$110,000,000 SOUTH FORK MUNICIPAL AUTHORITY

Transcription

1 NEW ISSUE Full Book Entry See Ratings herein In the opinion of Bond Counsel, interest on the 2005 Variable Rate Bonds is excludable from gross income for purposes of federal income tax, assuming compliance with the requirements of federal income tax laws. Interest on the 2005 Variable Rate Bonds will not be an item of tax preference for purposes of either individual or corporate federal alternative minimum tax; however, interest paid to corporate holders of the 2005 Variable Rate Bonds may be subject to alternative minimum tax and foreign branch profits tax under certain circumstances. Bond Counsel is of the further opinion that the 2005 Variable Rate Bonds are exempt from personal property taxes in Pennsylvania and the interest on the 2005 Variable Rate Bonds is exempt from Pennsylvania personal income tax and corporate net income tax. For a more complete description, see Tax Exemption herein. $32,300,000 Variable Rate Hospital Revenue Bonds, Refunding Series A of 2005 (Conemaugh Valley Memorial Hospital Project) $110,000,000 SOUTH FORK MUNICIPAL AUTHORITY Variable Rate Hospital Revenue Bonds, Series A-C of 2005 Consisting of the Following New Issues Being Offered: $47,700,000 Variable Rate Hospital Revenue Bonds, Series B of 2005 (Conemaugh Valley Memorial Hospital Project) $30,000,000 Variable Rate Hospital Revenue Bonds, Series C of 2005 (Conemaugh Valley Memorial Hospital Project) Dated: Date of Delivery Due: July 1 as shown on inside cover The 2005 Variable Rate Bonds will be issued pursuant to the three (3) separate Bond Indentures for each series of 2005 Variable Rate Bonds with Ameriserv Financial Bank (formerly U.S. Bank, formerly United States National Bank in Johnstown) as bond trustee, paying agent and bond register (the Bond Trustee ), (collectively, the Bond Indenture ) and will be special revenue obligations of the Authority. The 2005 Variable Rate Bonds will be payable from and secured by certain funds held by the Bond Trustee under each of the Bond Indentures and payments to the Bond Trustee, as assignee of the Authority, under three (3) separate Loan Agreements for each series of the 2005 Variable Rate Bonds described herein among the Authority, Conemaugh Valley Memorial Hospital ( MMC ) and Conemaugh Health System Inc. ( CHS ), as borrowers under the Loan Agreements (collectively referred to herein as, the Borrowers ). In addition, the 2005 Variable Rate Bonds will be payable from amounts to be paid to the Bond Trustee under the 2005 Master Notes (as described herein) and issued by CHS, as the Restricted Group Agent, under the Master Indenture dated as of November 1, 1985 as heretofore supplemented and amended, by and among the Borrowers and AmeriServ Financial Bank (formerly U.S. Bank, formerly United States National Bank in Johnstown) (the Master Trustee ) (the Master Indenture ). The timely payment of the principal of and interest on the 2005A Bonds and 2005B Bonds will be guaranteed by a financial guaranty insurance policy to be issued by Assured Guaranty Corp. The timely payment of the principal of and interest on the 2005C Bonds will be insured by a financial guaranty insurance policy to be issued by Radian Asset Assurance Inc. See Municipal Bond Insurance Policies herein. The 2005 Variable Rate Bonds will be issued only as fully registered bonds without coupons and, when issued, will be registered in the name of Cede & Co., as registered owner and nominee for The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository for the 2005 Variable Rate Bonds. Purchases of beneficial interests in the 2005 Variable Rate Bonds will be made in book-entry form, in denominations of $25,000 or any integral multiple thereof. Purchasers will not receive certificates representing their interest in the 2005 Variable Rate Bonds purchased. So long as Cede & Co. is the registered owner, as nominee of DTC, references herein to the Bondholders or registered owners shall mean Cede & Co., as aforesaid and shall not mean the Beneficial Owners of the 2005 Variable Rate Bonds. See The 2005 Variable Rate Bonds -- Book-Entry System herein. As described herein, each 2005 Variable Rate Bond shall bear interest and be subject to optional and mandatory sinking fund redemption, and to optional and mandatory tender for purchase based upon the Interest Period in effect for such 2005 Variable Rate Bond. Interest shall be payable on each Scheduled Interest Payment Date based on the Interest Period in effect for such 2005 Variable Rate Bond. The initial interest rate Mode for the 2005A Bonds is the Auction Mode, the initial interest rate for the 2005B Bonds is the Auction Mode, and the initial interest rate Mode for the 2005C Bonds is the Auction Mode, in each case as further described herein. The Borrowers (as defined herein) may elect from time to time to convert the Interest Period for some or all of the 2005 Variable Rate Bonds to a different Interest Period, upon the terms and conditions described in the each series of Bond Indenture. Information Regarding Maturities, Initial Interest Rate Modes and Prices (See Inside Front Cover Page) THE 2005 VARIABLE RATE BONDS ARE LIMITED OBLIGATIONS OF THE AUTHORITY. NEITHER THE GENERAL CREDIT OF THE AUTHORITY NOR THE CREDIT OR THE TAXING POWER OF THE COMMONWEALTH OF PENNSYLVANIA OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED FOR THE PAYMENT OF THE PRINCIPAL OR REDEMPTION PRICE OF, AND INTEREST ON, THE 2005 VARIABLE RATE BONDS, NOR SHALL THE 2005 VARIABLE RATE BONDS BE OR BE DEEMED TO BE GENERAL OBLIGATIONS OF THE AUTHORITY OR OBLIGATIONS OF THE COMMONWEALTH OF PENNSYLVANIA OR ANY POLITICAL SUBDIVISION THEREOF, NOR SHALL THE COMMONWEALTH OF PENNSYLVANIA OR ANY POLITICAL SUBDIVISION THEREOF BE LIABLE FOR THE PAYMENT OF THE PRINCIPAL AND REDEMPTION PRICE OF, AND INTEREST ON, THE 2005 VARIABLE RATE BONDS. THE AUTHORITY HAS NO TAXING POWER. This cover page contains information for quick reference only. It is not a summary of this issue. Investors must read the entire Official Statement, including the Appendices, to obtain information essential to making an informed investment decision. The 2005 Variable Rate Bonds are offered when, as and if issued by the Authority and received by the Underwriter, subject to the approving legal opinion of the Law Office of Wayne D. Gerhold, Pittsburgh, Pennsylvania and Tucker Arensburg, P.C., Pittsburgh, Pennsylvania, Co-Bond Counsel. Certain legal matters will be passed upon for the Borrowers by their counsel Shahade and Shahade, Johnstown, Pennsylvania; for the Authority by its counsel, Gilbert E. Caroff, Esquire, Johnstown, Pennsylvania; and for the Underwriter by its counsel, Pepper Hamilton LLP, Pittsburgh, Pennsylvania. It is expected that the 2005 Variable Rate Bonds in definitive form will be available for delivery through the facilities of DTC on or about September 1, Dated: August 31, 2005 Merrill Lynch & Co.

2 South Fork Municipal Authority Variable Rate Hospital Revenue Bonds, Series A-C of 2005 Maturity (July 1) INFORMATION REGARDING MATURITIES, INITIAL INTEREST RATE MODES AND PRICES $32,300,000 VARIABLE RATE HOSPITAL REVENUE BONDS, REFUNDING SERIES A OF 2005 (CONEMAUGH VALLEY MEMORIAL HOSPITAL PROJECT) (Initial Interest Mode: Auction Mode) Initial Period 2026 Ends September 7, 2005 Initial Period Interest Payment Date September 8, 2005 Initial Auction Date September 7, 2005 Auction Periods Generally Auction Dates Generally 7 Days Every Wednesday Auction Period Interest Payment Dates Generally Price CUSIP Every Thursday 100% 83786D EN 3 The 2005A Bonds will be initially issued as Auction Rate Securities. The 2005A Bonds will bear interest for the Initial Period set forth above at the rate established by Merrill Lynch, Pierce, Fenner & Smith Incorporated prior to the date of delivery. Thereafter, the 2005A Bonds will bear interest at the applicable Auction Rate for the Auction Rate Periods described herein, until a conversion to another interest rate Mode as described herein. Regularly scheduled interest will be payable on the Business Day following the last day of each Auction Period, provided that if an Auction Period is longer than one year, regularly scheduled interest will be payable on the first January 1 or July 1 following the month in which the Auction Period commences and on each January 1 and July 1 thereafter during such Auction Period and on the Business day following the last day of the Auction Period. Wilmington Trust Company will act as the Auction Agent with respect to the 2005A Bonds in the Auction Mode, and Merrill Lynch, Pierce, Fenner & Smith Incorporated will act as the initial Broker-Dealer for the 2005A Bonds in the Auction Mode. The timely payment of the principal of and interest on the 2005A Bonds will be guaranteed by a financial guaranty insurance policy to be issued by Assured Guaranty Corp. simultaneously with the issuance of the 2005A Bonds. See MUNICIPAL BOND INSURANCE POLICIES herein. Maturity (July 1) $47,700,000 VARIABLE RATE HOSPITAL REVENUE BONDS, SERIES B OF 2005 (CONEMAUGH VALLEY MEMORIAL HOSPITAL PROJECT) (Initial Interest Mode: Auction Mode) Initial Period 2035 Ends September 7, 2005 Initial Period Interest Payment Date September 8, 2005 Initial Auction Date September 7, 2005 Auction Periods Generally Auction Dates Generally 7 Days Every Wednesday Auction Period Interest Payment Dates Generally Price CUSIP Every Thursday 100% 83786D EP 8 The 2005B Bonds will be initially issued as Auction Rate Securities. The 2005B Bonds will bear interest for the Initial Period set forth above at the rate established by Merrill Lynch, Pierce, Fenner & Smith Incorporated prior to the date of delivery. Thereafter, the 2005B Bonds will bear interest at the applicable Auction Rate for the Auction Rate Periods described herein, until a conversion to another interest rate Mode as described herein. Regularly scheduled interest will be payable on the Business Day following the last day of each Auction Period, provided that if an Auction Period is longer than one year, regularly scheduled interest will be payable on the first January 1 or July 1 following the month in which the Auction Period commences and on each January 1 and July 1 thereafter during such Auction Period and on the Business day following the last day of the Auction Period. Wilmington Trust Company will act as the Auction Agent with respect to the 2005B Bonds in the Auction Mode, and Merrill Lynch, Pierce, Fenner & Smith Incorporated will act as the initial Broker-Dealer for the 2005B Bonds in the Auction Mode. The timely payment of the principal of and interest on the 2005B Bonds will be guaranteed by a financial guaranty insurance policy to be issued by Assured Guaranty Corp. simultaneously with the issuance of the 2005B Bonds. See MUNICIPAL BOND INSURANCE POLICIES herein.

3 Maturity (July 1) $30,000,000 VARIABLE RATE HOSPITAL REVENUE BONDS, SERIES C OF 2005 (CONEMAUGH VALLEY MEMORIAL HOSPITAL PROJECT) Initial Period 2029 Ends September 7, 2005 Initial Period Interest Payment Date September 8, 2005 Initial Auction Date September 7, 2005 Auction Periods Generally Auction Dates Generally 7 Days Every Wednesday Auction Period Interest Payment Dates Generally Price CUSIP Every Thursday 100% 83786D EQ 6 The 2005C Bonds will be initially issued as Auction Rate Securities. The 2005C Bonds will bear interest for the Initial Period set forth above at the rate established by Merrill Lynch, Pierce, Fenner & Smith Incorporated prior to the date of delivery. Thereafter, the 2005C Bonds will bear interest at the applicable Auction Rate for the Auction Rate Periods described herein, until a conversion to another interest rate Mode as described herein. Regularly scheduled interest will be payable on the Business Day following the last day of each Auction Period, provided that if an Auction Period is longer than one year, regularly scheduled interest will be payable on the first January 1 or July 1 following the month in which the Auction Period commences and on each January 1 and July 1 thereafter during such Auction Period and on the Business day following the last day of the Auction Period. Wilmington Trust Company will act as the Auction Agent with respect to the 2005C Bonds in the Auction Mode, and Merrill Lynch, Pierce, Fenner & Smith Incorporated will act as the initial Broker-Dealer for the 2005C Bonds in the Auction Mode. The timely payment of the principal of and interest on the 2005C Bonds will be insured by a financial guaranty insurance policy to be issued by Radian Asset Assurance Inc. simultaneously with the issuance of the 2005C Bonds. See MUNICIPAL BOND INSURANCE POLICIES herein.

4 South Fork Municipal Authority 507 Maple Street South Fork, PA BOARD MEMBERS Edward Terek Susan L. Vivian Diane M. Dolan* John J. Chicoli Lynn Wilson George Mehall Chairman Vice Chairman Secretary/Treasurer Assistant Secretary/Treasurer Member Member *non-member AUTHORITY COUNSEL Gilbert E. Caroff, Esquire Johnstown, Pennsylvania BOND TRUSTEE, MASTER TRUSTEE AND TENDER AGENT AmeriServ Financial Bank Johnstown, Pennsylvania CO-BOND COUNSEL Law Offices of Wayne D. Gerhold, Esquire Pittsburgh, Pennsylvania Tucker Arensburg, P.C. Pittsburgh, Pennsylvania BORROWERS COUNSEL Shahade and Shahade Johnstown, Pennsylvania COUNSEL TO UNDERWRITER Pepper Hamilton LLP Pittsburgh, Pennsylvania

5 IN CONNECTION WITH THIS OFFERING THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 2005 VARIABLE RATE 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 ORDER AND PLACEMENT OF MATERIALS IN THIS OFFICIAL STATEMENT, INCLUDING THE APPENDICES, ARE NOT TO BE DEEMED TO BE A DETERMINATION OF RELEVANCE, MATERIALITY, OR IMPORTANCE, AND THIS OFFICIAL STATEMENT, INCLUDING THE APPENDICES, MUST BE CONSIDERED IN ITS ENTIRETY. THE OFFERING OF THE 2005 VARIABLE RATE BONDS IS MADE ONLY BY MEANS OF THIS ENTIRE OFFICIAL STATEMENT. The information set forth herein has been obtained from the South Fork Municipal Authority (the Authority ), Conemaugh Valley Memorial Hospital ( MMC ) and Conemaugh Health System Inc. ( CHS along with MMC are each a Borrower and collectively, the Borrowers ), and from other sources which are believed to be reliable, but the information provided by sources other than the Authority is not guaranteed as to accuracy or completeness by the Authority. The information and expressions of opinions herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in any of the information set forth herein since the date hereof. The Underwriter has provided the following sentence for inclusion in the Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities law as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. No dealer, broker, salesperson or other person has been authorized by the Authority, the Underwriter or the Borrowers to give any information or to make any representations with respect to the 2005 Variable Rate Bonds, other than those contained in this Official Statement, and if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of any offer to buy any of the 2005 Variable Rate Bonds in any jurisdiction in which it is unlawful to make such an offer, solicitation, or sale. The Authority and the Borrowers deem this Official Statement to be final for purposes of Securities and Exchange Commission Rule 15c2-12(b)(3). The 2005 Variable Rate Bonds are not and will not be registered under the Securities Act of 1933, as amended, or under any state securities laws, and the Bond Indenture has not been and will not be qualified under the Trust Indenture Act of 1939, as amended, because of available exemptions therefrom. Neither the Securities and Exchange Commission nor any federal, state, municipal, or other governmental agency will pass upon the accuracy, completeness, or adequacy of the Official Statement. FORWARD-LOOKING STATEMENTS Certain statements included or incorporated by reference in this Official Statement constitute projections or estimates of future events, generally known as forward-looking statements. These statements are generally identifiable by the terminology used such as plan, expect, estimate, budget or other similar words. These forward-looking statements include the statements under the caption, CERTAIN BONDHOLDER RISKS in the forepart of this Official Statement. The achievement of certain results or other expectations in these forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Neither the Authority nor the Borrowers plan to issue any updates or revisions to those forward-looking statements if or when changes in their expectations, or events, conditions or circumstances on which these statements are based occur.

6 OFFICIAL STATEMENT... 1 INTRODUCTION... 1 Purpose of the Official Statement...1 The Authority...1 Purpose of the 2005 Variable Rate Bonds...1 Conemaugh Health System Inc....2 Master Indenture...3 The 2005 Variable Rate Bonds...3 Municipal Bond Insurance Policies...3 Security and Sources of Payment for the 2005 Variable Rate Bonds...4 The Loan Agreements...4 Mortgage...5 Permitted Indebtedness...5 Appendices and Underlying Documents...5 Risk Factors...5 Independent Accountants...5 Continuing Disclosure...6 THE AUTHORITY... 6 PLAN OF FINANCING... 7 General...7 Advance Refunding of 1996A Bonds...7 Verification of Certain Mathematical Computations...7 Estimated Sources and Applications of Funds...8 Existing and Pro Forma Long-Term Debt of the System...9 System Debt Service Requirements...10 Interest Rate Swap Agreements...11 THE 2005 VARIABLE RATE BONDS Interest Rate Modes...12 Market Factors Regarding 2005 Variable Rate Bonds 12 Description of the 2005 Variable Rate Bonds in the Auction Mode...12 Changes in Mode...15 Mandatory Tender of 2005 Variable Rate Bonds in Connection with Mode Changes...18 General Provisions Relating to Tenders...18 Redemption Provisions...20 Transfer...23 BOOK-ENTRY SYSTEM General...23 DTC and its Participants...23 Purchase of Ownership Interests...24 Transfers...24 Notices...24 Redemption and Mandatory Tender...25 Voting...25 Payments of Principal and Interest...25 Discontinuation of Book-Entry System...25 MUNICIPAL BOND INSURANCE POLICIES Assured and the Assured Policy...26 Radian and Radian Policy...29 SECURITY FOR THE 2005 VARIABLE RATE BONDS Limited Obligations...32 Loan Agreement...32 Pledge of Gross Revenues; Limitations on Effectiveness of Pledge...32 Debt Service Reserve Funds...34 Master Indenture and Certain Covenants of the Restricted Group...34 Mortgage...35 TABLE OF CONTENTS Page Concerning the Bond Insurers and Defaults and Remedies No Recourse Against Members of the Authority CERTAIN BONDHOLDER RISKS...35 General Risks in the Collection of Net Patient Service Revenues Risks in Healthcare Delivery Integrated Delivery Systems Affiliation, Merger, Acquisition and Divestiture Health Care Legislative and Regulatory Environment 42 Tax Matters Nonprofit Healthcare Environment Certain Matters Relating to Enforceability of Obligations Enforceability of Remedies Bankruptcy Municipal Bond Insurance Policies Rights of Bond Insurers Secondary Market Bond Ratings Other Factors TAX EXEMPTION 50 Federal Tax Exemption Pennsylvania Tax Exemption BOND TRUSTEE AND MASTER TRUSTEE...50 LEGAL MATTERS...51 INDEPENDENT ACCOUNTANTS...51 RATINGS...51 UNDERWRITING...52 LEGALITY OF THE 2005 VARIABLE RATE BONDS FOR INVESTMENT AND DEPOSIT...52 NEGOTIABILITY...52 LITIGATION...52 The Authority The Borrowers CONTINUING DISCLOSURE...53 MISCELLANEOUS...53 APPENDIX A: APPENDIX B: APPENDIX C: APPENDIX D APPENDIX E: APPENDIX F: APPENDIX G: Page INFORMATION CONCERNING CONEMAUGH HEALTH SYSTEM INC. CONSOLIDATED FINANCIAL STATEMENTS OF CONEMAUGH HEALTH SYSTEM INC. FOR THE FISCAL YEARS ENDED JUNE 30, 2004 AND JUNE 30, 2003 DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE, BOND INDENTURES AND LOAN AGREEMENTS SUMMARY OF AUCTION RATE PROCEDURES FORM OF FINANCIAL GUARANTY INSURANCE POLICY OF ASSURED GUARANTY CORP. FORM OF FINANCIAL GUARANTY INSURANCE POLICY OF RADIAN ASSET ASSURANCE INC. PROPOSED FORM OF OPINION OF BOND COUNSEL

7 OFFICIAL STATEMENT $110,000,000 South Fork Municipal Authority Variable Rate Hospital Revenue Bonds, Series A-C of 2005 Consisting Of the Following new Issues Being Offered: $32,300,000 Variable Rate Hospital Revenue Bonds, Refunding Series A of 2005 (Conemaugh Valley Memorial Hospital Project) $47,700,000 Variable Rate Hospital Revenue Bonds, Series B of 2005 (Conemaugh Valley Memorial Hospital Project) INTRODUCTION $30,000,000 Variable Rate Hospital Revenue Bonds, Series C of 2005 (Conemaugh Valley Memorial Hospital Project) The following introductory statement is subject in all respects to more complete information contained elsewhere in this Official Statement. Capitalized terms used in this Official Statement that are not otherwise defined herein have the meanings given to them in APPENDIX C hereto. Purpose of the Official Statement The purpose of this Official Statement, including the cover pages and the Appendices, is to furnish certain information relating to (1) the South Fork Municipal Authority (the Authority ), (2) Conemaugh Valley Health System Inc. ( CHS or the System ), (3) the Authority s Variable Rate Revenue Bonds, Refunding Series A of 2005, in the aggregate principal amount of $32,300,000 (the 2005A Bonds ), (4) the Authority s Variable Rate Revenue Bonds, Series B of 2005, in the aggregate principal amount of $47,700,000 (the 2005B Bonds ), and (5) the Authority s Variable Rate Revenue Bonds, Series C of 2005 in the aggregate amount of $30,000,000 (the 2005C Bonds, and, together with the 2005A Bonds and the 2005B Bonds, the 2005 Variable Rate Bonds ). The 2005A Bonds, the 2005B Bonds and the 2005C Bonds will be issued pursuant to separate Indentures of Trust (collectively, the Bond Indentures ). Each of the Bond Indentures is dated as of September 1, 2005 and is between the Authority and AmeriServ Financial Bank, Johnstown, Pennsylvania (the Bond Trustee ). The Authority The Authority is a body corporate and politic existing under the laws of the Commonwealth of Pennsylvania (the Commonwealth ) pursuant to Municipality Authorities Act, 53 Pa. Cons. Stat. 5601, as amended and supplemented (the Act ). The Governing Body of the Authority is a board of five members appointed by the members of the Council of the Borough of South Fork. The Authority, created under the Act in 1969, is authorized by the Act to issue the 2005 Variable Rate Bonds. Purpose of the 2005 Variable Rate Bonds The 2005 Variable Rate Bonds are being issued by the Authority for the purpose of undertaking the Project on behalf of the Borrowers in order to: (i) provide funds to refund in part its indebtedness which was incurred by Conemaugh Valley Memorial Hospital ( MMC ) for the purpose of acquiring certain assets owned by UPMC Lee Regional Hospital and UPMC d/b/a University of Pittsburgh Medical Center located at one or more locations in the City of Johnstown, Pennsylvania (the Lee Assets ), (ii)

8 provide funds to MMC for the construction and equipping of an energy plant located on the MMC Campus at 1086 Franklin Street, City of Johnstown, Pennsylvania, (iii) provide funds to MMC for other capital improvement purposes, (iv) provide funds to the Borrowers for the advance refunding of the South Fork Municipal Authority, Hospital Revenue Bonds, Series A of 1996, and (v) provide funds to fund reserves and to pay a portion of the costs of issuing and insuring the 2005 Variable Rate Bonds (collectively, the Project ). The proceeds of the 2005 Variable Rate Bonds will be loaned to the Borrowers for the purposes described above. The proceeds of the 2005A Bonds will be loaned to the Borrowers pursuant to a Loan Agreement dated as of September 1, 2005 between the Authority and the Borrowers (the 2005A Loan Agreement ). The proceeds of the 2005B Bonds will be loaned to the Borrowers pursuant to a Loan Agreement dated as of September 1, 2005 between the Authority and the Borrowers (the 2005B Loan Agreement ). The proceeds of the 2005C Bonds will be loaned to the Borrowers pursuant to a Loan Agreement dated as of September 1, 2005 between the Authority and the Borrowers (the 2005C Loan Agreement, along with the 2005A Loan Agreement and the 2005B Loan Agreement are collectively, the Loan Agreements ). Under the Loan Agreements, the Borrowers will be obligated to make loan payments to the Bond Trustee, as assignee of the Authority, in amounts and at times sufficient, among other things, to pay the principal or redemption price of, and interest on, the 2005 Variable Rate Bonds when due. Conemaugh Health System Inc. Conemaugh Health System Inc., a Pennsylvania non-profit corporation ( CHS ) exempt from taxes under Section 501(c)(3) of the Internal Revenue Code (the Code ), was formed in January 1994 for the primary purpose of serving as a parent corporation to certain medical centers and other health care institutions (collectively the System ). The System includes three general acute care medical centers, a philanthropic foundation and a non-profit taxable corporation that owns, directly or indirectly, a group of employed primary care physicians, a company that owns real estate, a durable medical equipment company, a nursing home/personal care facility and a preferred provider organization. The three general acute care medical centers in the System organization are Conemaugh Valley Memorial Hospital located in Johnstown, Cambria County, Pennsylvania, Meyersdale Community Hospital located in Meyersdale, Somerset County, Pennsylvania, and Windber Hospital, Inc. located in Windber, Somerset County, Pennsylvania. Conemaugh Valley Memorial Hospital, which operates under the name Memorial Medical Center ( MMC ), is a tax-exempt Pennsylvania non-profit corporation organized in Meyersdale Community Hospital, which operates under the name Meyersdale Medical Center ( Meyersdale ), is a tax-exempt Pennsylvania non-profit corporation organized in Windber Hospital, Inc., which operates under the name Windber Medical Center ( Windber ), is a taxexempt Pennsylvania non-profit corporation incorporated in Windber was originally organized in 1906 by the Berwind-White Coal Company. As of August 1, 2005, MMC acquired the Lee Assets, which have all been incorporated into MMC and operate under one hospital license. Other entities in the System include Conemaugh Health Foundation, a tax-exempt Pennsylvania non-profit corporation incorporated in 1993 to serve as a philanthropic organization, Conemaugh Health Initiatives, Inc., a taxable Pennsylvania non-profit corporation incorporated in 1994 as a holding company for entities, organizations and endeavors which are better suited to direction by a traditional corporation, and Penn Highlands Health Plan, a taxable Pennsylvania non-profit corporation which is a Preferred Provider Organization ( PPO ). See APPENDIX A for more information concerning CHS. APPENDIX A contains certain information on the history, organization, operations, and financial condition of the CHS. APPENDIX B contains certain consolidated audited financial statements of CHS. -2-

9 Master Indenture The Borrowers are subject to certain operational and financial restrictions set forth in the Master Indenture by and among the Borrowers and AmeriServ Financial Bank formerly U.S. Bank, formerly United States National Bank in Johnstown, as Master Trustee) (the Master Trustee ), dated as of November 1, 1985, as heretofore amended (the Master Indenture ). The Restricted Group described in the Master Indenture consists of CHS and MMC, and each Person who becomes a Restricted Affiliate pursuant to the terms of the Master Indenture. At present, CHS and MMC are the only members of the Restricted Group, and there is no present intention that any other entity become a member of the Restricted Group. The 2005 Variable Rate Bonds The 2005 Variable Rate Bonds of each series initially will be issued in the form of one registered bond in the aggregate principal amount of each maturity and will be registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York ( DTC ). DTC will maintain a book-entry system for recording ownership interests in the 2005 Variable Rate Bonds. See THE 2005 VARIABLE RATE BONDS -- BOOK-ENTRY SYSTEM herein. Each of the series of the 2005 Variable Rate Bonds will be initially issued in the Auction Mode, in each case as further described herein. Each Bond Indenture provides for conversion to various other interest rate Modes. However, if converted to another interest rate Mode, on the conversion date the 2005 Variable Rate Bonds will be purchased from the existing bondholders pursuant to the mandatory tender provisions set forth in each Bond Indenture. This Official Statement provides information with respect to the 2005 Variable Rate Bonds only in the Auction Mode, but does not provide information with respect to any other permitted interest rate Mode. If a conversion occurs as to any of the series of 2005 Variable Rate Bonds, a new official statement or other descriptive offering materials will be prepared with respect to such 2005 Variable Rate Bonds to provide information about the new interest rate Mode and other pertinent information for purchasers of the 2005 Variable Rate Bonds in the new interest rate Mode. Municipal Bond Insurance Policies Payment of the principal of and interest on the 2005A Bonds and 2005B Bonds will be guaranteed by a financial guaranty insurance policy (the Assured Policy ) issued by Assured Guaranty Corp. ( Assured ) simultaneously with the issuance of the 2005A Bonds and 2005B Bonds. Payment of the principal of and interest on the 2005C Bonds will be insured by a financial guaranty insurance policy (the Radian Policy and, together with the Assured Policy, the Bond Insurance Policies ) issued by Radian Asset Assurance Inc. ( Radian ) simultaneously with the issuance of the 2005C Bonds. The Assured Policy insures the payment only of the 2005A Bonds and 2005B Bonds and does not insure payment of the 2005C Bonds. The Radian Policy insures the payment only of the 2005C Bonds and does not insure payment of the 2005A Bonds and 2005B Bonds. Neither the Radian Policy nor the Assured Policy will insure the payment of any 2005 Variable Rate Bonds upon optional or extraordinary optional redemption or any payments to be made on any 2005 Variable Rate Bonds on an accelerated basis. See MUNICIPAL BOND INSURANCE POLICIES herein. -3-

10 Security and Sources of Payment for the 2005 Variable Rate Bonds Neither the general credit of the Authority nor the general credit or taxing power of the Commonwealth of Pennsylvania or any political subdivision thereof is pledged for the payment of the 2005 Variable Rate Bonds. The 2005 Variable Rate Bonds will not be deemed to be an obligation of the Commonwealth of Pennsylvania or of any political subdivision thereof. The 2005 Variable Rate Bonds will be secured under the provisions of the respective Bond Indentures, the respective Loan Agreements, the 2005A Master Note (with respect to the 2005A Bonds), 2005B Master Note (with respect to the 2005B Bonds) and 2005C Master Note (with respect to the 2005C Bonds), as each is referred to herein, and will be payable solely from receipts and revenues of the Authority. The Authority has no taxing power. CHS and MMC will be jointly and severally obligated to make payments under the Loan Agreements as hereinafter described in an amount sufficient for the payment of the principal of, interest and redemption premium, if any, on each respective series of 2005 Variable Rate Bonds. The Authority has assigned to the Bond Trustee, as security for the 2005 Variable Rate Bonds, its rights under the Loan Agreements to receive payments and all of its interest in the funds and accounts established under the Bond Indentures. (MMC and CHS are sometimes hereinafter referred to individually as a Borrower and collectively as the Borrowers. ) As security for the 2005A Bonds, CHS, as the Restricted Group Agent, will deliver a promissory note dated as of September 1, 2005 (the 2005A Master Note ) to the Bond Trustee pursuant to the Master Trust Indenture as heretofore supplemented, and as further supplemented by a Supplemental Master Indenture No. 13, dated as of September 1, 2005 between CHS, as the Restricted Group Agent, and AmeriServ Financial Bank (formerly U.S. Bank, formerly United States National Bank in Johnstown) (the Master Trustee ) ( Supplemental Master Indenture No. 13 ). The 2005A Note is secured by the Gross Revenues (as hereinafter defined) of the Restricted Group. As security for the 2005B Bonds, CHS, as the Restricted Group Agent, will deliver a promissory note dated as of September 1, 2005 (the 2005B Master Note ) to the Bond Trustee pursuant to the Master Trust Indenture as heretofore supplemented, and as further supplemented by a Supplemental Master Indenture No. 14, dated as of September 1, 2005 between CHS, as the Restricted Group Agent, and the Master Trustee ( Supplemental Master Indenture No. 14 ). The 2005B Note is secured by the Gross Revenues (as hereinafter defined) of the Restricted Group. As security for the 2005C Bonds, CHS, as the Restricted Group Agent, will deliver a promissory note dated as of September 1, 2005 (the 2005C Master Note, along with the 2005A Master Note and the 2005B Master Note are collectively, the 2005 Master Notes ) to the Bond Trustee pursuant to the Master Trust Indenture as heretofore supplemented, and as further supplemented by a Supplemental Master Indenture No. 15, dated as of September 1, 2005 between CHS, as the Restricted Group Agent, and the Master Trustee ( Supplemental Master Indenture No. 15 ). The 2005C Note is secured by the Gross Revenues (as hereinafter defined) of the Restricted Group. Each of the 2005 Master Notes are on parity with each other as well as with all other notes issued and to be reissued and secured under the Master Indenture. See EXISTING AND LONG TERM DEBT OF THE SYSTEM for a table listing the other obligations of the System on parity with the 2005 Master Notes. The Loan Agreements Concurrently with the issuance by the Authority of the 2005 Variable Rate Bonds, the Borrowers will enter into three (3) separate Loan Agreements with the Authority, each dated as of September 1, 2005, pursuant to which the Authority will loan the proceeds of the applicable series of 2005 Variable Rate Bonds to Borrowers and Borrowers will agree to repay the loan in installment payments that are -4-

11 fixed as to time of payment and amount to enable the Authority to pay the principal of, premium, if any, and interest on their respective series of 2005 Variable Rate Bonds. To secure the obligations under the 2005A Loan Agreement with respect to payment of the 2005A Bonds, CHS, as the Restricted Group Agent, will deliver to the Authority the 2005A Master Note, which will be assigned to the Bond Trustee. To secure the obligations under the 2005B Loan Agreement with respect to payment of the 2005B Bonds, CHS, as the Restricted Group Agent, will deliver to the Authority the 2005B Master Note, which will be assigned to the Bond Trustee. To secure the obligations under the 2005C Loan Agreement with respect to payment of the 2005C Bonds, CHS, as the Restricted Group Agent, will deliver to the Authority the 2005C Master Note, which will be assigned to the Bond Trustee. Mortgage See Security and Sources of Payment for the 2005 Variable Rate Bonds herein. To further secure the obligations of the Borrowers, MMC, as a member of the Restricted Group, will grant a mortgage to the Master Trustee for the benefit of any and all current and future noteholders under the Master Indenture which will be dated as of September 1, 2005 (the Mortgage ). Permitted Indebtedness The Master Indenture authorizes members of the Restricted Group (as defined in the Master Indenture) to issue, incur, guarantee, and assume other indebtedness, in some cases on a parity with the 2005 Variable Rate Bonds, for the purposes and subject to the terms and conditions described therein. See SUMMARY OF THE MASTER TRUST INDENTURE LIMITATIONS ON ADDITIONAL INDEBTEDNESS in APPENDIX C. See PLAN OF FINANCE FOR THE 2005 VARIABLE RATE BONDS herein. Appendices and Underlying Documents Brief descriptions of the 2005 Variable Rate Bonds, the Bond Indentures, the Master Indenture, the Supplemental Master Indentures and the Loan Agreements follow in this Official Statement and in APPENDIX C. Information concerning the operations and business of CHS and its affiliates is set forth in APPENDIX A. The descriptions and summaries of various documents hereinafter set forth do not purport to be comprehensive or definitive, and reference is made to each document for the complete details of all terms and conditions. Copies of the Bond Indentures, the Master Indenture, the Supplemental Master Indentures and the Loan Agreements as executed and delivered may be examined, or obtained at the expense of the person requesting, at the principal offices of CHS or at the principal corporate trust office of the Bond Trustee in Johnstown, Pennsylvania. Risk Factors Certain factors which could affect the ability of MMC or CHS to make the payments required under the 2005 Variable Rate Bonds are described elsewhere herein under CERTAIN BONDHOLDERS RISKS. Independent Accountants The consolidated financial statements of CHS as of June 30, 2004 and for the fiscal years then ended included in APPENDIX B to this Official Statement have been audited by BKD, LLP, independent accountants as stated in their report appearing in APPENDIX B. The consolidated financial statements of -5-

12 CHS as of June 30, 2003 and for the fiscal year then ended included in APPENDIX B to this Official Statement were audited by other accountants whose report dated September 29, 2003 expressed an unqualified opinion on those statements. Continuing Disclosure Borrowers will covenant, in a Continuing Disclosure Agreement to be entered into concurrently with the delivery of the 2005 Variable Rate Bonds, to provide disclosure of certain financial and operating information on an ongoing basis. Such information will include (a) audited annual financial statements of MMC and CHS and certain annual operating information pertaining to the MMC and CHS and (b) notice of the occurrence of certain specified events, if material. See CONTINUING DISCLOSURE herein. THE AUTHORITY The Authority is a body politic and corporate created by a resolution of the Council of the Borough of South Fork pursuant to the Municipality Authorities Act, 53 Pa. Cons. Stat. 5601, as amended and supplemented (the Act ). A Certificate of Incorporation, dated April 22, 1969, was issued to the Authority by the Secretary of State of the Commonwealth of Pennsylvania. A Certificate of Amendment, dated September 20, 1996 was issued to the Authority by the Secretary of State of the Commonwealth of Pennsylvania extending the Authority s existence to September 1, The Authority will issue the 2005 Variable Rate Bonds pursuant to the laws of the Commonwealth of Pennsylvania including, in particular, the Act and pursuant to the Bond Indenture. The Governing Body of the Authority is a board consisting of five (5) members appointed by the Council of the Borough of South Fork, the latter of whom are elected officials. The present members of the Authority s Board are: *non-member Member Edward Terek Susan L. Vivian Diane M. Dolan* John J. Chicoli Lynn Wilson George Mehall Office Chairman Vice Chairman Secretary/Treasurer Assistant Secretary/Treasurer Member Member The Authority has issued revenue bonds and notes for various projects. Each of the bond and note issues is a limited obligation of the Authority payable from receipts and revenues derived by the Authority from the facility on whose behalf such bonds or notes were issued and is secured separately and distinctly from the issues for every other hospital or health care facility. The Authority expects from time to time to enter into separate indentures or other agreements for projects for the same or other hospitals or health care facilities that will provide for the issuance of bonds or notes to be secured by revenues derived from such hospitals or health care facilities. The Authority has never been and presently is not in default under any of the foregoing obligations. -6-

13 THE AUTHORITY HAS NOT PREPARED OR ASSISTED IN THE PREPARATION OF THIS OFFICIAL STATEMENT, EXCEPT THE STATEMENTS UNDER THIS SECTION AND UNDER THE HEADING LITIGATION THE AUTHORITY, AND, EXCEPT AS AFORESAID, THE AUTHORITY DISCLAIMS RESPONSIBILITY FOR THE DISCLOSURES SET FORTH HEREIN MADE IN CONNECTION WITH THE OFFER, SALE, AND DISTRIBUTION OF THE 2005 VARIABLE RATE BONDS. General PLAN OF FINANCING The 2005 Variable Rate Bonds are being issued by the Authority for the purpose of undertaking the Project on behalf of the Borrowers in order to: (i) provide funds to refund in part its indebtedness which was incurred by MMC for the purpose of acquiring certain assets owned by UPMC Lee Regional Hospital and UPMC d/b/a University of Pittsburgh Medical Center located at one or more locations in the City of Johnstown, Pennsylvania (the Lee Assets ), (ii) provide funds to MMC for the construction and equipping of an energy plant located on the MMC Campus at 1086 Franklin Street, City of Johnstown, Pennsylvania, (iii) provide funds to MMC for other capital improvement purposes, (iv) provide funds to the Borrowers for the advance refunding of the South Fork Municipal Authority, Hospital Revenue Bonds, Series A of 1996 (the 1996A Bonds ), and (v) provide funds to fund reserves and to pay a portion of the costs of issuing and insuring the 2005 Variable Rate Bonds (collectively, the Project ). The proceeds of the 2005 Variable Rate Bonds will be loaned to the Borrowers for the purposes described above. The proceeds of the 2005A Bonds will be loaned to the Borrowers pursuant to a Loan Agreement dated as of September 1, 2005 between the Authority and the Borrowers (the 2005A Loan Agreement ). The proceeds of the 2005B Bonds will be loaned to the Borrowers pursuant to a Loan Agreement dated as of September 1, 2005 between the Authority and the Borrowers (the 2005B Loan Agreement ). The proceeds of the 2005C Bonds will be loaned to the Borrowers pursuant to a Loan Agreement dated as of September 1, 2005 between the Authority and the Borrowers (the 2005C Loan Agreement, along with the 2005A Loan Agreement and the 2005B Loan Agreement are collectively, the Loan Agreements ). Under the Loan Agreements, the Borrowers will be obligated to make loan payments to the Bond Trustee, as assignee of the Authority, in amounts and at times sufficient, among other things, to pay the principal or redemption price of, and interest on, the 2005 Variable Rate Bonds when due. Advance Refunding of 1996A Bonds Concurrently with the issuance and delivery of the 2005 Variable Rate Bonds, a portion of the proceeds of the 2005A Bonds will be deposited under an Escrow Deposit Agreement among the Borrowers, the Authority and the Bond Trustee, as escrow agent, and applied, together with earnings on the investment thereof, to the payment of the principal of, and interest due on, all of the outstanding 1996A Bonds, and to the redemption of the 1996A Bonds, at a redemption price equal to 102% of the principal amount thereof, on July 1, Upon the issuance of the 2005 Variable Rate Bonds, the 1996A Bonds will no longer be Outstanding under the Bond Indenture, and the payment obligations of the Borrowers under the applicable Loan Agreement and the Master Indenture in respect of the 1996A Bonds will be released and discharged. Verification of Certain Mathematical Computations The accuracy of (a) the mathematical computations of the adequacy of the maturing principal amounts of and interest on investments held pursuant to the Escrow Deposit Agreement described above -7-

14 to pay the principal and redemption price of, and interest on, the 1996A Bonds as described above from the date of issuance of the 2005 Variable Rate Bonds to and including July 1, 2006, and (b) the mathematical computations supporting the conclusion of Bond Counsel that the 2005 Variable Rate Bonds are not arbitrage bonds under the Internal Revenue Code of 1986, as amended, will be verified solely as to mathematical accuracy by BondResource Partners, LP, Philadelphia, Pennsylvania, financial consultants. Estimated Sources and Applications of Funds The following table sets forth the estimated sources and uses of funds in connection with the Project: Estimated Sources of Funds: Series Series Series 2005A Bonds 2005B Bonds 2005C Bonds Principal Amount of the 2005A Bonds... $32,300, Principal Amount of the 2005B Bonds... $47,700, Principal Amount of the 2005C Bonds... $30,000, Other Sources of Funds... $ 382, Total Sources of Funds... $32,682, $47,700, $30,000, Estimated Applications of Funds: Construction Fund... $ $40,707, $26,327, Escrow Fund for 1996A Bonds... $28,687, A Bonds Reserve Fund... $ 2,476, B Bonds Reserve Fund... $ 3,657, C Bonds Reserve Fund... $ 2,300, Costs of Issuance*... $ 1,509, $ 3,334, $ 1,372, Other (Additional Proceeds)... $ 9, $ $ Total Applications of Funds... $32,682, $47,700, $30,000, * Includes bond insurance premiums, Underwriter s discount, counsel fees (including Bond Counsel, Underwriter s counsel, Authority s counsel, and Borrowers counsel), rating agency fees, Bond Trustee and Master Trustee fees, escrow agent fees, auction agent fees, accountant fees, printing costs, fees and expenses of the Authority and other expenses related to issuance of the 2005 Variable Rate Bonds. -8-

15 Existing and Pro Forma Long-Term Debt of the System The following table summarizes the outstanding long-term debt of the System as of August 31, 2005, together with the pro forma outstanding long-term debt of the System following the issuance of the 2005 Variable Rate Bonds: Parity Debt: Outstanding Long-Term Debt (at August 31, 2005) Description Principal Amount South Fork Municipal Authority Hospital Revenue Refunding Bonds, Series of 1993 $ 10,840,000 South Fork Municipal Authority Hospital Revenue Bonds, Series A of ,460,000 South Fork Municipal Authority Hospital Revenue Refunding Bonds, Series B of ,190,000 South Fork Municipal Authority Hospital Revenue Refunding Bonds, Series of ,365,000 South Fork Municipal Authority Adjustable Rate Hospital Revenue Bonds, Series A of ,200,000 South Fork Municipal Authority Hospital Revenue Bonds, Series B of ,925,000 South Fork Municipal Authority Hospital Revenue Bonds, Series C of ,455,000 South Fork Municipal Authority Hospital Revenue Bonds, Series D of ,675,000 Parity Debt: Pro Forma Long-Term Debt (at September 1, 2005) Description Principal Amount South Fork Municipal Authority Hospital Revenue Refunding Bonds, Series of 1993 $ 10,840,000 South Fork Municipal Authority Hospital Revenue Bonds, Series A of South Fork Municipal Authority Hospital Revenue Refunding Bonds, Series B of ,190,000 South Fork Municipal Authority Hospital Revenue Refunding Bonds, Series of ,365,000 South Fork Municipal Authority Adjustable Rate Hospital Revenue Bonds, Series A of ,200,000 South Fork Municipal Authority Hospital Revenue Bonds, Series B of ,925,000 South Fork Municipal Authority Hospital Revenue Bonds, Series C of ,455,000 South Fork Municipal Authority Hospital Revenue Bonds, Series D of ,675,000 South Fork Municipal Authority Variable Rate Hospital Revenue Bonds, Refunding Series A of ,300,000 South Fork Municipal Authority Variable Rate Hospital Revenue Bonds, Series B of 2005 South Fork Municipal Authority Variable Rate Hospital Revenue Bonds, Series C of ,700,000 30,000,000 Total Parity Debt $176,110,000 Total Parity Debt $258,650,000-9-

