinum. Each QHP must agree to offer at least one plan at the silver and gold level. The PPAC Act sets forth the minimum coverage offered under each plan level and limits the variations in premiums that may be charged for exchange coverage on the basis of age and tobacco use. A QHP must also be certified by each exchange through which the plan is offered, must be licensed in each state where it offers insurance, and the QHP must limit cost sharing with the insured. Under the PPAC Act, individuals with family income under 400% of the FPL will be eligible for subsidized premiums, deductibles and co-pays for exchange plan coverage. Initially, only individuals and small employers will be able to access coverage through the exchanges. By 2017, large employers will also be able to use the exchanges to provide employer-based coverage to their employees. Although existing health insurance plans may continue to offer coverage as grandfathered plans in the individual and group markets, enrollment in such plans will be limited to those who were currently enrolled and their families. New employees and their families will still be allowed to enroll in grandfathered employer-sponsored coverage. At this time, it is not possible to project what impact the exchanges will have on competition in the insurance markets, the cost of coverage for employers, reimbursement rates for hospitals and physicians or the number of uninsured patients that the Borrower will still need to treat. Uncompensated Care Although the Borrower attempts to assure payment or reimbursement for most of the care it renders, it provides a substantial amount of uncompensated care to indigents. Obligations to provide uncompensated care can arise from laws and regulations that may require the Borrower to provide care without regard to a patient s ability to pay for such care. In Fiscal Year ended September 30, 2013, the Borrower provided approximately $41.3 million in uncompensated care. This amount does not include managed care discounts, write-offs for bad debts or inadequate Medicaid or Medicare reimbursement. Increased unemployment or other adverse economic conditions could increase the proportion of patients who are unable to pay all or any of the costs of their care. While the PPAC Act should reduce uncompensated care by providing coverage to the indigent and assuring access to insurance by medically high-risk individuals, these improvements to coverage access will not be available immediately. In addition, the Medicaid program is dependent on the continued ability of federal and state funding, which could be curtailed in the future in response to growing budget deficits at all governmental levels. The continued availability, comprehensiveness of coverage and adequacy of reimbursement for care for the indigent and disabled cannot be assured in the future. Regulatory Environment The Borrower and the health care industry in general are subject to regulation by a number of governmental agencies, including those that administer the Medicare and Medicaid programs, federal, state and local agencies responsible for administration of health care planning programs, and other federal, state and local governmental agencies. These laws and regulations require hospitals to meet various detailed standards relating to the adequacy of medical care, equipment, personnel, information technology, patient confidentiality, operating policies and procedures, maintenance of adequate records, utilization, rate setting, compliance with building codes and environmental protection laws, and numerous other matters. Failure to comply with applicable regulations can jeopardize a hospital s licenses, ability to participate in the Medicare and Medicaid programs, and ability to operate as a hospital. These laws and regulations, and the adoption of additional laws and regulations in these and other areas could have an adverse effect on the ability of the Borrower to generate revenues in sufficient amounts to timely pay the 2014 Bonds. 31

38 The PPAC Act enhanced the Medicare and Medicaid integrity provisions by increasing funding for enhanced fraud and abuse efforts over the next 10 years and increasing the fines and penalties for failure to comply. These efforts will be supported by the development of an integrated claims data repository of the Social Security Administration, Department of Defense and Indian Health programs to be used to identify potential fraud, waste and abuse. The Administration has estimated substantial cost savings from these enforcement efforts. Some of the laws and regulations affecting the health care industry are discussed below. Federal False Claims Act and Civil Money Penalties Law; South Carolina Insurance Laws. There are multiple federal laws concerning the submission of inaccurate or fraudulent claims for reimbursement and errors or misrepresentations on cost reports by hospitals and other health care providers. The coding, billing and reporting obligations of Medicare providers are extensive, complex and highly technical. In some cases, errors and omissions by billing and reporting personnel may result in liability under one of the federal False Claims Act or similar laws, exposing a health care provider to civil and criminal monetary penalties, as well as exclusion from participation in the Medicare and Medicaid programs. The federal False Claims Act prohibits knowingly submitting a false or fraudulent claim for payment to the United States. This statute is violated if a person acts with actual knowledge, or in deliberate ignorance or reckless disregard of the falsity of the claim. Penalties under the False Claims Act include fines of up to $11,000 per claim, plus treble damages, potentially resulting in penalties for ongoing claims submission errors aggregating millions of dollars. Anyone who knowingly makes a false statement or representation in any claim to the Medicare or Medicaid programs may be subject to criminal penalties, including fines and imprisonment. The False Claims Act includes whistleblower provisions under which anyone who believes that a person is violating the False Claims Act can file a sealed complaint against that person in the name of the United States government. The nature of the allegations is not revealed to the target during the time the United States Justice Department investigates the complaint and determines whether to join in the suit. If the Justice Department decides not to join in the suit, the original whistleblower can nonetheless proceed. In either event, if the case is successful, the whistleblower is entitled to between 15% and 30% of the proceeds of any fines or damages paid. Although the False Claims Act has been in effect for many years, in recent years there has been a significant increase in the number of whistleblower allegations filed under the False Claims Act, a large number of which involve the health care and pharmaceutical industries. In 2009, President Obama signed into law the Fraud Enforcement Recovery Act ( FERA ), which will provide the federal government with more tools to investigate and prosecute potential frauds. In addition, the Civil Money Penalties Law under the Social Security Act ( CMP Law ) provides for the imposition of civil money penalties against any person who submits a claim to Medicare, Medicaid or any other federal health care program that the person knows or should know: (a) is for items or services not provided as claimed; (b) is false or fraudulent; (c) is for services provided by an unlicensed or uncertified physician or by an excluded person; (d) represents a pattern of claims that are based on a billing code higher than the level of service provided; or (e) is for services that are not medically necessary. Penalties under the CMP Law include up to $50,000 for each item or service claimed, and damages of up to three times the amount claimed for each item or service, and exclusion from participation in the federal health care programs. The threats of large monetary penalties and exclusion from participation in Medicare, Medicaid and other federal health care programs, and the significant costs of mounting a defense, create serious pressures on providers who are targets of false claims actions or investigations to settle. Therefore, an action under the False Claims Act, FERA or CMP Law could have an adverse financial impact on the Borrower, regardless of the merits of the case. 32

39 South Carolina law also prohibits submitting a false claim or making a false record or statement in order to secure reimbursement from an insurance company, an HMO or from the State. Violation of this prohibition may lead to the imposition of civil or criminal penalties. The South Carolina Presenting False Claims for Payment Statute, the South Carolina Medicaid False Claims Statute, the South Carolina Medicaid False Application Statute, the South Carolina Insurance Fund and Reporting Immunity Act, and the South Carolina Department of Health and Human Services Administrative Sanctions Against Medicaid Providers Regulation all provide for criminal, civil and/or administrative penalties and sanctions for providers and individuals who are found to have engaged in making false statements, misrepresenting fact, concealing facts, and/or submitting claims for unnecessary services. These laws carry significant sanctions including fines, imprisonment, court costs, attorney s fees and full restitution to the victim of fraud. While the management of the Borrower believes it is in substantial compliance with this law, there can be no assurance that its operations will not become the subject of an investigation in the future. The South Carolina Presenting False Claims for Payment statute (S.C. Code Ann ) provides that a person who knowingly causes to be presented a false claim for payment to an insurer transacting business in this State, to a health maintenance organization transacting business in this State, or to any person, including the State of South Carolina, providing benefits for health care in this State, whether these benefits are administered directly or through a third person, or who knowingly assists, solicits, or conspires with another to present a false claim for payment, is depending upon the amount of the claim, guilty of anywhere from a misdemeanor for which the person can be fined and imprisoned to a felony whereby the person is subject to imprisonment for ten years and/or a fine of five thousand dollars. The South Carolina Medicaid False Claims Statute (S.C. Code Ann ) provides that it is unlawful for a provider of medical assistance, goods, or services to knowingly and willfully make or cause to be made a false claim, statement, or representation of a material fact in an application or request for a benefit, payment, or reimbursement from a State or federal agency that administers or assists in the administration of the State's medical assistance/medicaid program, or on a report, certificate, or similar document submitted to a State or federal agency which administers or assists in the administration of the state's Medicaid program in order for a provider or facility to qualify or remain qualified under the state's Medicaid program to provide assistance, goods, or services, or receive reimbursement, payment, or benefit for this assistance, goods, or services. Criminal, civil, and administrative penalties and sanctions may result to health care providers who knowingly and willfully make a false statement in an application or request for a benefit, reimbursement or in a report or certificate submitted to the Medicaid program. A person who violates the Medicaid False Claims Statute is guilty of a misdemeanor and subject to imprisonment for up to three years and a fine of not more than one thousand dollars per offense. In addition, the Attorney General may bring a civil action to recover treble damages and seek penalties of two thousand dollars per false claim. The state agency administering the Medicaid program may impose additional administrative sanctions on providers convicted under the Statute. The South Carolina Medicaid False Application Statute (S.C. Code Ann ) provides criminal penalties for any applicant, recipient or other person acting on their behalf to knowingly and willfully make or cause to be made a false statement or representation of material fact on a Medicaid application for entitlements, or conceal or fail to disclose any material fact affecting initial or continuing entitlement to receive assistance, goods or services under the state s Medicaid program. A person who violates the provisions of this statute is guilty of medical assistance recipient fraud, a misdemeanor, and upon conviction must be imprisoned not more than three years or fined not more than one thousand dollars, or both. The South Carolina Insurance Fraud and Reporting Immunity Act (S.C. Code Ann et seq.) provides for criminal and civil penalties related to insurance fraud and established an Insurance Fraud Division in the office of the Attorney General to prosecute violations. The term false statement and misrepresentation means a statement or representation made by a person that is false, material, made with the person's knowledge of the falsity of the statement and made with the intent of obtaining or causing another to 33

40 obtain or attempting to obtain or causing another to obtain an undeserved economic advantage or benefit or made with the intent to deny or cause another to deny any benefit or payment in connection with an insurance transaction, and specifically includes, but is not limited to, an intentional: (1) false report of business activities; (2) miscount or misclassification by an employer of its employees; (3) failure to timely reduce reserves; (4) failure to account for Second Injury Fund reimbursements or subrogation reimbursements; or (5) failure to provide verifiable information to public or private rating bureaus and the Department of Insurance. Any person or insurer who makes a false statement or misrepresentation is, depending upon the amount received and number of offenses, guilty of anywhere from a misdemeanor, thirty days imprisonment or fine to a felony, ten years imprisonment, and a one hundred thousand dollar fine. In addition to the criminal penalties, a person convicted must be ordered by the court to make full restitution to a victim for any economic advantage or benefit which has been obtained by the person as a result of that violation, and to pay the difference between any taxes owed and any taxes the person paid. In addition to criminal liability, a person who violates the statute faces potential civil fines up to $15,000 and may be ordered to pay court costs and attorneys' fees to the director of the Insurance Fraud Division, which retains the fines for use in enforcing and administering the Act. Any person, insurer, or agency having reason to believe that another has made a false statement or misrepresentation, or has knowledge of a suspected false statement or misrepresentation is required to notify the Insurance Fraud Division. In accordance with the Administrative Sanctions Against Medicaid Providers regulation (S.C. Code of Regulations R et seq.), the Administrator of Medicaid may invoke administrative sanctions against a Medicaid provider who has been determined to have abused the Medicaid Program. "Abuse" is defined as provider practices that are inconsistent with sound fiscal, business, or medical practices and result in unnecessary cost to the Medicaid Program, reimbursement for medically unnecessary services, or services that fail to meet professionally recognized standards for health care. Grounds for sanctioning providers under the DHHS regulations include presenting a false claim for services, submitting false information to obtain greater compensation than that to which the provider is entitled, overutilization, conviction for a criminal offense related to Medicaid or Medicare, failure to meet standards required by State or Federal law for participation in Medicaid, and other acts. Sanctions may include educational intervention, peer review, recoupment of overpayments, suspension, termination, post-payment or prepayment review of claims, and referral to licensing and certifying boards or agencies. The factors considered in determining sanctions include, but are not be limited to: the seriousness of the offense; the extent of violation; history of prior violation(s); prior imposition of sanctions; and, the providers failure to obey program rules and policies as specified in the appropriate Provider Manual or other official notices. If a material violation of one or more of the foregoing provisions were found, the sanctions imposed could have a material adverse effect upon the future operations and financial condition of the Borrower. Fraud and Abuse Laws and Regulations. Federal law (known as the Anti-Kickback Law ) prohibits the knowing and willful offer, payment or receipt of remuneration in exchange for or as an inducement to make or influence a referral of a patient for the provision of goods or services that may be reimbursed under federal health benefit programs. The PPAC Act amends the intent requirement to provide that a person need not have actual knowledge or specific intent to commit a kickback violation. The scope of the Anti-Kickback Law is very broad, and it potentially implicates many practices and arrangements common in the health care industry, including space and equipment leases, personal services contracts (e.g., medical director agreements), purchase of physician practices, joint ventures, and relationships with vendors. Penalties for violation of the Anti-Kickback Law include criminal prosecution, criminal fines of up to $25,000, civil penalties of up to $50,000 per violation, as well as exclusion from the federal health care programs. Penalties for the failure to grant timely access to HHS were also added by the PPAC Act. Federal safe harbor regulations describe certain arrangements that will not be deemed to violate the Anti-Kickback Law. The safe harbors, however, are narrow and do not cover a wide range of economic 34

41 relationships that many hospitals, physicians and other health care providers have historically considered to be legitimate business arrangements not prohibited by the Anti-Kickback Law. Because the safe harbor regulations do not purport to describe comprehensively all lawful or unlawful economic arrangements or other relationships between health care providers and referral sources, it is often uncertain whether hospitals, physicians and other health care providers that have these arrangements or relationships may need to alter them in order to ensure compliance with the Anti-Kickback Law. Failure to comply with a safe harbor, however, does not mean an arrangement necessarily violates the Anti-Kickback Law. Although the Anti-Kickback Law applies only to health benefit programs funded by the federal government, a number of states have passed similar laws pursuant to which similar types of prohibitions are made applicable to other health plans or third-party payors. Because the safe harbor exceptions are narrowly drawn and the case law interpreting the Anti- Kickback Law is sparse, there can be no assurances that the Borrower will not be found to be in violation of the Anti-Kickback Law. If such a violation were found, any sanctions imposed could have a material adverse effect upon the future operations and financial condition of the Borrower. The South Carolina Anti-Kickback Statute at defines a kickback as remuneration or payment back pursuant to an investment interest, compensation arrangement, or otherwise by a provider of health care services or items of a portion of the charges for services rendered to a referring health care provider as an incentive or inducement to refer patients for future services or items when the payment is not tax deductible as an ordinary and necessary expense. It is unlawful for a health care provider or a provider of health care services to offer, pay, solicit, or receive a kickback, directly or indirectly, overtly or covertly, in cash or in kind, for referring or soliciting patients. A violation is punishable by imprisonment for not more than 30 days or a fine of not more than $1,000. Because the case law and regulatory guidance interpreting this Statute is limited, there can be no assurances that the Borrower will not be found to be in violation of the Statute. If such a violation were found, any sanctions imposed could have a material adverse effect upon the future operations and financial condition of the Borrower. Restrictions on Self-Referrals. Current federal law (the Stark Law ) prohibits a physician who has a financial relationship with an entity that provides certain designated health services from referring Medicare (and Medicaid, according to pending cases involving the Department of Justice) patients to that entity for the provision of such designated health services, with limited exceptions. The Stark Law designated health services include physical therapy services, occupational therapy services, radiology or other diagnostic services (including MRIs, CT scans and ultrasound procedures), durable medical equipment, radiation therapy services, parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics and prosthetic devices, home health services, outpatient prescription drugs, and inpatient, outpatient hospital services, clinical laboratory services and diagnostic and therapeutic nuclear medicine services. The Stark Law also prohibits an entity that receives a prohibited referral from filing a claim or billing for the services arising out of that prohibited referral. Unlike the Anti-Kickback Law, which is an intent-based statute, the Stark Law absolutely prohibits (i.e., strict liability) specific referral arrangements and the accompanying claims for payment from Medicare or Medicaid by the provider unless an exception applies. Sanctions for violations of the Stark Law include refunds of the amounts collected for services rendered pursuant to a prohibited referral, civil money penalties of up to $15,000 for each claim arising out of such referral, plus up to three times the reimbursement claimed, and exclusion from the Medicare and Medicaid programs. The Stark Law also provides for a civil penalty of up to $100,000 for entering into an arrangement with the intent of circumventing its provisions. In addition, knowing violation of the Stark Law may also serve as the basis for liability under the False Claims Act. The types of financial arrangements between a physician and an entity that trigger the self-referral prohibitions of the Stark Law are broad, and include ownership and investment interests and compensation arrangements. 35

42 The PPAC Act states that the HHS Secretary shall establish a self-disclosure protocol for actual and potential Stark violations, with the authority to reduce penalties for self-disclosed violations. Although the Stark Law only applies to Medicare (and potentially Medicaid, according to pending cases involving the Department of Justice), a number of states have passed similar statutes pursuant to which similar types of prohibitions are made applicable to all other health plans or third-party payors. Because of the complexity of the Stark Law and the evolving nature of quality improvement and costreduction efforts, there can be no assurances that the Borrower will not be found to have violated the Stark Law. If such violation were found to have occurred, any sanctions imposed could have a material adverse effect upon the future operations and financial condition of the Borrower. The South Carolina Provider Self-Referral Act of 1993 (the Provider Self-Referral Act, et seq.) prohibits a healthcare provider from referring a patient for the provision of designated health services to an entity in which the healthcare provider is an investor or has an investment interest, subject to certain exceptions. A healthcare provider is any physician or other person licensed, certified or registered under the laws of the State to provide healthcare services. For purposes of the Provider Self-Referral Act, the term designated health services is defined more broadly than that same term is defined under the Stark Law and means any healthcare procedure, service or item provided by a healthcare provider. Under the Provider Self-Referral Act, a healthcare provider may not refer a patient for the provision of designated health services to an entity in which the healthcare provider is an investor or has an investment interest, unless the arrangement meets a statutory exception. If an arrangement is covered by the Provider Self-Referral Act and fails to meet an exception, no claim for payment may be submitted by an entity to any third-party payor for the provision of a designated health service furnished pursuant to a prohibited referral, and any sums collected must be refunded on a timely basis. A violation of this Act by a health care provider constitutes grounds for disciplinary action to be taken by the applicable board. A hospital found in violation of this Act is subject to the regulations promulgated by the South Carolina Department of Health and Environmental Control. In addition a healthcare provider who violates this Act is subject to a civil penalty of not more than $5,000 for each such service, and/or if the provider enters into an arrangement or scheme in an effort to circumvent the Provider Self-Referral Act, it is subject to a civil penalty of up to $25,000 for each circumvention arrangement or scheme. Penalties for violation of the anti-referral provision of the Provider Self-Referral Act could be applied to certain joint business activities between hospitals and physicians or other providers where the physicians or providers have acquired an investment interest in an affiliated entity of the Borrower. While management of the Borrower does not believe that any of those entities is or will be involved in any prohibited activity and is not aware of any challenge or investigation with respect to these matters, there can be no assurance that such challenge or investigation will not occur in the future. If the activities of the Borrower are determined to violate the anti-referral provisions of the Provider Self-Referral Act, this determination may have a materially adverse effect on such entities financial condition, operations, revenues and expenses, especially if violations are identified and prosecuted and result in substantial fines. HIPAA. Congress enacted The Health Insurance Portability and Accountability Act of 1996 ( HIPAA ) as part of a broad health care reform effort. Among other things, HIPAA established a program administered jointly by the Secretary of HHS and the United States Attorney General designed to coordinate federal, state and local law enforcement programs to control fraud and abuse in connection with the federal health care programs. In addition, Congress greatly increased funding for health care fraud enforcement activity, enabling the OIG to substantially expand its investigative staff and authorizing the Federal Bureau of Investigation to quadruple the number of agents assigned to health care fraud. The result has been a dramatic increase in the number of civil, criminal and administrative prosecutions for alleged violations of the laws relating to payment under the federal health care programs, including the Anti-Kickback Law and the False 36

43 Claims Act. This expanded enforcement activity, together with the whistleblower provisions of the False Claims Act, has significantly increased the likelihood that health care providers, including the Borrower, could face inquiries or investigations concerning compliance with the many laws governing claims for payment and cost reporting under the federal health care programs. In addition to the expanded enforcement activity noted above, the Administrative Simplification provisions of HIPAA mandate the use of uniform standard electronic formats for certain administrative and financial health care transactions, the adoption of minimum security standards for individually identifiable health information maintained or transmitted electronically, and compliance with privacy standards adopted to protect the confidentiality of personal health information. The Administrative Simplification provisions apply to health care providers, health plans, and health care clearinghouses (collectively Covered Entities ). HHS recently issued final omnibus regulations strengthening many aspects of the privacy and security rules under HIPAA so that they are more aligned with the Health Information Technology for Economic and Clinical Health Act ( HITECH Act ). The final rules change certain requirements for covered entities and establish rules that now apply directly to their vendors that handle protected health information (PHI) and qualify as business associates under HIPAA. A Covered Entity and its business associates must make reasonable efforts to use, disclose and request only the minimal amount of protected health information needed to accompany the intended use. HIPAA confidentiality provisions extend not only to patient medical records, but also to a wide variety of healthcare clinical and financial settings where patient privacy restrictions often impose new communication, operational, accounting and billing restrictions. These confidentiality provisions add costs and create potentially unanticipated sources of legal liability. Various requirements of HIPAA apply to virtually all health care organizations, and significant civil and criminal penalties may result from a failure to comply with the Administrative Simplification regulations. Compliance requires changes in information technology platforms, major operational and procedural changes in the handling of data, and vigilance in the monitoring of ongoing compliance with the various regulations. The financial costs of compliance with the Administrative Simplification regulations are substantial. The HITECH Act. The American Recovery and Reinvestment Act of 2009 ( ARRA ) appropriated approximately $20 billion for the development and implementation of health information technology standards and the adoption of electronic health care records. The law also significantly expanded the HIPAA privacy and security provisions applicable to Covered Entities and their business associates. The law includes a notice requirement when there is a breach of electronic personal health information, increased civil monetary and criminal penalties for HIPAA violations, and authorized the State Attorneys General to enforce its provisions. The financial costs of continuing compliance with HIPAA and the Administrative Simplification regulations are substantial and will increase as a result of the ARRA amendments. ARRA also includes the HITECH Act, which contains a number of provisions which affect the HIPAA privacy regulations that provide generally that Covered Entities must keep a person s personal health information private. The HITECH Act limits a Covered Entity s discretion in determining what health care information about a person may be properly disclosed under the HIPAA privacy regulations. Covered Entities that use an electronic health record will also be required to account for disclosures of information that are currently not subject to the accounting requirements, including disclosures for treatment, payment and health care operations, beginning as early as January 1, In addition, if a Covered Entity maintains an electronic health record, individuals have a right to receive a copy of the protected health information maintained in the record in an electronic format. Again, the Secretary of HHS is charged with developing guidance and implementing regulations for these requirements. The HITECH Act also includes provisions requiring Covered Entities to agree to a patient request to restrict disclosure of information to a health plan for the purposes of carrying out payment or health care operations, if the information pertains solely to an item or service for which the provider was paid out of 37

44 pocket in full; a prohibition on the direct or indirect payment or receipt of remuneration in exchange for protected health information without specific patient authorization, except in limited circumstances, and additional restrictions on the use and disclosures of protected health information for marketing communications and fundraising communications. In the event of an unauthorized disclosure of protected health information, Covered Entities now are required to notify the affected individuals, HHS and sometimes the media of the unauthorized disclosure, depending on the nature of the breach, the type of unauthorized disclosure and its scope. The HITECH Act revises the civil monetary penalties associated with violations of HIPAA, and provides state attorneys general with authority to enforce the HIPAA privacy and security regulations in some cases, through a damages assessment of $100 per violation or an injunction against the violator. The revised civil monetary penalties range: (a) in the case of violations due to willful neglect, from a minimum of $10,000 or $50,000 per violation depending on whether the violation was corrected within 30 days of the date the violator knew or should have known of the violation and (b) in the case of all other violations, from a minimum of $100 to $1,000 per violation, with a $1,500,000 limit per year for the same type of violation. HHS indicated that it will not enforce penalties for violations until on or after February 17, 2011 and it has had an opportunity to promulgate implementing regulations. Providers were scheduled to change from using ICD-9 diagnostic codes to IDD-10 on October 1, 2013 but this has been delayed until at least October 1, These changes may be costly to physicians and hospitals and will require significant planning, training and updates to the software and systems of hospitals. The PPAC Act also includes new electronic transaction and operating guidelines that must be used by all HIPAA covered entities for electronic funds transfers and various claim forms. The effective dates are 2013 and Moreover, the Department of Justice has prosecuted individuals who have "knowingly" obtained or disclosed individually identifiable health information in violation of HIPAA. Fines of up to $50,000, as well as imprisonment up to one year are possible, with crimes involving fraud permitting penalties up to $100,000, with up to five years in prison. Offenses committed with the intent to sell, transfer, or use individually identifiable health information for commercial advantage, personal gain or malicious harm permit fines of $250,000, and imprisonment for up to ten years. The Department of Justice has taken the position that criminal penalties for a violation of HIPAA are directly applicable to covered entities as well. Individuals such as directors, employees, or officers of the covered entity, may also be criminally liable under HIPAA. Covered entities and business associates are required to be compliant with the HIPAA final regulations by September 23, The Borrower is actively engaged in continuing compliance efforts with HIPAA and HITECH regulations. However, no guarantee can be made that the Borrower will remain HIPAA compliant in the future. Emergency Medical Treatment and Active Labor Act. Congress enacted the Emergency Medical Treatment and Active Labor Act ( EMTALA ), in response to allegations of inappropriate hospital transfers of indigent and uninsured emergency patients. EMTALA imposes strict requirements on hospitals in the treatment and transfer of patients with emergency medical conditions. EMTALA requires hospitals to provide a medical screening examination to any individual who comes to the Borrower s emergency department for treatment, without regard to ability to pay, to determine whether the individual suffers from an emergency medical condition within the meaning of EMTALA. A participating hospital may not delay providing a medical screening examination in order to inquire about method of payment or insurance status. If an emergency medical condition is present, the Borrower must provide such additional medical examination and treatment as may be required to stabilize the emergency 38

45 medical condition. If the Borrower deems it in the best interest of the individual to transfer the individual to another medical facility, the treating physician must execute a transfer certificate complying with the standards of EMTALA and must provide a medically appropriate transfer. In regulations, CMS has extended the application of EMTALA beyond the Borrower emergency department to any individual who is on hospital property and requests an examination or treatment, including individuals who are anywhere on the Borrower s main campus, in a hospital owned ambulance, or in a facility determined by CMS to be an off-campus department that is a dedicated emergency department of the Borrower. EMTALA imposes significant costs on hospitals, including the costs of treatment of individuals who may not be able to pay for such services, costs of development and implementation of protocols concerning medical screening examinations and stabilization and appropriate transfers and, in some cases, costs associated with assuring on-call availability of specialty physicians. In addition, the expansion of the requirements of EMTALA to applicable off-campus departments may result in significant costs in the training of personnel and the development of protocols for screening, stabilization and transportation of patients. If a hospital violates EMTALA, whether knowingly and willfully or negligently, it is subject to a civil money penalty of up to $50,000 per violation. Failure to satisfy the requirements of EMTALA may also result in termination of the Borrower s provider agreement with Medicare. In addition, EMTALA creates a private cause of action for individuals who suffer personal harm as a result of an EMTALA violation, and for any hospital that suffers financial loss as a result of another hospital s violation of EMTALA. Enforcement activity with respect to EMTALA violations has increased dramatically in recent years, and because of the broad interpretation of the reach of EMTALA, there can be no assurance that the Borrower will not have been found to have violated EMTALA, and if such a violation were found, that any sanctions imposed would not have a material adverse effect upon the future operations and financial condition of the Borrower. DRA Compliance Policy and Employee Training Requirements. The Deficit Reduction Act of 2015 ( DRA ) also established requirements for states participating in the Medicaid program to impose obligations on health care providers and others that receive at least $5 million annually in Medicaid payments to establish written policies and procedures to educate their employees (and certain contractors and agents) and to provide detailed information about the federal False Claims Act, the federal Program Fraud Civil Remedies Act, various other federal and state laws pertaining to civil or criminal penalties for false claims and statements, any whistleblower protections provided under such laws, the role of such laws in preventing and detecting fraud, waste and abuse, and the provider (or other party s) policies and procedures that are in place for the prevention and detection of fraud, waste and abuse. Providers and other covered parties that do not adequately update their compliance policies, handbooks and other training materials or otherwise abide by these requirements run the risk of losing their entitlement to receive Medicaid reimbursements to which they otherwise would be entitled and/or risk potential liability under the False Claims Act and other federal and state fraud and abuse authorities. Environmental Laws Affecting Health Care Facilities. Hospitals are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations that address, among other things, hospital operations or facilities and properties owned or operated by hospitals. In their role as owners and/or operators of properties or facilities, hospitals may be subject to liability for investigating and remedying any hazardous substances that have come to be located on the property, including any such substances that may have migrated off the property. Typical hospital operations include the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants, or contaminants. For these reasons, hospital operations are particularly susceptible to the practical, financial, and legal risks associated with compliance with such laws and regulations. Such risks may result in damage to individuals, property, or the environment; may interrupt 39

46 operations and/or increase their cost; may result in legal liability, damages, injunctions or fines; or may trigger investigations, administrative proceedings, penalties or other governmental agency actions. There can be no assurance that the Borrower will not encounter such risks in the future, and such risks may result in material adverse consequences to the operations or financial condition of the Borrower. Transparency in Pricing. The PPAC Act requires hospitals to establish and make public a list of the hospital s standard charges for items and services, including MS-DRGS. Federal legislation requires states to publicly report hospital charges for inpatient and outpatient services. A 2006 executive order was issued requiring the same public reporting of cost and quality data at four federal agencies. CMS also has made outcomes reporting a condition of Medicare participation. These are examples of a trend in which hospitals will be required to divulge proprietary information to the general public in order to participate in federal health care programs. The disclosure of proprietary information may have a negative impact on the ability of the Borrower to gain advantages in negotiations with payors. This, in turn, could negatively influence the Borrower s revenues. The PPAC Act includes various public disclosure obligations for financial arrangements between hospitals, physicians, imaging centers, and pharmaceutical and medical device manufacturers. The SC Department of Health and Human Services has implemented SCHealthData.org as a response to the health care transparency requirements of Proviso passed by the South Carolina General Assembly. The site allows users to compare key measures of financial performance for hospitals across South Carolina and identify trends in hospital performance. Due to the relative novelty of these disclosure requirements, it is impossible to predict the effect, if any, that cost and outcomes reporting will have on the Borrower s finances. Future Federal Legislation. The Borrower anticipates that the federal government s health care reform initiatives will result in further legislation, regulation, and other actions that may increase the demand for certain services but will continue the trend toward reduced reimbursement for hospital services and more pervasive regulation of operations. The impact of future cost control programs and future regulations upon the forecasted financial performance of the Borrower cannot be determined at this time. Any future changes to the Medicare and Medicaid programs could result in substantial reductions in the amounts of Medicare and Medicaid payments to hospital providers in the future, which could substantially reduce the revenues available to the Borrower, and any reduction in the levels of payment in these government payment programs could substantially adversely affect the financial condition of the Borrower and their ability to fulfill their obligations with respect to the 2014 Bonds. Regulatory Inquiries The laws and regulations governing federal reimbursement programs and the laws governing the health care industry generally (such as the False Claims Act, the Civil Money Penalties Law, the Anti- Kickback Law and the Stark Law) are complex and subject to varying interpretations, and the Borrower is subject to contractual reviews and program audits in the normal course of business. Penalties for violations of federal regulations governing health care providers can be severe, including per claim penalties of $15,000, treble damages, fines, and suspension from federal reimbursement programs such as Medicare and Medicaid. Federal agencies have initiated nationwide investigations into several areas of concern, including, among others: (a) teaching hospitals, (b) home health care services, (c) investigational devices, (d) laboratory billing, and (e) cost reporting. The Borrower expects that the level of review and audit to which it and other health care providers are subject will increase. Regulatory authorities have discretion to assert claims for noncompliance with applicable requirements based upon their interpretation of those requirements. Because these complex program requirements are subject to varying interpretations and because, in some instances 40

47 (e.g., the Anti-Kickback Law and the Stark Law), there is little clear regulatory or judicial guidance, there can be no assurance that regulatory authorities will not challenge the Borrower s compliance with these requirements and assert claims or penalties, and it is not possible to determine the impact (if any) any such claims or penalties would have upon the Borrower. Corporate Compliance In contrast to a government-imposed corporate compliance plan that may be instituted pursuant to the federal government s investigation of a health care provider, a voluntary corporate compliance plan is instituted by a health care provider to put into place effective internal controls that promote adherence to various federal and state laws regulating the health care industry. The Office of Inspector General s Compliance Program Guidance for Hospitals was released in February 1998 and supplemented in January The OIG believes that the adoption and implementation of voluntary compliance programs by hospitals significantly advances the prevention of fraud, abuse and waste in federal, state and private health plans. In fact, the OIG may consider the existence of an effective compliance plan that was instituted before a governmental investigation, when negotiating a settlement with a health care provider. The Borrower has compliance programs that are designed to detect and correct potential violations of laws and regulations applicable to their programs. Like other health care, educational and research institutions that have contracts with the federal government, the Borrower may be subject from time to time to other regulatory inquiries, whistleblower complaints under the False Claims Act and other similar investigations. It is not possible to assess the merits of any such inquiries or investigations, complaints or inquiries at this point and, in any event, no assurances can be given as to what the impact of any such investigations, complaints or inquiries would have upon the operations or consolidated financial position of the Borrower. Tax Exemption for Nonprofit Corporations Loss of tax-exempt status by the Borrower could result in loss of tax exemption of interest on the 2014 Bonds and of other tax-exempt bonds issued for the benefit of the Borrower, and defaults in covenants regarding the 2014 Bonds and other related tax-exempt bonds could be triggered. Such an event would have material adverse consequences on the financial condition of the Borrower. The maintenance by the Borrower of its tax-exempt status depends, in part, upon maintaining its status as an organization described in Section 501(c)(3) of the Code. Maintaining that status is contingent upon compliance with general rules promulgated in the Code and related regulations regarding the organization and operation of tax-exempt entities, including its operations for charitable and educational purposes and its avoidance of transactions that would cause its assets to inure to the benefit of private persons. The Internal Revenue Service (the IRS ) indicated that it intends to issue compliance checks relating to post-issuance compliance of tax exempt bonds issued for exempt organizations. The IRS also has announced that it intends to closely scrutinize transactions between nonprofit organizations and for-profit entities, and in particular has issued audit guidelines for tax-exempt hospitals. Although specific activities of hospitals, such as medical office building leases and compensation arrangements, joint ventures and other contracts with independent physicians, have been the subject of interpretations by the IRS in the form of private letter rulings, many activities have not been addressed in any official opinion, interpretation or policy of the IRS. Under new IRS form 990 tax information reporting requirements, tax exempt hospitals must disclose certain joint venture arrangements. Because the Borrower conducts large scale and diverse operations involving private parties, there can be no assurances that certain of their transactions would not be challenged by the IRS. 41

48 The IRS has taken the position that hospitals that are in violation of the Anti-Kickback Law may also be subject to revocation of their federal tax-exempt status. As a result, tax-exempt entities such as the Borrower that have, and will continue to have, extensive transactions with physicians are subject to an increased degree of scrutiny and perhaps enforcement by the IRS. On March 31, 2011, the IRS and OIG released guidance addressing the collaboration between health care providers that will result from health care reform initiatives, such as ACOs. The IRS has assured taxexempt organizations that participation in an ACO with for-profit entities will not jeopardized the organization s tax-exempt status and the OIG will create a waiver program for certain federal fraud and abuse statutes that may be implicated by these arrangements. Although the Borrower has covenanted to maintain their status as tax-exempt organizations, loss of tax-exempt status would likely have a significant adverse effect on any such organization and its operations. Any suspension, limitation or revocation of the tax-exempt status of the Borrower or assessment of significant tax liability could have a material adverse effect on the Borrower and might lead to the loss of tax exemption of interest on the 2014 Bonds. It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to taxation of exempt organizations. Since such actions and proposals have been made, they have been vigorously challenged and contested. There can be, however, no assurance that future changes in the laws and regulations of the federal, state or local governments will not materially and adversely affect the operations and revenues of the Borrower by requiring it to pay income or real estate taxes. There have also been numerous Congressional hearings in the past several years held by the House Ways and Means Committee, the Senate Finance Committee and other committees investigating various activities and practices of tax-exempt and other health care organizations, including hospital pricing systems, hospital billing and collection practices, unaudited business income and prices charged to uninsured patients. It cannot be determined at this time whether any legislation will be enacted in response to congressional hearings and investigations and, if so, what form any such legislation would take and what its impact would be on the Borrower. Other legislative changes or judicial actions with respect to matters relating to the tax-exempt status of nonprofit corporations, including the provision of free care to the indigent and the exemption from property taxes of such corporations, could be enacted. There can be no assurance that the future changes in federal, state or local laws, rules, regulations and policies governing tax-exempt entities will not have adverse effects on the future operations of the Borrower. Intermediate Sanctions The Taxpayer Bill of Rights 2 (the Intermediate Sanctions Law ) allows the IRS to impose intermediate sanctions against certain individuals in circumstances involving the violation by tax-exempt organizations of the prohibition against private inurement. Prior to the enactment of the Intermediate Sanctions Law, the only sanction available to the IRS was revocation of an organization s tax-exempt status. Intermediate sanctions may be imposed in situations in which a disqualified person (such as an insider ) (a) engages in a transaction with a tax-exempt organization on other than a fair market value basis, (b) receives unreasonable compensation from a tax-exempt organization, or (c) receives payment in an arrangement that violates the prohibition against private inurement. These transactions are referred to as excess benefit transactions. A disqualified person who benefits from an excess benefit transaction will be subject to an excise tax equal to 25% of the amount of the excess benefit. Organizational managers who participate in the excess benefit transaction knowing it to be improper are subject to an excise tax equal to 10% of the amount of the 42

49 excess benefit, subject to a maximum penalty of $10,000. A second penalty, in the amount of 200% of the excess benefit, may be imposed on the disqualified person (but not on the organizational manager) if the excess benefit is not corrected within a specified period of time. The IRS revenue rulings provide guidance on joint ventures between nonprofit and for-profit health care entities. The revenue ruling provides generally that a nonprofit hospital must retain control over certain of the key aspects of such a joint venture (e.g., control of the governing body of the joint venture, change in types of services offered, etc.) in order to assure that the joint venture s activities are treated as primarily furthering the exempt purposes of the nonprofit, charitable organization. It is not possible at this point to determine whether the IRS guidelines for joint ventures will restrict the ability of the Borrower to enter into joint ventures with for-profit entities. The IRS has stepped up its oversight activities of nonprofit corporations, particularly health care systems and hospitals. These efforts include a report on compensation practices of health care organization practices based on questionnaires the IRS sent to 500 tax exempt hospitals in 2007 and revisions to the annual IRS reporting form for nonprofit corporations commencing in The new IRS form 990 requires hospitals to report additional information about joint ventures, compensation arrangements and the charitable benefits that the Borrower provides to the community. The IRS s enforcement efforts on issues applicable to tax exempt organizations such as excessive compensation, private inurement, unrelated business tax and political intervention are expected to increase. The PPAC Act imposes additional reporting requirements relating to the organization s provision of charitable care and community health based needs assessment. Organizations that fail to comply with the tax exempt requirements may be subject to an excise tax of $50,000 per tax year. The tax-exempt status of nonprofit corporations, and the exclusion of income earned by them from taxation, has been the subject of review by various federal, state and local legislative, regulatory and judicial bodies. This review has included proposals to broaden and strengthen existing federal tax law with respect to unrelated business income of nonprofit corporations. Bills have been introduced from time to time in Congress that would require a nonprofit hospital to provide a certain amount of charity care and care to Medicare and Medicaid patients in order to maintain its tax-exempt status and avoid the imposition of an excise tax. Other proposed legislation would condition a hospital s tax-exempt status on the delivery of adequate levels of charity care. The PPAC Act requires additional reporting that will provide data to provide further evidence of whether further regulation is warranted. Although no such legislation has been enacted, there can be no assurance that similar legislative proposals or judicial actions will not be adopted in the future. The Subcommittee on Oversight of the United States House of Representatives Ways and Means Committee has considered options and recommendations in the area of taxation of unrelated business income of nonprofit organizations. Hearings have been held on these options and recommendations and legislation may be drafted to clarify and strengthen existing law with respect to the unrelated business income tax. The scope and effect of legislation, if any, that may be adopted at the federal and state levels with respect to unrelated business income cannot be predicted. Any such legislation could have the effect of subjecting all or a portion of the Borrower s income to federal or state income taxes. It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to federal, state or local taxation of nonprofit corporations. There can be no assurance that future changes in the laws and regulations of the federal, state or local governments or audits or examinations of the activities of the Borrower by one or more taxing authorities will not materially and adversely affect the future operations and revenues of the Borrower by requiring it to pay income, sales or real estate taxes or to make payments in lieu of such taxes. 43

50 The loss by the Borrower of federal tax exemption could also result in a challenge to the state tax exemption of these organizations. A loss of state nonprofit status could impose additional costs, possibly material, on the affected affiliates and could result in the loss of real estate and other state tax exemptions for the Borrower. Antitrust The Borrower, like other providers of health care services, is subject to antitrust laws. Those laws generally prohibit agreements that restrain trade and prohibit the acquisition or maintenance of a monopoly through anticompetitive practices. The legality of particular conduct under the antitrust laws generally depends on the specific facts and circumstances and, in some circumstances, cannot be predicted in advance. Antitrust actions against health care providers have become increasingly common in recent years. Antitrust liability can arise in a number of different contexts, including medical staff privilege disputes, third-party payor contracting, joint ventures and affiliations between health care providers, and mergers and acquisitions by health care providers. Actions can be brought by federal and state enforcement agencies seeking criminal and civil penalties and, in some instances, by private plaintiffs seeking damages for harm from allegedly anticompetitive behavior. With increasing consolidation in the healthcare industry, federal and state governments have stepped up antitrust enforcement actions, including challenging such affiliations prospectively and seeking to unwind them after the integration. Recent judicial decisions have permitted physicians who are subject to disciplinary or other adverse actions by a hospital at which they practice, including denial or revocation of medical staff privileges, to seek treble damages from the Borrower under the federal antitrust laws. The Federal Health Care Quality Improvement Act of 1986 provides immunity from liability for discipline of physicians by hospitals under certain circumstances, but courts have differed over the nature and scope of this immunity. In addition, hospitals occasionally indemnify medical staff members who incur costs as defendants in lawsuits involving medical staff privilege decisions. Recent court decisions have also permitted recovery by competitors claiming harm from a hospital s use of its market power to obtain unfair competitive advantage in expanding into ancillary health care businesses. Antitrust liability in any of these contexts can be substantial, depending upon the facts and circumstances involved. In 1993, the United States Department of Justice and the Federal Trade Commission issued Statements of Antitrust Enforcement Policy in the Health Care Area. These statements were revised in 1994, and again in The statements generally describe certain analytical principles which the agencies will apply to certain factual situations and also establish certain antitrust safety zones. Conduct within the safety zones will not be challenged by the agencies, absent extraordinary circumstances. Many activities frequently engaged in by health care providers fall outside of the zones but are not challenged, and failure to fall within a safety zone does not mean that a participant will be investigated or prosecuted, or even that the activity violated the antitrust laws. Under the South Carolina statutory provision for Unfair Methods and Deceptive Acts ( ), no person may engage in any trade practice that is defined as, or determined pursuant to law to be, an unfair method of competition or an unfair or deceptive act or practice in the business of insurance. There cannot be any assurances that enforcement authorities or private parties will not assert that the Borrower, or any transaction in which they are involved, are in violation of the antitrust laws. Other Legislative and Regulatory Actions The Borrower is also subject to regulatory actions and policy changes by the various federal, State and local agencies created by the National Health Planning and Resources Development Act, the Occupational Safety Health Act, the act creating the Environmental Protection Agency and other federal, 44