16 System Debt Service Requirements The following table sets forth, for each bond year of the System, the approximate annual debt service requirements on the 2005 Variable Rate Bonds, and other existing long-term debt of the System: Series 2005A Bonds Series 2005B Bonds Series 2005C Bonds Period Ending Principal Interest * Principal Interest * Principal Interest * Other Outstanding Long-term Debt Aggregate Debt Service 7/1/2006 $1,175,000 $1,058,651 $1,655,921 $1,030,173 $11,013,605 $15,933,349 7/1/ ,000 1,233,657 2,002,510 1,245,790 11,012,769 16,469,725 7/1/2008 1,025,000 1,195,012 2,002,510 1,245,790 11,016,119 16,484,430 7/1/2009 1,075,000 1,154,385 2,002,510 1,245,790 10,858,944 16,336,629 7/1/2010 1,075,000 1,133,158 2,041,019 $750,000 1,269,748 11,163,700 17,432,624 7/1/2011 1,125,000 1,069,169 2,002,510 1,050,000 1,214,645 10,971,931 17,433,255 7/1/2012 1,175,000 1,024,579 2,002,510 1,075,000 1,171,043 11,012,575 17,460,706 7/1/2013 1,225, ,007 2,002,510 1,100,000 1,126,402 11,011,338 17,443,256 7/1/2014 1,275, ,454 2,002,510 1,150,000 1,080,723 11,013,000 17,450,686 7/1/2015 1,350, ,919 2,002,510 1,300,000 1,032,968 10,889,300 17,453,696 7/1/2016 1,375, ,284 2,041,019 1,100, ,810 11,108,094 17,463,207 7/1/2017 1,450, ,911 2,002,510 1,300, ,304 11,016,863 17,473,588 7/1/2018 1,500, ,440 2,002,510 1,375, ,320 11,010,550 17,480,820 7/1/2019 1,575, ,987 2,002,510 1,425, ,221 11,013,713 17,492,430 7/1/2020 1,650, ,561 2,002,510 1,550, ,046 10,931,163 17,488,279 7/1/2021 1,700, ,281 2,041,019 1,425, ,116 11,094,756 17,509,173 7/1/2022 1,775, ,781 2,002,510 1,650, ,505 10,991,625 17,517,421 7/1/2023 1,850, ,429 2,002,510 1,700, ,987 11,008,588 17,520,513 7/1/2024 1,925, ,103 2,002,510 1,775, ,392 11,004,850 17,522,855 7/1/2025 2,025, ,804 2,002,510 1,850, ,683 10,996,013 17,539,009 7/1/2026 4,000, ,542 2,002, ,859 10,971,313 17,482,224 7/1/2027 2,041,019 1,750, ,587 13,300,500 17,448,107 7/1/2028 2,002,510 1,900, ,188 13,277,250 17,456,948 7/1/2029 $2,025,000 2,002,510 4,775, ,288 9,000,798 7/1/2030 6,825,000 1,917,497 8,742,497 7/1/2031 7,125,000 1,630,975 8,755,975 7/1/2032 7,400,000 1,357,470 8,757,470 7/1/2033 7,750,000 1,021,196 8,771,196 7/1/2034 8,100, ,841 8,795,841 7/1/2035 8,475, ,792 8,830,792 Total $32,300,000 $16,322,112 $47,700,000 $54,846,452 $30,000,000 $20,090,379 $257,688,555 $458,947,498 * Interest is calculated using the interest swap rate for each series of 2005 Variable Rate Bonds, as described in PLAN OF FINANCING Interest Rate Swap Agreements. -10-

17 Interest Rate Swap Agreements On August 3, 2005, Merrill Lynch Capital Services, Inc. (the Provider ), the counterparty and an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, an Underwriter and a Broker-Dealer, entered into two interest rate swap transactions, effective September 1, 2005, one with respect to the 2005A Bonds and one with respect to the 2005B Bonds and in each case with a notional amount equal to the aggregate principal amount of the bonds to which each such swap relates (the 2005A Interest Rate Swap Transaction and the 2005B Interest Rate Swap Transaction ). Under the 2005A Interest Swap Transaction and 2005B Interest Rate Swap Transaction, the Borrowers will pay to the Provider amounts based upon a fixed rate and will receive from the Provider amounts at a floating rate based upon a floating rate index. The notional amount under the transaction will amortize in amounts approximately equal to the amortization of the 2005A Bonds and 2005B Bonds. The obligation of the Borrowers to make such scheduled payments to the Provider under the 2005A Interest Rate Swap Transaction and the 2005B Interest Rate Swap Transaction will be on a parity with the obligation of the Borrowers to make payments on the 2005A Bonds and 2005B Bonds. Also, on August 3, 2005, the Provider entered into an interest rate swap transaction, effective September 1, 2005 and with a notional amount equal to the aggregate principal amount of the 2005C Bonds ( 2005C Interest Rate Swap Transaction ). Under the 2005C Interest Rate Swap Transaction, the Borrowers will pay to the Provider amounts based upon a fixed rate and will receive from the Provider amounts at a floating rate based upon a floating rate index. The notional amount under the transaction will amortize in amounts approximately equal to the amortization of the 2005C Bonds. The obligation of the Borrowers to make such scheduled payments to the Provider under the 2005C Interest Rate Swap Transaction and the 2005C Interest Rate Swap Transaction will be on a parity with the obligation of the Borrowers to make payments on the 2005C Bonds. The agreements by the Provider to pay amounts to the Borrowers pursuant to the 2005A Interest Rate Swap Transaction, 2005B Interest Rate Swap Transaction and the 2005C Interest Rate Swap Transaction do not alter or affect obligations to pay amounts due with respect to the 2005 Variable Rate Bonds under each Loan Agreement or on the 2005 Variable Rate Bonds. Neither the holders of the 2005 Variable Rate Bonds nor any other person other than the Borrowers will have any rights under the 2005A Interest Rate Swap Transaction, the 2005B Interest Rate Swap Transaction and the 2005C Interest Rate Swap Transaction or against the Provider. Pursuant to Supplemental Master Trust Indenture No. 13, CHS, as the Restricted Group Agent, will deliver a promissory note to the Provider dated as of September 1, 2005 (the "2005A Master Provider Note"). The 2005A Master Provider Note is secured by the Gross Revenues of the Restricted Group. Pursuant to Supplemental Master Trust Indenture No. 14, CHS, as the Restricted Group Agent, will deliver a promissory note to the Provider dated as of September 1, 2005 (the "2005B Master Provider Note"). The 2005B Master Provider Note is secured by the Gross Revenues of the Restricted Group. Pursuant to Supplemental Master Trust Indenture No. 15, CHS, as the Restricted Group Agent, will deliver a promissory note to the Provider dated as of September 1, 2005 (the "2005C Master Provider Note"). The 2005C Master Provider Note is secured by the Gross Revenues of the Restricted Group. Under certain circumstances, the 2005A Interest Rate Swap Transaction, 2005B Interest Rate Swap Transaction or 2005C Interest Rate Swap Transaction may be terminated prior to the scheduled termination date thereof and prior to the maturity date of the related bonds and the Borrowers may be required to make a substantial termination payment to the Provider. -11-

18 THE 2005 VARIABLE RATE BONDS Interest Rate Modes Pursuant to the Bond Indenture, the 2005 Variable Rate Bonds may bear interest in the Daily Mode, Weekly Mode, R-FLOATs Mode, Unit Pricing Mode, Term Rate Mode, Auction Mode, or Fixed Rate Mode, as each is more particularly described in the Bond Indenture. The 2005 Variable Rate Bonds may operate in different Modes at the same time Variable Rate Bonds in the R-FLOATs Mode or in the Auction Mode may be changed to any other Mode at the times and in the manner hereinafter described, provided that the portion of the 2005 Variable Rate Bonds to be changed must be an amount constituting an Authorized Denomination for the New Mode. The 2005A Bonds will be initially issued in the Auction Mode, the 2005B Bonds will be issued in the Auction Mode, and the 2005C Bonds will initially be issued in the Auction Mode, as each is more particularly described in this Official Statement. This Official Statement describes the terms and conditions of the 2005 Variable Rate Bonds only in the Auction Mode. The 2005 Variable Rate Bonds may be converted to another Mode or Modes, subject to certain conditions described herein, including a mandatory tender of the 2005 Variable Rate Bonds being converted. In the event the 2005 Variable Rate Bonds, or any portion thereof are converted to bear interest in another Mode, the Borrowers expect to deliver an official statement or other descriptive offering materials describing the terms of such Mode and certain provisions of such Bond Indenture related to such Mode. Market Factors Regarding 2005 Variable Rate Bonds The relative buying and selling interest of market participants in securities such as the 2005 Variable Rate Bonds in the Auction Rate Mode, and in the market for such securities as a whole, will vary over time, and such variations may be affected by, among other things, news relating to the Borrowers, the attractiveness of alternative investments, the perceived risk of owning the security (whether related to credit, liquidity or any other risk), the tax treatment accorded the instruments, the accounting treatment accorded such securities, including recent clarifications of U.S. generally accepted accounting principles relating to the treatment of auction rate securities (which may similarly apply to the 2005 Variable Rate Bonds in the Auction Rate Mode, reactions to regulatory actions or press reports, financial reporting cycles and marketing sentiment generally. Shifts of demand in response to any one or simultaneous particular events cannot be predicted and may be short-lived or exist for longer periods. Description of the 2005 Variable Rate Bonds in the Auction Mode General Interest on the 2005 Variable Rate Bonds in the Auction Mode will be calculated on the basis of a 360-day year for the number of days actually elapsed (except where the Auction Period is more than 183 days, in which event interest would be calculated on the basis of a 360-day year of twelve 30-day months). The 2005 Variable Rate Bonds in the Auction Mode are issuable in denominations of $25,000 and any integral multiple thereof. Each of the series of the 2005 Variable Rate Bonds will be dated as of the date of initial issuance. Regularly scheduled interest will be payable on (1) the Business Day following the last day of each Auction Period, provided that if an Auction Period is longer than one year, regularly scheduled interest will be payable on the first January 1 or July 1 following the month in which the Auction Period commences and on each January 1 and July 1 thereafter during such Auction Period and on the Business day following the last day of the Auction Period; (2) any Mode Change Date; and (3) the respective maturity date of each series of the 2005 Variable Rate Bonds. Payment of the interest on the 2005 Variable Rate Bonds in the Auction Mode will be made by wire transfer in immediately -12-

19 available funds to an account within the United States of America designated by the holder of such 2005 Variable Rate Bonds. Maturity Date While the 2005A Bonds bear interest at the Auction Rate, the 2005A Bonds will mature on, and the defined term 2005A Bonds Maturity Date shall mean, the Scheduled Interest Payment Date immediately preceding July 1, While the 2005B Bonds bear interest at the Auction Rate, the 2005B Bonds will mature on, and the defined term 2005B Bonds Maturity Date shall mean, the Scheduled Interest Payment Date immediately preceding July 1, While the 2005C Bonds bear interest at the Auction Rate, the 2005C Bonds will mature on, and the defined term 2005C Bonds Maturity Date shall mean, the Scheduled Interest Payment Date immediately preceding July 1, (The 2005A Bonds Maturity Date, the 2005B Bonds Maturity Date and the 2005C Bonds Maturity Date are each referred to as a Maturity Date ). Auction Procedures The Auction Rate for the Initial Period will be provided by the Underwriter to prospective purchasers of the 2005 Variable Rate Bonds prior to the date of delivery of the 2005 Variable Rate Bonds. Interest at the Auction Rate for the Initial Period shall accrue through and including September 7, 2005, and be paid on September 8, 2005 for each series of the 2005 Variable Rate bonds. Thereafter, the 2005 Variable Rate Bonds will bear interest at Auction Rates for seven-day Auction Periods until converted to bear interest at another rate or for a different Auction Period as described herein. The Auction Rate for each subsequent Auction Period will, subject to certain exceptions described below, be equal to the rate (the Auction Rate ) that the Auction Agent advises has resulted on the Auction Date from the implementation of the auction procedures set forth in the Bond Indenture and summarized in APPENDIX D (the Auction Procedures ) in which persons determine to hold or offer to sell or, based on interest rates bid by them, offer to purchase 2005 Variable Rate Bonds. Each periodic implementation of the Auction Procedures is hereinafter referred to as an Auction. Certain terms used hereinafter are defined in APPENDIX D. Auction Agent and Broker-Dealer The Borrowers will enter into an Auction Agreement, initially with Wilmington Trust ( Wilmington Trust ), pursuant to which Wilmington Trust will perform duties of an Auction Agent for the 2005 Variable Rate Bonds. The Borrowers will have the right to remove the Auction Agent as provided in the Auction Agreement. Merrill Lynch, Pierce, Fenner & Smith Incorporated will act as the initial Broker-Dealer for the 2005 Variable Rate Bonds in the Auction Mode. Conversion from One Auction Period to Another; Changes in Auction Date During any Auction Mode, the Borrowers, may from time to time on any Scheduled Interest Payment Date change the length of the Auction Period with respect to any series of 2005 Variable Rate Bonds in order to accommodate economic and financial factors that may affect or be relevant to the length of the Auction Period and the interest rate borne by each series of 2005 Variable Rate Bonds. On the conversion date for any of the 2005 Variable Rate Bonds from one Auction Period to another, any 2005 Variable Rate Bonds which are not the subject of a specific Hold Order or Bid shall be deemed to be subject to a Sell Order. In the event of a failed conversion to another Auction Period due to the lack of -13-

20 Sufficient Clearing Bids, the 2005 Variable Rate Bonds will automatically convert to a seven-day Auction Period and the Auction Rate for the next Auction Period will be the Maximum Rate. During any Auction Period, the Auction Agent, with the written consent of the Borrowers, may specify an earlier Auction Date (but in no event more than five Business Days earlier) than the Auction Date that would otherwise be determined in accordance with the definition of Auction Date in order to conform with then current market practice with respect to similar securities or to accommodate economic and financial factors that may affect or be relevant to the day of the week constituting an Auction Date and the interest rate borne on the 2005 Variable Rate Bonds. Changes to the Auction Periods and Auction Dates do not require the amendment of the Auction Procedures or any Bondholder consents. See Changes in Auction Period or Auction Date in APPENDIX D hereto. Special Considerations Relating to the 2005 Variable Rate Bonds in the Auction Mode An Existing Owner who desires to sell any series of 2005 Variable Rate Bonds on an Auction Date may be required to continue to hold such series of 2005 Variable Rate Bonds after such Auction Date if sufficient bids to purchase such series of 2005 Variable Rate Bonds are not received, in which case the Auction Rate will be the Maximum Rate. In the event the Auction Agent fails to calculate or, for any reason, fails to timely provide the Auction Rate for any Auction Period, (i) if the preceding Auction Period was a period of 28 days or less, the new Auction Period shall be the same as the preceding Auction Period and the Auction Rate for the new Auction Period shall be the same as the Auction Rate for the preceding Auction Period, and (ii) if the preceding Auction Period was a period of greater than 28 days, the preceding Auction Period shall be extended to the seventh day following the day that would have been the last day of such Auction Period had it not been extended (or if such seventh day is not followed by a Business Day then to the next succeeding day which is followed by a Business Day) and the Auction Rate in effect for the preceding Auction Period shall continue in effect for the Auction Period as so extended. In the event the Auction Period is extended as set forth in clause (ii) of this paragraph, an Auction shall be held on the last Business Day of the Auction Period as so extended. The Auction Procedures shall be suspended with respect to the 2005 Variable Rate Bonds during the period commencing on the date of the Auction Agent s receipt of notice from the Trustee or the Borrowers of the occurrence of an Event of Default under the Bond Indenture resulting from a failure by the Authority to pay principal, interest or premium on any series of 2005 Variable Rate Bonds in the Auction Mode when due, together with the failure by the Bond Insurer to honor its obligations under the Bond Insurance Policy, but shall resume two Business Days after the date on which the Auction Agent receives written notice from the Bond Trustee that such Event of Default (or failure by the Bond Insurer) has been waived or cured, with the next Auction to occur on the next regularly scheduled Auction Date occurring thereafter. The Auction Rate during this period shall be the Maximum Rate. If the Auction Agent has not been compensated for its services, the Auction Agent may resign and be discharged of the duties and obligations created by the respective Bond Indenture by giving at least forty-five (45) days notice to the Authority, the Borrowers, the Bond Trustee and the respective Bond Insurer even if a successor Auction Agent has not been appointed. The Broker-Dealer Agreement provides that the Broker-Dealer thereunder may resign upon five business days notice or immediately suspend its duties, in certain circumstances, and does not require, as a condition to the effectiveness of such resignation or suspension, that a replacement Broker-Dealer be in place. -14-

21 In the event that any series of 2005 Variable Rate Bonds are not rated or if such series of 2005 Variable Rate Bonds are no longer maintained in book-entry only form by the Securities Depository during an Auction Mode, then no Auctions will be held and the Auction Rate for such series of 2005 Variable Rate Bonds will be the Maximum Rate. The Broker-Dealer Agreement provides that the Broker-Dealer may submit Orders in Auctions for its own account. In the Broker-Dealer Agreement, the Broker-Dealer will agree to handle customers orders in accordance with its duties under applicable securities laws and rules. The information in this paragraph has been furnished by the Underwriter for inclusion in this Official Statement. The Broker-Dealer submitting an Order for its own account in any Auction could have an advantage over other Potential Holders in that it would have knowledge of other Orders placed through it in that Auction. A Broker Dealer would not, however, have knowledge of Orders submitted by other Broker-Dealers, if any. As a result of bidding by the Broker-Dealer in an Auction, the Auction Rate may be higher or lower than the rate that would have prevailed had the Broker-Dealer not bid. The Broker-Dealer may also bid in an Auction in order to prevent what would otherwise be (a) a failed Auction, (b) an all-hold Auction, or (c) the implementation of an Auction Rate that the Broker-Dealer believes, in its sole judgment, does not reflect the market for such securities at the time of the Auction. The Broker-Dealer may also encourage additional or revised investor bidding in order to prevent an allhold Auction. According to published news reports, the Securities and Exchange Commission (the Commission ) has requested information from a number of broker-dealers regarding certain of their practices in connection with auction rate securities, such as the practices described above. The Broker-Dealer has advised the Authority and the Borrowers that (i) it, together with other participants in the auction rate securities markets, has received a letter from the Commission requesting that it voluntarily conduct an investigation regarding certain of its practices and procedures in connection with those markets, and (ii) it is cooperating and expects to continue to cooperate with the Commission in providing the requested information. No assurance can be given as to whether the results of this process will affect the market for the 2005 Variable Rate Bonds or the Auctions therefor. During an Auction Period a beneficial owner of a 2005 Variable Rate Bond may sell, transfer or dispose of a 2005 Variable Rate Bond only pursuant to a Bid or Sell Order in accordance with the Auction Procedures (see APPENDIX D) or through the Broker-Dealer. The ability to sell a 2005 Variable Rate Bond in an Auction may be adversely affected if there are not sufficient buyers willing to purchase all the 2005 Variable Rate Bonds at a rate equal to or less than the Maximum Rate. The Broker-Dealer has advised the Authority and the Borrowers that it intends initially to make a market in the 2005 Variable Rate Bonds between Auctions; however, the Broker-Dealer is not obligated to make such markets, and no assurance can be given that secondary markets therefor will develop or be maintained. The Broker- Dealer may, in its own discretion, decide to sell 2005 Variable Rate Bonds in the secondary market to investors at any time and at any price, including at prices equivalent to, below, or above the par value of the 2005 Variable Rate Bonds. Changes in Mode Changes in Modes Other Than Fixed Rate Mode Any portion of the 2005 Variable Rate Bonds (other than 2005 Variable Rate Bonds in the Fixed Rate Mode, which must remain in the Fixed Rate Mode), may be changed from one Mode to another Mode (other than to a Fixed Rate Mode) as follows: -15-

22 (1) Mode Change Notice; Notice to Holders. No later than the 30th Business Day preceding the proposed Mode Change Date, the Restricted Group Agent shall give Immediate Notice to the Authority, the Bond Trustee, the Tender Agent, the Remarketing Agent (if any), the Auction Agent (if any), the Broker-Dealer (if any) and each Bond Insurer, specifying the 2005 Variable Rate Bonds or portions thereof to which such notice relates and its intention to effect a change in the Mode from the Mode then in effect (the Current Mode ) to another Mode (the New Mode ) specified in such written notice, and, if the change is to a Term Rate Mode, the length of the initial Interest Period, and, if the change is to an Auction Mode, the length of the initial Auction Period. (2) Determination of Interest Rates. The New Mode shall commence on the Mode Change Date and the interest rate(s) with respect to the 2005 Variable Rate Bonds in the New Mode shall be determined by the Remarketing Agent or, in the case of 2005 Variable Rate Bonds in the Auction Mode, by the Auction Agent. (3) Conditions Precedent. In the case of the conversion of a series of the 2005 Variable Rate Bonds from the Auction Mode, the following conditions must be satisfied in order for the New Mode to take effect: (a) The Mode Change Date shall be a Business Day. (b) The Bond Trustee, the Authority, the Tender Agent, the Auction Agent (if any), the Remarketing Agent (if any) and each Bond Insurer shall have received on the Mode Change Date a Favorable Opinion of Bond Counsel dated the Mode Change Date and addressed to the Bond Trustee, the Authority, the Tender Agent, the Auction Agent (if any), the Broker-Dealer (if any), each Bond Insurer and the Remarketing Agent (if any). (c) If the Current Mode is a Mode other than an Auction Mode and the New Mode is an Auction Mode, the Borrower shall have appointed an Auction Agent and the Broker-Dealer. (d) If the Current Mode is the Auction Mode, the Borrowers shall have appointed a Remarketing Agent and a Tender Agent (other than in the case of a change to a Fixed Rate Mode). (e) If required to do so in connection with a change to the New Mode, the Borrowers shall deliver to the Tender Agent a Liquidity Facility meeting the requirements of the applicable Loan Agreement. If no Liquidity Facility is in effect to provide funds for the purchase of such series of 2005 Variable Rate Bonds to be converted to the New Mode on the Mode Change Date, then the remarketing proceeds available on the Mode Change Date must be not less than the amount required to purchase all of such series of 2005 Variable Rate Bonds which are converting on such Mode Change Date at the Purchase Price. (4) Failure To Satisfy Conditions Precedent to Mode Change. If the foregoing conditions have not been satisfied by the Mode Change Date, the New Mode shall not take effect for the 2005 Variable Rate Bonds proposed to be converted to a New Mode and such 2005 Variable Rate Bonds shall not be purchased on the proposed Mode Change Date. If the change was from an Auction Mode, the 2005 Variable Rate Bonds proposed to be changed to the New Mode shall remain in the Auction Mode and the Auction Period shall automatically convert to a -16-

23 seven day period commencing on the failed Mode Change Date and the interest rate borne by the 2005 Variable Rate Bonds proposed to be changed to the New Mode during the Auction Period commencing on such failed Mode Change Date shall be the Maximum Rate until the first Auction Date after the proposed Mode Change Date. Such a failed conversion shall not constitute an Event of Default under the Bond Indenture. Change to Fixed Rate Mode At the option of the Borrowers, all or a portion of the 2005 Variable Rate Bonds not already in the Fixed Rate Mode may be changed to the Fixed Rate Mode. Not less than 45 days (or such shorter time as may be agreed to by the Bond Trustee, the Remarketing Agent, if any, and the Auction Agent, if any) before the proposed Mode Change Date, the Borrower shall give written notice to the Bond Trustee, the Authority, the Tender Agent, the Auction Agent (if any), the Broker-Dealer (if any), the Remarketing Agent (if any), each Bond Insurer and each Rating Agency then rating the 2005 Variable Rate Bonds proposed to be changed to the New Mode stating that the Mode will be changed to the Fixed Rate Mode and setting forth the proposed Mode Change Date. With respect to the conversion of the 2005 Variable Rate Bonds, any such change in Mode shall be made as follows: (1) Mode Change Date. The Mode Change Date shall be a Business Day. (2) Notice to Holders. Not less than the 30th day next preceding the Mode Change Date, the Tender Agent shall mail, in the name of the Authority, a notice of such proposed change to the Holders of the 2005 Variable Rate Bonds proposed to be changed to the Fixed Rate stating that the Mode will be changed to the Fixed Rate Mode, the proposed Mode Change Date and that such Holder is required to tender such Holder s Bonds proposed to be changed to the Fixed Rate for purchase on such proposed Mode Change Date. (3) Favorable Opinion of Bond Counsel. The change to the Fixed Rate Mode shall not occur unless the Authority, the Bond Trustee, the Remarketing Agent (if any), the Auction Agent (if any), and each Bond Insurer have received, on the Mode Change Date, a Favorable Opinion of Bond Counsel addressed to each of them and dated the Mode Change Date. (4) Remarketing Agent Certificate. If applicable, a certificate of the Remarketing Agent designating the maturities and interest rates on the 2005 Variable Rate Bonds to be converted shall be provided to the Bond Trustee, as provided in the Bond Indenture. (5) Firm Underwriting or Purchase Contract. Prior to the conversion to the Fixed Rate Mode, a firm underwriting or purchase contract from a recognized firm of bond underwriters or recognized institutional investors to underwrite or purchase all 2005 Variable Rate Bonds proposed to be changed to the Fixed Rate which are to be converted on such Mode Change Date at a price of 100% of the principal amount thereof, which contract may be subject to conditions to purchase, shall be provided to the Authority, each Bond Insurer and the Borrowers. (6) Replacement Bonds. The Authority and the Bond Trustee shall deliver replacement bonds, executed and authenticated as provided in the Bond Indenture bearing the Fixed Rate for 2005 Variable Rate Bonds surrendered or deemed surrendered by the owner thereof. (7) Failure To Satisfy Conditions Precedent to Mode Change. If any of the conditions precedent have not been satisfied on or prior to the Mode Change Date, the Fixed Rate Mode shall not become effective and all 2005 Variable Rate Bonds proposed to be changed to the -17-

24 Fixed Rate Mode shall be converted to the Daily Mode; provided that if the change was from an Auction Mode, such 2005 Variable Rate Bonds proposed to be changed to the Fixed Rate shall remain in the Auction Mode, the Auction Period shall automatically convert to a seven day period commencing on the failed Mode Change Date and the interest rate for such 2005 Variable Rate Bonds during the Auction Period commencing on such failed Mode Change Date shall be the Maximum Rate until the first Auction Date after the proposed Mode Change Date. Such a failed conversion shall not constitute an Event of Default under the Bond Indenture. Mandatory Tender of 2005 Variable Rate Bonds in Connection with Mode Changes If 2005 Variable Rate Bonds are converted from one Mode to another Mode, such 2005 Variable Rate Bonds are subject to mandatory tender for purchase on the effective date (a Mandatory Purchase Date ) of a conversion from one Mode to a different Mode at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the Mandatory Purchase Date. The owners of 2005 Variable Rate Bonds may not elect to retain their 2005 Variable Rate Bonds in the event of a mandatory tender. If any owner fails to properly deliver any 2005 Variable Rate Bonds on a Mandatory Purchase Date, such 2005 Variable Rate Bonds shall be deemed to have been properly tendered to the Bond Trustee, to the extent that there shall be on deposit with the Bond Trustee on such Mandatory Purchase Date an amount sufficient to pay the principal amount thereof plus accrued and unpaid interest thereon, no interest shall accrue on such 2005 Variable Rate Bonds from and after the Mandatory Purchase Date, and the owner of such 2005 Variable Rate Bonds shall have no rights under the Bond Indenture thereafter as the owner of such 2005 Variable Rate Bonds, except the right to receive the purchase price of such 2005 Variable Rate Bonds. Any failure of the Bond Trustee to give notice of a Mandatory Purchase Date or cause such notice to be given will not affect the requirement of the owners to tender their 2005 Variable Rate Bonds for mandatory purchase. If the conditions required by the Bond Indenture to change Modes have not been satisfied by the Mode Change Date, the New Mode shall not take effect for the 2005 Variable Rate Bonds proposed to be converted to the New Mode, such 2005 Variable Rate Bonds shall not be purchased on the proposed Mode Change Date and if the change was from an Auction Mode, the 2005 Variable Rate Bonds proposed to be changed to the New Mode shall remain in the Auction Mode and the Auction Period shall automatically convert to a seven day period commencing on the failed Conversion Date and the interest rate borne by the 2005 Variable Rate Bonds proposed to be changed to the New Mode during the Auction Period commencing on such failed Mode Change Date shall be the Maximum Rate until the first Auction Date after the proposed Mode Change Date Such a failed conversion shall not constitute an Event of Default under the Bond Indenture. General Provisions Relating to Tenders Inadequate Funds for Tenders If the funds available for purchases of Eligible 2005 Variable Rate Bonds are inadequate for the purchase of all 2005 Variable Rate Bonds tendered on any Purchase Date or Mandatory Purchase Date, no purchase shall be consummated and the Tender Agent shall, after any applicable grace period, (1) return all tendered 2005 Variable Rate Bonds to the Holders thereof and (2) return all moneys deposited in the Remarketing Proceeds Account to the Remarketing Agent for return to the Persons providing such moneys. Failure of the Authority to pay the Purchase Price of 2005 Variable Rate Bonds -18-

25 shall not be an Event of Default under the Bond Indenture. In no event shall the Bond Insurer be obligated to pay the Purchase Price of the 2005 Variable Rate Bonds. No Purchases or Sales in Certain Circumstances Anything in the Bond Indenture to the contrary notwithstanding, if (i) there shall have occurred and be continuing an Event of Default under the Bond Indenture with respect to the payment of principal or interest on the 2005 Variable Rate Bonds and the Bond Insurer has not paid such amount under the Bond Insurance Policy, or (ii) any conditions set forth in the Remarketing Agreement to the performance of the Remarketing Agent s obligation thereunder to remarket tendered 2005 Variable Rate Bonds shall not have been satisfied, then the Remarketing Agent shall not be required to remarket any 2005 Variable Rate Bonds. Payment of Purchase Price The Tender Agent is required to pay the Purchase Price of tendered and remarketed 2005 Variable Rate Bonds by the close of business of the Tender Agent, New York City time, on the applicable Purchase Date or Mandatory Purchase Date. The source of payment for purchase of 2005 Variable Rate Bonds in the R-FLOATs Mode upon optional tender or mandatory tender will, in all instances, be the proceeds of the sale of such 2005 Variable Rate Bonds by the Remarketing Agent. If the Remarketing Agent cannot successfully remarket all or any portion of the 2005 Variable Rate Bonds, the 2005 Variable Rate Bonds will be returned to the Holders thereof, and the 2005 Variable Rate Bonds in the R-FLOATs Mode will be Non-Remarketed 2005 Variable Rate Bonds, all as described above. At or before the close of business of the Tender Agent s New York City office on the Purchase Date or Mandatory Purchase Date and upon receipt by the Tender Agent of the aggregate Purchase Price of the tendered 2005 Variable Rate Bonds, the Tender Agent shall pay the Purchase Price of such 2005 Variable Rate Bonds to the Holders thereof by bank wire transfer in immediately available funds. If the Holder of any such 2005 Variable Rate Bond (or portion thereof) that is subject to purchase fails to deliver such 2005 Variable Rate Bond to the Tender Agent for purchase on the purchase date, and if the Tender Agent is in receipt of the Purchase Price therefor, such 2005 Variable Rate Bond (or portion thereof) shall nevertheless be deemed purchased on the date fixed for purchase thereof and ownership of such 2005 Variable Rate Bond (or portion thereof) shall be transferred to the purchaser thereof as provided in the Bond Indenture. The right of any beneficial owner to exercise its right to tender its interest in any 2005 Variable Rate Bond and receive payment therefor will be based solely upon and subject to the procedures and limitations of the book-entry only system, including the contractual arrangement of such beneficial owner with one of the DTC Participants or Indirect Participants and the contractual arrangements of such Participants or Indirect Participants with DTC. No representation is made herein that payment of the Purchase Price upon a tender of 2005 Variable Rate Bonds will be made in a timely manner, or as to the availability of funds to pay the Purchase Price of tendered 2005 Variable Rate Bonds as long as the book-entry only system is in effect. As long as the book-entry system is in effect, tenders of 2005 Variable Rate Bonds under the book-entry system will be governed by the procedures of DTC and its Participants in effect from time to time, and the beneficial owner of a 2005 Variable Rate Bond may experience a delay in receiving payment of the related Purchase Price. Such delay could result, for example, from the time needed to communicate information relating to such tender between DTC, its Participants and beneficial owners as well as the procedures under the Bond Indenture for receiving a 2005 Variable Rate Bond in exchange for a beneficial interest therein. -19-

26 Redemption Provisions Optional Redemption of 2005 Variable Rate Bonds in the Auction Mode The 2005A Bonds in the Auction Mode are subject to redemption prior to the 2005A Bonds Maturity Date by the Authority at the direction of the Borrowers, in whole or in part on any Scheduled Interest Payment Date at a Redemption Price equal to 100% of the principal amount of 2005A Bonds called for redemption, without premium, together with accrued interest, if any to the Redemption Date. The 2005B Bonds in the Auction Mode are subject to redemption prior to the 2005B Bonds Maturity Date by the Authority at the direction of the Borrowers, in whole or in part on any Scheduled Interest Payment Date at a Redemption Price equal to 100% of the principal amount of 2005B Bonds called for redemption, without premium, together with accrued interest, if any to the Redemption Date. The 2005C Bonds in the Auction Mode are subject to redemption prior to the 2005C Bonds Maturity Date by the Authority at the direction of the Borrowers, in whole or in part on any Scheduled Interest Payment Date at a Redemption Price equal to 100% of the principal amount of 2005C Bonds called for redemption, without premium, together with accrued interest, if any to the Redemption Date. Mandatory Sinking Fund Redemption 2005A Bonds. The 2005A Bonds will be subject to mandatory sinking fund redemption at a redemption price of 100% of the principal amount thereof on July 1 of the years and in the amounts set forth below. Redemption Date (July 1) Principal Amount Redemption Date (July 1) Principal Amount 2006 $1,175, $1,450, , ,500, ,025, ,575, ,075, ,650, ,075, ,700, ,125, ,775, ,175, ,850, ,225, ,925, ,275, ,025, ,350, ,000,000* ,375,000 *Stated maturity date -20-

27 2005B Bonds. The 2005B Bonds will be subject to mandatory sinking fund redemption at a redemption price of 100% of the principal amount thereof on July 1 of the years and in the amounts set forth below. Redemption Date (July 1) Principal Amount -21- Redemption Date (July 1) Principal Amount 2029 $2,025, $7,750, ,825, ,100, ,125, ,475,000* ,400,000 *Stated maturity date 2005C Bonds. The 2005C Bonds will be subject to mandatory sinking fund redemption at a redemption price of 100% of the principal amount thereof on July 1 of the years and in the amounts set forth below. Redemption Date (July 1) Principal Amount Redemption Date (July 1) Principal Amount 2010 $750, $1,550, ,050, ,425, ,075, ,650, ,100, ,700, ,150, ,775, ,300, ,850, ,100, ,750, ,300, ,900, ,375, ,775,000* ,425,000 *Stated maturity date Notwithstanding the foregoing, when any 2005 Variable Rate bonds in the Auction Mode are to be redeemed by mandatory sinking fund redemption on July 1 of any year as described above, if such July 1 is not a Scheduled Interest Payment Date for the Auction Mode, then the mandatory sinking fund redemption shall occur on the Scheduled Interest Payment Date immediately preceding such July 1. The principal amount of such series of 2005 Variable Rate Bonds otherwise required to be redeemed as described above may be reduced by the principal amount of such Bonds previously called for optional redemption or theretofore delivered to the Bond Trustee by the borrowers in lieu of cash payments under the respective Loan Agreement or purchased by the Bond Trustee out of moneys in the respective Debt Service Fund established under the respective Bond Indenture and which have not theretofore been applied as a credit against any sinking fund installment. Authorized Denominations No redemption of less than all of the 2005 Variable Rate Bonds at the time outstanding will be made unless (i) the aggregate principal amount of such 2005 Variable Rate Bonds to be redeemed is equal to or greater than $25,000 and (ii) the 2005 Variable Rate Bonds are redeemed in Authorized Denominations.

28 Purchase in Lieu of Redemption In lieu of redeeming 2005 Variable Rate bonds, the Bond Trustee may, at the request of the Borrowers, subject to the applicable Bond Insurer s consent, use funds otherwise available under the applicable Bond Indenture for redemption of 2005 Variable Rate bonds to purchase 2005 Variable Rate bonds identified by the Borrowers in the open market for cancellation at a price specified by the Borrower not exceeding the Redemption Price then applicable under the Bond Indenture. The Bond Trustee shall cancel all such 2005 Variable Rate bonds purchased pursuant to the provisions of the applicable Bond Indenture described in this paragraph. Optional Purchase of 2005 Variable Rate Bonds The Authority and, by their acceptance of the 2005 Variable Rate Bonds, the Holders, irrevocably grant to the Borrowers and any assigns of the Borrowers with respect to this right, the option to purchase, with the consent of the applicable Bond Insurer, at any time and from time to time, any 2005 Variable Rate Bond which is redeemable pursuant to, the Bond Indenture at a purchase price equal to the Redemption Price therefor. To exercise such option, the Borrowers will give the applicable Bond Trustee a written request exercising such option within the time period specified in the Bond Indenture as though such written request were a written request of the Authority for redemption, and the Bond Trustee will thereupon give the Holders of the 2005 Variable Rate Bonds to be purchased notice of such purchase in the manner specified below as though such purchase were a redemption and the purchase of such 2005 Variable Rate Bonds shall be mandatory and enforceable against the Holders. On the date fixed for purchase pursuant to any exercise of such option, the Borrowers will pay the Purchase Price of the 2005 Variable Rate Bonds then being purchased to the Bond Trustee in immediately available funds, and the Bond Trustee will pay the same to the sellers of such 2005 Variable Rate Bonds against delivery thereof. Notice of Redemption and Selection of 2005 Variable Rate Bonds to be Redeemed Any redemption of the 2005 Variable Rate Bonds under the preceding paragraphs shall be made as provided in the Bond Indenture upon not less than 15 days nor more than 60 days notice by mailing a copy of the redemption notice by first class mail, postage prepaid (except when DTC is the Registered Owner of all of the 2005 Variable Rate Bonds and except for persons or entities owning or providing evidence of ownership satisfactory to the Bond Trustee of a legal or beneficial ownership in at least $1,000,000 of principal amount of 2005 Variable Rate Bonds who so request, in which cases, by certified mail, return receipt requested or by other secure means), to the Registered Owner of all 2005 Variable Rate Bonds to be redeemed at the address shown on the bond register of the Authority maintained by the Bond Trustee. However, failure to mail any notice or any defect therein or in the mailing thereof, as it affects any particular 2005 Variable Rate Bond, shall not affect the validity of the proceedings for redemption of any other 2005 Variable Rate Bonds Variable Rate Bonds may be called for redemption by the Bond Trustee upon receipt by the Bond Trustee of a written request of the Borrowers requesting such redemption at least 20 days prior to the Redemption Date. If less than all 2005 Variable Rate Bonds are to be called for redemption, the Bond Trustee shall select 2005 Variable Rate Bonds for such redemption in the following manner provided that the 2005 Variable Rate Bonds that remain outstanding shall be in Authorized Denominations Variable Rate Bonds shall be selected for redemption from such series and subseries and in any order of maturity and in any principal amount (in Authorized Denominations) within a maturity as designated by the Borrowers, and if less than all of the 2005 Variable Rate Bonds of a series or subseries of a particular maturity are to be called for redemption, the 2005 Variable Rate Bonds of such series or -22-

29 subseries and maturity to be redeemed may be selected for redemption in such manner as the Borrowers may specify. Defeasance If the Authority deposits with the Bond Trustee funds, evidenced by moneys or Government Obligations (as defined in APPENDIX C) the principal of and interest on which, when due, will be sufficient to pay the principal or Redemption Price of any 2005 Variable Rate Bonds, by call for redemption or otherwise, together with interest accrued to the due date or the redemption date, as appropriate, in accordance with the terms of the Bond Indenture, such 2005 Variable Rate Bonds shall no longer be deemed to be Outstanding under the Bond Indenture. Interest on such 2005 Variable Rate Bonds, as appropriate, will cease to accrue on the due date or the redemption date, as appropriate, and from and after the date of such deposit of funds with the Bond Trustee the holders of the 2005 Variable Rate Bonds will be restricted to the funds so deposited as provided in the Bond Indenture. Transfer Subject to the provisions described under BOOK-ENTRY SYSTEM below, a 2005 Variable Rate Bond may be transferred only upon presentation thereof to the Trustee. Such 2005 Variable Rate Bond must be accompanied by an endorsement duly executed by the registered owner. No charge will be imposed in connection with any transfer or exchange, except for taxes or governmental charges related thereto. The Trustee is not required to transfer or exchange any 2005 Variable Rate Bond for a period of 15 days immediately preceding the date of mailing of any notice of redemption or at any time following the mailing of any such notice if the 2005 Variable Rate Bond or any portion thereof to be transferred or exchanged has been called for redemption. General BOOK-ENTRY SYSTEM Ownership interests in the 2005 Variable Rate Bonds will be available to purchasers only through a book-entry system (the Book-Entry System ) maintained by The Depository Trust Company ( DTC ), New York, New York, which will act as securities depository for the 2005 Variable Rate Bonds. The 2005 Variable Rate Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. Initially, one fully registered bond certificate will be issued for the 2005 Variable Rate Bonds of each series and maturity, in the aggregate principal amount of the 2005 Variable Rate Bonds of each series and maturity, and will be deposited with DTC. The following discussion will not apply to any 2005 Variable Rate Bonds issued in certificated form due to the discontinuance of the DTC Book-Entry System, as described below. So long as Cede & Co., as nominee of DTC, is the registered owner of the 2005 Variable Rate Bonds, the Beneficial Owners of the 2005 Variable Rate Bonds will not receive or have the right to receive physical delivery of the 2005 Variable Rate Bonds, and references herein to the Bondholders or Owners or registered owners of the 2005 Variable Rate Bonds shall mean Cede & Co. and shall not mean the Beneficial Owners of the 2005 Variable Rate Bonds. DTC and its Participants DTC, the world s largest 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 -23-

30 member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code and a clearing agency registered pursuant to the provisions of section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC, in turn is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation and Emerging Markets Clearing Corporation (NSCC, GGCCC, MBSCC and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange, LLC and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has Standard & Poor s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchase of Ownership Interests Purchase of 2005 Variable Rate Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the 2005 Variable Rate Bonds on DTC s records. The ownership interest of each actual purchaser of a 2005 Variable Rate Bond ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchases. Beneficial Owners are, however, expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 2005 Variable Rate Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the 2005 Variable Rate Bonds is discontinued. Transfers To facilitate subsequent transfers, all 2005 Variable Rate Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of 2005 Variable Rate Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee does not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the 2005 Variable Rate Bonds; DTC s records reflect only the identity of the Direct Participants to show accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Notices 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 -24-

31 requirements as may be in effect from time to time. Beneficial Owners of 2005 Variable Rate Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the 2005 Variable Rate Bonds, such as redemptions, tenders, defaults, and proposed amendments to the 2005 Variable Rate Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the 2005 Variable Rate Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. Redemption and Mandatory Tender Redemption and mandatory tender notices shall be sent to DTC. If less than all of the 2005 Variable Rate Bonds are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in the 2005 Variable Rate Bonds to be redeemed. Voting Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Payments of Principal and Interest The principal and redemption price of, and interest payments on, the 2005 Variable Rate Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the Authority or the Bond Trustee on the payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC (or its nominee), the Bond Trustee, the Borrowers or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of the principal and redemption price of, and interest on, the 2005 Variable Rate Bonds to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority, the Borrowers or the Bond Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. Discontinuation of Book-Entry System The book-entry system for registration of the ownership of the 2005 Variable Rate Bonds through DTC may be discontinued at any time that: (1) DTC determines to resign as securities depository for the 2005 Variable Rate Bonds and gives notice of such determination to the Authority and the Bond Trustee or (2) the Authority determines that continuation of the system of book-entry transfers through DTC is not in the best interests of the Authority or the holders of the 2005 Variable Rate Bonds and gives notice of such determination to the Bond Trustee and DTC. In either of such events the Authority may appoint a successor securities depository; but if the Authority does not appoint a successor, the 2005 Variable Rate Bonds are required to be printed and delivered. -25-

32 The information in this section concerning DTC and DTC s book-entry system has been obtained from DTC. The Borrowers, the Authority and the Underwriter take no responsibility for the accuracy thereof, and neither the DTC Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters but should instead confirm the same with DTC or the DTC Participants, as the case may be. None of the Authority, the Underwriter, the Bond Trustee, or any Borrower will have any responsibility or obligations to any Direct Participants or Indirect Participants or the persons for whom they act with respect to (i) the accuracy of any records maintained by DTC or any such Direct Participant or Indirect Participant; (ii) the payment by any Participant of any amount due to any Beneficial Owner in respect of the principal and redemption price of, and interest on, the 2005 Variable Rate Bonds; (iii) the delivery by any such Direct Participant or Indirect Participants of any notice to any Beneficial Owner that is required or permitted under the terms of the Bond Indenture to be given to Bondholders; (iv) the selection of the Beneficial Owners to receive payment in the event of any partial redemption of the 2005 Variable Rate Bonds; or (v) any consent given or other action taken by DTC as Bondholder. Assured and the Assured Policy MUNICIPAL BOND INSURANCE POLICIES The information relating to Assured and the Assured Policy contained under this caption has been furnished by Assured. Reference is made to APPENDIX E for a specimen of the Assured Insurance Policy. Assured Guaranty Corp. ( Assured ) has made a commitment to issue the Assured Insurance Policy (the Assured Policy ) relating to the 2005A Bonds and 2005B Bonds, effective as of the date of issuance of such 2005A Bonds and 2005B Bonds. Under the terms of the Assured Policy, Assured will unconditionally and irrevocably guarantee to pay that portion of principal and interest on the 2005A Bonds and 2005B Bonds that becomes Due for Payment but shall be unpaid by reason of Nonpayment by the Authority (the Assured Insured Payments ). Assured Insured Payments shall not include any additional amounts owing by the Authority solely as a result of the failure by the Bond Trustee to pay such amount when due and payable, including without limitation any such additional amounts as may be attributable to penalties or default interest rates, amounts in respect of indemnification, or any other additional amounts payable by the Bond Trustee by reason of such failure. The Assured Policy is noncancelable for any reason, including without limitation the non-payment of premium. Due for Payment, when referring to the principal of the 2005A Bonds and the 2005B Bonds means the stated maturity date thereof, or the date on which such 2005A Bonds and 2005B Bonds shall have been duly called for mandatory sinking fund redemption, and does not refer to any earlier date on which payment is due by reason of a call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity (unless Assured in its sole discretion elects to make any principal payment, in whole or in part, on such earlier date) and, when referring to interest on such 2005A Bonds and 2005B Bonds, means the stated dates for payment of interest. Nonpayment means the failure of the Authority to have provided sufficient funds to the Bond Trustee for payment in full of all principal and interest Due for Payment on the 2005A Bonds and 2005B Bonds. It is further understood that the term Nonpayment in respect of a 2005A Bond and 2005B Bond also includes any amount that is paid, credited, transferred or delivered to the holder of such 2005A Bond and 2005B Bond in respect of any Assured Insured Payment by the Bond Trustee, which amount has been rescinded or recovered from or otherwise required to be returned or repaid by such holders pursuant to the -26-