51 State and local governmental agencies. No assurance can be given as to the effect on future hospital operations of existing laws, regulations or of any future changes in such laws, regulations and standards. Legislative proposals which could have an adverse effect on the Borrower include: (a) any change in the taxation of not for profit corporations or in the scope of their exemption from income or property taxes; (b) limitations on the amount or availability of tax-exempt financing for charitable organizations described in Section 501(c)(3) of the Code; (c) regulatory limitations affecting the ability of the Borrower to undertake capital projects or develop new services; (d) a requirement that nonprofit health care institutions pay real estate property tax and sales tax on the same basis as for-profit entities; and (e) regulatory or legislative limitations affecting the Certificate of Need Laws (as defined below). South Carolina has adopted a Certificate of Need Law ( CON Law ), which regulates various types of activities and expenditures on behalf of or for health facilities, including hospitals, and services. The purpose of the CON Law is to prevent unnecessary duplication of expensive health care facilities and services in an effort to contain health care costs. Before undertaking certain types of activities or expenditures, any person, including a hospital or other health care facility or person, is required to file an application for a certificate of need, which is evaluated by the South Carolina Department of Health and Environmental Control ( DHEC ) on the basis of various statutory and regulatory criteria. These criteria include the need, cost-effectiveness and financial feasibility of each proposal, as well as the accessibility of the facility to indigent and other medically underserved patients. In some cases, applications to develop or operate a new service or facility are reviewed by DHEC on a competitive basis. The South Carolina courts, various parties and DHEC have been engaged in litigation related to DHEC s non-enforcement and suspension of the Certificate of Need program since funding was impacted and cut through actions of the South Carolina legislature and Governor. Since June 2013, DHEC has not enforced and has otherwise suspended the Certificate of Need program because of the lack of budgetary funding. It remains unclear as to when and how DHEC will re-initiate the enforcement of the Certificate of Need program. The Borrower has received certificates of need, where required, for all currently operational activities or has otherwise proceeded during the non-enforcement period by DHEC. The Borrower anticipates that it will receive certificates of need for future activities. The CON Law may limit or even prevent the Borrower from undertaking certain activities and expenditures which might be financially advantageous. In addition, the statutory and regulatory requirements may be amended in the future to increase or decrease the regulatory restrictions and resulting costs. For all of these reasons, the CON Law and regulations could have a materially adverse effect on the Borrower s financial condition, operations, revenues and expenses or its ability to make payments of principal, interest or any premium coming due on the 2014 Bonds. Licensing, Surveys and Accreditations Health care facilities, including the Borrower, are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. Those requirements include credentialing and survey requirements relating to Medicare and Medicaid participation, state licensing, private payor participation, the Joint Commission, the National Labor Relations Board and other federal, state and local government agencies. Renewal and continuance of certain of these licenses, certifications and accreditations are based on inspections, surveys, audits, investigations or other reviews. These activities are generally conducted in the normal course of business of health care facilities. Nevertheless, an adverse result could be the cause of loss or reduction in a facility s scope of licensure, certification or accreditation or reduce payments received. 45

52 Management of the Borrower currently anticipates no difficulty in renewing or maintaining currently held licenses, certifications or accreditations that are material to its operations, and does not anticipate a reduction in third-party payments that would materially adversely affect the financial condition, operations, revenues and expenses of the Borrower due to licensing, certification or accreditation difficulties. Nevertheless, there can be no assurance that the requirements of present or future laws, regulations, certifications, and licenses will not materially and adversely affect the operations of the Borrower. Actions in any of these areas could occur and could result in a reduction in utilization or revenues or both, or the loss of the Borrower s ability to operate all or a portion of its health care facilities, and, consequently, could adversely affect the Borrower s financial condition, operations, revenues and expenses or its ability to make payments of principal, interest or any premium coming due on the 2014 Bonds. State Tax Exemptions for Nonprofit Corporations Challenges to Real Property Tax Exemptions. The real property tax exemptions afforded to certain nonprofit health care providers by state and local taxing authorities have been challenged on the theory that the health care providers were not engaged in charitable activities. These challenges have been based on a variety of grounds, including allegations of aggressive billing and collection practices and excessive financial margins. While the Borrower is not aware of any current challenge to the tax exemption afforded to any material real property of any of its nonprofit affiliates, there can be no assurance that these types of challenges will not occur in the future. State and Local Tax Exemption. Until recently, states have not been as active as the IRS in scrutinizing the income tax exemption of health care organizations. Legislation that would result in further regulation and supervision of nonprofit corporations generally is introduced from time to time in state legislatures. The loss by the Borrower of federal tax exemption could trigger a challenge to its state or local tax exemptions. Depending on the circumstances, such a challenge, if successful, could be material and adverse. State and local taxing authorities undertake audits and reviews of the operations of tax-exempt health care providers with respect to their real property tax exemptions. In some cases, particularly where authorities are dissatisfied with the amount of services provided to indigents, the real property tax exempt status of the health care providers has been questioned. The majority of the real property of the Borrower is currently treated as exempt from real property taxation. Although the real property tax exemption with respect to its core facilities has not, to the knowledge of management, been under challenge or investigation, an audit could lead to a challenge that could adversely affect the real property tax exemption of the Borrower. It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to taxation of nonprofit corporations. There can be no assurance that future changes in the laws and regulations of state or local governments will not materially adversely affect the consolidated financial condition of the Borrower by requiring payment of income, local property or other taxes. Malpractice Lawsuits and Medical Professional Liability Insurance Market The dollar amounts of patient damage recoveries from medical malpractice lawsuits could be potentially significant. In recent years, McLeod Health has maintained its coverage with two professional liability insurance carriers. Mag Mutual is the professional liability insurer for McLeod Physician Associates and Darwin Select Insurance Co. (member of Allied World) provides the Borrower s professional liability insurance. McLeod Health has professional liability limits of $1,000,000 per claim and $3,000,000 annual aggregate. During the last five years, the professional liability insurance market has been relatively soft. Premiums have remained constant or have slightly decreased. Although the competitive market for insurance 46

53 carriers has increased, thus holding down premiums, there can be no guarantee that the unpredictability and increasing severity of jury awards and claims payouts will not occur. An increase in the costs of professional liability insurance coverage would adversely affect the operations or financial condition of McLeod Health by increasing operating costs. The South Carolina Charitable Immunity Statute allows for recovery against a charitable organization only the actual damages sustained, in an amount not exceeding the limitations of liability imposed in the South Carolina Tort Claims Act. The South Carolina Tort Claims Act (the Torts Claims Act ) provides that no person shall recover in any action or claim brought hereunder a sum exceeding $300,000 per person per occurrence or a total of $600,000 per single occurrence, except that both the per person and per occurrence amounts are raised to $1.2 million for the tort of a licensed physician or dentist employed by such facility. No award for damages under the Tort Claims Act shall include punitive or exemplary damages or interest prior to judgment. The Tort Claims Act applies for causes of action that arise or accrue after June 3, The PPAC Act states that it is the sense of the Senate that health care reform should address medical malpractice and medical liability insurance. The law authorized limited funding for state demonstration projects to develop and test alternatives to the civil litigation system to address patient safety and medical error issues. Nationwide Nursing Shortage The health care industry is facing a nationwide shortage of nursing professionals, including registered nurses. A shortage of nursing staff could result in escalating labor costs, delays in providing care, and patient care management issues, among other adverse effects. The shortage of nurses and other primary care healthcare practitioners may be exacerbated if the increase in access coverage to coverage provided under the PPAC Act leads to an increase in demand for medical care. The PPAC Act includes numerous workforce programs that should impact the existing and projected nursing shortages and increase the availability of other primary care health practitioners. There can be no assurance that a nursing or other non-physician health care practitioner shortage will not adversely affect the operations or financial condition of the Borrower. Competition The Borrower faces and will continue to face competition from other hospitals and physicians that offer comparable health care services. In addition, competition exists from alternative modes of health care delivery that offer lower priced services to the same population. Such alternative modes include ambulatory surgery centers, private laboratories and radiology services, skilled and specialized nursing facilities and home health care. No assurance can be given that increasing competition and consolidation of providers in the Service Area will not have a materially adverse effect on the Borrower s condition, operations, revenues and expenses. Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures Health plans, Medicare, Medicaid, employers, trade groups and other purchasers of health services, private standard-setting organizations and accrediting agencies increasingly are using statistical and other measures in efforts to characterize, publicize, compare, rank and change the quality, safety and cost of health care services provided by hospitals and physicians. Published rankings (such as score cards ), pay for performance, never events and other financial and non-financial incentive programs are being introduced to affect the reputation and revenue of hospitals and the members of their medical staffs and to influence the behavior of consumers and providers such as the Borrower. Currently prevalent are measures of quality based 47

54 on clinical outcomes of patient care, reduction in costs, patient satisfaction and investment in health information technology. Measures of performance set by others that characterize a hospital negatively may adversely affect its reputation and financial condition. Physician Relations The primary relationship between a hospital and physicians who practice in it 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 often file legal actions against hospitals. Such actions may include a wide variety of claims, some of which could result in substantial uninsured damages to a hospital. In addition, failure of the hospital governing body to oversee adequately the conduct of its medical staff may result in hospital liability to third parties. The Borrower is subject to such risks. Technology and Services Scientific and technological advances, new procedures, drugs and appliances, preventive medicine, occupational health and safety and outpatient healthcare delivery may reduce utilization and revenues of the Borrower in the future. Technological advances in recent years have accelerated the trend toward the use by hospitals of sophisticated, and costly, equipment and services for diagnosis and treatment. The acquisition and operation of certain equipment or services may continue to be a significant factor in hospital utilization, but the ability of the Borrower to offer such equipment or services may be subject to the availability of equipment or specialists, governmental approval, the ability to finance such acquisitions or operations, or reimbursement at levels sufficient to support the cost of such equipment or services. Affiliation, Merger, Acquisition and Divestiture The Borrower evaluates and pursues potential acquisition, merger and affiliation candidates as part of the overall strategic planning and development process. As part of its ongoing planning and property management functions, the Foundation reviews the use, compatibility and business viability of many of the operations of the Borrower, and from time to time the Foundation may pursue changes in the use of, or disposition of, the facilities used by the Borrower. Likewise, the Borrower occasionally receive offers from, or conduct discussions with, third parties about the potential acquisition of operations or properties which may become subsidiaries or affiliates of the Foundation in the future, or about the potential sale of some of the operations and properties which are currently conducted or owned by the Borrower. Discussions with respect to affiliation, merger, acquisition, disposition or change of use of facilities are held from time to time with other parties. These may be conducted with acute care hospital facilities, other health care providers, and insurers, and may relate to potential affiliation with Borrower. As a result, it is possible that the current organizations and assets of the Borrower may change from time to time. Impact of Disruptions in the Credit Markets and General Economic Factors General. The impact of the latest domestic and international economic downturn, including its impact on the availability of credit, personal, corporate and governmental revenues and the market for and interest payable on variable rate debt of or guaranteed by the Borrower, may adversely affect the Borrower s expenses and, consequently, its ability to pay debt service on its variable rate debt. The economic downturn has had, and may continue to have, negative repercussions upon the national and global economies, including a tightening of credit, volatility in the financial markets, increase in interest rates, reduced business activity, increased consumer bankruptcies and business failures and bankruptcies. 48

55 In response to the economic crisis of 2008 and 2009, Congress enacted the Emergency Economic Stabilization Act of 2008, which authorizes the U.S. Treasury to purchase up to $700 billion of mortgage backed debt and other securities from financial institutions and take other actions for the purpose of stabilizing the financial markets and the American Recovery and Reinvestment Act of 2009, which provides approximately $787 billion in federal spending and tax initiatives to stimulate the economy. Congress, the Federal Reserve Board and other agencies of the federal government and foreign governments have taken various actions designed to enhance liquidity, improve the performance and efficiency of credit markets and generally stabilize securities markets and stimulate spending. There can be no assurance these actions will be effective. The current conditions in credit markets may cause the Borrower s ability to borrow to fund capital expenditures to be more limited and more expensive. The credit market situation has also caused a number of financial institutions to restrict lending, including extending the term of liquidity and credit facilities. No assurance can be given that any of the financial institutions currently providing liquidity facilities or credit facilities for Borrower debt will renew or extend those facilities or that the Borrower will be able to obtain alternate liquidity for certain of its variable rate bonds on comparable terms. Contributions. The economic crisis may have an adverse impact on the Borrower s total receipts of charitable contributions, which have historically served as a material source of support for the Borrower s programs and services. In Fiscal Year 2013, the Borrower received contributions totaling $2,507,366. No assurance can be given that the effects of the recent economic crisis will not have a material adverse effect on the Borrower s ability to receive contributions at historical levels. Potential Effects of Bankruptcy If the Borrower were to file a voluntary petition in bankruptcy under the United States Bankruptcy Code, or with the filing of an involuntary petition in bankruptcy against the Borrower, the filing would be an automatic stay against the commencement or continuation of judicial or other proceedings against the Borrower and certain of its property. The filing of a petition in bankruptcy may allow an adjustment of debts, and obligations and other relief allowed under the United States Bankruptcy Code, which could include modifying or altering the rights of creditors generally, or any class of creditors, secured or unsecured. Under bankruptcy law, the court could issue certain orders that would substantially impact debts and various rights of creditors, would bind all creditors who had notice or knowledge of the plan and discharge all claims against the petitioner provided for in the plan. No plan may be confirmed unless certain conditions are met, including that the plan is in the best interests of creditors, is feasible and has been accepted by each class of claims impaired thereunder. Each class of claims will be deemed to have accepted the plan if at least two-thirds in dollar amount and more than one-half in number of the allowed claims of the class that are voted with respect to the plan are cast in its favor. Even if the plan is not so accepted, it may be confirmed if the court finds that the plan is fair and equitable with respect to each class of non-accepting creditors impaired thereunder and does not discriminate unfairly. Risks Related to Borrower Indenture Financings and Fraudulent Transfer or Conveyance Statutes The state of insolvency, fraudulent transfer or conveyance and bankruptcy laws relating to the enforceability of obligations of one corporation in favor of the creditors of another, or the obligation of one member of the Obligated Group to make debt service payments on behalf of the other member is unsettled. The ability of the Borrower to compel a member of the Obligated Group to make payment on behalf of another member of the Obligated Group could be subject to challenge if such other member would, by 49

56 making such payment, be rendered insolvent. In particular, such efforts by the Borrower may not be enforced under the United States Bankruptcy Code or applicable state fraudulent transfer or conveyance statutes if the obligation to pay is incurred without fair consideration or reasonably equivalent value to the obligor and if the incurrence of the obligation thereby renders any member of the Obligated Group insolvent. The standards for determining the fairness of consideration and the manner of determining insolvency are matters of judicial discretion based upon subjective standards and may vary under the United States Bankruptcy Code, state fraudulent transfer or conveyance statutes and applicable judicial decisions. It is possible that an action involving the attempt by the Borrower to compel one member of the Obligated Group to make payment on behalf of another member of the Obligated Group may not be successful in the event it is determined that sufficient consideration was not received by the transferring member and that such payment or obligation to pay would render the transferring member insolvent. In addition a court could determine, in the event of a bankruptcy of the Borrower, that payments made by such 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 federal Bankruptcy Code, which payments, if made during the one-year period prior to the date of filing of the petition in bankruptcy with respect to the Borrower, could be recovered by the trustee in bankruptcy from the holders of the 2014 Bonds. Enforceability of Certain Covenants The Loan Agreement obligates the Borrower to exercise all control it may have over its subsidiaries to cause them to pay, loan or otherwise transfer to the Borrower amounts necessary to pay debt service on the 2014 Bonds as the same becomes due and payable. Such agreement by the Borrower may not be enforceable to the extent such funds (a) are requested to make payments on any 2014 Bonds which are issued for a purpose not consistent with the charitable purposes of the affiliate from which such payment is required or which are issued for the benefit of any entity other than a tax-exempt organization; (b) are requested to be made from any property which is donor restricted or which is subject to a direct or express trust which does not permit the use of such property for such payments; or (c) would result in the cessation or discontinuation of any material portion of the healthcare or related services previously provided by the affiliate from which such payment is required. Due to the absence of clear legal precedent in this area, the extent to which the property of any affiliates of the Borrower currently falls within the categories referred to above cannot be determined and could be substantial. There is no clear precedent in the law as to whether transfers from an affiliate in order to pay debt service on bonds issued for the benefit of another affiliate may be avoided by a trustee under bankruptcy laws in the event of a bankruptcy of the transferring affiliate or pursuant to state fraudulent conveyances statutes. Under the United States Bankruptcy Code, a trustee in bankruptcy and, under certain state fraudulent conveyances statutes, a creditor of a related guarantor may avoid any obligation incurred by a related guarantor, if, among other factors, (a) the guarantor has not received fair consideration or reasonably equivalent value in exchange for the guaranty, and (b) the guaranty renders the guarantor insolvent, as defined in the United States Bankruptcy Code or certain state fraudulent conveyances statutes, or the guarantor is undercapitalized. Application by courts of the tests of insolvency, reasonably equivalent value and fair consideration has resulted in a conflicting body of case law. It is possible that, in an action to force one affiliate of the Borrower to pay debt service on bonds issued for the benefit of the Borrower or for another affiliate of the Borrower, a court might not enforce such a payment in the event it is determined that the affiliate is analogous to a guarantor, that fair consideration or reasonably equivalent value of such guarantee was not received and that the incurrence of such obligation has rendered and will render the transferring affiliate insolvent or the transferring affiliate is or will thereby become undercapitalized. 50

57 There exists common law authority and authority under state statutes for the ability of the courts to terminate the existence of a nonprofit corporation or undertake supervision of its affairs on various grounds, including a finding that such corporation has insufficient assets to carry out its stated charitable purposes. Such a court action may arise on the court s own motion or pursuant to a petition of a state attorney general or such other persons who have interests different from those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to see to the application of their funds to their intended charitable uses. Other Factors The following, among others, may adversely affect future operations of health care, educational and research institutions, including the Borrower, to an extent that cannot be determined at this time: (1) Hospitals are major employers, combining a complex mix of professional, quasi professional, technical, clerical, housekeeping, maintenance, dietary and other types of workers in a single operation. As with all large employers, the Borrower bears a wide variety of risks in connection with their employees. These risks include strikes and other related work actions, contract disputes, discrimination claims, personal tort actions, workrelated injuries, exposure to hazardous materials and other risks that may flow from the relationships between employer and employee or between physicians, patients and employees. Many of these risks are not covered by insurance, and certain of them cannot be anticipated or prevented; (2) Cost and availability of energy; (3) Potential depletion of the Medicare trust fund; (4) Adoption of additional health care reform legislation that would establish a national health program; (5) Continued availability of governmental and private funding for medical research activities conducted by the Borrower; (6) Increased medical malpractice exposure (affecting the Borrower or in general) which affect the cost and availability of professional liability insurance, and sufficiency of self-insurance reserves; (7) Reduced need for hospitalization or other medical services arising from future medical and scientific advances; (8) Increased unemployment or other adverse economic conditions which would increase the proportion of patients who are unable to pay fully for the cost of their care; (9) Increased competition from other hospitals and other health care providers that offer health care services to the populations which the Borrower serves; (10) Efforts by insurers and governmental agencies to limit the cost of hospital services and to reduce the utilization of health care facilities by such means as preventive medicine, improved occupational health and safety and outpatient care; (11) Acts of terrorism; (12) Any inability to obtain any required governmental approvals for necessary capital expenditures; and (13) The occurrence of natural disasters, including floods, tornados and hurricanes, which might damage the facilities of the Borrower. 51

58 THE BOND TRUSTEE The Bond Trustee is U.S. Bank National Association, a national banking association with a corporate trust office in Columbia, South Carolina. The Bond Trustee is authorized to exercise corporate trust powers under South Carolina law. The Bond Trustee is under no obligation to institute any suit or to take any remedial proceedings under the Trust Agreement or the Loan Agreement or to enter any appearance or in any way defend any suit in which it may be made defendant, or to take any steps in the execution of any of the trusts created under the Trust Agreement, until it has been indemnified to its satisfaction against any and all costs and expenses, outlays and counsel fees and other reasonable disbursements, and against all liability. The Bond Trustee is not financially liable for the payment of interest on or principal or redemption premium of the 2014 Bonds beyond the extent of the amounts received from the Issuer or as a result of exercise of remedies provided for in the Trust Agreement, and the Holders will have no right to look to the Bond Trustee for payment of interest on or principal or premium of the 2014 Bonds except from such sources. The Bond Trustee shall not be obliged to take notice of or be deemed to have notice of any Event of Default under the Trust Agreement or the Loan Agreement unless specifically notified in writing of such Event of Default by the Issuer or the holders of not less than 25% in aggregated principal amount of Bonds then Outstanding, except upon the happening of an Event of Default resulting from the failure of the Issuer to pay any interest on or principal or redemption premium of the 2014 Bonds when due or the failure of the Borrower to pay any loan repayment under the Loan Agreement. The Trust Agreement provides that the Bond Trustee may resign or may be removed by the Holders of not less than a majority in aggregate principal amount of the 2014 Bonds. Upon such event, the Borrower shall recommend, and the Issuer shall appoint a successor Bond Trustee. Such successor must be a trust company or bank having trust powers, be authorized to exercise trust powers within South Carolina and have a reported combined capital, surplus and undivided profits aggregating not less than $50,000,000. The Trust Agreement also provides that so long as the Issuer is not in default under the terms of the Trust Agreement, the Bond Trustee can be removed by the Issuer at any time. CONTINUING DISCLOSURE Pursuant to the provisions of the Loan Agreement, the Borrower will undertake, for the benefit of the beneficial owners of the 2014 Bonds, to provide: (a) by not later than 120 days after the end of each fiscal year of the Borrower (the Fiscal Year ), beginning with the Fiscal Year ending September 30, 2014, to the National Repository and to the state information depository for the State of South Carolina ( SID ), if any, the Audited Financial Statements (described below) for such Fiscal Year, if available, or, if such Audited Financial Statements are not available by 120 days after the end of such Fiscal Year, the Unaudited Financial Statements (described below) for such Fiscal Year to be replaced subsequently by the Audited Financial Statements to be delivered within 10 days after such Audited Financial Statements become available for distribution; (b) by not later than 120 days after the end of each Fiscal Year, beginning with the Fiscal Year ending September 30, 2014, to the National Repository and to the SID, if any, the following financial and statistical data as of a date not earlier than the end of the preceding Fiscal Year, (i) utilization statistics of the type set forth under the heading UTILIZATION in Appendix A hereto; (ii) revenue and expense data of the type set forth under the headings FINANCIAL PERFORMANCE and MANAGEMENT DISCUSSION in Appendix A hereto; (iii) sources of patient revenue of the type set forth under the heading FINANCIAL PERFORMANCE Sources of Revenue in Appendix A hereto and (iv) outstanding indebtedness, unless 52

59 such information is included in the Audited Financial Statements together with such narrative explanation as may be necessary to avoid misunderstanding, and to assist the reader in understanding the presentation of financial and operating data concerning the Borrower and in judging the financial and operating condition of the Borrower; (c) by not later than 45 days after the end of the each quarterly fiscal period of each Fiscal Year, beginning with the quarterly fiscal period ending December 31, 2014 for Fiscal Year 2015, to the National Repository and to the SID, if any, for such quarterly fiscal period (i) Unaudited Financial Statements, including balance sheet and statement of operations of the Borrower, as of the end of each such quarterly fiscal period, shown in each case in comparative form with the same period of the preceding quarterly fiscal period in reasonable detail; (ii) an update of the financial and statistical data as of a date not earlier than the end of the preceding quarterly fiscal period for the following information: (A) utilization statistics of the type set forth under the heading UTILIZATION in APPENDIX A hereto; (B) revenue and expense data of the type set forth under the headings FINANCIAL PERFORMANCE and MANAGEMENT DISCUSSION in Appendix A hereto; (C) sources of patient revenue of the type set forth under the heading FINANCIAL PERFORMANCE Sources of Revenue in Appendix A hereto and (D) outstanding indebtedness unless such information is included in the Unaudited Financial Statements in Appendix A hereto, together with such narrative explanation as may be necessary to avoid misunderstanding, and to assist the reader in understanding the presentation of financial and operating data concerning the Borrower and in judging the financial and operating condition of the Borrower; and (iii) notice of any of the following events with respect to the 2014 Bonds: (1) Principal and interest payment delinquencies; (2) Non-payment related defaults, if material; (3) Unscheduled draws on debt service reserves reflecting financial difficulties; (4) Unscheduled draws on credit enhancements reflecting financial difficulties; (5) Substitution of credit or liquidity providers, or their failure to perform; (6) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701 TEB) or other material notices or determinations with respect to the tax status of the 2014 Bonds, or other material events affecting the tax status of the 2014 Bonds; (7) Modifications to rights of the Holders of the 2014 Bonds, if material; (8) Bond calls, if material, and tender offers; (9) Defeasances; (10) Release, substitution, or sale of property, if any, securing repayment of the 2014 Bonds, if material; (11) Rating changes; (12) Bankruptcy, insolvency, receivership or similar event of the Borrower; 53

60 (13) The consummation of a merger, consolidation, or acquisition involving the Borrower or the sale of all or substantially all of the assets of the Borrower, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) Appointment of a successor or additional trustee or the change of name of a trustee, if material. Audited Financial Statements means the consolidated financial statements of the Borrower and its affiliates for a twelve-month period, or for such other period for which an audit has been performed, prepared in accordance with generally accepted accounting principles, which have been audited and reported upon by independent certified public accountants. Audited Financial Statements will also include, in an additional information section, unaudited combined financial statements for the same twelve-month period from which the accounts of any affiliate which is not a member of the Obligated Group have been eliminated and to which the accounts of any member of the Obligated Group which is not an affiliate have been added; provided, however, that for purposes of adding the accounts of a member of the Obligated Group which is not an affiliate, the balances of such accounts will be extracted from audited financial statements of such member of the Obligated Group and its affiliates, if any. Unaudited Financial Statements has the same meaning as Audited Financial Statements, except that such financial statements have not been audited and reported upon by independent certified public accountants. National Repository means the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access ( EMMA ) system. The Loan Agreement also provides that if the Borrower fails to comply with the undertaking described above, any beneficial owner of the 2014 Bonds then Outstanding may take action to protect and enforce the rights of all beneficial owners with respect to such undertaking, including an action for specific performance; provided, however, that failure to comply with such undertaking will not be an event of default under the Loan Agreement and will not result in any acceleration of payment on the 2014 Bonds. All actions shall be instituted, had and maintained in the manner provided in this paragraph for the benefit of all beneficial owners of the 2014 Bonds. Pursuant to the Loan Agreement, the Borrower reserves the right to modify from time to time the information to be provided to the extent necessary or appropriate in the judgment of the Borrower, provided that: (1) any such modification may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, composition, nature or status of the Obligated Group; (2) the information to be provided, as modified, would have complied with the requirements of Rule 15c2-12 issued under the Securities Exchange Act of 1934 ( Rule 15c2-12 ) as of the date of this Official Statement, after taking into account any amendments or interpretations of Rule 15c2-12, as well as any changes in circumstances; and (3) any such modification does not materially impair the interests of the beneficial owners of the 2014 Bonds, as determined by bond counsel, or by the approving vote of the registered owners of a majority in principal amount of the 2014 Bonds then Outstanding pursuant to the terms of the Trust Agreement, as it may be amended from time to time. 54

61 Any annual financial information containing the amended operating data or financial information is required to explain, in narrative form, the reasons for the amendments and the impact of the change in the type of operating data of financial information being provided. The undertaking described in this section will terminate upon payment, or provision having been made for payment in a manner consistent with Rule 15c2-12, in full or the principal of and interest on all of the 2014 Bonds. The Borrower has also covenanted in the Series 2014 Supplemental Master Indenture to cause any person becoming a member of the Obligated Group to comply with the continuing disclosure provisions of the Loan Agreement to the extent that such provisions require information to be provided with respect to such member of the Obligated Group. In addition, any person subsequently becoming a member of the Obligated Group is required to deliver to the Bond Trustee an instrument containing the agreement of such person to become subject to the continuing disclosure provisions of the Loan Agreement to the extent that such provisions are applicable to such member of the Obligated Group. The Borrower is current in the filing of Annual Reports required by certain outstanding indebtedness. UNDERWRITING The 2014 Bonds are being purchased by J.P. Morgan Securities LLC (the Underwriter ) at an aggregate purchase price of $69,885, (which is equal to the principal amount of the 2014 Bonds plus original issue premium of $9,047,079.50, and less underwriter s discount of $336,116.25). The Bond Purchase Agreement (the Purchase Agreement ) between the Issuer and the Underwriter and agreed upon and accepted by the Borrower, provides that the Underwriter will purchase all of the 2014 Bonds if any are purchased. The obligation of the Underwriter to accept delivery of the 2014 Bonds is subject to various conditions contained in the Purchase Agreement. The Borrower will indemnify the Underwriter against losses, claims and liabilities arising out of any untrue statement of a material fact relating to McLeod Health or its affiliates or their activities contained in this Official Statement or the omission therefrom of any material fact relating to McLeod Health or its affiliates or their activities in connection with the transactions contemplated by this Official Statement. The Underwriter intends to offer the 2014 Bonds to the public initially at the offering prices set forth on the inside cover page of this Official Statement which may change without requirement of prior notice. The Underwriter reserves the right to join with dealers and other underwriters in offering the 2014 Bonds to the public. The Underwriter may offer and sell the 2014 Bonds to certain dealers at prices lower than the public offering price. In connection with this offering, the Underwriter may overallot or effect transactions that stabilize or maintain the market price of the 2014 Bonds at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The Underwriter has entered into a negotiated dealer agreement ( Dealer Agreement ) with Charles Schwab & Co., Inc. ( CS&Co. ) for the retail distribution of certain securities offerings, at the original issue prices. Pursuant to the Dealer Agreement (if applicable to this transaction), CS&Co. will purchase 2014 Bonds from the Underwriter at the original issue price less a negotiated portion of the selling concession applicable to any 2014 Bonds that CS&Co. sells. LEGAL MATTERS Legal matters incident to the authorization and validity of the 2014 Bonds are subject to the approving opinion of Haynsworth Sinkler Boyd, P.A., Florence, South Carolina, as Bond Counsel, the proposed form of which is included in Appendix D to this Official Statement. Certain legal matters will be 55

62 passed upon for the Issuer by D. Malloy McEachin, Jr., County Attorney, Florence, South Carolina; for the Borrower by Aiken, Bridges, Elliot, Tyler & Saleeby, P.A., Florence, South Carolina and Moore & Van Allen, PLLC, Charleston, South Carolina; and for the Underwriter by Ballard Spahr LLP, Philadelphia, Pennsylvania. The various legal opinions to be delivered concurrently with the delivery of the 2014 Bonds express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. By rendering a legal opinion, the opinion giver does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or of the future performance of parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of such transaction. CERTAIN RELATIONSHIPS Benjamin T. Zeigler, Esq., a shareholder in the law firm of Haynsworth Sinkler Boyd, P.A., Bond Counsel to the Issuer in connection with the issuance of the 2014 Bonds, is a member of the McLeod Health Board. Haynsworth Sinkler Boyd, P.A. have from time to time represented the Issuer, Bond Trustee and the Borrower in previous matters unrelated to this financing. Moore & Van Allen, PLLC have from time to time represented the Bond Trustee and the Underwriter in previous matters unrelated to this financing. Federal Income Tax Generally TAX EXEMPTION On the date of issuance of the 2014 Bonds, Haynsworth Sinkler Boyd, P.A., Florence, South Carolina ( Bond Counsel ), will render an opinion that, assuming continuing compliance by the Issuer and Borrower with the requirements of the Code, and the applicable regulations promulgated thereunder (the Regulations ) and further subject to certain considerations described in Collateral Federal Tax Considerations below, under existing statutes, regulations and judicial decisions, interest on the 2014 Bonds is excludable from the gross income of the registered owners thereof for federal income tax purposes. Interest on the 2014 Bonds will not be treated as an item of tax preference in calculating the alternative minimum taxable income of individuals or corporations; however, interest on the 2014 Bonds will be included in the calculation of adjusted current earnings in determining the alternative minimum tax liability of corporations. The Code contains other provisions that could result in tax consequences, upon which no opinion will be rendered by Bond Counsel, as a result of (i) ownership of the 2014 Bonds or (ii) the inclusion in certain computations (including, without limitation those related to the corporate alternative minimum tax) of interest that is excluded from gross income. The opinion of Bond Counsel will be limited to matters relating to the authorization and validity of the 2014 Bonds and the tax-exempt status of interest on the 2014 Bonds as described herein. Bond Counsel makes no statement regarding the accuracy and completeness of this Official Statement. The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel s judgment as to the proper treatment of the 2014 Bonds for federal income tax purposes. Bond Counsel s opinions are based upon existing law, which is subject to change. Such opinions are further based on factual representations made to Bond Counsel as of the date thereof. Bond Counsel assumes no duty to update or supplement its opinions to reflect any facts or circumstances that may thereafter come to Bond Counsel s attention or to reflect any changes in law that may thereafter occur or become effective. Moreover, Bond Counsel s opinions are not a guarantee of a particular result, and are not binding on the Internal Revenue Service (the IRS ) or the courts; rather, such opinions represent Bond Counsel s professional judgment based on its review of existing law, and in reliance on the representations and covenants that it deems relevant to such opinions. 56

63 With respect to the status of the Borrower as a 501(c)(3) organization and certain organizational matters with respect to the Borrower, Bond Counsel has relied on the opinion of Moore & Van Allen, PLLC, Charleston, South Carolina, counsel to the Borrower. The opinion of Bond Counsel described above is subject to the condition that the Issuer and Borrower comply with all requirements of the Code and the Regulations, including, without limitation, certain restrictions on the use, expenditure and investment of the gross proceeds of the 2014 Bonds and the obligation to rebate certain earnings on investments of such gross proceeds to the United States Government, that must be satisfied subsequent to the issuance of the 2014 Bonds in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The Issuer and Borrower have covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the 2014 Bonds in gross income for federal income tax purposes retroactive to the date of issuance of the 2014 Bonds. The opinion of Bond Counsel delivered on the date of issuance of the 2014 Bonds is conditioned on compliance by the Issuer and Borrower with such requirements and Bond Counsel has not been retained to monitor compliance with the requirements subsequent to the issuance of such 2014 Bonds. Collateral Federal Tax Considerations Prospective purchasers of the 2014 Bonds should be aware that ownership of tax-exempt obligations may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, financial institutions, property and casualty insurance companies, life insurance companies, certain foreign corporations, certain S corporations, individual recipients of Social Security or Railroad Retirement benefits and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry taxexempt obligations. The 2014 Bonds have not been designated bank qualified tax exempt obligations under Section 265(b)(3) of the Code. Bond Counsel expresses no opinion concerning such collateral income tax consequences and prospective purchasers of 2014 Bonds should consult their tax advisors as to the applicability thereof. Future legislation, if enacted into law, or clarification of the Code may cause interest on the 2014 Bonds to be subject, directly or indirectly, to federal income taxation, or otherwise prevent owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislation or clarification of the Code may also affect the market price for, or marketability of, the 2014 Bonds. Prospective purchasers of the 2014 Bonds should consult their own tax advisers regarding any pending or proposed federal tax legislation, as to which Bond Counsel expresses no opinion. The IRS has established an ongoing program to audit tax-exempt obligations to determine whether interest on such obligations is includable in gross income for federal income tax purposes. Bond Counsel cannot predict whether the IRS will commence an audit of the 2014 Bonds. Bond Counsel s engagement with respect to the 2014 Bonds ends with the issuance of the 2014 Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the Issuer, the Borrower or the Owners regarding the tax-exempt status of the 2014 Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the Issuer and their appointed counsel, including the Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the Issuer or Borrower legitimately disagrees may not be practicable. Any action of the IRS, including but not limited to selection of the 2014 Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the 2014 Bonds, and may cause the Issuer or Borrower or the Owners to incur significant expense, regardless of the ultimate outcome. Under certain circumstances, the Borrower may be obligated to disclose the commencement of an audit under the Continuing Disclosure Agreement. See, CONTINUING DISCLOSURE, herein. 57

64 Original Issue Premium The 2014 Bonds have been sold at an initial public offering price which is greater than the amount payable at maturity (the Premium Bonds ). An amount equal to the excess of the purchase price of the Premium Bonds over their stated redemption prices at maturity constitutes premium on such 2014 Bonds. A purchaser of a Premium Bond must amortize any premium over the earlier of (i) such 2014 Bond s term or (ii) the first optional redemption date for such Premium Bonds using constant yield principles, based on the purchaser s yield to maturity or earlier redemption, as applicable. As premium is amortized, the purchaser s basis in such Premium Bond is reduced by a corresponding amount, resulting in an increase in the gain (or decrease in the loss) to be recognized for federal income tax purposes upon a sale or disposition of such Premium Bond prior to its maturity. Even though the purchaser s basis is reduced, no federal income tax deduction is allowed. Purchasers of any 2014 Bonds at a premium, whether at the time of initial issuance or subsequent thereto, should consult with their own tax advisors with respect to the determination and treatment of premium for federal income tax purposes and with respect to state and local tax consequences of owning such 2014 Bonds. State Tax Exemption Bond Counsel is of the further opinion that the 2014 Bonds and the interest thereon are exempt from all taxation by the State of South Carolina, its counties, municipalities and school districts except estate, transfer or certain franchise taxes. Interest paid on the 2014 Bonds is currently subject to the tax imposed on banks by Section , Code of Laws of South Carolina 1976, as amended, which is enforced by the South Carolina Department of Revenue as a franchise tax. The opinion of Bond Counsel is limited to the laws of the State of South Carolina and federal tax laws. No opinion is rendered by Bond Counsel concerning the taxation of the 2014 Bonds or the interest thereon under the laws of any other jurisdiction. RATINGS Standard & Poor s Credit Market Services, a Division of The McGraw-Hill Companies, Inc. has assigned a rating of AA- with a stable outlook to the 2014 Bonds; and Fitch Ratings has assigned a rating of AA- with a stable outlook to the 2014 Bonds. Such ratings reflect only the respective views of such organizations, and an explanation of the significance of such ratings may be obtained only from the rating agency furnishing the same. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by either or both such rating agencies if, in the judgment of either or both, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the 2014 Bonds. FINANCIAL ADVISOR The Borrower has retained Kaufman, Hall & Associates, Inc., Skokie, Illinois, to serve as financial advisor to the Borrower in connection with the issuance of the 2014 Bonds. The Financial Advisor assisted the Borrower with preparation of this Official Statement and in other matters relating to the planning and issuance of the 2014 Bonds. However, the Financial Advisor is not obligated to undertake, and has not undertaken, to make an independent verification or to assume responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement. 58

65 FINANCIAL STATEMENTS Independent Auditors The consolidated financial statements of the Borrower as of and for the years ended September 30, 2013 and 2012, included in this Official Statement in Appendix B, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing therein. Representation of the Borrower According to Borrower officials, there have been no adverse material changes in the financial condition of the Borrower from the date of the financial information for the year ended September 30, 2013 to the date of this Official Statement. VERIFICATION OF MATHEMATICAL ACCURACY On the date of delivery and payment, proceeds of the 2014 Bonds will be used to purchase eligible securities (the Escrowed Obligations ) to be held in trust by the Bond Trustee to provide for payment of principal of and interest on the Refunded Bonds due through their redemption date. The arithmetical accuracy of certain computations included in the schedules provided by or on behalf of the Issuer relating to the computation of anticipated receipts of principal and interest on the Escrowed Obligations to pay the regularly scheduled debt service on the Refunded Bonds, if any, until the redemption date and to redeem the Refunded Bonds on the redemption date will be verified by Causey Demgen & Moore Inc., certified public accountants. Such computations are based solely upon assumptions and information supplied by or on behalf of the Issuer. Causey Demgen & Moore Inc. has restricted its procedures to verifying the arithmetical accuracy of certain computations and has not made any study or evaluation of the assumptions and information upon which the computations are based and, accordingly, has not expressed an opinion on the data used, the reasonableness of the assumptions, or the achievability of future events. LITIGATION In the opinion of the Obligated Group management, based upon the advice of its counsel, no litigation or proceedings are pending or threatened against it except the following: litigation and proceedings involving claims for professional liability in which the probable recoveries and estimated costs and expenses of defense will be entirely within applicable insurance policy limits (subject to applicable deductibles) and estimated self-insurance reserve; litigation and proceedings other than those described above in which, if adversely determined, would not materially adversely affect the financial condition or operation of the System. There is no pending or threatened litigation seeking to restrain or enjoin the issuance, sale, execution or delivery of the 2014 Bonds, or in any way questioning or affecting the validity of the 2014 Bonds or any proceedings of the Issuer or the Borrower taken with respect to the issuance or sale thereof, or in any way questioning or affecting the validity of the pledge or application of any moneys, revenues or security provided for the payment of the 2014 Bonds, the use of the Bond proceeds or the existence or powers of the Issuer or the Borrower. In the opinion of the Borrower and management of the Borrower, there is no litigation pending or, to the knowledge of the Issuer or the Borrower, threatened, which could have a material adverse effect upon the business, operations or properties of the Borrower. 59

66 MISCELLANEOUS The references herein to the Act, the Trust Agreement, the Loan Agreement, the Master Trust Indenture, the Series 2014 Supplemental Master Indenture, the 2014 Bonds and other materials are brief outlines of certain provisions thereof. Such outlines do not purport to be complete, and for full and complete statements of such provisions reference is made to such instruments, documents and other materials, copies of which are on file with the Borrower, the Issuer and the principal corporate trust office of the Bond Trustee. The Appendices attached hereto are integral parts of this Official Statement and must be read in conjunction herewith. Any statements made in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. The Issuer, its staff, its attorneys and members of the Issuer Council assume no responsibility for the accuracy or completeness of any representation or statement herein except for material with respect to them included under the captions THE ISSUER and LITIGATION herein. The information and expressions of opinion contained herein are subject to change without notice. The execution and distribution of this Official Statement by the Chairman of the Florence County Council have been duly authorized by the Florence County Council and the Borrower has approved this Official Statement. FLORENCE COUNTY, SOUTH CAROLINA Approved: By: /s/ James T. Schofield Chairman, Florence County Council McLEOD REGIONAL MEDICAL CENTER OF THE PEE DEE, INC. By: /s/ Robert L. Colones President and Chief Executive Officer 60

67 APPENDIX A INFORMATION CONCERNING MCLEOD HEALTH OBLIGATED GROUP AND AFFILIATES The information contained in this Appendix A has been obtained from McLeod Health and other sources that it believes are reliable.