33 United States Bankruptcy Code by a trustee in bankruptcy in accordance with a final, nonappealable order of a court having competent jurisdiction that such payment constitutes an avoidable preference with respect to such holder within the meaning of any applicable bankruptcy law. Nonpayment does not include nonpayment of principal or interest caused by the failure of the Bond Trustee, to pay such amount when due and payable. Assured will pay each portion of an Assured Insured Payment that is Due for Payment and unpaid by reason of Nonpayment by the Authority to the Bond Trustee, as beneficiary of the Assured Policy on behalf of the holders of the 2005A Bonds and 2005B Bonds on the later to occur of (i) the date such principal or interest becomes Due for Payment or (ii) the business day next following the day on which Assured receives notice of claim therefor in accordance with the terms of the Assured Policy. Assured shall be subrogated to the rights of the holders of the 2005A Bonds and 2005B Bonds to receive payments in respect of the Assured Insured Payments to the extent of any payment by Assured under the Assured Policy. Assured Guaranty Corp. Assured is a Maryland-domiciled insurance company regulated by the Maryland Insurance Administration and licensed to conduct financial guaranty insurance business in forty-seven states and the District of Columbia. Assured commenced operations in Assured is a wholly owned, indirect subsidiary of Assured Guaranty Ltd. ( AGL ), a Bermuda-based holding company whose shares are publicly held and are listed on the New York Stock Exchange under the symbol AGO. AGL, through its operating subsidiaries, provides credit enhancement products to the public finance, structured finance and mortgage markets. Neither AGL nor any of its shareholders is obligated to pay any debts of Assured or any claims under any insurance policy issued by Assured. Assured is subject to insurance laws and regulations in Maryland and in New York (and in other jurisdictions in which it is licensed) that, among other things, (i) limit Assured s business to financial guaranty insurance and related lines, (ii) prescribe minimum solvency requirements, including capital and surplus requirements, (iii) limit classes and concentrations of investments, (iv) regulate the amount of both the aggregate and individual risks that may be insured, (v) limit the payment of dividends by Assured, (vi) require the maintenance of contingency reserves, and (vii) govern changes in control and transactions among affiliates. Certain state laws to which Assured is subject also require the approval of policy rates and forms. Assured s financial strength is rated AAA by Standard and Poor s, a division of The McGraw- Hill Companies, Inc., AAA by Fitch, Inc. and Aa1 by Moody s Investors Service, Inc. Each rating of Assured should be evaluated independently. An explanation of the significance of the above ratings may be obtained from the applicable rating agency. The above ratings are not recommendations to buy, sell or hold any security, and such ratings are subject to revision or withdrawal at any time by the rating agencies. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of any security guaranteed by Assured. Assured does not guaranty the market price of the securities it guarantees, nor does it guaranty that the ratings on such securities will not be revised or withdrawn. Capitalization of Assured Guaranty Corp. As of December 31, 2004, Assured had total admitted assets of $1,278,208,171 (audited), total liabilities of $1,041,463,558 (audited), total surplus of $236,744,613 (audited) and total statutory capital (surplus plus contingency reserves) of $755,118,880 (audited) determined in accordance with statutory -27-

34 accounting practices prescribed or permitted by insurance regulatory authorities. As of June 30, 2005, Assured had total admitted assets of $1,116,713,441 (unaudited), total liabilities of $839,301,627 (unaudited), total surplus of $277,411,784 (unaudited) and total statutory capital (surplus plus contingency reserves) of $820,777,512 (unaudited), determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. The Maryland Insurance Administration recognizes only statutory accounting practices for determining and reporting the financial condition and results of operations of an insurance company, for determining its solvency under the Maryland Insurance Code, and for determining whether its financial condition warrants the payment of a dividend to its stockholders. No consideration is given by the Maryland Insurance Administration to financial statements prepared in accordance with accounting principles generally accepted in the United States ( GAAP ) in making such determinations. The following documents are hereby incorporated by reference into this Official Statement and shall be deemed to be a part hereof: The consolidated balance sheets of Assured as of December 31, 2004 and December 31, 2003 and the related consolidated statements of operations and comprehensive income, of shareholder s equity and of cash flows for each of the three years in the period ended December 31, 2004, prepared in accordance with GAAP, included as Exhibit 99.1 to the Annual Report on Form 10-K of AGL for the fiscal year ended December 31, 2004 (which was filed with the Securities and Exchange Commission (the SEC ) on March 22, 2005); The unaudited consolidated balance sheet and statement of shareholder s equity of Assured as of and for the period ended March 31, 2005, respectively, and the related consolidated statements of operations and comprehensive income and cash flows for the three months ended March 31, 2005 and March 31, 2004, prepared in accordance with GAAP, included as Exhibit 99.1 to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005 (which was filed by AGL with the SEC on May 12, 2005); The unaudited consolidated balance sheet and statement of shareholder s equity of Assured as of and for the period ended June 30, 2005, respectively, the related consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2005 and June 30, 2004, and the statements of cash flows for the six months ended June 30, 2005 and June 30, 2004, prepared in accordance with GAAP, included as Exhibit 99.1 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005 (which was filed by AGL with the SEC on August 15, 2005); and The Current Reports on Form 8-K filed by AGL with the SEC on April 12, 2005, April 20, 2005, May 10, 2005, May 18, 2005, June 24, 2005 and August 5, 2005, as they relate to Assured. Any statement contained in a document incorporated herein by reference or contained herein under the heading MUNICIPAL BOND INSURANCE POLICIES Capitalization of Assured Guaranty Corp. shall be modified or superseded for purposes of this Official Statement to the extent that a statement contained herein or in any subsequently filed document which is incorporated by reference herein also modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Official Statement. -28-

35 All consolidated financial statements of Assured included in documents filed by AGL with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date of this Official Statement and prior to the termination of the offering of the 2005A Bonds and the 2005B Bonds shall be deemed to be incorporated by reference into this Official Statement and to be a part hereof from the respective dates of filing such consolidated financial statements. Copies of the consolidated financial statements of Assured incorporated by reference herein and of the statutory financial statements filed by Assured with the Maryland Insurance Administration are available upon request by contacting Assured at 1325 Avenue of the Americas, New York, New York or by calling Assured at (212) Assured makes no representation regarding the 2005A Bonds or the 2005B Bonds or the advisability of investing in the 2005A Bonds or the 2005B Bonds. In addition, Assured makes no representation regarding, nor does it accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding Assured supplied by Assured and presented under the heading MUNICIPAL BOND INSURANCE POLICIES - Assured Guaranty Corp. and MUNICIPAL BOND INSURANCE POLICIES Capitalization of Assured Guaranty Corp. Radian and Radian Policy The information relating to Radian and the Radian Policy contained under this caption has been furnished by Radian. Reference is made to APPENDIX F for a specimen of the Radian Insurance Policy. A financial guaranty insurance policy (the Radian Policy ) will be issued by Radian Asset Assurance Inc. ( Radian ) simultaneously with the issuance and delivery of the 2005C Bonds. The Radian Policy is noncancelable during its term and provides for the prompt payment of principal of and interest on the Bonds to the extent that the Trustee, has not received sufficient funds from the Authority for payment of the Bonds on the due date. Radian is obligated to make the required payment on the later of the due date or the first business day after which Radian has received notice from The Bank of New York, as Insurance Trustee (the Insurance Trustee ), that the Authority has failed to pay amounts due on the 2005C Bonds. Under the Radian Policy, the due date of the Bonds, when referring to the payment of principal, means the stated maturity date thereof or the date on which payment of principal is due by reason of mandatory sinking fund payments and does not mean any earlier date on which payment is due by reason of any call for redemption, acceleration, or other advancement of maturity, other than in the discretion of Radian. With respect to interest on the 2005C Bonds, the due date means the stated date for payment of interest. Radian guarantees reimbursement of any recovery of any such payment from a Holder or the Trustee pursuant to a final judgment by any court of competent jurisdiction holding that such payment constituted a voidable preference within the meaning of any applicable bankruptcy law. For specific information on the coverage provided, reference should be made to the Radian Policy that has been reproduced in specimen form in Appendix F hereto. The Radian Policy does not insure against nonpayment of principal or interest on the Bonds due to the insolvency, misconduct or negligence of the Trustee. The Radian Policy does not insure the payment of any redemption premium. Radian Asset Assurance Inc. Radian Asset Assurance Inc. is a financial guaranty insurance company, regulated by the Insurance Department of the State of New York and licensed to do business in all 50 states, the District of Columbia and the United States Virgin Islands. Radian was formerly known as Asset Guaranty -29-

36 Insurance Company. Radian changed its corporate name to Radian Asset Assurance Inc. Radian has received approval to use its new corporate name in all jurisdictions where it is licensed to do business. As of March 31, 2005, Radian had total shareholders equity of approximately $1,472,646,000 and total assets of approximately $2,352,815,000. The financial information relating to the Insurer presented in this Official Statement was prepared internally by Radian, based on accounting principles generally accepted in the United States of America ( GAAP ), and has not been audited by independent auditors. The address of Radian s administrative office is 335 Madison Avenue, New York, New York 10017, and its telephone number is Radian has filed the information in the next three paragraphs with entities designated as Nationally Recognized Municipal Securities Information Repositories ( NRMSIRs ) pursuant to Rule 15c2-12 of the Securities Exchange Act of 1934: Radian s consolidated financial statements as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004 prepared in accordance with accounting principles generally accepted in the United States of America, together with the accompanying report of Radian s independent registered public accounting firm, which expresses an unqualified opinion and includes an explanatory paragraph concerning the merger of Radian Reinsurance Inc. ( Radian Re ) with and into Radian. Radian s quarterly unaudited consolidated balance sheet as of March 31, 2005 and unaudited consolidated statement of operations for the three month period then ended, prepared in accordance with generally accepted accounting principles; A table presenting selected unaudited balance sheet and income sheet data of Radian as of December 31, 2001 (with respect to non-balance sheet information only), 2002 and 2003 and March 31, 2004 on a proforma combined basis as if Radian Re were merged with Radian as of the dates indicated, in accordance with accounting principles generally accepted in the United States of America. Though unaudited, the information so filed was derived from the respective audited financial statements of Radian and Radian Re as of December 31, 2003 and 2002, and for each for the three years in the period ended December 31, 2003, together with the respective accompanying reports of Radian s independent registered public accounting firm. Additional information regarding Radian can be found in the following documents filed by Radian Group with the Securities and Exchange Commission: (a) Annual Report on Form 10-K for the year ended December 31, 2004 and Quarterly Report on Form 10-Q for the period ended March 31, 2005 under the headings: (i) Safe Harbor Statement under the Private Securities Limitation Reform Act of 1995 (but only insofar as it relates to the financial guaranty insurance businesses); (ii) in the 10-K only, Item 1. Business: Financial Guaranty Business, Risk in Force Financial Guaranty Business, Customers Financial Guaranty Business, Sales and Marketing Financial Guaranty Business, Competition Financial Guaranty Business, Risk Management Financial Guaranty Ratings (but only insofar as it relates to the Insurer or Radian Re), Defaults and Claims (but only insofar as it relates to the financial guaranty business) and Regulation Direct Regulation (but only insofar as it relates to the financial guaranty business); (iii) in the 10 -K only, Item 6 Selected Financial Data, Selected Ratios Financial Guaranty and Other Data Financial Guaranty, and (iv) Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Financial Guaranty Results of Operations and Liquidity and Capital Resources (but only to the extent it relates to the Insurer or Radian Re), and Critical Accounting Policies; and (b) the Reports of Form 8-K dated January 20, 2005, February 14, 2005 (as amended March 30, 2005), March 9, 2005, March 17, 2005, April 21, 2005 and April 25,

37 A complete copy of the audited consolidated financial statements and additional information of the Insurer as of December 31, 2004 and 2003, and for each for the three years in the period ended December 31, 2004, together with the accompanying report of Radian s independent registered public accounting firm, is available from Radian upon written request. Prior year amounts included in such audited consolidated financial statements have been restated to reflect the combined balances and results of operations of Radian and Radian Re. Radian is a wholly owned indirect subsidiary of Radian Group Inc. ( Radian ), a publicly owned corporation with its shares listed on the New York Stock Exchange (symbol RDN ). Radian is a leading credit enhancement provider to the global financial and capital markets, headquartered in Philadelphia. Radian s subsidiaries provide products and services through three business lines: financial guaranty, mortgage insurance and financial services. None of Radian, Radian s other subsidiaries or any of Radian s investors is obligated to pay the debts of or claims against Radian. Effective June 1, 2004, the financial guaranty reinsurance affiliate of Radian, Radian Re was merged with and into Radian. As a result of the merger, the financial guaranty reinsurance business conducted by Radian Re and the direct financial guaranty business conducted by Radian is now conducted by Radian. As a result of the merger, Radian has greater assets, liabilities and shareholder s equity than it previously had on a stand-alone basis. One of Radian s customers with a right to recapture business previously ceded to Radian in connection with the merger of Radian Re into Radian and the resulting downgrade of Radian Re from Aa2 to Aa3 in May 2004 has agreed, without cost to or concessions by Radian, to waive its recapture rights. On November 8, 2004, the remaining primary insurer customer with recapture rights in connection with the May 2004 downgrade by Moody s notified Radian of its intent to recapture, at an unspecified date in the near future, approximately $6.4 billion of par in force ceded to Radian, including $50.6 million of written premiums as of December 31, 2004, $3.9 million of which would be recorded as an immediate reduction of earned premiums at the time of the recapture, which represents the difference between statutory unearned premiums and GAAP unearned premiums. This return of unearned premiums would also require an increase in policy acquisition costs of $0.9 million. The amount of future lost premiums due to this recapture will be approximately $129.7 million, which is made up of the unearned premium balance and the present value of future installment premiums. Based on a projected recapture date of March 31, 2005, the total approximate reduction in pre-tax income for 2005 including the immediate impact would be $12.3 million. Despite the recapture, the primary insurer customer also informally advised Radian that, going forward, the customer intends to continue its reinsurance relationship with Radian on the same terms as prior to the recapture. The customer also has the right to recapture an additional $5.2 billion of par in force ceded to Radian, including $57.8 million of written premiums as of December 31, 2004, $16.3 million of which would be recorded as an immediate reduction of earned premiums. By letter dated March 8, 2005, this primary insurer customer agreed to waive those recapture rights without cost to or concessions by Radian. There are no remaining recapture rights with respect to the May 2004 Moody s downgrade. Radian has a financial strength rating of AA (outlook: negative) from Standard & Poor s Ratings Services, a division of The McGraw-Hill Companies, Inc. ( S&P ), an insurance financial strength rating of Aa3 (outlook: stable) from Moody s Investors Service, Inc. ( Moody s ) and a claims paying ability rating of AA (outlook: negative) by Fitch Ratings Services ( Fitch ). On April 27, 2005, Fitch affirmed the AA insurer financial strength rating of Radian, but revised its rating outlook for Radian from stable to negative. Such ratings reflect only the views of S&P, Moody s and Fitch, respectively, do not constitute a recommendation to buy, sell or hold securities and are subject to revision or withdrawal at any time by such rating agencies. -31-

38 Neither Radian nor any of its affiliates makes any representation regarding the 2005A Bonds and 2005B Bonds or the advisability of purchasing the 2005A Bonds and 2005B Bonds and makes no representation regarding this Official Statement other than as to the information supplied by Radian and presented under the heading Radian and Radian Policy and as set forth in APPENDIX F of this Official Statement. Radian s role is limited to providing the coverage set forth in the Radian Policy. Limited Obligations SECURITY FOR THE 2005 VARIABLE RATE BONDS The 2005 Variable Rate Bonds are limited obligations of the Authority payable solely from the Receipts and Revenues of the Authority from the applicable Loan Agreement and secured under the applicable Bond Indenture by, (1) a pledge of the Receipts and Revenues received and to be received by the Authority under the Loan Agreements, (2) the money and securities held by the Bond Trustee in certain funds and accounts under the respective Bond Indenture, (3) payments made by pursuant to the applicable Master Note, and first lien mortgage on all the property of the Borrower. Neither the general credit of the Authority nor the general credit or taxing power of the Commonwealth of Pennsylvania or any political subdivision thereof is pledged for the payment of the 2005 Variable Rate Bonds. The 2005 Variable Rate Bonds will not be or be deemed to be an obligation of the Commonwealth of Pennsylvania or of any political subdivision thereof. Loan Agreement The Borrowers, jointly and severally, will enter into each Loan Agreement with the Authority at the time of delivery of the 2005 Variable Rate Bonds pursuant to which they will borrow the proceeds of their respective series of Bonds from the Authority. The Borrowers obligation to make payments under each respective Loan Agreement will be absolute and unconditional and will constitute a general obligation of the Borrowers. The Borrowers will be obligated to make monthly payments sufficient to pay when due the principal, sinking fund installments, premium, if any, and interest on each respective series of 2005 Variable Rate Bonds. Pursuant to the Bond Indentures, the Authority will assign to the Bond Trustee all right, title and interest of the Authority in and to the Receipts and Revenues payable to the Authority or to the Bond Trustee for the account of the Authority and to the moneys and securities deposited and held from time to time by the Authority or by the Bond Trustee in the funds and accounts created under the applicable Bond Indenture (excluding fees and expenses payable to the Authority, moneys and securities held in the Rebate Fund), all right, title and interest of the Authority to all other property of every kind and nature, from time to time conveyed, pledged, assigned or transferred as additional security for the 2005 Variable Rate Bonds. Pledge of Gross Revenues; Limitations on Effectiveness of Pledge The 2005A Master Note securing the 2005A Bonds, the 2005B Master Note securing the 2005B Bonds and the 2005C Master Note securing the 2005C Bonds (the 2005A Master Note, 2005B Master Note and the 2005C Master Note are collectively, the 2005 Master Notes ) will all be issued pursuant to the Master Indenture. CHS and MMC s (collectively, the Restricted Group ) obligations with respect to the 2005 Master Notes are absolute and unconditional, general obligations of the Members of the Restricted Group, additionally secured by a pledge to the Master Trustee of the Gross Revenues of the Restricted Group, subject in each case to the applicable Permitted Encumbrances (both as defined in the Master Indenture). The 2005 Master Notes are on a parity with obligations which have been or will be in -32-

39 the future issued and outstanding under the Master Indenture. At the time of issuance of the 2005 Variable Rate Bonds there will be $258,650,000 aggregate principal amount of obligations issued and outstanding under the Master Indenture. Gross Revenues means all revenues, income, receipts and money received in any period by the members of the Restricted Group (other than the proceeds of borrowing) including, but without limiting the generality of the foregoing, (a) gross revenues derived from operations, (b) gifts, grants, bequests, donations and contributions and income therefrom, exclusive of any gifts, grants, bequests, donations and contributions and income therefrom to the extent specifically restricted by the donor to a particular purpose inconsistent with their use for the payment of principal of, redemption premium and interest on Master Indenture obligations, and (c) proceeds derived from (i) insurance, except to the extent otherwise required by the Master Indenture, (ii) accounts receivable, (iii) securities and other investments, unless such securities or investments are excluded under clause (b) above in this definition, (iv) inventory and other tangible and intangible property, (v) medical or hospital insurance or indemnity programs or agreements of third party payors, and (vi) contract rights and other rights and assets now or hereafter owned, held or possessed by or on behalf of any or all members of the Restricted Group; provided, that no determination of Gross Revenues shall take into account any revenues of an Affiliate which is not a member of the Restricted Group or any 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. The effectiveness of the security interest in Gross Revenues granted pursuant to the Master Indenture may be limited by a number of factors including, but not limited to: (i) provisions prohibiting the direct payment of amounts due to health care providers from Medicaid and Medicare programs to persons other than such providers; (ii) the absence of an express provision permitting assignment of receivables due under contracts, and present or future prohibitions against assignment contained in any applicable statutes or regulations; (iii) certain judicial decisions which cast doubt upon the right of the Master Trustee, in the event of the bankruptcy of a Member of the Restricted Group, to collect and retain accounts receivable due such Member from Medicare, Medicaid and other governmental programs; (iv) constructive trusts, equitable or other rights impressed or conferred by a Federal or state court in the exercise of its equitable jurisdiction; (v) statutory liens; (vi) rights arising in favor of the United States of America or any agency thereof; and (vii) claims that might arise if appropriate financing or continuation statements are not filed in accordance with the Pennsylvania Uniform Commercial Code as from time to time in effect. In addition, the effectiveness of the security interest granted in the Gross Revenues of each Member of the Restricted Group may be limited if the proceeds thereof are commingled with other moneys of such Member not subject to such security interest and if the Master Trustee does not take possession of any cash (or other items as to which possession is required for perfection of a security interest) constituting Gross Revenues of the proceeds thereof. In the event of the bankruptcy of any Member of the Restricted Group, pursuant to the Federal Bankruptcy Code, any receivables in favor of such bankrupt member coming into existence and any Gross Revenues of such bankrupt member received on or after the date which is 90 days (or, in some circumstances, one year) prior to the commencement of proceedings in the Bankruptcy Court with respect to such bankrupt member may no longer be subject to the lien granted to secure the Master Trust Indenture obligations and, with respect to the Gross Revenues, the interest of the Master Trustee holding the Master Trust Indenture obligations for the benefit of tie bondowners would be shared with general creditors of such Member of the Restricted Group. Under certain circumstances, a Bankruptcy Court or a court of equity may have the power to direct the use of Gross Revenues to meet expenses of the bankrupt -33-

40 entity before paying debt service on the Master Trust Indenture obligations. With respect to Gross Revenues not subject to the lien, the Authority and the Trustee and, in turn, the bondowners would occupy the position of an unsecured creditor. Debt Service Reserve Funds The Debt Service Reserve Funds created under the Bond Indentures are for the benefit of the applicable series of Bonds secured by the applicable Bond Indenture. The applicable Debt Service Reserve Funds will be fully funded upon the issuance of the applicable 2005 Variable Rate Bonds. If, on any date on which payment of the principal, redemption premium (if any) or interest on any series of 2005 Variable Rate Bonds is due, whether at maturity, upon redemption prior to maturity, upon acceleration, or otherwise, and the amount on deposit in the applicable Bond Fund is insufficient to make such payment, the applicable Bond Trustee shall transfer without any further instruction or direction from the applicable Debt Service Reserve Fund to the applicable Bond Fund, amounts sufficient to pay any such deficiency. In lieu of depositing moneys in the Debt Service Reserve Fund, or in substitution of all or a portion of the moneys previously deposited in the Debt Service Reserve Fund, the Borrowers, as applicable, may provide the Bond Trustee with a Reserve Fund Letter of Credit; provided that the applicable Bond Insurer consents in writing. Any such Reserve Fund Letter of Credit shall be payable or available to be drawn upon, as the case may be (upon the giving of notice as required thereunder), on any Interest Payment Date or other payment date on the 2005 Variable Rate Bonds (whether upon maturity, redemption prior to maturity, acceleration or otherwise) on which a deficiency exists in the moneys held in the Bond Fund and available for payment. See SUMMARY OF THE BOND INDENTURES in APPENDIX C hereto. Master Indenture and Certain Covenants of the Restricted Group Pursuant to the Master Indenture, the Restricted Group has agreed with the Master Trustee to subject itself to certain operational and financial restrictions contained therein. These operational and financial restrictions apply directly only to the Restricted Group. However, the Restricted Group has agreed in the Master Indenture to cause each Restricted Affiliate to comply with such restrictions as well. In addition, under its Contribution Agreement each Restricted Affiliate will covenant to comply with any such restrictions applicable to it. The operational and financial restrictions contained in the Master Indenture relate primarily to debt service coverage requirements, the incurrence, directly or by guaranteeing the debt of others, of additional indebtedness, the ability to transfer assets, including both physical and liquid assets, the ability of entities to become Restricted Affiliates, through merger or otherwise, and the ability of Restricted Affiliates to cease to be Restricted Affiliates. Entities become Restricted Affiliates by adopting the Required Charter Provisions, as defined in the Master Indenture, which gives CHS certain powers to control the operations of such Restricted Affiliates. See DEFINITIONS OF CERTAIN TERMS and SUMMARY OF THE MASTER TRUST INDENTURE in APPENDIX C. Because of (i) the control of each Restricted Affiliate by CHS and (ii) the presence of the Required Charter Provisions in the corporate charter or bylaws, or both, of each Restricted Affiliate, Income Available for Debt Service is defined in the Master Indenture to include the consolidated income available for debt service of the Restricted Group. The Restricted Group has agreed in the Master Indenture to cause the Restricted Affiliates to transfer funds or other assets to the Restricted Group, to the extent permitted by law, for the purpose of enabling the Restricted Group to satisfy its obligations under the Master Indenture, including the debt service requirements applicable to any Notes and Guaranties, -34-

41 issued under the Master Indenture. See SUMMARY OF THE MASTER TRUST INDENTURE in APPENDIX C hereto. Mortgage To further secure the obligations of the Borrowers, MMC, as a member of the Restricted Group, will grant the Mortgage, dated as of September 1, 2005, to the Master Trustee for the benefit of any and all current and future noteholders under the Master Indenture. Since the facilities secured pursuant to the Mortgage are not likely suited for industrial or commercial uses, the value of the facilities secured by the Mortgage may not realize an amount sufficient to pay the outstanding 2005 Variable Rate Bonds in the event of a bankruptcy proceeding. See CERTAIN BONDHOLDERS RISKS Certain Matters Relating to Enforceability of Obligations. Concerning the Bond Insurers and Defaults and Remedies So long as the Bond Insurance Policies are in effect and the Bond Insurers are not in default thereunder, the Bond Insurers will be regarded as the sole holders of the 2005 Variable Rate Bonds for all purposes of the applicable Bond Indenture, including for purposes of exercising any voting right or giving any consent or direction or taking any other action that the Holders of the 2005 Variable Rate Bonds are entitled to take pursuant the applicable Bond Indenture. Furthermore, so long as the Bond Insurers perform their obligations under their respective Bond Insurance Policies, the Bond Insurers may (1) direct to be exercised or exercise any remedies that the Bond Trustee exercises under the applicable Bond Indenture, and (2) consent in lieu of the consent of any Holder to any supplement, amendment or modification of the applicable Bond Indenture, the applicable Loan Agreement and to the Master Indenture (other than to amendments or modifications to the payment or security provisions of the 2005 Variable Rate Bonds or the 2005 Master Notes). No Recourse Against Members of the Authority No recourse shall be had for payment of the principal and redemption price of, and interest on, the 2005 Variable Rate Bonds, or for any claims based on the 2005 Variable Rate Bonds or on the Bond Indenture or any indenture supplemental thereto, against any member, officer or employee, past, present or future, of the Authority, or of any successor corporation, as such, either directly or through the Authority or any such successor corporation, whether by virtue of any constitutional provision, statute or rule of law, or by the enforcement of any assessment or penalty, or otherwise, and the release of all such liability of such members, officers or employees is a condition of and consideration for the execution by the Authority of the Bond Indenture and the issuance of the 2005 Variable Rate Bonds. General CERTAIN BONDHOLDER RISKS The purchase and ownership of the 2005 Variable Rate Bonds involve certain investment risks that are discussed throughout this Official Statement. Each prospective purchaser of the 2005 Variable Rate Bonds (or a beneficial ownership interest therein) should make an independent evaluation of the information presented in this Official Statement. Some of the risks that could affect the 2005 Variable Rate Bonds and the future financial condition of the System are described below. This description of various risks is not, and is not intended to be, exhaustive. -35-

42 The 2005 Variable Rate Bonds are payable solely from payments to be made by the Borrowers and secured by obligations issued pursuant to the Master Indenture as described previously. No representation or assurance can be given that revenues will be realized by the System in amounts sufficient to pay principal of and any premium and interest on the 2005 Variable Rate Bonds. Purchasers of the 2005 Variable Rate Bonds should bear in mind that the occurrence of any number of events, some of which are specified described below in more detail, could adversely affect the System s ability to make payments. Demand for health care and hospital services, ability of the System to provide the services required by patients, physicians confidence in the System s health care facilities, levels and methods of Federal and state reimbursement under the Medicare and Medicaid programs, national health-care reform proposals, reimbursement from third-party payors, contracts or lack of contracts with managed care entities, changes in demand for health care services, increased competition from other health care providers, economic development in the service area of the System, demographic changes, care provided to indigent or uninsured patients who do not pay the System s charges, malpractice claims and other litigation may adversely affect the revenues and expenses of the System and, consequently, their ability to make payments on the 2005 Variable Rate Bonds. Certain additional investment considerations with respect to purchases of the 2005 Variable Rate Bonds in the Auction Mode are set forth herein under the heading THE 2005 VARIABLE RATE BONDS: Description of the 2005 Variable Bonds in the Auction Mode Special Considerations Relating to the 2005 Variable Rate Bonds in the Auction Mode. The information set forth in this section should be read carefully in conjunction with the information describing the businesses, operations and financial condition of CHS set forth in APPENDIX A and APPENDIX B hereto. Risks in the Collection of Net Patient Service Revenues General A substantial portion of the net patient service revenues of System is derived from third-party payors which pay for the services provided to patients covered by such third parties for such services. These third-party payors include the federal Medicare program, the Pennsylvania Medicaid program and private health plans and insurers, including health maintenance organizations and preferred provider organizations. Many of those programs make payments to the System in amounts that may not reflect the direct and indirect costs of the System of providing services to patients. The financial performance of the System has been and could be in the future adversely affected by the financial position or the insolvency or bankruptcy of or other delay in receipt of payments from third-party payors that provide coverage for services to their patients. Medicare For the fiscal year ended June 30, 2004, approximately 53.7% of the net patient service revenues of the System were derived from Medicare (excluding Medicare managed care programs). Medicare is a federal governmental health insurance system under which physicians, hospitals and other health care providers are reimbursed or paid directly for services provided to eligible elderly and disabled persons. Medicare is administered by the Centers for Medicare and Medicaid Services ( CMS ) of the federal Department of Health and Human Services. In order to achieve and maintain Medicare certification, a health care provider must meet CMS s conditions of participation on an ongoing basis, as determined by the state in which such provider is located and/or the Joint Commission for Accreditation of Healthcare Organizations ( JCAHO ). -36-

43 A substantial portion of the net patient service revenues of the System is derived from the Medicare program (including capitated Medicare payments). As a result, the System has a significant dependence on Medicare as a source of revenue. Because of this dependence, changes in the Medicare program may have a material effect on the System. Future reductions in Medicare reimbursement, or increases in Medicare reimbursement in amounts less than increases in the costs of providing care, may have a material adverse financial effect on the System. Substantially all of the Medicare revenues of the System are derived from payments made for services rendered to Medicare beneficiaries under a prospective payment system, or PPS. Under a prospective payment system, the amount paid to the provider for an episode of care is established by federal regulation and is not related to the provider s charges or costs of providing that care. Presently, inpatient and outpatient services, skilled nursing care, and home health care are paid on the basis of a prospective payment system. Under inpatient PPS, fixed payment amounts per inpatient discharge are established based on the patient s assigned diagnosis related group, or DRG. DRGs classify treatments for illnesses according to the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis. All services paid under PPS for hospital outpatient services are classified into groups called ambulatory payment classifications, or APCs. Services in each APC are similar clinically and in terms of the resources they require. A payment rate is established for each APC. The capital component of care is paid on a fully prospective basis. From time to time, the factors used in calculating the prospective payments for units of service are modified by CMS, which may reduce or increase revenues for particular services. Additionally, as part of the federal budgetary process, Congress has regularly amended the Medicare law to reduce increases in payments that are otherwise scheduled to occur, or to provide for reductions in payments for particular services. Such actions have adversely affected the revenues of the System. Additional payments may be made to individual providers. Hospitals that treat a disproportionately large number of low-income patients (Medicaid and Medicare patients eligible to receive supplemental Social Security income) currently receive additional payments in the form of disproportionate share payments. Additional payments are made to hospitals that treat patients who are more costly to treat than the average patient; these additional payments are referred to as outlier payments. These additional payments are also subject to reductions and modifications in otherwise scheduled increases as a result of amendments to relevant statutory provisions. Medicaid For the fiscal year ended June 30, 2004, approximately 11.3% of net patient service revenues of the System were derived from Medicaid (excluding Medicaid managed care programs). Medicaid is a health insurance program for certain low-income and needy individuals that is jointly funded by the federal government and the states. Pursuant to broad federal guidelines, each state establishes its own eligibility standards; determines the type, amount, duration, and scope of services; sets the payment rates for such services; and administers its own programs. As an alternative to Medicaid, some states operate under a waiver of some basic Medicaid requirements. The Pennsylvania Medicaid program, administered by the Department of Public Welfare (DPW), reimburses Pennsylvania hospitals for providing services to covered patients. Coverage to Medicaid patients includes both traditional coverage and a Medicaid managed care program. Because Pennsylvania administers and partially funds the Medicaid program, the timing and amount of payments may be particularly affected by the Commonwealth s budgetary constraints. -37-

44 Medicaid payment for inpatient acute-care service is based on a prospective payment system similar to the federal Medicare DRG-based, prospective payment system. Traditional Medicaid pays for hospital outpatient services rendered based on the lower of the usual charge to the general public for the same service or the Medicaid maximum allowable fee. Managed care Medicaid pays based on negotiated contract rates. Historically, traditional Medicaid provided payments for capital costs (including depreciation and interest, but excluding costs for moveable equipment) which were integrated into the inpatient payment rates. There is no assurance that Medicaid reimbursement levels for depreciation and interest for the remaining traditional Medicaid business or the managed care Medicaid contract rates will be adequate to satisfy capital requirements. Disproportionate share payments are paid to providers under the traditional Medicaid payment contract. Provider eligibility for inpatient DSH payments is based upon an annual re-determination formula, while payments are based on prior period payouts and may include small increases. Effective January 1, 2002, the DPW converted rehabilitation hospitals/units from a retrospective payment system to a prospective payment system. Thus, payments received will not be subject to cost settlement. There can be no assurance that payments under the Medicaid program will be adequate to cover the costs incurred by providing rehabilitation care to Medicaid patients. Medicaid generally provides payment for inpatient mental health services rendered to eligible recipients at private psychiatric hospitals and distinct psychiatric units at a facility. Medicare and Medicaid Audits Hospitals participating in Medicare and Medicaid may be subject to audits and retroactive audit adjustments with respect to reimbursement claimed under those programs. Because such claims can be large or small amounts, it is impossible to predict the effect of such claims. Any such future adjustments could be material. Both Medicare and Medicaid regulations also provide for withholding payments in certain circumstances. Any such withholding with respect to the System could have a material adverse effect on the ability to generate funds sufficient to make required payments related to the 2005 Variable Rate Bonds and on the overall financial condition of the System. In addition, contracts between hospitals and third-party payors often have contractual audit, setoff and withhold language that may cause retroactive adjustments, which could have a material adverse effect on the future financial condition of the System. Under both the Medicare and Medicaid programs, certain health care providers, including hospitals, are required to report certain financial information on a periodic basis, and with respect to certain types of classifications of information, penalties are imposed for inaccurate reports. As these requirements are numerous, technical and complex, there can be no assurance that the System will avoid incurring such penalties in the future. These penalties may be material and adverse and could include criminal or civil liability for making false claims and/or exclusion from participation in federal health care programs. 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 a hospital to civil or criminal sanctions. While it is not anticipated that Medicare and Medicaid audits will materially adversely affect the future financial condition or operations of the System, in light of the complexity of the regulations relating to both the Medicare and Medicaid programs, there can be no assurance that significant difficulties could not develop in the future. -38-

45 Private Health Plans and Managed Care For the fiscal year ended June 30, 2004, approximately 35.0% of net patient service revenues of the System were derived from private health plans and third-party managed care programs (excluding Medicare and Medicaid managed care programs). Managed care plans generally use discounts and other economic incentives to reduce or limit their cost and utilization of health care services. Payments to the System from managed care plans typically are lower than those received from traditional indemnity/commercial insurers. There is no assurance that the System will maintain managed care contracts or obtain other similar contracts in the future. Failure to maintain contracts could have the effect of reducing the market share of the System and the System s net patient services revenues. Conversely, participation may maintain or increase the patient base but could result in lower net income or operating losses to the System if the System is unable to adequately contain its costs. Many preferred provider organizations ( PPOs ) and health maintenance organizations ( HMOs ) currently pay providers on a negotiated fee-for-service basis or on a fixed rate per day of care, which, in each case, usually is discounted from the typical charges for the care provided. The discounts offered to HMOs and PPOs may result in payment to a provider that is less than its actual cost. Additionally, the volume of patients directed to a hospital may vary significantly from projections used to formulate the discount, and/or changes in the utilization of certain services offered by the provider may be significant and unexpected, thus further reducing revenues and jeopardizing the provider s ability to contain costs. Some HMOs employ a capitation payment method under which hospitals are paid a predetermined periodic rate for each enrollee in the HMO who is assigned or otherwise directed to receive care at a particular hospital. In a capitation payment system, the hospital assumes a financial risk for the cost and scope of care given to such HMO s enrollees. In some cases, the capitated payment covers total hospital patient care provided. However, if payment under an HMO or PPO contract is insufficient to meet the hospital s costs of care or if utilization by such enrollees materially exceeds projections, the financial condition of the hospital could erode rapidly and significantly. As a consequence of the above factors, the effect of managed care on the System s financial condition is difficult to predict and may be different in the future than the financial statements for the current periods reflect. Risks in Healthcare Delivery General Efforts by health insurers and governmental agencies to limit the cost of hospital service and to reduce utilization of hospital facilities may reduce future revenues. Hospitals in the United States are considered to have significant excess capacity. Through various combinations of changes in governmental policy, competition, advances in technology and treatment, and changes in payment methodology to reduce incentives for inpatient hospital utilization, inpatient hospitalizations have generally decreased over the past five years. It is probable that these trends will continue, and the factors mentioned above will continue to create operational and economic uncertainty for hospitals. It is now generally acknowledged that hospital operations pose greater complexity and higher risk than in years past, and this trend may also continue. It is not practical to enumerate each and every operating risk which may result from the operations of the System, and certain risks or combinations of risks which are -39-

46 now unanticipated may have material adverse results in the future. Certain risks relating to the operations of the System are enumerated below. Competition Increased competition from a wide variety of potential sources, including, but not limited to, other hospitals, inpatient and outpatient healthcare facilities, clinics, physicians and others, may adversely and increasingly affect the utilization and/or revenues of the System. Existing and potential competitors may not be subject to various regulations and restrictions applicable to the System, and may be more flexible in their ability to adapt to competitive opportunities and risks. Certain new competitors, such as home health and infusion providers, and certain niche providers, such as specialized cardiology or oncology companies, specifically target hospital patients as their prime source of revenue growth. Some of these companies have aggressive business and marketing plans, and some are well capitalized. Regardless of any moratorium that may be imposed from time to time on such types of competition, if these competitors are successful, some of the most profitable aspects of the inpatient services of the System may be stripped away, and/or overall hospital utilization of the System may decline further. Competition may, in the future, arise from new sources not currently anticipated or prevalent. Service Area The financial performance of the System is, to some extent, dependent upon the economic vitality of its service area. If there were a general economic downturn in the System s extended service area, it could result in a decrease in the population served by the System or a loss of insurance benefits for a portion of the System s patients, either or both of which could lead to a decrease in revenues of the System. Staffing Shortages In recent years, the healthcare industry has suffered from a scarcity of nursing and other qualified health care technicians and personnel. This trend could force the System to pay higher salaries to nursing and other qualified health care technicians and personnel as competition for such employees intensifies and, in an extreme situation, could lead to difficulty in keeping the facilities licensed to provide nursing care and thus eligible for reimbursement under Medicare and Medicaid. 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 adequately oversee the conduct of its medical staff may result in hospital liability to third parties. All hospitals, including those owned and operated by the System, are subject to such risks. Physician Contracting The System may contract with physician organizations (such as independent physician associations and physician-hospital organizations) to arrange for the provision of physician and ancillary services. Because physician organizations are separate legal entities with their own goals, obligations to -40-

47 shareholders, financial status, and personnel, there are risks involved in contracting with the physician organizations. The success of the System will be partially dependent upon its ability to attract physicians to join the physician organizations and to attract physician organizations to participate in their networks, and upon the ability of the physicians, including the employed physicians, to perform their obligations and deliver high quality patient care in a cost-effective manner. There can be no assurance that the System will be able to attract and retain the requisite number of physicians, or that such physicians will deliver high quality health care services. Without impaneling a sufficient number and type of providers, the System could fail to be competitive, could fail to keep or attract payor contracts, or could be prohibited from operating until its panel provided adequate access to patients. Such occurrences could have a material adverse effect on the business or operations of the System. 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 System 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 System to offer such equipment or services may be subject to the availability of equipment or specialists, governmental approval or the ability to finance such acquisitions or operations. Malpractice Claims and Liability Insurance Malpractice and other actions alleging wrongful conduct are often filed against hospitals. Potential liabilities associated with these claims can be significant. While the System believes its insurance program is adequate, it is possible that the cost of coverage, including other programs of insurance, in the future could significantly increase or that the amount payable in respect of liability claims could impose material increased expense to the System. Increases in the cost or limitations on the availability of malpractice insurance to other health care professionals could also result in a shortage of medical professionals and has the potential of disrupting the delivery of healthcare. For a discussion of the professional liability insurance coverage of the System, see APPENDIX A: Accreditation, Litigation And Insurance Malpractice Insurance. Integrated Delivery Systems From time to time, many health care providers have considered exploring ways to develop integrated systems for the delivery of health care services within their geographic service areas. These integrated health care delivery systems involve the coordinated delivery of services by hospitals, physician groups, other health care professionals, managed care organizations and alternative delivery systems such as health maintenance organizations. This coordination may be achieved through formal corporate affiliations such as the merger of existing corporate entities or through contractual agreements to implement and coordinate services or some combination of both. Examples of such integrated delivery systems include medical service organizations, which provide physicians and physician groups with a combination of financial and managed care contracting services, physician-hospital organizations, which are typically organizations jointly owned or controlled by a hospital and a physician group for the purpose of managed care contracting and hospital-based clinics or medical practice foundations which purchase and operate physician practices and provide administrative services to physicians. The development of -41-

48 these integrated delivery systems may require that assets be transferred out of the System or that new entities be brought into the System. Although any such transfer or entry would require compliance with the applicable provisions of the Master Indenture, such action could nevertheless result in a reduction in the net income available for debt service of the System. Further, such integrated delivery systems also, in some instances depending on the structure and operation of such systems, may raise certain legal or regulatory risks, including questions relating to compliance with the Medicare anti-self referral laws, antikickback laws, antitrust laws and federal or state tax exemption issues. No prediction can be made as to the potential impact of such risks on the System. Affiliation, Merger, Acquisition and Divestiture Significant numbers of affiliations, mergers, acquisitions and divestitures have occurred in the health care industry in recent years. As part of its ongoing planning process, the System has considered and will continue to consider the potential acquisition of operations or property which may become affiliated with or become part of the System in the future, as well as the potential disposition of certain existing operations or properties of the System. Health Care Legislative and Regulatory Environment Effect of Regulation Generally Hospitals, including the hospitals of the System, are subject to extensive regulation by federal, state and local governmental agencies and by certain nongovernmental agencies such as the Joint Commission on Accreditation of Healthcare Organizations ( JCAHO ). These laws and regulations require that hospitals meet various detailed standards relating to the adequacy of medical care, equipment, personnel, 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. No assurance can be given as to the effect on future operations of the System of existing laws, regulations and standards for certification or accreditation or of any future changes in such laws, regulations and standards. Licensing, Certification and Accreditation Health facilities, including those in the System, are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. These include, but are not limited to, requirements for participation in Medicare, requirements for participation in Medicaid, state licensing agencies, private payors and the accreditation standards of JCAHO. Renewal and continuation of certain of these licenses, certifications and accreditations are based on inspections, surveys, audits, investigations or other reviews, some of which may require affirmative actions by the System. The System anticipates that it will be able to renew periodically currently held licenses, certifications or accreditations when required. Nevertheless, adverse actions in any of these areas could occur, which could result in the loss of utilization, revenue, or the ability to operate all or a portion of the System s facilities, and consequently, could have a material and adverse effect on the System. Civil and Criminal Fraud and Abuse Laws and Enforcement Federal and state health care fraud and abuse laws regulate both the provision of services to government program beneficiaries and the methods and requirements for submitting claims for services rendered to such beneficiaries. Under these laws, individuals and organizations can be penalized for -42-

49 submitting claims for services that are not provided, billed in a manner other than as actually provided, not medically necessary, provided by an improper person, accompanied by an illegal inducement to utilize or refrain from utilizing a service or product, or billed in a manner that does not otherwise comply with applicable government requirements. Federal and state governments have a range of criminal, civil and administrative sanctions available to penalize and remediate health care fraud and abuse, including exclusion of the provider from participation in the Medicare or Medicaid programs, fines, civil monetary penalties, and suspension of payments and, in the case of individuals, imprisonment. Fraud and abuse cases may be prosecuted by one or more government entities and/or private individuals, and more than one of the available penalties may be imposed for each violation. Based upon the prohibited activity in which the provider has engaged, governmental agencies and officials may bring actions against providers under civil or criminal False Claims Acts, statutes prohibiting referrals for compensation or fee-splitting, or the Stark law, which prohibits certain referrals by a physician to certain organizations in which such physician has a financial relationship. The civil and criminal monetary assessments and penalties may be substantial. Additionally, the provider may be denied participation in the Medicare and/or Medicaid programs. If and to the extent any Member of the Restricted Group engaged in a prohibited activity and judicial or administrative proceedings concluded adversely to such Member, such outcome could materially adversely affect the System. The System has internal policies and procedures and has developed and implemented a compliance program that management of the System believes effectively reduces exposure for violations of these laws. However, because the government s enforcement efforts presently are widespread within the industry and may vary from region to region, there can be no assurance that the compliance program will significantly reduce or eliminate the exposure of the System to civil or criminal sanctions or adverse administrative determinations. Patient Records and Patient Confidentiality The Health Insurance Portability and Accountability Act of 1996 ( HIPAA ) addresses the confidentiality of individuals health information. Disclosure of certain broadly defined protected health information is prohibited unless expressly permitted under the provisions of the HIPAA statute and regulations or authorized by the patient. HIPAA s confidentiality provisions extend not only to patient medical records, but also to a wide variety of health care clinical and financial settings where patient privacy restrictions often impose new communication, operational, accounting and billing restrictions. These add costs and create potentially unanticipated sources of legal liability. HIPAA imposes civil monetary penalties for violations and criminal penalties for knowingly obtaining or using individually identifiable health information. The penalties range from $50,000 to $250,000 and/or imprisonment if the information was obtained or used with the intent to sell, transfer or use the information for commercial advantage, personal gain or malicious harm. Emergency Medical Treatment and Active Labor Act In response to concerns regarding inappropriate hospital transfers of emergency patients based on the patient s ability to pay for the services provided, in 1986 Congress enacted the Emergency Medical Treatment and Active Labor Act ( EMTALA ). This so-called anti-dumping law imposes certain requirements on hospitals prior to transferring a patient to another facility. Failure to comply with EMTALA can result in exclusion from the Medicare and Medicaid programs as well as civil and criminal penalties, any of which could adversely affect the financial condition of the System. EMTALA and its -43-

50 implementing regulations are complex and compliance is dependent, in part, upon the actions of the medical staff of the System s facilities. While the System has established policies and procedures intended to assure compliance with EMTALA, no assurance can be given that a violation of EMTALA will not occur. Environmental Laws and Regulations The System generates medical waste that must be disposed of in compliance with federal, state and local environmental laws, rules, and regulations. The System s operations, as well as the System s purchases and sales of facilities, also are subject to compliance with various other environmental laws, rules and regulations. No assurance can be given that a violation of federal, state or local environmental laws, rules, or regulations will not occur. Tax Matters Tax-Exempt Status of Interest on the 2005 Variable Rate Bonds The tax-exempt status of the 2005 Variable Rate Bonds is based on the continued compliance by the Authority and the Borrowers with certain covenants relating generally to restrictions on use of the facilities of the Borrowers, maintenance of Section 501(c)(3) status under the Code by the Borrowers, arbitrage limitations, rebate of certain excess investment earnings to the federal government, and restrictions on the amount of issuance costs financed with the proceeds of the 2005 Variable Rate Bonds. Failure to comply with such covenants could cause interest on the 2005 Variable Rate Bonds to become subject to Federal income taxation retroactive to the date of issue of the 2005 Variable Rate Bonds. Bond Examinations The Internal Revenue Service has an ongoing program of examining tax-exempt obligations to determine whether, in the view of the IRS, interest on such obligations is properly excluded from gross income for federal income tax purposes, and it is possible that the 2005 Variable Rate Bonds may be selected for examination under such program. If an examination is commenced, under current procedures, the IRS will treat the Authority as the relevant taxpayer under the Code, and the holders of the 2005 Variable Rate Bonds may have no right to participate. The commencement of an audit could adversely affect the market value and liquidity of the 2005 Variable Rate Bonds regardless of the ultimate outcome. Tax-Exempt Status of the Borrowers The tax-exempt status of the 2005 Variable Rate Bonds presently depends upon the maintenance by each Borrower that receives or uses the proceeds of the 2005 Variable Rate Bonds or owns facilities financed with the 2005 Variable Rate Bonds of its status as an organization described in Section 501(c)(3) of the Code. The maintenance of such status is contingent on compliance with general rules promulgated in the Code and related regulations regarding the organization and operation of tax-exempt entities, including their operation for charitable and educational purposes and their avoidance of transactions which may cause their earnings or assets to inure to the benefit of private individuals. As these general principles were developed primarily for public charities which do not conduct large-scale technical operations and business activities, they often do not adequately address the myriad of operations and transactions entered into by modern healthcare organizations. The most significant adverse consequence to a tax-exempt entity for inurement or unlawful private benefit available to the Internal Revenue Service under the Code would be revocation of tax- -44-

51 exempt status. Although the IRS has not often revoked the 501(c)(3) tax-exempt status of an organization, it could do so in the future. The loss of tax-exempt status by either Borrower could adversely affect the tax exemption of the 2005 Variable Rate Bonds and of other tax-exempt debt of the System retroactively to the date of issuance of the 2005 Variable Rate Bonds or debt, and defaults in covenants regarding the 2005 Variable Rate Bonds and other related tax-exempt debt would likely result. Loss of tax-exempt status could also result in substantial tax liabilities on income of affected Borrower. For these reasons, loss of tax-exempt status of any Borrower could have a material adverse effect on the financial condition of the System, taken as a whole. With increasing frequency, the IRS has imposed substantial monetary penalties and future charity care or public benefit obligations on tax-exempt organizations that own and operate hospitals in lieu of revoking tax-exempt status, as well as requiring that certain transactions be altered, terminated or avoided in the future and/or requiring governance or management changes. These penalties and obligations typically are imposed on the tax-exempt organization pursuant to a closing agreement. The IRS conducts comprehensive examinations of nonprofit organizations through its Coordinated Examination Program ( CEP ). These examinations generally cover a wide range of possible issues, including the community benefit basis of exemption, private inurement and private benefit, partnerships and joint ventures, retirement plans and employee benefits, employment taxes, taxexempt bond financing, political contributions and unrelated business taxable income. the System may be the subject of a CEP audit in the future. In recent years, the Internal Revenue Service has issued a number of formal and informal statements or interpretations, which have increased uncertainty as to the Internal Revenue Service s position on a wide variety of activities commonly undertaken by health care organizations, including the arrangements of such organizations with physicians and physician groups. As a result, tax-exempt hospitals and other providers are currently subject to an increased degree of scrutiny and possibly enforcement by the Internal Revenue Service with respect to such activities. Legislation adopted by Congress in 1996 provides the IRS with an intermediate sanctions systems of federal excise taxes to combat violations by tax-exempt organizations of the private inurement prohibition of the Code. Prior to the enactment of this law, the IRS could punish such violations only through revocation of an entity s tax-exempt status. Intermediate sanctions may be imposed where there is an excess benefit transaction defined to include a disqualified person (i.e., an insider) (i) engaging in a non-fair market value transaction with the tax-exempt organization; (ii) receiving unreasonable compensation from the tax-exempt organization; or (iii) receiving payment in an arrangement that violates the private inurement proscription. Penalty excise taxes may be imposed in an amount up to 200% of the amount of the excess benefit and may be imposed by the IRS either in lieu of or in addition to revocation of exemption. The legislation is potentially favorable to tax-exempt entities since it provides the IRS with a punitive option short of revocation of tax-exempt status to deal with incidents of private inurement. However, the standards for tax exemption have not been changed and the IRS still has the authority for revoking tax-exempt status in appropriate circumstances. Unrelated Business Income The IRS sometimes undertakes audits and reviews of the operations of tax-exempt hospitals with respect to their exempt activities and the generation of unrelated business taxable income ( UBTI ). The Borrower participate in activities which generate UBTI. Management believes it has properly accounted for and reported UBTI; nevertheless, an investigation or audit could lead to a challenge which could result in taxes, interest and penalties with respect to unreported UBTI and in some cases could ultimately affect the tax-exempt status of a Borrower as well as the exclusion from gross income for federal income tax -45-

52 purposes of the interest payable on the 2005 Variable Rate Bonds and other tax-exempt debt of the System. State Income Tax Exemption and Local Property Tax Exemption It is likely that the loss by a Borrower of federal tax exemption would also result in a challenge to the state tax exemption of such Borrower. Such an event would likely impose significant additional costs on the System. In recent years, state, county, and local taxing authorities have been undertaking audits and reviews of the operations of tax-exempt healthcare providers with respect to their real property tax exemptions. In some cases, particularly where such authorities are dissatisfied with the amount of services provided to indigents, the real property tax-exempt status of the healthcare providers has been questioned. The majority of the real property of the Borrower is exempt from real property taxation. Such challenges could have a material adverse effect on the financial condition of the System, taken as a whole. Nonprofit Healthcare Environment The Borrowers are nonprofit corporations, exempt from federal income taxation as organizations described in Section 501(c)(3) of the Code. As nonprofit tax-exempt organizations, the Borrowers are subject to federal, state and local laws, regulations, rulings and court decisions relating to their organization and operation, including their operation for religious and charitable purposes. At the same time, the Borrowers conduct large-scale complex business transactions and are often the major employers in their geographic areas. There can often be a tension between the rules designed to regulate a wide range of charitable organizations and the day-to-day operations of a complex, multi-state healthcare organization. Recently, an increasing number of the operations or practices of healthcare providers have been challenged or questioned to determine if they are consistent with the regulatory requirements for nonprofit tax-exempt organizations. These challenges are broader than concerns about compliance with federal and state statutes and regulations, such as Medicare and Medicaid compliance, and instead in many cases are examinations of core business practices of the healthcare organizations. Areas which have come under examination have included pricing practices, billing and collection practices, charitable care, executive compensation, exemption of property from real property taxation, and others. These challenges and questions have come from a variety of sources, including state attorneys general, the IRS, labor unions, Congress, state legislatures, and patients, and in a variety of forums. These examples are indicative of a greater scrutiny of the billing, collection and other business practices of these organizations, and may indicate an increasingly more difficult operating environment for healthcare organizations, including the System. The challenges and examinations, and any resulting legislation, regulations, judgments, or penalties, could have a material adverse effect on the System. Certain Matters Relating to Enforceability of Obligations Certain facilities of MMC, as a member of the Restricted Group, are pledged as security pursuant to the Mortgage to the Master Trustee for the benefit of all current and future noteholders under the Master Indenture which includes the 2005 Master Notes. With certain minor exceptions, the facilities of MMC are not general purpose facilities and are not likely to be suitable for industrial or commercial use. Consequently, it would be difficult to find a buyer or lessee for such facilities and, in the event of the institution of bankruptcy proceedings, the estate in bankruptcy may not realize an amount sufficient to pay the outstanding 2005 Variable Rate Bonds from the disposition of such facilities. -46-

53 Enforceability of Remedies Enforcement of remedies under the Master Indenture, the Bond indentures and the Loan Agreements may be limited or restricted by fraudulent conveyance laws, laws relating to bankruptcy and rights of creditors and by application of general principles of equity. The Master Notes delivered under the Master Indenture are secured by pledging and granting a security interest in their Gross Revenues. As to certain items included in Gross Revenues, namely documents, instruments and cash, perfection of the security interest can and only will be accomplished if the secured party has possession. Also, some of the items of collateral included in the definition of Receipts and Revenues are not covered by the Pennsylvania Uniform Commercial Code and, therefore, will not be governed by it. Under the Loan Agreements, the Authority is entitled to repayment of the loan and certain other amounts. The Authority will also assign the right to receive such payments to the Bond Trustee under the Bond Indentures, as further security for the payment of the 2005 Variable Rate Bonds. To the extent that the Bond Trustee receives possession of payments made pursuant to the Loan Agreements, the security interest has been perfected and, unless those payments constitute a preference in bankruptcy proceedings, the Bond Trustee has a valid and binding first lien on those payments. The remedies available to Bondholders upon an Event of Default are set forth in the applicable Bond Indentures and the applicable Loan Agreements and are in many respects dependent upon judicial action which is subject to discretion or delay. Under existing law and judicial decisions, including specifically Title 11 of the United States Code, the remedies specified in the Bond Indentures and the Loan Agreements may not be readily available or may be limited. There is no clear precedent in the law as to whether payments by members of an obligated group or a restricted group may be voided by a trustee in bankruptcy in the event of a bankruptcy of either of them or by third party creditors in an action brought pursuant to state fraudulent transfer or conveyance statutes. Under the United States Bankruptcy Code, a trustee in bankruptcy (and under state fraudulent transfer or conveyance statutes, a creditor of a guarantor), may void any obligation incurred by a guarantor if, among other bases therefore, (a)(1) the guarantor has not received fair consideration or reasonably equivalent value in exchange for the guaranty, and (2) the guaranty renders the guarantor insolvent, as defined in the Bankruptcy Code or state fraudulent conveyance statutes, or (b) the guarantor is undercapitalized. Application by courts of the tests of insolvency, reasonably equivalent value and fair consideration has resulted in a conflicting body of case law. It is possible that, in an action to force a debtor to make a payment, a court might not enforce such a payment in the event it is determined that sufficient consideration for such obligations was not received or that the incurrence of such obligation has rendered or will render the debtor, insolvent or it is or will thereby become undercapitalized. The various legal opinions to be delivered concurrently with the original delivery of the 2005 Variable Rate Bonds will contain customary qualifications as to the enforceability of the various legal instruments by limitations imposed by state and Federal laws, rulings and decisions affecting remedies and by bankruptcy, reorganization, insolvency, fraudulent conveyance or other similar laws or legal or equitable principles affecting creditors rights generally. If any of such limitations are imposed, they may adversely affect the ability of the Bond Trustee and the Holders to enforce their claims and assert their rights against the Borrowers and/or the Restricted Group, as applicable. There exists statutory authority in Pennsylvania for a court to dissolve a nonprofit corporation or undertake supervision of its affairs on various grounds, including a finding that such corporation is insolvent. Moreover, pursuant to the common law and statutory power to enforce charitable trusts and to -47-

54 see that charitable funds are applied to their intended uses, the Attorney General of the Commonwealth of Pennsylvania (in which each Borrower is incorporated) may commence legal proceedings to dissolve a non-profit corporation acting contrary to its charitable purposes or to restrain actions inconsistent with the charitable use of such funds or which render such non-profit corporation unable to discharge its charitable functions. Such actions may arise on a court s own motion or pursuant to a petition of the Attorney General or such other persons who have interests different than those of the general public. The obligations of each Borrower may be limited by such charitable trust laws. Bankruptcy The rights and remedies of owners of the 2005 Variable Rate Bonds are subject to various provisions of the United States Bankruptcy Code (the Bankruptcy Code ). A filing under the Bankruptcy Code by the Borrower would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against such Borrower, and its property, and as an automatic stay of any act or proceeding to enforce a lien upon its property. Borrowers may file a plan for the adjustment of its debts in any such proceeding, which could include provisions modifying or altering the rights of creditors generally, or any class of them, secured or unsecured. The plan, when confirmed by the court, binds all creditors who had notice or knowledge of the plan and discharges all claims against the debtor provided for in the plan. No plan may be confirmed unless certain conditions are met, among which are 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 has 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. Municipal Bond Insurance Policies There can be no assurance that each Bond Insurer will be able to meet its contractual obligations under any Bond Insurance Policy with respect to any 2005 Variable Rate Bonds. Certain information with respect to each Bond Insurer is set forth under the caption MUNICIPAL BOND INSURANCE POLICIES herein. The information as to each Bond Insurer was provided by such Bond Insurer, and no representation is made as to the adequacy or the accuracy thereof. In the event that a Bond Insurer is required to pay principal of or interest on any of the 2005 Variable Rate Bonds, no representation or assurance is given or can be made that such event will not adversely affect the market price for or marketability of such Bonds. Owners of the 2005 Variable Rate Bonds should note that, while a Bond Insurance Policy will insure payment of the principal amount (but not any premium) paid to any Owner in connection with the optional or extraordinary redemption of any 2005 Variable Rate Bond which is recovered from such Owner as a voidable preference under applicable bankruptcy law, such amounts will be repaid by the Bond Insurer to such Owner only at the times and in the amounts as would have been due absent such redemption. Rights of Bond Insurers So long as the Bond Insurance Policies are in effect and the Bond Insurers are not in default thereunder, the Bond Insurers will be regarded as the sole holders of the 2005 Variable Rate Bonds for all purposes of the Bond Indenture, including for purposes of exercising any voting right or giving any consent or direction or taking any other action that the Holders of the 2005 Variable Rate Bonds are entitled to take pursuant the Bond Indenture. Furthermore, so long as the Bond Insurers perform their obligations under the Bond Insurance Policies, the Bond Insurers may (1) direct to be exercised or -48-

55 exercise any remedies that the Bond Trustee exercises under the Bond Indenture, and (2) consent in lieu of the consent of any Holder to any supplement, amendment or modification of the Bond Indenture, the Loan Agreement and to the Master Indenture (other than to amendments or modifications to the payment or security provisions of the 2005 Variable Rate Bonds or the 2005 Master Notes). See APPENDIX C: SUMMARY OF THE BOND INDENTURES PROVISIONS CONCERNING BOND INSURERS -- GENERALLY. Secondary Market There can be no assurance that there will be a secondary market for the purchase or sale of the 2005 Variable Rate Bonds. From time to time, there may be no market for the 2005 Variable Rate Bonds depending upon prevailing market conditions, including the financial condition or market position of firms who may make the secondary market, the evaluation of the System s capabilities and the financial condition and results of operations of the System. Bond Ratings There is no assurance that the ratings assigned to the 2005 Variable Rate Bonds at the time of issuance will not be lowered or withdrawn at any time, the effect of which could adversely affect the market price for, and marketability of, the 2005 Variable Rate Bonds. Other Factors Additional factors may affect future operations of the System. The extent of such factors influence cannot be determined at this time. Such factors include the following: (i) (ii) (iii) (iv) (v) (vi) Adverse labor actions resulting in a reduction in revenues without corresponding decreases in cost. Reduced demand for health care or other services arising from future medical and scientific advances. Efforts by insurers and governmental agencies to limit the cost of hospital services and to reduce utilization of inpatient hospital facilities by such means as preventive medicine, improved occupational health and safety, and outpatient care. Occurrence of natural or man-made disasters, which may damage the facilities of the System or interrupt utility service to the facilities or otherwise impair the operation of the System and the generation of revenues from the facilities. Increased unemployment or other adverse economic conditions in the System s service area that could increase the proportion of patients who are unable to pay fully for the cost of their care. In addition, increased unemployment caused by a general downturn in the economy of the System s service area or the Commonwealth of Pennsylvania or by the closing of operations of one or more major employers in such service area may result in a loss of health insurance benefits for a portion of the System s patients. Cost and availability of energy. -49-

56 TAX EXEMPTION Federal Tax Exemption Concurrently with the issuance of the 2005 Variable Rate Bonds, Bond Counsel will deliver its opinion to the effect that, under existing law as enacted and construed on the date of such opinion, interest on the 2005 Variable Rate Bonds is excludable from gross income for federal income tax purposes, assuming the accuracy of the certifications of the Authority and the Borrowers and continuing compliance by the Authority and the Borrowers with requirements of the Code. Interest paid on the 2005 Variable Rate Bonds will not be a preference item for purposes of calculating individual or corporate alternative minimum taxable income. However, interest paid on the 2005 Variable Rate Bonds held by a corporation (other than an S corporation, regulated investment company, real estate investment trust or real estate mortgage investment conduit) may be indirectly subject to federal alternative minimum tax because of its inclusion in adjusted current earnings of the corporate holder. In addition, interest on the 2005 Variable Rate Bonds held by foreign corporations may be subject to the foreign branch profits tax imposed by the Code. The Code establishes requirements that must be complied with subsequent to the issuance of the 2005 Variable Rate Bonds for interest thereon to be and remain excluded from gross income pursuant to Section 103 of the Code. Failure to comply with these requirements could cause the interest on the 2005 Variable Rate Bonds to be included in gross income, retroactive to the date of issue of the 2005 Variable Rate Bonds or at some later date. The requirements include, but are not limited to, the provisions of Section 148 of the Code which prescribes yield and other limits within which the proceeds of the 2005 Variable Rate Bonds are to be invested and may require that certain investment earnings on the foregoing be rebated on a periodic basis to the United States. The Borrowers and the Authority have covenanted to comply with the provisions of the Code. Ownership of the 2005 Variable Rate Bonds may result in collateral federal tax consequences to certain taxpayers, including, without limitation, financial institutions, S corporations, property and casualty insurance companies, individual recipients of social security or railroad retirement benefits and taxpayers who may be deemed to have incurred indebtedness to purchase or carry the 2005 Variable Rate Bonds. Bond Counsel will express no opinion with respect to such collateral tax consequences and taxpayers who may be subject to these provisions should contact their own tax advisors. Pennsylvania Tax Exemption Bond Counsel will also deliver an opinion to the effect that, under existing law as enacted and construed on the date of such opinion, the 2005 Variable Rate Bonds are exempt from personal property taxes in Pennsylvania, and interest on the 2005 Variable Rate Bonds is exempt from the Pennsylvania personal income tax and the Pennsylvania corporate net income tax. BOND TRUSTEE AND MASTER TRUSTEE The obligations of the Bond Trustee and the Master Trustee (the Trustees ) are described in the applicable Bond Indenture and the Master Indenture, respectively. The Bond Trustee and the Master Trustee have undertaken only those obligations and duties which are expressly set out in the applicable Bond Indenture and the Master Indenture, respectively. The Trustees have not independently passed upon the validity of the 2005 Variable Rate Bonds or the 2005 Master Notes, any security for the payment thereof, the adequacy of the provisions for such payment, or the status for federal or state income tax purposes of the interest on the 2005 Variable Rate Bonds. The Bond Indentures and the Master Indenture -50-

57 expressly provide that the respective Trustees will not be responsible for any loss or damage resulting from any action or inaction taken (i) in good faith in reliance upon an opinion of counsel or (ii) absent the Trustees negligence or gross misconduct. LEGAL MATTERS Legal matters incident to the authorization, issuance, and sale of the 2005 Variable Rate Bonds will be passed upon by the Law Office of Wayne D. Gerhold, Pittsburgh, Pennsylvania and Tucker Arensburg, P.C., Pittsburgh, Pennsylvania, Co-Bond Counsel. The proposed form of Co-Bond Counsel s opinion with respect to the 2005 Variable Rate Bonds is included in APPENDIX G hereto. Certain legal matters will be passed upon for the Authority by its counsel, Gilbert E. Caroff, Esquire, Johnstown, Pennsylvania; for the Borrowers by Shahade and Shahade, Johnstown, Pennsylvania; and for the Underwriter by its counsel, Pepper Hamilton LLP, Pittsburgh, Pennsylvania. INDEPENDENT ACCOUNTANTS The consolidated financial statements of CHS as of June 30, 2004 and for the fiscal years then ended included in APPENDIX B to this Official Statement have been audited by BKD, LLP, independent accountants as stated in their report appearing in APPENDIX B. The consolidated financial statements of CHS as of June 30, 2003 and for the fiscal year then ended included in APPENDIX B to this Official Statement were audited by other accountants whose report dated September 29, 2003 expressed an unqualified opinion on those statements. RATINGS Moody s Investors Service ( Moody s ) and Standard & Poor s Ratings Services (a division of the McGraw-Hill Companies, Inc.) ( S&P ) have assigned the 2005A Bonds and the 2005B Bonds municipal bond ratings of Aa1 and AAA, respectively, in each case based upon the issuance by Assured Guaranty Corp. of its Bond Insurance Policy. Moody s and S&P have assigned the 2005C Bonds municipal bond ratings of Aa3 and AA, respectively, in each case based upon the issuance by Radian Asset Assurance Inc. of its Bond Insurance Policy. In addition, Moody s has assigned its underlying municipal bond rating of Baa1 to the 2005 Variable Rate Bonds without regard to the Bond Insurance Policies. Any explanation of the significance of any rating may only be obtained from the rating agency furnishing the same. The Borrowers have furnished to the rating agencies certain information and material concerning the 2005 Variable Rate Bonds and themselves. Generally, rating agencies base their ratings on this information and materials and on investigations, studies and assumptions made by the rating agencies themselves. There is no assurance that the ratings initially assigned to any of the 2005 Variable Rate Bonds will be maintained for any given period or time or that such ratings may not be revised downward or withdrawn entirely by a rating agency if, in its judgement, circumstances so warrant. Any downward change in or the withdrawal of any such rating might have an adverse effect on the market price or marketability of the 2005 Variable Rate Bonds to which it applies. -51-

58 UNDERWRITING Pursuant to the provisions of a bond purchase contract among the Authority, the Borrowers and Merrill Lynch & Co., (the Underwriter ), the Underwriter has agreed, subject to certain conditions, to purchase the 2005 Variable Rate Bonds from the Authority at an aggregate discount of $599,500 from the initial public offering prices set forth on the inside front cover page hereof. The Underwriter will be obligated to purchase all of the 2005 Variable Rate Bonds if any are purchased. The public offering prices may be changed, from time to time, by the Underwriter. The 2005 Variable Rate Bonds may be offered and sold to certain dealers (including the Underwriter and other dealers depositing the 2005 Variable Rate Bonds into investment trusts) at prices lower than such public offering prices. The bond purchase contract for the 2005 Variable Rate Bonds requires the Borrowers to indemnify the Authority and the Underwriter against certain liabilities relating to this Official Statement. LEGALITY OF THE 2005 VARIABLE RATE BONDS FOR INVESTMENT AND DEPOSIT Under the Act, bonds of the Authority (including the 2005 Variable Rate Bonds) are made securities in which all officers of the Commonwealth and its political subdivisions and municipal officers and administrative departments, boards and commissions of the Commonwealth, all banks, bankers, savings banks, trust companies, savings and loan associations, investment companies, and other persons carrying on a banking business, all insurance companies, insurance associations, and other persons carrying on an insurance business, and all administrators, executors, guardians, trustees and other fiduciaries, and all other persons whatsoever who are authorized to invest in bonds or other obligations of the Commonwealth, may properly and legally invest any funds, including capital belonging to them or within their control, and the bonds of the Authority (including the 2005 Variable Rate Bonds) are made securities which may properly and legally be deposited with, and received by, any State or municipal officers or agency of the Commonwealth for any purpose for which the deposit of bonds or other obligations of the Commonwealth is authorized by law. NEGOTIABILITY Under the Act, the 2005 Variable Rate Bonds have all the qualities of negotiable instruments under the law merchant and the laws of the Commonwealth relating to negotiable instruments. The Authority LITIGATION There is no litigation of any nature pending or, to the Authority s knowledge, threatened against the Authority at the date of this Official Statement to restrain or enjoin the issuance, sale, execution or delivery of the 2005 Variable Rate Bonds, or in any way contesting or affecting the validity of the 2005 Variable Rate Bonds or any proceedings of the Authority taken with respect to the issuance or sale thereof, or the pledge or application of any moneys or the security provided for the payment of the 2005 Variable Rate Bonds or the existence or powers of the Authority. The Borrowers There are various legal actions pending against the Borrowers, which have arisen in the ordinary course of the business of the Borrowers, including medical malpractice claims that may or may not be covered by insurance or self-insurance because of the type of action or damages sought (such as punitive damages), because of a reservation of rights by an insurance carrier or self-insurance program or because -52-

59 the action has not proceeded to a stage that permits an accurate assessment of available coverage. Nonetheless, in the opinion of management of the Borrowers, there is no litigation pending or overtly threatened against any of the Borrowers in which an adverse decisions would have a material adverse effect on the current business, financial position or operations of the Borrowers. See Accreditation, Litigation And Insurance Litigation in APPENDIX A hereto. CONTINUING DISCLOSURE The Authority has determined that no financial or operating data concerning the Authority is material to any decision to purchase, hold or sell the 2005 Variable Rate Bonds and will not provide any such information to or for the benefit of purchasers or holders of the 2005 Variable Rate Bonds in the future. The Borrowers have undertaken the responsibilities for continuing disclosure described below, and the Authority has no responsibility or liability to the holders of the 2005 Variable Rate Bonds or any other person with respect to such disclosure. The Borrowers will covenant for the benefit of the holders of the 2005 Variable Rate Bonds in a Continuing Disclosure Agreement (the Disclosure Agreement ) among the Authority, the Borrowers and the Bond Trustee, to provide to certain information repositories (i) certain financial information and operating data on an annual basis within 150 days after the end of each fiscal year of the Borrowers, commencing with the fiscal year ending June 30, 2005, that the 2005 Variable Rate Bonds are outstanding, and (ii) notices of the occurrence of certain enumerated events on a timely basis following their occurrence if their occurrence is determined by the Borrowers to be material to the holders of the 2005 Variable Rate Bonds. The annual financial information and operating data of the Borrowers to be provided in accordance with the Disclosure Agreement includes the System s consolidated audited annual financial statements, together with statistical information similar to the information provided in APPENDIX A hereto under the headings: HOSPITAL SERVICES: Bed Complement Patient Care Services SERVICE AREA: Service Area Providers SUMMARY OF HISTORICAL UTILIZATION SOURCES OF PATIENT REVENUE AND ADMISSIONS SUMMARY OF REVENUE AND EXPENSES Any filing in connection with the Disclosure Agreement may be made solely by transmitting such filing to the Texas Municipal Advisory Council (the MAC ) as provided at unless the SEC has withdrawn its interpretative advice in its letter to the MAC dated September 7, The Borrowers have entered into similar disclosure agreements in accordance with Rule 15c2-12 of the Securities and Exchange Commission in connection with prior debt obligations issued on behalf of Borrowers and have not failed to comply with any previous undertaking to provide continuing disclosure. MISCELLANEOUS The references herein to the 2005 Variable Rate Bonds, the Master Indenture, the Bond Indentures and the Loan Agreements are brief outlines of certain provisions thereof. Such outlines do not purport to be complete. For full and complete statements of such provisions, reference is made to such instruments, documents and other materials, copies of which will be on file at the principal office of the Bond Trustee. -53-

60 The agreement of the Authority with the owners of the 2005 Variable Rate Bonds is fully set forth in the Bond Indentures. This Official Statement is not to be construed as constituting an agreement with the purchasers of the 2005 Variable Rate Bonds. Statements made in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended merely as such and not as representations of facts. Copies of the documents mentioned under this heading are on file in the offices of the Authority and following delivery of the 2005 Variable Rate Bonds will be on file at the principal corporate trust office of the Bond Trustee. The attached Appendices are integral parts of this Official Statement and should be read together with all foregoing statements. -54-

61 CHS and MMC have reviewed the information contained herein and in the Appendices attached hereto which relates to it and has approved all such information for use within this Official Statement. South Fork Municipal Authority Approved: Conemaugh Valley Memorial Hospital By: /s/ Susan L. Vivian, Vice Chairman By: /s/ Steven Tucker, President Conemaugh Health System Inc. By: /s/ Scott A. Becker, Chief Executive Officer -55-

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63 APPENDIX A: INFORMATION CONCERNING CONEMAUGH HEALTH SYSTEM INC.

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65 INFORMATION CONCERNING CONEMAUGH HEALTH SYSTEM INC. This Appendix A contains certain information pertaining to Conemaugh Health System Inc. ( CHS, Conemaugh or the System ) and its affiliates. GENERAL INFORMATION CHS, a Pennsylvania nonprofit corporation exempt from taxes under Section 501 (c)(3) of the Internal Revenue Code (the Code ), was formed in January 1994 for the primary purpose of serving as a parent corporation to certain medical centers and other health care institutions. The System includes three general acute care medical centers, a philanthropic foundation and a nonprofit taxable corporation that owns, directly or indirectly, a group of employed primary care physicians, and a subsidiary company that owns real estate, a durable medical equipment company, a nursing home and a preferred provider organization. The three general acute care medical centers in the CHS organization are Conemaugh Valley Memorial Hospital located in Johnstown, Cambria County, Pennsylvania, Meyersdale Community Hospital located in Meyersdale, Somerset County, Pennsylvania and Windber Hospital, Inc. located in Windber, Somerset County, Pennsylvania. Conemaugh Valley Memorial Hospital, which operates under the name Memorial Medical Center ( MMC ), is a tax-exempt Pennsylvania nonprofit corporation organized in On August 1, 2005, MMC purchased certain assets of UPMC Lee Regional Hospital ( Lee ). The clinical operations of Lee were incorporated into MMC and now the Johnstown Main Campus (MMC) and the Downtown Campus (former Lee facility) operate under one hospital license. Meyersdale Community Hospital, which operates under the name Meyersdale Medical Center ( MYMC ), is a tax-exempt Pennsylvania nonprofit corporation organized in Windber Hospital, Inc. which operates under the name Windber Medical Center ( WMC ), is a tax-exempt Pennsylvania nonprofit corporation incorporated in WMC was originally organized in 1906 by the Berwind White Coal Company. Other entities in the System include: Good Samaritan Medical Center ( GSMC ), a taxexempt Pennsylvania nonprofit corporation incorporated in 1911, which operates a skilled nursing facility; Conemaugh Health Foundation, a tax-exempt Pennsylvania nonprofit corporation incorporated in 1993 to serve as a philanthropic organization; Conemaugh Health Initiatives, Inc., a taxable Pennsylvania nonprofit corporation incorporated in 1994 as a holding company for entities, organizations and endeavors which are better suited to direction by a traditional corporation; and Penn Highlands Health Plan, a taxable Pennsylvania nonprofit corporation which is a Preferred Provider Organization ( PPO ). Miners Hospital d/b/a Miners Medical Center ( MiMC ), which operates an acute care hospital, became a jointly controlled affiliate member of CHS in Due to the structure of control and governance, MiMC is not consolidated into the CHS financial statements. HISTORICAL BACKGROUND Prior to the incorporation of CHS, the organization s three current acute care medical centers, MMC, MYMC and WMC, operated as independent and competitive entities located within fifty miles of one another in Cambria and Somerset Counties, Pennsylvania. The structure of the CHS organization was designed to maintain, enhance and protect the scope of services of each of its member institutions while controlling rising costs by avoiding duplication of services and employing economies of scale. CHS was organized to be a regional integrated health care system to service the needs of the communities in the Laurel Highlands region. A-1

66 When CHS was organized in early 1994, MMC was the only medical center member of the System. MYMC entered into an affiliation with CHS in May 1994, followed by GSMC and WMC in The services provided by the System range from traditional inpatient and outpatient care to subacute care which provides a transitional level of care for medical patients who no longer require a hospital stay but who can benefit from a level of care beyond traditional long-term care or outpatient care. CHS and its affiliates have attempted to provide services that meet the needs of the community they serve and to respond to the changing health care market by coordinating their programs and services on an ongoing basis and making appropriate changes. Memorial Medical Center DESCRIPTION OF ENTITIES IN THE SYSTEM Memorial Medical Center ( MMC ) is a tertiary care, teaching hospital located in Johnstown, Pennsylvania, approximately 78 miles east of Pittsburgh and 130 miles west of Harrisburg. It was incorporated under the laws of the Commonwealth of Pennsylvania in The purpose of MMC as set forth in its charter is to erect, maintain, and operate a general hospital for the care and the treatment of the sick and injured in west central Pennsylvania and its vicinity, to establish, maintain, and operate a school for the instruction and training of persons who desire to become qualified graduate nurses and other allied health professionals, and to provide facilities and a program for post graduate education of physicians, surgeons and technicians necessary to the hospital s operation. MMC is the flagship hospital of CHS with 783 licensed beds, which includes the beds acquired as part of the purchase of certain assets of UPMC Lee Regional hospital. MMC is the region s only Level 3 neonatal intensive care unit, which has been recognized by the National Coalition of Healthcare. MMC is the only Level 1 Regional Resource Trauma Center between Pittsburgh, PA and Hershey, PA and has a service coverage area of approximately 10,000 square miles. MMC is also the only hospital in all of Western Pennsylvania to achieve the distinction of being recognized by Solucient, Inc. as a Top 100 Heart Hospital for four of the past five years. In addition, Solucient, Inc. has also recognized MMC as a Top 100 Orthopedic Hospital. MMC s John P. Murtha Neuroscience and Pain Institute provides extensive diagnosis, treatment and rehabilitation of illnesses and injuries related to the nervous system. MMC also operates the only accredited sleep disorders center between Harrisburg and Pittsburgh, a child psychiatric unit offering inpatient care, the only unit of its kind in the Laurel Highlands region, and a chemical dependency unit, the first of its kind in the area when opened in MMC has consistently expanded its range and scope of services in order to provide the highest level of care possible. MMC is committed to teaching and maintains seven medical residency programs, a PharmD residency, Conemaugh School of Nursing and a number of allied health programs. MMC also has a direct or indirect interest in the following entities: Medical Building of Johnstown - The Medical Building of Johnstown, Inc., is a business corporation formed in The corporation owns and operates a medical office building at 1111 Franklin Street. The Medical Building is a wholly owned subsidiary of MMC. Conemaugh Housing, Inc. - Conemaugh Housing, Inc., is a tax-exempt nonprofit corporation formed in The corporation owns and operates subsidized housing for the elderly under Section 202 of the National House Act on the campus of LaurelWood Care Center, which is described below. The InforMedx Group - The InforMedx Group is a health solutions company focused on developing a national professional fee billing and information technology practice. The InforMedx Group currently has clients in the states of Pennsylvania and Tennessee. The company has also secured A-2

67 projects with the Department of Defense to enhance TRICARE online patient access software, General Dynamics, Inc. to enhance bio-surveillance software, Johns Hopkins University to evaluate value of patient health information prescriptions and the Department of Defense to evaluate remote computer technology as a means to improve diabetes care. Laurel Highlands Advanced Imaging - Laurel Highlands Advanced Imaging ( LHAI ) is a partnership between MMC and the physicians who comprise the Cambria Somerset Radiology & Nuclear Medicine Group, Inc. and is located in the Conemaugh Regional Healthcare Pavilion in suburban Johnstown. LHAI offers state-of-the-art MRI and CT capabilities. LHAI operates both a closed and an open 1.5 Tesla MRI as well as a sixteen slice CT scanner. Conemaugh Enterprises, Inc. Conemaugh Enterprises, Inc. ( CE ) is organized as a Pennsylvania taxable non-profit organization located in Johnstown, Pennsylvania. Incorporated in 2005, the general purpose of CE is to identify, acquire, develop and improve real estate in the Greater Johnstown area and nearby areas requiring improvement. The goal of this development is to spur economic growth and employment opportunities in the Johnstown area. Meyersdale Medical Center Meyersdale Medical Center ( MYMC ) is organized as a Pennsylvania tax-exempt nonprofit corporation serving Meyersdale, Pennsylvania and surrounding areas of southern Somerset County, Pennsylvania and northern Garrett County, Maryland. The corporation was formed in 1945 under the laws of the Commonwealth of Pennsylvania and the facility was built in MYMC is a 20-bed hospital providing acute medical/surgical care, inpatient swing bed services, general surgery, emergency department medicine and other outpatient services. The majority of the hospital s patients are covered by the Medicare program. Effective July 1, 2001, MYMC was accepted to participate in the Medicare program as a critical access hospital (CAH). Under this designation certain state requirements must be met, as well as appropriate licensure. The designation allows for cost based reimbursement from Medicare. Windber Medical Center WMC is organized as a Pennsylvania tax-exempt, nonprofit corporation located in Windber, Pennsylvania, a community approximately ten miles east of Johnstown, Pennsylvania. WMC was originally founded in 1906 by the Berwind-White Coal Company and operated through the Windber Hospital Association, an unincorporated entity. On September 11, 1970, the Court of Common Pleas of Somerset County approved the donation of the Windber Hospital and all of its property and assets to MMC. The hospital was operated as the Windber Division of MMC for nearly three years. On July 1, 1973, Windber Hospital, Inc. a new Pennsylvania nonprofit corporation formed by representatives from the Windber community purchased the land and assets of the Windber Hospital from MMC. This corporation continues to operate the hospital today. Despite these changes in ownership, WMC has served as a short-term acute care general hospital on an uninterrupted basis since its founding. WMC offers a full range of primary care services, including OB/GYN, pediatrics, general surgery and limited specialty care. Windber Hospital Regional Hospice was one of the first hospice programs to be established in a rural area within the Commonwealth of Pennsylvania. A-3

68 Windber Professional, Technical Support Services, Inc. ( WPTSS ) WPTSS is a business corporation formed in 1986 under the laws of the Commonwealth of Pennsylvania and is wholly owned by WMC. As presently operated, WPTSS acts as the sole shareholder of Medical Building, Inc. of Alum Bank, a business corporation formed in 1988 under the laws of the Commonwealth of Pennsylvania, which leases office space to two physicians and a day care center. There are no present plans to expand the scope of activities of either WPTSS or Medical Building, Inc. of Alum Bank. Good Samaritan Medical Center Good Samaritan Medical Center ( GSMC ) was incorporated in 1911 under the name of Mercy Hospital of Johnstown under the sponsorship of the Religious Sisters of Mercy, a Roman Catholic religious order of Scranton, Pennsylvania. As with other Catholic hospitals, GSMC traditionally offered its services to people whose special condition made them vulnerable, such as the poor. In 1993, Infinity Health Associates assumed governance of Mercy Hospital of Johnstown and changed its name to Good Samaritan Medical Center; however, the Catholic identity, values and tradition continued. Effective July, 1, 1996, GSMC became a controlled affiliate member of CHS. In 1997, the Board of Directors of GSMC approved a plan to consolidate and reorganize hospital operations with MMC. The reorganization resulted in GSMC retaining a nonprofit corporate status while discontinuing its separate hospital license and provider identification billing number. GSMC continues to own a 73-bed skilled nursing facility, known as the Nursing Care Center ( NCC ), which is located across from GSMC s former hospital building. On December 18, 1997, GSMC and MMC signed a Consolidation Agreement, Asset Purchase and Liability Assumption Agreement, Lease Agreement and Management Service and Support Agreement for Operation of the Nursing Care Center, effective December 31, According to the terms of the Consolidation Agreement, GSMC transferred substantially all of its tangible and intangible assets to MMC, but retained fee interest ownership in its real estate, the NCC and assets related to its operation. MMC, directly or indirectly, assumed substantially all fixed, liquidated, noncontingent obligations of GSMC, exclusive of those directly related to the NCC. MMC also agreed and has received approval to assume GSMC s Hill-Burton Act obligations to provide uncompensated care for qualified individuals. MMC also assumed operation of an 18-bed geropsychiatric unit opened by GSMC in 1996 to meet the specific needs of the increasingly elderly population of the Johnstown area. GSMC continues to offer pastoral care as an alternative source of care for patients. Conemaugh Health Foundation Conemaugh Health Foundation ( CHF ) is a tax-exempt nonprofit corporation formed in 1993 under the laws of the Commonwealth of Pennsylvania. The primary purpose of CHF is to solicit, receive and administer assets exclusively for charitable purposes in a manner that will most effectively assist and benefit Conemaugh and all of its affiliates. Conemaugh Health Initiatives, Inc. Conemaugh Health Initiatives, Inc. ( CHI ), formerly known as, Con-Val, Inc. is a taxable nonprofit corporation formed in 1994 under the laws of the Commonwealth of Pennsylvania. Its purpose is to support, promote, improve and advance the educational and health care delivery programs of the System by engaging in various activities and joint ventures. CHI has a direct or indirect interest in the following entities: Meridian Medical Group CHI, doing business under the name Meridian Medical Group ( MMG ), serves as the primary care physician employment corporation of CHS. MMG represents the A-4

69 largest group of primary care physicians in the four-county area of Cambria, Somerset, Blair and Bedford counties. At present, MMG consists of 40 primary care physicians and their staffs. Capstone Medical Group CHI, doing business under the name Capstone Medical Group ( CMG ), employs the physician specialists of CHS. Physician specialties include: anesthesiology, critical care, general surgery, nephrology, neurology, neurosurgery, obstetrics, oncology, pediatrics, physiatry, plastics, psychiatry and trauma. At present, CMG consists of 45 specialists, faculty and their staffs Real Estate, Inc Real Estate, Inc., a business corporation formed in 1985 under the laws of the Commonwealth of Pennsylvania, is a wholly owned subsidiary of CHI. The company engages in real estate-based ventures, including the Laurel Wood Care Center described below. Laurel Wood Care Center, LLC The Laurel Wood Care Center ( Laurel Wood ) opened in 1989 as a 50/50 joint venture partnership between 1086 Real Estate, Inc. and Grane Health Care Co. of Pittsburgh, Pennsylvania. Laurel Wood provides services to post-hospital care patients, including 20 specialty care (sub acute) beds, 100 traditional skilled nursing beds and a 90-bed personal care residence. Working closely with the System s medical centers, Laurel Wood s specialty care unit provides a costeffective alternative to long-term hospitalization without compromising the level of quality medical treatment and rehabilitation services. Conemaugh Health Co., Inc. Conemaugh Health Co., Inc. ( CHC ), a business corporation formed in 1985 under the laws of the Commonwealth of Pennsylvania, is a wholly owned subsidiary of CHI. CHC operates a durable medical equipment business over a four-county area. Penn Highlands Health Plan Penn Highlands Health Plan, ( PHHP ), is a nonprofit corporation formed in 1985 under the laws of the Commonwealth of Pennsylvania. The primary purpose of PHHP is to establish a physician hospital organization network to promote, develop, establish and encourage the provision of cost effective quality medical services and healthcare to residents of Cambria, Somerset and the surrounding counties in Pennsylvania. Miners Medical Center Miners Hospital d/b/a Miners Medical Center ( MiMC ) is organized as a Pennsylvania tax-exempt nonprofit corporation founded in MiMC provides residents of Hastings, Pennsylvania and the Northern Cambria County community with appropriate and accessible health care facilities and services. MiMC became a jointly controlled affiliate member of CHS on December 31, The affiliation is intended to expand the demographic base of the System and to further the mission of CHS to provide efficient, cost-effective health care services to the surrounding communities and residents of Northern Cambria County. The affiliation agreement provides CHS with certain reserved powers related to the approval of the following: board appointees, officers, capital budgets, management contracts, bylaws and/or articles of incorporation, mergers and consolidations, non-budgeted debt, strategic planning and managed care contracts. MiMC has a management services agreement with CHS, whereby certain salary and other expenses associated with the MiMC s chief executive officer and chief financial officer are reimbursed to CHS. A-5