68 TABLE OF CONTENTS INTRODUCTION... 1 The Borrower... 1 McLeod Health and the System... 1 Obligated Group... 2 SYSTEM CORPORATE ORGANIZATION... 2 McLeod Health... 3 The Borrower... 3 McLeod Medical Center-Dillon... 3 Physician Associates... 4 Other System Affiliates... 4 Governance... 4 Conflicts of Interest... 6 Management... 6 MCLEOD HEALTH HOSPITAL FACILITIES AND OTHER OPERATING DIVISIONS OF THE BORROWER... 9 McLeod Regional Medical Center... 9 McLeod Medical Center-Dillon AWARDS STRATEGIC PLANNING OBLIGATED GROUP MEDICAL STAFF SERVICE AREA TOTAL SERVICE AREA McLeod Regional Medical Center Discharges by County McLeod Medical Center-Darlington Discharges by County McLeod Medical Center-Dillon Discharges by County Demographic and Socioeconomic Trends Major Employers Unemployment Competition Obligated Group PSA Market Share of Inpatient Discharges UTILIZATION FINANCIAL PERFORMANCE Condensed Consolidated Balance Sheets Condensed Consolidated Statements of Operations Sources of Revenue Investments and Liquidity Position of the Obligated Group Employee Retirement Plans Current Indebtedness of the Obligated Group OBLIGATED GROUP COVERAGE OF HISTORICAL AND PRO FORMA DEBT SERVICE OBLIGATED GROUP HISTORICAL AND PRO FORMA CAPITALIZATION MANAGEMENT DISCUSSION Service Area Summary of Utilization and Financial Performance Capitalization and Liquidity EMPLOYEES INSURANCE AND LITIGATION ACCREDITATION, LICENSES, MEMBERSHIPS AND AFFILIATIONS COMMUNITY OUTREACH, EDUCATION AND VOLUNTEER SERVICES Capitalized terms used, but not defined in this Appendix A are defined in the forepart of this Official Statement and in Appendix C to this Official Statement. A-i

69 INTRODUCTION The Borrower McLeod Regional Medical Center of the Pee Dee, Inc., doing business as McLeod Regional Medical Center (the Borrower ), is a charitable, nonprofit corporation, located in the City of Florence, South Carolina. The Borrower owns and operates McLeod Regional Medical Center, a 453-bed tertiary care facility, together with other hospital, surgical, health and fitness, behavioral health, and hospice facilities located in Florence and Darlington Counties, South Carolina. In addition, the Borrower is majority owner in a joint venture that owns and operates three medical office buildings on the McLeod Regional Medical Center campus. McLeod Regional Medical Center began as the eight bed Florence Infirmary established by Dr. Frank Hilton McLeod in 1906 for the purposes of providing an up-to-date facility for efficiency and best outcomes in the provision of medical care. In 1930, its name was changed to McLeod Infirmary and in 1935, a 200-bed, seven story building was constructed near the current campus. In 1956, a north wing to that facility was opened, which expanded the facility to approximately 280 beds. The McLeod Annex, a tuberculosis sanitarium, jointly owned and operated by Florence and Darlington Counties, was acquired by McLeod Infirmary in The McLeod Infirmary was renamed McLeod Memorial Hospital in In 1979, its name changed to McLeod Regional Medical Center of the Pee Dee, Inc., doing business as McLeod Regional Medical Center. In that same year, the Borrower consolidated operations at its current campus. The Borrower is a member of the McLeod Health Obligated Group and a member of the System (hereafter defined), as described under SYSTEM CORPORATE ORGANIZATION below. McLeod Regional Medical Center is the main hospital campus for the System. McLeod Health and the System McLeod Health, a charitable, nonprofit corporation, is the parent corporation and sole member of the Borrower, McLeod Medical Center-Dillon, McLeod Loris Seacoast Hospital ( Loris Seacoast ), McLeod Physician Associates II ( Physician Associates ), and McLeod Health Foundation ( Foundation ), and is the sole shareholder of McLeod Physician Associates, Inc., all of which are collectively referred to as the System. The System provides a broad array of advanced tertiary, secondary, general acute, post-acute, ancillary, physician, and other related services to a 12-county area in the northeast quadrant of South Carolina (the State ), known as the Pee Dee region of the State. McLeod Health was formed with the mission to improve the overall health and well-being of people living within South Carolina and eastern North Carolina by providing excellent healthcare. McLeod Health was organized on July 3, 2003 as a South Carolina nonprofit corporation as part of a corporate reorganization of the System (the 2003 Reorganization ). The 2003 Reorganization was implemented with the intent to: (i) provide greater access to, and a higher quality of, healthcare services; (ii) reduce administrative time and expense by eliminating unnecessary for-profit corporations and streamlining operations; (iii) centralize management and provide better focus and coordination of healthcare services; (iv) allow increased communication and cooperation among System affiliates; and (v) improve the quality of healthcare services provided as a result of greater physician involvement in quality of care and other clinical matters. See SYSTEM CORPORATE ORGANIZATION below. An affiliation between the 155-bed Loris Community Hospital District d/b/a Loris Healthcare System ( Loris ) and McLeod Health became effective January 9, On such date, Loris contributed the majority of its assets to Loris Seacoast, a South Carolina non-profit corporation of which McLeod Health is the sole member. Loris Seacoast is not a member of the Obligated Group, but it is consolidated into McLeod Health's financial statements. The outstanding debt of Loris Seacoast is $69.5 million of which the majority is a Federal Housing Administration insured mortgage note payable. A-1

70 Obligated Group McLeod Health, the Borrower, McLeod Medical Center-Dillon and Physician Associates comprise all of the members of the Obligated Group established under an Amended and Restated Master Trust Indenture dated as of January 15, 1998, as amended and supplemented (the Master Trust Indenture ) between the Borrower and U.S. Bank National Association, as successor master trustee (the Master Trustee ). Any member of the Obligated Group may incur debt by issuing an obligation under the Master Trust Indenture. All members of the Obligated Group are jointly and severally liable for all such obligations issued. No member of the Obligated Group may withdraw from the Obligated Group unless all of the obligations issued by such member under the Master Trust Indenture are no longer outstanding or are fully defeased and there is delivered to the Master Trustee evidence that certain financial conditions with respect to the Obligated Group after the withdrawal of such member are met. See Appendix C THE MASTER TRUST INDENTURE Withdrawal from the Obligated Group. The Obligated Group accounts for 87.2% of total revenues, 85.3% of the total expenses, 97.5% of net assets and 79.4% of the net liabilities of the System as of April 30, SYSTEM CORPORATE ORGANIZATION Set forth below is a current corporate organizational chart for the System. McLeod Health McLeod Loris Seacoast Hospital McLeod Physician Associates II McLeod Physician Associates, Inc. (for-profit) (in-active) McLeod Regional Medical Center of the Pee Dee, Inc., doing business as McLeod Regional Medical Center McLeod Medical Center-Dillon McLeod Health Foundation McLeod Medical Partners, LLC (for-profit JV) Obligated Group Member Not an Obligated Group Member A-2

71 McLeod Health McLeod Health is a South Carolina nonprofit corporation and an organization described under Sections 501(c)(3) and 509(a)(3) of the Internal Revenue Code of 1986, as amended (the Code ). McLeod Health is the sole member of the Borrower, McLeod Medical Center-Dillon, Loris Seacoast, Physician Associates and the Foundation, and the sole shareholder of McLeod Physician Associates, Inc., an inactive corporate subsidiary. See INTRODUCTION McLeod Health and the System above. McLeod Health provides governance and administrative oversight to the System through standard member/shareholder reserved powers set forth in the corporate bylaws of its affiliated organizations, including the members of the Obligated Group. See Governance below. The Borrower The Borrower is a South Carolina nonprofit corporation and an organization described under Sections 501(c)(3) and 509(a)(1) of the Code. The Borrower is headquartered in the City of Florence, Florence County, South Carolina, which is situated in the Pee Dee region of the State, located approximately 70 miles northeast of Columbia, the state capital, 70 miles west of Myrtle Beach, and 90 miles north of Charleston. Florence is the largest city in Florence County and is designated a Metropolitan Statistical Area. The Borrower owns and operates the following organizations, which operate as divisions of the Borrower: McLeod Regional Medical Center, the System s main hospital campus located in Florence, South Carolina, which includes a 453-bed tertiary care facility and a 40-bed neonatal intensive care unit; McLeod Medical Center-Darlington, a 49-bed community hospital located in Darlington, South Carolina; McLeod Behavioral Health, a 23-bed psychiatric facility located on the campus of McLeod Medical Center-Darlington; McLeod Home Health, a five-county home healthcare organization with offices in Florence, South Carolina; McLeod Hospice House, a 24-bed inpatient hospice facility located in Florence, South Carolina; McLeod Health & Fitness Center, a comprehensive health and fitness center located in Florence, South Carolina; McLeod Ambulatory Surgery Center, a free-standing outpatient service center located on the campus of McLeod Regional Medical Center; and McLeod Urgent Care Centers, two facilities for care of non-emergent conditions or illnesses located in Florence and Darlington, South Carolina. Additionally, the Borrower is the majority owner in a joint venture, McLeod Medical Partners, LLC, which owns and operates three medical office buildings on the campus. See MCLEOD HEALTH HOSPITAL FACILITIES AND OTHER OPERATING DIVISIONS OF THE BORROWER McLeod Regional Medical Center below. McLeod Medical Center-Dillon McLeod Medical Center-Dillon is a South Carolina nonprofit corporation and an organization described under Sections 501(c)(3) and 509(a)(1) of the Code. McLeod Medical Center-Dillon owns and operates a 79-bed community hospital and an on-campus medical office building located in the City of Dillon, Dillon County, South Carolina. Dillon County borders Florence County to the northeast. See MCLEOD HEALTH HOSPITAL FACILITIES AND OTHER OPERATING DIVISIONS OF THE BORROWER McLeod Medical Center - Dillon below. A-3

72 Physician Associates Physician Associates is a South Carolina nonprofit corporation and an organization described under Sections 501(c)(3) and 509(a)(2) of the Code that operates a multi-specialty physician group practice of approximately 130 employed physicians providing primary and specialty care services through 54 offices in eight South Carolina counties and one North Carolina county. Physician Associates supports the mission of McLeod Health, providing comprehensive medical and surgical services, including a wide range of physician specialties, to McLeod s patients from a 12-county service area. Other System Affiliates The following System affiliates are not members of the Obligated Group. Loris Seacoast. Loris Seacoast is a South Carolina nonprofit corporation and an organization described under Sections 501(c)(3) and 509(a)(1) of the Code. Loris Seacoast owns and operates the following organizations, which operate as divisions of Loris Seacoast: McLeod Loris (formerly Loris Community Hospital), a 105-bed community hospital located in Loris, South Carolina; McLeod Seacoast (formerly Seacoast Medical Center), a 50-bed community hospital located in Little River, South Carolina; Loris Extended Care Center, an 88-bed long-term care facility located in Loris, South Carolina; Center for Health and Fitness, a health and fitness center located in Loris, South Carolina; and Seacoast Medical Office Building, a facility which contains multiple physician practices in Little River, South Carolina. Foundation. The Foundation was organized in 1986 as a South Carolina nonprofit corporation and is an organization described under Sections 501(c)(3) and 509(a)(3) of the Code. The Foundation is principally engaged in fundraising activities for the System. According to its bylaws, the Foundation s governing body consists of not less than 15 and not more than 30 members, each of which is appointed by the Board of Trustees of McLeod Health (the McLeod Health Board or the Board ). Currently, there are 26 members of the Foundation s governing body. At least one member of the Foundation s governing body must be a member of the McLeod Health Board. McLeod Medical Partners, LLC. McLeod Medical Partners, LLC is a for-profit entity that owns and operates three medical office buildings on the McLeod Regional Medical Center campus. The Borrower owns a 62% share in the equity of this company. Of the remaining 38%, 22 individual physicians own individual shares of between about 0.24% and 4.93%, and an approximately 7.88% share is held by AWC Investments LLC, a South Carolina for-profit limited liability company. McLeod Physician Associates, Inc. McLeod Physician Associates, Inc. is a South Carolina for-profit corporation that formerly operated a multi-specialty physician group practice, but is now inactive. Effective October 1, 2006, substantially all assets and operations of McLeod Physician Associates, Inc. were transferred to Physician Associates. Governance McLeod Health Board. The McLeod Health Board governs the System. The bylaws of each affiliated organization (except McLeod Medical Partners, LLC) reserve all major financial and operational decisions to McLeod Health as the sole member of the organization. The Borrower exerts control over McLeod Medical Partners, LLC by virtue of its majority ownership interest. Thus, the Board has ultimate A-4

73 authority over all System affiliated organizations. The Board consists of 20 members, representing a crosssection of the communities served by the System. Board members possess a broad range of backgrounds and interests, and include civic leaders and medical staff members. Under its bylaws, the Board may consist of 20 to 23 members. No more than 34.8% of the members at any time may be physicians on the active medical staff of the McLeod Regional Medical Center. Members of the Board are elected by existing members through a nomination process and serve five-year terms for a maximum of three consecutive terms. end. The following table sets forth the current members of the Board and the dates on which their terms Name Occupation Term Ends Charles Bethea Retired, Educational Professor February 2018 E. Daniel Guyton, Jr., MD Retired Urologist February 2018 Kaye Floyd-Parris Real Estate, VP-Griggs, Floyd & Grantham February 2018 Gerald T. Rosenlund Retired Plant Mgr, E.I.Dupont de Nemours, Inc. February 2018 Leander Crawford Real Estate, CEO, The Crawford Group February 2019 John C. Pittard, MD Nephrologist February 2019 Larry Geddie President, Geddie & Sons Carpet February 2017 Michael R. Rose, MD Anesthesiologist, VP, Surgical Svcs. February 2016 Steven R. Ross, MD Internal Medicine February 2016 John R. Braddy Managing Partner, Braddy Insurance February 2017 Andrew H. Rhea, MD Neurosurgeon, MRMC Chief of Staff December 2015 W. Crawford Moore Businessman February 2015 Benjamin T. Zeigler * Attorney, Haynsworth Sinkler Boyd, P.A. February 2015 Tracy Ray, OD Optometrist February 2015 Ronald M. Fowler Educator February 2019 Frank Boulineau President, Boulineau, Inc. February 2018 William N. Boulware, MD Internal Medicine February 2017 Willie E. (Bill) Boyd, Sr., PhD Assist. Superintendent, Administration/Darlington February 2017 Frances S. Jones Financial Advisor, Stifel Nicolaus Investments February 2018 Frank J. Brand, II Financial Advisor, Stifel Nicolaus Investments February 2018 * Haynsworth Sinkler Boyd, P.A. is serving as Bond Counsel in connection with the issuance of the 2014 Bonds. Committees of McLeod Health. There are eight committees established by the McLeod Health Board: the Governance, Finance, Nominating, Planning, Compliance, Medical and Education Affairs, Audit, and Physician Development Committees. Committee appointments are made by the McLeod Health Board pursuant to the terms of the McLeod Health bylaws. Advisory Boards of Borrower, McLeod Center-Dillon and Loris Seacoast. Designated powers have been granted by McLeod Health to the advisory boards of the Borrower, McLeod Medical Center-Dillon and Loris Seacoast, including medical staff oversight, appointment and credentialing, bylaw matters, and facility accreditation and licensure requirements. Additional powers may be delegated by McLeod Health to the advisory boards from time to time and as deemed necessary. A-5

74 The Community Board of the Borrower is an advisory board consisting of not less than ten and not more than 20 members, including ex-officio members consisting of the Chief Operating Officer of McLeod Health, the Chief Financial Officer of McLeod Health, the Administrator of the Borrower and the Chief of the Medical Staffs of the Borrower and McLeod Medical Center-Dillon. The remaining members are appointed by the McLeod Health Board. At least 51% of the total members of the Community Board must be current or former active members of the medical staff of the Obligated Group. The Chairperson of the Community Board must be a member of the McLeod Health Board appointed by the McLeod Health Board. The McLeod Medical Center-Dillon and Loris Seacoast Board of Directors are also advisory boards, consisting of four ex-officio members. McLeod Medical Center-Dillon s board consists of four ex-officio members which are the Administrator of McLeod Medical Center-Dillon, the Chief of the Medical Staff of McLeod Medical Center-Dillon, the Chief Operating Officer of McLeod Health, and the Chief Financial Officer of McLeod Health. Loris Seacoast s advisory board consists of 18 members, including community leaders as well as these ex-officio members: the Chief Operating Officer of McLeod Health, the Chief Financial Officer of McLeod Health, the Administrator of Loris Seacoast, and the Senior Vice President of McLeod Physician Associates Conflicts of Interest The McLeod Health Board has adopted specific policies and procedures and a code of conduct that governs transactions between insiders, including directors, and the System. Management believes that the transactions and relationships currently in place are on terms that are consistent with arm s length, fair market value arrangements between unaffiliated parties. Currently, the following members of the McLeod Health Board have business relationships with McLeod Health affiliates: Dr. Rose is an employee of McLeod Regional Medical Center, as well as a principal in the firm that is the main provider of anesthesia services for McLeod Regional Medical Center; and Dr. William Boulware, Dr. Steven Ross and Dr. John Pittard practice medicine at and refer patients to McLeod Regional Medical Center. Mr. Zeigler, along with other attorneys at the law firm at which he is a partner, Haynsworth Sinkler Boyd, PA, is serving as Bond Counsel in connection with the issuance of the 2014 Bonds. Management does not believe the objectivity of the McLeod Health Board is compromised in any way due to the relationships discussed above. Management The corporate members of the System s management team and certain biographical information regarding these individuals are set forth below. Robert L. Colones, President and CEO (age 56) - A long-time member of the McLeod management team, Mr. Colones has served as President and CEO of the organization since Mr. Colones joined McLeod Regional Medical Center in He was promoted in 1994 to Executive Vice President and Chief Operating Officer, charged with the leadership of McLeod Regional Medical Center. He earned a Master of Business Administration from Duke University Fuqua School of Business and his undergraduate degrees in Business Administration Finance from the University of South Carolina and Hospital Administration from Park College. A Milliken Medal of Quality Award recipient, Mr. Colones has served on the Faculty for the Institute for Healthcare Improvement s Executive Quality Academy. He also provides leadership as a member of the Quality Committee for the South Carolina Quality Forum Advisory Committee. Ronald L. Boring, Chief Operating Officer (age 55) - Mr. Boring joined the McLeod leadership team in He is responsible for leading strategic planning initiatives for the entire organization. Mr. Boring came to McLeod Health from Plano, Texas. For sixteen years, he served as President and CEO of Richardson Regional Medical Center in Richardson, Texas. Mr. Boring's educational background includes an Associate of Science degree in Respiratory Care from Tyler Junior College, in Tyler, Texas; a Bachelor of A-6

75 Science degree from the University of Texas Health Science Center in Dallas, Texas; a Master of Business Administration in Financial Management from Amber University also in Dallas; and a Master of Science in Health Care Administration from Trinity University in San Antonio, Texas. Mr. Boring is also a Graduate of the Columbia Business School Senior Executive Program at Columbia University in New York, New York. In 2014, Mr. Boring received a Doctorate in Health Administration from the Medical University of South Carolina (MUSC). S. Fulton Ervin, III, Senior Vice President of Finance & CFO (age 57) - A native of Florence, Mr. Ervin has served as Senior Vice President of Finance since February of He was promoted to Chief Financial Officer in March of As the Chief Financial Officer, Mr. Ervin is responsible for the areas of Accounting and Finance, Business Services, Managed Care, Occupational Medicine, Payroll, Workers Compensation, Procurement Services, Real Estate, Registration, Reservations and Scheduling, Construction, Grounds Maintenance, Engineering and Telecommunications. He joined the McLeod team in August of 1997 as Controller. During his tenure, Mr. Ervin has assumed many additional financial and operational responsibilities including being named Corporate Controller in 2003, assuming all accounting functions for McLeod Health and many of its subsidiaries. In 2005, as Associate Vice President, Mr. Ervin also had the added responsibility for Physician Accounting, Payroll and Financial Systems. A long-time member of the Healthcare Financial Management Association, Mr. Ervin graduated from Presbyterian College in 1979 with a Bachelor of Science degree in Business Administration/Accounting, and later received a Master in Business Administration from Francis Marion University in Marie Segars, Administrator of McLeod Regional Medical Center and Senior Vice President of McLeod Health (age 57) - Ms. Segars has served as Administrator and Senior Vice President for McLeod Regional Medical Center since January of She is responsible for the day to day operations of the 453- bed McLeod Regional Medical Center as well as the administrative oversight of McLeod Health and Fitness Center, McLeod Home Health, McLeod Hospice, the Area Health Education Center (AHEC), and the McLeod Family Medicine Residency Program. Prior to this position, Ms. Segars served McLeod Regional Medical Center as Vice President of Patient Services and Chief Nursing Officer since Ms. Segars began her career with McLeod in 1988 as Nursing Director for the McLeod Surgical Intensive Care. Ms. Segars has a Master's of Nursing Administration degree from the University of South Carolina, and is a fellow of the Johnson & Johnson School of Business Wharton Fellows Program in Management for Nurse Executives at the University of Pennsylvania. She is also certified by the American Nurses Association as a Certified in Nursing Administration - Advanced. Dane P. Ficco, Senior Vice President of McLeod Physician Associates (age 52) - Mr. Ficco joined the McLeod team in February of 2008 as Senior Vice President of Physician Associates. In his role leading the efforts of McLeod Physician Associates, Mr. Ficco is charged with ensuring that residents in the region have access to excellent and appropriate medical care through its network of approximately 130 physicians and 54 offices strategically located throughout northeastern South Carolina and one in North Carolina. His goals for McLeod Physician Associates include positioning it as the paramount medical group in the state by recruiting and retaining the most qualified physicians, providing the best care to patients, hiring the strongest employees, and connecting all of the medical staff. Ficco served as Vice President and then Senior Vice President of Physician Services in another healthcare system for more than eight years. In addition, he served as Interim Chief Information Officer in that organization for four years. Ficco graduated from Saint Vincent College in 1983 with a Bachelor of Science degree in Economics and received a Master in Business Administration from the University of Pittsburgh in Donna Isgett, Senior Vice President of Corporate Quality & Safety (age 50) - As Senior Vice President of Quality & Safety since February of 2010, Ms. Isgett is responsible for the corporate oversight of the Divisions of Clinical Effectiveness, Service Excellence, Operational Effectiveness, Corporate Quality and Risk Management, Clinical Outcomes, Epidemiology, Medical Staff Credentials and Case Management for McLeod Health. Ms. Isgett joined the McLeod team in 1997 as Director of Nursing Information Management A-7

76 where she was in charge of the centralized nursing office and assisted the organization in special projects. She was promoted to Associate Vice President of Clinical Effectiveness in 1999 where she had administrative oversight of the Clinical Effectiveness division which included the following McLeod Regional Medical Center departments: Clinical Outcomes Management, Counseling and Discharge Planning, Risk Management, Infection Control, Survey Readiness, Clinical Effectiveness Care Managers, Physician Credentialing and Medical Staff Support. Ms. Isgett s promotion to Vice President of Clinical Effectiveness (later renamed Quality & Safety) in January of 2002 expanded her role to include all facilities and departments of McLeod Health. She is currently Co-Chair of the McLeod Health Quality Operations Committee and a member of the Borrower s Community Board. During her tenure, McLeod Health has received numerous awards for its quality initiatives. She has also been an invited speaker on quality improvement at numerous national events including the Institute for Healthcare Improvement National Forums and Summits, the National Patient Safety Foundation, the Annual Patient Safety Congress, the National Quality Forum, and the American Hospital Association Annual Meeting. Ms. Isgett has also personally been honored with the Milliken Medal of Quality Award from the South Carolina Quality Forum, the 2009 Lewis Blackman Patient Safety Award from the South Carolina Hospital Association, and is currently a Liberty Fellow of the Aspen Institute. Isgett attained her Bachelor of Science degree in Nursing from Georgia State University and her Master s degree in Nursing from the Medical University of South Carolina in Charleston. Tim Hess, Senior Vice President of Human Resources and Training (age 49) - Mr. Hess joined the McLeod team in With more than two decades of service in Human Resources, his skills and experience in the functions of this specialty offer an essential connection to the culture of McLeod Health. Mr. Hess advocates for programs to support work-life balance and wellness for staff and medical professionals through new programs and services in Human Resources. After serving for four years as Vice President of Human Resources Operations for Saint Thomas Health in Nashville, Mr. Hess returned to McLeod Health in 2006 as Associate Vice President of Human Resources. In 2011, he was promoted to Senior Vice President of Human Resources and Training. In his current role, Mr. Hess leads the recruiting and retention efforts for McLeod Health as well as the development of the strategic management plan for Human Resources. Mr. Hess received a bachelor s degree in industrial relations from Xavier University in Cincinnati, Ohio, and a Master of Business Administration from the University of South Carolina. He is a Certified Compensation Professional through World at Work, a Certified Professional in Human Resources through the Society for Human Resource Management, and has served as facilitator for the McLeod Financial Peace University. Debbie Locklair, Senior Vice President and Administrator of McLeod Dillon (age 55) - Ms. Locklair has served as Administrator for McLeod Dillon since In this role, her responsibilities include daily leadership and coordination of the overall operations of the 79-bed McLeod Dillon, all regulatory and compliance licensing surveys and audits, and development and implementation for the five-year strategic plan. Ms. Locklair began her career at McLeod in 1989 as a Social Worker and Discharge Planner for the Neonatal Intensive Care Unit. In 1992, she was named Director of Discharge Planning, a position she held until 1994 when she assumed leadership as the Administrator of McLeod Darlington and Vice President of McLeod Health. In 2003, she became Administrative Chief of Staff for McLeod President and Chief Executive Officer Rob Colones. Ms. Locklair received her Bachelor of Science degree in Health Science from Furman University in Greenville. She also earned her master s degree in Counseling and Education from Francis Marion University. In 2014, she was elected to the board of directors of the South Carolina Chapter of the American College of Healthcare Executives for a three-year term. Edward D. Tinsley, Senior Vice President and Administrator of McLeod Loris Seacoast (age 61) - Mr. Tinsley has served in a leadership position with McLeod Health since He has been a part of healthcare leadership for more than 25 years, providing organizational expertise in a variety of duties, including vendor relationships, strategic planning, managed care, joint ventures, physician engagement and service line development. In 2011, he was named Administrator of Loris Seacoast. In this role, Mr. Tinsley is responsible for the daily operations of the 105-bed McLeod Loris, the 50-bed McLeod Seacoast as well as the 88-bed skilled nursing facility, Loris Extended Care Center. His duties as Administrator include fiscal A-8

77 management of these facilities, program development and long-term strategic planning. As part of his role with McLeod Health, he is also involved in government relations and serves on the Legislative Committee for the South Carolina Hospital Association. Mr. Tinsley received his Bachelor of Arts degree at Clemson University in 1974 and earned a Master of Business Administration from Duke University in Jenean Blackmon, Senior Vice President and Chief Information Officer (age 58) - Mrs. Blackmon joined McLeod Health in Her experience includes 31 years in healthcare, 10 of those in nursing and 21 in healthcare IT. After serving for over seven years as Director of Clinical Information Systems for McLeod Health she was promoted to Associate Vice President and in 2011 she was made Vice President of Information Systems and Medical Records. Ms. Blackmon now serves as Senior Vice President and CIO for McLeod Health. Ms. Blackmon has a Management Certification from the College of Health Sciences in Roanoke, VA, an Associate Degree in Nursing from Virginia Western Community College, Roanoke, VA, a Bachelor of Science Degree in Nursing from South University in Columbia and a Master of Business Administration in Healthcare Administration also from South University. She is a member of both Phi Kappa Honor Society of Nursing and Sigma Theta Tau - International Honor Society of Nursing. E. Coy Irvin, M.D., Chief Medical Officer (age 60) - Dr. Irvin joined the McLeod Regional Medical Center leadership team as Vice President of Medical Affairs and Chief Medical Officer in June of In 2013, he was promoted to Chief Medical Officer for McLeod Health expanding his role in this leadership function to all five hospitals in the McLeod network. In this position, Dr. Irvin s responsibilities include enhancing relationships and communications with the medical staff and assisting the Chief of Staff from each hospital as well as other officers of the medical staff. His duties also include overseeing the McLeod Hospitalist program and assuring that appropriate physician education, peer review, and quality assurance systems are in place to fulfill the mission and goals of McLeod Health. A graduate of Mississippi State University, Dr. Irvin received his medical degree from the University of Mississippi School of Medicine. He completed an internship in Family Medicine through the Pensacola Education Program followed by a residency in Family Medicine at the Northwest Florida Academy of Family Practice Program. Dr. Irvin came to McLeod from Baptist Health in Pensacola, Florida, where he served as Chief Medical Officer. He also served patients in a Family Medicine practice for nearly 25 years. MCLEOD HEALTH HOSPITAL FACILITIES AND OTHER OPERATING DIVISIONS OF THE BORROWER McLeod Regional Medical Center The Borrower owns and operates the following organizations, which operate as divisions of the Borrower, in Florence, South Carolina on or near the Borrower s main campus and in Darlington, South Carolina. See Licensed Beds and SERVICES below for more information about the services provided at the hospital facilities described below. McLeod Regional Medical Center. Located on 43 acres in Florence, South Carolina, this 453-bed tertiary care hospital consists of three towers: the McLeod Tower with approximately 387,644 square feet and seven floors; the Pavilion with approximately 520,801 gross square feet on 12 floors; and the Center for Intensive Care with approximately 188,100 gross square feet on four finished floors and one shell floor; as well as the Institute for Cancer Treatment and Research with approximately 60,000 gross square feet (11,685 square feet occupied with IV Therapy, 17,130 square feet occupied with oncology/pulmonology physician offices and the balance as undeveloped medical office shell space). Hospital facilities include an advanced stereotactic radiosurgery (SRS) photon beam, 29 advanced surgical suites, three open heart surgery rooms, one hybrid operating room, five heart catheterization labs and 10 endoscopy rooms. McLeod Regional Medical Center s fully digital surgical suites are designed to create a virtual cockpit for the doctor, enabling control of all devices, access to images and information, and virtual consultation using the internet, with colleagues down the hall, or across the country. Surgical services at McLeod Regional Medical Center A-9

78 include minimally invasive keyhole surgery, open heart, joint replacement and reconstruction, and image guided surgery. Buildings within the main hospital campus are interconnected via a 26,400 square foot public concourse, which contains an employee/retail pharmacy, a gift shop, credit union, three restaurants and food court, floral shop and chapel. Other programs and services include: the McLeod Heart and Vascular Institute; the McLeod Center for Cancer Treatment and Research, which is the region s only cancer program approved as a Community Hospital Comprehensive Cancer Program by the American College of Surgeons; and the McLeod Children s Hospital, which provides the highest level of pediatric care available in the region. McLeod s 40-bed neonatal intensive care unit is the designated Regional Perinatal Center for northeastern South Carolina. Three Board-certified neonatologists and one neonatal nurse practitioner staff the unit, along with the region s most comprehensive nursing, respiratory therapy and occupational therapy staff, trained and experienced in the management of high-risk newborns and their families. McLeod Regional Medical Center s diagnostic services include the state s first 320-slice CT-scanner and the only GE High-Speed Tesla 0.7 Open-MRI unit in the region. In addition, McLeod Regional Medical Center recently became the first hospital in the United States to acquire Samsung's XGEO GC80, a smart X-ray room designed to provide better images, lower radiation doses, and quicker exam times. McLeod Regional Medical Center also offers the first and only fixed-based PET scanner in the Pee Dee region of the State. For breast health needs, McLeod Regional Medical Center has the region s only Breast MRI 8-channel biopsy coil, and was the first in Florence County to install digital mammography (which occurred in the spring of 2007). Emergency services include Level-2 trauma, certified chest pain and stroke centers. Outpatient services include sleep lab, wound care, diabetes center, sports medicine, and adult and pediatric rehabilitation. McLeod Ambulatory Surgery Center. This 7,288 square foot, free-standing outpatient surgery center dedicated to eye care is located on the campus of McLeod Regional Medical Center and utilizes the latest in ophthalmic technology. The center averages 1,300 various eye procedures a year including cataract and lasik surgeries. McLeod Health & Fitness Center. This comprehensive health and fitness center, located on the wellness campus in Florence, South Carolina, consists of 79,422 square feet on two floors, and offers state of the art wellness services, fitness equipment, personal training, cardiac rehabilitation services, indoor and outdoor tracks, aquatic center, and a day spa. McLeod Rehabilitation and Sports Medicine. The Borrower s 25,374 gross square foot orthopedic and sports therapy facility is located on the wellness campus in Florence, South Carolina. This specialized Sports Medicine program provides physicians, therapists, and certified athletic trainers who are dedicated to injury prevention, performance improvement, and injury rehabilitation. McLeod Home Health. McLeod Home Health is a home health care organization with offices in Florence, South Carolina that serves five of the six counties in McLeod Health s primary service area including Florence, Darlington, Dillon, Marion and Lee counties. McLeod Home Health offers a range of healthcare services to individuals who require medical care at home, including skilled nursing, physical therapy, occupational therapy, wound care, diabetes management, and medical social work services. McLeod Hospice House. The McLeod Hospice House is a 24-bed inpatient hospice facility located in Florence, South Carolina. The 32,524 gross square foot facility includes 24 private rooms especially designed for the comfort of the patient, which afford space for patients families to stay with their loved ones. Sensory gardens, a chapel and other amenities provide dignified, comprehensive end-of-life care to residential hospice patients and their families. McLeod s outpatient hospice program also provides comprehensive hospice A-10

79 services to patients electing to remain in their own home. The outpatient hospice program services residents in Florence, Marion, Dillon, Darlington, Lee, Clarendon and Williamsburg Counties in South Carolina. McLeod Medical Center-Darlington. Located on 20 acres in Darlington, South Carolina, this 49-bed community hospital consists of 58,143 square feet. The hospital offers acute and post-acute (swing bed) care, inpatient and outpatient services including rehabilitation, radiology, laboratory and respiratory, as well as surgical and endoscopic services. McLeod Behavioral Health. McLeod Behavioral Health is a 23-bed psychiatric facility located on the campus of McLeod Medical Center-Darlington. This facility consists of 18,749 square feet and offers comprehensive inpatient behavioral health services to adults in the McLeod service area. McLeod Medical Center-Dillon McLeod Medical Center-Dillon owns and operates a 79-bed community hospital located on approximately eight acres in Dillon, South Carolina. The hospital consists of 128,631 gross square feet and offers inpatient acute care, an advanced birthing center, orthopedic and other surgical services, 24-hour emergency services, cardiac rehabilitation, and radiology services including CT, Open MRI, and digital mammography. Emergency services include a 24-hour ER, and telepsychiatry services. In 2011, the medical center completed a $7.3 million addition to replace the previous emergency department. The expansion consisted of a one-story addition of approximately 9,365 square feet and provides improved workflow for staff and patients, new exam and treatment rooms including designated triage and trauma rooms, and staff support spaces. See Licensed Beds and SERVICES below for further description of operations currently at McLeod Medical Center-Dillon. Licensed Beds As of April 30, 2014, the Obligated Group operated the following licensed beds at McLeod Regional Medical Center ( MRMC ), McLeod Medical Center-Darlington ( MMCDA ), and McLeod Medical Center- Dillon ( MMCD ): MRMC MMCDA MMCD Total Medicine / Surgery * Obstetrics Pediatrics Psychiatry Intensive Care / Coronary Care NICU Hospice Total Source: McLeod Health. *Includes 24 swing beds. A-11

80 SERVICES The Obligated Group provides the following basic and specialized inpatient and outpatient services at McLeod Regional Medical Center, McLeod Medical Center-Darlington, and McLeod Medical Center-Dillon, as set forth in the table below. Services MRMC* MMCDA MMCD Angiography x Cancer Center x Cardiac Catheterization x Cardiac Rehabilitation Services x x Chemo / Intravenous Therapy x Children's Hospital x Chronic Disease Management Clinic x CT Scan (320-slice at MRMC/32-slice at MMCDA) x x x Diabetes Education x x x Dietary Counseling x x x Emergency Department (Level II Trauma Center) x ER Only Endoscopy (including optical colonoscopy) x x x Health & Fitness Center x Home Health Services x x Hospice (residential and outpatient programs) x Intensive Care Units (Cardiovascular, Trauma, Surgical, Medical, Cardiac, Stroke) x x Maternity x x Medical / Surgical Units x x x Mobile & Full-Field Digital Mammography x x x MRI x x Neonatal & Pediatric Intensive Care x Nuclear Medicine x x Occupational Health x Open-heart surgery x Orthopedics x x Outpatient Surgery Center x Pain Clinic x x PET Scan x Pharmacy x x x Physical Therapy x x x Progressive Care (Surgical, Medical) x Psychiatric Care x Radiation Oncology (IMRT / IGRT) x Radiology x x x Respiratory Care x x x Sleep Disorder Program x x Social Services x x x Sports Medicine Program x Swing beds (post-acute care) x Ultrasound x x x Urgent Care Centers x x Women's Health Programs x x * Excludes services provided at MMCDA. A-12

81 AWARDS McLeod Regional received the following awards and distinctions: 2014 HealthGrades Distinguished Hospital Award for Clinical Excellence, this distinction places McLeod among the Top 5% of more than 4,500 hospitals nationwide Top 10% in the nation in Outstanding Patient Experience HealthGrades for years Premier Award for Quality in Clinical Effectiveness, sponsored by Premier, Inc. Selected Participant for Pursuing Perfection: Raising the Bar for Health Care Performance, sponsored by Robert Wood Johnson Foundation and the Institute for Healthcare Improvement Distinguished Hospital Award for Patient Safety, HealthGrades American Hospital Association Quest for Quality Award South Carolina Governor's Quality Award STRATEGIC PLANNING The Borrower seeks to develop programs and services to continue to meet the changing needs of its patients and community. For patients and their families, the Borrower seeks to reduce the burdens associated with illness and injury. Programs and services focus on, and are distinguished by, seven core areas: Quality & Safety, Physician Partnerships, Our People, Service Lines, Improvement in Community Health, Technology, and Providing for the Mission. From time to time, the Borrower engages in discussions with unaffiliated third parties regarding potential acquisitions, divestitures, joint ventures or other arrangements that could impact the Borrower s services and the markets in which it operates. Management is currently evaluating certain options, none of which would be expected to have an adverse effect on the financial position, operating results, or cash flows of the Members of the Borrower. OBLIGATED GROUP MEDICAL STAFF The medical staff of the Obligated Group (the Medical Staff ) is appointed by the McLeod Health Board for specific facilities and is composed of individuals who have completed their medical residencies and are board eligible and licensed to practice in the State. All Medical Staff members are granted non-voting provisional privileges for their first year and until such time as such members are board certified. Following their provisional periods and board certification, staff members are reviewed for appointment to their requested staff categories and are eligible to vote and hold office. As of April 30, 2014, there were 390 members of the Medical Staff, including 177 employed physicians, in two categories of membership as follows. Active Medical Staff. The active staff consists of physicians or dentists who regularly admit or are consistently involved in the care of patients. As of April 30, 2014, there were 336 active staff members, including those with provisional privileges. A-13

82 Consulting Medical Staff. Consulting staff members must be requested by a member of the active staff to exercise such privileges as are granted to the staff member, but may not admit patients to the Obligated Group facilities or be solely responsible for the care management of a patient. Consulting staff may attend Medical Staff meetings, but cannot hold office or vote. As of April 30, 2014, there were 54 consulting staff members. Net Additions to the Medical Staff The Medical Staff has grown in recent years as a result of recruiting by the Obligated Group and the addition of new specialty services. The following table demonstrates the net increases in the Medical Staff for the fiscal years ended September 30, 2011, 2012 and 2013, and through April 30, For the Fiscal Year Ended September 30, As of April 30, New Appointments Resignations Net Additions (Reductions) Total Medical Staff Source: McLeod Health. Medical Staff Age and Board Certification by Specialty The following table identifies the age distribution of the Medical Staff by specialty as of April 30, Age Specialty Average Under Over 60 Total Board Certified % Board Certified Allergy & Immunology % Anatomic and Clinical Pathology % Anesthesiology % Cardiology % Cardiothoracic Surgery % Dentistry % Emergency Medicine % Family Medicine % Gastroenterology % General Surgery % Gynecology % Infectious Diseases % Internal Medicine % Internal Medicine/Nephrology % Maternal Fetal Medicine % Neonatology % Nephrology % Neurological Surgery % Neurology % Obstetrics/Gynecology % Oncology/Hematology % Ophthalmology % Oral and Maxillofacial Surgery % Orthopedic Surgeon % Orthopedics % A-14

83 Age Specialty Average Under Over 60 Total Board Certified % Board Certified Otolaryngology % Pain Management % Palliative Medicine % Pathology % Pediatric Cardiology % Pediatric Critical Care % Pediatric Dentistry % Pediatric Endocrinology % Pediatric Gastroenterology % Pediatrics % Pediatrics Critical Care % Physiatry % Plastic and Reconstructive Surgery % Podiatry % Psychiatry % Pulmonary & Critical Care % Medicine Pulmonary Medicine % Radiation Oncology % Radiology % Rheumatology % (Tele)Neurology % (Tele)Neurophysiology % (Tele)Psychiatry % (Tele)Radiology % Urology % Source: McLeod Health. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] A-15

84 Top Ten Obligated Group Admitting Physicians Group Practices The following table identifies the Obligated Group s top ten admitting physicians group practices for the fiscal year ended September 30, % of Total Obligated Group Physicians Number of Physician / Group Practice Discharges Discharges Average Age Physicians * McLeod Health Practices 18, % Pee Dee Nephrology 1, % 44 5 Pee Dee Orthopedic Associates 1, % 49 8 Advance Women s Care % 54 4 Florence Neurosurgery & Spine, P.C % 52 4 Eastern Carolina Pediatrics % 53 4 Pediatrix Medical Group % 52 7 Advanced Cardiology Consultants % 59 5 Dr. Sitti, Sitti & Pitiranggon % 53 5 Dillon Internal Medicine % 58 2 Total/Average 25, % Total Obligated Group Discharges 26,590 Source: McLeod Health. * Represents the number of physicians contributing to the discharges which may or may not be the same as the number of physicians in each practice. Top Ten Obligated Group Admitting Physicians by Specialty The following table identifies the Obligated Group s top ten admitting physicians by specialty for the fiscal year ended September 30, % of Total Obligated Group Discharges Physician s Age Specialty Discharges Nephrology % 37 Nephrology % 38 Psychiatry % 36 Nephrology % 50 General Medicine % 59 Obstetrics % 64 Orthopedics % 51 Cardiology % 55 Cardiology % 56 Orthopedics % 50 Total/Average 3, % 49.6 Total Obligated Group Discharges 26,590 Source: McLeod Health. A-16

85 SERVICE AREA As illustrated in the map immediately below, the Obligated Group considers its primary service area ( PSA ) the counties of Florence, Darlington, Chesterfield, Dillon, Marion and Marlboro, and its secondary service area ( SSA ) the counties of Clarendon, Georgetown, Horry, Lee, Sumter and Williamsburg. The second map illustrates where the PSA and SSA are situated within the State of South Carolina. McLeod Medical Center-Darlington McLeod Medical Center-Dillon McLeod Regional Medical Center McLeod Loris Hospital & Loris Extended Care Center (Not an Obligated Group Member) McLeod Seacoast Hospital (Not an Obligated Group Member) A-17

86 TOTAL SERVICE AREA McLeod Regional Medical Center Discharges by County The following table shows discharges, excluding newborns, psychiatric, and hospice, from McLeod Regional Medical Center (Florence campus only) *, by county for the PSA, SSA and outside the service area. For the Fiscal Year ended September 30, County PSA Chesterfield Darlington 3,829 3,890 3,948 Dillon 1,395 1,439 1,418 Florence 10,886 11,012 10,549 Marion 1,207 1,272 1,272 Marlboro Subtotal 18,986 19,386 18,823 SSA Clarendon Georgetown Horry Lee Sumter Williamsburg 1,019 1, Subtotal 3,069 3,276 2,965 PSA and SSA Total 22,055 22,662 21,788 Outside PSA and SSA Other Discharges Total Discharges* 23,003 23,641 22,704 Total PSA (as a % of total discharges) 82.5% 82.0% 82.9% SSA (as a % of total discharges) 13.4% 13.9% 13.1% Other zip codes (as a % of total discharges) 4.1% 4.1% 4.0% Source: McLeod Health. * This does not include discharges from McLeod Medical Center-Darlington described in the next table, notwithstanding that McLeod Medical Center-Darlington is a corporate division of the Borrower, McLeod Regional Medical Center. A-18

87 McLeod Medical Center-Darlington Discharges by County The following table shows discharges, excluding newborns, psychiatric, and hospice, from McLeod Medical Center-Darlington for Darlington County and for all other counties. For the Fiscal Year ended September 30, County Darlington Other Discharges Total Discharges Darlington County (as a % of total discharges) 69.9% 69.3% 65.3% Other zip codes (as a % of total discharges) 30.1% 30.7% 34.7% Source: McLeod Health. McLeod Medical Center-Dillon Discharges by County The following table shows discharges, excluding newborns, psychiatric, and hospice, from McLeod Medical Center-Dillon for Dillon County and for all other counties. For the Fiscal Year ended September 30, County Dillon 2,155 2,109 2,147 Other Discharges Total Discharges 2,821 2,776 2,830 Dillon County (as a % of total discharges) 76.4% 76.0% 75.9% Other zip codes (as a % of total discharges) 23.6% 24.0% 24.1% Source: McLeod Health. A-19

88 Demographic and Socioeconomic Trends The Obligated Group s PSA population increased 3.1% from 2002 to 2012, and is expected to increase another 3.8% from 2012 to The SSA population grew 17.0% from 2002 to 2012, and is expected to grow 10.0% from 2012 to The following table, based on data from the U.S. Census Bureau and the South Carolina Budget and Control Board, Office of Research and Statistics, sets forth historical and estimated population growth of the PSA and SSA for the period 2002 through Population Trends for PSA and SSA % Change 2022 Projected % Change Service Area PSA Chesterfield 43,834 46, % 49, % Darlington 68,247 68, % 69, % Dillon 31,000 31, % 32, % Florence 127, , % 144, % Marion 34,786 32, % 31, % Marlboro 28,599 28, % 29, % Subtotal 333, , % 357, % SSA Clarendon 33,094 34, % 36, % Georgetown 57,688 60, % 63, % Horry 206, , % 330, % Lee 19,970 18, % 18, % Sumter 105, , % 109, % Williamsburg 36,333 33, % 33, % Subtotal 459, , % 590, % Source: US Census Bureau and South Carolina Budget and Control Board, Office of Research and Statistics. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] A-20

89 The following table identifies the age distribution as of 2012 in the PSA and SSA. Age Distribution for PSA and SSA Median Age Total Population Service Area Over 65 PSA Chesterfield 8,858 17,189 13,190 6, ,103 Darlington 13,313 24,831 19,386 10, ,139 Dillon 6,887 11,765 8,388 4, ,446 Florence 28,111 53,546 36,921 19, ,948 Marion 6,464 11,574 9,277 5, ,457 Marlboro 4,863 11,378 7,864 4, ,145 Total 68, ,283 95,026 50, ,238 % of Total PSA 20% 38% 28% 15% SSA Clarendon 5,987 12,197 9,852 6, ,357 Georgetown 10,224 18,579 18,024 13, ,189 Horry 47, ,706 78,873 52, ,285 Lee 3,357 7,136 5,342 2, ,654 Sumter 22,622 43,162 27,491 14, ,052 Williamsburg 6,255 12,177 9,734 5, ,620 Total 95, , ,316 95, ,157 % of Total SSA 18% 37% 28% 18% South Carolina Total 901,787 1,863,016 1,263, , ,723,723 % of Total State 19% 39% 27% 15% Source: US Census Bureau and South Carolina Budget and Control Board, Office of Research and Statistics. Major Employers The following table sets forth the ten major employers in the PSA in calendar year Employer Location Industry Employees 1. McLeod Health * Florence Healthcare 5, Florence School District One ** Florence Education 3, Carolinas Hospital System Florence Healthcare 1, Schaeffler Group USA Inc. Cheraw Rolling/Plain Bearings 1, Sonoco-Crellin Inc. Hartsville Paper/Plastic Products 1, Mohawk Industries Bennettsville Carpet Fiber 1, Perdue Farms Inc. Dillon Chicken Production 1, Nan Ya Plastics Corp USA Lake City Polyester Fibers Honda of South Carolina Timmonsville All-Terrain Vehicles 900 Steel bar, joists, girders 10. Nucor Corporation Darlington and decks 900 Source: North Eastern Strategic Alliance (NESA). * Source: McLeod Health. **Source: Florence School District One. A-21

90 Unemployment The following table shows average unemployment rates for the PSA, the SSA, the State and the United States for the calendar years 2010, 2011, 2012 and The less populous counties in the PSA have historically had higher than average unemployment rates National 9.6% 8.9% 8.1% 7.4% State of South Carolina 11.1% 10.3% 9.0% 7.6% Primary Service Area Chesterfield 15.6% 13.8% 12.1% 10.0% Darlington 12.6% 12.2% 10.5% 8.9% Dillon 15.8% 15.7% 14.0% 11.8% Florence 11.4% 11.0% 9.6% 8.5% Marion 20.4% 19.7% 17.7% 14.7% Marlboro 19.4% 17.9% 16.1% 12.9% Secondary Service Area Clarendon 15.1% 15.4% 13.7% 11.2% Georgetown 12.1% 11.2% 9.8% 8.2% Horry 12.1% 11.6% 10.1% 8.5% Lee 13.6% 13.5% 11.7% 9.4% Sumter 12.0% 11.4% 10.1% 8.6% Williamsburg 14.3% 13.7% 12.8% 10.3% Source: U.S. Bureau of Labor and Statistics. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] A-22

91 Competition The following table contains the latest discharge, excluding newborns, and other State data available for the Obligated Group and its major competitors in the PSA for calendar years 2010, 2011 and Licensed Distance from Florence, Total Discharges Provider Beds * SC McLeod Health Obligated Group ,934 22,905 23,448 Carolinas Hospital System ,944 10,909 11,058 Carolina Pines Regional Medical Center ,302 4,359 4,285 Chesterfield General Hospital ,424 2,178 2,033 Lake City Community Hospital Marion County Medical Center ,381 3,123 2,804 Marlboro Park Hospital ,361 1,421 1,412 Source: SC Budget and Control Board, Office of Research and Statistics. Discharges exclude newborns. * Excludes all non-acute beds (i.e. hospice, rehab, SNF, psychiatric); includes NICU. The following table shows relative share of licensed beds and discharges for the Obligated Group and its major competitors in the PSA for calendar years 2010, 2011 and 2012, based on the data presented in the table immediately above. Share of Licensed Beds Share of Total Discharges (Excluding Hospice & Newborns) Provider McLeod Health Obligated Group 44.1% 45.9% 44.0% 47.8% Carolinas Hospital System 24.2% 22.9% 20.9% 22.5% Carolina Pines Regional Medical Center 8.5% 10.2% 8.4% 8.7% Chesterfield General Hospital 4.2% 4.7% 4.2% 4.1% Lake City Community Hospital 3.4% 1.0% 1.3% 1.3% Marion County Medical Center 8.8% 6.5% 6.0% 5.7% Marlboro Park Hospital 6.7% 2.6% 2.7% 2.9% A-23

92 Obligated Group PSA Market Share of Inpatient Discharges The following table sets forth the market share of inpatient discharges for the Obligated Group and its competitors for each of the counties in the Obligated Group s PSA for calendar years 2010, 2011 and 2012, which is the latest available information. Hospital Florence County Obligated Group 53.4% 54.7% 54.5% Carolinas Hospital System 38.7% 36.1% 36.1% Lake City Community Hospital 2.4% 3.2% 2.9% Other Providers 5.6% 6.0% 6.4% Darlington County Obligated Group 42.3% 45.0% 44.7% Carolina Pines Regional Medical Center 38.8% 35.4% 34.7% Carolinas Hospital System 12.6% 12.8% 12.4% Other Providers 6.3% 6.8% 8.2% Dillon County Obligated Group 77.1% 76.8% 77.5% Marion County Medical Center 10.5% 9.9% 9.8% Carolinas Hospital System 8.1% 7.2% 6.9% Other Providers 4.3% 6.1% 5.9% Chesterfield County Obligated Group 20.5% 19.5% 23.9% Chesterfield General Hospital 41.3% 39.1% 37.1% Carolina Pines Regional Medical Center 17.1% 16.4% 15.4% Other Providers 21.2% 25.0% 23.6% Marion County Obligated Group 28.6% 26.1% 29.1% Marion County Medical Center 50.8% 51.5% 45.9% Carolinas Hospital System 12.2% 13.4% 16.6% Other Providers 8.4% 8.9% 8.4% Marlboro County Obligated Group 28.1% 28.3% 30.1% Marlboro Park Hospital 41.0% 39.5% 39.2% Carolinas Hospital System 15.4% 16.6% 15.6% Other Providers 15.5% 15.7% 15.1% Source: South Carolina Budget Control Board, Office of Research and Statistics. Excludes newborns. A-24

93 UTILIZATION The following table identifies selected inpatient and outpatient utilization statistics for McLeod Regional Medical Center, McLeod Medical Center-Dillon, and McLeod Medical Center-Darlington for the fiscal years ended September 30, 2011, 2012 and 2013, and for the seven months ended April 30, 2013 and April 30, As of September 30, As of April 30, 2011* McLeod Regional Medical Center Acute Admissions (excludes newborns) 22,917 23,591 22,712 13,080 13,964 Hospice Admissions Acute Days (excludes newborns) 121, , ,650 74,651 77,881 Hospice Days 3,698 3,918 4,305 2,627 2,309 Acute Length of Stay (excludes newborns) Hospice Length of Stay Emergency Department Visits 56,308 59,846 65,124 36,718 40,409 Inpatient Surgery Procedures 6,704 6,809 6,289 3,587 3,394 Outpatient Surgery Procedures 10,922 10,592 10,975 6,534 6,812 Open Heart Procedures Newborn Deliveries 2,068 2,022 1,983 1,100 1,163 McLeod Medical Center-Dillon Acute Admissions (excludes newborns) 2,792 2,747 2,818 1,696 1,507 Acute Days (excludes newborns) 9,649 8,792 8,896 5,357 4,705 Length of Stay (excludes newborns) Emergency Department Visits 26,934 27,949 29,873 17,283 17,944 Inpatient Surgery Procedures Outpatient Surgery Procedures 1, Newborn Deliveries McLeod Medical Center-Darlington Acute Admissions Swing Bed Admissions Behavioral Health Admissions Acute Days 2,075 1, Swing Bed Days 5,262 6,435 7,116 4,304 4,357 Behavioral Health Days 5,435 5,991 5,927 3,474 3,559 Acute Length of Stay Swing Bed Length of Stay Behavioral Health Length of Stay Inpatient Surgery Procedures Outpatient Surgery Procedures Source: McLeod Health. *Surgery statistics includes endoscopy cases for MMC-Dillon and MMC-Darlington. A-25

94 FINANCIAL PERFORMANCE Set forth below is a summary of consolidated balance sheets of the System as of the fiscal years ended September 30, 2011, 2012 and 2013 and as of April 30, 2014, as well as a summary of the System s consolidated statements of operations for the fiscal years ended September 30, 2011, 2012 and 2013 and the seven month periods ended April 30, 2013 and April 30, The condensed consolidated interim financial information does not represent complete financial statements and should be read in conjunction with McLeod Health s audited Consolidated Financial Statements included in Appendix B to the Official Statement. Condensed Consolidated Balance Sheets (in Thousands of Dollars) September 30, April 30, (Unaudited) Assets Cash & Investments $ 22,900 $ 66,300 $ 21,600 $ 35,400 Accounts Receivable 71,500 88,400 93,900 90,600 Other Current Assets 11,100 16,500 17,200 16,900 Assets Limited as to Use 532, , , ,400 Property, Plant & Equipment 373, , , ,300 Other Assets 17,700 18,500 18,000 18,400 Total Assets 1,029,100 1,271,100 1,387,100 1,468,000 Liabilities/Net Assets Current Liabilities 97, , , ,000 Long-Term Liabilities 283, , , ,400 Minority Interest 1,800 1,600 1,800 1,900 Net Assets 646, , ,000 1,023,700 Total Liabilities & Net Assets $1,029,100 $1,271,100 $1,387,100 $1,468,000 Note: The affiliation with Loris Seacoast became effective January 9, 2012 resulting in only a partial year of financial information being included in fiscal year In fiscal year 2013, a full year of financial information for Loris Seacoast is reported. The Obligated Group accounts for 97.5% of the net assets and 79.4% of the net liabilities of the System as of April 30, Loris Seacoast makes up 1.4% of the net assets and 17.8% of net liabilities of the System as of April 30, [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] A-26

95 Condensed Consolidated Statements of Operations (in Thousands of Dollars) Seven Months Fiscal Year Ended September 30, Ended April 30, (Unaudited) Revenue, Gains, and Other Support Net Patient Service Revenue 592, , , , ,288 Other Operating Revenues 17,893 26,283 39,159 21,184 25,590 Total Revenue, Gains, and Other Support 610, , , , ,878 Expenses Personnel 311, , , , ,734 Other 208, , , , ,243 Interest 11,486 14,620 14,922 8,867 8,469 Depreciation and Amortization 33,076 40,767 44,894 25,217 28,544 Subtotal 564, , , , ,990 Income from Operations 45,712 45,348 53,478 29,962 31,888 Other Revenues (Expenses) Investment Management Fees (1,935) (2,360) (1,935) (978) (1,479) Investment Income (Loss) 23,719 13,040 29,664 13,248 21,382 Other Revenues (Expenses) ,873 2, ,175 Unrealized Gains (Losses) (42,644) 64,388 53,227 42,477 29,038 Increase (decrease) in Unrestricted Net Assets 25, , ,843 85,617 82,004 Increase (decrease) in Temp Restricted Net Assets 2,320 (334) ,333 Increase (decrease) in Perm Restricted Net Assets Increase (decrease) in Total Net Assets 27, , ,265 86,596 83,337 Note: The affiliation with Loris Seacoast became effective January 9, 2012 resulting in only a partial year of financial information being included in fiscal year In fiscal year 2013, a full year of financial information for Loris Seacoast is reported. The Obligated Group accounts for 87.2% of the total revenues and 85.3% of the total expenses of the System as of April 30, Loris Seacoast makes up 12.2% of the total revenues and 13.5% of the total expenses of the System as of April 30, [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] A-27

96 Sources of Revenue Payments to the Obligated Group are made on behalf of certain patients by third-party payors, including Federal and State governments under the Medicare and Medicaid programs, commercial indemnity insurance providers and managed care providers. The percentage distribution of the Obligated Group s total gross patient service revenue by source of payment for the fiscal years ended September 30, 2011, 2012, 2013, and the seven month periods ended April 30, 2013 and April 30, 2014, is set forth in the following table. Percentage of Total Obligated Group Gross Revenues by Payor Categories Seven Months Ended Fiscal Year Ended September 30, April 30, (Unaudited) Medicare 45.9% 46.3% 47.1% 47.1% 47.8% Medicaid 16.3% 17.0% 16.8% 16.9% 16.1% Commercial 0.7% 0.8% 0.7% 0.6% 0.8% Contracted Payors 27.0% 26.1% 25.4% 26.1% 24.9% Self-Pay 10.1% 9.8% 10.0% 9.3% 10.4% Total 100.0% 100.0% 100.0% 100.0% 100.0% Source: McLeod Health. Contracted Payors accounted for approximately 25.4% of the Obligated Group s gross patient revenue in Fiscal Year ended September 30, The Obligated Group has contracts with 28 organizations which represent the majority of contract payors in the total service area. Medicare made up 47.1% of gross patient revenue (88.0% was traditional (FFS), 12.0% managed Medicare) for the same period. Medicaid made up 16.8% of gross patient revenue (74.9% managed Medicaid revenue, 25.1% still in traditional plans). The Obligated Group does not have any capitated contracts that pay a fixed amount per plan participant. The Obligated Group has established principles to guide its negotiation and implementation of payor contracting, as well as the information systems to capture data for performance monitoring. The Obligated Group received disproportionate share and other supplemental payments from the Medicaid programs in fiscal year ended September 30, as follows: $23.8 million in 2011, $22.0 million in 2012, and $20.4 million in Investments and Liquidity Position of the Obligated Group McLeod Health s investments support operational, capital, and restricted activities and assure the ongoing fulfillment of the corporate mission. The overriding objectives are to provide sufficient liquidity to meet maturing obligations and to maximize return giving consideration to time horizons for use of funds and risk tolerance. McLeod Health employs Mercer Investment Consulting to provide advice on investment allocation and manager selection to manage risk and return. Implementation of McLeod Health s investment policy is monitored by the McLeod Health Board. The investments are managed by professional fund managers. As of April 30, 2014, the investment allocation in McLeod Health s non-trust assets, excluding working capital, was invested approximately 17% in large cap equities, 14% small/mid cap equities, 22% international equities, 9% global equities, 24% fixed income, 9% alternative investments, 3% global macro and 2% private real estate. A-28

97 Investments and investments limited as to use are reported at fair value on the equity method of accounting. Additional information concerning valuation of investments and assets limited as to use is set forth in the Consolidated Financial Statements of McLeod Health in Appendix B. Employee Retirement Plans McLeod Health currently has no defined benefit plan in place for any employee. McLeod Health sponsors a 401(k) plan covering substantially all employees of McLeod Health. Annual contributions are based upon a matching of the participant s elective deferrals and amounted to $5,289,809 and $4,778,341 in fiscal years 2013 and 2012, respectively. Prior to January 1, 2014, McLeod Heath maintained a separate defined contribution plan from the above which covered a limited number of employees who were hired prior to January 1, McLeod Health contributed 3% of each eligible participant s compensation. Such contributions amounted to $2,615,022 and $2,619,841 in fiscal years 2013 and 2012, respectively. As of January 1, 2014, this separate plan was discontinued. Current Indebtedness of the Obligated Group Long-term Debt. Long-term debt of the Obligated Group as of April 30, 2014 and as of the date of issuance of the 2014 Bonds includes the following indebtedness secured by Master Trust Indenture Obligations. Master Trust Indenture Principal Amount Outstanding as of Bonds Obligation April 30, 2014 Issue Date Outstanding Securing Debt (Unaudited) of 2014 Bonds Hospital Revenue Bonds (McLeod Regional Medical Center Project), Series 2004A, final maturity November 1, 2034 Obligation No. 10 $74,890,000 $0 Hospital Revenue Bonds (McLeod Regional Medical Center Project), Series 2010A, final maturity November 1, 2037 Obligation No ,480, ,480,000 Hospital Revenue Bonds (McLeod Regional Medical Center Project), Series 2010B, final maturity November 1, 2040 Obligation No ,770,000 46,770,000 Refunding Hospital Revenue Bonds (McLeod Regional Medical Center Project), Series 2014, final maturity November 1, 2034 Obligation No ,175,000 Unamortized Premiums/Discounts on above Bond Obligations 1,156,669 9,072,855 * TOTAL $238,296,669 $232,497,855 * Excludes the premium associated with the 2004A Bonds. A-29

98 As of April 30, 2014, the members of the Obligated Group have aggregate indebtedness of $16,816,330 that is not secured by a Master Trust Indenture Obligation, including a guarantee issued by the Borrower in respect of a commercial loan to McLeod Medical Partners, LLC outstanding in the amount of $11,266,177. The Borrower also has guaranteed the amounts payable by McLeod Medical Partners, LLC under the terms of a variable-to-fixed interest rate swap agreement related to such commercial loan. For additional information concerning the guarantee, the loan and the interest rate swap agreement, please refer to Appendix B of this Official Statement. See OBLIGATED GROUP COVERAGE OF HISTORICAL AND PRO FORMA DEBT SERVICE below. Short-term Debt. As of April 30, 2014, McLeod Health has a $20,000,000 unsecured line of credit with Wells Fargo Bank, National Association. Outstanding balances from draws on the line of credit bear interest on at LIBOR plus 1.25% (1.40% as of April 30, 2014), and interest is payable monthly. There were no outstanding balances at April 30, OBLIGATED GROUP COVERAGE OF HISTORICAL AND PRO FORMA DEBT SERVICE The following schedule sets forth Net Income Available for Debt Service of the Obligated Group for the three fiscal years ended September 30, 2011, 2012 and The information is derived from the corresponding information contained in the financial statements for the fiscal years ended September 30, 2011, 2012 and The Obligated Group includes all System affiliates except Loris Seacoast, the Foundation and McLeod Medical Partners, LLC. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] A-30

99 The following schedule also shows, on a historical and pro forma basis, the resulting debt service coverage ratios by dividing such income Available for Debt Service by the historical and pro forma maximum annual debt service in any future fiscal year on the Bonds and the other currently outstanding long-term indebtedness of the Obligated Group. Fiscal Years Ended (in Thousands) September 30, Obligated Group Operating Income $47,024 $56,545 $58,755 Nonoperating Income (Loss) net of Unrealized Gain/Losses * 21,771 10,677 27,522 Obligated Group Excess Revenue over (under) Expenses * 68,795 67,222 86,277 Add Back: Depreciation and Amortization Expense 32,527 35,155 38,892 Interest Expense 10,798 10,249 9,181 Loss on Disposal of Property Net Income Available for Debt Service 112, , ,709 Historical Maximum Annual Debt Service ** 15,839 15,832 15,825 Pro Forma Maximum Annual Debt Service *** 15,808 15,808 15,808 Historical Coverage of Maximum Annual Debt Service Historical Coverage of Pro Forma Maximum *** * Excludes unrealized gains and losses as required by covenants for purposes of computing debt service. Includes realized gains and losses. Includes Eliminations related to the Obligated Group. ** Variable rate debt is assumed to bear interest at the average rate borne by such debt in the prior fiscal year. The following rates per annum were assumed in calculating maximum annual debt service for the fiscal years ended September 30, 2011, 2012 and Such calculations of maximum annual debt service were performed in accordance with the provisions of the Master Trust Indenture. *** Pro Forma Debt Service assumes 0.12% interest rate for the Series 2010B Bonds (preliminary, subject to change). Fiscal Year Ended September 30, B Bonds 0.21% 0.17% 0.12% Wells Fargo Note 0.98% 1.00% 0.95% See Appendix B to this Official Statement for a more detailed description of the variable rate debt listed in the table immediately above. A-31

100 OBLIGATED GROUP HISTORICAL AND PRO FORMA CAPITALIZATION The following table sets forth the historical and pro forma capitalization of the Obligated Group as of the fiscal years ended September 30, 2011, 2012 and 2013 and as of April 30, 2013 and April 30, 2014, assuming the issuance of the 2014 Bonds. See PLAN OF FINANCE in the front portion of this Official Statement. (Dollars are in thousands) September 30, Seven Months Ended April 30, (Unaudited) Long-term Debt and Notes Payable $271,344 $ 266,390 $ 241,063 $ 242,543 $ 237,204 Unrestricted Net Assets* 636, , , , ,616 Total Capitalization 907,709 1,041,546 1,154,487 1,103,190 1,234,820 Long-term Debt to Capitalization 29.89% 25.58% 20.88% 21.99% 19.21% 2014 Bonds $ 61,175 Pro Forma LT Debt, including 2014 Bonds 223,489 Pro Forma Debt to Capitalization, including 2014 Bonds 18.30% Note: Long-term debt is net of current portion. * Includes Eliminations related to the Obligated Group. Service Area MANAGEMENT DISCUSSION The McLeod Health Obligated Group serves a twelve county region in northeast South Carolina through McLeod Regional Medical Center, a major tertiary referral center in Florence County, and two community providers, McLeod Medical Center-Dillon (Dillon County), and McLeod Medical Center- Darlington (Darlington County). The six primary service area ( PSA ) counties, Florence, Darlington, Chesterfield, Dillon, Marion, and Marlboro, account for more than 80% of the Obligated Group s admissions. PSA population growth from 2002 to 2012 was moderate at 3.1%, while the population of the secondary service area ( SSA ), which accounts for less than 20% of the Obligated Group s admissions, grew by 17.0% over the same period. Age distribution is approximately similar among the PSA and SSA, and within the State. The employment base is diversified across multiple industries, with health care, manufacturing, education, textiles, and food production comprising the top ten employers. The Obligated Group is the largest employer in the PSA. Unemployment rates in the PSA have been consistently above national and State averages. The major economic hub counties, principally Florence (population 137,948) and Darlington (population 68,139) counties in the PSA and Horry (population 282,285) and Sumter (population 108,052) in the SSA, are experiencing unemployment rates within the 8% to 9% range compared to 7.4% nationally and 7.6% for the State. The more populated counties in the PSA, Florence and Darlington, had unemployment rates at 8.5% and 8.9%, respectively, for calendar year The less populated counties in the PSA had an average annual unemployment rate of 12.0% for the same period. A-32

101 Summary of Utilization and Financial Performance Fiscal Year Ended September 30, The Obligated Group had 27,490 admissions (consisting of 26,093 acute care, 165 swing bed, 564 Hospice and 668 Behavioral Health admissions) and 147,873 days (consisting of 133,478 acute care, 5,262 swing bed, 3,698 Hospice and 5,435 Behavioral Health days) a 4.6% decrease and 2.9% decrease from 2010, respectively. Inpatient surgeries and open heart surgeries stayed flat at 7,694. Emergency room visits were 83,242 (up 1.1%) and outpatient surgeries were 13,086 (down 5.2%). The decrease, attributed to general economic conditions, was mitigated by growth in other outpatient services. Total System net patient service revenue of $592.8 million was up 3.7% and operating income of $45.7 million was down from $47.9 million in fiscal The System experienced a net $42.6 million unrealized loss and a $14.8 million net realized gain (income) on investments. Unrestricted cash and investments of $503.5 million were up 5.3% from $478.4 million in Total capital expenditures were $81.7 million. Fiscal Year Ended September 30, The Obligated Group had 28,009 admissions (consisting of 26,568 acute care, 132 swing bed, 583 Hospice and 726 Behavioral Health admissions) and 151,378 days (consisting of 135,034 acute care, 6,435 swing bed, 3,918 Hospice and 5,991 Behavioral Health days) a 1.9% and 2.4% increase over 2011, respectively. Inpatient surgeries and open heart surgeries decreased to 7,548 (down 1.9%). Emergency room visits increased to 87,795 (up 5.5%) while outpatient surgeries decreased to 12,015 (down 8.2%). The outpatient surgical decrease, attributed to general economic conditions, was mitigated by growth in inpatient services as well as inpatient admissions. Total System net patient service revenue of $681.4 (including $60.9 million from Loris Seacoast) was up 15.0% and operating income of $45.3 million (including -$10.0 million from Loris Seacoast) was down from $45.7 million during the same period in The System experienced a net $64.4 million unrealized gain and a $5.6 million net realized gain. Unrestricted cash and investments of $638.6 million were up 26.8% from $503.5 million in Total capital expenditures were $75.1 million. Fiscal Year Ended September 30, The Obligated Group had 27,257 admissions (consisting of 25,691 acute care, 111 swing bed, 675 Hospice and 780 Behavioral Health admissions) and 152,619 days (consisting of 135,271 acute care, 7,116 swing bed, 4,305 Hospice and 5,927 Behavioral Health days), a 2.7% decrease and 0.8% increase from 2012, respectively. Emergency room visits increased to 94,997 (up 8.2%). Overall surgeries remained consistent with the same period last year. Total System net patient service revenue of $742.9 million (including $92.1 million from Loris Seacoast) was up 9.0% from last year and operating income of $53.5 million (including -$3.9 million from Loris Seacoast) was up from $45.3 million in the prior year. The System experienced a net $53.2 million unrealized gain and a $20.7 million net realized gain on investments. Unrestricted cash and investments of $702.3 million were up 10.0% from $638.6 million in Total capital expenditures were $78.6 million. Seven Months Ended April 30, The Obligated Group had 16,574 admissions (consisting of 15,575 acute care, 73 swing bed, 383 Hospice and 543 Behavioral Health admissions) and 93,313 days (consisting of 83,088 acute care, 4,357 swing bed, 2,309 Hospice and 3,559 Behavioral Health days), a 4.9% increase and 2.8% increase from the same period in 2013, respectively. Inpatient surgeries and open heart surgeries decreased to 3,834 (down 4.2%). Outpatient activities increased as evidenced by emergency room visits (58,353 up 8.1%) and outpatient surgeries (7,485 up 2.4% from the same period in 2013). Total System net patient service revenue of $445.3 million (including $56.8 million from Loris Seacoast) was up 3.3% and operating income of $31.9 million (including -$1.7 million from Loris Seacoast) was up from $30.0 million during the same period in The System experienced a net $30.4 million A-33

102 unrealized gain and a $15.2 million net realized gain (income) on investments. Unrestricted cash and investments of $764.4 million were up 12.5% from $679.7 million as of April 30, Total capital expenditures were $38.8 million. Capitalization and Liquidity As of April 30, 2014, the System had $764.4 million of unrestricted cash and investments (394.8 days cash on hand), $317.4 million of long-term debt and $1.0 billion of unrestricted net assets. EMPLOYEES As of April 30, 2014, the System had approximately 5,199 full-time equivalent employees, as set forth in the table below. FTEs McLeod Regional Medical Center 3,050 McLeod Medical Center-Dillon 266 McLeod Loris Seacoast Hospital 642 McLeod Physician Associates 720 McLeod Health 513 McLeod Foundation 8 TOTAL 5,199 The Borrower provides compensation and a comprehensive package of fringe benefits that it believes are competitive with other providers in the region. See FINANCIAL PERFORMANCE Employee Retirement Plans above. At the present time there are no Obligated Group employees covered by collective bargaining agreements, nor is management aware of any union organizing activities among employees. Management considers employee relations as excellent and measures employee satisfaction regularly. INSURANCE AND LITIGATION The System maintains a comprehensive insurance program providing coverage in the areas of professional liability, commercial general liability, automobile liability, directors and officers, employer s liability, fiduciary liability, property insurance, and crime. Workers Compensation is covered under a selfinsurance program, with an excess workers compensation insurance coverage liability limit of $1 million. Independent insurance representatives review the insurance program bi-annually. See also BONDHOLDER RISKS Malpractice Lawsuits and Medical Professional Liability Insurance Market in the Official Statement. There is no litigation pending or, to the knowledge of McLeod Health, threatened that could have a material adverse effect upon the operations or consolidated financial position of McLeod Health and its affiliates. ACCREDITATION, LICENSES, MEMBERSHIPS AND AFFILIATIONS All members of the Obligated Group are currently accredited by the Joint Commission. In addition to accreditation by the Joint Commission, there are other accreditation procedures which are required for State licensure and for certification by Medicare and Medicaid. All of the Borrower s facilities are licensed by the A-34

103 State of South Carolina and are certified for participation in the Medicare and Medicaid programs. Accreditation must be renewed periodically. The Borrower has never experienced any difficulty in obtaining such renewals. The Borrower is a member of Premier, Inc. and ROi, which are organizations that provide group purchasing programs for hospital operation consulting services, equipment, and consumable supplies. In addition, the Borrower is a member of the American Hospital Association and the South Carolina Hospital Association. The Borrower is affiliated with The Medical University of South Carolina as a communitybased hospital training site for family practice residents. COMMUNITY OUTREACH, EDUCATION AND VOLUNTEER SERVICES As a community-based health care delivery provider, McLeod Regional Medical Center (through its affiliates) has numerous initiatives in place to provide community benefits that promote prevention, healing, and treatment. Some of these initiatives include health education, support groups, health fairs, free health screenings, research, and financial and in-kind contributions. McLeod Regional Medical Center is also supported by more than 255 volunteers serving nearly every department. Volunteers provided approximately 43,000 hours of donated time in These services include comfort and support of patients, operating the gift shops, and assisting departmental and hospital needs as appropriate. A-35

104 [THIS PAGE INTENTIONALLY LEFT BLANK]

105 Appendix B McLeod Health Audited Consolidated Financial Statements as of and for the Fiscal Years Ended September 30, 2013 and 2012, and Independent Auditor s Report

106 [THIS PAGE INTENTIONALLY LEFT BLANK]

107 McLeod Health Consolidated Financial Statements as of and for the Years Ended September 30, 2013 and 2012, Supplemental Consolidating Information as of and for the Year Ended September 30, 2013, and Independent Auditors Report

108 MCLEOD HEALTH TABLE OF CONTENTS Page INDEPENDENT AUDITORS REPORT CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND 2012: Balance Sheets Statements of Operations Statements of Changes in Net Assets Statements of Cash Flows Notes to Consolidated Financial Statements SUPPLEMENTAL CONSOLIDATING INFORMATION AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2013: Supplemental Consolidating Balance Sheet Information Obligated and Nonobligated Group Supplemental Consolidating Statement of Operations Information Obligated and Nonobligated Group

109 INDEPENDENT AUDITORS REPORT To the Board of Trustees of McLeod Health Florence, South Carolina We have audited the accompanying consolidated financial statements of McLeod Health and subsidiaries ( McLeod Health ), which comprise the consolidated balance sheets as of September 30, 2013 and 2012, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to McLeod Health s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of McLeod 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

110 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of McLeod Health as of September 30, 2013 and 2012, and the results of its operations, changes in its net assets, and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis-of-Matter As discussed in Note 1 to the consolidated financial statements, McLeod Health adopted the presentation and disclosure requirements of Accounting Standards Update No , Health Care Entities (Topic 954): Presentation and Disclosure of Patient Services Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities, and changed its presentation of the provision for bad debts in the consolidated statements of operations and changes in net assets. Our opinion is not modified with respect to this matter. Report on Supplemental Consolidating Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplemental consolidating information on pages 31 to 32 is presented for the purpose of additional analysis of the consolidated financial statements rather than to present the financial position and results of operations of the individual companies and is not a required part of the consolidated financial statements. This supplemental consolidating information is the responsibility of McLeod Health s management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. Such supplemental consolidating information has been subjected to the auditing procedures applied in our audits of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, such supplemental consolidating information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. December 16,

111 MCLEOD HEALTH CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2013 AND 2012 (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 19,083 $ 62,631 Investments 2,508 3,639 Receivables: Patient net of allowances for doubtful accounts of $97,355 and $79,932 in 2013 and 2012, respectively 89,473 84,435 Other 4,446 3,965 Inventories 7,944 7,300 Prepaid expenses 9,230 9,214 Total current assets 132, ,184 ASSETS LIMITED AS TO USE 693, ,657 PROPERTY AND EQUIPMENT Net 542, ,701 OTHER ASSETS: Bond issue costs net 5,156 5,730 Goodwill 3,262 3,262 Other assets 9,599 9,459 Total other assets 18,017 18,451 TOTAL $ 1,387,158 $ 1,270,993 LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Current portion of long-term debt $ 7,010 $ 10,117 Accounts payable 29,867 25,917 Accrued expenses and other liabilities 42,936 42,368 Estimated third-party settlements 44,195 40,172 Total current liabilities 124, ,574 LONG-TERM DEBT Net of current portion 322, ,111 Total liabilities 446, ,685 COMMITMENTS AND CONTINGENCIES (Note 11) NET ASSETS: Unrestricted: McLeod Health 932, ,075 Noncontrolling interest in MMP 1,789 1,551 Total unrestricted 934, ,626 Temporarily restricted 5,362 4,940 Permanently restricted Total net assets 940, ,308 TOTAL $ 1,387,158 $ 1,270,993 See notes to consolidated financial statements

112 MCLEOD HEALTH CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND 2012 (In thousands) UNRESTRICTED REVENUES, GAINS, AND OTHER SUPPORT: Patient service revenues net of contractual and other allowances $ 899,363 $ 830,583 Provision for bad debts net (156,371) (149,141) Net patient service revenues 742, ,442 Other operating revenues 38,112 25,386 Net assets released from restrictions 1, Total unrestricted revenues, gains, and other support 782, ,725 EXPENSES: Personnel 417, ,584 Professional fees 19,651 21,987 Supplies 138, ,701 Purchased services 42,157 38,138 Facility-related costs 17,202 16,301 Insurance 7,153 5,688 Other 25,643 24,070 Interest 14,922 14,620 Depreciation and amortization 44,894 40,767 Loss on disposal of property Total expenses 728, ,377 INCOME FROM OPERATIONS 53,478 45,348 OTHER REVENUES (EXPENSES) 82,569 75,068 EXCESS OF REVENUES OVER EXPENSES FROM CONSOLIDATED OPERATIONS 136, ,416 INHERENT CONTRIBUTION FROM THE ACQUISITION OF LHS 32,249 LESS INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST (532) (75) EXCESS OF REVENUES OVER EXPENSES ATTRIBUTABLE TO MCLEOD HEALTH 135, ,590 NET ASSETS RELEASED FROM RESTRICTIONS FOR PURCHASES OF PROPERTY AND EQUIPMENT 1,328 2,698 INCREASE IN UNRESTRICTED NET ASSETS ATTRIBUTABLE TO MCLEOD HEALTH $ 136,843 $ 155,288 See notes to consolidated financial statements

113 MCLEOD HEALTH CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND 2012 (In thousands) Unrestricted Noncontrolling McLeod Health Interest Total Temporarily Restricted Permanently Restricted Total NET ASSETS September 30, 2011 $ 640,787 $ 1,838 $ 642,625 $ 5,274 $ 717 $ 648,616 Excess of revenues over expenses 120, ,416 (897) 119,519 Restricted donations and investment income - 3, ,286 Distributions to noncontrolling interest (362) (362) (362) Inherent contribution of restricted net assets from the acquisition of LHS 32,249 32,249 32,249 Net assets released from restrictions for property and equipment 2,698 2,698 (2,698) - Change in net assets 155,288 (287) 155,001 (334) ,692 NET ASSETS September 30, ,075 1, ,626 4, ,308 Excess of revenues over expenses 135, ,047 (1,047) 135,000 Restricted donations and investment income 2,797 2,797 Distributions to noncontrolling interest (294) (294) (294) Net assets released from restrictions for property and equipment 1,328 1,328 (1,328) - Change in net assets 136, , ,503 NET ASSETS September 30, 2013 $ 932,918 $ 1,789 $ 934,707 $ 5,362 $ 742 $ 940,811 See notes to consolidated financial statements

114 MCLEOD HEALTH CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND 2012 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Change in net assets $ 137,503 $ 154,692 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 44,894 40,767 Provision for uncollectible accounts net 156, ,141 Change in fair market value of interest rate swap agreement (893) 763 Loss on disposal of property Proceeds from sales of trading securities 196, ,607 Purchases of trading securities (249,445) (388,957) Unrealized gains on investments (52,334) (65,151) Inherent contribution from the acquisition of LHS (32,249) Gain on acquisition of SC MOB (1,613) Noncontrolling interest distributions Changes in operating assets and liabilities (excluding those acquired): Patient receivables (161,409) (151,557) Other receivables (481) (2,099) Inventories (644) (995) Prepaid expenses (16) 4,570 Other assets (140) 1,771 Accounts payable 5,643 2,948 Accrued expenses and other liabilities 1,461 1,617 Estimated third-party settlements 4,023 (1,902) Net cash provided by operating activities 79,667 62,849 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment Purchase of property and equipment (78,619) (75,123) Bond proceeds designated for capital purchases 1,205 53,293 Other investing activities (2,642) 3,909 Net cash used in investing activities (79,559) (17,356) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (41,673) (4,891) Borrowings of short-term debt 1,628 Repayments of capital lease obligations (294) Funds limited as to use for debt service (1,689) Noncontrolling interest distributions (294) (362) Net cash used in financing activities (43,656) (3,919) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (43,548) 41,574 CASH AND CASH EQUIVALENTS Beginning of year 62,631 21,057 CASH AND CASH EQUIVALENTS End of year $ 19,083 $ 62,631 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 14,922 $ 14,688 Liabilities accrued for the purchase of property and equipment net $ 4,189 $ 5,882 Equipment purchased through capital leases $ - $ 3,241 See notes to consolidated financial statements

115 MCLEOD HEALTH NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND 2012 (In thousands) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization McLeod Health is a South Carolina nonprofit corporation and is also an organization as described under Sections 501(c)(3) and 509(a)(3) of the Internal Revenue Code (IRC). McLeod Health serves as the parent corporation and sole member of McLeod Regional Medical Center of the Pee Dee, Inc. ( McLeod Regional Medical Center or MRMC), McLeod Medical Center Dillon, McLeod Health Foundation (the Foundation ), McLeod Physician Associates II, McLeod Loris Seacoast Hospital (MLSH), and Loris/Seacoast Healthcare Foundation (LSHF) and is the sole shareholder of McLeod Physician Associates, Inc. (MPA). McLeod Health serves the health care needs of a 14-county region in eastern South Carolina and the extreme southeastern portion of North Carolina. The activities of the principal entities comprising McLeod Health are summarized as follows: McLeod Regional Medical Center MRMC is a 453-bed teaching hospital and tertiary care referral center located in Florence, South Carolina. McLeod Medical Center Dillon McLeod Medical Center Dillon is a 79-bed community hospital located in Dillon, South Carolina. McLeod Medical Center Darlington McLeod Medical Center Darlington is a division of MRMC and operates a 49-bed community hospital located in Darlington, South Carolina. McLeod Behavioral Health McLeod Behavioral Health is a division of MRMC and operates a 23-bed psychiatric facility located in Darlington, South Carolina. McLeod Hospice House McLeod Hospice House is a division of MRMC and operates a 24-bed inpatient hospice facility located in Florence, South Carolina. McLeod Home Health McLeod Home Health is a division of MRMC that provides home health care services. The Foundation The Foundation is a not-for-profit foundation organized to solicit funds for facilities, research, and general support of McLeod Health. McLeod Health and Fitness Center McLeod Health and Fitness Center is a division of MRMC that operates a health and fitness center. McLeod Physician Associates, Inc. (MPA) MPA is a for-profit corporation that was composed of approximately 30 medical practices located throughout the Pee Dee region prior to October 1, Effective October 1, 2006, substantially all assets and operations were transferred to McLeod Physician Associates II, which is a not-for-profit corporation (see discussion below)