70 Board of Directors of CHS BOARD OF DIRECTORS AND ADMINISTRATORS CHS is governed by a Board of Directors that is responsible for control and management of the affairs of the System. In accordance with the Bylaws of CHS, the Board consists of 19 persons, including the Chief Executive Officer (CEO), who is an ex officio member of the Board. In addition, Memorial Medical Center (MMC) shall have eight (8) members of the Board of Directors, Good Samaritan Medical Center (GSMC) of Johnstown shall have two (2) members of the Board of Directors, Meyersdale Medical Center (MYMC) shall have one (1) member of the Board of Directors, Windber Medical Center (WMC) shall have three (3) members of the Board of Directors, Miners Medical Center (MIMC) shall have one (1) member of the Board of Directors, Conemaugh Health Foundation (CHF) shall have one (1) member of the Board of Directors, Conemaugh Health Initiatives (CHI) shall have one (1) member of the Board of Directors and Penn Highlands Health Plan (PHHP) shall have one (1) member of the Board of Directors. CHS bylaws also provide that at least one member of the Board of Directors, included within the foregoing enumerated hospital representatives, shall be an active member of the MMC Medical Staff, one member shall be an active member of the Medical Staff of WMC, the MYMC member may be an active member of the Medical Staff of MYMC and the MYMC member may be an active member of the Medical Staff of MYMC; but no more than forty percent (40%) of the Board of Directors shall be active practitioners of the healing arts (physician, dentists, chiropractors, nurses, etc.) or administrators. Each Director shall serve for a regular three-year term or until a successor is elected. A Director who has completed three (3) consecutive three-year terms may not be re-elected until said Director has been off the Board of Directors for at least one (1) year. Each member organization of the System also has its own Board of Directors (Trustees), and Directors of CHS must be represented on all such governing boards. The following are the names and business affiliations of the members of the System s Board of Directors for fiscal year (FY) 2006 (the name of the System member organization that designated such member to the Board appears in brackets): Name and Office Business Affiliation Term Expires Scott A. Becker CEO, CHS Ex officio Samuel Catanese (Chair) President, Catanese Group Inc. (GSMC) 6/06 David Csikos, MD Physician (WMC) 6/07 Sister Mary Ann Dillon President, Mt. Aloysius College (MMC) 6/07 Robert Gleason, Jr. (Treasurer) Chairman/CEO, The Gleason Agency, Inc. (MMC) 6/06 James Hargreaves SVP, Wachovia Securities (MMC) 6/08 John F. Hollern Hollern & Koontz Insurance Agency (WMC) 6/08 John Kriak President, GroupGenesis (MMC) 6/06 Norman Krumenacker (Vice Judge (GSMC) 6/08 Chair) Kim Kunkle (Secretary) President/CEO, Laurel Holdings (MMC) 6/08 Samuel McClure President, Citizens National Bank (MYMC) 6/06 Jeanne McKelvey Attorney-at-law (WMC) 6/06 Walter Niton Partner, Catanese Group Inc. (MMC) 6/08 Raymond Ponchione Vice President for Advancement, Saint Francis 6/07 University (MiMC) John Saracena Partner, Barnes Saly & Company LLP (CHF) 6/06 Sally Sargent President, Sargent s Personnel Agency (CHI) 6/08 Michael Smith President/CEO, Laurel Auto Group (MMC) 6/07 Ron Vickroy Professor, University of Pittsburgh at Johnstown (PHHP) 6/07 Shiban Warikoo, MD Physician (MMC) 6/07 A-6

71 Board of Trustees of MMC MMC is governed by a Board of Trustees that has control of the property, affairs, and funds of MMC. Pursuant to the Bylaws of Conemaugh Valley Memorial Hospital (Memorial Medical Center), the Board currently consists of 20 members, one of who shall be the CEO of CHS and one of whom shall be the President of MMC. Each Trustee is elected for a term of three years. The following are the names and business affiliations of the Board of Trustees of MMC for fiscal year 2006: Name and Office Business Affiliation Term Expires Scott A. Becker CEO, MMC Ex officio Samuel Catanese (Treasurer) President, The Catanese Group, Inc. 6/08 Sister Mary Ann Dillon President, Mount Aloysius College 6/07 Bruce Duke, MD General Surgeon/ Valley Surgeons, Inc. 6/07 James Furnary, MD (Secretary) Retired General Surgeon 6/07 Robert A. Gleason, Jr. (Vice Chair) Chairman/CEO, The Gleason Agency, Inc. 6/07 Sidney Goldblatt, MD Department of Pathology, MMC 6/08 James Hargreaves, (Chair) SVP, Wachovia Securities 6/08 David Johns, DO Family/Internal Medicine Physician 6/06 John Kriak President, Group Genesis 6/08 Kim Kunkle President/CEO, Laurel Holdings 6/07 Charles Neuhoff President, H. F. Lenz Company 6/08 Charles Oschwald, MD Cardiologist, Johnstown Cardiovascular Associates 6/07 Jagdish D. Patel, MD Family/Internal Medicine Physician 6/06 Sally Sargent President, Sargent s Personnel Agency 6/08 Michael Smith President/CEO, Laurel Auto Group 6/07 Tom Stephenson Retired Vice President Crown American Corp. 6/07 Steven Tucker President, MMC Ex officio Ronald Vickroy (Assistant Secretary) Professor, University of Pittsburgh at Johnstown 6/06 Shiban Warikoo, MD Surgeon, Urology Associates 6/06 Administration The principal members of the senior administration staff of CHS are listed below along with brief biographical summaries. These officers are responsible for the daily management and operations of the System. Scott A. Becker, FACHE, CEO, Conemaugh Health System and Memorial Medical Center - Scott A. Becker, FACHE, was named Chief Executive Officer of the Conemaugh Health System and Memorial Medical Center effective May 2, Becker had been with Highmark Blue Cross Blue Shield in Pittsburgh since 2000, most recently holding the position of Vice President, Hospital and Mid-Market Sales. Prior to that, Mr. Becker held top leadership positions at the University of Pittsburgh Medical Center Health System, most recently serving as Chief Operating Officer of the Hospital Division. His career highlights also include holding the positions of President and Chief Executive Officer of Butler Regional Health System and Chief Operating Officer of Monongahela Valley Hospital. He holds master's degrees in public health and business administration from the University of Pittsburgh and a bachelor's degree in economics from Washington and Jefferson College. Mr.Becker is active in state healthcare organizations, community boards, and serves as an academic preceptor to a number of graduate programs in health administration. Mr. Becker is also a fellow of the American College of Health Care Executives. A-7

72 James Furnary, MD, Interim CMO - Dr. James Furnary was named Interim Chief Medical Officer (CMO) at MMC on November 5, Dr. Furnary has served in various leadership positions within the System. He is currently on the MMC Board of Trustees and has been a board member within the System for more than 10 years. He is the current Chairman of the MMC Operating Room Executive Committee. Now a retired general surgeon, he has been on the medical staff of MMC for 42 years. He is a graduate of Greater Johnstown High School and the University of Pittsburgh at Johnstown. He earned his medical degree at Hahnemann Medical College in Philadelphia, served an internship at MMC and a residency at Case Western Reserve and University Hospitals in Cleveland. Edward H. DePasquale, MPM, CIA, CPA, Chief Financial Officer - Mr. DePasquale serves as Chief Financial Officer of the System. He is responsible for coordinating, investing, budgeting, accounting and financial reporting for all System entities; oversight of the internal audit, external audit and corporate compliance functions; directing the operations of the Decision Support Department; directing a Systemwide strategy relative to information systems and technology; as well as researching, creating a vision and implementation plan for shared services within the System. Mr. DePasquale has been with the System since 1984 serving as the Executive Director of the Decision Support Department and the Director of Internal Audit and Management Services before being named its Chief Financial Officer. He was Chief Auditor and a staff auditor with the Westmoreland County Controllers Office in Greensburg. A magna cum laude graduate of St. Vincent College, Latrobe, Mr. DePasquale received a bachelor s degree in accounting. He is a Certified Public Accountant and a Certified Internal Auditor. Mr. DePasquale graduated summa cum laude with a Master s of Public Management degree concentrating in Health Systems Management at the Heinz School of Public Policy and Management of Carnegie Mellon University. Mr. DePasquale is a member of the Pennsylvania Institute of Certified Public Accountants, Institute of Internal Auditors, Association of Healthcare Internal Auditors and the Healthcare Financial Management Association. Other executives in the System s organization include the following: F. Nicholas Jacobs, MPM, FACHE, President, Windber Medical Center and Windber Research Institute - F. Nicholas Jacobs, FACHE, is the president of WMC and Windber Research Institute. Mr. Jacobs is responsible for setting a strategic vision for WMC and Windber Research Institute; providing general management and coordination for the Medical Center; developing and implementing strategic business plans; coordinating and integrating WMC s services; participating in regional and local activities; and developing and maintaining sound business relationships with physicians and key leaders within the community. Previously, Mr. Jacobs served as the Chief Communications Officer of the System; Executive Director for CHF; Vice President of Mercy Medical Center; President of Laurel Highlands Tourist Promotion Agency; Executive Director of Laurel Arts, Inc., Somerset, Pa; Teacher and Department Chairperson for Westmont and Johnstown Schools and for Plum Borough in Pittsburgh. Mr. Jacobs holds a Master s degree in Public Management/Health Systems Management from Carnegie Mellon University and a Master s of Education and Bachelor s degree from Indiana University of Pennsylvania. He holds a certification from the Grantsmanship Center at the College of William and Mary and a certificate in Health Care Management from the Harvard School of Public Health. Mr. Jacobs is a fellow of the American College of Health Care Executives. Mary Libengood, President, Meyersdale Medical Center - Mary Libengood has been a part of the System since she graduated from the Conemaugh School of Nursing in She served as a pediatric nurse at MMC and a staff nurse, charge nurse, QA Coordinator for Infection Control, Director of Nursing and Associate Executive Director at MYMC. In 1996, she was named the President of MYMC. She is a member of the Somerset County Safe Kids Coalition, Advisory Board of Somerset County Vo-Tech School, MYMC Auxiliary, Meyersdale Nursing Association and the Conemaugh School of Nursing A-8

73 Alumni Association. Ms. Libengood is certified by the Quorum Nursing Executive Management Program and the Healthcare Administration of Saint Joseph Hospital of Maine. Steven E. Tucker, MBA, President, Memorial Medical Center - Steven E. Tucker was named the President of MMC and GSMC in He is responsible for management and coordination of hospital activities; leadership in establishing current and long-range objectives, business plans and policies; setting goals for hospital operations, human resources and financial performance; and providing direction and management of hospital operations. Since joining the System, Mr. Tucker has also served as Vice President of MMC and GSMC, Director of Support Services and Director of Materials Management of MMC. Prior to joining the System, he was employed at St. Mary s Regional Medical Center for eight years. Mr. Tucker is a Magna Cum Laude graduate of Temple University, where he was awarded his Bachelor s Degree in Business Administration. He also holds a Master s in Business Administration from Indiana University of Pennsylvania. Mr. Tucker is involved with numerous community and professional organizations, including Greater Johnstown Regional Partnership Committee, United Way, Pennsylvania Catholic Health Association, American College of Healthcare Executives, Hospital Association of Pennsylvania, MMC Board of Trustees, GSMC Board of Directors, Penn Highlands Health Plan Board of Directors and Hospital Council of Western Pennsylvania and the VHA of Pennsylvania Board of Directors. A-9

74 HOSPITAL SERVICES Bed Complement As of August 1, 2005, after the acquisition of certain UPMC Lee Regional Hospital assets, CHS is licensed to operate a total of 1,005 beds, of which 690 are staffed. MMC is licensed to operate 783 beds and staffs 528. WMC is licensed to operate 102 beds and staffs 69. MYMC is licensed to operate and staffs 20 beds. GSMC is licensed to operate and staffs 73 beds. The following chart details the staffed bed complement: Staffed Bed Compliment As of August 1, 2005 Category MMC WMC MYMC GSMC Total Medical/Surgical NICU Pediatrics Obstetrics Intensive Care Critical Care Psychiatric Adult Gero Child 8 8 Rehab Palliative Care Unit 6 6 Total Acute Care Beds Transitional Care Subtotal Beds Bassinets Long-Term Care Total Beds Patient Care Services MMC, WMC, and MYMC provide a wide variety of acute inpatient services, as well as ambulatory, home health, hospice, and emergency trauma services. The surgical services that are offered at these medical centers utilize the latest technologies. MMC provides resources for all aspects of general surgery and surgical specialties. The following chart shows the major services provided by MMC, WMC, and MYMC: A-10

75 Clinical Services Overview Aeromedical Helicopter Lithotripsy Rehabilitaion Behavioral Medicine Nephrology Rheumatology Birthing Neuroscience Skilled nursing Obstetrics Neurosurgery Sleep disorders High risk OB & fetal Pain Surgery NICU (level III) Post Polio Cardiac Breast Care Center Research Dental and oral Cardiac intervention Oncology General Cardiac disease reversal Medical oncology Laser Dermatology Radiation oncology Opthalmology Emergency medicine Pediatric Orthopedic Endocrinology Pulmonary Plastic Endosocopy Radiology Reconstructive Gastroenterology CT Thoracic General internal CT 16 slice Urology Hematology Interventional Vascular Home Health MRI Trauma (level I) Hospice PET Wound Center Specialized Services MMC has developed the following programs and services to compliment some of the surgical services listed above: Heart Care - MMC has been recognized as a Top 100 Heart Hospital four of the past five years by Solucient, Inc. MMC is the only hospital in all of Western Pennsylvania to achieve that distinction. Orthopedics Solucient, Inc. has recognized MMC as a Top 100 Orthopedic Hospital. MMC is one of the few hospitals in the nation to extensively utilize the continuous peripheral nerve catheterization technique for the majority of joint replacement operations. This procedure allows postoperative recovery to be essentially pain free and reduces length of stay. It also enables patients who cannot tolerate general anesthesia to have joint replacement surgery. Perinatology and Neonatology - MMC offers the region s only Level 3 neonatal intensive care unit, which has received quality and innovation recognition by the National Coalition of Healthcare. MMC offers the only Perinatology service in the region. The combination of both services has resulted in strong regional referral. Trauma - MMC offers the only Level 1 Regional Resource Trauma Center between Pittsburgh and Hershey and has a service coverage area of approximately 10,000 square miles that is serviced by two aero-medical helicopters. A-11

76 Neuroscience - MMC s John P. Murtha Neuroscience and Pain Institute provides extensive diagnosis, treatment and rehabilitation of illnesses and injuries related to the nervous system. The Institute will host an International Symposium, Finding a Cure for Brain Injury, Improving Outcomes, October 13-16, 2005 with presenters and participants from twelve nations. With the addition of neurosurgeon, Alfred Bowles, MD to the medical staff, MMC is aggressively pursuing installation of BrainLAB technology. This technology is installed at only a few hospitals worldwide and permits intraoperative MRI to significantly improve surgical approach and outcomes. Crichton Rehabilitation Center - Crichton Rehabilitation Center ( CRC ) is CARF-accredited and provides comprehensive inpatient, outpatient and community re-entry programs of care designed to return people to an active lifestyle as safely and quickly as possible. CRC's experienced team of nurses, physicians and therapists provide services for a wide variety of conditions, including (but not limited to) orthopedics, neurological disorders, stroke, brain and head injuries, arthritis, spinal cord injuries, and, multiple trauma. CRC also offers therapy services at several outpatient sites, located throughout the region. Home Health - MMC offers home health services in these local communities: Johnstown, Meyersdale, Jennerstown, Portage, Ebensburg and Richland. As a result of the acquisition of certain UPMC Lee Regional Hospital assets on August 1, 2005, MMC will also offer home health services in Hastings, Phillipsburg, and Bedford. The purchase of Home health professional provide healthcare services in a variety of disciplines including skilled nursing, physical, occupational, and speech therapy, home health aid and medical social services. General SERVICE AREA The System s primary service areas are Cambria and Somerset Counties, Pennsylvania, which accounted for approximately 85.98% of admissions in The System s secondary service area includes portions of the five surrounding Pennsylvania counties: Bedford, Blair, Clearfield, Indiana, and Westmoreland. These counties provided approximately 9.13% of admissions in The remaining admissions are derived from other parts of Pennsylvania, as well as northern Maryland. MMC, and GSMC are located in the Greater Johnstown area; WMC is approximately 10 miles southeast of Johnstown; and MYMC is located in southern Somerset County. Johnstown is approximately 78 miles east of Pittsburgh, Pennsylvania. The city of Johnstown was built on a foundation of steel, coal, and other heavy industries. The area s economy was severely affected during the 1970 s with the worldwide decline in demand for steel products and the introduction of various alternatives to steel. Johnstown went through a difficult, but successful transition period while converting the local economy from a base of steel and heavy industry to one of technology and research. As a result of this transition, the Greater Johnstown Region has seen unemployment rates drop from a high of 20% in 1990 to current levels of approximately 6%. Population United States census figures for 2000 showed the combined population of Cambria and Somerset Counties at 232,631. The estimated total population of Cambria and Somerset Counties in 2004 was 228,812, a decline of 1.64% from the 2000 census. The following table shows the age composition and the average number of persons per household in Cambria County, Somerset County and the Commonwealth of Pennsylvania in the year A-12

77 Age Composition US Bureau of the Census Persons Per Household Cambria County 23.9% 26.3% 19.8% 2.38 Somerset County 24.5% 57.5% 18.0% 2.45 Commonwealth of Pennsylvania 26.6% 57.8% 15.6% 2.48 Source: Pennsylvania State Data Center Labor Force and Employment The following chart shows the labor force and employment statistics for Cambria and Somerset Counties for the most recent 5 years: RECENT EMPLOYMENT TRENDS As of December 31, CAMBRIA COUNTY: Civilian Labor Force (000) Employment (000) Unemployment (000) Unemployment Rate % SOMERSET COUNTY: Civilian Labor Force (000) Employment (000) Unemployment (000) Unemployment Rate % Pennsylvania: Civilian Labor Force (000) 6,086 6,163 6,247 6,186 6,275 Employment (000) 5,832 5,870 5,897 5,835 5,927 Unemployment (000) Unemployment Rate % Source: Pennsylvania Department of Labor and Industry A-13

78 SERVICE AREA PROVIDERS MMC is the major provider of inpatient, acute health care in Cambria County. WMC and Somerset Hospital are the major health care providers in Somerset County. The following table lists the number of beds and the market share percentage for hospital facilities in Cambria and Somerset counties. Staffed Beds Market Share (Percent by Admissions) Cambria County MMC* 528** 73.72%** MiMC* % Other / Outside the county % Total Cambria County Somerset County MYMC* % Somerset Hospital % WMC* % Other / Outside the county % Total Somerset County % * denotes member of the Conemaugh Health System ** after the acquisition of certain UPMC Lee Regional Hospital Assets. MEDICAL STAFF Medical Staff The 416 member Medical Staff of MMC represents 35 practice areas, including 16 medical and 14 surgical specialties/subspecialties. The medical staff is comprised of the Inpatient Medical Staff of 362 members, the Non-Inpatient Staff is made up of 19 members and the Emeritus Staff consists of 35 members. These numbers include former UPMC Lee Regional physicians who previously did not have privileges at MMC. These physicians applied for privileges and were reviewed in a manner consistent with our regular admission policy. Within the Inpatient Medical Staff there are Active and Courtesy categories. The Inpatient Medical Staff is provided for those physicians and dentists who extend care for patients in the hospital portion of the Medical Center. Active category members are defined as being involved in the care of at least 25 patients per year while those assigned to the Courtesy category do not meet that threshold. At present there are 282 Active category members and 80 Courtesy. Ninety-two percent of Inpatient Medical Staff members are board-certified in their respective specialties. The average age of the Inpatient Medical Staff member is 50 years of age. The Non-Inpatient Medical Staff consists of the Associate, Affiliate and Honorary categories. The Non-Inpatient Medical Staff is for those licensed physicians and dentists who maintain practice outside of the hospital; none have inpatient clinical privileges. The Associate member category is made up of licensed physicians and dentists who work only in an outpatient setting within MMC. The Affiliate category is for licensed physicians and dentists who do not work within any part of the MMC. A-14

79 The Honorary category is specific to physicians and dentists who have been on the Medical Staff more than twenty-five years, are engaged in the practice of medicine, and are fully licensed and insured who have elected to maintain their practice outside of the hospital and no longer meet the criteria for Active or Courtesy staff. At present there are 10 Associate members, 2 Affiliate members and 7 Honorary members. The Emeritus Medical Staff consists former members of the Hospital Medical Staff or Non-Hospital Staff, or non-appointees to the Medical Staff who are of outstanding reputation, not necessarily residing in the community, and who are not required to hold current state licensure and professional liability insurance. There are 35 Emeritus Members of the medical staff. The MMC Board of Trustees appoints members into respective categories upon the recommendation of the Medical Executive Committee. Medical Education Graduate Medical Education - MMC has offered graduate medical education since MMC s major medical school affiliates are Temple University School of Medicine, Philadelphia, PA and the Milton S. Hershey University School of Medicine, Hershey, PA. MMC sponsors five Accreditation Council for Graduate Medical Education (ACGME) accredited training programs including Family Practice, Internal Medicine, Pathology, Surgery, Transitional Year and two American Osteopathic Association (AOA) accredited programs; an AOA Internship and AOA Family Practice. These programs range in length from one through five years depending on the specialty. There are currently 65 trainees participating in MMC Internship/Residencies. Over 25% of the graduates of these programs continue their education with fellowships in areas such as Critical Care Medicine, Colo-Rectal Surgery, Geriatrics, Neuropathology, Cytology and Forensic Pathology. In keeping with it s strong role as a teaching institution, MMC hosts over 200 medical student rotations annually from medical schools such as Lake Erie College of Osteopathic Medicine, Philadelphia College of Osteopathic Medicine, Temple University School of Medicine and Drexel University College of Medicine. Nursing Education - On February 7, 1896, the Conemaugh School of Nursing ( CSN ) admitted its first class of six female students. At this time there were only 35 nursing schools in the United States. The curriculum had a two-year plan of rigorous clinical practical experiences and lectures by hospital physicians. Today, the curriculum plan is designed for the student to progress from simple to complex. Each nursing course stresses scientific principles, ethical-legal issues, critical thinking, pharmacology, the theory of caring, and concepts essential in providing holistic care to the patient, family and community. Students have the option to be enrolled in the two-year full-time program or the threeyear part-time program. Licensed Practical Nurses are given advanced standing in the program. Upon completion of the CSN curriculum, the graduate receives a diploma and is eligible to take the registered nurse examination. CSN graduates possess thirty-six college credits and forty nursing credits toward the attainment of a baccalaureate degree in nursing. CSN has appeared on the list of approved schools of nursing since the first list was compiled in 1918 by the Pennsylvania Board of Nursing. Continuous accreditation has been granted since 1955 to the nursing program. The school is accredited by the National League for Nursing Accrediting Commission, New York, NY. Allied Health Education - MMC possesses a rich history of providing health education programs. In the field of Allied Health, the first accredited program for Surgical Technology in Pennsylvania was initiated here. The School of Histotechnology is one-year in length and is the only accredited program in the Commonwealth of Pennsylvania. The Medical Technology School is affiliated with numerous regional colleges. Upon completion of the 1-year curriculum plan, the college graduate is job ready. The School of Radiologic Technology is an accredited two-year program. The program A-15

80 provides transferable credit toward additional radiologic specialties. The Paramedic school is one-year in length and is regionally known for the quality of education provided. All Allied Health schools provide the graduate with a diploma and they are eligible to sit for certification and registry exams. Affiliate Health Education - In addition to the MMC schools, regional and out-of-state students utilize MMC for clinical practicum. They are provided quality-learning experiences for social workers, physical therapists, nursing, marketing, business, emergency medical technician, and phlebotomy. SUMMARY OF HISTORICAL UTILIZATION Combined historical operating statistics for MMC, WMC, MYMC and GSMC are summarized in the following table for the fiscal years ending June 30, 2000 through June 30, Historical Utilization Fiscal Years Ended June 30, Inpatient Utilization Licensed Beds Staffed Beds Admissions 19,027 20,359 22,029 21,754 21,843 22,389 Patient Days 118, , , , , ,996 Average Length of Stay Percent Occupancy Average Daily Census Inpatient Surgeries 6,533 6,548 6,527 6,276 6,577 7,135 Births , Outpatient Utilization Outpatient Registration (1) 271, , , , , ,339 Outpatient Surgeries 23,727 24,462 26,346 27,542 28,372 31,619 Emergency Visits 40,757 44,012 50,709 54,788 57,775 62,194 Home Health Visits 86,009 98, , , , ,293 Clinic Visits (2) 85,961 80,105 83,175 4,556 4,603 4,696 Total Outpatient Visits 507, , , , , ,141 Notes: (1) In FY2003, Memorial Medical Center started using a new methodology to calculate outpatient registrations. (2) At the end of FY2002, Memorial Medical Center's hospital based clinics moved to CHI. A-16

81 SOURCES OF PATIENT REVENUE AND ADMISSIONS The following table summarizes the third party payor revenue by percentage of gross patient revenue and admissions by payor class for MMC, WMC, MYMC, and GSMC, for the fiscal years ending June 30, 2000 through June 30, 2005: CHS Gross Patient Revenue by Payor Class (Percentage) Fiscal Years Ended June 30: Medicare and Security Blue 53.1% 52.9% 54.0% 53.0% 53.7% 54.5% Medical Assistance and Managed Care 10.2% 10.4% 10.5% 10.9% 11.3% 11.7% Blue Cross and Keystone Health Plan 22.3% 21.4% 21.6% 22.0% 20.7% 20.4% Commercial and other 14.4% 15.3% 13.9% 14.1% 14.3% 13.4% SUMMARY OF REVENUES AND EXPENSES The consolidated summary of revenues and expenses presented below was derived from the audited financials of CHS and its consolidated subsidiaries for the fiscal years ended June 30, 2000 through The summary financial data for CHS and its consolidated subsidiaries for June 30, 2005 was derived from the un-audited financial statements prepared by CHS management. Conemaugh Health System Inc. and Subsidiaries Summary of Revenues and Expenses Audited Unaudited Fiscal year ending June 30, Net Patient Service Revenue $202,892 $226,027 $262,975 $275,342 $289,777 $325,584 Other Operating Revenue 15,981 17,909 21,400 26,000 32,493 38,356 Total Operating Revenue 218, , , , , ,940 Operating Expenses Salaries, wages & employee benefits 111, , , , , ,809 Professional fees, supplies, purchased services & other 93,620 96, , , , ,896 Depreciation & Amortization 14,815 15,627 17,379 18,604 19,826 20,735 Interest 8,130 7,273 9,579 8,935 8,213 8,171 Provision for bad debts 8,027 8,149 11,511 12,366 11,989 13,170 Total Operating Expenses 236, , , , , ,781 Income (Loss) from Operations (17,342) (1,463) 810 (3,869) (1,295) 8,159 Non-operating Gains (Losses) 32,158 9,243 (13,785) (4,306) 7,200 12,330 Excess of Revenues Over Expenses $14,816 $7,780 ($12,975) ($8,175) $5,905 $20,489 A-17

82 MANAGEMENT S DISCUSSION ANALYSIS Financial Highlights CHS has experienced increasing net patient service revenues for each of the past five years. This is attributable to a concentrated focus on all aspects of the revenue cycle, an initiative to improve the documentation and coding related to inpatient services in an effort to make the billing process more efficient, the negotiation of favorable rates from third party payors, and an overall increase in volumes. Salaries, wages, and employee benefits have increased as a result of competitive pressure for and staffing shortages in critical positions such as registered nurses and pharmacists, as well as higher recruitment costs for hospital employed doctors. Rising healthcare costs have had a negative impact on employee benefit related expenses. Professional fees, supplies, purchased services and other expense categories may fluctuate depending on the needs of the System in any given year. Professional fees tend to rise when the System is engaged in new ventures or when the services of consultants are needed to enhance the outcome of a new initiative, such as the revenue cycle reform discussed above. Contracts for supplies, purchased services and on-going professional relationships are negotiated in an effort to manage operating expenses. Depreciation and amortization has seen little fluctuation over the past five years, despite the fact that substantial capital improvements have been made in an effort to continually modernize the System. Most of these improvements have been funded through operations, thus eliminating the need to take on additional debt or deplete the cash reserves. Non-operating gains and losses are driven in large part by the performance of the System s fixed income and equity investments. The fluctuations seen over the past five years are similar to those seen in the market place. The large loss in 2002 is attributable to a change in the accounting treatment of impaired assets. The System recognized the loss on any investment that had dropped to below 50% of it s original book value for three or more consecutive quarters. ACCREDITATION, LITIGATION AND INSURANCE Accreditation, Approvals and Memberships MMC, WMC, and MYMC are accredited by the Joint Commission on Accreditation of Health Care Organizations. MMC is also accredited by the College of American Pathologist, Accreditation Council for Graduate Medical Education, American Osteopathic Association, American Registry of Radiologic Technologists, American Association of Blood Banks, Committee on Allied Health Education and Accreditation of the American Medical Association, National Accrediting Agency for Clinical Laboratory Sciences and the National League for Nursing. MMC is approved by the Pennsylvania Board of Nursing and licensed by the Pennsylvania Department of Health and Public Welfare. MMC maintains residencies in Internal Medicine, Transitional, General Surgery, Family Medicine and Pathology, and an American Osteopathic Association internship. The American College of Radiology also accredits its mammography facilities. MMC holds membership in the Hospital A-18

83 Association of Pennsylvania, the Cambria-Somerset Council for Education of Health Professional, Inc., the Council of Teaching Hospitals of the American Association of Medical Colleges, the Central Pennsylvania Health Sciences Library Association, the Medical Library Association and the Hospital Council of Western Pennsylvania. CHS also is a member of the Voluntary Hospitals of America ( VHA ), a national organization that represents one-fifth of the community hospitals. Membership in VHA provides participation in a group purchasing program and access to advice, consultation and assistance in a variety of subjects. Litigation MMC currently has thirty potential litigation cases pending or threatened against it or against its employees in their capacity as such. After discussion with litigation counsel, MMC believes that the result of such litigation, if decided against MMC, will not exceed MMC s applicable insurance coverage. GSMC currently has two litigation cases pending or threatened against it or against its employees in their capacity as such. After discussion with litigation counsel, GSMC believes that the result of such litigation, if decided against GSMC, will not exceed the GSMC s applicable insurance coverage. WMC currently has eleven litigation cases pending or threatened against it or against its employees in their capacity as such. WMC believes that the result of such litigation, if decided against WMC, will not exceed the WMC s applicable insurance coverage. MiMC has six cases pending. MiMC believes that the result of such litigation, if decided against MiMC, will not exceed the MiMC s applicable insurance coverage. MYMC currently has no litigation cases pending or threatened against it or against its employees in their capacity as such. Malpractice Insurance Effective October 1, 2002 CHS obtained medical malpractice insurance for its member institutions on a claims-made basis through Community Health Alliance Reciprocal Risk Retention Group ( CHA ), an affiliated captive insurance company domiciled in Vermont and approved for coverage in Pennsylvania. MMC, WMC, MYMC, GSMC, CHI and MiMC participate in the insurance program through CHS and are individually responsible for premiums billed by CHS and certain other funding requirements. CHS has approximately a 20% ownership in the captive. There are inherent risks of loss that could be material, associated with this captive, if other members become insolvent and consequently are unable to pay their respective claims incurred. These losses would be shared with remaining members. There are no potential losses recorded in CHS s consolidated financial statements for those inherent risks based on the current belief of management that such risk is low. Under the current policy, CHS has primary professional liability/general liability and umbrella/excess liability coverage, subject to a $250,000 per occurrence deductible and an actuarially determined stop-loss amount of approximately $2,200,000. The primary limit for 2005 is $500,000 per claim and $2,500,000 annual aggregate. A-19

84 Additionally, MMC has assumed payment responsibility for any malpractice losses incurred by other CHS affiliates, including WMC, MYMC, GSMC and MiMC. MMC accrues for its portion of the estimated cost of the program based upon known and anticipated claims, including a related accrual for MMC s obligation for incurred but not reported claims. MMC, WMC, MYMC, GSMC, CHI and MiMC also participate in the Medical Care Availability and Reduction of Error Fund (MCARE) as part of the state s medical malpractice insurance system. Any unfunded liabilities within the MCARE fund will be funded through surcharge assessments in future years. No provision has been made for any future MCARE fund assessments in the accompanying consolidated financial statements as Conemaugh s portion of MCARE fund s unfunded liability cannot be reasonably determined. Prior to its existing malpractice insurance arrangements, MMC, WMC, MYMC and MiMC were insured for malpractice by PHICO Insurance Company (PHICO). In February 2002, PHICO, at the request of Pennsylvania Insurance Department, was placed in liquidation by an order of the Commonwealth Court of Pennsylvania (Liquidation Order). The Liquidation Order refers these claims to the state guaranty association. The state guaranty association statutes generally provide for coverage between $100,00 to $300,000 per insured claim and provide for net worth and residency limitations that, if applicable, may limit or prevent MMC and WMC from recovering from the state guaranty association fund. At this time, CHS believes that the resolution of these PHICO claims will not have a material adverse effect on CHS s financial position, cash flows or results of operations. Worker s Compensation MMC is principally self insured for worker s compensation claims. Losses are expensed for claims incurred and estimated incurred but not reported claims. Amounts needed to pay claims are funded annually to an irrevocable trust established to pay such claims. WMC, MYMC, CHI and MiMC purchase commercial insurance against losses from worker s compensation claims. A-20

85 APPENDIX B: CONSOLIDATED FINANCIAL STATEMENTS OF CONEMAUGH HEALTH SYSTEM INC. FOR THE FISCAL YEARS ENDED JUNE 30, 2004 AND JUNE 30, 2003

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87 Conemaugh Health System, Inc. and Subsidiaries Accountants Report and Consolidated Financial Statements June 30, 2004 and 2003

88 Conemaugh Health System, Inc. and Subsidiaries June 30, 2004 and 2003 Contents Independent Accountants Report... 1 Consolidated Financial Statements Balance Sheets... 2 Statements of Operations and Changes in Net Assets... 3 Statements of Cash Flows... 5 Notes to Financial Statements... 6 Supplemental Information Consolidating Balance Sheet Consolidating Statement of Operations and Changes in Net Assets... 35

89 Independent Accountants Report Board of Directors Conemaugh Health System, Inc. and Subsidiaries Johnstown, Pennsylvania We have audited the accompanying consolidated balance sheet of Conemaugh Health System, Inc. and Subsidiaries (CHS) as of June 30, 2004, and the related consolidated statements of operations and changes in net assets and cash flows for the year then ended. These financial statements are the responsibility of CHS s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of CHS as of and for the year ended June 30, 2003, were audited by other accountants whose report dated September 26, 2003, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2004 consolidated financial statements referred to above present fairly, in all material respects, the financial position of CHS as of June 30, 2004, and the results of its operations, the changes in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplementary information is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. September 15, 2004

90 Conemaugh Health System, Inc. and Subsidiaries Consolidated Balance Sheets June 30, 2004 and 2003 Assets (in thousands) Current Assets Cash and cash equivalents $ 13,057 $ 8,154 Assets limited as to use, current 8,375 7,457 Patient accounts receivable, net of allowance; $3,843, $6,415 36,726 39,841 Other receivables 2, Due from affiliates, net 1, Supply inventories 4,875 4,850 Prepaid expenses and other assets 3,297 5,155 Total current assets 70,314 66,296 Assets Limited as to Use Internally designated 119, ,238 Held by trustee 19,287 20,668 Custodial agency funds Investments subject to annuity agreements Donor restricted for specific purpose 2,586 1, , ,505 Less amount required to meet current obligations 8,375 7, , ,048 Property and Equipment, At Cost Land and land improvements 9,168 7,021 Buildings and improvements 219, ,728 Equipment 128, ,863 Construction in progress 3,594 2, , ,285 Less accumulated depreciation 173, , , ,519 Other Assets Investments 1, Interest in net assets of charitable foundations Deferred financing costs 4,627 4,943 Other assets 4,538 7,075 10,380 13,358 Total assets $ 402,186 $ 396,221 See Notes to Consolidated Financial Statements

91 Liabilities and Net Assets (in thousands) Current Liabilities Current maturities of long-term debt $ 5,589 $ 4,896 Current maturities of capital lease obligations Accounts payable 11,736 11,790 Bond interest payable 3,245 3,438 Accrued expenses 18,655 21,975 Estimated amounts due to third-party payers 9,871 9,449 Deferred grant revenues 480 2,704 Other liabilities 1,423 Total current liabilities 51,500 54,482 Accrued Pension and Post-retirement Liabilities 25,498 34,295 Deferred Compensation 1,629 1,515 Deferred Grant Revenue 3,746 2,436 Losses in Excess of Equity and Advances to Joint Venture 2,287 2,136 Long-term Debt 192, ,637 Capital Lease Obligations 1, Other Liabilities 4,300 3,780 Total liabilities 282, ,857 Minority Interest Net Assets Unrestricted 115,527 95,778 Temporarily restricted 3,021 2,484 Permanently restricted Total net assets 119,345 99,077 Total liabilities and net assets $ 402,186 $ 396,221 2

92 Conemaugh Health System, Inc. and Subsidiaries Consolidated Statements of Operations and Changes in Net Assets Years Ended June 30, 2004 and 2003 (in thousands) Unrestricted Revenues, Gains and Other Support Net patient service revenue $ 289,777 $ 275,342 Other revenue 32,286 24,962 Net assets released from restrictions used for operations Total unrestricted revenues, gains and other support 322, ,052 Expenses Salaries, wages and employee benefits 160, ,287 Professional fees, supplies, purchased services and other 122, ,041 Depreciation and amortization 19,826 18,604 Interest 8,213 8,522 Provision for bad debts 11,989 12,257 Total expenses 323, ,711 Operating Loss (1,295) (3,659) Other Income (Expense) Investment return 7,126 (2,953) Equity in income (loss) of joint venture 430 (322) Valuation adjustment for interest rate exchange agreements 1, Minority interest (1,565) (1,211) Other (247) 123 Total other income (expense) 7,200 (4,136) Excess (Deficiency) of Revenues Over Expenses $ 5,905 $ (7,795) See Notes to Consolidated Financial Statements 3

93 Conemaugh Health System, Inc. and Subsidiaries Consolidated Statements of Operations and Changes in Net Assets (Continued) Years Ended June 30, 2004 and Excess (Deficiency) of Revenues Over Expenses $ 5,905 $ (7,795) Investment return change in net unrealized gains and losses on investments other than trading securities 5,853 10,778 Change in fair value of interest rate swap agreements (136) (815) Change in additional minimum pension liability 8,390 (16,191) Change in interest of the net assets of charitable foundations (263) (38) Net assets released from restrictions 535 Increase (Decrease) in Unrestricted Net Assets 19,749 (13,526) Temporarily Restricted Net Assets Investment income and change in net unrealized gain (loss) on investments Contributions and change in interest of the net assets of charitable foundations 1, Other (434) Net assets released from restrictions (207) (1,283) Increase (decrease) in temporarily restricted net assets 537 (299) Permanently Restricted Net Assets Change in beneficial interest in perpetual trust (18) 19 Increase (decrease) in permanently restricted net assets (18) 19 Change in Net Assets 20,268 (13,806) Net Assets, Beginning of Year 99, ,883 Net Assets, End of Year $ 119,345 $ 99,077 4

94 Conemaugh Health System, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended June 30, 2004 and 2003 (in thousands) Cash Flows from Operating Activities Change in net assets $ 20,268 $ (13,806) Items not requiring (providing) cash Depreciation and amortization 19,826 18,604 Net gains and losses on other than trading securities and other (9,865) (4,119) Provision for bad debts 11,989 12,257 Change in valuation adjustment for interest rate exchange agreements (1,456) (227) Change in additional minimum pension liability (8,390) 16,191 Minority interest 1,565 1,211 Equity in loss (income) of joint venture (430) 322 Contributions and investment income received restricted for long-term investment (876) (1,087) Change in the interest of the net assets of charitable foundations (Gain) loss on disposal of property, plant and equipment (215) 421 Change in beneficial interest in perpetual trust 18 (19) Changes in Patient accounts receivable (8,874) (3,846) Other assets 1,069 (3,912) Accounts payable and accrued expenses (3,375) 2,311 Other liabilities 764 2,253 Net cash provided by operating activities 22,297 26,693 Cash Flows from Investing Activities Change in assets limited as to use 1,475 6,314 Purchase of property, plant and equipment (14,047) (28,144) Payments pursuant to noncompete agreements (133) (166) Distributions received from joint venture Other Net cash used in investing activities (11,961) (21,745) Cash Flows from Financing Activities Payments on long-term debt and capitalized lease obligations (5,002) (5,863) Proceeds from issuance of long-term debt 4,603 Distributions to minority interest holders (1,374) (1,231) Proceeds from termination of interest rate exchange agreement 950 Contributions and investment income received restricted for longterm investment 876 1,087 Other 67 (692) Net cash used in financing activities (5,433) (1,146) See Notes to Consolidated Financial Statements

95 Increase in Cash and Cash Equivalents $ 4,903 $ 3,802 Cash and Cash Equivalents, Beginning of Year 8,154 4,352 Cash and Cash Equivalents, End of Year $ 13,057 $ 8,154 Supplemental Cash Flow Information Capital lease obligation incurred for property and equipment $ 1,210 $ 296 Acquisition of property and equipment in trade accounts payable $ 0 $ 1,452 Interest paid (net of amount capitalized) $ 9,735 $ 9,853 5

96 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Conemaugh Health System, Inc. and Subsidiaries (CHS) is organized as a not-for-profit Pennsylvania corporation and was created to establish a regional integrated health care system with the objective of lowering health care costs through reduced duplication of services and the introduction of managed care alternatives. The services of CHS are provided principally to the residents of Johnstown, Pennsylvania, surrounding counties and extended service areas for their regional programs. The controlled members of CHS include: Conemaugh Health Foundation (CHF) Conemaugh Health Initiatives, Inc. and Subsidiaries (CHI) Good Samaritan Medical Center (Good Samaritan) Memorial Medical Center and Subsidiaries (Memorial) Meyersdale Medical Center (Meyersdale) Windber Medical Center and Subsidiaries (Windber) In addition, Miners Medical Center (Miners), effective January 1, 2003, became a noncontrolled affiliated organization of CHS. Principles of Consolidation The consolidated financial statements include the controlled members of CHS. All significant intercompany transactions and balances have been eliminated in consolidation. Minority interests represent the proportionate share of the equity of certain joint ventures and partnerships that is owned by third parties. The net income or loss of these joint ventures is allocated to the minority interest holders based on their percentage of ownership throughout the year. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents Cash equivalents consists of all liquid investments with a maturity of three months or less, excluding amounts limited as to use. At June 30, 2004 and 2003, cash equivalents consisted primarily of repurchase agreements, money market accounts with brokers, cash management accounts and certificates of deposit. 6

97 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Patient Accounts Receivable Patient accounts receivable for services rendered are reported at net realizable amounts from thirdparty payers, patients and others. CHS provides an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information and existing economic conditions. As a service to the patient, CHS bills third-party payers directly and bills the patient when the patient s liability is determined. Patient accounts receivable are due in full when billed. Accounts are considered delinquent and subsequently written off as bad debts based on individual credit evaluation and specific circumstances of the account. Assets Limited as to Use Assets limited as to use include assets held by trustees, primarily under bond indenture agreements, and assets set aside by the board of directors (Board) for future capital improvements over which the Board retains control and may, at its discretion, subsequently use for other purposes. Amounts required to meet current liabilities of CHS are included in current assets. Workers Compensation Trust Memorial is required to maintain a minimum balance in an irrevocable trust for its self-insured workers compensation program as required by the Commonwealth of Pennsylvania Bureau of Workers Compensation, Department of Labor and Industry. Funds held in trust consist of marketable equity securities, which have been recorded at fair value, and are included with assets limited as to use on the balance sheets. Custodial Agency Funds The board of directors of CHF agreed to act as the fiscal agent of the Conemaugh Valley Memorial Hospital Charitable Gifts Fund for the employees of Memorial. As such, CHF is responsible for holding the bi-weekly charitable contributions withheld from the employees wages for annual distribution in accordance with the directions of the employees and charitable gift committee. Accordingly, this and other funds for which CHF acts as a fiscal agent are presented as a custodial agency fund asset and a custodial agency fund obligation on the accompanying balance sheets. Since CHF acts only as a fiscal agent for these funds, the receipts and disbursements relating to these funds are not reflected as operating revenues or expenses of CHF. Investments Subject to Annuity Agreement Investments subject to annuity agreement represent donations to CHF for which CHF will pay the donors an annual amount for life from the principal and investment earnings. The principal of the annuity gifts, and the investment earnings thereon, are recorded as temporarily restricted net assets, reduced by the annual annuity payments, until such time that the terms of the annuity gift have been met. When the terms of the annuity gift have been met, the remaining amount of the gift will be reclassified to unrestricted net assets. The investments consist principally of mutual funds. 7

98 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Investments and Investment Return Investment in equity securities with readily determinable fair values and all investments in debt securities are recorded at fair value. When the fair values are not available, investments are stated at the estimated fair value as determined by the investment manager. The investment in equity investee is reported on the equity method of accounting. Other investments are valued at the lower of cost or fair value. Investment return, including realized gains and losses, interest and dividends, is included in excess of revenues over expenses unless the income is restricted by donor or law. All unrealized gains and losses on investments are included as increases or decreases in unrestricted net assets. Unrealized losses that are other than temporary based on management s quantitative and qualitative criteria are recognized as a realized investment loss. Derivatives and Hedging Memorial has adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS Nos. 137 and 138. The fair value of all derivative instruments is recorded on the consolidated balance sheets. Derivatives are held as a part of a formally documented risk management (hedging) program. Memorial s hedging activities are subject to the management, direction and control of CHS and the Board. Memorial measures hedge effectiveness by formally assessing the historical and probable future high correlation of changes in the fair value or expected future cash flows of the hedged item. If the hedging relationship ceases to be highly effective, or it becomes probable than an expected transaction will no longer occur, gains or losses on the derivative are recorded in nonoperating income or expense. Changes in the fair value of derivatives are recorded in the consolidated statement of operations and changes in net assets along with the change in the fair value of the underlying hedged item if the derivative is designated as a fair value hedge. If no hedging relationship is designated, the derivative is marked to market through nonoperating income or expense. Cash flow from financial instruments is recognized in the statement of cash flows in a manner consistent with the underlying transactions. Supply Inventories Supply inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method. Property, Plant and Equipment Property and equipment are depreciated on a straight-line basis over the estimated useful life of each asset. Assets under capital lease obligations and leasehold improvements are depreciated over the shorter of the lease term or their respective estimated useful life. 8

99 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Certain of Windber s property and equipment has been acquired with funds provided by a federal granting agency under provisions of a grant and remain the property of the funding agency until the expiration of the grant or program for which the grant was originally provided, at which time the funding agency may request the return of the property and equipment or may donate it to Windber. The cost of these assets totaled approximately $2,664,000 and $2,311,000 and has been included in property, plant and equipment at June 30, 2004 and 2003, respectively. Donations of property and equipment are reported at fair value as an increase in unrestricted net assets unless use of the assets is restricted by the donor. Monetary gifts that must be used to acquire property and equipment are reported as restricted support. The expiration of such restrictions is reported as an increase in unrestricted net assets when the donated asset is placed in service. The carrying value of the assets is evaluated periodically in relation to the operating performance and future undiscounted cash flows of the underlying operations. Adjustments are made if the sum of expected future net cash flows is less than book value. CHS capitalizes interest costs as a component of construction in progress based on the weighted average rates paid for long-term borrowing. Total interest incurred was: (in thousands) Interest capitalized $ 309 $ 553 Interest charged to expense 8,213 8,522 Other Assets Total interest incurred $ 8,522 $ 9,075 Noncompete Agreements. CHI has entered into various noncompete agreements in connection with physician practice acquisitions with terms between two and eight years. These agreements are being amortized on a straight-line basis over the terms of the underlying agreement. Affiliation Agreements. CHS entered into an affiliation agreement with Bon Secours Health System, Inc. (BSHSI) whereby CHS became a member of Bon Secours Holy Family Regional Health System (BSHF), a Pennsylvania nonprofit, nonstock corporation and subsidiary of BSHSI. CHS invested $3,000,000 in BSHF and received a 20% membership interest. The affiliate agreement provides that either party will have the right at specified dates to sell or purchase, respectively, CHS interest for fair market value (as defined) but not less than $3,000,000. CHS, as a member, is obligated to make capital loans or fund capital additions as may be requested based upon its membership interest percentage. On March 31, 2004, CHS entered into a termination agreement with BSHSI resulting in $3,430,000 being paid to CHS from BSHSI. 9

100 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 In December 2001, CHS entered into a Master Affiliation Agreement (MAA) and a Management Services Agreement (MSA) with Miners. The MAA and MSA provide CHS with significant operational responsibility for Miners. Under the MAA, CHS has committed to provide funding for operating losses, when requested by Miners, of up to $1,500,000 during the first three years of the MAA and up to an additional $2,500,000 of funding afterward. However, CHS will not be required to provide in excess of $500,000 per year subsequent to the end of the third year of the MAA. Under the MAA, CHS is not responsible for nor guarantees any of Miners s financial obligations, nor has CHS been requested to provide any of the committed funding to Miners. On January 29, 2003, Miners filed a bankruptcy petition in the U. S. Bankruptcy Court for the Western District of Pennsylvania. During the bankruptcy process, CHS continued to provide administrative and managerial functions to Miners under the MSA, which were billed to Miners. Miners s bankruptcy re-organization plan contemplated continuing the MAA and MSA with CHS once Miners exited bankruptcy. On June 10, 2004, Miners emerged from bankruptcy and continued the MAA and MSA with CHS. Refer to Note 13 for further information. Split-dollar Life Insurance Policies. Other assets include the discounted cumulative paid premiums under a split-dollar life insurance policy for certain physicians and employees of CHS. In accordance with the policy agreement, CHS will receive the greater of the cash surrender value of the policy or cumulative premiums upon termination of the contract by the physicians and employees. Investment in Joint Ventures. The investment in joint ventures are accounted for by the equity method of accounting and further described in Note 6. Deferred Financing Costs. Deferred financing costs represent costs incurred in connection with the issuance of bonds and are deferred and amortized over the life of the bonds primarily using the interest method. Insurance Medical Malpractice Insurance Effective October 1, 2002, CHS obtained medical malpractice insurance for its member institutions on a claims-made basis through an affiliated captive insurance company domiciled in Vermont and approved for coverage in Pennsylvania. CHI, Good Samaritan, Memorial, Meyersdale and Windber participate in the insurance program through CHS and are individually responsible for premiums billed by CHS and certain other funding requirements. CHS has approximately a 20% ownership in the captive. There are inherent risks of loss that could be material, associated with this captive, if other members become insolvent and consequently are unable to pay their respective claims incurred. These losses would be shared with remaining members. There are no potential losses recorded in CHS s consolidated financial statements for those inherent risks based on the current belief of management that such risk is low. Under the current policy, CHS has primary professional liability/general liability and umbrella/excess liability coverage, subject to a $250,000 per occurrence deductible and an actuarially determined stop-loss amount of approximately $2,200,

101 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Additionally, Memorial has assumed payment responsibility for any malpractice losses incurred by other CHS affiliates, including CHI, Good Samaritan, Meyersdale and Windber. Memorial accrues for its portion of the estimated cost of the program based upon known and anticipated claims, including a related accrual for Memorial s obligation for incurred but not reported claims. CHI, Good Samaritan, Memorial, Meyersdale and Windber also participate in the Medical Care Availability and Reduction of Error Fund (MCARE) as part of the state s medical malpractice insurance system reform. Any unfunded liabilities within the MCARE fund will be funded through surcharge assessments in future years. No provision has been made for any future MCARE fund assessments in the accompanying consolidated financial statements as CHS s portion of MCARE fund s unfunded liability cannot be reasonably determined. Prior to its existing malpractice insurance arrangements, Memorial and Windber were insured for malpractice by PHICO Insurance Company (PHICO). In February 2002, PHICO, at the request of Pennsylvania Insurance Department, was placed in liquidation by an order of the Commonwealth Court of Pennsylvania (Liquidation Order). The Liquidation Order refers these claims to the state guaranty association. The state guaranty association statutes generally provide for coverage between $100,000 to $300,000 per insured claim and provide for net worth and residency limitations that, if applicable, may limit or prevent Memorial and Windber from recovering from the state guaranty association fund. At this time, CHS believes that the resolution of these PHICO claims will not have a material adverse effect on CHS s financial position, cash flows or results of operations. Worker s Compensation Memorial is principally self-insured for workers compensation claims. Losses are expensed for claims incurred and estimated incurred but not reported claims. Amounts needed to pay claims are funded annually to an irrevocable trust established to pay such claims. CHI and Good Samaritan maintains an insurance program with Memorial whereby Memorial assumes all risk under the arrangement. Meyersdale and Windber purchase commercial insurance against loss from workers compensation claims. Employee Health Insurance CHS, excluding Windber, maintains a self-insured health care plan covering substantially all fulltime employees. Contributions are made to the administrator of the plan as health care claims are incurred, while expenses are accrued as incurred. An estimated liability for incurred but not reported claims has been recorded in other liabilities for these members employees health benefits. Windber purchases commercial insurance against loss from employee health claims. 11

102 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Guarantees CHS accounts for certain guarantees under Financial Accounting Standards Board Interpretation No. 45 (FIN 45). FIN 45 outlines measurement and disclosure requirements related to the estimated fair value of certain guarantees issued or modified by CHS after December 31, At the inception of qualifying guarantees, CHS records a liability and contribution expense for the value of the guarantee provided, if material. Because CHS has not issued or modified any guarantees subsequent to December 31, 2002, no amounts have been recorded pursuant to this interpretation. CHS has entered into various guarantee agreements with unconsolidated affiliates prior to December 31, 2002, as outlined below. CHI, through its wholly owned subsidiary 1086 Real Estate, Inc., has proportionally guaranteed, based upon its ownership percentage, a mortgage loan related to its 50% interest in Laurel Wood Associates. Refer to Note 6 for additional information. The current balance of debt outstanding under these agreements was as follows at June 30, 2004 and 2003: CHI $ 8,066,000 $ 8,232,000 Should CHS be obligated to perform under the guarantee agreements, CHI may seek reimbursement from the affiliates of amounts expended under the guarantee. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are comprised of the net assets of charitable foundations, which are available for use in future periods. Permanently restricted net assets are comprised of the net assets of certain perpetual trust agreements. Net Patient Service Revenue CHS s hospital providers have agreements with third-party payers that provide for payments at amounts different from established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payers. 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. CHS believes that reasonable provision has been made in the accompanying consolidated financial statements for anticipated adjustments. 12

103 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 CHI s revenues include charges for services rendered and medical equipment provided to patients under Medicare, Medical Assistance, Blue Shield and other programs whereby CHI is paid based upon prospective rates or prevailing fees, which may be less than CHI s standard rates. Provision has been made in the accompanying consolidated financial statements for anticipated adjustments resulting from the difference between rates charged and amounts to be realized upon collection. Charity Care and Other Uncompensated Services CHS s subsidiaries provide medical services to patients who meet certain criteria under their charity care policy without charge or at amounts less than their established rates. Because CHS does do not pursue collection of amounts determined to qualify as charity care, these amounts are not reported as net patient service revenue. CHS maintains records to identify and monitor the level of charity care provided. The amount of charges forgone for services and supplies furnished under the CHS s charity care policy aggregated approximately $3,837,000 and $3,781,000 in 2004 and 2003, respectively. Other Revenues Other revenue includes, among other things, income earned on federal grants and contracts. Revenue from these grants and contracts is recognized at the time CHS incurs expenditures for the purpose specified by the grantor or donor. Such amounts received, but not yet expended, are reported as deferred revenue in the consolidated balance sheets. CHI has agreements with various health maintenance organizations (HMOs) to provide medical services to subscribing participants. Under these agreements, CHI receives monthly capitation payments based on the number of each HMOs participants, regardless of services actually performed by CHI. Additionally, CHI leases certain of its equipment to customers and accounts for such leases under the operating lease method of accounting, whereby rental income is recognized as it is earned over the terms of the leases. Contributions Gifts of cash and other assets received without donor stipulations are reported as unrestricted revenue and net assets. Gifts received with a donor stipulation that limits their use are reported as temporarily or permanently restricted revenue and net assets. When a donor stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Gifts and investment income that are originally restricted by the donor and for which the restriction is met in the same time period are recorded as temporarily restricted and then released from restriction. 13

104 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Unconditional gifts expected to be collected within one year are reported at their net realizable value. Unconditional gifts expected to be collected in future years are reported at the present value of estimated future cash flows. The resulting discount is amortized using the level-yield method and is reported as contribution revenue. Conditional gifts depend on the occurrence of a specified future and uncertain event to bind the potential donor and are recognized as assets and revenue when the conditions are substantially met and the gift becomes unconditional. Deferred Revenue and Grant Revenue Grant revenue is recognized by CHS when it incurs operating expenditures for the purpose specified by the grantor, or in the case of capital assets acquired with federal grant funds, revenue is recognized over the useful lives of the respective assets in conjunction with depreciation expense. Deferred revenue consists of unearned grant revenue received for the Breast Care Center, the Dean Ornish Program and other programs, as well as membership revenue for the health fitness center which is recognized over the membership period. CHS recorded grant revenue from the Henry M. Jackson Foundation, Dean Ornish and others (Grantors) of approximately $7,383,000 and $6,263,000 related to operating expenditures specified by the Grantors for the years ended June 30, 2004 and 2003, respectively. Excess of Revenues Over Expenses The consolidated statements of operations include excess (deficiency) of revenues over expenses. Changes in unrestricted net assets which are excluded from excess (deficiency) of revenues over expenses, consistent with industry practice, include unrealized gains and losses on investments other than trading securities, the change in fair value of an interest rate swap agreement, additional minimum pension liabilities, 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 purpose of acquiring such assets). Income Taxes CHS and its not-for-profit subsidiaries, except for CHI and certain subsidiaries of Memorial and Windber, qualify as not-for-profit corporations as described in Section 501(c)(3) of the Internal Revenue Code (Code) and are exempt from federal income taxes on related income pursuant to Section 501(a) of the Code. However, these entities are liable for federal income taxes on any unrelated business taxable income. 14

105 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 CHI and certain subsidiaries of Memorial and Windber are taxable for federal income tax purposes. The subsidiaries of CHI are taxable for both federal and state income tax purposes. Deferred income taxes are provided for timing differences between financial and tax accounting. The consolidated financial statements include a provision for income taxes relating to the undistributed earnings of the joint venture. Reclassifications Certain reclassifications have been made to the 2003 consolidated financial statements to conform to the 2004 consolidated financial statement presentation. The reclassifications had no effect on the change in net assets. Note 2: Net Patient Service Revenue CHS has agreements with third-party payers that provide for payments to CHS at amounts different from its established rates. These payment arrangements include: Medicare. For Memorial and Windber, inpatient acute care services and substantially all outpatient services rendered to Medicare program beneficiaries are paid at prospective determined rates. These rates vary according to a patient classification system that is based on clinical, diagnostic and other factors. Certain inpatient nonacute services and defined medical education costs are paid based on a cost reimbursement methodology. Memorial and Windber are reimbursed for certain services at tentative rates with final settlement determined after submission of annual cost reports by CHS and audits thereof by the Medicare fiscal intermediary. Meyersdale is designated by Medicare as a critical access hospital (CAH). Inpatient acute care, swing bed and most outpatient services are reimbursed based on a cost reimbursement methodology. CAH status places certain operational requirements on Meyersdale, including limitations on bed size and aggregate length of stay for acute patients. Payments are made during the year at estimated interim rates with final settlement determined after submission of the annual cost reports by Meyersdale and audits thereof by the Medicare fiscal intermediary. Good Samaritan is reimbursed for services rendered to patients covered by the federal Medicare program on a prospective payment system for Part A Medicare services and on a fee schedule basis for Part B Medicare therapy services. No additional settlement will be made for the difference between the prospective rates paid and actual costs. Medicaid. For Good Samaritan, Memorial, Meyersdale and Windber, inpatient and outpatient services rendered to Medicaid program beneficiaries are reimbursed under prospectively determined daily rates and fee schedules, respectively. 15

106 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Other. CHI, Good Samaritan, Memorial, Meyersdale and Windber have also entered into payment agreements with certain commercial insurance carriers, HMOs and preferred provider organizations. The basis for payment to CHS under these agreements includes prospectively determined rates per discharge, discounts from established charges and prospectively determined daily rates. The mix of net patient service revenue for the year ended June 30, 2004 and 2003, was: Medicare 53% 57% Medicaid 7 6 Blue Cross Other % 100% The Tobacco Settlement Act of 2001 provides for annual contributions to hospitals and health systems for uncompensated care and extraordinary expense. During 2004 and 2003, CHS received notice from the Hospital and Healthsystem Association of Pennsylvania that CHS was eligible for payments totaling approximately $1,185,000 and $1,212,000, respectively. These amounts have been included in net patient service revenue. Laws and regulations governing the Medicare and Pennsylvania Medical Assistance (Medicaid) programs are complex and subject to interpretation and change. As a result, it is reasonably possible that recorded estimates will change materially in the near term. CHS believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no significant regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties and exclusion from the Medicare and Medicaid programs. Note 3: Concentration of Credit Risk CHS grants credit without collateral to its patients, most of whom are area residents and are insured under third-party payer agreements. The mix of receivables from patients and third-party payers is as follows at June 30: Medicare 32% 33% Medicaid Blue Cross Other % 100% 16

107 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 CHS routinely has cash balances in individual financial institutions in excess of FDIC insurance limits. Management believes these institutions are financially stable and that the credit risk related to these deposits is minimal. Note 4: Assets Limited as to Use and Investments Assets limited as to use at June 30 include: (in thousands) Cash and cash equivalents $ 21,315 $ 21,952 Government, agency and corporate obligations 45,621 42,561 Mutual funds 2,210 10,539 Common and preferred stocks 58,566 38,707 Interest receivable Hedge funds 8,465 7,126 Real estate investment trusts 6,696 4,852 Equity options 8,782 Interest rate exchange agreements (747) (2,203) Total investment return is comprised of the following: $ 142,143 $ 132,505 (in thousands) Interest and dividend income $ 3,361 $ 3,694 Realized gains (loss) on other than trading securities 3,801 (7,008) Net unrealized gains on other than trading securities 5,966 11,153 $ 13,128 $ 7,839 Total investment return is reflected in the statements of operations and changes in net assets as follows: Unrestricted net assets Other nonoperating income $ 7,126 $ (2,953) Change in unrealized gains and losses on other than trading securities 5,853 10,778 Temporarily restricted net assets $ 13,128 $ 7,839 17

108 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 CHS continually reviews investments for impairment conditions that indicate that an other than temporary decline in market value has occurred. These factors include specific information pertaining to individual companies or industries and general market conditions that reflect prospects for the economy as a whole. Certain investments in debt and marketable equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at June 30, 2004, was $32,555,000, which is approximately 23% of CHS s investment portfolio. These declines primarily resulted from recent increases in market interest rates and failure of certain investments to maintain consistent credit quality ratings (or meet projected earnings targets). Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in excess of revenues over expenses in the period the other-than-temporary impairment is identified. The following table shows the investments gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2004: Description of Securities (in thousands) Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Government, agency and corporate obligations $ 22,315 $ (639) $ 2,169 $ (78) $ 24,484 $ (717) Common and preferred stocks 6,138 (517) 973 (104) 7,111 (621) Hedge funds 960 (10) 960 (10) Total temporarily impaired securities $ 29,413 $ (1,166) $ 3,142 $ (182) $ 32,555 $ (1,348) CHS s investments are exposed to various risks such as interest rate, market and credit. Due to the level of risk associated with certain investments and the level of uncertainty related to changes in the value of investments, it is at least reasonably possible that changes in these risks in the near term could materially affect the amounts reported in the consolidated balance sheets and consolidated statements of operations and changes in net assets. 18

109 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Note 5: Interest Rate Exchange Agreements Interest rate exchange agreements are comprised of the following as of and for the years ended June 30: (in thousands) Notional Amount Balance at June 30, 2004 Balance at June 30, 2003 Valuation Adjustment June 30, 2004 Valuation Adjustment June 30, 2003 August 1998 $ 52,300 $ $ (343) $ 343 $ 1,394 February 2000 $ 50, (305) (1,410) February 2000 $ 51,400 (747) (1,855) 1,108 (1,139) January 2001 $ 50,000 (310) 310 1,382 $ (747) $ (2,203) $ 1,456 $ 227 CHS has authorized Memorial to utilize interest rate exchange agreements and related transactions such as caps, floors and collars. These interest rate exchange agreements subject Memorial to market risk associated with changes in interest rates. In connection with the issuance of the 1998 Series A Bonds, Memorial entered into an interest rate exchange agreement with a notional amount of $52,300,000. The contract provided for Memorial to make fixed rate payments of 4.82% and receive variable rate payments based upon the BMA Index. On February 10, 2000, Memorial entered into an agreement effectively terminating this interest rate exchange agreement on September 1, In connection with this termination, Memorial received a premium payment of $2,920,000 which was primarily recognized as a reduction in interest expense during the years ending June 30, 2001 through June 30, On February 10, 2000, Memorial entered into an interest rate exchange rate with a notional amount of $50,000,000, which expired on September 1, The contract provided for Memorial to make variable rate payments based upon the BMA Index and receive fixed payments of 4.75%. On February 14, 2000, Memorial entered into an interest rate exchange agreement with a notional amount of $51,400,000, which will expire on July 1, The contract provides for Memorial to make variable rate payments based upon the BMA Index and receive payments of 74.50% of the three-month LIBOR rate. In January 2001, Memorial entered into an interest rate exchange agreement with a notional amount of $50,000,000, which expired on September 1, The contract provided for Memorial to make fixed rate payments at 4.56%, and receive payments based upon the BMA Index. 19

110 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 In April 2002, Memorial entered into an interest rate exchange agreement with a notional amount of $30,420,000, which was to expire on July 1, The contract provided for Memorial to make variable rate payments based upon the BMA Index and receive fixed payments of 3.875%. This instrument was designated a fair value hedge and accordingly, increases or decreases in the instrument and the underlying debt s fair value were included in the change in unrestricted net assets. In June 2003, the April 2002 agreement was terminated with Memorial receiving a premium payment of $1,211,000. Note 6: Investment in Joint Venture 1086 Real Estate, Inc., a subsidiary of CHI, is a 50% joint venture partner in Laurel Wood Associates d/b/a Laurel Wood Convalescent Center and Laurel Wood Healthcare Associates (Centers). The Centers own and operate a nursing home and personal care facility in Johnstown, Pennsylvania which began operations in November The joint venture agreement with the Centers specifies that under certain conditions, as outlined in the agreement, the Centers may require additional capital calls or mandatory loans. In the event that 1086 Real Estate, Inc. would not comply with the capital calls or mandatory loan provisions, it would forfeit its initial investment in the joint venture or its percentage ownership would be decreased by a specified percentage, depending on the amount of previous capital contributed to the venture. Additionally, Laurel Wood Associates has a mortgage note payable in the amount of $8,151,341 and $8,231,997 as of June 30, 2004 and 2003, respectively, which is proportionally guaranteed by 1086 Real Estate, Inc. and other partners in the joint venture based on their ownership percentages Real Estate, Inc. accounts for its investment in the joint venture using the equity method of accounting. During 2004 and 2003, the Centers made joint venture distributions of approximately $610,000 and $125,000, respectively, to 1086 Real Estate, Inc. which has been recorded as a reduction of 1086 Real Estate, Inc. s investment in the Centers. The equity in the joint venture at June 30, 2004 and 2003, is comprised of losses and distributions in excess of equity in and advances to the Centers of $2,286,948 and $2,135,854, respectively. The equity in the earnings of the Centers, which has been included in the statements of operations and changes in net assets for the years ended June 30, 2004 and 2003, is based upon the most recently available unaudited financial statements of the Centers as summarized below: Balance Sheet (in thousands) Current assets $ 1,723 $ 2,563 Other assets $ 124 $ 0 Property and equipment, net $ 2,624 $ 3,211 Current liabilities $ 979 $ 1,283 Long-term debt $ 8,066 $ 8,232 Partners (deficit) $ (4,574) $ (3,741) 20

111 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Note 7: Long-term Debt (in thousands) South Fork Municipal Authority Hospital Revenue Refunding Bonds, Series of 1993 (A) $ 11,925 $ 12,425 Series of 1995 (C) 5,700 6,200 Series A of 1996 (B) 28,790 29,410 Series B of 1996 (B) 12,805 13,090 Series of 1997 (C) 5,555 6,110 Series A of 1998 (D) 48,400 49,400 Series B of 1998 (D) 67,800 68,260 Series C of 1998 (D) 5,705 5,825 Series D of 1998 (D) 2,805 2,865 Equipment loans (E) Mortgages payable (F) 7,305 7,814 Notes payable (G) 1,031 1,129 Other , ,421 Less unamortized bond discount 1,798 1,888 Less current portion 5,589 4,896 $ 192,083 $ 197,637 (A) (B) In April 1993, Memorial participated in the issuance of $14,205,000 of Authority Hospital Revenue Refunding Bonds, Series of 1993 (1993 Bonds), which bear interest at rates ranging from 4.75 %to 5.75%. The 1993 Bonds proceeds of approximately $12,340,000 were used to legally defease $10,095,000 of the 1988 Series B Revenue Bonds. The remaining proceeds from the 1993 Bonds were used primarily to fund scheduled interest payments of the 1993 Bonds. The 1993 Bonds are subject to retirement in varying principal amounts through The bonds are secured by the gross revenues of Memorial and assets restricted under the bond indenture agreement. In September 1996, Memorial participated in the issuance of $30,000,000 of Authority Hospital Revenue Refunding Bonds, Series A of 1996, (1996 A Bonds), which bear interest at rates ranging from 4.70% to 5.75%. The 1996 A Bonds proceeds were used to fund general renovations, maintenance and improvements to Memorial s building complex and equipment purchases. The 1996 A Bonds are subject to retirement in varying principal amounts through The bonds are secured by the gross revenues of Memorial and assets restricted under the bond indenture agreement. 21

112 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 In September 1996, Good Samaritan participated in the issuance of $13,360,000 of Authority Hospital Revenue Refunding Bonds, Series B of 1996 (1996 B Bonds), which bear interest at rates ranging from 4.70% to 5.375%. The 1996 B Bonds proceeds were used to advance refund of the Cambria County Hospital Development Authority, Hospital Revenue Bonds, Series of 1985 and the payment of related issuance costs. The 1996 B Bonds are subject to retirement in varying principal amounts through The bonds are secured by gross revenues of Good Samaritan and assets restricted under the bond indenture agreement. (C) In January 1997, Windber issued the Authority Hospital Revenue Refunding Bonds, Series C of 1997 (1997 Bonds), which bear interest at rates ranging from 4.45% to 5.25%. The 1997 Bonds are subject to retirement in varying principal amounts through The bonds are secured by the gross revenues of Windber and the assets restricted under the bond indenture agreement. Proceeds from the issuance of 1997 Bonds, the existing 1995 Bonds debt service reserve fund and funds from Windber were used to establish a debt service fund for the 1995 Bonds and to pay for the costs related to the issuance. The debt service fund is invested in U. S. Treasury obligations in such amounts, rates and maturities to provide for the retirement of the 1995 Bonds and the payment of related interest as they become due. The refunded 1995 Bonds, as well as the related debt service fund, are reflected on CHS s consolidated balance sheets at June 30, 2004 and The 1995 Bonds are subject to retirement in varying principal amounts through 2012 and bear interest at a rate of 6.5%. (D) In August 1998, the Authority issued Hospital Revenue Refunding Bonds Series B of 1998 (1998 Series B Bonds) which bear interest at rates ranging from 4.2% to 5.0%, and the Adjustable Rate Hospital Revenue Bonds, Series A of 1998 (1998 Series A Bonds) in the amounts of $68,260,000 and $52,300,000, respectively. The 1998 Series A Bonds bear interest at a variable rate, as determined by a remarketing agent on a daily basis, based on the BMA Index. The variable interest rate at June 30, 2004 and 2003, was approximately 1.0%. The 1998 Series A and B Bonds are subject to retirement in varying principal amounts through The 1998 Series A and B Bonds proceeds were used to finance certain capital projects, acquisition of equipment, refund certain indebtedness consisting of the Revenue Refunding Bonds, Series A of 1988 and a portion of the Revenue Refunding and Improvement Bonds, Series B of 1992 and to pay the bond insurance and issuance costs of the 1998 Series A and B Bonds. In August 1998, Windber issued through the Authority $6,260,000 of Hospital Revenue Bonds, Series C of 1998 (1998 C Bonds), which bear interest at rates ranging from 3.9% to 5.0%. The proceeds of the 1998 C Bonds were used to finance the construction of a 24,000 square foot outpatient medical center and general renovation and maintenance and improvements to Windber s building complexes. The 1998 C Bonds are subject to retirement in varying principal amounts through

113 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 In August 1998, Meyersdale participated in the issuance of $3,015,000 of the Authority Hospital Revenue Refunding Bonds, Series D of 1998 (1998 D Bonds), which bear interest at rates ranging from 3.7% to 5.0%. Bond proceeds of approximately $2,561,000 were used to repay outstanding indebtedness. The remaining proceeds from the issue were used primarily to fund Meyersdale s building renovation projects, the acquisition of equipment and the payment of certain issuance costs. The 1998 D Bonds are subject to retirement in varying principal amounts through The 1998 Series A and Series B Bonds were issued under a Master Trust Indenture and Guarantee Agreement which incorporates the Windber Hospital Revenue Bonds Series C of 1998 and the Meyersdale Hospital Revenue Bonds Series D of The Master Trust Indenture and Guarantee Agreement defines the Restricted Group as Memorial, CHS, Windber and Meyersdale. The bonds are secured by the gross revenues of the Restricted Group and assets restricted under the bond indenture agreement. (E) In August 1991, Memorial entered into a note to purchase various equipment for $1,500,000. The loan bears interest at a variable rate with monthly payments of principal and interest. The variable rate as of June 30, 2004 and 2003, was 5.75%. The loan is secured by the equipment and matures in August In November 2002, Meyersdale entered into a six-year note to purchase equipment for $469,978. The note bears an interest rate of 5.77% over the term of the note and is secured by the certain equipment. (F) In November 1991, Conemaugh Housing Inc., a subsidiary of Memorial, entered into a $1,813,000 mortgage with the Department of Housing and Urban Development (HUD) on an apartment complex that leases apartments to residents on a month-to-month basis following an initial lease of one year. The loan bears interest at a fixed rate of 8.4% with monthly payments of principal and interest of approximately $13,000. The loan is secured by the mortgaged land and building and matures in November In June 1984, Good Samaritan entered into an agreement with the City of Johnstown (City), whereby the City developed a 323 unit parking garage, a four-story office building and a pedestrian bridge connecting the garage with Good Samaritan. The project was financed with a $2,290,000 loan with a bank and through second mortgages with the City in an amount of $845,000. The bank loan is payable in monthly installments of $19,974 through April 2005, including interest at variable rates changing every three years, 9% at June 30, The second mortgages are payable in monthly installments of $2,772 and $351 through April 2005, including interest at 2%. These mortgages are secured by certain real estate. In November 1977, the Medical Building of Johnstown, a subsidiary of Memorial, entered into a mortgage agreement with a bank through the Cambria County Industrial Development Authority to purchase the land currently occupied by the Medical Building for $1,600,000. The loan bears interest at a fixed rate of 7.5% with monthly payments of principal and interest of $12,000. The loan is secured by the building and matured in

114 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Windber has entered into several mortgage notes payable with monthly payments that range from approximately $2,500 to $8,700. These mortgage notes payable bear interest at rates that range from 5.75% to 8.25% and mature between 2016 and These loans are secured by real estate. CHI has entered into several mortgage notes payable with fixed monthly payments that range from approximately $1,000 to $31,000. These mortgage loans payable bear interest at rates that range from 5.4% to 6.5% and mature between January 2014 and November These loans are secured by certain commercial real estate. (G) Windber entered into a loan agreement for approximately $1,200,000 with a bank to partially finance the construction of the Joyce Murtha Breast Care Center. The loan is unsecured and payable in monthly payments of $70,844 at an interest rate of 5.0% and continues through Memorial has approximately $636,000 and $810,000 in lines of credit at June 30, 2004 and 2003, respectively, in order to satisfy requirements pursuant to Memorial s insurance arrangements. No amounts were drawn on the lines of credit as of June 30, 2004 and Under the terms of the Master Trust Indenture and certain loan agreements with the Authority, CHS is required to maintain certain deposits with a trustee. Such deposits are included with assets limited as to use in the financial statements (see Note 4). The Master Trust Indenture also places limits on the incurrence of additional borrowings and require that certain measures of financial performance be maintained so long as the bonds are outstanding. At June 30, 2004 and 2003, CHS was in compliance with such requirements. Aggregate future principal maturities of long-term debt are as follows at June 30, 2004: (in thousands) 2005 $ 5, , , , ,776 Thereafter 172,040 $ 199,470 Note 8: Capital Lease Obligations Memorial and Windber have entered into various capital lease agreements for certain machinery and equipment. The lease agreements bear interest at varying amounts ranging from 0.0% to 8.4%. 24

115 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Property and equipment include the following under capital leases: (in thousands) Buildings $ 337 $ 337 Equipment 2,344 1,708 2,681 2,045 Less accumulated depreciation $ 1,764 $ 1,681 Future minimum lease payments under capitalize lease obligations at June 30, 2004, are: (in thousands) 2005 $ Thereafter 20 2,004 Less portion representing interest 183 Present value of future minimum lease payments 1,821 Less current portion 501 $ 1,320 Note 9: Pension Plan Memorial Plans A cash balance defined benefit pension plan, covering substantially all of Memorial s employees, provides retirement, disability and death benefit obligations to eligible participants based on each participant s eligible earnings and accrued interest. Memorial s funding policy is to contribute such amounts as are necessary on an actuarial basis to provide the plan with sufficient assets to meet the benefits to be paid to retirees or their beneficiaries. Memorial expects to contribute approximately $3,924,000 to the plan in

116 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Prior to January 1, 1999, Memorial also provided certain post-retirement health care benefits until age 65 and life insurance benefits for retired full-time employees and their beneficiaries. The health care plan was contributory with retiree contributions adjusted annually. Memorial funded the cost of the post-retirement benefits through a Voluntary Employee Benefit Association Trust (Trust). During 2003, the assets of the Trust were liquidated to fund active employee health care claims. Windber Plans Windber has a noncontributory defined benefit pension plan (Plan) which covers substantially all of the Windber s and Windber Research Institute s (WRI) employees, of which the latter group is not a significant part of the Plan s assets or obligation. Windber s pension benefits are based on a formula taking into consideration an employee s compensation and years of service. Windber s funding policy is to contribute such amounts as are necessary on an actuarial basis to provide the Plan with sufficient assets to meet its benefit obligation under the Plan. Windber expects to contribute approximately $481,000 to the Plan in Effective June 22, 2003, Windber froze Plan benefits, resulting in a Plan curtailment gain and related reduction in the total Plan benefit obligation. Deferred Benefit Plan Disclosures Memorial uses a March 31 measurement date for its defined benefit pension plan and a June 30 measurement date for the post-retirement benefits plan. Windber uses a June 30 measurement date for its plan. Significant balances, costs and assumptions are: Pension Benefits Other Benefits Pension Benefits Other Benefits Memorial Windber Memorial Memorial Windber Memorial (in thousands) Benefit obligation $ 74,544 $ 9,665 $ 1,364 $ 72,398 $ 8,941 $ 1,344 Fair value of plan assets 52,220 6,559 41,674 5,767 Funded status $ 22,324 $ 3,106 $ 1,364 $ 30,724 $ 3,174 $ 1,344 Accumulated benefit obligation $ 73,715 $ 9,666 $ 71,716 $ 8,941 26

117 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Amounts recognized in the balance sheets: Pension Benefits Other Benefits Pension Benefits Other Benefits Memorial Windber Memorial Memorial Windber Memorial (in thousands) Accrued benefit cost $ (6,225) $ (1,243) $ (1,837) $ (6,492) $ (1,067) $ (1,786) Benefit costs $ 5,364 $ 450 $ 51 $ 3,018 $ 668 $ (113) Employer contributions (reversion) $ 5,396 $ 625 $ 325 $ 40 $ 805 $ (1,839) Benefits paid $ 4,575 $ 347 $ 325 $ 5,815 $ 345 $ 376 Weighted-average assumptions used to determine benefit obligations: Pension Benefits Other Benefits Pension Benefits Other Benefits Memorial Windber Memorial Memorial Windber Memorial Discount rate 6.00% 6.25% 6.00% 6.25% 6.25% 6.25% Rate of compensation increase 3.50% 3.00% N/A 3.50% 3.00% N/A% Weighted-average assumptions used to determine benefit costs: Pension Benefits Other Benefits Pension Benefits Other Benefits Memorial Windber Memorial Memorial Windber Memorial Discount rate 6.00% 6.25% 6.00% 6.25% 6.25% 6.25% Expected return on plan assets 8.25% 7.50% N/A 8.25% 7.50% N/A Rate of compensation increase 3.50% 3.00% N/A 3.50% 3.00% N/A CHS has estimated the long-term rate of return on Plan assets based primarily on historical returns on Plan assets, adjusted for changes in target portfolio allocations and recent changes in long-term rates based on publicly available information. For measurement purposes of the post-retirement benefits plan, a 9.50% and 10.50% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2004 and 2003, respectively. The rate was assumed to decrease gradually to 4.5% by the year 2009 and remain at that level thereafter. 27

118 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Act) was signed into law. The Act introduces a prescription drug benefit under Medicare Part D, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide benefits at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position 106-1, CHS has not reflected the effects of the Act on the measurements of Plan benefit obligations and periodic benefit costs and accompanying notes. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, may require CHS to change previously reported information. The following benefit payments which reflect expected future service, as appropriate, are expected to be paid as of June 30: (in thousands) Other Pension Benefits Benefits Memorial Windber Memorial 2005 $ 6,998 $ 362 $ , , , , Thereafter ( ) 35, $ 69,365 $ 1,884 $ 1,242 Plan assets are held by a bank-administered trust fund, which invests the Plan assets in accordance with the provisions of the Plan agreements. The Plan agreements permit investment in common stocks, corporate bonds and debentures, U. S. Government securities, certain insurance contracts, real estate and other specified investments, based on certain target allocation percentages. Asset allocation is primarily based on a strategy to provide stable earnings while still permitting the Plans to recognize potentially higher returns through a limited investment in equity securities. The target asset allocation percentages for 2004 were as follows: Pension Benefits Memorial Windber Equity securities 6.0% to 23.0% 65% International equity 4.0% to 8.0% 0 Convertible securities 0.0% to 5.0% 0 Real estate securities 0.0% to 5.0% 0 Hedged equity 0.0% to 3.5% 0 Hedged fixed investments 0.0% to 3.5% 0 Investment grade fixed income 25.0% to 35.0% 35% Cash and cash equivalents 0.0% to 10.0% 0 28

119 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Plan assets are rebalanced quarterly. At June 30, 2004 and 2003, the Plans assets by category were as follows: (in thousands) Pension Benefits Pension Benefits Memorial Windber Memorial Windber Equity securities 60% 62% 51% 58% Fixed income Cash/money account Other 8 6 Defined Contribution Plans 100% 100% 100% 100% CHI has a defined contribution plan which covers substantially all employees. Contributions amounted to approximately $1,428,000 and $1,305,000 for the years ended June 30, 2004 and 2003, respectively. Memorial and Meyersdale also provide a tax sheltered annuity plan under Section 403(b) of the Internal Revenue Code for substantially all of its employees. Total plan contributions by Memorial and Meyersdale for the years ended June 30, 2004 and 2003, amounted to approximately $32,000 and $363,000, respectively. Note 10: Operating Leases CHS has entered into several operating leases for property and equipment which expire on various dates through November Rent expense was approximately $7,122,000 and $5,685,000 for the years ended June 30, 2004 and 2003, respectively. Included in the amount is approximately $169,000 and $217,000, respectively, relating to buildings and medical equipment leased from physicians who are employed by CHI. Future minimum rental payments on operating lease obligations for fiscal years ending after June 30, 2004, are as follows: (in thousands) 2005 $ 3, , , , Thereafter 398 $ 11,217 29

120 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Note 11: Income Taxes Income tax expense was approximately $101,000 and $16,000 for the years ended June 30, 2004 and 2003, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of deferred tax liabilities and assets at June 30 are as follows: (in thousands) Net operating losses $ 10,108 $ 7,697 Other, net (679) 400 Total deferred tax assets 9,429 8,097 Valuation allowance for deferred tax assets (9,581) (8,163) Net deferred tax liability $ (152) $ (66) The income taxes paid were approximately $0 and $89,000 during 2004 and 2003, respectively. At June 30, 2004, CHI had net operating loss carryforwards of approximately $29,330,000 for federal income tax purposes which can be used to offset future taxable income and that begin to expire in Note 12: Functional Expenses CHS provides general health care services to residents within its geographic area. Expenses related to providing these services are as follows for the years ended June 30: (in thousands) Health care services $ 264,940 $ 244,131 Fundraising services General and administrative services 58,414 60,373 $ 323,565 $ 304,711 30

121 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Note 13: Related-party Transactions At June 30, 2004, the amounts due to CHS and subsidiaries from Miners totaled approximately $1,248,000. The amounts are noninterest bearing and are classified in the accompanying consolidated balance sheet based upon CHS s or Miners s intent to demand receipt or payment for services or goods provided. Actual repayment terms may differ from the balance sheet classification at June 30, 2004, based on management s discretion and available cash flows of Miners. The total amount of services provided to Miners by CHS and its controlled members for the year ended June 30, 2004, was approximately $1,313,000. On June 10, 2004, Miners emerged from Chapter 11 Bankruptcy protection and had an unrestricted net asset deficit as of June 30, 2004, of approximately $2,753,000. No liability has been established by CHS for any potential loss from the Miners s affiliation agreements. Additionally, Windber is affiliated with WRI, a not-for-profit corporation through common board members and activity related to federal grants. Windber has a management contract with WRI whereby WRI reimburses Windber for personnel and other costs of the Clinical Breast Care Program incurred by Windber, including overhead costs such as equipment, supplies and a share of utilities, lease rentals, maintenance and other service costs. The assets, liabilities, net assets and results of operations of WRI are not included in Windber s consolidated financial statements. At June 30, 2004 and 2003, a receivable of approximately $2,408,000 and $112,000 was recorded by Windber from WRI, included in other receivables. Note 14: Management Agreement Conemaugh Health Company, Inc. paid management fees of $1,366,804 and $767,417 during the years ended June 30, 2004 and 2003, respectively, to a vendor for various professional management services. Note 15: Fair Value of Financial Instruments The following methods and assumptions were used in estimating the fair value disclosures for financial instruments. Cash and Cash Equivalents The carrying amount reported in the consolidated balance sheets for cash and cash equivalents approximates fair value. Investments and Assets Limited as to Use The fair value for assets limited as to use is based on quoted market prices. 31

122 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Long-term Obligations The fair value of long-term obligations is estimated using quoted market prices and discounted cash flows of debt service, based on the current incremental borrowing rate for similar types of borrowing arrangements. The carrying amounts and estimated fair values of financial instruments are as follows at June 30: (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Cash and cash equivalents $ 13,057 $ 13,057 $ 8,154 $ 8,154 Assets limited as to use and investments $ 143,153 $ 143,153 $ 133,351 $ 133,351 Long-term debt, including current portion $ 199,470 $ 202,812 $ 204,421 $ 215,056 Note 16: Significant Estimates, Concentrations and Commitments Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Those matters include the following: Allowance for Net Patient Service Revenue Adjustments Estimates of allowances for adjustments included in net patient service revenue are described in Notes 1 and 2. Malpractice Claims Estimates related to the accrual for medical malpractice claims are described in Note 1. Litigation In the normal course of business, CHS is, from time to time, subject to allegations that may or do result in litigation. Some of these allegations are in areas not covered by CHS s self-insurance program (discussed elsewhere in these notes) or by commercial insurance, i.e., allegations regarding employment practices or performance of contracts. CHS evaluates such allegations by conducting investigations to determine the validity of each potential claim. Based upon the advice of counsel, management records an estimate of the amount of ultimate expected loss, if any, for each of these matters. Events could occur that would cause the estimate of ultimate loss to differ materially in the near term. 32

123 Conemaugh Health System, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2004 and 2003 Commitment Memorial and CHS have pledged to support the ongoing operations of Meyersdale, Good Samaritan, CHI and Windber as may be necessary through at least July 1, No amounts have been recorded in the financial statements related to this pledge. Note 17: Subsequent Event On August 18, 2004, Memorial signed a non-binding letter of intent with the University of Pittsburgh Medical Center (UPMC) to initiate discussing a business relationship with respect to UPMC Lee Regional and certain of its affiliated entities. The proposed transaction specifies that certain assets of UPMC Lee Regional will be acquired by Memorial and the current activities of UPMC Lee Regional will be operated financially and administratively within Memorial. 33

124 Supplemental Information

125 Assets (in thousands) Memorial Medical Center Conemaugh Health System, Inc. and Subsidiaries Consolidating Balance Sheet June 30, 2004 Good Samaritan Medical Center Meyersdale Medical Center Windber Medical Center Conemaugh Health Initiatives, Inc. Conemaugh Health Foundation Conemaugh Health System Eliminations Total Current Assets Cash and cash equivalents $ 10,206 $ 143 $ 272 $ 1,339 $ 515 $ 274 $ 308 $ $ 13,057 Assets limited as to use, current 5, , ,375 Patient accounts receivable, net 27, ,206 5,044 36,726 Other receivables 2, ,736 Due from affiliates 4, (3,729) 1,248 Supply inventories 3, ,875 Prepaid expenses and other assets 2, (806) 3,297 Total current assets 53,483 2,034 1,642 9,685 6, (4,535) 70,314 Assets Limited as to Use Internally designated 115, , ,442 Held by trustee 11, ,282 19,287 Custodial agency funds Investments subject to annuity agreements Donor restricted for specific purpose 2,586 2, , , ,414 2, ,143 Less amount required to meet current obligations 5, , , , , ,397 2, ,768 Property and Equipment, At Cost Land and improvements 4,230 1, ,284 9,168 Buildings and improvements 184,864 4,761 27,020 2, ,325 Equipment 110, ,320 11,304 2, ,673 Construction in progress 3, , ,149 2,244 8,143 39,371 7, ,760 Less accumulated depreciation 147,159 1,725 4,315 17,843 1, , , ,828 21,528 5, ,724 Other Assets Investments 1,010 1,010 Interest in net assets of charitable foundations 2, (2,870) 205 Deferred financing costs 3, ,627 Other assets 1,466 9, (9,116) 4,538 7,621 9, , , (11,986) 10,380 Total assets $ 338,597 $ 12,127 $ 6,642 $ 38,832 $ 13,373 $ 5,198 $ 3,938 $ (16,521) $ 402,186

126 Liabilities and Net Assets (in thousands) Memorial Medical Center Good Samaritan Medical Center Meyersdale Medical Center Windber Medical Center Conemaugh Health Initiatives, Inc. Conemaugh Health Foundation Conemaugh Health System Eliminations Total Current Liabilities Current maturities of long-term debt $ 2,846 $ 999 $ 139 $ 1,395 $ 210 $ $ $ $ 5,589 Current maturities of capital lease obligations 1, (806) 501 Accounts payable 8, , ,736 Bond interest payable 2, ,245 Accrued expenses 13, ,594 2, ,655 Due to affiliates, net 1,009 1, (3,729) 0 Estimated amounts due to third-party payers 9, ,871 Deferred grant revenues Other liabilities 1, ,423 Total current liabilities 39,236 2,576 1,785 7,064 3, ,529 (4,535) 51,500 Accrued Pension and Postretirement Liabilities 22, , ,498 Deferred Compensation 1, ,629 Deferred Grant Revenue 1, , ,173 3,746 Losses in Excess of Equity and Advances to Joint Venture , ,287 Long-term Debt 155,752 12,045 2,955 17,648 3, ,083 Capital Lease Obligations 10, (9,116) 1,320 Other Liabilities 3, ,300 Total liabilities 234,245 14,621 4,740 29,179 9, ,789 (13,651) 282,363 Minority Interest Net Assets Unrestricted 101,396 (2,648) 856 9,534 3,703 1,537 1, ,527 Temporarily restricted 2, ,821 (2,870) 3,021 Permanently restricted Total net assets 103,874 (2,494) 1,902 9,653 3,703 4,428 1,149 (2,870) 119,345 Total liabilities and net assets $ 338,597 $ 12,127 $ 6,642 $ 38,832 $ 13,373 $ 5,198 $ 3,938 $ (16,521) $ 402,186 34