116 McLeod Physician Associates II McLeod Physician Associates II is a not-for-profit corporation that is composed of 58 medical practices located throughout the Pee Dee and Northern Horry county regions. McLeod Ambulatory Surgery Center McLeod Ambulatory Surgery Center is a division of MRMC that provides outpatient surgery services. McLeod Medical Partners, LLC (MMP) MMP is a for-profit corporation that owns and operates three medical office buildings adjacent to MRMC. MRMC owns approximately a 62% controlling share in the equity of MMP. McLeod Loris (formerly Loris Community Hospital) McLeod Loris is a division of MLSH and operates a 105-bed community hospital located in Loris, South Carolina (Note 2). McLeod Seacoast (formerly Seacoast Medical Center) McLeod Seacoast is a division of MLSH and operates a 50-bed community hospital located in Little River, South Carolina (Note 2). Loris Extended Care Center Loris Extended Care Center is a division of MLSH and operates a long-term care facility in Loris, South Carolina (Note 2). Loris/Seacoast Healthcare Foundation (LSHF) LSHF is a not-for-profit foundation organized to solicit funds for facilities, research, and general support of MLSH. Loris Foundation is a division of McLeod Health (Note 2). Principles of Consolidation The consolidated financial statements include the accounts of McLeod Health and all wholly owned or controlled subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Obligated Group consists of McLeod Health, MRMC, McLeod Medical Center Dillon, and McLeod Physician Associates II. The Nonobligated Group consists of the Foundation, MPA, MMP, and MLSH. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used for, but not limited to net patient service revenue; valuation of accounts receivable, including contractual allowances and provisions for doubtful accounts; estimated third-party settlements; and accounting for business combinations. Future events and their effects cannot be predicted with certainty; accordingly, management s accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the accompanying consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as the operating environment changes. Management regularly evaluates the accounting policies and estimates it uses. In general, management relies on historical experience and on other assumptions believed to be reasonable under the circumstances and may employ outside experts to assist in the evaluation, as considered necessary. Although management believes all adjustments considered necessary for fair presentation have been included, actual results may vary from those estimates. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with original maturities of three months or less at the time of purchase, which have not been designated as limited as to use

117 Patient Receivables and Allowance for Doubtful Accounts Patient receivables are reported at the net realizable amounts due from patients and third-party payors for services rendered, including estimated retroactive adjustments under reimbursement agreements. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Collection of these patient receivables is McLeod Health s primary source of cash and is critical to operating performance. The process of estimating the allowance for doubtful accounts requires McLeod Health to estimate the collectability of patient receivables, which is primarily based on McLeod Health s collection history, adjusted for expected recoveries. Collections are impacted by the economic ability of patients to pay and the effectiveness of collection efforts. Significant changes in payor mix, business office operations, economic conditions, or trends in federal and state governmental health care coverage could affect the collection of patient receivables. McLeod Health also continually reviews overall reserve adequacy by monitoring historical cash collections as a percentage of trailing net revenue, as well as by analyzing current-period gross revenue and admissions by payor classification, aged accounts receivable by payor, and days revenue outstanding. McLeod Health collects substantially all of third-party insured receivables, which include receivables from governmental agencies, resulting in a significant portion of the allowance for doubtful accounts relating to self-pay patients, as well as co-payments and deductibles owed by patients with insurance. The allowance for doubtful accounts was $97,335 and $79,392 for the years ended September 30, 2013 and 2012, respectively. The change in the allowance for doubtful accounts between 2012 and 2013 is primarily a result of a shift in self-pay patient accounts from charity care. Investments and Investment Income Investments, including those recorded as assets limited as to use, are stated at fair value in the accompanying consolidated balance sheets. Investment income or loss, including realized and unrealized gains and losses, is included in excess of revenues over expenses, unless the income or loss is restricted by donor or law. Assets limited as to use include investments designated by the Board of Trustees of McLeod Health ( Board of Trustees ) for future capital improvements (over which the Board of Trustees retains control and may at its discretion subsequently use for other purposes) and funds held by trustees under bond indenture agreements. Assets limited as to use that are required for settlement of current liabilities are reported within current assets in the accompanying consolidated balance sheets. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. Property and Equipment Property and equipment are recorded at cost, except for donated assets, which are recorded at fair value at the date of receipt. Assets under capital lease obligations are stated at the lesser of fair value or the present value of the minimum lease payments at the inception of the lease. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, which range from three to 40 years. Equipment under capital lease obligations is amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the accompanying consolidated financial statements. Expenditures, which materially extend the useful lives of the related assets, are capitalized. Routine maintenance and repair costs are charged to expense. Interest costs incurred during the construction period for significant construction projects are capitalized as part of the cost of the constructed asset and amortized over the applicable useful lives

118 Bond Issue Costs Bond issue costs are amortized over the term of the respective obligation utilizing the straight-line method, which approximates the effective interest method. Bond discounts and premiums are also amortized over the terms of the outstanding obligations using the straight-line method. Amortization, discounts, and premiums are included as components of depreciation and amortization in the accompanying consolidated financial statements. Goodwill Effective October 1, 2010, McLeod Health adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) , Business Combinations, relating to goodwill. Prior to the adoption of ASC , goodwill of $8,272 associated with the purchase of McLeod Medical Center Dillon was amortized over a 20-year period using a straight-line method. Beginning October 1, 2010, and upon adoption of ASC , the goodwill associated with the purchase of McLeod Medical Center Dillon was no longer amortized. The remaining unamortized balance of goodwill of approximately $3,262 is now subject to at least an annual assessment for impairment or more frequently if events or circumstances indicate that assets might be impaired by applying a fair value based test. There was no impairment of goodwill during the years ended September 30, 2013 and Interest Rate Swap Agreement In May 2005, MMP entered into a nine-year interest rate swap agreement related to its note payable. As part of the refinancing of the associated note payable, the interest rate swap agreement was amended and restated in February The agreement terminates in February The terms of the amended and restated agreement do not differ significantly from the terms of the original agreement. The notional amount of the agreement as of September 30, 2013 and 2012, was $11,481 and $11,838, respectively. The agreement requires MMP to pay the counterparty a 4.66% fixed rate of interest on the notional amount. In return, the counterparty will pay MMP interest at a variable rate based on the published London InterBank Offered Rate (LIBOR) index in accordance with the swap agreement. MMP did not designate the derivative as a hedge instrument. The net settlement between the fixed and variable rates is included as a component of interest expense in the accompanying consolidated statements of operations. The fair value of this derivative, which was estimated using Level 2 observable inputs, of $(1,060) and $(1,953) as of September 30, 2013 and 2012, respectively, is reported in the accompanying consolidated balance sheets as a component of accrued expenses and other liabilities, and changes in the fair value are reflected in other revenues (expenses) in the accompanying consolidated statements of operations. Noncontrolling Interest Noncontrolling interest represents the minority stockholders proportionate share of the net assets of MMP. Revenues in excess of expenses are allocated to the noncontrolling interest of MMP in proportion to their ownership percentage and are reflected as income attributable to noncontrolling interest in the consolidated statements of operations. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those assets whose use has been limited by a donor to a specific time period or purpose. Temporarily restricted net assets as of September 30, 2013 and 2012, of $5,362 and $4,940, respectively, are available for scholarships, continuing education, and various other health-related programs. Temporarily restricted net assets are transferred to unrestricted net assets when the donor restrictions as to time or purpose have been met and are reflected as net assets released from restrictions in the accompanying consolidated financial statements. Net assets released from restrictions in fiscal years 2013 and 2012 of $2,375 and $3,595, respectively, included $1,328 and $2,698 for the purchase of property and equipment, respectively, and $1,047 and $897 for operating activities, respectively

119 Permanently restricted net assets of $742 at both September 30, 2013 and 2012, have been restricted by the donors to be maintained by McLeod Health in perpetuity. The income from permanently restricted net assets is recorded as temporarily restricted net assets and is expendable for scholarships, continuing education, and various other health-related programs. Net Patient Service Revenues McLeod Health recognizes a significant amount of patient service revenues at the time the services are rendered even though McLeod Health does not assess the patient s ability to pay at that time. As a result, the provision for bad debts is presented as a deduction from patient service revenue (net of contractual and other allowances). Net patient service revenues are reported at the estimated net realizable amounts received, or to be received, from patients, third-party payors, and others for the specific services and supplies rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and are adjusted in future periods as estimates change or final settlements are determined. Charity Care McLeod Health provides care without charge, or at amounts less than its established rates, to patients who meet certain criteria under its charity care policy. Because McLeod Health does not pursue collection of patient accounts determined to qualify as charity care, they are not reported as net patient service revenues. McLeod Health estimates the direct and indirect costs of providing charity care using a calculated ratio of costs to gross charges for each facility. Electronic Health Records (EHR) Incentives The American Recovery and Reinvestment Act of 2009 established incentive payments under Medicare and Medicaid programs for certain professionals and hospitals that meaningfully use certified EHR technology. The EHR incentive payments to hospitals include a base amount, plus a discharge-related portion, which is calculated by the Centers for Medicare and Medicaid Services (CMS) based on the hospital s most recently filed cost report and are subject to adjustment upon settlement of the cost report for the hospital s fiscal year that begins after the beginning of the payment year. A hospital may receive incentive payments for up to four years, provided that it successfully demonstrates meaningful use for each applicable EHR reporting period. McLeod Health recognizes revenue for EHR incentive payments in the period in which it is reasonably assured that it will comply with the applicable EHR meaningful use requirements. EHR incentive revenues are recognized ratably over the applicable meaningful use-reporting period and are included in other operating revenues in the consolidated statements of operations. McLeod Health recognized EHR incentive revenues of $8,843 and $0 for the years ended September 30, 2013 and 2012, respectively. McLeod Health s attestations regarding the meaningful use of EHR technology are subject to audit by the federal government or its designee. Contributions Unconditional promises by donors to give cash or other assets are reported at fair value at the date the promises are received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gifts are received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor restrictions that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated financial statements as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year that they are received are reported as unrestricted contributions in the accompanying consolidated financial statements. Contributions of property and equipment are recorded as unrestricted support in the absence of donor stipulations regarding how long the assets are to be used

120 Income Taxes McLeod Health and its not-for-profit subsidiaries have been recognized by the Internal Revenue Service as tax exempt under IRC Section 501(c)(3). Accordingly, no provision for income taxes has been recorded in the accompanying consolidated financial statements. Excess of Revenues over Expenses The accompanying consolidated financial statements reflect an excess of revenues over expenses. Changes in unrestricted net assets resulting from permanent transfers of assets to and from affiliates for other than goods and services and contributions of long-lived assets (including assets acquired using contributions which, by donor restriction, were to be used for the purposes of acquiring such assets) are excluded from excess of revenues over expenses. Subsequent Events McLeod Health has evaluated events and transactions occurring after September 30, 2013, for potential recognition or disclosure in its consolidated financial statements through December 16, 2013, the date that the consolidated financial statements were issued. Adopted Accounting Pronouncements In July 2011, the FASB issued Accounting Standards Update (ASU) No , Health Care Entities (Topic 954): Presentation and Disclosure of Patient Services Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. The amendments require entities to change the presentation of their statements of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual and other allowances). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The new guidance is effective for nonpublic entities for fiscal years beginning after December 15, McLeod Health has adopted this guidance in fiscal year Upon adoption, the provision for bad debts associated with patient service revenue was presented as a reduction of patient service revenue (net of contractual and other allowances). The provisions of the standard related to the presentation of the provision for bad debts are required to be applied retrospectively to all periods presented. Accordingly, the consolidated statement of operations for the fiscal year ended September 30, 2012, has been adjusted to present the provision for bad debts as a reduction of patient service revenue for comparative purposes with the September 30, 2013, presentation. The adoption of this guidance also resulted in additional disclosures as presented in the allowance for doubtful accounts policy within Note 1 and net patient service revenue disclosures presented within Note 3. In April 2011, the FASB issued ASU No , Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US. GAAP and IFRS. The new guidance results in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Some of the amendments clarify the FASB s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The new guidance is effective for fiscal years beginning after December 15, The adoption of this guidance did not have a material impact on McLeod Health s consolidated financial statements. New Accounting Pronouncements In February 2013, the FASB issued ASU No , Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date, providing guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. The new guidance requires entities to measure these obligations as the sum of the

121 amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The new guidance is effective for fiscal years ending after December 15, McLeod Health is evaluating the impact on its consolidated financial statements from the adoption of this guidance. 2. BUSINESS COMBINATIONS Seacoast MOB LLC (SC MOB) Effective March 31, 2013, McLeod Health acquired controlling interest of SC MOB, a limited liability company organized to operate the Seacoast Medical Office Building in Little River, for approximately $2 million in cash from the controlling partner. Prior to the acquisition, MRMC and MLSH held noncontrolling interests in SC MOB accounted for under the equity method. At the acquisition date, the assets and liabilities of SC MOB, measured at fair value, were consolidated into McLeod Health, resulting in a consolidated gain from the acquisition of $1.6 million, reflected in other revenues (expenses) in the accompanying consolidated statements of operations. McLeod Health acquired assets of approximately $15.8 million, primarily consisting of the medical office building and related capital assets, and assumed liability of $11.6 million related to an existing mortgage on the medical office building. The operating results of this acquisition are not material to the consolidated financial statements of McLeod Health. Subsequent to the acquisition date, McLeod Health purchased the immaterial noncontrolling interests from the remaining two partners in SC MOB to control 100% of SC MOB. An intercompany capital contribution of $1.9 million from MRMC to MLSH was made to purchase MLSH s interest in SC MOB. Upon full control of SC MOB, the remaining assets and liabilities of SC MOB were transferred to MRMC, effectively dissolving SC MOB. In June 2013, McLeod Health paid off the $11.6 outstanding balance on the SC MOB mortgage. Loris Healthcare System On November 9, 2011, McLeod Health entered into an affiliation agreement with the Loris Community Hospital District d/b/a Loris Healthcare System (LHS). LHS provides care for residents of northern Horry County in South Carolina and southern Brunswick and Columbus Counties in North Carolina. LHS operated Loris Community Hospital, which has 105 licensed inpatient beds, Seacoast Medical Center, which has 50 licensed inpatient beds, and a network of physician practices. The affiliation agreement was subject to approval by the U.S. Department of Housing and Urban Development (HUD). Effective January 9, 2012, HUD approved the affiliation agreement and LHS contributed all of the assets, properties, rights, obligations, and liabilities associated with the LHS business, including, but not limited to, the Loris/Seacoast Hospitals, to McLeod Loris Seacoast Hospital, a South Carolina nonprofit corporation, in which McLeod Health is the sole member. As of the effective date, McLeod Health also became the sole member of the Loris Foundation. The fair value of unrestricted assets acquired exceeded liabilities assumed resulting in an inherent contribution of $32,249, which was recorded in the consolidated statements of operations and changes in net assets for the year ended September 30, Transaction costs incurred, primarily for legal and consulting services, are included in purchased services in the consolidated statements of operations and changes in net assets

122 Summarized consolidated opening balance sheet information for the assets acquired and liabilities assumed from LHS as of January 9, 2012, is as follows: Assets: Cash and cash equivalents $ 3,909 Patient accounts receivable 12,366 Other current assets 10,834 Property, plant, and equipment 85,909 Other assets 2,730 Total assets acquired at fair value 115,748 Liabilities: Current portion of long-term debt 1,258 Other current liabilities 12,808 Long-term debt 69,433 Total liabilities assumed at fair value 83,499 Total unrestricted net assets acquired $ 32,249 The operating results of the MLSH for the period January 9, 2012, through September 30, 2012, included total unrestricted revenue of $80.1 million and a deficit of revenues over expenses of $9.9 million. The amount of McLeod Health s revenue and changes in net assets had the acquisition of LHS occurred on October 1, 2011, are as follows: 2012 (pro forma) Total operating revenue $ 727,236 Excess of revenue over expenses 109,909 Change in unrestricted net assets 144,814 Change in temporarily restricted net assets (334) Change in permanently restricted net assets NET PATIENT SERVICE REVENUES Patient service revenues net of contractual and other allowances for the years ended September 30, 2013 and 2012, are summarized as follows: Medicare $ 312,054 $ 273,063 Medicaid 82,150 77,769 Managed care and other commercial insurers 337, ,255 Self-pay patients 167, ,496 Total patient service revenues net of contractual and other allowances $ 899,363 $ 830,

123 McLeod Health has agreements with third-party payors that provide for payments to McLeod Health at amounts different from its established rates. A summary of the payment arrangements with certain thirdparty payors is as follows: Medicare Inpatient acute-care services rendered to Medicare program beneficiaries are generally paid at prospectively determined rates per discharge, which vary according to a patient classification system based on clinical, diagnostic, and other factors. McLeod Health s classification of Medicare patients and the appropriateness of their admissions are subject to review by a Medicare contracted independent organization. Most outpatient services are also reimbursed at prospectively determined rates. However, final Medicare reimbursement is determined based upon the submission of annual cost reports by McLeod Health and audits thereof by the Medicare Audit Contractor (MAC). McLeod Health s Medicare cost reports have been audited by Palmetto GBA, the MAC, through September 30, However, final settlements for all acute-care hospitals were delayed by the CMS for fiscal years ending on or after September 30, 2007, due to issues related to the computation of the SSI fraction, a key component in the calculation of Medicare Disproportionate Share reimbursement. As of September 30, 2013, McLeod Health s Medicare cost reports have been settled through fiscal year ending September 30, Since final determination of amounts due from or to the Medicare and Medicaid programs is subject to audit and subsequent reopenings, changes resulting from final determinations are reflected as changes in estimates, generally in the year of determination. In the opinion of management, adequate provision has been made for adjustments, if any, that may result from such reviews. Net patient service revenue decreased approximately $2.1 million for the year ended September 30, 2013, due to increases in estimated third-party settlement reserves for fiscal years ended September 30, 2006, through September 30, Net patient service revenue decreased approximately $2.3 million for the year ended September 30, 2012, due to increases in estimated third-party settlement reserves for fiscal years ended September 30, 2005, through September 30, Medicaid Inpatient and outpatient Medicaid services are reimbursed on a reasonable cost basis. Interim payments are made by the state based on each facility s historical costs trended forward. Tentative settlements are made based on actual costs reported on hospital cost reports, but these are subject to further adjustment based on subsequent audits. As of September 30, 2012, final settlements have been determined by the State of South Carolina for fiscal years 2004 and Management has established reserves for potential Medicaid cost settlements and settlement adjustments for fiscal years In the state of South Carolina, providers are assessed a quarterly tax and receive periodic Medicaid disproportionate share and upper payment limit funds from the State of South Carolina. The tax assessment was $14,896 and $14,137 for the years ended September 30, 2013 and 2012, respectively, and is recorded as other operating expense in the accompanying consolidated statements of operations. McLeod Health received approximately $24,779 and $24,450 of disproportionate share funds from the state for the years ended September 30, 2013 and 2012, respectively, and recorded the funds as net patient service revenues in the accompanying consolidated statements of operations. Effective January 1, 2003, funds received under the upper payment limit program may be subject to a retroactive settlement process. McLeod Health continues to evaluate the settlement process related to the upper payment limit program and believes that it has recorded adequate provisions as of September 30, 2013 and 2012, in estimated third-party settlements in the accompanying consolidated balance sheets. Funds received under these programs may be subject to a retroactive settlement process

124 and future receipts of funds are not guaranteed. Beginning in fiscal year 2012, states are required to perform audits of hospital disproportionate share data and make adjustments to payments if over or underpayments have occurred based on the results of these audits. Charity Care In accordance with McLeod Health s mission to improve the health of its communities, McLeod Health facilities accept patients regardless of their ability to pay. McLeod Health offers financial assistance to patients who meet established financial assistance guidelines. Because McLeod Health does not pursue collection of patient accounts determined to qualify as charity care, they are not reported as net patient service revenues. McLeod Health estimates the direct and indirect costs of providing charity care using a calculated ratio of costs to gross charges for each facility. The estimated cost of charity care provided by McLeod Health under its charity care policy was $43,269 and $36,435 for the years ended September 30, 2013 and 2012, respectively. 4. INVESTMENTS Investments as of September 30, 2013 and 2012, are composed of investments held by the Foundation and LSHF and are recorded as follows: Investments held by the Foundation $ 5,218 $ 4,445 Investments held by LSHF 77 1,778 Less amounts included in assets limited to use (2,787) (2,584) Total investments held as certificates of deposit and money market funds $ 2,508 $ 3,639 McLeod Health has segregated assets limited as to use maintained by the Foundation into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value as of September 30, 2013 and 2012, as follows: Fair Value Measurement as of September 30, 2013 Quoted Prices in Significant Active Markets Other for Identical Observable Assets Inputs (Level 1) (Level 2) September 30, 2013 Significant Unobservable Inputs (Level 3) Common stocks $ 721 $ 721 $ - Mutual funds 1,429 1,429 Corporate bond funds Government bonds Other Total $ 2,787 $ 2,487 $ 300 $ - $

125 Fair Value Measurement as of September 30, 2012 Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable September 30, 2012 Assets (Level 1) Inputs (Level 2) Inputs (Level 3) Common stocks $ 1,252 $ 1,252 $ - Mutual funds Corporate bond funds Government bonds Other Total $ 2,584 $ 2,232 $ 352 $ - $ - 5. ASSETS LIMITED AS TO USE McLeod Health combines its investments in a system-wide investment pool, which includes investments and assets whose use is limited. Assets whose use is limited primarily include assets held by trustees under a master trust indenture agreement and assets designated by the board of directors for future capital improvements, over which the board retains control and may, at its discretion, subsequently use for other purposes. Assets limited as to use are stated at fair value as of September 30, 2013 and 2012, and have been designated as follows: By the Board of Trustees for future expansion, purchase of property and equipment, and repayment of debt $ 680,725 $ 572,338 Held by trustee for construction and purchase of property and equipment 1,205 Held by trustee for debt service reserve 7,540 7,540 Held by the Foundation 2,787 2,584 MRF Trust Fund (Note 8) 2, Total $ 693,731 $ 584,

126 McLeod Health has segregated its investments and assets limited as to use into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value as of September 30, 2013 and 2012, as follows: Fair Value Measurement as of September 30, 2013 Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable September 30, Assets Inputs Inputs 2013 (Level 1) (Level 2) (Level 3) Cash, cash equivalents, and money market funds $ 8,928 $ 8,928 $ - $ - Mutual funds 110, ,327 Domestic equities 92,046 92,046 Fixed income: Government bonds and government-backed securities 34,438 34,438 Corporate bonds 23,012 23,012 Mortgage-backed securities 30,813 30,813 Other 28,223 28,223 Large-cap commingled funds: State Street Global Advisors S&P 500 Index Funds 52,166 52,166 JPMorgan U.S. Large Cap 130/30 Fund LLC 59,998 59,998 International equity commingled funds: Blackrock Global Investors Fund 74,455 74,455 State Street Global Advisors MSCI Index Fund 72,101 72,101 Alternative investments: Blackstone Partners Offshore Fund Ltd. 61,580 61,580 Winton Futures Fund Ltd. 12,623 12,623 Global Ascent Ltd. 11,705 11,705 Real Estate 15,850 15,850 MRF Trust Fund (Note 8) 2,679 2,679 Investments held by the Foundation (Note 4) 2,787 2, Total $ 693,731 $ 216,467 $ 375,506 $ 101,758 Fair Value Measurement as of September 30, 2012 Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable September 30, Assets Inputs Inputs 2012 (Level 1) (Level 2) (Level 3) Cash, cash equivalents, and money market funds $ 15,911 $ 15,911 $ - $ - Mutual funds 100, ,133 Domestic equities 75,772 75,772 Fixed income: Government bonds and government-backed securities 54,406 54,406 Corporate bonds 30,744 30,744 Mortgage-backed securities 7,281 7,281 Other 10,703 10,703 Large-cap commingled funds: State Street Global Advisors S&P 500 Index Funds 43,737 43,737 JPMorgan U.S. Large Cap 130/30 Fund LLC 48,345 48,345 International equity commingled funds: Blackrock Global Investors Fund 62,356 62,356 Alliance Institutional International Equity Fund 29,456 29,456 Bernstein International Value Fund 27,009 27,009 Alternative investments: Blackstone Partners Offshore Fund Ltd. 50,537 50,537 Winton Futures Fund Ltd. 12,243 12,243 Global Ascent Ltd. 12,450 12,450 MRF Trust Fund (Note 8) Investments held by the Foundation (Note 4) 2,584 2, Total $ 584,657 $ 195,038 $ 314,389 $ 75,

127 The fair value of fixed-income securities shown in Level 2 above are measured using inputs other than quoted prices that are observable for the assets, including the stated interest rate, maturity, and credit risk. McLeod Health s commingled funds and alternative investments include the following funds that do not have readily determinable market values: State Street Global Advisors S&P 500 Index Funds privately held funds that invest primarily in equity securities that trade on national stock exchanges and seeks to gain exposure to large capitalization U.S. companies by replicating the returns and characteristics of the S&P 500 Index. There are no redemption restrictions on these funds. JPMorgan U.S. Large Cap 130/30 Fund LLC a privately held fund that invests primarily in equity securities that trade on a national stock exchange, utilizes an active stock selection with a systematic valuation process, and seeks to invest in a diversified portfolio of U.S. large-cap equities with a target average exposure of 130% long and 30% short. There are no redemption restrictions on this fund. Blackrock Global Investors Fund (Formerly Barclay s) a privately held fund that invests primarily in international equity securities that trade on global stock exchanges. There are no redemption restrictions on this fund. Alliance Institutional International Equity Fund a privately held fund that invests primarily in equity securities of non-u.s. companies actively traded on foreign exchanges. The portfolio generally will be broadly diversified at the country level, with no more than 5% of any class of securities of any single issuer. The notification periods required for redemption or other limits on redemption as of September 30, 2013, were four business days. McLeod Health is no longer invested in this fund as of December Bernstein International Value Fund a privately held fund that invests primarily in equity securities of non-u.s. companies actively traded on foreign exchanges located in the countries comprising the Morgan Stanley Capital International All Country World Index. The notification periods required for redemption or other limits on redemption as of September 30, 2013, were four business days. McLeod Health is no longer invested in this fund as of December State Street Global Advisors MSCI Index Fund a privately held fund that invests primarily in equity securities that trade on international stock exchanges and seeks to gain exposure to global equities by replicating the returns and characteristics of the MSCI Global Equity Indices. There are no redemption restrictions on this fund. Blackstone Partners Offshore Fund Ltd. a privately held fund that invests primarily in other funds that are not publicly traded and is a fund of funds constructed through a multimanager framework of strategies that collectively are not highly correlated to traditional asset classes. This fund provides for redemptions on a semiannual basis with 95 days prior written notice. Winton Futures Fund Ltd. a privately held fund that seeks to achieve long-term capital appreciation of assets in a variety of changing market conditions using a diversified futures trading program focused on quantitative technical analysis. The fund trades a portfolio of more than 100 international futures, options, and forward contracts. This fund provides for redemptions on any dealing day provided that written notice is received two days prior to the relevant dealing date (first business day of each month)

128 Global Ascent Ltd. a privately held fund managed by Blackrock and domiciled in the Cayman Islands. The fund s investment objective is to generate absolute returns by employing a long/short leveraged strategy in the various global markets, including, but not limited to, stock, bond, currency, cash, commodities, and volatility markets. This fund provides for redemptions 10 business days prior to the dealing date (last day of the month). Real Estate (PRISA) a domestic comingled property fund that pools investor money to build and invest into commercial, industrial, and residential real estate. The fund seeks to generate a return from property appreciation, as well as lease and rental revenue. The notification periods required for redemption or other limits on redemption is 90 days. The commingled funds and alternative investments may contain elements of both credit and market risk. Such risks could include, but are not limited to, limited liquidity, absence of oversight, dependence upon key individuals, emphasis on speculative investments (both derivatives and nonmarketable investments), and nondisclosure of portfolio composition. McLeod Health reviews and evaluates the values provided by the investment managers for commingled funds and alternative investments and agrees with the valuation methods and assumptions used in determining the fair value of commingled funds and alternative investments. U.S. GAAP permits, as a practical expedient, a reporting entity to measure the fair value of certain investments without readily determinable fair values by using the reported net asset value per share (or its equivalent) of the investment without further adjustment if the investment is in an entity that meets the description of an investment company whose underlying investments are measured at fair value as set forth in the ASC. Accordingly, McLeod Health generally estimates the fair value of its alternative investments using this approach based on information reported by the respective fund managers or the general partners. The estimated fair value of certain alternative investments is based on valuations performed prior to the balance sheet date by the external investment managers and adjusted for cash receipts, cash disbursements, and securities distributions through September 30, Financial instruments, which involve varying degrees of off-balance-sheet risk for the various limited partnerships, limited liability corporations, and offshore investment funds included within alternative investments, may result in a loss due to changes in the market (market risk). Because alternative investments are not readily marketable, their estimated value is subject to uncertainty and, therefore, may differ from the value that would have been used had a ready market for such investments existed. Such differences could be material

129 There were no significant reclassifications between Level 1, Level 2, or Level 3 during the years ended September 30, 2013 and A summary of the changes in the fair value of McLeod Health s Level 3 alternative investments for the years ended September 30, 2013 and 2012, are as follows: Blackstone Partners Offshore Fund Ltd. Winton Futures Global Real Fund Ltd. Ascent Ltd. Estate Total Balance September 30, 2011 $ 47,301 $ - $ - $ - $ 47,301 Capital contribution 12,500 12,500 25,000 Unrealized gains (losses) 3,236 (257) (50) 2,929 Balance September 30, ,537 12,243 12,450 75,230 Capital contribution 6,000 15,000 21,000 Realized gains (losses) Unrealized gains (losses) 5,043 6 (745) 644 4,948 Balance September 30, 2013 $ 61,580 $ 12,623 $ 11,705 $ 15,850 $ 101,758 Other revenues (expenses) for the years ended September 30, 2013 and 2012, is as follows: Unrealized gains (losses) on investments $ 52,334 $ 65,151 Realized gains on sales of investments 20,659 5,603 Dividends and interest net of management fees 7,070 5,077 Gain on acquisition of SC MOB 1,613 Change in fair market value of interest rate swap 893 (763) Total $ 82,569 $ 75, PROPERTY AND EQUIPMENT Property and equipment as of September 30, 2013 and 2012, consist of the following: Land and land improvements $ 75,145 $ 76,133 Buildings 642, ,026 Fixed and moveable equipment 270, ,929 Leasehold improvements 7,454 2,991 Construction in progress 40,428 90,894 1,035,667 1,019,973 Less accumulated depreciation (492,941) (523,272) Total $ 542,726 $ 496,

130 7. SHORT-TERM BORROWINGS McLeod Health has a $20,000 unsecured line of credit with a local financial institution. The line of credit bears interest at LIBOR, plus 1.25% (LIBOR was 0.18% as of September 30, 2013). Interest is assessed at a variable interest rate adjusted daily and is payable monthly. There were no outstanding borrowings as of September 30, 2013 and LONG-TERM DEBT Long-term debt as of September 30, 2013 and 2012, consists of the following: Series A Bonds, paid off November 2012 $ - $ 20, Series A Bonds, plus unamortized premium, due in various installments ranging from $805 to $26,275 through Interest is paid semiannually at rates ranging from 4.10% to 5.25% 76,054 76, Series A Bonds, plus unamortized premium, due in various installments ranging from $2,420 to $15,215, beginning in 2011 and extending to Interest is paid semiannually at rates ranging from 3.00% to 5.00% 118, , Series B Bonds, plus unamortized premium, due in annual installments of $15,375 to $15,805, beginning in 2038 and extending to Interest is paid monthly based on a variable rate (0.07% at September 30, 2013) 46,770 46,770 Note payable, due in monthly principal installments of $159, with the outstanding balance to be paid in October Interest is paid monthly at LIBOR (0.18% at September 30, 2013) plus 0.75%. Collateralized by a portion of assets 5,892 7,803 Note payable, due in monthly installments of approximately $32, with the remaining outstanding balance of $7.8 million to be paid in February Interest is paid monthly according to a swap agreement described in Note 1. Collateralized by MMP s land and buildings 11,481 11,838 Mortgage payable, due in monthly installments of approximately $522, with the outstanding balance to be paid in November Interest is paid monthly based on a fixed interest rate of 7.25% 70,137 71,239 Other 884 4, , ,228 Less current portion of long-term debt (7,010) (10,117) Total $ 322,339 $ 349,

131 McLeod Health s Series 2010A and 2010B, Series 2004A, and Series 1998A bonds were issued through the governmental municipality of Florence County, South Carolina. Each member of the Obligated Group is jointly and severally liable for the repayment of the principal and interest as they become due on the bonds under a master indenture agreement. All accounts receivable of McLeod Health, now owned or hereafter acquired, and all proceeds thereof are pledged as collateral for the bonds. Additionally, under the master indenture agreement, the bonds are secured by the mortgage, as described in Note 11, on McLeod Health s land and all personal property and fixtures located thereon. Upon payment or defeasance of the Series 2004A and Series 1998A bonds, the master trustee has agreed to cancel the mortgage, and upon such cancellation, the Series 2010A and 2010B bonds will no longer be secured by the mortgage. Also, under the master indenture agreement, McLeod Health is subject to various restrictions as a part of debt covenants for the bonds and other debt. As of September 30, 2013, McLeod Health was in compliance with its restrictive financial debt covenants under the master indenture agreement. McLeod Health exercised a full redemption on November 1, 2012, of the Series 1998A bonds pursuant to the terms of the governing debt documents. The bonds were redeemed at the remaining outstanding principal amount of $20,586 together with interest accrued to the redemption date. The approximately $11,800 note payable was refinanced during February As part of the refinancing, $575 was added to the principal amount of the loan. The amended and restated loan agreement extended maturity date of the loan from February 2014 to February All other terms of the amended and restated agreement do not differ significantly from the terms of the original agreement. As part of the acquisition of LHS, McLeod Health assumed a secured mortgage fully insured by the U.S. Department of Housing and Urban Development Federal Housing Administration (FHA) pursuant to Section 242 of the National Housing Act, as amended, related to construction projects, refunding of other long-term debt, and other projects and equipment purchases of LHS. At the date of acquisition, the outstanding principal balance of the mortgage of approximately $71,567 was assigned to the newly formed MLSH. The mortgage calls for monthly installments of approximately $522, which includes interest at 7.25% with the final payment expected in November The mortgage is secured by all current or future properties and revenues of MLSH. As part of the agreement to the assigned mortgage (the agreement ), MLSH was required to establish a mortgage reserve fund (MRF) with a trustee to provide reserve funds related to the mortgage. MLSH is required to make monthly payments to the MRF which, when coupled with an assumed investment rate of return of 4%, will equal approximately 12 months and 24 months of mortgage debt service at five and 10 years, respectively. Such deposits held by the trustee are included with assets limited to use in the consolidated financial statements. The agreement also places limits on the incurrence of additional borrowings and distribution of assets, including cash, and requires that certain financial performance measures be satisfied as long as the mortgage is outstanding. As of September 30, 2013, MLSH did not meet all of the financial performance measures but has complied with the remediation requirements outlined in the agreement when such measures have not been met

132 9. Future aggregate annual principal payments applicable to long-term debt as of September 30, 2013, are as follows: Years Ending September $ 7, , , , ,341 Thereafter 294,820 Total $ 329,349 EMPLOYEE BENEFIT PLANS McLeod Health maintains a defined contribution plan covering a limited number of employees who were hired prior to January 1, McLeod Health contributes 3% of each eligible participant s compensation. Such contributions amounted to $2,615 and $2,620 in fiscal years 2013 and 2012, respectively. McLeod Health sponsors a 401(k) plan covering substantially all employees of McLeod Health. Annual contributions are based upon a matching of the participant s elective deferrals and amounted to $5,290 and $4,778 in fiscal years 2013 and 2012, respectively. 10. CONCENTRATIONS OF CREDIT RISK McLeod Health provides acute and nonacute health care services to residents of the Pee Dee region of South Carolina. While the majority of patient receivables are due from the Medicare and Medicaid programs and various insurance companies, the collectibility of receivable balances is affected by the economic stability of the area. Accordingly, receivables are reflected in the balance sheet net of valuation allowances based on the anticipated collectibility of the related gross receivables. The mix of receivables from patients and third-party payors as of September 30, 2013 and 2012, is as follows: Medicare 35 % 36 % Medicaid Managed care and other commercial insurers Self-pay patients Total 100 % 100 %

133 11. COMMITMENTS AND CONTINGENCIES McLeod Health has leased a portion of its land for its physical plant through 2076, at which time McLeod Health has the option to purchase the property for a nominal cost. McLeod Health is also contingently responsible for any debt service cost of the landlord, plus any expenses incurred by the landlord in connection with the ownership of the premises. For the years ended September 30, 2013 and 2012, the landlord had incurred no debt service costs or other expenses in connection with the land. McLeod Health has a claims-made professional liability insurance policy to cover medical malpractice claims in accordance with state-mandated limits for both hospital operations and its physicians. The South Carolina Charitable Immunity Statute allows for recovery against a charitable organization of only the actual damages sustained in an amount not exceeding the limitations of liability imposed in the South Carolina Tort Claims Act (the Tort Claims Act ). The Tort Claims Act provides that no person shall recover in any action or claim brought hereunder a sum exceeding $300 per person, per occurrence or a total of $600 per occurrence, except that both the per-person and per-occurrence amounts are raised to $1.2 million for the tort of a licensed physician or dentist employed by such facility. No award for damages under the Tort Claims Act shall include punitive or exemplary damages or interest prior to judgment. While any medical malpractice claims contain an element of uncertainty, management believes that the outcome of any pending lawsuit or claim is covered by insurance and the related claim liability and anticipated insurance recoveries are not material due to the limitations of liability imposed in the Tort Claims Act. McLeod Health is self-insured with respect to employee health benefits and workers compensation. McLeod Health is involved in various litigation, regulatory matters, and administrative proceedings arising in the ordinary course of business, including personnel- and employment-related matters. While any litigation contains an element of uncertainty, management believes that the outcome of any pending lawsuit or claim is covered by insurance and/or has been adequately reflected as accrued expenses and other liabilities in the accompanying consolidated financial statements. McLeod Health believes that the ultimate resolution of these matters will not have a material adverse effect on future financial position, results from consolidated operations, or its cash flows. The health care industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient care services, and Medicare and Medicaid fraud and abuse. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time. Violations of these laws and regulations could result in expulsion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. The health care industry continues to attract much legislative interest and public attention. In March of 2010, the President signed into law H.R. 3590, The Patient Protection and Affordable Care Act, and companion bill H.R. 4872, The Health Care and Education Affordability Reconciliation Act of The reform will be effective over a 10-year period through 2020 and contains an individual insurance mandate, low-income subsidies, an expansion of Medicaid, insurance reforms, and the creation of statebased health insurance exchanges. It is unclear at this time what the net impact of this legislation will be on McLeod Health. Such effects may include material and adverse changes to the amounts of reimbursement received by McLeod Health s facilities

134 McLeod Health has committed to contracts with outside parties for various construction projects and equipment purchases that still have approximately $24,919 due to be paid subsequent to September 30, Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the consolidated financial statements. 12. RELATED-PARTY TRANSACTIONS Total expenditures for related-party transactions during fiscal years 2013 and 2012 were approximately $2,198 and $2,374, respectively. Such transactions primarily consist of payments to Pee Dee Pathology, where a member of the Foundation Board practices, as well as medical director and chief of staff fees for several members of the Board of Trustees and community board. In addition, a Board of Trustees member and a community board member are key employees of an anesthesiology group that has an exclusive arrangement with McLeod Health for provision of anesthesiology services. In fiscal years 2013 and 2012, McLeod Health purchased insurance coverage from third-party insurance companies involving premiums totaling approximately $3,996 and $2,790, respectively. This coverage was placed by an insurance broker who serves on the Board of Trustees of the Foundation. 13. OPERATING LEASES McLeod Health leases office space to outside parties under lease agreements with varying expiration dates through fiscal year Portions of the buildings below are used by McLeod Health, and accordingly, no rental income is recognized for that space. The cost and carrying amounts of property covered by these leases as of September 30, 2013, are as follows: Buildings $ 33,270 Less accumulated depreciation (14,720) Total $ 18,550 Aggregate annual rental payments during the remaining terms of these agreements as of September 30, 2013, is as follows: Years Ending September $ 2, , , Thereafter 3,991 Total $ 10,174 Rental income for the years ended September 30, 2013 and 2012, totaled $2,685 and $2,966, respectively

135 McLeod Health leases certain equipment and office space used in its operations. Generally, the leases provide for renewal for various periods at stipulated rates. Aggregate future minimum lease payments under noncancelable operating leases as of September 30, 2013, are as follows: Years Ending September $ 1, , , Thereafter Total $ 5,480 Rent expense related to office space for the years ended September 30, 2013 and 2012, was $1,857 and $1,685, respectively. Rent expense related to equipment for the years ended September 30, 2013 and 2012, was $4,575 and $4,349, respectively. 14. FUNCTIONAL EXPENSES McLeod Health primarily provides various health care services to its patients. Expenses related to providing these services during fiscal years 2013 and 2012 are summarized as follows: Health care services $ 661,172 $ 599,617 General and administrative 67,849 62,760 Total $ 729,021 $ 662, FAIR VALUE MEASUREMENTS The following methods and assumptions were used in estimating the fair value of financial instruments: Cash and Cash Equivalents The carrying amount reported in the accompanying consolidated balance sheets for cash and cash equivalents approximates its fair value. Investments and Assets Limited as to Use The carrying amounts reported in the accompanying consolidated balance sheets are based on quoted market prices, if available, or estimated using quoted market prices for similar securities (see Notes 4 and 5 for additional information). Receivables The carrying amounts reported in the accompanying consolidated balance sheets for receivables approximate their fair value. Accounts Payable and Accrued Expenses and Other Liabilities The carrying amounts reported in the accompanying consolidated balance sheets for accounts payable and accrued expenses and other liabilities approximate their fair value. Estimated Third-Party Settlements The carrying amount reported in the accompanying consolidated balance sheets for estimated third-party settlements approximates its fair value

136 Long-Term Debt The fair value of McLeod Health s long-term debt was approximately $334,850 and $374,648 as of September 30, 2013 and 2012, respectively, and was determined based on quoted market prices for bonds and the carrying amounts of notes payable with variable interest rates. 16. ENDOWMENT FUNDS McLeod Health s endowment funds consist of donor-restricted funds and internally designated funds established primarily for scholarship purposes. Management has interpreted FASB Staff Position FAS 117-1, Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures for All Endowment Funds (ASC Topic 958), as requiring the preservation of the fair value of original gifts and subsequent contributions as of the gift date of donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result, the Foundation classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent contributions to the permanent endowment, and (c) other accumulations to the permanent endowment as required by donor gift instruments. The remaining portion of donor-restricted endowment funds that is not classified as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Foundation consistent with the donor s wishes. Losses on the investments of donor-restricted endowment funds are recorded as a reduction of temporarily restricted net assets to the extent that donor-imposed temporary restrictions on net appreciation of the fund have not been met before the loss occurs. Any remaining losses reduce unrestricted net assets. Investment gains on donor-restricted endowment funds totaling $32 and $44 as of September 30, 2013 and 2012, respectively, have been recorded as changes in the temporarily restricted net assets of the endowment funds. The Foundation has developed an investment policy for all of its investable assets whose general purpose is to preserve the capital and purchasing power of the endowments and to produce sufficient investment earnings for current and future spending needs. The Foundation has adopted a spending policy that limits the amount of funds available for distribution each year to 4% of a 12-quarter trailing average market value of each portfolio computed as of the prior September 30 fiscal year end. Depending on investment conditions, the Board may approve a spending policy of no less than 3.5% and no more than 5% of the 12-quarter trailing average market value of the fund. With this policy, the annual dollar amount available for spending will be known at the beginning of the year. If necessary, quarterly transfers of approximately 1% of the earnings of the endowment will be scheduled to be transferred to the main cash account from the endowment funds. In establishing this policy, the Foundation considered the long-term expected return on its investments and the objective to preserve purchasing power