127 Conemaugh Health System, Inc. and Subsidiaries Consolidating Statement of Operations and Changes in Net Assets Year Ended June 30, 2004 (in thousands) Memorial Medical Center Good Samaritan Medical Center Meyersdale Medical Center Windber Medical Center Conemaugh Health Initiatives, Inc. Conemaugh Health Foundation Conemaugh Health System Eliminations Total Unrestricted Revenues, Gains and Other Support Net patient service revenue $ 224,886 $ 4,237 $ 6,761 $ 24,181 $ 29,712 $ $ $ $ 289,777 Other revenue 14,117 1, ,616 12, ,979 (10,114) 32,286 Net assets released from restrictions used for operations Total unrestricted revenues, gains and other support 239,003 5,409 6,847 31,797 41, ,979 (10,114) 322,270 Expenses Salaries, wages and employee benefits 109,805 2,137 3,079 15,817 26, , ,830 Professional fees, supplies, purchased services and other 91,751 2,833 2,837 12,315 17, ,114 (9,196) 122,707 Depreciation and amortization 16, , ,826 Interest 7, (918) 8,213 Provision for bad debts 9, ,011 11,989 Total expenses 235,047 5,956 6,896 31,771 46, ,980 (10,114) 323,565 Operating Income (Loss) 3,956 (547) (49) 26 (4,495) (185) (1) 0 (1,295) Other Income (Expense) Investment return 6, ,126 Equity in (loss) income of joint venture Valuation adjustment for interest rate exchange agreements 1,456 1,456 Minority interest (1,567) 2 (1,565) Other (270) (117) (247) Total other income (expense) 6, (86) ,200

128 (in thousands) Memorial Medical Center Good Samaritan Medical Center Meyersdale Medical Center Windber Medical Center Conemaugh Health Initiatives, Inc. Conemaugh Health Foundation Conemaugh Health System Eliminations Total Excess (Deficiency) of Revenues Over Expenses $ 10,733 $ (523) $ 69 $ (60) $ (4,173) $ (140) $ (1) $ 0 $ 5,905 Investment return change in net unrealized gains and losses on investments other than trading securities 5, ,853 Change in fair value of interest rate swap agreements (136) (136) Transfers from (to) affiliates (2,998) (11) 303 (241) 5,361 (2,414) 0 Change in additional minimum pension liability 8,515 (125) 8,390 Change in interest of the net assets of charitable foundations (271) 8 (263) Increase (Decrease) in Unrestricted Net Assets 21,788 (534) 372 (682) 1,202 (18) (2,379) 0 19,749 Temporarily Restricted Net Assets Investment income and change in net unrealized gain (loss) on investments Contributions and change in interest of the net assets of charitable foundations (10) 845 (842) 1,029 Other (434) (434) Net assets released from restrictions (207) (207) Increase (decrease) in temporarily restricted net assets (10) (1,276) 537 Permanently Restricted Net Assets Change in beneficial interest in perpetual trust (18) (18) Increase (decrease) in permanently restricted net assets 0 0 (18) (18) Change in Net Assets 22,545 (496) 595 (692) 1, (2,379) (1,276) 20,268 Net Assets, Beginning of Year 81,329 (1,998) 1,307 10,345 2,501 3,659 3,528 (1,594) 99,077 Net Assets, End of Year $ 103,874 $ (2,494) $ 1,902 $ 9,653 $ 3,703 $ 4,428 $ 1,149 $ (2,870) $ 119,345 35

129 APPENDIX C: DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE, BOND INDENTURES AND LOAN AGREEMENTS

130 TABLE OF CONTENTS DEFINITION OF CERTAIN TERMS...2 SUMMARY OF THE BOND INDENTURES...19 SUMMARY OF THE LOAN AGREEMENTS...33 SUMMARY OF THE MASTER TRUST INDENTURE...46 C-1

131 The following are summaries of definitions of certain terms and summary of certain provisions of the Master Indenture, Bond Indentures, and Loan Agreements applicable to the 2005 Variable Rate Bonds bearing interest at an Auction Rate. There are significant differences in the terms of the 2005 Variable Rate Bonds in other Modes. The Official Statement is not intended to provide information with respect to the 2005 Variable Rate Bonds in any Mode other than the Auction Mode. Although each Bond Indenture and each Loan Agreement relating to the issuance of a series of the 2005 Variable Rate Bonds described on the cover page hereto are entirely separate, the terms and conditions contained therein are substantially the same and accordingly the description of the Bond Indenture and the Loan Agreement set forth below applies equally to each Bond Indenture and each Loan Agreement relating to the issuance of each separate series of 2005 Variable Rate Bonds described on the cover page hereto (except as may be specifically noted below). Unless otherwise indicated, references to the Issuer, the Bonds, the Project, the Loan Agreement, and the Bond Insurance Policy below are to the Issuer, each separate series of the 2005 Variable Rate Bonds, the Project, the Loan Agreement, and the Bond Insurance Policy which relate to the respective Bond Indenture. Defined terms discussed below have the same meaning under each of the Bond Indentures unless otherwise noted. These summaries do not purport to be complete or definitive and are qualified in their entireties by reference to the full terms of such documents. All capitalized terms used in this Summary and not defined herein have the same meanings as in the Bond Indentures. DEFINITION OF CERTAIN TERMS The following are definitions of certain terms used in this Appendix C, in Appendix D and elsewhere in this Official Statement. Certain additional terms are defined in APPENDIX D "Summary of Auction Rate Procedures." Other defined terms are set forth elsewhere in this Official Statement. "Additional Indebtedness" means any Indebtedness incurred pursuant to the terms and conditions of the Master Trust Indenture (including all Notes and all Guaranties) incurred subsequent to the issuance of the Series A Note under the Supplemental Indenture No. 1, both dated as of November 1, "Additional Payments" means the payments so designated and required to be made by the Borrowers pursuant the Loan Agreement. "Affiliate" is a term which applies only to the Master Indenture and means any Person (a) which directly or indirectly controls or is controlled by, or is under. common control with, the Borrowers or the Governing Body of the Borrowers or any other Affiliate or (b) is a supporting organization, as such term is used in connection with Section 509(a)(3) of the Code, of the Borrowers or an Affiliate. For the purposes of this definition, "control" (including the terms "controlling," "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of the Borrowers or the Governing Body of the Borrowers, or of the Person or the Governing Body of the Person, whether through stock ownership, membership, voting rights, governing boards, committees, divisions or other bodies with one or more common members, or by contract or otherwise. "Assured" means Assured Guaranty Corp., a Maryland corporation, and its successors and assigns. "Auction Agent" means the auction agent appointed in accordance with the Bond Indenture. C-2

132 "Auction Mode" means the Mode during which the Bonds bear interest at the Auction Rate. "Auction Rate" means the rate of interest to be borne by the Bonds during each Auction Period, not greater than the Maximum Rate, determined in accordance with the Bond Indenture. "Authorized Minimum Denominations" means denominations of (i) $100,000 and any integral multiple of $5,000 in excess thereof, with respect to Bonds in a Daily Mode, a Weekly Mode, Unit Pricing Mode and Term Rate Mode, (ii) $5,000 and any integral multiple thereof, with respect to Bonds in the Fixed Rate Mode, and (iii) $25,000 and any integral multiple thereof with respect to Bonds in an Auction Mode, and a R-FLOATs Mode. "Authorized Representative" means with respect to each Borrower, its Chief Financial Officer or any other person designated as an Authorized Representative of the such Borrower by a Certificate of such Borrower signed by its Chief Financial Officer and filed with the Trustee. "Avoided Payment" means any amount that is paid, credited, transferred or delivered to a Holder of either the 2005A Bonds or the 2005B Bonds in respect of any Insured Payment (as defined in the Assured Policy) by the Trustee, which amount has been rescinded or recovered from or otherwise required to be returned or repaid by such Holder pursuant to the United States Bankruptcy Code by a trustee in bankruptcy in accordance with a final, nonappealable order of a court having competent jurisdiction that such payment constitutes an avoidable preference with respect to such holder. "Balloon Long-Term Indebtedness" means Long-Term Indebtedness, fifty percent (50%) or more of the principal of which matures on the same date, which portion of the principal is not required by the documents governing such Indebtedness to be amortized by redemption prior to such date, provided, however, Balloon Long-Term Indebtedness shall not include Interim Indebtedness or Intermediate-Term Indebtedness. "Beneficial Owner" means the person in whose name a Bond is recorded as the beneficial owner of such Bond by the respective systems of DTC and each of the DTC Participants. "Bloomberg" means Bloomberg L.P., Skillman, New Jersey, and its successors and assigns. "Bond Counsel" means legal counsel of recognized national standing in the field of obligations the interest on which is excluded from gross income for federal income tax purposes, selected by the Issuer and not objected to by the Borrowers, the Trustee or the Bond Insurers. "Bond Insurance Policies" means collectively, each of the municipal bond insurance policies issued by a Bond Insurer insuring the scheduled payment when due of principal of and interest on the Bonds as provided therein; and the term "Bond Insurance Policy" shall mean any of the Bond Insurance Policies. "Bonds" means the bonds of a separate series of the 2005 Variable Rate Bonds. "Business Day" means a day that is not a Saturday, Sunday or legal holiday on which banking institutions in the Commonwealth of Pennsylvania, the State of New York or in any state in which the office of the Liquidity Facility Provider (if any), the Credit Facility Provider, the Remarketing Agent (if any), the Tender Agent (if any), the Auction Agent (if any) or the Trustee is located are authorized to remain closed or a day on which the New York Stock Exchange is closed. C-3

133 "Bond Insurer" means, with respect to the 2005A and 2005B Bonds, Assured, and means, with respect to the 2005C Bonds, Radian. "Book Value" when used in connection with Property, Plant and Equipment or other Property of the Borrowers or any Restricted Affiliate, means the value of such Property, net of accumulated depreciation and amortization, as it is carried on the books of the Borrowers or such Restricted Affiliate in conformity with generally accepted accounting principles, and when used in connection with Property, Plant and Equipment or other Property of the Restricted Group means the aggregate of the net values so determined with respect to such Property of each member of the Restricted Group determined in such a manner that no portion of such value of Property of any member is included more than once. "Borrowers" means MMC and CHS, jointly and severally, as the context requires. "Code" means the Internal Revenue Code of 1986, as amended, or any successor statute thereto, and any regulations promulgated thereunder. "Completion Indebtedness" means any Long-Term Indebtedness incurred by the Borrowers or any Restricted Affiliate for the purpose of financing the completion of constructing or equipping facilities for which Long-Term Indebtedness, or Interim Indebtedness in anticipation thereof, has theretofore been incurred, 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 or other Indebtedness in anticipation thereof was originally incurred. "Consultant" means a person or firm which is not, and which has no member, holder of five percent (5%) or more of any class of its stock, director, officer or employee of which is, an officer or employee of the Borrowers or any Affiliate, and which is a nationally recognized professional consultant having the skill and experience necessary to render the particular report required by the provision hereof in which such requirement appears, and which is acceptable to the Trustee. "Contribution Agreement" means an agreement by and between the Borrowers and each Restricted Affiliate (being a separate agreement for each Restricted Affiliate) required by the Master Indenture as a condition to an Affiliate becoming a Restricted Affiliate. "Convertible Indebtedness" means all Indebtedness which is convertible at the option of the Borrowers or a Restricted Affiliate into a form of Indebtedness which is permitted by the Master Trust Indenture other than the form of such Indebtedness at the time it was originally incurred. "Costs of Issuance" means all items of expense directly or indirectly payable by or reimbursable to the Issuer or a Borrower and related to the authorization, issuance, sale and delivery of the Bonds, including but not limited to costs of preparation and reproduction of documents, printing expenses, filing and recording fees, initial fees and charges of the Trustee and its counsel, the initial fees and charges of the Auction Agent and its counsel, legal fees and charges, fees and disbursements of consultants and professionals, fees and charges for preparation, execution and safekeeping of the Bonds and any other cost, charge or fee in connection with the original issuance of the Bonds. "Credit Facility" means a letter of credit, including, if applicable, a confirming letter of credit, bond insurance policy or similar credit facility issued by a commercial bank, savings institution, insurer or other financial institution rated in one of the three highest long-term credit categories by each Rating Agency then rating the Bonds which, by its terms, shall secure the payment of the principal of and C-4

134 interest on the Bonds when due, including each Bond Insurance Policy, delivered to the Trustee pursuant to the respective Loan Agreement, if applicable, and including a Substitute Credit Facility. "Credit Facility Provider" means the commercial bank, savings institution, bond insurer or other financial institution issuing a Credit Facility, including the Bond Insurers. "Debt Service Reserve Fund" shall have the meaning specified in the Bond Indenture (as previously defined). "Depository Participant" means a member of, or participant in, the Securities Depository. "Due for Payment" means, when referring to the principal of either a 2005A Bond or 2005B Bond, the stated maturity date thereof, or the date on which such 2005A Bond or 2005B Bond shall have been duly called for mandatory sinking fund redemption, and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity (unless the Assured in its sole discretion elects to make any principal payment, in whole or in part, on such earlier date) and means, when referring to interest on a 2005A Bond or 2005B Bond, the stated date for payment of such interest. "Electronic Means" means telecopy, telegraph, telex, facsimile transmission, transmission or other similar electronic means of communication, including a telephonic communication confirmed by writing or written transmission. "Extended Group" shall mean the Borrowers; Good Samaritan Medical Center of Johnstown, a Pennsylvania nonprofit corporation; Windber Hospital, Inc., a Pennsylvania nonprofit corporation and Meyersdale Medical Center, a Pennsylvania nonprofit corporation for as long as all such entities are included on the consolidated financial statements of CHS. "Favorable Opinion of Bond Counsel" means, with respect to any action the occurrence of which requires such an opinion, an unqualified Opinion of Counsel, which shall be Bond Counsel, to the effect that such action is permitted under the Bond Indenture and will not, in and of itself, result in the inclusion of interest on the Bonds in gross income for federal income tax purposes (subject to the inclusion of any exceptions contained in the opinion delivered upon original issuance of the Bonds). "Financial Statements" means the consolidated or combined financial statements of the Restricted Group or the consolidated or combined financial statements of the Borrowers and their consolidated or combined Affiliates, including the Restricted Affiliates, which contain certain summarized consolidated or combined financial information concerning the Restricted Group. "Governing Body" means, when used with respect to the Borrowers or any Restricted Affiliate, its board of directors, or any similar body which pursuant to law or charter documents, shall act as the governing body of the Borrowers or such Restricted Affiliate. "Governmental Restrictions" means federal, state or other applicable governmental laws or regulations affecting the Borrowers or any Restricted Affiliate and its or their health care facilities, which place restrictions and limitations on the (i) fees and charges to be fixed, charged and collected or revenues to be earned by the Borrowers or the Restricted Affiliate or (ii) timing of receipt of such revenues or (iii) the Borrowers 's ability to incur debt or supply services. C-5

135 "Government Obligations" (1) 2005A or 2005B Bond Indenture - means noncallable direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of Treasury of the United States of America) and obligations of any agency or instrumentality of the United States of America the timely payment of the principal of and interest on which are fully guaranteed by the United States of America. (2) 2005C Bond Indenture - means certificates or interest-bearing notes or obligations of the United States, or those for which the full faith and credit of the United States are pledged for the payment of principal and interest. "Gross Revenues" means all revenues, income, receipts and money received in any period by the members of the Restricted Group (other than the proceeds of borrowing), including, but without limiting the generality of the foregoing, (a) gross revenues derived from operations, (b) gifts, grants, bequests, donations and contributions and income therefrom, exclusive of gifts, grants, bequests, donations and contributions and income therefrom to the extent specifically restricted by the donor to a particular purpose inconsistent with their use for the payment of principal of, redemption premium and interest on Notes, and (c) proceeds derived from (i) insurance, except to the extent otherwise required by the Master Indenture or the Indentures, (ii) accounts receivable, (iii) securities and other investments, unless such securities or investments are excluded under clause (b) above in this definition, (iv) inventory and other tangible and intangible property, (v) medical or hospital insurance or indemnity programs or agreements or third-party payors and (vi) contract rights and other rights and assets now or hereafter owned, held or possessed by or on behalf of the Corporation and any or all members of the Restricted Group; provided, that no determination of Gross Revenues shall take into account any revenues of an Affiliate which is not a member of the Restricted Group or any 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. "Guaranty" means all obligations of the Borrowers or a Restricted Affiliate guaranteeing or contingently agreeing to acquire, in any manner, whether directly or indirectly, other than for the purposes of collecting in the ordinary course of business, any obligation of any other person which obligation of such other person would constitute Indebtedness under the Master Indenture if such obligation were the obligation of the Borrowers or such Restricted Affiliate, unless such obligation of such other person is not for payment of a sum certain. "Holder" or "Bondholder," when used with respect to a Bond, means the Person in whose name such Bond is registered. "Income Available for Debt Service" means with respect to the Borrowers, as to any period of time, the excess of revenues over expenses to which shall be added depreciation, amortization and interest, all as determined on a consolidated basis for the Borrowers and the Restricted Group in accordance with generally accepted accounting principles consistently applied, after eliminating all portions of the foregoing items of the Restricted Affiliates which are properly allocable to unsubordinated equity interests owned by persons other than members of the Restricted Group; provided that no determination of Income Available for Debt Service shall take into account any revenue, expense or earnings of any person which is not a member of the Restricted Group of any gain or loss resulting from either the extinguishment of Indebtedness or the sale, exchange or other disposition of capital assets considered to be extraordinary items under generally accepted accounting principles. C-6

136 "Indebtedness" means all obligations for borrowed money, or installment sales and capitalized lease obligations, incurred or assumed by the Borrowers or a Restricted Affiliate, or secured by a lien on any Property of the Borrowers or a Restricted Affiliate, including Guaranties (other than any Guaranty by any member of the Restricted Group of Indebtedness of any other member of the Restricted Group), Long- Term Indebtedness, Intermediate-Term Indebtedness, Short-Term Indebtedness or any other obligation for payments of principal or interest with respect to money borrowed, except obligations of a member of the Restricted Group to another member of the Restricted Group, but the term "Indebtedness" shall not be deemed to include any obligation for which a. segregated escrow fund or other similar account or fund has been irrevocably established as security for such obligation and is funded with cash or investment securities which, together with the earnings thereon, is sufficient to pay principal of and interest and premium, if any, on such obligation to the maturity thereof or earlier redemption. "Interested Parties" means the Borrowers, the Issuer, the Trustee, the Tender Agent and the Credit Facility Provider. "Interest Payment Date" means (1) with respect to Bonds in an Auction Mode, the Business Day immediately following the last day of the Initial Period and the Business Day immediately following the last day of each subsequent Auction Period; unless such Auction Period has been changed pursuant to the Bond Indenture to a period of 180 days or more in which case each March 1 and September 1 (each an "Interim Interest Payment Date") and the Business Day immediately following the last day of such Auction Period or unless such Auction Period has been changed pursuant to the Bond Indenture to a six month Auction Period in which case to the next succeeding March 1 or September 1; (2) any Mode Change Date; and (3) the Maturity Date of the Bonds. "Interest Payment Period" means the period commencing on the last Interest Payment Date to which interest has been paid (or, if no interest has been paid in such Mode, from the date of original issuance of the Bonds, or the Mode Change Date, as the case may be) to, but not including, the Interest Payment Date on which interest is to be paid. "Interest Period" means the period of time that an interest rate remains in effect, which period, with respect to the Bonds in an Auction Mode, shall be the Auction Period. "Interim Indebtedness" means all obligations incurred by the Borrowers or a Restricted Affiliate having a term of 60 months or less incurred in anticipation of financing of capital improvements by the issuance of Long-Term Indebtedness. "Intermediate-Term Indebtedness" means all Indebtedness of the Borrowers or a Restricted Affiliate, for any of the following: (a) Payments under 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, longer than one year but not longer than five (5) years; (b) Payments under installment purchase contracts having an original term longer than one year but not longer than five (5) years; and (c) Payments under construction contracts pursuant to which payment is expected to be completed more than one year, but not more than five (5) years, from the date on which construction commenced, except to the extent to which payments have been provided for from sources other than future operations as evidenced by an Officer's Certificate delivered to the Trustee. C-7

137 "Investments" means any investment in any Person, whether by means of purchase or acquisition of obligations or securities of such Person, capital contribution to such Person, loan or advance to such Person, or making of a time deposit with such Person, and includes, without limitation, shares of stock, debentures, notes, shares of beneficial interest, partnership interests and other securities. "Investment Securities" means any of the following that at the time are legal investments under the laws of the Commonwealth of Pennsylvania for moneys held under the Bond Indenture and then proposed to be invested therein: (1) 2005A or 2005B Bond Indenture (a) noncallable direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of Treasury of the United States of America) and obligations of any agency or instrumentality of the United States of America the timely payment of the principal of and interest on which are fully guaranteed by the United States of America; (b) Obligations of any of the following federal agencies which obligations represent the full faith and credit of the United States of America: (i) (ii) (iii) (iv) (v) (vi) (vii) Export-Import Bank; Rural Economic Community Development Administration; U.S. Maritime Administration; Small Business Administration; U.S. Department of Housing & Urban Development (PHAs); Federal Housing Administration; and Federal Financing Bank. (c) Direct obligations of any of the following federal agencies which obligations are not fully guaranteed by the full faith and credit of the United States of America: (i) Senior debt obligations issued by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC); (ii) (iii) Obligations of the Resolution Funding Corporation (REFCORP); Senior debt obligations of the Federal Home Loan Bank System; and (iv) Senior debt obligations of other government sponsored agencies approved by the applicable Bond Insurer. (d) U.S. dollar denominated deposit accounts, federal fund and bankers acceptances with domestic commercial banks which have a rating on their short term certificates of deposit on the date of C-8

138 purchase of "P-1" by Moody s and "A-1" or "A-1+" by S&P and maturing not more than 360 calendar days after the date of purchase; (e) Commercial paper which is rated at the time of purchase in the single highest classification, "P-1" by Moody s and "A-1+" by S&P and which matures not more than 270 calendar days after the date of purchase; (f) Investments in money market funds rated "AAAm" or "AAm-G" or better by S&P; (g) Pre-refunded Municipal Obligations defined as follows: any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which are not callable at the option of the obligor prior to maturity or as to which irrevocable instructions have been given by the obligor to call on the date specified in the notice; and (i) which are rated, based on irrevocable escrow account or fund (the "escrow"), in the highest Rating Category of Moody s or S&P or any successors thereto; or (ii) (a) which are fully secured as to principal and interest redemption premium, if any, by an escrow consisting only of cash or United States Government Obligation, which escrow may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, and (b) which escrow is sufficient, as verified by a nationally recognized independent certified public accountant, to pay principal of and interest and redemption premium, if any, on the bonds or other obligations described in this paragraph on the maturity date or dates specified in the irrevocable instructions referred to above, as appropriate. (h) Municipal obligations rated "Aaa/AAA" or general obligations of States with a rating of "A2/A" or higher by both Moody s and S&P; (i) Investment agreements approved in writing by the applicable Bond Insurer (supported by appropriate opinions of counsel); and (j) Assured. Other forms of investments (including repurchase agreements) approved in writing by (2) 2005C Bond Indenture (a) Certificates or interest-bearing notes or obligations of the United States, or those for which the full faith and credit of the United States are pledged for the payment of principal and interest. (b) Investments in any of the following obligations provided such obligations are backed by the full faith and credit of the United States (i) direct obligations or fully guaranteed certificates of beneficial interest of the Export-Import Bank of the United States, (ii) debentures of the Federal Housing Administration, (iii) guaranteed mortgage backed bonds of the Government National Mortgage Association, (iv) certificates of beneficial interest of the Farmers Home Administration, (v) obligations of the Federal Financing Bank or (vi) project notes and local authority bonds of the Department of Housing and Urban Development. (c) Investments in (i) senior obligations of the Federal Home Loan Bank System, (ii) participation certificates or senior debt obligations of the Federal Home Loan Mortgage Corporation, (iii) C-9

139 mortgage-backed securities and senior debt obligations (excluding stripped mortgage securities that are valued greater than par on the portion of unpaid principal) of the Federal National Mortgage Association or (iv) senior debt obligations of the Student Loan Marketing Association. (d) Repurchase agreements with primary dealers and/or banks rated, at all times, AA and AA2 or better by Standard & Poor's Corporation and Moody's Investors Service, Inc., respectively, collateralized with the obligations described in clauses (a) or (b) above, held by a third party custodian, at the levels set forth below, which repurchase agreements have been approved by the applicable Bond Insurer. (e) S.E.C. registered money market mutual funds conforming to Rule 2a-7 of the Investment Company Act of 1940 that invest primarily in direct obligations issued by the U.S. Treasury and repurchase agreements backed by those obligations, including funds for which the Trustee or an affiliate of the Trustee acts as an advisor, and rated in the highest category by Standard & Poor's Corporation and Moody's Investors Service, Inc. (f) Certificates of deposit of any bank (including the Trustee), trust company or savings and loan association whose short term obligations are rated, at all times, A-1 or better by Standard & Poor's Corporation and P-1 by Moody's Investors Service, Inc. provided that such certificates of deposit are fully secured by the obligations described in (a) or (b) above, at the levels set forth below, the Trustee has a perfected first security interest in the obligations securing the certificates and the Trustee holds (or shall have the option to appoint a bank, trust company or savings and loan association as its agent to hold) the obligations securing the certificates. (g) Certificates of deposit of any bank (including the Trustee), trust company or savings and loan association which certificates are fully insured by the Federal Deposit Insurance Corporation. (h) Commercial paper rated, at all times, P-1 or better by Moody's Investors Service, Inc. and A-1+ by Standard & Poor's Corporation. (i) Obligations of, or obligations fully guaranteed by, any state of the United States of America or any political subdivision thereof which obligations, at all times, are rated by Standard & Poor's Corporation and Moody's Investors Service, Inc. in the highest rating categories (without regard to any refinement or graduation of rating category by numerical modifier or otherwise) and without regard to credit enhancement assigned by such rating agencies to obligations of that nature. Collateral Levels for United States Government Securities Concerning Clauses (d) and (f) Above Remaining Maturity 1 Year or less 5 Years or less 10 Years or less 15 Years or less 30 Years or less Frequency of Valuation Daily Weekly Monthly Quarterly Further requirements for the collateral levels for United States government securities concerning clauses (d) and (f) of this definition include the following: (x) on each valuation date the market value of the collateral will be an amount equal to the requisite collateral percentage of the obligation (including C-10

140 unpaid accrued interest) that is being secured, (y) in the event the collateral level is below its collateral percentage on a valuation date, such percentage shall be restored within the following restoration periods: (1) one business day for daily valuations, (2) two business days for weekly valuations, and (3) one month for monthly and quarterly valuations, and (z) the Trustee shall terminate any repurchase agreement upon a failure to maintain the requisite collateral percentage after the restoration period and, if not paid by the counterparty in federal funds against transfer of the repo securities, liquidate the collateral. (j) Commercial paper which is rated at the time of purchase in the single highest classification, "P-1" by Moody s and "A-1+" by S&P and which matures not more than 270 calendar days after the date of purchase; (k) Investment agreements approved in writing by the applicable Bond Insurer (supported by appropriate opinions of counsel); and (l) Other forms of investments (including repurchase agreements) approved in writing by the applicable Bond Insurer. "Loan Agreements" means collectively those certain loan agreements, each dated as of September 1, 2005, between the Issuer and the Borrowers related to the issuance of the Bonds, as originally executed and as each may from time to time be supplemented, modified or amended in accordance with the terms thereof and of the applicable Bond Indenture; and "Loan Agreement" shall mean any of the Loan Agreements. "Loan Default Event" means any of the events specified in the section of the Loan Agreement entitled Events of Default. "Loan Repayments" means the payments so designated and required to be made by the Borrowers pursuant to 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 the Maximum Annual Debt Service. "Long-Term Debt Service Requirement" means, for any period of time for which such determination is made, the aggregate of the payments to be made in respect of principal and interest on Outstanding Long- Term Indebtedness of each member of the Restricted Group during such period, also taking into account: (i) with respect to Indebtedness incurred in anticipation of Long-Term Indebtedness, the term and interest rate certified pursuant to the test for incurring such Indebtedness in the Master Indenture at the time such Indebtedness is incurred; (ii) with respect to Indebtedness represented by a Guaranty of obligations of a person which is not a member of the Restricted Group, the amount of the principal and interest payments to be taken into account pursuant to the provisions of the Master Indenture restricting Guaranties; (iii) with respect to Balloon Long-Term Indebtedness and Optional Tender Indebtedness, the amount of principal and interest during such period determined under the provisions of the Master Indenture relating to Balloon Long-Term Indebtedness and Optional Tender Indebtedness; (iv) with respect to Convertible Indebtedness, the amount of principal and interest during such period determined under the provisions of the Master Indenture relating to Convertible Indebtedness; and (v) with respect to Variable Rate Long-Term Indebtedness, the amount of principal and interest determined under the provisions of the Master Indenture relating to Variable Rate Long-Term Indebtedness; provided, however, that in reference to Long-Term Indebtedness incurred to finance the construction of capital improvements, principal shall be excluded from the determination of Long-Term Debt Service Requirement until the C-11

141 completion of such construction (except to the extent any portion of the principal of Long-Term Indebtedness incurred to finance such construction is required by the terms of such Long-Term Indebtedness to be paid during the period of such construction) and 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; provided further that principal and interest requirements on Long-Term Indebtedness, or portions thereof, shall not be included in the determination of Long-Term Debt Service Requirement for any period in which such principal or interest, or portions thereof, is payable from amounts (including, without limitation, capitalized interest, accrued interest, cash or other obligations so deposited in trust, escrowed or otherwise set aside), together with the interest thereon, deposited in trust, escrowed or otherwise set aside for the payment thereof with the Master Trustee, a Related Trustee or another person approved by the Master Trustee. "Long-Term Indebtedness" means all Indebtedness of the Borrowers or a member of the Restricted Group (other than any Guaranty by the Borrowers or a member of the Restricted Group of any obligation of any person which is not a Restricted Affiliate which obligation would, if it were a direct obligation of the Borrowers or a member of the Restricted Group, constitute Short-Term Indebtedness) for any of the following: (a) Payments of principal and interest with respect to money borrowed for an original term, or renewable at the option of the borrower for a period from the date originally incurred, longer than one year; (b) Payments under 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, longer than five (5) years; and (c) (5) years. Payments under installment purchase contracts having an original term in excess of five "Mandatory Purchase Date" means any Mode Change Date. "Mandatory Sinking Account Payment" means the amount required by the Sinking Fund Redemption provisions of the Bond Indenture to be paid by the Trustee on any single date for the retirement of Bonds. "Master Indenture" means the Master Trust Indenture dated as of November 1, 1985 from the Borrowers to the Master Trustee as supplemented by Supplemental Master Indenture No. 5 dated as of April 15, Supplemental Master Indenture No. 6 dated as of September 15, 1996, Supplemental Master Indenture No. 7 dated as of January 15, 1997, Supplemental Master Indentures No. 8, No. 9, No. 10, No. 11 and No. 12 each dated as of August 1, 1998, Supplemental Master Indentures No. 13, No. 14 and No. 15 each dated as of September 1, "Master Indenture Default Event" means any of the events specified in the section of the Master Indenture entitled Events of Default. "Master Indenture Note" means any notes issued, authenticated and delivered under the Master Indenture. "Maximum Annual Debt Service" means the maximum amount of principal and interest coming due pursuant to the definition of Long-Term Debt Service Requirement for any succeeding fiscal year; provided, however, that: C-12

142 (a) in the case of any indebtedness for which a sinking fund has been established, the principal due thereon shall be deemed to mature in each year in which a payment is required to be made into such sinking fund in the amount of such payment; (b) (c) principal and interest payable from funds capitalized therefore shall be excluded; and payments on indebtedness which has been advance refunded shall be excluded. "Maximum Rate" means, with respect to the 2005A Bonds and the 2005B Bonds, 15% per annum, and means with respect to the 2005C Bonds, 12% per annum. "Mode" means, as the context may require, the Auction Mode, the Unit Pricing Mode, the Daily Mode, the Weekly Mode, the R-FLOATs Mode, the Term Rate Mode or the Fixed Rate Mode. "Mode Change Date" means the day following the last day of one Mode on which another Mode begins. "Moody s" means Moody s Investors Service, a corporation organized and existing under the laws of the state of its organization, its successors and their assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Issuer by notice to the Borrowers, the Bond Insurers, and the Trustee. "Mortgage" means the Mortgage and Security Agreement, dated as of September 1, 2005, executed by MMC (as previously defined) in favor of the Master Trustee as amended and supplemented. "Mortgage Default Event" means any of the events specified in the section of the Master Indenture entitled Events of Default. "Nonpayment" in respect of a 2005A Bond or 2005B Bond means the failure of the Issuer to have provided sufficient funds to the Trustee for payment in full of all principal and interest Due for Payment on such 2005A Bond or 2005B Bond. It is further understood that the term "Nonpayment" in respect of a 2005A Bond or 2005B Bond includes any Avoided Payment. "Non-Recourse Indebtedness" means any Indebtedness secured by a Lien on Property, the purchase, acquisition or improvement of which was financed with the proceeds of such Indebtedness, liability for which Indebtedness is effectively limited to that Property, with no recourse, directly or indirectly, to any other Property of the Borrowers or of any other members of the Restricted Group. "Note" means the applicable Master Note for each series of the Bonds in the face principal amount of such series of Bonds issued by the Borrowers in accordance with the terms of the Master Indenture to the order of the Issuer and delivered by the Issuer to the Trustee as collateral for the obligations of the Borrowers under the applicable Loan Agreement. "Noteholder" means the registered owner of any Note or Master Indenture Notes as applicable. "Officer's Certificate" means a certificate signed by the chairman of the Governing Body, or the president or chief executive officer or the chief financial officer, or the chairman of the finance committee of the Governing Body of the Borrowers. C-13

143 "Operating Assets" means any or all land, leasehold interests, buildings, machinery, equipment, hardware, and inventory of the Borrowers and each Restricted Affiliate, whether separately or together with other such assets but shall not include Excluded Assets. "Opinion of Counsel" means a written opinion of counsel (who may be counsel for the Issuer) selected by the Issuer and not objected to by the Trustee or the Bond Insurer. If and to the extent required by the provisions of the Bond Indenture, each Opinion of Counsel shall include the statements provided for in the Bond Indenture. "Optional Tender Indebtedness" means any portion of Indebtedness incurred under the Master Indenture a feature of which is any option on the part of the holders of such Indebtedness to tender for payment all or a portion of such Indebtedness to the Borrowers, any Restricted Affiliate or the Trustee or other fiduciary for such holders. "Outstanding," when used as of any particular time with reference to Bonds, means (subject to the provisions of the Bond Indenture) all Bonds theretofore, or thereupon being, authenticated and delivered by the Trustee under the Bond Indenture except: (1) Bonds theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (2) Bonds with respect to which all liability of the Issuer shall have been discharged in accordance with the Bond Indenture, including the Bonds (or portions of the Bonds) referred to in the Bond Indenture; and (3) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Trustee pursuant to the Bond Indenture. "Parity Debt" shall mean all obligations incurred pursuant to the Master Indenture. "Participant" or "DTC Participant" shall mean (i) any person for which, from time to time, the Securities Depository effectuates book-entry transfers and pledges of securities pursuant to the book-entry system referred to in the Bond Indenture or (ii) any securities broker or dealer, bank, trust company or other person that clears through or maintains a custodial relationship with a person referred to in (i). "Person" means an individual, corporation, firm, association, partnership, limited liability company, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof. "Principal Corporate Trust Office" means the office of the Trustee designated in the Bond Indenture. "Principal Payment Date" means, with respect to a Bond, the date on which principal of such Bond and becomes due and payable, either by maturity, redemption, acceleration or otherwise. "Project" means, with respect to the 2005A Bonds, (i) the provision of funds to the Borrowers for the advance refunding of the South Fork Municipal Authority, Hospital Revenue Bonds, Series A of 1996 (Conemaugh Valley Hospital Project), (ii) the provision of funds to pay the municipal bond insurance premium to obtain the applicable Bond Insurance Policy to insure the payment of the principal of and interest on the 2005A Bonds, and (iii) the provision of funds to fund reserves and to pay a portion of the costs of issuing the 2005A Bonds; and means, with respect to the 2005B Bonds, (i) the provision of funds to MMC to acquire, or refinance, a portion of the purchase price of, certain assets owned by UPMC Lee Regional Hospital and UPMC d/b/a University of Pittsburgh Medical Center located at one or more locations in the City of Johnstown, Pennsylvania (the "Lee Assets"), (ii) the provision of funds to MMC for other capital improvement purposes, (iii) the provision of funds to pay the municipal bond insurance premium to obtain the applicable Bond Insurance Policy to insure the payment of the principal of and C-14

144 interest on the 2005B Bonds and (iv) the provision of funds to fund reserves and to pay a portion of the costs of issuing the 2005B Bonds; and means, with respect to the 2005C Bonds, (i) the provision of funds for MMC for the construction and equipping of an energy plant located on the MMC Campus at 1086 Franklin Street, City of Johnstown, Pennsylvania, (ii) the provision of funds for MMC for other capital improvement purposes, (iii) the provision of funds to pay the municipal bond insurance premium to obtain the applicable Bond Insurance Policy to insure the payment of the principal of and interest on the 2005C Bonds and (iv) provide funds to fund reserves and to pay a portion of the costs of issuing the 2005C Bonds. "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 but shall not include Excluded Assets as defined in the Master Indenture and the Indentures and described in Appendix B to the Master Indenture and the Indentures. "Property, Plant and Equipment" means all Property of the members of the Restricted Group, which is property, plant and equipment under generally accepted accounting principles. "Radian" means Radian Asset Assurance Inc., a New York corporation, and its successors and assigns. "Rate Determination Date," when used with respect to the Bonds, means the date on which the interest rate(s) with respect to the Bonds shall be determined, which, in the case of Bonds in the Auction Mode, shall be the Auction Date. "Rating Agencies" means S&P and Moody s; "Rating Agency" shall mean any of the Rating Agencies. "Rating Category" means one of the general rating categories of the Rating Agencies without regard to any refinement or gradation of such rating category by numerical modifier or otherwise. "Record Date" means with respect to the Bonds in an Auction Mode the day (whether or not a Business Day) immediately preceding each Interest Payment Date. "Redemption Price" means, with respect to any Bond (or portions thereof), the principal amount of such Bond (or portion) plus the applicable premium, if any, payable upon redemption thereof pursuant to the provisions of such Bond and the Bond Indenture. "Related Bonds" means the revenue bonds or other obligations issued by the Commonwealth of Pennsylvania or any other State of the United States of America 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 the Borrowers or any member of the Restricted Group in consideration of the execution, authentication and delivery of a Note or Notes to or for the order of such governmental issuer. "Related Bond Indenture" shall mean any indenture, bond resolution or other comparable instrument pursuant to which a series of Related Bonds are issued. "Required Charter Provisions" shall mean provisions in the corporate charter or by-laws, or both, of any Affiliate substantially to the effect that: (i) the Borrowers (or successor resulting from a merger or consolidation) or a Restricted Affiliate which is controlled directly by the Borrowers or indirectly by the Borrowers exclusively through control over other Restricted Affiliates, or an Affiliate which controls the C-15

145 Borrowers are and shall continue to be the sole members of such Affiliate, if such Affiliate is a membership corporation; (ii) the Borrowers or a Restricted Affiliate which is controlled directly by the Borrowers or indirectly by the Borrowers exclusively through control over other Restricted Affiliates or any Affiliate which controls the Borrowers are and shall continue to be the sole shareholders of such Affiliate, if such Affiliate is a stock corporation; (iii) the Borrowers, either alone or in conjunction with an Affiliate which controls the Borrowers, shall have the sole right to elect or appoint or to veto the appointment of and dismiss directly the members of the Governing Body of any Affiliate which is a nonprofit corporation with or without cause or indirectly by vote of the Affiliate's stock the members of the Governing Body of any Affiliate which is a stock corporation with or without cause; (iv) upon liquidation or dissolution of such Affiliate all remaining net assets shall be transferred to the Borrowers; provided, however, that such transfer to the Borrowers shall occur only if, at the time of such transfer, the Borrowers are tax-exempt organizations; (v) no Indebtedness, as such term is defined herein, may be incurred except in accordance with the provisions hereof and with the consent of the Borrowers; (vi) nothing contained in such corporate charter or by-laws shall restrict the ability of such Affiliate to acquire, own, hold, mortgage and dispose of and invest its funds in real or personal property for the use and benefit and under the direction of the Borrowers and in furtherance of the purposes of the Borrowers during such period as the Borrowers are tax-exempt organizations; (vii) a designated purpose of such Affiliate shall be to aid, assist and confer benefits, including financial support and assistance to, and to invest and/or dispose of its funds for the use and benefit of, and to discharge the charitable and corporate purposes of the Borrowers and the health care and associated facilities and institutions owned, leased, managed, operated or controlled by the Borrowers and by other Restricted Affiliates; and (viii) the corporate charter and by-laws of any such Affiliate may be altered, amended or repealed only with the consent of the Borrowers alone or only with the consent jointly of the Borrowers and an Affiliate which controls the Borrowers. "Required Stated Amount" means at any time of calculation with respect to the Bonds, an amount equal to the aggregate principal amount of all the Bonds then Outstanding together with interest accruing thereon (assuming an annual rate of interest equal to the Maximum Rate) for the period specified in a Certificate of the Borrowers to be the minimum period specified by each Rating Agency then rating the Bonds as necessary to maintain, in the case of the Credit Facility, the long-term rating of the Bonds. Reserve Fund Requirement shall mean the amount required to be maintained in the Debt Service Reserve Fund as required by the Bond Indenture. "Restricted Affiliate" means MMS and any Affiliate which shall have been designated as an additional Restricted Affiliate pursuant to the provisions of the Master Indenture, the corporate charter or bylaws, or both, of which at any particular time, contains the Required Charter Provisions. "Restricted Group" shall mean the Borrowers and each Restricted Affiliate. "Retained Rights" means the rights of the Issuer to receive notices, opinions, indemnity, approvals and Additional Payments under the Bond Indenture and the Loan Agreement. Retained Rights further include the Issuer s sole right to enforce the provisions providing these rights. "Revenues" means all amounts received by the Issuer or the Trustee for the account of the Issuer pursuant or with respect to a Loan Agreement or a Master Note, including, without limiting the generality of the foregoing, Loan Repayments (including both timely and delinquent payments, any late charges, and whether paid from any source), prepayments, collateral proceeds, insurance proceeds, condemnation proceeds, and all interest, profits or other income derived from the investment of amounts in any fund or C-16

146 account established pursuant to the Bond Indenture, but not including any Additional Payments or any moneys required to be deposited in the Rebate Fund or the Purchase Fund. "S&P" means Standard & Poor s, a division of The McGraw-Hill Companies, Inc., a corporation organized and existing under the laws of the state of its organization, its successors and their assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Issuer by notice to the Borrowers, the Bond Insurer and the Trustee. "Securities Depository" means The Depository Trust Company and its successors and assigns, or any other securities depository selected as set forth in the Bond Indenture, which agrees to follow the procedures required to be followed by such securities depository in connection with the Bonds. "Short-Term Indebtedness" shall mean all Indebtedness for any of the following: (a) Payments of principal and interest with respect to money borrowed for an original term, or renewable at the option of the borrower for a period from the date originally incurred, of one year or less; (b) Payments under 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 less. (c) Payments under installment purchase contracts having an original term of one year or "Special Record Date" means the date established by the Trustee pursuant to the Bond Indenture as a record date for the payment of defaulted interest on the Bonds. "Substitute Credit Facility" means the date of delivery to the Trustee of a Credit Facility by the Borrowers pursuant a Loan Agreement. "Supplemental Bond Indenture" means any indenture duly authorized and entered into between the Issuer and the Trustee, supplementing, modifying or amending the Bond Indenture; but only if and to the extent that such Supplemental Bond Indenture is specifically authorized under the Bond Indenture. "Supplemental Master Indenture" means an indenture supplemental to, and authorized and executed pursuant to the terms of, the Master Indenture for the purpose, among others, of creating a particular series of Master Notes or a particular guaranty issued pursuant to the Master Indenture. "Swap Agreement,shall mean the ISDA Master Agreement dated as of August 3, 2005 with Merrill Lynch Capital Services, Inc. ("MLCS"), with a Schedule to the ISDA Master Agreement, dated as of August 3, 2005 between the Borrowers as the Counterparty, and MLCS and a Confirmation, dated August 3, 2005 between MLCS and the Borrowers. "Tax Certificate and Agreement" means the Tax Certificate and Agreement delivered by the Issuer and the Borrowers at the time of issuance and delivery of the Bonds, as the same may be amended or supplemented in accordance with its terms. C-17

147 "Total Operating Revenues" shall mean the aggregate of total operating revenues of the Restricted Group, determined in accordance with generally accepted accounting principles consistently applied. "Trustee" means AmeriServ Financial Bank, a corporation duly organized and existing under the laws of the Commonwealth of Pennsylvania, having a principal corporate trust office in Johnstown, Pennsylvania, or its successor, as Trustee hereunder as provided in the Bond Indenture. "Underwriter" means Merrill, Lynch, Pierce, Fenner & Smith Incorporated. C-18