137 As of September 30, 2013 and 2012, McLeod Health s total endowment net assets were $944 and $911, respectively. Changes in endowment net assets for the years ended September 30, 2013 and 2012, consisted of the following: Unrestricted Temporarily Restricted Permanently Restricted Total Endowment net assets beginning of year October 1, 2011 Investment gain Additions Expenses Endowment net assets end of year September 30, 2012 $ - $ 123 $ 717 $ (2) (2) Investment gain Additions Expenses 32 5 (4) 32 5 (4) Endowment net assets end of year September 30, 2013 ****** $ - $ 202 $ 742 $

138 SUPPLEMENTAL CONSOLIDATING INFORMATION

139 MCLEOD HEALTH SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION OBLIGATED AND NONOBLIGATED GROUP AS OF SEPTEMBER 30, 2013 (In thousands) ASSETS Obligated Nonobligated Group Group Eliminations Total CURRENT ASSETS: Cash and cash equivalents $ 10,381 $ 8,702 $ - $ 19,083 Investments 2,508 2,508 Net patient receivables 75,439 14,034 89,473 Other receivables 3,792 1,263 (609) 4,446 Inventories 5,620 2,324 7,944 Prepaid expenses 8, ,230 Total current assets 103,522 29,771 (609) 132,684 INVESTMENT IN SUBSIDIARIES 7,802 (7,802) - DUE FROM (TO) AFFILIATED ENTITIES Net 5,935 (5,935) ASSETS LIMITED AS TO USE 688,265 5,466 PROPERTY AND EQUIPMENT Net 456,221 86, , ,726 BOND ISSUE COSTS Net 5,156 5,156 GOODWILL 3,262 3,262 OTHER ASSETS 7,351 2,248 9,599 TOTAL $ 1,277,514 $ 118,055 $ (8,411) $ 1,387,158 LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Current portion of long-term debt $ 5,367 $ 1,643 $ - $ 7,010 Accounts payable 28,048 2,428 (609) 29,867 Accrued expenses and other liabilities 38,367 4,569 42,936 Estimated third-party settlements 41,643 2,552 44,195 Total current liabilities 113,425 11,192 (609) 124,008 LONG-TERM DEBT Net of current portion 242,254 80, ,339 Total liabilities 355,679 91,277 (609) 446,347 NET ASSETS: Noncontrolling interest 1,789 1,789 McLeod Health 921,835 24,989 (7,802) 939,022 TOTAL $ 1,277,514 $ 118,055 $ (8,411) $ 1,387,

140 MCLEOD HEALTH SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION OBLIGATED AND NONOBLIGATED GROUP FOR THE YEAR ENDED SEPTEMBER 30, 2013 (In thousands) Obligated Group REVENUES, GAINS, AND OTHER SUPPORT: Patient service revenues net of contractual and other allowances $ 778,335 $ 121,028 $ - 899,363 Provision for bad debts net (127,402) (28,969) (156,371) Net patient service revenues 650,933 92, ,992 Other operating revenues 35,319 10,519 (7,726) 38,112 Net assets released from restrictions 1,047 1,047 Total revenues, gains, and other support 687, ,578 (7,726) 782,151 EXPENSES: Personnel 372,513 45, ,971 Professional fees 4,572 15,079 19,651 Supplies 123,855 14, ,717 Purchased services 33,553 9,972 (1,368) 42,157 Facility-related costs 19,151 3,383 (5,332) 17,202 Insurance 5,923 1,230 7,153 Other 22,558 4,111 (1,026) 25,643 Interest 9,181 5,741 14,922 Depreciation and amortization 38,892 6,002 44,894 Loss on disposal of property Total expenses 630, ,842 (7,726) 728,673 INCOME (LOSS) FROM OPERATIONS 56,742 (3,264) Total 53,478 OTHER REVENUES (EXPENSES) 80,057 2,512 82,569 SUBSIDIARIES (LOSS) INCOME Net 1,262 Nonobligated Group Eliminations (1,262) - EXCESS (DEFICIENCY) REVENUES OVER (UNDER) EXPENSES 138,061 (752) (1,262) 136,047 INHERENT CONTRIBUTION FROM THE ACQUISITION OF LHS LESS INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST (532) - (532) EXCESS OF REVENUES OVER EXPENSES ATTRIBUTABLE TO MCLEOD HEALTH 138,061 (1,284) (1,262) 135,515 MMP DISTRIBUTIONS 482 (482) NET ASSETS RELEASED FROM RESTRICTIONS FOR PURCHASES OF PROPERTY AND EQUIPMENT 1,328-1,328 CHANGE IN NET ASSETS ATTRIBUTABLE TO MCLEOD HEALTH: Unrestricted 139,871 (1,766) (1,262) 136,843 Temporarily restricted Permanently restricted - TOTAL CHANGE IN NET ASSETS ATTRIBUTABLE TO MCLEOD HEALTH $ 139,871 $ (1,344) $ (1,262) $ 137,

141 APPENDIX C DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF THE MASTER TRUST INDENTURE AND SUPPLEMENTS AND THE 2014 TRUST AGREEMENT AND THE 2014 LOAN AGREEMENT

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143 DEFINITIONS OF CERTAIN TERMS The following is a summary of the definitions of certain terms contained in the Trust Agreement, the Loan Agreement, the Master Indenture, and supplements thereto and used in this Official Statement. Account Lien Amount means the product of (x) the Coverage Factor multiplied by (y) an amount equal to the Obligated Group s net patient accounts receivable (as shown in its Financial Statements for the preceding Fiscal Year). Accounts means any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance. Act means Title 44, Chapter 7, Article 11, Code of Laws of South Carolina, 1976, as amended, or any successor statute. Affiliate means a corporation, partnership, joint venture, association, business trust or similar entity organized under the laws of the United States of America or any state thereof which (i) is directly or indirectly controlled by any Member of the Obligated Group or by any Person which directly or indirectly controls any Member of the Obligated Group or (ii) controls, directly or indirectly, any Member of the Obligated Group. For purposes of this definition, controls means the power to direct the management and policies of a Person through the ownership of not less than a majority of its voting securities or the right to designate or elect not less than a majority of the members of its board of directors or other governing board or body by contract or otherwise. Agreement means the Loan Agreement relating to the Bonds, dated as of August 1, 2014, between the County and the Hospital, including all amendments or supplements thereto as therein permitted. Audited Financial Statements means the consolidated financial statements of the Corporation and its Affiliates for a twelve-month period, or for such other period for which an audit has been performed, prepared in accordance with generally accepted accounting principles, which have been audited and reported upon by independent certified public accountants. Audited Financial Statements shall also include, in an additional information section, unaudited combining financial statements for the same twelve-month period from which the accounts of any Affiliate which is not a Member of the Obligated Group have been eliminated and to which the accounts of any Member of the Obligated Group which is not an Affiliate have been added; provided, however, that for purposes of adding the accounts of a Member of the Obligated Group which is not an Affiliate, the balances of such accounts shall be extracted from audited financial statements of such Member of the Obligated Group and its Affiliates, if any. Balloon Long-Term Indebtedness means Long-Term Indebtedness 25% or more of the principal payments of which are due in a single year, which portion of the principal is not required by the documents pursuant to which such Indebtedness is issued to be amortized by redemption prior to such date. Bankruptcy Code means Title 11 of the United States Code, as amended, and any successor statute or statutes having substantially the same function. Beneficial Owners means the holders of beneficial ownership interests in the Bonds on the books of DTC as set forth in Section 211 of the Trust Agreement. C-1

144 Bond Counsel means any firm of nationally recognized municipal bond counsel selected by the Hospital and not unacceptable to the County and the Bond Trustee. Bond Fund means the fund by that name created and established in Section 501 of the Trust Agreement. Bond Registrar means the Bond Trustee acting in the capacity of registrar for the Bonds. Bond Trustee means U.S. Bank National Association and its successors and their assigns. Bond Year means the period commencing on November 1 of any year and ending on October 31 of the next succeeding year. Bonds means the Florence County, South Carolina Refunding Hospital Revenue Bonds (McLeod Regional Medical Center Project), Series 2014, in the aggregate principal amount of $61,175,000, issued under and secured by the Trust Agreement. Business Day means a day (a) other than a day on which banks located in Columbia, South Carolina, St. Paul, Minnesota, or in New York, New York, are authorized or required by law to close and (b) on which The New York Stock Exchange is not closed. Capitalization means the sum of the aggregate principal amount of Long-Term Indebtedness of the Members of the Obligated Group, plus the aggregate unrestricted fund balance of the nonprofit Members of the Obligated Group and plus the aggregate excess of assets over liabilities of the proprietary members of the Obligated Group, if any, all as calculated in accordance with generally accepted accounting principles. Closing means the date on which the Loan Agreement becomes legally effective, the same being the date on which the Bonds are delivered against payment therefor. Code means the Internal Revenue Code of 1986, as amended, and all regulations promulgated thereunder. Completion Indebtedness means any Long-Term Indebtedness incurred by any Member of the Obligated Group for the purpose of financing the completion of facilities for the acquisition, construction or equipping of which Long-Term Indebtedness has theretofore been incurred in accordance with the provisions of the Master Indenture, to the extent necessary to provide a completed and equipped facility of the type and scope contemplated at the time that such Long-Term Indebtedness theretofore incurred was originally incurred, and, to the extent the same shall be applicable, in accordance with the general plans and specifications for such facility as originally prepared with only such changes as have been made in conformance with the documents pursuant to which such Long-Term Indebtedness theretofore incurred was originally incurred. Conditional Redemption means Conditional Redemption as defined in Section 307 of the Trust Agreement. Consultant means a firm which is not, and no member, stockholder, director, officer, trustee, or employee of which is, an officer, director, trustee, or employee of any Member of the Obligated Group or Affiliate and which is a nationally recognized professional management consultant having the skill and experience necessary to render the particular report required by the provision of the Master Indenture in which such requirement appears and which is acceptable to the Master Trustee. C-2

145 Corporation as used in the Master Indenture, means the Hospital. Cost of Issuance means (i) the costs of legal fees and expenses, underwriters discount, underwriting fees, financing costs, financial advisor s fees, accounting fees and expenses, consulting fees, the Bond Trustee s fees and expenses, paying agent and certifying and authenticating agent fees, publication costs and printing and engraving costs incurred in connection with the authorization, sale, issuance and carrying of the Bonds and the preparation of the Loan Agreement, Obligation No. 14, Supplement No. 14, the Trust Agreement and all other documents in connection therewith and (ii) any other costs in connection with the issuance of the Bonds permitted by the Act to be paid or reimbursed from the proceeds of the Bonds. Cost of Issuance Fund means the fund created and so designated by Section 401 of the Trust Agreement. County means Florence County, South Carolina, and any successor thereto. County Representative means each of the persons at the time designated to act on behalf of the County in a written certificate furnished to the Hospital and the Bond Trustee, which certificate shall contain the specimen signature(s) of such person(s) and shall be signed on behalf of the County by the Chairman or Vice Chairman of its County Council. Credit Facility means a line of credit, letter of credit, standby bond purchase agreement or similar credit enhancement or liquidity facility established to provide credit or liquidity support for Indebtedness. Cross-over Date means, with respect to Cross-over Refunding Indebtedness, the date on which the principal portion of the related Cross-over Refunded Indebtedness is to be paid or redeemed from the proceeds of such Cross-over Refunding Indebtedness. Cross-over Refunding Indebtedness means Indebtedness issued for the purpose of refunding other Indebtedness if the proceeds of such refunding Indebtedness are irrevocably deposited in escrow to secure the payment on the applicable redemption date or maturity date of the refunded Indebtedness, and the earnings on such escrow deposit (i) are required to be applied to pay interest on such refunding Indebtedness until the Cross-over Date and (ii) shall not be used directly or indirectly to pay interest on the refunded Indebtedness. Defaulted Interest means any interest on any Bond which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date. Defeasance Obligations (1) as used in the Master Indenture means direct obligations of the United States of America; and (2) as used in the Trust Agreement means (a) noncallable Government Obligations, (b) evidences of ownership of a proportionate interest in specified noncallable Government Obligations, which Government Obligations are held by a bank or trust company organized and existing under the laws of the United States of America or any state thereof in the capacity of custodian, (c) defeased Government Obligations and (d) evidences of ownership of a proportionate interest in specified defeased Government Obligations, which defeased Government Obligations are held by a bank or trust company organized and existing under the laws of the United States of America or any state thereof in the capacity of custodian. Depository means one or more banks or trust companies authorized under the laws of the United States of America or the State to engage in the banking business within the State having capital, C-3

146 surplus and undivided profits of at least $50,000,000, and designated by the County, with the approval of the Hospital, as a depository of money under the provisions of the Trust Agreement. Derivative Agreement means, without limitation, (i) any contract known as or referred to or which performs the function of an interest rate swap agreement, currency swap agreement, forward payment conversion agreement or futures contract; (ii) any contract providing for payments based on levels of, or charges or differences in, interest rates, currency exchange rates, or stock or other indices; (iii) any contract to exchange cash flows or payments or series of payments; (iv) any type of contract called, or designed to perform the function of, interest rate floors or caps, options, puts or calls, to hedge or minimize any type of financial risk, including, without limitation, payment, currency, rate or other financial risk; and (v) any other type of contract or arrangement that the Member of the Obligated Group entering into such contract or arrangement determines is to be used, or is intended to be used, to manage or reduce the cost of Indebtedness, to convert any element of Indebtedness from one form to another, to maximize or increase investment return, to minimize investment return risk or to protect against any type of financial risk or uncertainty. Derivative Indebtedness means Indebtedness for which a Member of the Obligated Group shall have entered into a Derivative Agreement in respect of all or a portion of such Indebtedness. Derivative Period means the period during which a Derivative Agreement is in effect. Eminent Domain means the eminent domain or condemnation power by which all or any part of the Operating Assets may be taken for public use or any agreement that is reached in lieu of proceedings to exercise such power. Escrow Agent means U.S. Bank National Association, acting as Escrow Agent, pursuant to the Escrow Agreement. Escrow Agreement shall mean that certain Escrow Deposit Agreement dated August 7, 2014, among the County, the Hospital and the Escrow Agent providing for the payment of the Refunded Bonds. Event of Default means with respect to the Master Indenture, each of those events set forth in Section 4.01 of the Master Indenture; with respect to the Loan Agreement Section 6.01 of the Loan Agreement, and with respect to the Trust Agreement each of those events set forth in Section 801 of the Trust Agreement. Financial Statements means the unaudited combined financial statements of the Obligated Group derived from the Audited Financial Statements included, in an additional information section, in the Audited Financial Statements and covering the same twelve-month period as the Audited Financial Statements, from which the accounts of any Affiliate which is not a Member of the Obligated Group have been eliminated and to which the accounts of any Member which is not an Affiliate have been added; provided, however, that for purposes of adding the accounts of a Member of the Obligated Group which is not an Affiliate, the balances of such accounts shall be extracted from Audited Financial Statements of such Member of the Obligated Group and its Affiliates, if any. Fiscal Year means the period commencing on October 1 of any year and ending on September 30 of the following year unless the Master Trustee is notified in writing by the Obligated Group Representative of a change in such period, in which case the Fiscal Year shall be the period set forth in such notice. C-4

147 Fitch means Fitch Investors Service, L.P., a limited partnership organized under the laws of the State of New York, its successors and their assigns, and, if such limited partnership shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, Fitch shall be deemed to refer to any other nationally recognized securities rating agency designated by the Hospital by notice to the Bond Trustee and the County. Governing Body means, when used with respect to a member of the Obligated Group, its board of directors, board of trustees, or other board or group of individuals in which the powers of such Member of the Obligated Group are vested. Government Obligations means direct obligations of, or securities fully and unconditionally guaranteed as to the timely payment of principal and interest by, the United States of America; provided, that the full faith and credit of the United States of America must be pledged to any such direct obligation or guarantee. Governmental Restrictions means federal, state or other applicable governmental laws or regulations affecting the corporation or any other Member of the Obligated Group and their health care facilities placing restrictions and limitations on the (i) fees and charges to be fixed, charged and collected by the Corporation or any other Member of the Obligated Group or (ii) the timing of the receipt of such revenues. Gross Receipts means all Accounts and all revenues, income, receipts and money (other than proceeds of borrowing) received in any period by or on behalf of any Member of the Obligated Group, including, but without limiting the generality of the foregoing, (a) revenues derived from its operations, (b) gifts, grants, bequests, donations and contributions and the income therefrom, exclusive of any gifts, grants, bequests, donations and contributions to the extent specifically restricted by the donor to a particular purpose inconsistent with their use for the payment of Obligations, (c) proceeds derived from (i) insurance; except to the extent otherwise required by the Master Indenture, (ii) Accounts, (iii) securities and other investments, (iv) inventory and other tangible and intangible property, (v) medical or hospital insurance, indemnity or reimbursement programs or agreements and (vi) contract rights and other rights and assets now or hereafter owned, held, or possessed by each Member of the Obligated Group, and (d) rentals received from the leasing of real or tangible personal property. Guaranty means any obligation of any Member of the Obligated Group guaranteeing in any manner, directly or indirectly, any obligation of any Person that is not a Member of the Obligated Group which obligation of such other Person would, if such obligation were the obligation of a Member of the Obligated Group, constitute Indebtedness under the Master Indenture. For the purposes of the Master Indenture, the aggregate annual principal and interest payments on any indebtedness in respect of which any Member of the Obligated Group shall have executed and delivered its Guaranty shall, so long as no payments are required to be made thereunder and so long as such Guaranty constitutes a contingent liability under generally accepted accounting principles, be deemed to be equal to twenty-five percent (25%), provided that if there shall have occurred a payment by any Member of the Obligated Group on such Guaranty, then, during the period commencing on the date of such payment and ending on the day which is one year after such other Person resumes making all payments on such guaranteed obligation, (i) with respect to a historical computation, one hundred percent (100%) of the amount actually paid by a Member of the Obligated Group for principal and interest on such guaranteed indebtedness during the period for which the computation is being made shall be taken into account and (ii) with respect to a computation of projected debt service coverage, one hundred percent (100%) of the amount payable for principal and interest on such guaranteed indebtedness during the period for which the computation is being made shall be taken into account. C-5

148 Holder means, with respect to the Master Indenture, the owner of any Obligation issued in other than bearer form, and, with respect to the Trust Agreement, a person in whose name a Bond is registered in the registration books provided for by the Trust Agreement. Hospital means McLeod Regional Medical Center of the Pee Dee, Inc., a private, nonprofit corporation duly incorporated and validly existing under and by virtue of the laws of the State of South Carolina, and any successor or successors thereto. Hospital Representative means each of the persons at the time designated to act on behalf of the Hospital in a written certificate furnished to the County and the Bond Trustee, which certificate shall contain the specimen signature(s) of such person(s) and shall be signed on behalf of the Hospital by its President and Chief Executive Officer or its Chief Financial Officer or its Administrator. Income Available for Debt Service means, with respect to the Obligated Group, as to any period of 12 consecutive calendar months, the excess of revenues over expenses before depreciation, amortization and interest, as determined in accordance with generally accepted accounting principles consistently applied; provided, however, that (1) no determination thereof shall take into account any (a) gain or loss resulting from either the extinguishment of Indebtedness or the sale, exchange or other disposition of capital assets not made in the ordinary course of business or (b) unrealized gain and losses on investments of any Member of the Obligated Group and (2) revenues shall not include income from the investment of Qualified Escrow Funds to the extent that such income is applied to the payment of principal or interest on Long-Term Indebtedness which is excluded from the determination of Long-Term Debt Service Requirement or Related Bonds secured by such Long-Term Indebtedness. Indebtedness means (i) all indebtedness of Members of the Obligated Group for borrowed money, (ii) all installment sales and capital lease obligations, incurred or assumed by any Member of the Obligated Group and (iii) all Guaranties (other than any Guaranty by any Member of the Obligated Group of Indebtedness of any other Member of the Obligated Group), whether constituting Long-Term Indebtedness or Short-Term Indebtedness. Indebtedness shall not include obligations of any Member of the Obligated Group to another Member of the Obligated Group. Insurance Consultant means a person or firm who is not, and no member, stockholder, director, trustee, officer or employee which is, an officer, director, trustee, or employee of any Member of the Obligated Group or Affiliate which is qualified to survey risks and to recommend insurance coverage for hospitals, health-related facilities and services and organizations engaged in such operations and which is selected by the Obligated Group Representative. Interest Account means the account in the Bond Fund created and so designated by Section 501 of the Trust Agreement. Interest Payment Date means May 1 or November 1, as the case may be. Investment Securities means as follows: (a) Government Obligations, including (i) repurchase agreements with a qualified depository bank or securities dealers fully collateralized by such obligations, maturing on or before the date such moneys will be required for disbursement, and (ii) shares in money market funds that invest solely in Government Obligations or repurchase agreements described in clause (i) (which may include money market funds advised by the Bond Trustee); C-6

149 (b) Prime commercial paper rated by Moody s within its NCO/Moody s ratings of Prime 1, or by Standard & Poor s within its ratings of A-1, or by Fitch, Inc. within its ratings of F-1 ; (c) Savings accounts, time deposits or certificates of deposit, including a business investment deposit account in the name of the Bond Trustee, maturing on or before the date such moneys will be required for disbursement, held in any bank or trust company organized under the laws of the United States of America or any state thereof, including the Bond Trustee, which has, at the time of the acquisition by the Bond Trustee of such investments, a combined capital, surplus and undivided profits of not less than $100,000,000 and a short-term bank deposit rating of at least A-1/P-1 and a long-term bank deposit rating of A or better; (d) Tax-exempt securities that are rated, or that are supported by a letter of credit or similar credit enhancement that is rated, not lower than the second highest rating category of Moody s or Standard & Poor s; (e) Shares in any money market fund that invests solely in obligations described in (a) through (d) above or obligations determined to be of comparable quality by the board of directors of such fund; and (f) Such other obligations as may at any time be authorized under applicable law of the State; provided that the Bond Trustee may require as a condition to the investment of funds under this clause (f) that the Bond Trustee shall have received an opinion of Bond Counsel to the effect that such investment is permitted under applicable law of the State. Lien means any mortgage, deed of trust or pledge of, security interest in or encumbrance on any Property of the Corporation or any other Member of the Obligated Group which secures any Indebtedness or any other Obligation of the Corporation or any other Member of the Obligated Group or which secures any obligation of any person, other than an Obligation to the Corporation or any other Member of the Obligated Group. Loan means the loan of the proceeds of the Bonds made by the County to the Hospital pursuant to Section 3.01 of the Loan Agreement. Loan Agreement means the Loan Agreement dated as of August 1, 2014, by and between the County and the Hospital, and any amendments and supplements thereto permitted hereunder. Loan Repayments means those payments designated by and set forth in Section 3.03 of the Loan Agreement. Long-Term Debt Service Coverage Ratio means for any period of time the ratio determined by dividing the Income Available for Debt Service by Maximum Annual Debt Service. Long-Term Debt Service Requirement means, for any period of twelve (12) consecutive calendar months for which such determination is made, the aggregate of the payments to be made in respect of principal and interest (whether or not separately stated) on Outstanding Long-Term Indebtedness of the Obligated Group during such period, also taking into account: (i) with respect to Balloon Long-Term Indebtedness which is not amortized by the terms thereof (a) the amount of principal which would be payable in such period if such principal were amortized from the date of incurrence thereof over a period of thirty (30) years on a level C-7

150 debt service basis at an interest rate equal to the current market rate for a 30-year obligation set forth in an opinion of a banking institution or an investment banking institution knowledgeable in health care finance delivered to the Master Trustee as the interest rate at which the Obligated Group could reasonably expect to borrow the same by issuing an Obligation with the same term as assumed above; provided, however, that if the date of calculation is within twelve (12) calendar months of the actual maturity of such Indebtedness, the full amount of principal payable at maturity shall be included in such calculation or (b) principal payments or deposits with respect to Indebtedness secured by an irrevocable letter of credit issued by, or an irrevocable line of credit with, a bank having a combined capital and surplus of at least seventy-five million dollars ($75,000,000), or insured by an insurance policy issued by any insurance company rated at least A by Alfred M. Best Company or its successors in Best s Insurance Reports or its successor publication, nominally due in the last Fiscal Year in which such Indebtedness matures may, at the option of the Member of the Obligated Group which issued such Indebtedness, be treated as if such principal payments or deposits were due as specified in any loan agreement issued in connection with such letter of credit, line of credit or insurance policy, and interest on such Indebtedness after such Fiscal Year shall be assumed to be payable pursuant to the terms of such loan agreement or repayment provisions; (ii) with respect to Long-Term Indebtedness which is Variable Rate Indebtedness the interest on such Indebtedness shall be calculated at the rate which is equal to the average of the actual interest rates which were in effect (weighted according to the length of the period during which each such interest rate was in effect), for the most recent twelve-month period immediately preceding the date of calculation for which such information is available (or shorter period if such information is not available for a twelve-month period), except that with respect to new Variable Rate Indebtedness the interest rate for such Indebtedness for the initial interest rate period shall be the initial rate at which such Indebtedness is issued and thereafter shall be calculated as set forth above; (iii) with respect to any Credit Facility, to the extent that such Credit Facility has not been used or drawn upon, the principal and interest relating to such Credit Facility shall not be included in the Long-Term Debt Service Requirement; and (iv) with respect to Derivative Indebtedness, the interest on such Indebtedness during any Derivative Period for so long as the provider of the Derivative Agreement has not defaulted on its payment obligations thereunder shall be calculated by adding (x) the amount of interest payable by a Member of the Obligated Group on such Derivative Indebtedness pursuant to its terms and (y) the amount of interest payable by such Member of the Obligated Group under the Derivative Agreement and subtracting (z) the amount of interest payable by the provider of the Derivative Agreement at the rate specified in the Derivative Agreement; provided, however, that to the extent that the provider of any Derivative Agreement is in default thereunder, the amount of interest payable by the Member of the Obligated Group shall be the interest calculated as if such Derivative Agreement had not been executed; provided, however, that interest shall be excluded from the determination of Long-Term Debt Service Requirement to the extent the same is provided from the proceeds of the Long-Term Indebtedness and provided further, however notwithstanding the foregoing, the aggregate of the payments to be made with respect to principal and interest on Outstanding Long-Term Indebtedness shall not include principal and interest payable from Qualified Escrow Funds (other than principal and interest so payable solely by reason of the Obligated Group s failure to make payments from other sources). C-8

151 Long-Term Indebtedness means all obligations incurred or assumed by the Corporation or any other Member of the Obligated Group, including Guaranties and Short-Term Indebtedness if a commitment by an institutional lender exists to provide financing to retire such Short-Term Indebtedness and such commitment provides for the repayment of principal on terms which would, if such commitment were implemented, constitute Long-Term Indebtedness, and excluding the current portion of Long-Term Indebtedness, for any of the following: (i) money borrowed for an original term, or renewable at the option of the borrower for a period from the date originally incurred, longer than one year; (ii) leases which are required to be capitalized in accordance with generally accepted accounting principles having an original term, or renewable at the option of the lessee for a period from the date originally incurred, longer than one year; and (iii) one year. installment sale or conditional sale contracts having an original term in excess of Master Indenture means the Amended and Restated Master Trust Indenture between the Hospital and U.S. Bank National Association, successor to Wachovia Bank, National Association (formerly known as First Union National Bank) dated as of January 15, 1998, including all amendments or supplements thereto as therein permitted. Master Trustee means the Master Trustee under the Master Indenture. Maximum Annual Debt Service means the highest Long-Term Debt Service Requirement for any succeeding Fiscal Year. Member of the Obligated Group means, initially, the Corporation, and thereafter, any other Person which shall join the Obligated Group pursuant to the provisions of the Master Indenture and not including any Person which shall have withdrawn from the Obligated Group pursuant to the provisions of the Master Indenture. Moody s means Moody s Investors Service, Inc., a corporation organized and existing under the laws of the State of Delaware, its successor and assigns and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, Moody s shall be deemed to refer to any other nationally recognized securities rating agency designated by the Hospital by notice to the County and the Bond Trustee. National Repository mean the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access ( EMMA ) system. Net Book Value when used in connection with Property and Equipment or other Property of any person, means the value of such property, net of accumulated depreciation, as it is carried on the books of such person in accordance with generally accepted accounting principles, and when used in connection with Property and Equipment or other Property of the Obligated Group, means the aggregate of the values so determined with respect to such Property and Equipment or other Property of the Obligated Group determined in such a manner that no portion of Property and Equipment or other Property is included more than once. Non-Recourse Indebtedness means any Indebtedness secured by a Lien, the liability for which is effectively limited to the Property, the purchase or acquisition or, in the case of vacant land only, the C-9

152 improvement of which was financed with the proceeds of such Non-Recourse Indebtedness and which is subject to such Lien with no recourse, directly or indirectly, to any other Property of any Member of the Obligated Group. Group. Obligated Group means, collectively, the Corporation and each other Member of the Obligated Obligated Group Representative means each of the Person(s) at the time designated to act on behalf of the Obligated Group in a written certificate furnished to the Master Trustee, which certificate shall contain the specimen signature(s) of such Person(s) and shall be signed on behalf of the Obligated Group by the President of the Corporation or by his designee. Obligation means the evidence of particular Indebtedness issued under the Master Indenture. Obligation No. 14 means Obligation No. 14 issued, authenticated and delivered under the Master Indenture and Supplement No. 14 (as defined in Obligation No. 14) which was delivered to the County as collateral security for the repayment of the Loan and the performance of the Hospital s obligations under the Agreement and which was assigned by the County to the Bond Trustee as security for the Bonds. Officer s Certificate (1) as used in the Master Indenture means a certificate signed by the Chairman of the Governing Body, or the president or chief executive officer, or the chief financial officer or chairman of the finance committee of the Governing Body of such Member of the Obligated Group as the context requires; and (2) as used in the Loan Agreement means a certificate signed by the County Representative or the Hospital Representative, as the case may be. Official Statement means the Official Statement dated July 29, 2014, relating to the Bonds. Operating Assets means, any or all land, leasehold interests, buildings, machinery, equipment, hardware and inventory of the Corporation and each other Member of the Obligated Group used in their respective trades or businesses, whether separately or together with other such assets, but not including cash, investment securities and other Property held for investment purposes. Opinion of Bond Counsel means, with respect to the Master Indenture, an opinion in writing signed by an attorney or firm of attorneys acceptable to the Master Trustee and experienced in the field of municipal bonds whose opinions are generally accepted by purchasers of municipal bonds. Opinion of Counsel means, with respect to the Master Indenture, an opinion in writing signed by an attorney or firm of attorneys, acceptable to the Master Trustee, who may be counsel for any Member of the Obligated Group or other counsel acceptable to the Master Trustee, and, with respect to the Trust Agreement, means an opinion in writing signed by an attorney or firm of attorneys who may be counsel for the County or the Hospital or other counsel. Outstanding, means (1) As used in the Master Indenture, when used with reference to Indebtedness, means, as of any date of determination, all Indebtedness theretofore issued or incurred and not paid and discharged other than (i) Obligations theretofore cancelled by the Master Trustee or delivered to the Master Trustee for cancellation, (ii) Indebtedness deemed paid and no longer Outstanding under the documents pursuant to which such Indebtedness was incurred, (iii) Defeased Obligations and (iv) Obligations in lieu of which other Obligations have been authenticated and delivered or have been paid pursuant to the provisions of the Supplement regarding mutilated, destroyed, lost or stolen C-10

153 Obligations unless proof, satisfactory to the Master Trustee has been received that any such Obligation is held by a bona fide purchaser. (2) As used in the Trust Agreement, as of a particular date, all Bonds theretofore issued under the Trust Agreement, except: (i) Bonds theretofore canceled by the Bond Registrar or delivered to the Bond Registrar for cancellation; (ii) Bonds for the payment of which money, Defeasance Obligations, or a combination of both, sufficient to pay, on the date when such Bonds are to be paid or redeemed, the principal amount of or Redemption Price of, and the interest accruing to such date on, the Bonds to be paid or redeemed, has been deposited with the Bond Trustee or the Bond Registrar in trust for the Holders of such Bonds; Defeasance Obligations shall be deemed to be sufficient to pay or redeem Bonds on a specified date if the principal of and the interest on such Defeasance Obligations, when due, will be sufficient to pay on such date the Redemption Price of, and the interest accruing on, such Bonds to such date; (iii) (iv) Agreement. Bonds in exchange for or in lieu of which other Bonds have been issued; and Bonds deemed to have been paid in accordance with Section 1201 of the Trust Person means an individual, association, unincorporated organization, corporation, partnership, joint venture, business trust or a government or an agency or a political subdivision thereof, of any other entity. Pledged Assets means all Accounts of the Members of the Obligated Group, now owned or hereafter acquired the proceeds of such Accounts, and Gross Receipts and proceeds thereof. Predecessor Bonds of any particular Bond means every previous Bond evidencing all or a portion of the same debt as that evidenced by such particular Bond, and, for purposes of this definition, any Bond authenticated and delivered under Section 210 of the Trust Agreement in lieu of a lost, destroyed or stolen Bond shall be deemed to evidence the same debt as the lost, destroyed or stolen Bond. Principal Account means the account in the Bond Fund created and so designated by Section 501 of the Trust Agreement. Property means any and all rights, titles and interests in and to any and all property whether real or personal, tangible or intangible and wherever situated. Property and Equipment means all Property of the Members of the Obligated Group which is property equipment under generally accepted accounting principles. Put Indebtedness means Long-Term Indebtedness twenty-five percent (25%) or more of the principal of which is required, at the option of the owner thereof, to be purchased or redeemed at one time. Qualified Escrow Funds means amounts deposited in a segregated escrow fund or other similar fund or account in connection with the issuance of Long-Term Indebtedness or Related Bonds secured by C-11

154 such Long-Term Indebtedness which fund or account is required by the documents establishing such fund to be applied toward the Obligated Group s payment obligations with respect to principal or interest on (a) the Long-Term Indebtedness or Related Bonds secured thereby which are issued under the documents establishing such fund or (b) Long-Term Indebtedness or Related Bonds secured thereby which are issued prior to the establishment of such fund. Rating Agency means Fitch, if such agency s ratings are in effect with respect to the Bonds, and Standard & Poor s, if such agency s ratings are in effect with respect to the Bonds, and Moody s, if such agency s ratings are in effect with respect to the Bonds, and their respective successors and assigns. If any such corporation ceases to act as a securities rating agency, the Hospital may appoint any nationally recognized securities rating agency as a replacement by notice to the County and the Bond Trustee. Initially, Fitch and S&P shall provide ratings with respect to the Bonds. Redemption Account means the account in the Bond Fund created and so designated by Section 501 of the Trust Agreement. Redemption Price means, with respect to any Bond or portion thereof, the principal amount of such Bond or portion thereof plus the applicable premium, if any, payable upon redemption thereof in the manner contemplated in accordance with its terms, the terms of the Series Ordinance providing for the issuance thereof and the Trust Agreement. Refunded Bonds means all or a designated portion of the outstanding principal amount of Florence County, South Carolina, Hospital Revenue Bonds (McLeod Regional Medical Center Project) Series 2004A being refunded with a portion of the proceeds of the Bonds. Regular Record Date means, with respect to any Interest Payment Date, the 15th day of the month next preceding such Interest Payment Date. Related Bond Indenture means any indenture, trust agreement, bond resolution or other comparable instrument pursuant to which a series of Related Bonds is issued. Related Bond Issuer means the issuer of any issue of Related Bonds. Related Bonds means the revenue bonds or other obligations issued by any state, territory or possession of the United States or any municipal corporation or political subdivision formed under the laws thereof or any constituted authority or agency or instrumentality of any of the foregoing empowered to issue obligations on behalf thereof ( governmental issuer ), pursuant to a single Related Bond Indenture, the proceeds of which are loaned or otherwise made available to (i) a Member of the Obligated Group in consideration of the execution, authentication and delivery of an Obligation to or for the order of such governmental issuer, or (ii) any person other than a Member of the Obligated Group in consideration of the issuance to such governmental issuer (A) by such person of any Indebtedness or other obligation of such person and (B) by a Member of the Obligated Group of a Guaranty in respect of such Indebtedness or other obligation, which Guaranty is represented by an Obligation. Related Bond Trustee means the trustee and its successors in the trust created under any Related Bond Indenture. Required Payments under the Agreement means the payments so designated by and set forth in Section 3.04 of the Loan Agreement. C-12

155 Securities Depository means The Depository Trust Company, New York, New York, or other recognized securities depository selected by the Hospital, which securities depository maintains a bookentry system in respect of the Bonds, and shall include any substitute for or successor to the securities depository initially acting as Securities Depository. Securities Depository Nominee means, as to any Securities Depository, such Securities Depository or the nominee of such Securities Depository in whose name there shall be registered on the registration books maintained by the Bond Registrar the Bond certificates to be delivered to and immobilized at such Securities Depository during the continuation with such Securities Depository of participation in its book-entry system. Serial Bonds means Bonds which are stated to mature in the years 2016 through 2034, inclusive. Series Ordinance means the ordinance of the County providing for the issuance of the Bonds required to be adopted prior to such issuance by the Trust Agreement. Short-Term Indebtedness means all obligations for borrowed money, including Guaranties and the current portion of Long-Term Indebtedness, incurred or assumed by one or more Members of the Obligated Group, for any of the following: (i) money borrowed for an original term, or renewable at the option of the borrower for a period from the date originally incurred, of one year or less; (ii) leases which are capitalized in accordance with generally accepted accounting principles having an original term, or renewable at the option of the lessee for a period from the date originally incurred, of one year or less; and (iii) installment purchase or conditional sale contracts having an original term of one year of less. S&P means Standard & Poor s Ratings Group, a division of a corporation organized and existing under the laws of the State of New York, its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, S&P shall be deemed to refer to any other nationally recognized securities rating agency designated by the County, with the approval of the Hospital, by notice to the Bond Trustee and the Hospital. Special Record Date for the payment of any Defaulted Interest on Bonds means a date fixed by the Bond Trustee pursuant to the provisions of the Trust Agreement. State means the State of South Carolina. Supplement means an indenture supplemental to, and authorized and executed pursuant to the terms of, the Master Indenture. Supplement No. 14 means Supplemental Indenture for Obligation No. 14, dated as of August 1, 2014, between the Hospital and the Master Trustee. Total Revenue means, with respect to the Obligated Group, as to any period of time, total revenue, as determined in accordance with generally accepted accounting principles consistently applied; C-13

156 provided, however, that Total Revenues shall not include nonoperating gains as determined in accordance with generally accepted accounting principles consistently applied. Total Required Payments means the sum of Loan Repayments and Required Payments under the Loan Agreement. Transfer means any act or occurrence the result of which is to dispossess any person of any asset or interest including specifically, but without limitation, the forgiveness of any debt or the lease of any such asset. Trust Agreement means the Trust Agreement securing the Bonds, dated as of August 1, 2014, between the County and U.S. Bank National Association, as Bond Trustee, including any trust agreement amendatory thereof or supplemental thereto. Variable Rate Indebtedness means any portion of Indebtedness the interest rate on which is not established at the time of incurrence at a fixed or constant rate. SUMMARIES OF PRINCIPAL LEGAL DOCUMENTS Following are summaries of certain provisions of the Master Indenture, the Trust Agreement and the Loan Agreement. These summaries are not complete recitals of the aforementioned documents and reference should be made to such documents for their complete terms. Words and terms used in these summaries and not defined herein shall have the same meanings as in the Master Indenture, the Trust Agreement and the Loan Agreement. Authorization and Issuance of Obligations THE MASTER INDENTURE Any Member of the Obligated Group and the Master Trustee may from time to time enter into a Supplement in order to create Indebtedness. Obligations evidencing such Indebtedness shall be issued in the form created by such Supplement. (Sec. 2.04) Security; Restrictions on Encumbering Pledged Assets; Payment of Principal and Interest (a) Any Obligation issued pursuant to the Master Indenture shall be a joint and several general obligation of the Members of the Obligated Group. 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 a security interest in the Pledged Assets, subject to Permitted Liens. Each Member of the Obligated Group shall 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 for the Pledged Assets. Prior to its receipt of a request from the Master Trustee pursuant to Section 3.01(d) of the Master Indenture, any Member of the Obligated Group may sell, or incur Indebtedness secured by, all or any part of its Gross Receipts free of such security interest, subject, however, to the provisions of Sections 3.06, C-14

157 3.08 and 3.09 of the Master Indenture. In the event of such sale or incurrence of Indebtedness, upon the request of a Member of the Obligated Group, the Master Trustee shall execute a release of its security interest with respect to the assets so sold or pledged as security for such Indebtedness. Upon the request of any Member of the Obligated Group, the Master Trustee will provide to such Member of the Obligated Group a written certification as to whether there is currently outstanding a request from the Master Trustee pursuant to Section 3.01(d) of the Master Indenture. (Secs and 4.04) (b) Each Member of the Obligated Group covenants that it will not pledge or grant a security interest in any of its Pledged Assets, subject to Permitted Liens. (c) Each Member of the Obligated Group covenants to promptly pay or cause to be paid the principal of, premium, if any, and interest on each Obligation whether at maturity, upon proceedings for redemption, by acceleration or otherwise. (d) Each Member of the Obligated Group covenants that, if an Event of Default specified in the Master Indenture shall have occurred and be continuing, it will, upon request of the Master Trustee, deliver or direct to be delivered to the Master Trustee all Gross Receipts until such Event of Default has been cured, such Gross Receipts to be applied in accordance with the Master Indenture. (Sec. 3.01) Covenants as to Corporate Existence, Maintenance of Properties, and Tax-Exempt Status Each Member of the Obligated Group covenants to preserve its corporate or other legal existence and all rights and licenses necessary or desirable for the operation of its business, to maintain its Property in good repair and working order, and pay all taxes and assessments due and to comply with all applicable laws. Each Member of the Obligated Group which is a Tax-Exempt Organization (as defined in the Master Indenture) at the time it becomes a Member of the Obligated Group, so long as all amounts due or to become due on any Related Bond have not been fully paid to the Holder thereof, agrees to take no action or suffer any action to be taken by others, including any action which would result in the alteration or loss of its status as a Tax-Exempt Organization, which, in the Opinion of Bond Counsel, would result in the interest on any Related Bond becoming subject to federal income taxes. (Sec. 3.02) Insurance Each Member of the Obligated Group agrees that it will maintain, or cause to be maintained, the following types of insurance (including one or more self-insurance programs considered to be adequate by the Insurance Consultant, subject to limitations as set forth below) in such amounts as, in its judgment, are adequate to protect it and its Property and operations: (i) comprehensive general public liability and automobile insurance including owned and hired automobiles (excluding collision and comprehensive coverage thereon), (ii) fire, lightning, windstorm, hail, explosion, riot, riot attending a strike, civil commotion, damage from aircraft, smoke, vandalism, and malicious mischief endorsements, uniform standard coverage and business interruption insurance, (iii) workers compensation insurance and (iv) boiler insurance. Each of the Hospital and the other Members of the Obligated Group which own or operate facilities in which medicine is practiced agrees that it will maintain, or cause to be maintained, professional liability or medical malpractice insurance in the minimum amount of $1,000,000 per person and per occurrence and $3,000,000 annual aggregate. (Sec. 3.03) Each Member of the Obligated Group shall maintain insurance in accordance with the prevailing industry practice as to carriers, deductibles and coverage. No Member of the Obligated Group shall selfinsure with respect to casualty losses to any real or personal property owned, leased or used by any C-15

158 Member of the Obligated Group, including plant, Property and Equipment; provided, however, reasonable deductibles approved by the Insurance Consultant shall be permitted. Insurance and Condemnation Proceeds (a) Amounts that do not exceed twenty percent (20%) of the Net Book Value of the Property and Equipment of the Obligated Group received by any Member of the Obligated Group as insurance proceeds with respect to any casualty loss or as condemnation awards may be used in such manner as the recipient may determine, including, without limitation, applying such moneys to the partial payment or prepayment of any Indebtedness in accordance with the terms thereof and of any pertinent Supplement. (b) Amounts that exceed twenty percent (20%) of the Net Book Value of the Property and Equipment of the Obligated Group received by any Member of the Obligated Group as insurance proceeds with respect to any casualty loss or as condemnation awards shall be applied in such manner as the recipient may determine; provided, however, that the recipient shall notify the Master Trustee and within 12 months after the casualty loss or taking, deliver to the Master Trustee: (i) (A) An Officer s Certificate certifying the expected Long-Term Debt Service Coverage Ratio for each of the two full Fiscal Years following the date on which such proceeds or awards are expected to have been fully applied, which Long-Term Debt Service Coverage Ratio for each such period is not less than 1.50, as shown by pro forma financial statements for each such period, accompanied by a statement of the relevant assumptions including assumptions as to the use of such proceeds or awards, upon which such pro forma statements are based; and (B) a written report of a Consultant confirming such certification; or (ii) A written report of a Consultant stating the Consultant s recommendations, including recommendations as to the use of such proceeds or awards, to cause the Long-Term Debt Service Coverage Ratio for each of the periods described in subsection (i) under this heading to be not less than 1.20, or, if in the opinion of the Consultant the attainment of such level is impracticable, at the highest practicable level. Each Member of the Obligated Group agrees that it will use such proceeds or awards, to the extent permitted by law, only in accordance with the assumptions described in subsection (i) under this heading, or the recommendation described in subsection (ii) under this heading. (Sec. 3.04) Limitations on Creation of Liens Each Member of the Obligated Group agrees that it will not create or suffer to be created or permit the existence of any Lien upon Pledged Assets or on Property now owned or hereafter acquired by it other than Permitted Liens. (Sec 3.05) Permitted Liens include the following: (i) The Lien on the Pledged Assets created by the Master Indenture; (ii) Liens arising by reason of good faith deposits with any Member of the Obligated Group in connection with leases of real estate, bids or contracts (other than contracts the for payment of money), deposits by any Member of the Obligated Group to secure public or statutory obligations, or to secure, or in lieu of, surety, stay or appeal C-16

159 bonds, and deposits as security for the payment of taxes or assessments or other similar charges; (iii) Any Lien arising by reason of deposits with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulation for any purpose at any time as required by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege or license, or to enable any Member of the Obligated Group to maintain selfinsurance or to participate in any funds established to cover any insurance risks or in connection with workers compensation, unemployment insurance, pension or profit sharing plans or other social security, or to share in the privileges or benefits required for companies participating in such arrangements; (iv) Any judgment lien against any Member of the Obligated Group so long as such judgment is being contested in good faith and execution thereon is stayed; (v) (A) Rights reserved to or vested in any municipality or public authority by the terms of any right, power, franchise, grant, license, permit or provision of law, affecting any Property; (B) any Liens on any Property for taxes, assessments, levies, fees, water and sewer rents, and other governmental and similar charges and any Liens of mechanics, materialmen, laborers, suppliers or vendors for work or services performed or materials furnished in connection with such Property, which are not due and payable or which are not delinquent or which, or the amount or validity of which, are being contested and execution thereon is stayed or, with respect to liens of mechanics, materialmen, laborers, suppliers or vendors have been due for less than 90 days; (C) easements, rights-of-way, servitudes, restrictions, oil, gas or other mineral reservations and other minor defects, encumbrances and irregularities in the title to any Property which do not materially impair the use of such Property or materially and adversely affect the value thereof; (D) to the extent that it affects title to any Property, the Master Indenture; and (E) landlord s liens; (vi) Any Lien which is existing on the date of authentication and delivery of the initial Obligation issued under the Master Indenture; (vii) Any Lien securing Non-Recourse Indebtedness permitted by the provisions described in subsection (e) under Limitations on Indebtedness below; (viii) Any Lien on Property acquired by a Member of the Obligated Group if the Indebtedness secured by the Lien is Indebtedness permitted under the provisions described under Limitations on Indebtedness below, and if an Officer s Certificate is delivered to the Master Trustee certifying that (A) the Lien and the Indebtedness secured thereby were created and incurred by a Person other than the Member of the Obligated Group, and, (B) the Lien was not created for the purpose of enabling the Member of the Obligated Group to avoid the limitations hereof on creation of Liens on Property of the Obligated Group; (ix) So long as no Event of Default exists under the Master Indenture and subject to clause (xix) under this heading Limitations on Creation of Liens, any Lien on Property which is part of the Property and Equipment securing Long-Term Indebtedness in an amount not exceeding twenty-five percent (25%) of the Net Book Value of the Property of the Obligated Group; C-17

160 (x) Any Lien on pledges, gifts or grants to be received in the future including any income derived from the investment thereof; (xi) Any Lien on inventory which does not exceed the greater of (A) twentyfive percent (25%) of the Net Book Value thereof or (B) $1,000,000; (xii) Any Lien in favor of a creditor or a trustee on the proceeds of Indebtedness and any earnings thereon prior to the application of such proceeds and such earnings; (xiii) Any Lien securing all Obligations on a parity basis; (xiv) Any Liens subordinate to the Lien described in clause (xii) under the heading Limitations on Creation of Liens required by a statute under which a Related Bond is issued; (xv) Liens on moneys deposited by patients or others with any Member of the Obligated Group as security for or as prepayment for the cost of patient care; (xvi) Liens on Property received by any Member of the Obligated Group through gifts, grants or bequests, such Liens being due to restrictions on such gifts, grants or bequests of Property or the income thereon; (xvii) Liens on Property due to rights of third party payors for recoupment of amounts paid to any Member of the Obligated Group; (xviii) Rights of the United States of America under Title 42 United States Code, Section 291; (xix) Any Lien on moveable equipment (as such term is defined under generally accepted accounting principles) securing Indebtedness incurred to purchase such moveable equipment, provided that the total of such Indebtedness does not exceed twenty-five percent (25%) of the Net Book Value of the Property of the Obligated Group as shown on the Financial Statements of the prior Fiscal Year; provided, however, that the total of all Indebtedness secured by any Lien permitted under this clause (xix) and secured by any Lien on Property and Equipment permitted under clause (ix) under this heading Limitations on Creation of Liens shall not exceed twenty-five percent (25%) of the Net Book Value of the Property of the Obligated Group as shown on the Financial Statements for the prior Fiscal Year; (xx) Any Lien on Accounts that are sold pursuant to the provisions described in subsection (c) under the heading Sale, Lease or Other Disposition of Operating Assets; Disposition of Cash and Investments; Sale of Accounts below or that are pledged to secure Indebtedness permitted by the provisions described in subsection (g) under the heading Limitations on Indebtedness below; and (xxi) Any Lien on Property or Accounts acquired by a Member of the Obligated Group in a transaction permitted by Section 3.09 of the Master Indenture. (Sec. 3.05) C-18

161 Limitations on Indebtedness Each Member of the Obligated Group agrees that at all times it shall comply with the following covenants: (a) Long-Term Indebtedness may only be incurred if prior to incurrence of the Long-Term Indebtedness there is delivered to the Master Trustee: (i) an Officer s Certificate of an Obligated Group Representative certifying that (A) immediately after the incurrence of the proposed Long-Term Indebtedness the aggregate principal amount of all Long-Term Indebtedness does not exceed sixty-five percent (65%) of Capitalization; and (B) the forecasted Long-Term Debt Service Coverage Ratio, taking the proposed Long-Term Indebtedness into account, for (1) in the case of Long-Term Indebtedness (other than a Guaranty) to finance capital improvements, the first complete Fiscal Year next succeeding the date on which such capital improvements are expected to be placed in operation or (2) in the case of Long- Term Indebtedness not financing capital improvements or in the case of a Guaranty, each of the first two complete Fiscal Years next succeeding the date on which the Indebtedness is incurred, is not less than 1.20; or (ii) an Officer s Certificate of an Obligated Group Representative certifying that the Long-Term Debt Service Coverage Ratio for the most recent period of twelve (12) full consecutive calendar months preceding the date of delivery of the certificate of the Obligated Group Representative for which there are Financial Statements available taking all Long-Term Indebtedness incurred after such period and the proposed Long- Term Indebtedness into account as if such Long-Term Indebtedness had been incurred at the beginning of such period, is not less than 1.35; or (iii) a written report of (A) an independent certified public accountant demonstrating that the Long-Term Debt Service Coverage Ratio for the period mentioned in subsection (a)(ii) under this heading Limitations on Indebtedness, excluding the proposed Long-Term Indebtedness, is at least 1.20; provided, however, that compliance with the test set forth in this clause (a)(iii)(a) may be evidenced by an Officer s Certificate in lieu of a report of an independent certified public accountant where the Long-Term Debt Service Coverage Ratio for the period mentioned in subsection (a)(ii) under this heading Limitations on Indebtedness, excluding the proposed Long-Term Indebtedness, is at least 1.50 and (B) a Consultant demonstrating that the forecasted Long-Term Debt Service Coverage Ratio is not less than 1.35 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 expected 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 pro forma financial statements for the Obligated Group for each such period, accompanied by a statement of the relevant assumptions upon which such pro forma financial statements for the Obligated Group are based. Notwithstanding any of the Long-Term Debt Service Coverage Ratios specified in subsections (a)(ii) or (a)(iii) under this heading Limitations on Indebtedness, if the report of a Consultant states that Governmental Restrictions have been imposed which make it impossible for the coverage requirements of C-19

162 this subsection 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) In addition to Long-Term Indebtedness permitted to be incurred pursuant to subsection (a) under this heading Limitations on-indebtedness, Long-Term Indebtedness may be incurred provided that there shall be delivered to the Master Trustee an Officer s Certificate of an Obligated Group Representative certifying that, immediately after giving effect to any Long-Term Indebtedness incurred pursuant to this subsection (b), the aggregate of Long-Term Indebtedness incurred under this subsection (b) shall not exceed twenty percent (20%) of Total Revenue as reflected in the most recent Financial Statements. (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) either (A) the Master Trustee receives an Officer s Certificate stating that, taking into account the Long-Term Indebtedness proposed to be incurred, the existing Long-Term Indebtedness to remain Outstanding after the refunding and the existing Long-Term Indebtedness to be refunded, Maximum Annual Debt Service will not be increased by more than fifteen percent (15%), or (B) the conditions described in paragraphs (a)(i), (a)(ii) or (a)(iii) under this heading Limitations on Indebtedness are met with respect to such proposed Long-Term Indebtedness, taking into account the existing Long-Term Indebtedness to remain Outstanding after the refunding and the refunding of the existing Long-Term Indebtedness to be refunded and (ii) the Master Trustee receives an Opinion of Counsel stating that upon the incurrence of such proposed Long-Term Indebtedness and application of the proceeds thereof (on the Cross-over Date, in the case of Cross-over Refunding Indebtedness), the Outstanding Long-Term Indebtedness to be refunded thereby will no longer be Outstanding. (d) Short-Term Indebtedness may be incurred in the ordinary course of business subject to the limitation that the aggregate of all Short-Term Indebtedness shall not at any time exceed twenty-five percent (25%) of Total Revenue as reflected in the Financial Statements of the Obligated Group for the most recent period of twelve consecutive months for which Financial Statements are available; provided, however, that there shall be a period of at least twenty (20) consecutive calendar days during each such period of twelve consecutive calendar months for which Financial Statements are available during which Short-Term Indebtedness (excluding Short-Term Indebtedness incurred pursuant to subsection (g) under this heading Limitations on Indebtedness ) shall not exceed three percent (3%) of Total Revenue; provided, further, that the aggregate of the principal amount of Indebtedness Outstanding under this subsection (d) and subsection (b) under this heading Limitations on Indebtedness shall not at any time exceed twenty-five percent (25%) of Total Revenue as reflected in the Financial Statements of the Obligated Group for the most recent period of twelve (12) consecutive months for which Financial Statements are available. At the election of the Obligated Group Representative, Indebtedness that constitutes Short-Term Indebtedness may be excluded from Short-Term Indebtedness for the purpose of meeting the requirements set forth in the proviso of the preceding sentence for any twelve (12) consecutive calendar months if such Indebtedness is treated as Long-Term Indebtedness for the purpose of computing the Long-Term Debt Service Requirement for such period of twelve (12) consecutive calendar months. (e) Non-Recourse Indebtedness may be incurred without limit. (f) Completion Indebtedness may be incurred without limitation; provided, however, that prior to the incurrence of Completion Indebtedness, the Obligated Group Representative shall furnish to the Master Trustee the following: a certificate of an architect estimating the costs of completing the facilities for which Completion Indebtedness is to be incurred; an Officer s Certificate of the Chief Financial Officer of the Member of the Obligated Group for which Completion Indebtedness is to be C-20

163 incurred certifying that the amount of Completion Indebtedness to be incurred will be sufficient, together with other funds, if applicable, to complete construction of the facilities in respect of which Completion Indebtedness is to be incurred; and a certificate from a Consultant to the effect that the Long-Term Indebtedness originally incurred to finance the costs of the construction of the facilities in respect of which Completion Indebtedness is to be incurred was estimated prior to the date of incurrence of the original Long-Term Indebtedness to be sufficient, together with other funds, if applicable, to complete the construction of such facilities, but due to certain factors enumerated in the certificate the costs of constructing such facilities exceeded the amount of the original Indebtedness plus other funds, if applicable. (g) Indebtedness secured by Accounts may be incurred if prior to the incurrence of such Indebtedness there is delivered to the Master Trustee an Officer s Certificate of an Obligated Group Representative certifying that immediately after the incurrence of such Indebtedness, the amount of Accounts that have been pledged to secure Indebtedness that has been issued pursuant to this subsection (g) and is then Outstanding will not exceed the difference between (i) the Account Lien Amount and (ii) an amount equal to the Net Book Value of any patient Accounts that have been sold in the then current Fiscal Year pursuant to the provisions described in subsection (c) under the heading Sale, Lease or Other Disposition of Operating Assets; Disposition of Cash and Investments; Sale of Accounts ; provided, however, that (A) the determination of whether a disposition of Accounts is a sale or a loan shall be made in accordance with generally accepted accounting principles and (B) any Indebtedness issued pursuant to this provision shall be considered to be Short-Term Indebtedness subject to the incurrence test set forth in subsection (d) under this heading Limitations on Indebtedness. (h) Put Indebtedness may be incurred, if prior to the incurrence of such Put Indebtedness (i) the conditions described in subsection (a)(i), (a)(ii) or (a)(iii) under this heading Limitations on Indebtedness are met and (ii) a binding commitment from a bank or other financial institution exists to provide financing sufficient to pay the purchase price or principal of such Put Indebtedness on any date on which the owner of such Put Indebtedness may demand payment thereof pursuant to the terms of such Put Indebtedness. (i) Notwithstanding the foregoing provisions set forth under this heading Limitations on Indebtedness nothing herein contained shall preclude a Member of the Obligated Group from incurring any obligation under a Credit Facility. (Sec. 3.06) Long-Term Debt Service Coverage Ratio (a) Each Member of the Obligated Group covenants to set rates and charges for its facilities, services and products such that the Long-Term Debt Service Coverage Ratio, calculated at the end of each Fiscal Year, will not be less than 1.20; 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 shall not be taken into account in making the foregoing calculation until the first Fiscal Year commencing after the occupation or utilization of such capital improvements unless the Long-Term Debt Service Requirement with respect thereto is required to be paid from sources other than the proceeds of such Long-Term Indebtedness prior to such Fiscal Year. (b) If at any time the Long-Term Debt Service Coverage Ratio described in clause (a) above is not met, the Obligated Group covenants to retain a Consultant to make recommendations to increase such Long-Term Debt Service Coverage Ratio in the following Fiscal Year to the level required or, if in the opinion of the Consultant the attainment of such level is impracticable, to the highest level attainable. Each Member of the Obligated Group agrees that it will, to the extent permitted by law, follow the recommendations of the Consultant. So long as a Consultant shall be retained and each Member of the C-21

164 Obligated Group shall follow such Consultant s recommendations to the extent permitted by law, the Obligated Group shall be deemed to have complied with the requirements of the Master Indenture described in clause (a) above and this clause (b) even if the Long-Term Debt Service Coverage Ratio for the following Fiscal Year is below the required level; provided, however, the revenues of the Obligated Group shall not be less than the amount required in cash to pay the total operating expenses of the Obligated Group and to pay the debt service on all Indebtedness of the Obligated Group for such Fiscal Year; provided further, however, that the Obligated Group shall not be required to retain a Consultant more frequently than biennially. (c) If a report of a Consultant is delivered to the Master Trustee and the Holders, which report shall state that Governmental Restrictions have been imposed which make it impossible for the coverage requirement described in clause (a) above to be met, then such coverage requirement shall be reduced to the maximum coverage permitted by such Governmental Restrictions but in no event less than (Sec. 3.07) Sale, Lease or Other Disposition of Operating Assets; Disposition of Cash and Investments; Sale of Accounts (a) Each Member of the Obligated Group agrees that it will not transfer in any Fiscal Year Operating Assets except for Transfers: (i) To any Person of Operating Assets (A) the disposition of which is permitted by Section 3.02(b) of the Master Indenture, and (B) the Net Book Value of which does not exceed two percent (2%) in the aggregate of the unrestricted fund balance (plus in the case of Members of the Obligated Group that are stock corporations the excess of assets over liabilities, if applicable) of the Obligated Group, as shown on the Financial Statements for the most recent Fiscal Year or period of twelve (12) full consecutive calendar months for which such Financial Statements are available. (ii) To any Person if prior to the sale, lease or other disposition there is delivered to the Master Trustee an Officer s Certificate of an Obligated Group Representative stating that such Operating Assets have become inadequate, obsolete, worn out, unsuitable, unprofitable, undesirable or unnecessary and the sale, lease, removal or other disposition thereof will not (A) impair the structural soundness, efficiency or economic value of the remaining Operating Assets, or (B) adversely affect the amount of Total Revenue; provided, however, that an Officer s Certificate of an Obligated Group Representative shall not be required to be delivered to the Master Trustee with respect to the Transfer of any such Operating Assets having an aggregate Net Book Value of less than the greater of (A) $500,000 per year or (B) two and one-half percent (2.5%) of all Property and Equipment of the Obligated Group. (iii) To another Member of the Obligated Group without limit. (iv) To any Person provided there shall be delivered to the Master Trustee prior to such Transfer either: (A) an Officer s Certificate (accompanied by the report of the independent certified public accountants mentioned below) certifying the Long-Term Debt Service Coverage Ratio, adjusted to exclude the revenues and expenses derived from the Operating Assets proposed to be disposed of, for each of the two most recent Fiscal Years preceding the date of delivery of the Officer s Certificate for which the Financial Statements are available and such Long-Term Debt Service Coverage Ratio is not less C-22

165 than 1.50 and not less than sixty-five percent (65%) of what it would have been were such Transfer not to take place; or (B) the report of a Consultant to the effect that the forecasted Long-Term Debt Service Coverage Ratio, taking such Transfer into account, for each of the two full Fiscal Years succeeding the date on which such Transfer is expected to occur, and the Long-Term Debt Service Coverage Ratio for each such period is not less than 1.50 and not less than sixty-five percent (65%) of what it would have been were such Transfer not to take place, accompanied by a statement of the relevant assumptions upon which such forecasts are based. (v) To any Person provided that (A) the Member of the Obligated Group proposing to make such Transfer shall receive, as consideration for such Transfer, cash, services or Property equal to the fair market value of the asset so transferred (fair market value of real property shall be evidenced by a written report of an independent appraiser who is a Member of the Appraisal Institute (MAI) which report shall state the fair market value of a date not more than one (1) year prior to the date as of which such fair market value is being determined), and (B) if the fair market value of the asset to be transferred exceeds five percent (5%) of the unrestricted fund balance of the Obligated Group as shown on the Financial Statements for the most recent Fiscal Year or period of twelve (12) full consecutive calendar months for which such Financial Statements are available, then there shall be delivered to the Master Trustee prior to such Transfer either: (1) an Officer s Certificate (accompanied by the report of the independent certified public accountants mentioned below) certifying the Long-Term Debt Service Coverage Ratio, adjusted to exclude the revenues and expenses derived from the Operating Assets proposed to be disposed of, for each of the two most recent Fiscal Years preceding the date of delivery of the Officer s Certificate for which the Financial Statements are available and such Long-Term Debt Service Coverage Ratio is not less than 1.50 and not less than sixty-five percent (65%) of what it would have been were such Transfer not to take place; or (2) the report of a Consultant to the effect that the forecasted Long-Term Debt Service Coverage Ratio, taking such Transfer into account, for each of the two full Fiscal Years succeeding the date on which such Transfer is expected to occur, is not less than 1.50 and not less than sixty-five percent (65%) of what it would have been were such Transfer not to take place, accompanied by a statement of the relevant assumptions upon which such forecasts are based. Each Member of the Obligated Group covenants to maintain records adequate to enable the Master Trustee to ascertain that the provisions of paragraph (v) of subsection (a) under this heading Sale, Lease or Other Disposition of Operating Assets; Disposition of Cash and Investments; Sale of Accounts have been complied with and to make such records available to the Master Trustee upon written request. (b) Each Member of the Obligated Group agrees that it will not transfer cash or securities except for Transfers: (i) To another Member of the Obligated Group without limit. (ii) To any Person if there shall be filed with the Master Trustee an Officer s Certificate of an Obligated Group Representative, accompanied by and based upon Financial Statements for the most recent Fiscal Year or period of twelve (12) full consecutive calendar C-23

166 months for which Financial Statements are available, demonstrating that the Long-Term Debt Service Coverage Ratio for such Fiscal Year or 12-month period would not be reduced below 1.75 if the fair market value of cash or securities that are the subject of the proposed Transfer were deducted from Income Available for Debt Service for such period. (iii) To any Person provided that the Member of the Obligated Group proposing to make such Transfer shall receive as consideration for such Transfer Property, cash, securities or services the fair market value of which is at least equal to the amount of the cash or securities so transferred and further provided that, if the Master Trustee so requests, the Member of the Obligated Group proposing to make such Transfer can demonstrate the foregoing in an Officer s Certificate filed with the Master Trustee; provided, however, that in the case of a Transfer involving forgiveness of debt in connection with physician contracts which contain, as compensation, a loan, the forgiveness of which is contingent upon the completion by said physician of a term of service as specified in such physician contracts, services received or to be received by the Member of the Obligated Group in the event of completion of such term of service are, presumptively, equal to at least the fair market value of such forgiveness of debt. (c) Each Member of the Obligated Group agrees that it will not Transfer Accounts, provided, however, that prior to its receipt of a request from the Master Trustee pursuant to Section 3.01(d) of the Master Indenture any Member of the Obligated Group will have the right to sell, in any Fiscal Year, its Accounts in an amount not to exceed the difference between (i) the Account Lien Amount and (ii) the amount of Accounts that have been pledged to secure Outstanding Indebtedness incurred by any Member of the Obligated Group pursuant to the provisions described in subsection (g) under the heading Limitations on Indebtedness above, if such Member of the Obligated Group shall (i) receive as consideration for such sale cash, services or Property equal to the fair market value of the accounts receivable so sold, as certified to the Master Trustee in an Officer s Certificate of such Member of the Obligated Group and (ii) deliver to the Master Trustee a statement from the Obligated Group s certified public accountants that such sale of accounts receivable constitutes a sale under generally accepted accounting principles. (d) Notwithstanding the foregoing provisions set forth under this heading Sale, Lease or Other Disposition of Operating Assets; Disposition of Cash and Investments; Sale of Accounts, nothing in the Master Indenture shall be construed as limiting the ability of any Member of the Obligated Group to purchase or sell Property (other than Operating Assets) in the ordinary course of business or to transfer cash, securities and other investment properties in connection with ordinary investment transactions where such purchases, sales and transfers are for substantially equivalent value. (Sec. 3.08) Consolidation, Merger, Sale or Conveyance (a) Each Member of the Obligated Group covenants that it will not merge or consolidate with any other corporation which is not a Member of the Obligated Group, or sell or convey all or substantially all of its assets to any person which is not a Member of the Obligated Group unless: (i) Either a Member of the Obligated Group will be the successor corporation, or if the successor corporation is not a Member of the Obligated Group, such successor corporation shall execute and deliver to the Master Trustee an appropriate instrument, containing the agreement of such successor corporation to assume the due and punctual payment of the principal of, premium, if any, and interest on all Outstanding Obligations issued under the Master Indenture and the due and punctual performance and observance of all the covenants and conditions of the Master Indenture and any Supplement thereto and granting to the Master Trustee a security interest in the Pledged Assets of such successor corporation; C-24

167 (ii) No Member of the Obligated Group immediately after such merger, consolidation, sale or conveyance would be in default in the performance or observance of any covenant or condition of the Master Indenture; and (iii) If all amounts due or to become due on any Related Bond have not been fully paid to the Holder thereof, the Master Trustee must also receive an Opinion of Bond Counsel that under then existing law, the consummation of such merger, consolidation, sale or conveyance, whether contemplated on the date of delivery of such Related Bond, would not adversely affect the exemption from federal income taxation of interest payable on such Related Bond. (iv) There is delivered to the Master Trustee an Officer s Certificate of an Obligated Group Representative demonstrating that the conditions described in subsection (a) under the heading Limitations on Indebtedness above have been satisfied for the issuance of an additional one dollar ($1.00) of Indebtedness, assuming such merger, consolidation or sale of assets had occurred at the beginning of the most recent period of twelve (12) full consecutive calendar months for which Financial Statements are available, and there is also delivered to the Master Trustee either (A) an Officer s Certificate of an Obligated Group Representative demonstrating that if such merger, consolidation, sale or conveyance of assets had occurred at the beginning of the most recent period of twelve (12) full consecutive calendar months for which Financial Statements are available, the Long-Term Debt Service Coverage Ratio for such period would not have been reduced by more than thirty-five percent (35%); provided, however, that in no event shall such ratio be reduced to less than 1.50, or (B) (1) a written report of a Consultant indicating that the expected average Long-Term Debt Service Coverage Ratio for the two periods of twelve (12) full consecutive calendar months succeeding the proposed date of such merger, or consolidation, or sale or conveyance of assets is greater than 1.35; provided, however, that compliance with the test set forth in this clause (B)(1) may be evidenced by an Officer s Certificate of an Obligated Group Representative in lieu of a Consultant s report where the Long- Term Debt Service Coverage Ratio for each of the two most recent periods of twelve (12) consecutive calendar months for which Financial Statements are available preceding the proposed date of such merger or consolidation, or sale or conveyance of assets is greater than 2.00 and that for the most recent period of twelve (12) full consecutive calendar months for which Financial Statements are available it would not have been reduced by more than thirty-five percent (35%) if such merger or consolidation, or sale or conveyance of assets had occurred at the beginning of such period and (2) an Officer s Certificate of an Obligated Group Representative demonstrating that the unrestricted fund balance (or excess of assets over liabilities, as the case may be) of the successor, resulting or acquiring corporation, as the case may be, after giving effect to said merger or consolidation, or sale or conveyance of assets is not less than ninety percent (90%) of the unrestricted fund balance (or excess of assets over liabilities, as the case may be) of the Member of the Obligated Group which was merged into, consolidated with or whose assets were acquired by, such successor corporation as reflected in the most recent Financial Statements; provided, however, that the requirements in clause (B)(2) need not be met if there is delivered to the Master Trustee an Officer s Certificate of an Obligated Group Representative demonstrating that the Long-Term Debt Service Coverage Ratio, assuming such merger or consolidation, or sale or conveyance of assets had occurred at the beginning of most recent period of twelve (12) full consecutive calendar months for which Financial Statements are available would have been greater than the Long-Term Debt Service Coverage Ratio for such period as reflected in the Financial Statement of the Obligated Group for such period. (b) In case of any such consolidation, merger, sale or conveyance and upon any such assumption by the successor corporation, such successor corporation shall succeed to and be substituted for its predecessor. Any such successor corporation thereupon may cause to be signed, and may issue in C-25

168 its own name Obligations issuable under the Master Indenture, and upon the order of such successor corporation and subject to all the terms, conditions and limitations in the Master Indenture prescribed, the Master Trustee shall authenticate and shall deliver Obligations that such successor corporation shall have caused to be signed and delivered to the Master Trustee. All Outstanding Obligations so issued shall in all respects have the same security position and benefit under the Master Indenture as Outstanding Obligations theretofore or thereafter issued in accordance with the terms of the Master Indenture as though all of such Obligations had been issued under the Master Indenture without any such consolidation, merger, sale or conveyance having occurred. (c) The Master Trustee may accept an Opinion of Counsel as conclusive evidence that any such consolidation merger, sale or conveyance, and any such assumption, complies with the provisions of the Master Indenture. (Sec. 3.09) Parties Becoming Members of the Obligated Group Persons which are not Members of the Obligated Group may, with the prior written consent of the Members of the Obligated Group, become Members of the Obligated Group, if: (a) The Person or successor corporation which is becoming a Member of the Obligated Group shall execute and deliver to the Master Trustee an appropriate instrument, satisfactory to the Master Trustee containing the agreement of such Person or successor corporation (i) to become a Member of the Obligated Group under the Master Indenture and any Supplements and thereby become subject to compliance with all provisions of the Master Indenture and any Supplements pertaining to a Member of the Obligated Group, including the pledge and security interest provided for in Section 3.01 of the Master Indenture and the performance and observance of all covenants and obligations of a Member of the Obligated Group under the Master Indenture, and (ii) unconditionally and irrevocably guaranteeing to the Master Trustee and each other Member of the Obligated Group that all Obligations issued and then Outstanding or to be issued and outstanding under the Master Indenture will be paid in accordance with the terms thereof and of the Master Indenture when due; (b) Each instrument executed and delivered to the Master Trustee in accordance with subsection (a) under this heading Parties Becoming Members of the Obligated Group, shall be accompanied by an Opinion of Counsel, addressed to and satisfactory to the Master Trustee, to the effect that such instrument has been duly authorized, executed and delivered by such Person or successor corporation and constitutes a valid and binding obligation enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy laws, insolvency laws, other laws affecting creditors rights generally, equity principles and laws dealing with fraudulent conveyances; and (c) There shall be filed with the Master Trustee an Officer s Certificate of an Obligated Group Representative demonstrating that the conditions described in subsection (a)(ii) under the heading Limitations on Indebtedness above have been satisfied for the incurrence of an additional one dollar ($1.00) of Indebtedness, assuming such admission actually occurred at the beginning of the most recent period of twelve (12) full consecutive calendar months for which Financial Statements are available, and there is also delivered to the Master Trustee either (i) an Officer s Certificate of an Obligated Group Representative demonstrating that the Long-Term Debt Service Coverage Ratio for the most recent period of twelve (12) full consecutive calendar months for which Financial Statements are available (A) would not have been reduced by more than thirty-five percent (35 %) and would not have been reduced to less than 1.50 or (B) would be greater than in the absence of such Person becoming a Member of the Obligated Group; or (ii) the written report of a Consultant demonstrating that the expected average Long- Term Debt Service Coverage Ratio for the two full Fiscal Years succeeding the proposed date of such admission is greater than 1.30; provided, however, that compliance with the tests set forth in clause (ii) C-26

169 may be evidenced by an Officer s Certificate of an Obligated Group Representative in lieu of a Consultant s report where the Long-Term Debt Service Coverage Ratio for each of the two most recent periods of twelve (12) consecutive calendar months for which Financial Statements are available preceding the proposed date of such admission is greater than 2.00 and that for the most recent period of twelve (12) full consecutive calendar months for which Financial Statements are available it would not have been reduced by more than thirty-five percent (35%) if such admission had occurred at the beginning of such period; and (d) If all amounts due or to become due on any Related Bond have not been paid to the Holders thereof, there shall be filed with the Master Trustee an Opinion of Bond Counsel, in form and substance satisfactory to the Master Trustee, to the effect that the consummation of such transaction would not adversely affect the exclusion of the interest on any such Related Bond from the gross income of the Holder thereof for purposes of federal income taxation. (e) If such Person is not a nonprofit corporation, the Obligated Group Representative shall have delivered to the Master Trustee an Opinion of Counsel to the effect that the addition of such Person to the Obligated Group will not necessitate the registration of any Obligations under the Securities Act of 1933, as amended, or cause the qualification of the Master Indenture or any Supplement under the Trust Indenture Act of 1939, as amended, to be required, or, if such registration or qualification is required, that all applicable registration and qualification provisions of said acts have been complied with. (Sec. 3.11) Withdrawal from the Obligated Group (a) No Member of the Obligated Group may withdraw from the Obligated Group without the prior written consent of the other Members of the Obligated Group and unless, prior to the taking of such action, there is delivered to the Master Trustee: (i) An Officer s Certificate of an Obligated Group Representative demonstrating that (A) all Obligations issued by such Member of the Obligated Group are no longer Outstanding, or (B) an amount of cash or Defeasance Obligations sufficient to accomplish the requirement of clause (i)(a) above has been paid by such Member to the Master Trustee sufficient to render each such Obligation a Defeased Obligation; provided; however, that if all amounts due on any Related Bonds which bear interest which is not includable in the gross income of the recipient thereof under the Code have not been paid to the Holders thereof, there shall be delivered to the Master Trustee an Opinion of Bond Counsel, in form and substance satisfactory to the Master Trustee, to the effect that under then existing law such Member s withdrawal from the Obligated Group, whether or not contemplated on any date of delivery of any Related Bond, would not cause the interest payable on such Related Bond to become includable in the gross income of the recipient thereof under the Code; and (ii) An Officer s Certificate of an Obligated Group Representative demonstrating that the conditions described in subsection (a)(ii) under the heading Limitations on Indebtedness above have been satisfied for the incurrence of an additional one dollar ($1.00) of Indebtedness, assuming such withdrawal to have occurred at the beginning of the most recent period of twelve (12) full consecutive calendar months for which Financial Statements are available, and either (A) a certificate of an Obligated Group Representative demonstrating that the Long-Term Debt Service Coverage Ratio for the most recent period of twelve (12) full consecutive calendar months for which Financial Statements are available (1) would not, if such withdrawal had occurred at the beginning of such period, be reduced by more than thirty-five percent (35%) and would not have been reduced to less than 1.25 or (2) would be greater than in the absence of such withdrawal; or (B) a written report of a Consultant demonstrating that the C-27

170 expected average Long-Term Debt Service Coverage Ratio for the two full Fiscal Years succeeding the proposed date of such withdrawal is greater than 1.30; provided, however, that compliance with the test set forth in clause (B) above may be evidenced by an Officer s Certificate of an Obligated Group Representative in lieu of a Consultant s report where the Long- Term Debt Service Coverage Ratio for each of the two full Fiscal Years succeeding the proposed date of such withdrawal is greater than 2.00 and not less than sixty-five percent (65%) of what it would have been were such withdrawal not to take place, assuming such withdrawal had occurred on the first day of the most recent Fiscal Year or twelve month period for which Financial Statements of the Obligated Group are available. (b) Upon the withdrawal of any Member from the Obligated Group pursuant to the provisions described in subsection (a) under this heading Withdrawal from the Obligated Group, any Guaranty by such Member pursuant to the provisions described under the heading Parties Becoming Members of the Obligated Group above shall be released and discharged in full and all liability of such Member of the Obligated Group with respect to all Obligations Outstanding under the Master Indenture shall cease. Replacement Master Indenture Each Holder of an Obligation evidencing and securing Indebtedness other than Related Bonds shall surrender such Obligation to the Master Trustee and each Related Bond Trustee for Related Bonds shall, with the prior written consent of the Credit Facility provider, if any, for such, Related Bonds, surrender any Obligation issued to secure such Related Bonds to the Master Trustee upon presentation to the Holder or the Related Bond Trustee, as the case may be, of the following: (a) an original replacement note or similar obligation (the Substitute Obligation ) duly authenticated and issued under and pursuant to an existing or new master trust indenture (the Replacement Master Indenture ) by which the Members of the Obligated Group and certain other Persons named therein, which Persons are not Members of the Obligated Group and are not affiliated with any Member of the Obligated Group (the New Group ), have agreed to be bound; provided, however, that the trustee serving as master trustee under such Replacement Master Indenture (the New Trustee ) shall be an independent corporate trustee (which may be the Master Trustee or the Related Bond Trustee) meeting the eligibility requirements of the Master Trustee as set forth in the Master Indenture; (b) the Replacement Master Indenture pursuant to which each member of the New Group has agreed (i) to become a member of the New Group and thereby to become subject to compliance with all provisions of the Replacement Master Indenture and (ii) unconditionally and irrevocably (subject to the right of such Person to cease its status as a member of the New Group pursuant to the terms and conditions of the Replacement Master Indenture) to jointly and severally make payments upon each note and Obligation, including the Substitute Obligation, issued under the Replacement Master Indenture at the times and in the amounts provided in each such note or Obligation; (c) an Opinion of Counsel addressed to the Holder of an Obligation evidencing and securing Indebtedness other than Related Bonds or to the Related Bond Trustee, as the case may be, and the Obligated Group to the effect that: (i) the Replacement Master Indenture has been duly authorized, executed and delivered by each member of the New Group, the Substitute Obligation has been duly authorized, executed and delivered by each member of the New Group, and the Replacement Master Indenture and the Substitute Obligation are each a legal, valid and binding obligation of each member of the New Group, enforceable in accordance with their terms, subject in each case to customary exceptions for bankruptcy, insolvency, fraudulent conveyance and other laws generally affecting enforcement of creditors rights and application of general principles of equity; (ii) all requirements and conditions to the C-28

171 issuance of the Substitute Obligation set forth in the Replacement Master Indenture have been complied with and satisfied; and (iii) the registration of the Substitute Obligation under the Securities Act of 1933, as amended, and the qualification of the Replacement Master Indenture under the Trust Indenture Act of 1939, as amended, is not required, or, if such registration or qualification is required, that all applicable registration and qualification provisions of said Acts have been complied with; (d) an Officer s Certificate to the effect that (i) the New Group could, after giving effect to the Substitute Obligation, meet the conditions of the Master Indenture for the incurrence of one dollar ($1.00) of additional Long-Term Indebtedness pursuant to the provisions described in subsection (a) under the heading Limitations on Indebtedness above, as demonstrated in such certificate, (ii) the unrestricted fund balance of the New Group is not less than ninety percent (90%) of the unrestricted fund balance of the Obligated Group and (iii) the New Group would not be in default under the provisions described under the heading Limitations on Creation of Liens above; (e) an Opinion of Bond Counsel to the effect that the surrender of the Obligation and the acceptance by the Related Bond Trustee of the Substitute Obligation will not adversely affect the validity of the Related Bonds or any exemption for the purposes of federal or state income taxation to which interest on the Related Bonds would otherwise be entitled; (f) an original executed counterpart or certified copy of the Replacement Master Indenture; (g) evidence that (i) written notice of such substitution, together with a copy of such Replacement Master Indenture, has been given by the New Group to each rating agency then maintaining a rating on any Obligation or Related Bonds, (ii) the then current rating on the Obligation or Related Bonds shall not be withdrawn or reduced by any such rating agency as a result of such substitution, and (iii) an investment grade rating has been assigned to any Substitute Obligation or Related Bonds to be issued simultaneously with the execution and delivery of the Replacement Master Indenture by at least one nationally recognized securities rating agency; and (h) such other opinions and certificates as the Holder of an Obligation evidencing and securing Indebtedness other than Related Bonds or the Related Bond Trustee, as the case may be or the Credit Facility provider, if any, may reasonably require, together with such reasonable indemnities as the Holder of an Obligation evidencing and securing Indebtedness other than Related Bonds or the Related Bond Trustee, as the case may be, the Credit Facility provider, if any, may request. Notwithstanding the provisions described under this heading Replacement Master Indenture, no Substitute Obligation may extend the stated maturity of or time for paying interest on any Obligation surrendered to the Master Trustee or reduce the principal amount of or the redemption premium or rate of interest payable on such Obligation without the consent of each Holder of such Obligation evidencing and securing Indebtedness other than Related Bonds affected thereby or the registered owners of all Related Bonds then Outstanding affected thereby, as the case may be. (Sec. 3.13) Default and Remedies Events of Default. An Event of Default under the Master Indenture is any of the following events: (a) the failure to make any payment on any Obligation when due and payable, whether at maturity, by proceedings for redemption, by acceleration or otherwise in accordance with the terms of the Master Indenture or any Supplement; (b) the failure by any member of the Obligated Group to perform, observe or comply with any covenant or agreement under the Master Indenture, and such failure continues for a period of 30 days after written notice shall have been given to the Members of the Obligated Group by the Master Trustee or to the Members of the Obligated Group and the Master Trustee C-29

172 by Holders having at least 25% aggregate principal amount of Obligations then Outstanding, provided, however, that if said failure be such that it cannot be corrected within such 30-day period, no Event of Default will exist if corrective action is instituted within such 30-day period and diligently pursued until the Event of Default is corrected; (c) an Event of Default shall occur under a Related Bond Indenture, upon a Related Bond, or, while the Mortgage is in effect, under the Mortgage; (d) any default in the payment of any Indebtedness except Non-Recourse Indebtedness (other than Outstanding Obligations) and any applicable grace period shall have expired, or any default as defined in any mortgage, indenture or instrument, under which there may be issued, secured or evidenced any Indebtedness, whether such Indebtedness now exists or shall hereafter be created, shall occur, which Event of Default shall not have been waived by the Holder of such mortgage, indenture or instrument, and as a result of such failure to pay or other Event of Default such Indebtedness shall have been accelerated; provided, however, that such a default will not constitute an Event of Default if within thirty (30) days, (i) written notice is delivered to the Master Trustee, signed by an Obligated Group Representative, that such Member of the Obligated Group is contesting the payment of such Indebtedness and the amount of such Indebtedness is less than one-half of one percent (.50%) of Income Available for Debt Service of the immediately preceding Fiscal Year, or (ii) if such Indebtedness is equal to or greater than one-half of one percent (.50%) of Income Available for Debt Service, within the time allowed for service of a responsive pleading if any proceeding to enforce payment of the Indebtedness is commenced, any Member of the Obligated Group in good faith shall commence proceedings to contest the obligation to pay or the existence of such Indebtedness; (e) the entry of a decree or order by a court having jurisdiction in the premises for an order for relief against any Member of the Obligated Group; or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of such Member under the United States Bankruptcy Code or any other applicable federal or state law; or appointing a receiver, liquidator, custodian, assignee or sequestrator (or other similar official) of such Member or of substantial part of its Property; or ordering the winding up or liquidation of its affairs, and such decree or order shall have continued unstayed for a period of 90 consecutive days; and (f) the institution by any Member of the Obligated Group of proceedings for the issuance of an order for relief, or the consent by it to an order for relief against it, or the filing by it of a petition or answer or consent seeking reorganization, arrangement, adjustment, compensation or relief under the United States Bankruptcy Code or any similar applicable federal or state law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, custodian, assignee, trustee or sequestrator (or other similar official) of such Member of the Obligated Group or of any substantial part of its Property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due. (Sec. 4.01) Acceleration; Annulment of Acceleration. Upon the occurrence and during the continuation of an Event of Default under the Master Indenture, the Master Trustee may and, upon the written request of (i) the Holders of not less than 25% in aggregate principal amount of Obligations Outstanding or (ii) any person properly excising the right given to such person under any Supplement to require acceleration of the Obligations issued pursuant to such Supplement, shall, by notice to the Members of the Obligated Group, declare all Obligations Outstanding immediately due and payable, whereupon such Obligations shall become and be immediately due and payable, anything in the Obligations or in any section of the Master Indenture to the contrary notwithstanding; provided, however, that if the terms of any Supplement give a person the right to consent to acceleration of the Obligations issued pursuant to said Supplement, the Obligations issued pursuant to such Supplement may not be accelerated by the Master Trustee unless such consent is properly obtained pursuant to the terms of such Supplement. In the event Obligations are accelerated, there shall be due and payable on such Obligations an amount equal to the total principal amount of all such Obligations, plus all interest accrued thereon to the date of acceleration and, to the extent permitted by applicable law, which accrues to the date of payment. C-30

173 If, at any time after the principal of the Obligations has been declared due and payable by the Master Trustee and before the entry of final judgment in any proceeding relating thereto, the Obligated Group has paid or caused to be paid or deposited with the Master Trustee moneys sufficient to pay all matured installments of interest and all principal or redemption prices then due (other than the principal then due only because of such declaration) of all Obligations Outstanding; and the Obligated Group has paid or caused to be paid or deposited with the Master Trustee moneys sufficient to pay the charges, compensation, expenses, disbursements, advances, fees and liabilities of the Master Trustee; and all other amounts then payable by the Obligated Group under the Master Indenture shall have been paid or a sum sufficient to pay the same shall have been deposited with the Master Trustee; and every Event of Default (other than a default in the payment of the principal of such Obligations then due only because of such declaration) shall have been remedied, then the Master Trustee may, and upon the written request of the Holders of not less than twenty-five percent (25%) in aggregate principal amount of the Obligations Outstanding shall, annul such declaration and its consequences with respect to any Obligations or portions thereof not then due by their terms. No such annulment shall extend to or affect any subsequent Event of Default or impair any right consequent thereon. (Sec. 4.02) Additional Remedies and Enforcement of Remedies. Upon the occurrence and continuance of any Event of Default, the Master Trustee may, and upon the written request of the Holders of not less than 25% in aggregate principal amount of the Obligations Outstanding, together with indemnification of the Master Trustee to its satisfaction, shall, proceed forthwith to protect and enforce its rights and the rights of such Holders by such suits, actions or proceedings as the Master Trustee being advised by counsel shall deem expedient. Regardless of the happening of an Event of Default, the Master Trustee, if requested in writing by the Holders of not less than 25% in aggregate principal amount of the Obligations then Outstanding, shall, when indemnified to its satisfaction, institute and maintain such suits and proceedings necessary or expedient to prevent any impairment of security by any acts which may be unlawful or in violation of the Master Indenture, or to preserve or protect the interests of the Holders, provided that such request and action is not in conflict with applicable law or the Master Indenture and, in the Master Trustee s sole judgment, is not unduly prejudicial to the interest of the Holders of Obligations not making such request, including without limitation enforcement of its rights and remedies under the Mortgage while the Mortgage is in effect. (Sec. 4.03) Application of Gross Receipts and Other Moneys After Default. During the continuance of an Event of Default all Gross Receipts and other moneys received by the Master Trustee, after payment of costs and expenses of collection, and in the sole discretion of the Master Trustee, the expenses of operating the Obligated Group, shall be applied as follows: (a) Unless the principal of all Outstanding Obligations shall have become or have been declared due and payable: First: to the payment of interest then due on the Obligations in the order of the maturity, and, if the amount available shall not be sufficient to pay in full all amounts maturing on the same date, then ratably, according to the amounts due, without discrimination or preference; and Second: to the payment of the unpaid principal installments of any Obligations then due, whether at maturity or by call for redemption, in the order of their due dates, and if the amount available shall not be sufficient to pay in full amount the Obligations due on any date, then ratably, according to the amounts of principal installments due on such date, without discrimination or preference. (b) If the principal of all Outstanding Obligations shall then be or have been declared to be due and payable, to the payment of the principal and interest then due and unpaid without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any C-31

174 other installment of interest, or of any Obligation over any other Obligation, ratably, according to the amounts due respectively for principal and interest, without discrimination or preference. (c) If the principal of all Outstanding Obligations shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled under the provisions of the Master Indenture, then, subject to the provisions described in paragraph (b), above, in the event that the principal of all Outstanding Obligations shall later become due or be declared due and payable, the moneys shall be applied in accordance with the provisions described in paragraph (a) above. Moneys to be applied by the Master Trustee during continuance of an Event of Default shall be applied as the Master Trustee shall determine, having due regard for the amount available and the likelihood of additional moneys becoming available in the future. Whenever the Master Trustee shall apply such moneys, it shall fix the date upon which such application is to be made and upon such date interest on the amounts of principal to be paid on such date shall cease to accrue. The Master Trustee shall give such notice as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date, and shall not be required to make payment to the Holder of any unpaid Obligation until such Obligation shall be presented to the Master Trustee for appropriate endorsement of any partial payment or for cancellation if fully paid. (Sec. 4.04) Holders Control of Proceedings. If any Event of Default shall have occurred and be continuing, the Holders of not less than a majority in aggregate principal amount of Obligations then Outstanding shall have the right, subject to the terms of the Master Indenture, to direct the method and place of conducting any enforcement proceedings. (Sec. 4.07) Waiver of Event of Default. No delay or omission of the Master Trustee or of any Holder to exercise any right or power accruing upon any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein. Every power and remedy given to the Master Trustee and the Holders, respectively, may be exercised from time to time and as often as may be deemed expedient by them. The Master Trustee may waive any Event of Default which in its opinion shall have been remedied before the entry of final judgment. The Master Trustee, upon the written request of the Holders of a majority of the aggregate principal amount of Obligations then Outstanding, shall waive any Event of Default (except payment defaults, which may be waived only by Holders of all the Obligations then Outstanding with respect to which such payment defaults exist) and its consequences. In case of such waiver, all parties shall be restored to their former positions but no such waiver shall extend to any subsequent or other Event of Default. (Sec. 4.09) Appointment of Receiver. Upon the occurrence of any Event of Default, the Master Trustee shall be entitled to the appointment of a receiver or receivers of the Property of the Obligated Group with such powers as the court shall confer. (Sec. 4.10) Notice of Default. The Master Trustee shall, within 10 days after it has knowledge of the occurrence of an Event of Default, mail to all Holders as the names and addresses of such Holders appear upon the books of the Master Trustee notice of such Event of Default known to the Master Trustee, unless such Event of Default shall have been cured before the giving of such notice; and provided that, except in the default in the payment of the principal of or premium, if any or interest on any of the Obligations and certain Events of Default relating to bankruptcy, the Master Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors or a responsible officer of the Master Trustee in good faith determine that the withholding of such notice is in the interests of the Holders. (Sec. 4.12) C-32

175 Supplements and Amendments Supplements Not Requiring Consent of Holders. The Master Indenture may be supplemented or amended without the consent of or notice to any of the Holders, but only to cure any ambiguity or formal defect or omission; to correct or supplement any provision which may be inconsistent with any other provision, or to make any other provisions with respect to matters or questions arising under the Master Indenture and which shall not materially and adversely affect the interests of the Holders; to grant or confer ratably upon all Holders any additional rights, remedies, powers or authority that may lawfully be granted on or conferred upon them; to qualify the Master Indenture under the Trust Indenture Act of 1939, as amended, or corresponding provisions of federal laws from time to time in effect; to create and provide for the issuance of Indebtedness as permitted under the Master Indenture; to obligate a successor to any Member of the Obligated Group; and to comply with the provisions of any federal or state securities laws. (Sec. 6.01) Supplements Requiring Consent of Holders. Other than Supplements referred to in the preceding paragraph, the Holders of not less than a majority in aggregate principal amount of the Obligations then Outstanding shall have the right to consent to and approve execution of Supplements modifying, altering, amending, adding to or rescinding, in any particular, the Master Indenture, except that no Supplement may: (i) Effect a change in the times, amounts or currency of payment of the principal of, premium, if any, and interest on any Obligation or a reduction in the principal amount or redemption price of any Obligation or the rate of interest thereon, without the consent of the Holder of such Obligation; (ii) Permit the preference or priority of any Obligation over any other Obligation, without the consent of the Holders of all Obligations then Outstanding; or (iii) Reduce the aggregate principal amount of Obligations then Outstanding the consent of the Holders of which is required to authorize such Supplement without the consent of the Holders of all Obligations then Outstanding. All Supplements executed pursuant to the Master Indenture shall be binding on all Holders of Obligations. (Sec. 6.02) Satisfaction and Discharge of Indenture If the Obligated Group shall deliver to the Master Trustee for cancellation all Obligations theretofore authenticated and not theretofore cancelled, or all Obligations not cancelled or delivered to the Master Trustee for cancellation shall have become due and payable and have been paid, or the Members of the Obligated Group shall deposit in trust as trust funds the entire amount of moneys or Defeasance Obligations, sufficient to pay at maturity or redemption all Outstanding Obligations and all other sums payable under the Master Indenture, then the Master Indenture shall cease to be of further effect. (Sec. 7.01) C-33

176 THE TRUST AGREEMENT The 2014 Bonds are payable solely from the funds, accounts and other sources of revenue pledged under the Series 2014 Trust Agreement (the Trust Agreement ), including Obligation No. 14. The Trust Agreement is dated as of August 1, 2014, between Florence County, South Carolina, and U.S. Bank National Association, as trustee (the Bond Trustee ). Solely for purposes of convenience, certain of the summaries included in the following discussion are followed by references to particular sections of the Trust Agreement to which such summaries relate. Application of Bond Proceeds The proceeds of the 2014 Bonds shall be applied by the Bond Trustee, simultaneously with the delivery of such Bonds, as follows: (1) the Bond Trustee shall transfer the sum required to be transferred from the proceeds of such series of Bonds to the Escrow Agent for deposit pursuant to the Escrow Agreement; and (2) the Bond Trustee shall deposit to the credit of the Cost of Issuance Fund established for the Bonds an amount sufficient to pay the costs of issuance of such Bonds. Payments from the Cost of Issuance Fund are to be made to pay Costs of Issuance in accordance with the provisions of the Trust Agreement. (Sec. 402) Pursuant to the Trust Agreement, moneys in the Cost of Issuance Fund shall be applied to the payment of the Costs of Issuance. (Sec. 401). Various Funds and Accounts Created by the Trust Agreement The Trust Agreement creates the following funds: 1. Bond Fund 2. Cost of Issuance Fund The Trust Agreement creates four separate accounts within the Bond Fund, which accounts are designated the Principal Account, Interest Account, and Redemption Account. Money in these funds and accounts will be held in trust and will be subject to a lien and charge in favor of the Holders of the 2014 Bonds until paid out or transferred as provided in the Trust Agreement. (Sec. 501) Bond Trustee s Application of Money Received (a) The Bond Trustee will deposit all amounts received as Loan Repayments in the following order, subject to the credits provided in the Trust Agreement: (i) on October 25, 2014, and on the 25th day of each April and October thereafter, into the Interest Account, an amount which, after credits as hereinafter provided for, is equal to the interest payable on the Series 2014 Bonds on the next ensuing Interest Payment Date; and C-34

177 (ii) on October 25, 2014, and on the 25th day of each October thereafter, into the Principal Account, the amount required to retire the Serial Bonds maturing on the next ensuing November 1. (b) If, after giving effect to the credits specified below, any installment of Total Required Payments required above should be increased, the Bond Trustee shall so notify the Hospital and request that each future installment of the Total Required Payments be increased as may be necessary to make up any previous deficiency in any of the required payments and to make up any deficiency or loss in any of the above-mentioned accounts and funds, except as provided in the Trust Agreement. To the extent that investment earnings are credited to the Interest Account or Principal Account in accordance with the Trust Agreement or amounts are credited thereto as a result of the application of Series 2014 Bond proceeds or a transfer of surplus funds in the Cost of Issuance Fund or a transfer of investment earnings on any other fund or account held by the Bond Trustee, or otherwise, future deposits to such accounts shall be reduced by the amount so credited, and the Loan Repayments due from the Hospital in the months following the date upon which such amounts are credited shall be reduced by the amounts so credited. All amounts received by the Bond Trustee as principal of or interest accruing on the Bonds to be redeemed as a result of a prepayment of Obligation No. 14 shall be deposited in the Redemption Account and Interest Account, respectively, when received. All amounts received by the Bond Trustee for the payment of redemption premiums shall be deposited in the Redemption Account when received. (Sec. 502) Bond Fund Money on deposit in the Interest Account and the Principal Account of the Bond Fund established under the Trust Agreement will be used to pay the principal of and the interest on the Bonds, when due. (Secs. 503, 504 and 505) Money held for the credit of the Redemption Account will be applied to the purchase or redemption of the Bonds as provided in the Trust Agreement. (Sec. 507) Investments Money held for the credit of all funds and accounts, as nearly as may be practicable, will be continuously invested and reinvested by the Bond Trustee in Investment Securities. Any such Investment Securities will mature not later than the respective dates when the money held for the credit of such funds or accounts will be required for the purposes intended. No Investment Securities in any fund or account under the Trust Agreement may mature beyond the latest maturity date of any Bonds Outstanding at the time such Investment Securities are deposited. Investment Securities credited to any fund or account established under the Trust Agreement will be held by or under the control of the Bond Trustee and will be deemed at all times to be part of such fund or account in which such money was originally held. Interest accruing on such Investment Securities and any profit or loss realized upon the disposition or maturity of the same will be credited to or charged against the fund or account to which the same are credited. The Bond Trustee will sell at the best price obtainable or reduce to cash a sufficient amount of such Investment Securities whenever it is necessary to provide money to make any payment or transfer of money from any such fund or account. The Bond Trustee will not be liable or responsible for any loss resulting from any such investment. (Sec. 602) C-35

178 Valuation For the purpose of determining the amount on deposit in any fund or account, Investment Securities in which money in such fund or account is invested shall be valued at the lesser of (a) the cost of such Investment Securities minus the amortization of any premium or plus the amortization of any discount thereon or (b) the market value of such obligations. The Bond Trustee will value the Investment Securities in the fund and accounts established under the Trust Agreement five Business Days prior to each Interest Payment Date. In addition, the Investment Securities will be valued by the Bond Trustee at any time required by the County Representative or the Hospital Representative on reasonable notice to the Bond Trustee (which period of notice may be waived or reduced by the Bond Trustee, except that the Bond Trustee will not be so required to value the Investment Securities more than once in any calendar month.) (Sec. 603) Events of Default Each of the following events is an Event of Default under the Trust Agreement: (a) (b) (c) (d) (e) payment by the County of any installment of interest on any of the Bonds shall not be made when due and payable; or payment by the County of the principal of or the redemption premium, if any, on any Bond shall not be made when due and payable, whether at maturity or by proceedings for redemption or at maturity by acceleration; or default in the payment of any other amount required to be paid under the Trust Agreement or the performance or observance of any other of the covenants, agreements or conditions contained in the Trust Agreement, or in the Bonds issued under the Trust Agreement, and continuance thereof for a period of 30 days after written notice specifying such failure and requesting that it be remedied, shall have been given to the County and the Hospital by the Bond Trustee, which may give such notice in its discretion and shall give such notice at the written request of Bondholders of not less than 25% in aggregate principal amount of the Bonds then Outstanding, unless the Bond Trustee, or the Bond Trustee and Bondholders of an aggregate principal amount of Bonds not less than the aggregate principal amount of Bonds the Bondholders of which requested such notice, as the case may be, shall agree in writing to an extension of such period prior to its expiration; provided, however, if the failure stated in the notice cannot be corrected within the applicable period but can reasonably be expected to be fully remedied, the County and the Bond Trustee shall not unreasonably withhold their consent to an extension of such time if corrective action is instituted by the County, or the Hospital on behalf of the County, within such period and is being diligently pursued; an Event of Default shall have occurred under the Loan Agreement; If Obligation No. 14 is declared by the Master Trustee to be immediately due and payable; and (f) If there occurs any Event of Default under the Master Indenture. (Sec. 801) C-36

179 Remedies Upon the happening and continuance of any Event of Default specified in the Trust Agreement, the Bond Trustee may, or upon the written request of the Holders of not less than 25% in aggregate principal amount of Bonds then Outstanding shall, by notice in writing to the County and the Hospital, declare the principal amount of Bonds then Outstanding (if not then due and payable) to be due and payable immediately, and upon such declaration the same shall become and be immediately due and payable, anything contained in the Bonds or in the Trust Agreement to the contrary notwithstanding; provided, however, that if at any time after the principal of Bonds shall have been so declared to be due and payable, and before the entry of final judgment or decree in any suit, action or proceeding instituted on account of such default, or before the completion of the enforcement of any other remedy under the Trust Agreement, money shall have accumulated in the Bond Fund sufficient to pay the principal of all matured Bonds and arrears of interest, if any, upon all Bonds then Outstanding (except the principal of any Bonds not then due and payable by its terms and the interest accrued on such since the last Interest Payment Date), and the charges, compensations, expenses, disbursements, advances and liabilities of the Bond Trustee and all other amounts then payable by the County under the Trust Agreement shall have been paid or a sum sufficient to pay the same shall have been deposited with the Bond Trustee, and every other default known to the Bond Trustee in the observance or performance of any covenant, condition or agreement contained in the Bonds or in the Trust Agreement (other than a default in the payment of the principal of such Bonds then due only because of a declaration under this Section) shall have been remedied to the satisfaction of the Bond Trustee, then and in every such case, the Bond Trustee may, and upon the written request of the Holders of not less than 25% in aggregate principal amount of Bonds not then due and payable by their terms (Bonds then due and payable only because of a declaration under this Section shall not be deemed to be due and payable by their terms) and then Outstanding and shall, by written notice to the County and the Hospital, rescind and annul such declaration and its consequences, but no such rescission and annulment shall extend to or affect any subsequent Event of Default or impair any right consequent thereon. Whenever any Event of Default shall have happened and be continuing, the Bond Trustee may take the following remedial steps: (i) In the case of any Event of Default, the Bond Trustee may by written notice to the County, the Master Trustee and the Hospital declare immediately due and payable the principal amount of the Outstanding Bonds and the payments to be made by the Hospital therefor and accrued interest on the foregoing, whereupon the same shall become immediately due and payable without any further action or notice. (ii) In the case of an Event of Default described in Section 801(a) or (b) of the Trust Agreement, the Bond Trustee may take whatever action at law or in equity is necessary or desirable to collect the Loan Repayments then due or payments due under Obligation No. 14. (iii) In the case of an Event of Default described in Section 801(c) of the Trust Agreement, the Bond Trustee may take whatever action at law or in equity is necessary or desirable to enforce the performance, observance or compliance by the County with any covenant, condition or agreement by the County under the Trust Agreement. (iv) In the case of an Event of Default described in Sections 801(d), (e), or (f) of the Trust Agreement, the Bond Trustee may take whatever action the County would be entitled to take, and shall take whatever action the County would be required to take, pursuant to the Trust Agreement in order to remedy the Event of Default in question. (Sec. 802) C-37

180 No Holder may institute any suit, action or proceeding on any Bonds or for any remedy under the Trust Agreement unless the County or the Holders of not less than 25% in aggregate principal amount of the Bonds then Outstanding previously has given to the Bond Trustee written notice of the Event of Default on account of which suit, action or proceeding is to be instituted, and unless also the Holders of not less than 25% in aggregate principal amount of the Bonds then Outstanding have requested, in writing, the Bond Trustee to act and have furnished indemnity as required in the Trust Agreement and the Bond Trustee has refused or neglected to comply with such request; except that, the Holders of not less than 25% in aggregate principal amount of the Bonds then Outstanding may institute any suit, action or proceeding in their own names for the benefit of all Holders under the Trust Agreement. Except as provided in the Trust Agreement, no Holder will have any right in any manner whatever to enforce any right thereunder, and any individual rights given to such Holders by law are restricted by the Trust Agreement to the rights and remedies therein granted. (Sec. 807) Notice to Bondholders Notice of redemption will be mailed to all Holders owning Bonds to be redeemed in whole or in part and, except as described below, notice of any Event of Default will be mailed to all Holders and the Master Trustee. The Bond Trustee shall not be subject to any liability to any Holder by reason of failure to mail notice of any Event of Default. Except upon the happening of an Event of Default with respect to the payment of the principal of, and interest on or redemption premium on Bonds when due, the Bond Trustee may withhold notice of any Event of Default to Holders, if in its opinion such withholding is in the interest of such Holders. (Secs. 303 and 812) Defaulted Interest Any Defaulted Interest shall forthwith cease to be payable to the Holder on the relevant Regular Record Date solely by virtue of such Holder having been such Holder; and such Defaulted Interest may be paid by the County, at its election in each case, as provided in Subsection A or B below: A. The County may elect to make payment of any Defaulted Interest on the Bonds to the persons in whose names such Bonds (or their respective Predecessor Bonds) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The County shall notify the Bond Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Bond and the date of the proposed payment (which date shall be such as will enable the Bond Trustee to comply with the next sentence hereof), and at the same time the County shall deposit or cause to be deposited with the Bond Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Bond Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the persons entitled to such Defaulted Interest as in this Subsection provided. Thereupon the Bond Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Bond Trustee of the notice of the proposed payment. The Bond Trustee shall promptly notify the County and the Hospital of such Special Record Date and, in the name and at the expense of the Hospital, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at his address as it appears in the registration books maintained under Section 205 of the Trust Agreement not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special C-38

181 Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the persons in whose names the Bonds (or their respective Predecessor Bonds) are registered on such Special Record Date and shall no longer be payable pursuant to the following Subsection B. B. The County may make payment of any Defaulted Interest on the Bonds in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Bonds may be listed and upon such notice as may be required by such exchange, if, after notice given by the County to the Bond Trustee of the proposed payment pursuant to this Subsection, such payment shall be deemed practicable by the Bond Trustee. Subject to the foregoing, each Bond delivered under the Trust Agreement upon transfer of or in exchange for or in lieu of any other Bond shall carry all the rights to interest accrued and unpaid, and to accrue, which were carried by such other Bond and each such Bond shall bear interest from such date, so that neither gain nor loss in interest shall result from such transfer, exchange or substitution. (Sec. 202) Payment of Bond Trustee s and Bond Registrar s Fees If the County fails to cause required payments to be made to the Bond Trustee or the Bond Registrar under the Trust Agreement for compensation and expenses, such Bond Trustee or Bond Registrar may make such payment from any money in its possession pursuant to the Trust Agreement and will be entitled to a preference therefor over any Bonds Outstanding under the Trust Agreement. (Sec. 905) Holders of Bonds Deemed to be Holders of Obligation In the event that any request, direction or consent is requested or permitted by the Master Indenture of the Holders of Obligations issued thereunder, including Obligation No. 14, the Holders of Bonds then Outstanding shall be deemed to be Holders of Obligations No. 14 for the purpose of any such request, direction or consent in the proportion that the aggregate principal amount of Bonds then Outstanding held by each such Holder of Bonds bears to the aggregate principal amount of all Bonds then Outstanding. The provisions of Article X of the Trust Agreement and of Article VIII of the Master Indenture shall govern the execution of any such request, direction, consent or other instrument in writing required or permitted to be signed by Holders and Holders of Obligation No. 14, respectively. (Sec. 1003) Modification of the Trust Agreement The County and the Bond Trustee may from time to time, without the consent of or notice to the Holders, execute such supplemental trust agreements as shall be consistent with the terms and provisions of the Trust Agreement and the Loan Agreement and, in the Opinion of Counsel, shall not affect adversely or prejudice the interest of the Holders thereunder; to cure any ambiguity or formal defect or omission; to modify, alter, amend, add to or rescind in any particular, any of the terms or provisions contained in the Trust Agreement; to grant or to confer upon the Bond Trustee for the benefit of such Holders any additional rights, remedies, powers, authority or security that may lawfully be granted to or conferred upon such Holders or the Bond Trustee; to add to the conditions, limitations and restrictions of the Trust Agreement other conditions, limitations and restrictions thereafter to be observed; to add to the covenants and agreements of the County, other covenants and agreements thereafter to be observed by the County to surrender any right or power reserved to or conferred upon the County; to permit the qualification of the Trust Agreement under any federal or state securities law and to add any terms, conditions and provisions as may be permitted or required by such law; or to provide for the issuance of the Bonds in bearer form. (Sec. 1101) C-39

182 The Trust Agreement may be amended in any particular with the consent of the Holders of not less than 51% in aggregate principal amount of the Bonds Outstanding; provided, that nothing contained in the Trust Agreement will permit (a) an extension of maturity of principal or interest on any Bonds, (b) a reduction in the principal amount of or the redemption premium or the rate of interest on any Bonds, (c) a preference or priority of any Bonds over any other Bonds, or (d) a reduction in the aggregate principal amount of Bonds required for consent to such supplemental trust agreement without the consent of the Holders of all of the Bonds then Outstanding. (Sec. 1102) Anything in the Trust Agreement to the contrary notwithstanding, no such supplement or amendment to the Trust Agreement will become effective unless and until the Hospital shall have consented thereto. (Sec. 1105) Defeasance When, among other things, the principal, premium, if any, and interest due upon all of the Bonds issued under the Trust Agreement is paid or sufficient Defeasance Obligations are held by the Bond Trustee thereunder for such purpose, then the right, title and interest of the Bond Trustee in the Pledged Assets, and the funds and accounts created by the Trust Agreement will cease and the Bond Trustee will release the Trust Agreement. (Sec. 1201) Recourse Against County Limited The members, officers and employees of the County are not personally liable for any costs, losses, damages or liabilities caused or incurred by the County in connection with the Trust Agreement, or for the payment of any sum or for the performance of any obligation under the Trust Agreement. (Sec. 1309) THE LOAN AGREEMENT Loan Repayments; Required Payments under the Loan Agreement The Hospital is required to make Total Required Payments under the Loan Agreement when due. The Hospital shall make Loan Repayments and Required Payments under the Loan Agreement directly to the Bond Trustee, or, in the name of the Bond Trustee, to any Depositary for deposit in the Bond Fund. All other Required Payments under the Loan Agreement are to be paid by the Hospital directly, when due and payable, to the persons entitled thereto. (Sec. 3.01, 3.02 and 3.03) Loan Repayments are required to be sufficient in the aggregate to repay the Loan and interest thereon and to pay in full all the Bonds together with total interest and redemption premium, if any, thereon. The Hospital may prepay all or any part of the Loan with respect to Bonds as provided in the Loan Agreement. (Sec. 3.03) Absolute Obligation to Make Total Required Payments The Obligation of the Hospital to make all payments required under the Loan Agreement is absolute and unconditional and will not be abated, diminished or reduced, regardless of any rights of setoff, recoupment or counterclaim that the Hospital may have against the County, the Bond Trustee, any Holder or any other person. (Sec. 3.06) C-40

183 Prepayment of the Loan The Hospital has the option to prepay, together with accrued interest, all or any portion of the unpaid aggregate amount of the Loan of the proceeds of the Bonds in accordance with the terms and provisions of the Trust Agreement. Such prepayment shall be made by the Hospital taking, or causing the County to take, the actions required (i) for payment of the Bonds, whether by redemption prior to maturity or by payment at maturity, or (ii) to effect the purchase, redemption or payment at maturity of less than all of the Bonds according to their terms. (Sec. 7.01) The Hospital has the option to prepay the unpaid aggregate amount of the Loan of the proceeds of the Bonds (in whole or in part upon the occurrence of the events described in (a) below, or in whole upon the occurrence of the events described in (b) below), together with accrued interest to the date of prepayment upon the occurrence of (a) damage or destruction of all or any part of the Operating Assets by fire or casualty, or loss of title to or use of substantially all of the Operating Assets as a result of the failure or title, Eminent Domain proceedings or proceedings in lieu thereof; or (b) changes in the Constitution of the United States of America or of the State or in legislation or administrative action, or failure of administrative action by the United States of America or the State or any agency or political subdivision of either thereof, or by reason of any judicial decision, in either event, to such extent that in the opinion of the Board of Trustees of the Hospital and in the opinion of an independent architect, engineer or management consultant (as may be appropriate for the particular event), both filed with the County and the Bond Trustee, (i) the Loan Agreement is impossible to perform without unreasonable delay or (ii) unreasonable burdens or excessive liabilities not being imposed on the date of the Loan Agreement are imposed on the Hospital. (Sec. 7.02) Amendments to Loan Agreement The Loan Agreement may be amended without the consent of or notice to any of the Holders, to cure any ambiguity or formal defect or omission therein, to grant to or confer upon the Bond Trustee for the benefit of the Holders any additional rights, remedies, powers, authority or security that may lawfully be granted or conferred upon them and to add conditions, limitations and restrictions on the Hospital. Any other amendments to the Loan Agreement requires approval of the Holders of not less than 51% in aggregate principal amount of the Bonds then Outstanding; provided, however, nothing described in this paragraph shall permit or be construed as permitting a Supplement or amendment which would (i) extend the stated maturity of or time for paying interest on Obligation No. 14 or reduce the principal amount of or the redemption premium or rate of interest payable on Obligation No. 14 without the consent of the Holders of Bonds then Outstanding; (ii) except as expressly permitted at the time of execution of the Loan Agreement, grant to the Holder of any Indebtedness a security interest in Pledged Assets superior to that of the Holders without the consent of the Holders of all Bonds then Outstanding; or (iii) reduce the aggregate principal amount of Bonds then Outstanding the consent of the Holders of which is required to authorize such Supplement or amendment without the consent of the Holders of all Bonds then Outstanding. (Sec ) Members of County Council, Officers and Employees of the Hospital, and the County Not Liable Neither the members of County Council, officers or employees of the County, nor the members of the board of directors or the officers and employees of the Hospital shall be personally liable for any costs, losses, damages or liabilities caused or subsequently incurred by the Hospital or any officer, director or agent thereof in connection with or as a result of the Loan Agreement. (Sec ) C-41

184 Security for the Loan As collateral security for repayment of the Loan of the proceeds of the Bonds and the performance by the Hospital of its obligations under the Loan Agreement, the Hospital has executed and delivered to the County Obligation No. 14. Obligation No. 14 is issued under and secured by the Master Indenture and a Supplemental Indenture. The Master Indenture provides that the Hospital may issue additional Indebtedness, including notes and guarantees, secured by the security for the Obligations delivered to the County, including Obligation No. 14, on a pari passu basis for the purposes, under the terms and conditions, and to the extent described in the Master Indenture. (Sec. 3.01) The County shall pledge and assign to the Bond Trustee under the Trust Agreement as security for the Bonds all of the County s right, title and interest in and to Obligation No. 14, the Master Indenture as Holder of Obligation No. 14 and the Loan Agreement (except for those certain rights under the Loan Agreement that are set forth in the granting clauses of the Trust Agreement). The Hospital consents to such pledge and assignment and agrees that the Bond Trustee may enforce any and all rights, privileges and remedies of the County under or with respect to Obligation No. 14, the Master Indenture and the Loan Agreement, including those rights reserved by the County. (Sec. 3.07) Other Covenants of the Hospital The Loan Agreement provides that the Hospital will comply with, and will cause each other Member of the Obligated Group to comply with, each covenant, condition and agreement in the Master Indenture. The Loan Agreement also sets forth certain other agreements of the Hospital with respect to: examination of books and records by the Bond Trustee and the County; furnishing financial statements and certain other information required to be provided under the Master Indenture; inspection by the County, the Bond Trustee and under certain circumstances the Holders of the Bonds, of the Operating Assets; the indemnification of the County and the Bond Trustee under certain circumstances; and certain other agreements. (Art. 5 and Sec. 8.01) Defaults and Remedies Events of Default are defined in the Loan Agreement to include: (a) failure of the Hospital to make any Required Payments under the Agreement as the same becomes due and payable, (b) failure of the Hospital to pay any other payments required under the Loan Agreement or to perform, observe or comply with any covenant, condition or agreement on its part under the Loan Agreement (other than a payment under (a) above), including any covenant, condition or agreement in the Master Indenture applicable to any Member of the Obligated Group and incorporated by reference in the Loan Agreement, and such failure continues for a period of 30 days after the date on which written notice of such failure, requiring the same to be remedied shall have been given to the Hospital by the Bond Trustee or to the Hospital and the Bond Trustee by the Holders of at least 25% in aggregate principal amount of the Bonds of the applicable Series then Outstanding, provided, however, that if such performance, observation or compliance requires work to be done, action to be taken, or conditions to be remedied, which by their nature cannot reasonably be done, taken or remedied, as the case may be, within such 30-day period, no Event of Default shall be deemed to have occurred or to exist if, and so long as, the Hospital shall commence such performance, observation or compliance within such period and shall diligently and continuously prosecute the same to completion, (c) the Master Trustee shall have declared the aggregate principal amount of Obligation No. 14 and all interest due thereon immediately due and payable in C-42

185 accordance with the Master Indenture, or (d) an Event of Default shall have occurred under the Trust Agreement or the Master Indenture. (Sec. 6.01) Upon the happening and continuance of an Event of Default under the Loan Agreement, the County may take whatever action at law or in equity is necessary or desirable to: (1) in the case of an Event of Default described in part (a) of the preceding paragraph, to collect the payments then due under Obligation No. 14; (ii) in the case of an Event of Default described in part (b) of the preceding paragraph, to enforce the performance, observance or compliance by the Hospital with any covenant, condition or agreement by the Hospital under the Loan Agreement; and (iii) in the case of an Event of Default described in part (c) of the preceding paragraph, to enforce the Master Indenture, but only as the Master Trustee shall direct, but only to the extent such directions are consistent with the provisions of the Master Indenture. C-43

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187 Appendix D Form of Bond Counsel Opinion

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189 135 S. DARGAN STREET, SUITE 300 ( ) POST OFFICE BOX 6617 ( ) FLORENCE, SOUTH CAROLINA TELEPHONE FACSIMILE August 7, 2014 Florence County, South Carolina c/o Florence County Council Florence, South Carolina J.P. Morgan Securities LLC New York, New York U.S. Bank National Association Columbia, South Carolina McLeod Regional Medical Center of the Pee Dee, Inc. Florence, South Carolina Re: $61,175,000 Florence County, South Carolina Refunding Hospital Revenue Bonds (McLeod Regional Medical Center Project) Series 2014 Gentlemen: We have examined the transcript of proceedings filed with the Clerk of Court for Florence County, South Carolina (the County ) authorizing the issuance and sale of $61,175,000 Florence County, South Carolina Refunding Hospital Revenue Bonds (McLeod Regional Medical Center Project) Series 2014 (the Bonds ). The Bonds are issued by the County under and pursuant to Title 44, Chapter 7, Article 11, Code of Laws of South Carolina, 1976, as amended (the Act ), and a Trust Agreement dated as of August 1, 2014 (the Trust Agreement ), by and between the County and U.S. Bank National Association, Columbia, South Carolina, as Bond Trustee (the Bond Trustee ), in order to provide funds to be loaned to the Hospital (as hereinafter defined) to defray the cost of refunding the outstanding principal amount of the Florence County, South Carolina Hospital Revenue Bonds (McLeod Regional Medical Center Project), Series 2004A (the Refunding ); and paying certain expenses incurred in connection with the issuance of the Bonds. D-1

190 Florence County, South Carolina J.P. Morgan Securities LLC U.S. Bank National Association McLeod Regional Medical Center of the Pee Dee, Inc. August 7, 2014 Page 2 The Bonds are issuable in fully registered form and are subject to redemption prior to maturity in the manner and upon the terms and conditions set forth in the Trust Agreement. The Bonds are issuable in denominations of $5,000 or any whole multiple thereof and bear interest from the date of delivery. As authorized by the Act, the County has entered into a Loan Agreement dated as of August 1, 2014 (the Loan Agreement ) with McLeod Regional Medical Center of the Pee Dee, Inc., a non-profit corporation organized and existing under the laws of the State of South Carolina (the Hospital ), whereby the County has loaned the proceeds of the Bonds to the Hospital to finance the Refunding. Pursuant to the Loan Agreement, the Hospital is required to make payments in amounts sufficient to provide for the payment of principal of, premium, if any, and interest on the Bonds when due. The Hospital s obligation to make such payments is evidenced by Obligation No. 14 ( Obligation No. 14 ) issued in favor of the County pursuant to an Amended and Restated Master Trust Indenture dated as of January 15, 1998, as amended (the Master Indenture ), among the Hospital, McLeod Health, McLeod Medical Center-Dillon, and McLeod Physician Associates II, each a South Carolina nonprofit corporation, and U.S. Bank National Association (as successor to First Union National Bank), as Master Trustee (the Master Trustee ). The Bonds will be secured by a pledge under the Trust Agreement of the County s right, title and interest in Obligation No. 14 and the Loan Agreement (except for certain rights relating to notices, approvals and payments for expenses and indemnification). As security for the payment of Obligation No. 14, the Hospital and each Member of the Obligated Group (as defined in the Master Indenture) has, pursuant to the Master Indenture, pledged its Pledged Assets (as defined in the Master Indenture). The pledge securing Obligation No. 14 is on a parity in all respects with the pledge securing the Obligations (as defined in the Master Indenture) heretofore issued by the Hospital under the Master Indenture. The Master Indenture also provides for the issuance, from time to time, under the conditions, limitations and restrictions therein set forth, of additional Obligations on a parity with the Obligations heretofore issued and Obligation No. 14. We have also examined the form of the Bonds. From such examination we are of the opinion that: 1. The Act is valid. D-2

191 Florence County, South Carolina J.P. Morgan Securities LLC U.S. Bank National Association McLeod Regional Medical Center of the Pee Dee, Inc. August 7, 2014 Page 3 2. The Bonds have been duly authorized and validly issued for the purpose of paying the cost of the Refunding, and paying certain expenses incurred in connection with the issuance of the Bonds. 3. The Trust Agreement is a valid and binding agreement of the County securing the Bonds enforceable against the County in accordance with its terms. 4. The Bonds are valid and binding limited obligations of the County payable in accordance with their terms. The Bonds do not constitute an indebtedness of the County within the meaning of any State of South Carolina constitutional provision or statutory limitation and will not constitute or give rise to a pecuniary liability of the County or a charge against its general credit or taxing powers. 5. The Loan Agreement has been duly authorized and executed by the County and the Hospital and is a valid and binding limited obligation of the County enforceable in accordance with its terms and all right, title and interest of the County in and to the Loan Agreement (except as hereinabove described) and Obligation No. 14 has been assigned and pledged to the Bond Trustee pursuant to the Trust Agreement. 6. The Master Indenture is a valid and binding agreement securing Obligation No. 14 in accordance with its terms. 7. Obligation No. 14 is a valid and binding obligation of the Hospital payable in accordance with its terms. 8. Under the Master Indenture the Members of the Obligated Group have granted the Master Trustee, for the benefit of the owners of Obligations issued thereunder, a security interest in the Pledged Assets. An appropriate financing statement has been duly executed and filed as required by the Uniform Commercial Code of South Carolina in order to perfect such security interest to the extent it could be so perfected and as so perfected, such security interest will be prior to any other security interest in such Pledged Assets which could be perfected by such a filing provided continuation statements are duly and timely filed as required by such Code. D-3

192 Florence County, South Carolina J.P. Morgan Securities LLC U.S. Bank National Association McLeod Regional Medical Center of the Pee Dee, Inc. August 7, 2014 Page 4 9. Under the Trust Agreement, the County has granted the Bond Trustee, for the benefit of the owners of the Bonds, a security interest in its right, title and interest in and to Obligation No. 14 and the Loan Agreement. An appropriate financing statement has been duly executed and filed as required by the Uniform Commercial Code of South Carolina in order to perfect such security interest to the extent it could be so perfected and as so perfected, such security interest will be prior to any other security interest in the County s rights with respect to Obligation No. 14 and the Loan Agreement which could be perfected by such a filing provided continuation statements are duly and timely filed as required by such Code. 10. Interest on the Bonds (including any original issue discount properly allocable to an owner thereof) is excludable from gross income of the registered owners thereof for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations. The opinion set forth in the preceding sentence is subject to the condition that the County and the Hospital comply with all requirements of the Code that must be satisfied subsequent to the issuance of the Bonds in order that interest thereon be (or continue to be) excludable from gross income for federal income tax purposes. Failure to comply with certain of such requirements may cause interest on the Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The County and the Hospital have covenanted to comply with all such requirements. It should be noted, however, that for the purpose of computing the alternative minimum tax imposed on certain corporations (as defined for federal income tax purposes), interest on the Bonds is taken into account in determining adjusted current earnings. We express no opinion regarding other federal tax consequences arising with respect to the Bonds. 11. The Bonds and the interest thereon (including any original issue discount properly allocable to an owner thereof) are exempt from all state, county, school district, municipal and all other taxes or assessments of the State of South Carolina, except inheritance, estate, transfer or certain franchise taxes. 12. We express no opinion herein regarding the accuracy, adequacy or completeness of the Official Statement dated July 29, 2014 relating to the Bonds, or regarding the perfection or priority of the lien on the Pledged Assets or other funds created under the Master Indenture (or any other document or instrument mentioned herein). This opinion is given as of the date D-4

193 Florence County, South Carolina J.P. Morgan Securities LLC U.S. Bank National Association McLeod Regional Medical Center of the Pee Dee, Inc. August 7, 2014 Page 5 hereof and we assume no obligation to revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention, or any changes in law that may hereafter occur. In rendering the opinions set forth in paragraphs 3, 5, 6 and 7, above, we have relied upon opinions of counsel for the County and the Hospital as to due authorization, execution and delivery by the County and the Hospital of the Master Indenture, Obligation No. 14, the Trust Agreement and the Loan Agreement. In rendering the Opinion set forth in paragraphs 10 and 11 above, we have relied upon the opinion of counsel to the Hospital that each of the Members of the Obligated Group is an organization described in Section 501(c)(3) of the Code. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Our engagement with respect to the Bonds has concluded with their issuance, and we disclaim any obligation to update this opinion. It is to be understood that the rights of the holders of the Bonds and the enforceability of the Bonds, the Master Indenture, Obligation No. 14, the Trust Agreement and the Loan Agreement may be subject to bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors rights heretofore or hereafter enacted to the extent constitutionally applicable and that their enforcement may also be subject to the exercise of judicial discretion in appropriate cases. Very truly yours, D-5

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196 FLORENCE COUNTY, SOUTH CAROLINA Refunding Hospital Revenue Bonds (McLeod Regional Medical Center Project), Series 2014