148 SUMMARY OF THE BOND INDENTURES General Each Bond Indenture sets forth the terms of the applicable Bonds authorized thereunder, the application of the proceeds of such Bonds, the nature and extent of the security for such Bonds, various rights of the Bondholders, rights, duties and immunities of the Trustee and the rights and obligations of the Issuer. Certain provisions of each Bond Indenture are summarized below. Other provisions are summarized in this Official Statement under the captions "THE 2005 VARIABLE RATE BONDS" and "SECURITY FOR THE 2005 VARIABLE RATE BONDS." These summaries do not purport to be complete or definitive and are qualified in their entireties by reference to the full terms of each applicable Bond Indenture. Unless otherwise noted the following summary is applicable to each Bond Indenture. Pledge and Assignment Subject only to the provisions of the Bond Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in the Bond Indenture, all of the Revenues and any other amounts (including proceeds of the sale of the Bonds) held in any fund or account established pursuant to the Bond Indenture (other than the Purchase Fund and the Rebate Fund) are pledged to secure the payment of the principal of and premium, if any, and interest on the Bonds in accordance with their terms and the provisions of the Bond Indenture. Said pledge shall constitute a lien on and security interest in such assets and shall attach, be perfected and be valid and binding from and after delivery by the Trustee of the Bonds, without any physical delivery thereof or further act. The Issuer transfers in trust, grants a security interest in and assigns to the Trustee, for the benefit of the Holders from time to time of the Bonds, all of the Revenues and other assets pledged in the Bond Indenture and all of the right, title and interest of the Issuer in the Loan Agreement (except (i) Retained Rights and (ii) the obligation of the Borrowers to make deposits pursuant to the Tax Certificate and Agreement). The Trustee shall be entitled to and shall collect and receive all of the Revenues, and any Revenues collected or received by the Issuer shall be deemed to be held, and to have been collected or received, by the Issuer as the agent of the Trustee and shall forthwith be paid by the Issuer to the Trustee. Subject to the provisions of the Bond Indenture with respect to the control of remedial proceedings by the Bond Insurer, the Trustee also shall be entitled to and shall take all steps, actions and proceedings reasonably necessary in its judgment to enforce, either jointly with the Issuer or separately, all of the rights of the Issuer that have been assigned to the Trustee and all of the obligations of the Borrowers under the Loan Agreement other than for those items excepted in the parenthetical contained in the first sentence of this subsection. All Revenues deposited with the Trustee shall be held, disbursed, allocated and applied by the Trustee only as provided in the Bond Indenture. If on the day of any month in which a Loan Repayment is required to be made, the Trustee has not received the full amount of such Loan Repayment, the Trustee shall immediately notify the Borrowers, the Issuer and the Bond Insurer of such insufficiency by Electronic Means and confirm such notification as soon as possible thereafter by written notice. The Gross Revenues (as defined in the Master Indenture) of the Restricted Group (as defined in the Master Indenture) and other assets of the Restricted Group are pledged to the Trustee to secure the Bonds on a parity basis with other debt holders of the Restricted Group. See the caption "SECURITY FOR THE 2005 VARIABLE RATE BONDS". C-19

149 Interest Fund The Trustee shall deposit the following Revenues in the Interest Fund when and as such Revenues are received: (1) the interest component of all Loan Repayments, including the interest component of all cash prepayments of Loan Repayments made pursuant to the Loan Agreement; (2) all interest, profits and other income received from the investment of moneys in the Interest Fund; and (3) any other Revenues not required to be deposited in any other fund or account established pursuant to the Bond Indenture. All amounts in the Interest Fund shall be used and withdrawn by the Trustee solely for the purpose of paying the interest on the Bonds as the same becomes due and payable (including accrued interest on any Bonds purchased or redeemed prior to maturity pursuant to the Bond Indenture), or to reimburse the Bond Insurer with respect to drawings under the Bond Insurance Policy for such purposes. Principal Fund The Trustee shall deposit the following Revenues in the Principal Fund when and as such Revenues are received: (1) the principal component of all Loan Repayments, but excluding the principal component of all cash prepayments of Loan Repayments made pursuant to the Loan Agreement, which shall be deposited in the Redemption Fund; and (2) all interest, profits and other income received from the investment of moneys in the Principal Fund. All amounts in the Principal Fund shall be used and withdrawn by the Trustee solely to redeem the Bonds, or pay the Bonds at maturity, or to reimburse the Bond Insurer with respect to drawings under the Bond Insurance Policy for such purposes. On each Mandatory Sinking Account Payment date, the Trustee shall apply the Mandatory Sinking Account Payment required on that date to the redemption (or payment at maturity, as the case may be) of the Bonds, in the amounts and upon the notice and in the manner provided in the Bond Indenture; provided that, at any time prior to giving such notice of such redemption, the Trustee shall, upon direction of the Borrowers, apply such moneys to the purchase of Bonds at public or private sale, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Fund) as the Borrowers may direct, except that the purchase price (excluding accrued interest) shall not exceed the par amount of such Bonds. If, during the twelve month period immediately preceding said Mandatory Sinking Account Payment date, the Trustee has purchased Bonds with moneys in the Principal Fund, or, during said period and prior to giving said notice of redemption, the Borrowers has deposited Bonds with the Trustee, or Bonds were at any time purchased or redeemed by the Trustee from the Redemption Fund and allocable to said Mandatory Sinking Account Payment, such Bonds so purchased or deposited or redeemed shall be applied, to the extent of the full principal amount thereof, to reduce said Mandatory Sinking Account Payment. All such Bonds C-20

150 purchased or deposited shall be cancelled and destroyed by the Trustee to or upon the Order of the Borrowers. All Bonds purchased from the Principal Fund or deposited by the Borrowers with the Trustee shall be allocated first to the next succeeding Mandatory Sinking Account Payment, then to the remaining Mandatory Sinking Account Payments as selected by the Borrowers. Project Fund (applicable to the 2005B Bonds and 2005C Bonds only) The moneys in the Project Fund shall be used and withdrawn by the Trustee to pay the capital costs of the Project. No moneys in the Project Fund shall be used to pay Costs of Issuance. Clearing Fund (applicable to the 2005A Bonds only). The moneys in the Clearing Fund will be used to advance refund those of those certain South Fork Municipal Authority Hospital Revenue Bonds, Series A of 1996 (Conemaugh Valley Memorial Hospital Project), to purchase the Bond Insurance Policy for the 2005A Bonds and to pay a portion of the cost of issuance of the 2005A Bonds. Debt Service Reserve Fund The Trustee shall establish a Debt Service Reserve Fund for the sole and exclusive benefit and security of the holders of the Bonds. Moneys on deposit in the Debt Service Reserve Fund shall be applied as follows: (i) On the date of each required payment from the Principal Fund, the Interest Fund or the Redemption Fund, as the case may be, moneys in the Debt Service Reserve Fund shall be applied to cure any deficiency in the Principal Fund, the Interest Fund or the Redemption Fund, as applicable; (ii) Any amount in the Debt Service Reserve Fund in excess of the Reserve Fund Requirement on any valuation date or on any date on which the principal of the Bonds is payable (including any excess arising after giving effect to such payment of principal) shall be transferred to the Principal Fund, the Interest Fund or the Redemption Fund, as the case may be, and credited against the payments next becoming due (in direct order) under the Loan Agreement in respect of the principal or Redemption Price of or interest on the Bonds of the related series; and (iii) In each month during the 12-month period preceding the final maturity date of the related Bonds, moneys held in the Debt Service Reserve Fund shall be credited against the payments otherwise due under the Loan Agreement in respect of principal of and interest on the Bonds and shall be transferred to the Principal Fund, the Interest Fund or the Redemption Fund, as the case may be, for the payment of such principal and interest; provided, however, that no such credit shall be given and no such transfer shall be made if and to the extent that, immediately prior to such crediting and transfer, the amount on deposit in the Debt Service Reserve Fund is not at least equal to the Reserve Fund Requirement, less the amounts previously transferred to the Principal Fund, the Interest Fund or the Redemption Fund during such 12-month period pursuant to this subparagraph (iii). The amount of any withdrawal for the purpose of (i) above shall be restored by the Borrowers in no more than 12 substantially equal, consecutive, monthly installments, each payable on the last Business Day of the month, commencing with the month in which the withdrawal is made; provided that, if any withdrawal is made and if, prior to the restoration of the amount withdrawn, an additional withdrawal is made, such additional withdrawal shall be restored in equal monthly installments over the remainder of the restoration period for the initial withdrawal. In addition, if the fair market value of the investments in the Debt Service Reserve Fund is less than 90% of the Reserve Fund Requirement of the Bonds Outstanding on any valuation date, the difference between such Reserve Fund Requirement and the value C-21

151 of the Debt Service Reserve Fund shall be restored by the Borrowers in no more than 12 equal, consecutive, monthly installments, each payable on the last Business Day of the month, commencing with the month in which the valuation revealing the deficiency is made. The Borrowers, and with the consent of the Bond Insurer, shall be permitted to substitute a letter of credit, surety bond or other credit enhancement (each, a "debt service reserve credit facility") for funds on deposit in the Debt Service Reserve Fund, provided that: (i) the debt service reserve debt service reserve credit facility (including any replacement credit facility) is issued by a bank, trust company, national banking association or insurance company whose unsecured long term debt obligations (in the case of a bank, trust company or national banking association) or whose claims paying abilities (in the case of an insurance company) are rated by a Rating Agency, at the time the debt service reserve credit facility is issued and at the time of each extension or renewal thereof, in a rating category at least equal to the rating category assigned by a Rating Agency to long-term indebtedness of the Borrowers, determined without regard to credit enhancement, if applicable, but in no event lower than an "investment grade" rating category; (ii) the issuer of the debt service reserve credit facility does not receive as security for any reimbursement obligation in respect of the debt service reserve credit facility any lien, security interest or other similar right or interest in any property which is superior to the rights of the Trustee in respect of such property; and (iii) the debt service reserve credit facility (including any replacement debt service reserve credit facility, if provided by a different issuer) has an initial term of not less than three years and any extension, renewal or replacement (if provided by the same issuer) thereof has a term of not less than one year. Upon such substitution, funds on deposit in the Debt Service Reserve Fund which, when added to the face amount of the debt service reserve credit facility, exceed the Reserve Fund Requirement, shall be transferred to the Borrowers and applied to such purposes as may be approved in a Favorable Opinion of Bond Counsel. Thereafter, the debt service reserve credit facility shall be considered a part of the Debt Service Reserve Fund and the amount available thereunder shall be included in any calculations of the amount required to be retained in the Debt Service Reserve Fund; provided that, (A) if the sum of the amount available under the credit facility and the amount of moneys on deposit in the Debt Service Reserve Fund exceeds the amount required to be on deposit pursuant to subsection (a) above, the Borrowers, shall be permitted (i) to cause the amount available under the debt service reserve credit facility to be reduced by an amount equal to such excess, or (ii) to direct that the excess moneys be transferred to the Borrowers and applied to such purposes as may be approved in a Favorable Opinion of Bond Counsel, and (B) if the debt service reserve credit facility is not extended, renewed or replaced at least six months prior to its scheduled expiration or termination date, the Borrowers shall be obligated to restore the difference between the Reserve Fund Requirement and the value of the Debt Service Reserve Fund computed without regard to the debt service reserve credit facility in no more than 30 equal, consecutive monthly installments, each payable on the last Business Day of the month, commencing on the first such day which is less than six months prior to such expiration or termination. Costs of Issuance Fund (applicable to the 2005B Bonds and 2005C Bonds only) The moneys in the Costs of Issuance Fund shall be used and withdrawn by the Trustee to pay the Costs of Issuance upon requisition of the Borrowers. C-22

152 Redemption Fund The Trustee shall establish, maintain and hold in trust within the Redemption Fund a separate Optional Redemption Account and a separate Special Redemption Account. The Trustee shall deposit the following Revenues in the Optional Redemption Account when and as such Revenues are received: (1) except for proceeds of insurance or condemnation as provided below, the principal component of all cash prepayments of Loan Repayments made pursuant to the Loan Agreement; and (2) all interest, profits and other income received from the investment of moneys in the Optional Redemption Account. The Trustee shall deposit the following Revenues in the Special Redemption Account when and as such Revenues are received: (1) the principal component of all cash prepayments of loan repayments made pursuant to the Loan Agreement which are specified in a certificate of the Borrowers to have been derived from insurance or condemnation proceeds with respect to facilities of the Borrowers; and (2) all interest, profits and other income received from the investment of moneys in the Special Redemption Account. All amounts deposited in the Optional Redemption Account and in the Special Redemption Account shall be used and withdrawn by the Trustee solely for the purpose of redeeming the Bonds, in the manner and upon the terms and conditions specified in the Bond Indenture, at the next succeeding date of redemption for which notice has not been given and at the Redemption Prices then applicable to redemptions from the Optional Redemption Account and the Special Redemption Account, respectively, or to reimburse the Bond Insurer with respect to drawings under the Bond Insurance Policy for such purpose; provided that in the case of the Optional Redemption Account in lieu of redemption at such next succeeding date of redemption, or in combination therewith, amounts in such account may be transferred to the Principal Fund and credited against Loan Repayments in order of their due date as set forth in a Request of the Borrowers. All Bonds redeemed from the Redemption Fund shall be allocated to applicable Mandatory Sinking Account Payments in inverse order of their payment dates. Rebate Fund The Trustee shall establish and maintain, when required, a fund separate from any other fund established and maintained under the Bond Indenture designated as the Rebate Fund. Within the Rebate Fund, the Trustee shall maintain such accounts as shall be necessary to comply with instructions of the Borrowers given pursuant to the terms and conditions of the Tax Certificate and Agreement. Subject to the transfer provisions of the Bond Indenture, all money at any time deposited in the Rebate Fund shall be held by the Trustee in trust, to the extent required to satisfy the Rebate Requirement (as defined in the Tax Certificate and Agreement), for payment to the federal government of the United States of America. Neither the Issuer, the Borrowers nor the Holder of any Bonds shall have any rights in or claim to such money. All amounts deposited into or on deposit in the Rebate Fund shall be governed by the Bond Indenture and by the Tax Certificate and Agreement. C-23

153 Notwithstanding any other provision of the Bond Indenture, including in particular the section of the Bond Indenture regarding defeasance, the obligation to remit the Rebate Requirement to the United States and to comply with all other requirements regarding Rebate Fund and tax covenants and the Tax Certificate shall survive the defeasance or payment in full of the Bonds. Investment of Moneys in Funds and Accounts All moneys in any of the funds and accounts established pursuant to the Bond Indenture (other than the Purchase Fund which proceeds shall remain uninvested) shall be invested as directed by the Borrowers solely in Investment Securities. All Investment Securities shall be acquired subject to the limitations set forth in the tax covenants section of the Bond Indenture, the section in the Bond Indenture on limitations as to maturities and the section regarding investment of moneys in funds and accounts, and such additional limitations or requirements consistent with the foregoing as may be established by request of the Borrowers. Moneys in all funds and accounts shall be invested in Investment Securities maturing not later than the date on which it is estimated that such moneys will be required for the purposes specified in the Bond Indenture. Investment Securities purchased under any investment agreement may be deemed to mature on the date or dates on which the Trustee may redeem such Investment Securities under such agreement. All interest, profits and other income received from the investment of moneys in any fund or account shall be deposited when received in such fund or account. An amount of interest received with respect to any Investment Security equal to the amount of accrued interest, if any, paid as part of the purchase price of such Investment Security shall be credited to the fund or account for the credit of which such Investment Security was acquired. Amendment of Loan Agreement The Issuer may amend, modify or terminate any of the terms of the Loan Agreement, or consent to any such amendment, modification or termination, with the written consent of (i) the Bond Insurer (provided that the Bond Insurance Policy is then in effect or any amounts are owing to the Bond Insurer and the Bond Insurer is not in default under its payment obligations under the Bond Insurance Policy) or (ii) the Holders of a majority in principal amount of the Bonds then Outstanding (if the Bond Insurance Policy is no longer in effect or the Bond Insurer is then in default under its payment obligations under the Bond Insurance Policy) to such amendment, modification or termination have been filed with the Trustee. The Trustee shall give such written consent only if (1) in the opinion of the Trustee, which may be based on an opinion of Bond Counsel, such amendment, modification or termination will not materially adversely affect the interests of the Bondholders or result in any material impairment of the security given by the Bond Indenture for the payment of the Bonds; or (2) the Trustee first obtains the written consent of (i) the Bond Insurer (provided that the Bond Insurance Policy is then in effect or any amounts are owing to the Bond Insurer and the Bond Insurer is not in default under its payment obligations under the Bond Insurance Policy) or (ii) the Holders of a majority in principal amount of the Bonds then Outstanding (if the Bond Insurance Policy is no longer in effect or the Bond Insurer is then in default under its payment obligations under the Bond Insurance Policy); or (3) even if consent of Holders would otherwise be required, if such amendment will be effective upon the remarketing of the Bonds following the mandatory tender of the Bonds pursuant to the Bond Indenture; provided that in the case of (1), (2) or (3), no such amendment, modification or termination shall reduce the amount of Loan Repayments to be made to the Issuer or the Trustee by the Borrowers pursuant to the Loan Agreement, or C-24

154 extend the time for making such payments, without the written consent of all of the Bond Insurer or Holders of the Bonds then Outstanding. Events of Default Events of Default under the Bond Indenture include: (A) default in the due and punctual payment of the principal or Redemption Price of any Bond when and as the same shall become due and payable; (B) default in the due and punctual payment of any installment of interest on any Bond when and as the same shall become due and payable; (C) default by the Issuer in the observance of any of the other covenants, agreements or conditions on its part contained in the Bond Indenture or in the Bonds, if such default shall have continued for a period of 30 days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the Issuer by the Trustee, or to the Issuer and the Trustee by the Bond Insurer or the Holders of not less than 25% in aggregate principal amount of the Bonds at the time Outstanding and the Bond Insurer; except that, if such default can be remedied but not within such 30 day period and if the Issuer has taken all action reasonably possible to remedy such default within such 30 day period, such default, with the Bond Insurer's prior written consent, shall not become an Event of Default for so long as the Issuer shall diligently proceed to remedy such default in accordance with and subject to any directions or limitations of time established by the Trustee; (D) a Loan Default Event; (E) a Master Indenture Default Event; (F) the outstanding principal of the Note is declared or deemed due and payable; (G) a final determination that interest payable on any Bond is includable in the gross income for federal income tax purposes of a beneficial owner; and (H) a Mortgage Default Event. Acceleration of Maturities During the continuance of an Event of Default described above, unless the principal of all the Bonds shall have already become due and payable, the Trustee, upon the written request of the Bond Insurer or the Holders of not less than 66-2/3% in aggregate principal amount of the Bonds at the time Outstanding, with the consent of the Bond Insurer, shall, promptly upon such occurrence, by notice in writing to the Issuer, the Borrowers and the Bond Insurer, declare the principal of all the Bonds then Outstanding and the interest accrued thereon, to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in the Bond Indenture or in the Bonds contained to the contrary notwithstanding. Interest on the Bonds shall cease to accrue as of the date of declaration. The Trustee, as promptly as feasible following acceleration of the Bonds, shall notify the Bondholders of the date of acceleration and the cessation of accrual of interest on the Bonds in the same manner as for a notice of redemption; provided, however, that failure to give such notice shall not affect the acceleration of the Bonds. The preceding paragraph, however, is subject to the condition that if, at any time after the principal of the Bonds shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as provided in the Bond Indenture, there shall have been deposited with the Trustee a sum sufficient to pay all the principal of the Bonds matured prior to such declaration and all matured installments of interest (if any) upon all the Bonds, with interest on such overdue installments of principal as provided in the Loan Agreement, and the reasonable fees and expenses of the Trustee, including reasonable fees and expenses of its attorneys, and any and all other defaults known to the Trustee (other than in the payment of principal of and interest on the Bonds due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Trustee and the Bond Insurer or provision deemed by the Trustee and the Bond Insurer to be adequate shall have been made therefore and the declaration of acceleration of the Master Notes shall be annulled in accordance with the provisions of the Master Indenture, then, and in every C-25

155 such case, the Bond Insurer or the Holders of at least a majority in aggregate principal amount of the Bonds then Outstanding, with the written consent of the Bond Insurer, by written notice to the Issuer and to the Trustee, may, on behalf of the Holders of all the Bonds, rescind and annul such declaration and its consequences and waive such default; but no such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair or exhaust any right or power consequent thereon. Notwithstanding any other provision of the Bond Indenture except as provided in the following sentence, the Trustee may not exercise any remedy in the event of a default described under clause (A), (B), (C) or (D) above without the written consent of the Bond Insurer, so long as the Bond Insurance Policy is in effect and the Bond Insurer is not in default under its payment obligations under the Bond Insurance Policy. The Trustee may exercise any and all remedies under the Bond Indenture and the Loan Agreement (except acceleration) to collect any fees or expenses due from the Borrowers to the Trustee or the Issuer without obtaining the consent of the Bond Insurer; provided that the Trustee shall first provide written notice to the Bond Insurer of its intent to exercise such remedies and provide the Bond Insurer with an opportunity to cure any failure of the Borrowers with respect to such fees, expenses and indemnification prior to exercising any such remedy. Notwithstanding the foregoing provisions and for so long as the Bond Insurance Policy is in effect, the Trustee shall not without the written consent of the Bond Insurer (i) declare the principal of the Bonds, or the interest accrued with respect thereto, to be due and payable immediately, or (ii) rescind and annul any declaration of acceleration or waive any default under the Bond Indenture with respect to the Bonds. Bond Insurer and Bondholders Direction of Proceedings Anything in the Bond Indenture to the contrary notwithstanding, the Bond Insurer, so long as the Bond Insurance Policy is in effect and the Bond Insurer is not in default thereunder, or otherwise the Holders of a majority in aggregate principal amount of the Bonds then Outstanding shall have the right, by an instrument or concurrent instruments in writing executed and delivered to the Trustee, to direct the method of conducting all remedial proceedings taken by the Trustee under the Bond Indenture, provided that such direction shall not be otherwise than in accordance with law and the provisions of the Bond Indenture, and that the Trustee shall have the right to decline to follow any such direction which in the opinion of the Trustee would be unjustly prejudicial to Bondholders not parties to such direction. Limitation on Bondholders Right to Sue No Holder of any Bond shall have the right to institute any suit, action or proceeding at law or in equity, for the protection or enforcement of any right or remedy under the Bond Indenture, the Loan Agreement, or any other applicable law with respect to such Bond, unless (1) such Holder shall have given to the Trustee written notice of the occurrence of an Event of Default; (2) the Holders of not less than 25% in aggregate principal amount of the Bonds then Outstanding and the Bond Insurer shall have made written request upon the Trustee to exercise the powers granted in the Bond Indenture or to institute such suit, action or proceeding in its own name; (3) such Holder or said Holders shall have tendered to the Trustee the written consent of the Bond Insurer and reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; and (4) the Trustee shall have refused or omitted to comply with such request for a period of 60 days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee. Such notification, request, tender of indemnity and refusal or omission are, in every case, conditions precedent to the exercise by any Holder of the Bonds of any remedy under the Bond Indenture or under law; it being understood and intended that no one or more Holders of the Bonds shall have any C-26

156 right in any manner whatever by his or their action to affect, disturb or prejudice the security of the Bond Indenture or the rights of any other Holders of the Bonds, or to enforce any right under the Bond Indenture, the Loan Agreement or other applicable law with respect to the Bonds, except in the manner provided in the Bond Indenture, and that all proceedings at law or in equity to enforce any such right shall be instituted, had and maintained in the manner provided in the Bond Indenture and for the benefit and protection of all Holders of the Outstanding Bonds, subject to the provisions of the Bond Indenture. Modification or Amendment of the Bond Indenture The Bond Indenture and the rights and obligations of the Issuer, of the Trustee and of the Holders of the Bonds may be modified or amended from time to time and at any time by a Supplemental Bond Indenture, which the Issuer and the Trustee may enter into with the written consent of the Bond Insurer, so long as the Bond Insurance Policy is in effect and the Bond Insurer is not in default thereunder, or otherwise Holders of a majority in aggregate principal amount of the Bonds then Outstanding shall have been filed with the Trustee. No such modification or amendment shall (1) extend the fixed maturity of any Bond, or reduce the amount of principal thereof, change the method of computing the rate of interest thereon, or extend the time of payment of interest thereon, or extend the time of payment or reduce the amount of any Mandatory Sinking Account Payment, or reduce any premium payable upon the redemption thereof, without the consent of the Holder of each Bond so affected, or (2) reduce the aforesaid percentage of Bonds the consent of the Holders of which is required to effect any such modification or amendment without the consent of all of the Holders of the Bonds then Outstanding, or (3) permit the creation of any lien on the Revenues and other assets pledged under the Bond Indenture prior to or on a parity with the lien created by the Bond Indenture, or deprive the Holders of the Bonds of the lien created by the Bond Indenture on such Revenues and other assets (except as expressly provided in the Bond Indenture), without the consent of the Bond Insurer (so long as the Bond Insurance Policy is in effect and the Bond Insurer is not the in default under its payment obligation thereunder) or the Holders of all Bonds so affected then Outstanding (if the Bond Insurance Policy is no longer in effect or the Bond Insurer is then in default under its payment obligations thereunder)or (4) modify any of the rights or obligations of the Trustee without its consent. It shall not be necessary for the consent of the Bondholders to approve the particular form of any Supplemental Bond Indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Issuer and the Trustee of any Supplemental Bond Indenture pursuant to the Bond Indenture, the Trustee shall mail a notice, setting forth in general terms the substance of such Supplemental Bond Indenture to the Bondholders at the addresses shown on the registration books maintained by the Trustee. Any failure to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such Supplemental Bond Indenture. The Bond Indenture and the rights and obligations of the Issuer, of the Trustee and of the Holders of the Bonds may also be modified or amended from time to time and at any time by a Supplemental Bond Indenture, which the Issuer and the Trustee may enter into with the consent of the Bond Insurer (so long as the Bond Insurer is not in default under the Bond Insurance Policy) but without the consent of any Bondholders, if the Trustee determines that the provisions of such Supplemental Bond Indenture shall not materially adversely affect the interests of the Holders of the Bonds, including, without limitation, for any one or more of the following purposes: (1) to add to the covenants and agreements of the Issuer contained in the Bond Indenture other covenants and agreements thereafter to be observed, to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender any right or power reserved to or conferred upon the Issuer by the Bond Indenture; (2) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing or correcting any defective provision, contained in the Bond Indenture, or in regard to matters or questions arising under the Bond Indenture, as the Issuer, the Borrowers or the Trustee may deem necessary or desirable and not C-27

157 inconsistent with the Bond Indenture; (3) to modify, amend or supplement the Bond Indenture in such manner as to permit the qualification under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute; (4) to make the Bonds eligible for deposit with any securities depository; (5) to obtain a rating on the Bonds; (6) to conform to the terms and provisions of any Credit Facility; or (7) to make any modification or amendment to the Bond Indenture even if consent of Holders would otherwise be required if it is only effective upon mandatory tender of the Bonds. The provisions of the Bond Indenturer shall not prevent any Bondholder from accepting any amendment as to the particular Bonds held by him, provided that due notation thereof is made on such Bonds. A supplemental indenture shall not become effective unless and until the Borrowers and Master Trustee shall have consented in writing to the execution and delivery of such supplemental indenture. The Trustee shall cause notice of the proposed execution of any supplemental indenture together with a copy of the proposed supplemental indenture to be mailed to the Borrowers and Master Trustee at least fifteen (15) days prior to the proposed date of execution of such supplemental indenture. Discharge of Bond Indenture The Bonds may be paid by the Issuer or the Trustee on behalf of the Issuer in any of the following ways: (a) by paying or causing to be paid the principal or Redemption Price of and interest on all Bonds Outstanding, as and when the same become due and payable (from funds other than moneys paid pursuant to the Bond Insurance Policy); (b) by depositing with the Trustee, in trust, at or before maturity, moneys or securities in the necessary amount (as provided in the section of the Bond Indenture regarding deposit of money or securities with the Trustee) to pay or redeem all Bonds then Outstanding (from funds other than moneys paid pursuant to the Bond Insurance Policy); or (c) by delivering to the Trustee, for cancellation by it, all Bonds then Outstanding. Deposit of Money or Securities with Trustee The money or securities to be deposited or held to pay or redeem the Bonds may include money or securities held by the Trustee in the funds and accounts established pursuant to the Bond Indenture (other than the Rebate Fund or the Purchase Fund) and shall be: (a) lawful money of the United States of America, in an amount equal to the principal amount of such Bonds and all unpaid interest thereon to maturity (based on the Maximum Rate for periods for which the actual interest rate is not known), except that, in the case of Bonds which are to be redeemed prior to maturity and in respect of which notice of such redemption shall have been given as provided in the Bond Indenture or provision satisfactory to the Trustee shall have been made for the giving of such notice, the amount to be deposited or held shall be the principal amount or Redemption Price of such Bonds and all unpaid interest thereon (based on the Maximum Rate for periods for which the actual interest rate is not known) to the redemption date; or (b) Investment Securities described in subsection (a) of the definition thereof (or otherwise approved by the Bond Insurer) (not callable by the Issuer thereof prior to maturity, unless such call by the Issuer was anticipated in the verification report relating to the escrow of which such Investment Securities are a part) the principal of and interest on which when due (without any income from the reinvestment thereof) will provide money sufficient to pay the principal or Redemption Price of and all unpaid interest to maturity, or to the redemption date, as the case may be, on the Bonds to be paid or C-28

158 redeemed (based on the Maximum Rate for periods for which the actual interest rate is not known), as such principal or Redemption Price and interest become due; provided that, in the case of Bonds which are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in the Bond Indenture or provision satisfactory to the Trustee shall have been made for the giving of such notice; provided, in each case, that the Trustee shall have been irrevocably instructed (by the terms of the Bond Indenture or by Request of the Issuer) to apply such money to the payment of such principal or Redemption Price and interest on such Bond. Provisions Concerning Bond Insurers Generally In the event that the principal and/or interest due on the Bonds shall be paid by Bond Insurer to Persons pursuant to the Bond Issuance Policy, the Bonds shall remain outstanding for all purposes, not be defeased or otherwise satisfied and not be considered paid by the Issuer, and the assignment and pledge of the trust estate and all covenants, agreements and other obligations of the Issuer to the registered owners shall continue to exist and shall run to the benefit of Bond Insurer, and Bond Insurer shall be subrogated to the rights of such registered owners including, without limitation, and rights that such owners may have in respect of securities law violations arising from the offer and sale of the Bonds. Assured (applicable to the 2005A Bonds and 2005B Bonds only) Whenever in the Bond Indenture the consent of the Holders of the Bonds is required, the consent of the Bond Insurer shall also be required. The Bond Insurer shall be deemed to be the Holder of all Bonds then Outstanding for purposes of the Bond Indenture, including without limitation for purposes of granting any consents (including any consents for the purpose of any selection, appointment or remainder of any consultant required under the Master Indenture) or approving amendments (as and to the extent permitted in the Bond Indenture) and exercising all remedies following the occurrence of an Event of Default. Notwithstanding any other provision of the Bond Indenture, any provision of the Bond Indenture requiring the consent of, the giving of notice to, or control of proceedings by the Bond Insurer shall be in effect for so long as, and only during such time as (1) the Bonds are Outstanding and (2) no default shall have occurred and be continuing by the Bond Insurer with respect to the payment provisions under the Bond Insurance Policy. Without the prior consent of Bond Insurer, no Bond received by the Issuer shall be purchased by the Issuer in lieu of redemption, provided, however, that an open market purchase by the Issuer or the Borrower of the Bonds in order to satisfy any series of fund redemptions shall be permitted, and at the time of such redemption the Bonds purchased on the open market and applied to satisfy such redemption shall be cancelled. To the extent that the Bond Indenture confers upon or gives or grants to the Bond Insurer any right, remedy or claim under or by the Bond Indenture, the Bond Insurer shall be a third- party beneficiary under the Bond Indenture and may enforce any such right, remedy or claim conferred, given or granted thereunder. Any provision of this Bond Indenture expressly recognizing or granting rights in or to Bond Indenture may not be amended in any manner that affects the rights of Bond Insurer hereunder without the prior written consent of Bond Insurer. C-29

159 Any reorganization or liquidation plan with respect to the Borrower must be acceptable to Bond Insurer. In the event of any reorganization or liquidation, Bond Insurer shall have the right to vote on behalf of all Holders who hold obligations guaranteed by Bond Insurer under the Bond Insurance Policy, absent a default by Bond Insurer under the Bond Insurance Policy. Radian (applicable to the 2005C Bonds only) Notwithstanding any other provision hereof or of the Bonds to the contrary, so long as (1) the Bonds are Outstanding and (2) no default shall have occurred and be continuing by the Bond Insurer with respect to the payment provisions under the Bond Insurance Policy, the following provisions of concerning the Bond Insurer this shall govern and control any contrary provisions in the Indenture. Payment. The Issuer shall deposit with the Trustee with respect to interest due on the Bonds on any payment date shall be made by the Issuer in immediately available funds no later than five (5) days prior to such payment date so that there are amounts sufficient to provide for the payment of such interest due on such payment date. Acceleration. To the extent the Bonds are subject to acceleration, upon the occurrence of an Event of Default, the indebtedness evidenced by the Bonds shall not be accelerated without the Bond Insurer's prior written consent. At that time, the Bond Insurer may, in its discretion, either direct the accelerated payment of the Bonds or continue to pay principal and interest on the originally scheduled due dates of the Bonds. Amendment. Any rating agency rating the Bonds must receive notice of each amendment to this Indenture, the Bonds and the Loan Agreement and a copy thereof at least fifteen (15) Business Days in advance of its execution or adoption. The Bond Insurer shall be provided with a full transcript of all proceedings relating to the execution of any such amendment. Redemption. Redemption of the Bonds shall be permitted at any time without Bond Insurer's prior written consent so long as funds for such redemption are irrevocably deposited with the Trustee prior to rendering notice of redemption to the Bondholders, or in the alternative, the notice expressly states that such redemption is subject to the deposit of funds by the Issuer. Debt Service Reserve Fund. (i) The debt service reserve requirement shall, subject to the requirements and limitations of Federal income tax law, be based on maximum annual debt service and shall be fully funded upon the issuance of the Bonds and any additional bonds. (ii) Any withdrawal from the Debt Service Reserve Fund shall be replenished in twelve equal monthly payments immediately succeeding such withdrawal. Any deficiency in the Debt Service Reserve Fund determined upon the quarterly valuation thereof, shall be replenished in three equal monthly payments prior to the next succeeding valuation date. Elimination of Debt Service Reserve Fund. At the request of the Borrower, delivered in writing to the Trustee and upon the written consent of the Bond Insurer, the Reserve Fund Requirement shall be eliminated and all moneys then on deposit in the Debt Service Reserve Fund shall be released to the Borrower or otherwise applied as specified in the Borrower's written request, in each case for such purposes as may be approved in a Favorable Opinion of Bond Counsel; provided that: (i) the Bond Insurer and the Trustee shall have received an Officer s Certificate of the Borrower demonstrating and concluding that for each of the two most recent fiscal years for which Financial Statements of the C-30

160 Borrower are available, the Borrower's Days of Unrestricted Cash on Hand is equal to or greater than 150 days; (ii) the long term unenhanced obligations of the Borrower are rated at least "A1" by Moody s and "A+" by S&P; or (iii) the Bond Insurer shall have consented to such release or other application. The Reserve Fund Requirement, if eliminated pursuant to the foregoing, shall be subject to restoration in full (i) if the Borrower s Days of Unrestricted Cash on Hand (as defined in the Loan Agreement) falls below 90 days or (ii) if the long term unenhanced obligations of the Borrower are rated "A3" or lower by Moody s or "A-" or lower by S&P or (iii) if any Event of Default has occurred and is continuing under the Indenture or the Master Indenture. Satisfaction of such financial ratios shall be evidenced semi-annually by an Officer s Certificate provided to the Trustee and the Bond Insurer by the Borrower, which shall be based upon and shall accompany the unaudited financial statements delivered pursuant to the Master Indenture. If any such certificate indicates that the required financial ratios were not satisfied for any semi-annual period, or in the event the long term unenhanced obligations of the Borrower are downgraded to "A3" or lower by Moody s or "A-" or lower by S&P, the Borrower shall be required to deposit into the Debt Service Reserve Fund an amount equal to the Reserve Fund Requirement within 45 days after the delivery of such certificate to the Trustee or within 45 days after the date of such downgrade, as applicable, which amount shall be maintained in the Debt Service Reserve Fund for at least 24 months until such time thereafter, if any, as the Borrower again satisfies the requirements above. Investments and Valuation. All funds shall be invested only in Investment Securities. Investments on deposit in all funds and accounts shall be valued at market value at least quarterly. No forward delivery agreements, hedge, purchase and resale agreements or par-put agreements may be used with respect to the investment of any fund or account with respect to the trust estate pledged to the Bonds without the prior written consent of Bond Insurer. Debt Service Reserve Fund Investments. Amounts contained in any Debt Service Reserve Fund shall be invested only in the instruments set forth in paragraphs (i), (ii) and (v) of the definition of Investment Securities, with maturities of not longer than five years. No Debt Service Reserve Fund credit facilities, insurance policies, forward delivery agreements, investment agreements, hedge or par-put agreements may be used without the prior written consent of Bond Insurer. Control. Anything in this Indenture to the contrary notwithstanding, upon the occurrence and continuance of an Event of Default hereunder, the Bond Insurer shall be entitled to control and direct the enforcement of all rights and remedies granted to the Bondholders of the Bonds or any trustee appointed for the benefit of the Bondholders under this Indenture as if the Bond Insurer were the Bondholder of the Bonds insured by it. Default Rate. Amounts paid by Bond Insurer in respect of the principal and/or interest on the Bonds shall bear interest until repaid to Bond Insurer at a per annum rate of interest equal to the rate from time to time announced by the Insurance Trustee as its base lending rate plus three percent (3%) (the "Default Rate"). Trustee. Prior to an Event of Default the Bond Insurer shall have the right to remove the Trustee for cause, and after an Event of Default, the Bond Insurer shall have the right to remove the Trustee for any reason. Consent Requirements. The Bond Insurer's consent shall be required for the following purposes: (i) execution and delivery of any amendment, supplement or waiver to this Indenture, the C-31

161 Master Indenture, the Mortgage, the Bonds or the Loan Agreement (other than an amendment or supplement for the purpose of authorizing additional indebtedness in accordance with the terms of this Indenture, the Bonds or the Loan Agreement) or any other document executed in connection with the issuance of the 2005C Bonds; (ii) removal of the Trustee; and (iii) initiation or approval of any action not described in (i) and (ii) above which requires Bondholder consent. Party in Interest. The Bond Insurer is hereby deemed to be included as a party in interest (or third party beneficiary) with respect to this Indenture, the Master Indenture, the Mortgage, the Bonds and the Loan Agreement and as a party entitled to (i) notify the Trustee of the occurrence of an Event of Default hereunder, and (ii) request the Trustee to intervene in judicial proceedings that affect the Bonds or the security therefore. Interpretation. (i) Notwithstanding any other provision of this Indenture, in determining whether the rights of the Bondholders will be adversely affected by any action taken pursuant to the terms and provisions of this Indenture, the Trustee shall consider the effect on the Bondholders without regard to the Bond Insurance Policy. (ii) The Trustee shall not be permitted to resolve ambiguities in this Indenture, the Master Indenture, the Bonds or the Loan Agreement in any manner that shall be deemed to be conclusively binding on Bondholders without the consent of Bond Insurer. Bond Insurer shall receive notice of any proposed meetings of Bondholders held under this Indenture and shall be given the opportunity to attend and participate in the same. (iii) Any legal opinions rendered to any party to this Indenture, the Master Indenture or the Loan Agreement as to compliance with or interpretation of, the provisions thereof, shall also be provided to Bond Insurer. C-32

162 SUMMARY OF THE LOAN AGREEMENTS General The Loan Agreement is an agreement between the Issuer and the Borrowers, whereby the Issuer agrees to lend the proceeds of the Bonds to the Borrowers and the Borrowers agree to make payments to the Trustee sufficient to pay debt service on such Bonds. The following are summaries of certain provisions of the Loan Agreement. These summaries do not purport to be complete or definitive and are qualified in their entireties by reference to the full terms of the Loan Agreement. Payments Payments of Principal, Premium and Interest. In consideration of the loan of proceeds of the Bonds to the Borrowers, the Borrowers agree that, it shall make equal monthly deposits with the Trustee for deposit into the Principal Fund and Interest Fund so that at least twenty (20) days prior to a principal or interest payment date there are amounts sufficient to provide for the payment of principal and interest due on such payment date; provided, however, that while the Bonds are in a variable rate mode with interest rate adjustments made on a daily, weekly or monthly basis, deposits with the Trustee with respect to interest due on the Bonds on any payment date shall be made by the Borrowers in immediately available funds no later than five (5) days prior to such payment date so that there are amounts sufficient to provide for the payment of such interest due on such payment date. Notwithstanding the foregoing, the Borrowers agree to make payments, or cause payments to be made, at the times and in the amounts required to be paid as principal or redemption price of and interest on the Bonds from time to time Outstanding under the Bond Indenture and other amounts required to be paid under the Bond Indenture, as the same shall become due whether at maturity, upon redemption, by declaration of acceleration or otherwise. Additional Payments. In addition to the Loan Repayments, the Borrowers shall also pay to the Issuer, the Bond Insurers or to the Trustee, as the case may be, "Additional Payments," as follows: (a) all taxes and assessments of any type or character charged to the Issuer or to the Trustee affecting the amount available to the Issuer or the Trustee from payments to be received under the Loan Agreement or in any way arising due to the transactions contemplated by the Loan Agreement (including taxes and assessments assessed or levied by any public agency or governmental authority of whatsoever character having power to levy taxes or assessments) but excluding franchise taxes based upon the capital and/or income of the Trustee and taxes based upon or measured by the net income of the Trustee; provided, however, that the Borrowers shall have the right to protest any such taxes or assessments and to require the Issuer or the Trustee, at the Borrowers expense, to protest and contest any such taxes or assessments levied upon them and that the Borrowers shall have the right to withhold payment of any such taxes or assessments pending disposition of any such protest or contest unless such withholding, protest or contest would adversely affect the rights or interests of the Issuer, the Holders or the Trustee; (b) all reasonable fees, charges and indemnities of the Trustee under the Bond Indenture, as and when the same become due and payable; (c) the reasonable fees and expenses of such accountants, consultants, attorneys and other experts as may be engaged by the Issuer or the Trustee to prepare audits, financial statements, reports, opinions or provide such other services required under the Loan Agreement or the Bond Indenture; C-33

163 (d) the annual fee of the Issuer specified in the Loan Agreement and the fees and costs of the Issuer pursuant to the Loan Agreement, any attorney or consultant representing the Issuer in connection with the Loan Agreement, the Bonds and the Bond Indenture, including any and all expenses incurred in connection with the authorization, issuance, sale and delivery of any such Bonds, or in connection with any litigation or other proceeding which may at any time be instituted involving the Loan Agreement, the Bonds and the Bond Indenture, or any of the other documents contemplated thereby, or in connection with the supervision or inspection of the Borrowers, its properties, assets or operations, or otherwise in connection with the administration of the Loan Agreement. For the 2005C Loan Agreement If the Swap Agreement terminates or if the Mode is changed to a Fixed Rate Mode prior to the final maturity of the 2005C Bonds with respect to which the Swap Agreement is effective, a premium adjustment payment ("PAP") may at that time be due and payable to the Bond Insurer by the Borrowers. The PAP would be calculated by taking the remaining principal amortization multiplied by the difference between (a) the Bond Buyer Revenue Bond Index plus 0.40% or the new fixed interest rate, and (b) the original swap rate under the Swap Agreement plus 0.40%. If the difference between (a) and (b) is positive (i.e. the Bond Buyer Revenue Bond Index plus 0.40% or the new fixed rate in the Fixed Rate Mode is more than the original swap rate under the Swap Agreement), a PAP will be immediately due and payable by the Borrowers to the Bond Insurer. Failure to make the PAP within thirty (30) days after the termination of the Swap Agreement will constitute an Event of Default under this Loan Agreement. No PAP will be owed to the Bond Insurer in the event the Borrowers refund the 2005C Bonds with respect to which the Swap Agreement effective. Events of Default Each of the following events shall constitute and be referred to as a "Loan Default Event": (a) Failure of the Borrowers to make any payment to the Trustee when due pursuant to the Loan Agreement; or (b) Failure of the Borrowers to make any payment to the Tender Agent with respect to the Bonds when due pursuant to the Loan Agreement; or (c) Failure of the Borrowers to make any other payment or to perform any other covenant, condition or agreement requires by the Loan Agreement to be performed by them; or (d) If the CHS or MMC propose or make an assignment for the benefit of creditors or a composition agreement with all or a material part of its or their creditors, or a trustee, receiver, executor, conservator, liquidator, sequestrator or other judicial representative, similar or dissimilar, is appointed for the CHS or MMC or any of its assets or revenues, or there is commenced any proceeding in liquidation, bankruptcy, reorganization, arrangement of debts, debtor rehabilitation, creditor adjustment or insolvency, local, state or federal, by or against CHS or MMC and if such is not vacated, dismissed or stayed on appeal within sixty (60) days; or (e) If the Trustee receives notice from the Master Trustee that an Event of Default under the Master Indenture has occurred and is continuing; or C-34

164 (f) If the Trustee declares the principal of the Note to be immediately due and payable or the principal of the Bonds, the principal of any Master Note or notes guaranteed pursuant to the Master Indenture shall have been accelerated; or (g) (h) If there is an event of default under the Bond Indenture; or If there is an event of default under the Mortgage or the Reimbursement Agreement. Remedies in General Upon the occurrence and during the continuance of any Loan Default Event, the Trustee on behalf of the Issuer, at the Trustee s option, but subject to the limitations in the Bond Indenture as to the enforcement of remedies, including but not limited to the right of the Bond Insurer to direct the enforcement of remedies, may take such action as it deems necessary or appropriate to collect amounts due under the Loan Agreement, to enforce performance and observance of any obligation or agreement of the Borrowers under the Loan Agreement or to protect the interests securing the same. Certain Covenants of the Borrowers Not withstanding any provisions of the Master Indenture that may be less restrictive, the following additional covenants apply with regard to the Borrowers. Provisions Required by Assured (applicable to the 2005A Bonds and 2005B Bonds only) Covenant Against Encumbrances; Permitted Encumbrances. (a) No Liens on property of the Extended Group (including unrestricted cash and investments and cash equivalents) shall be permitted except permitted encumbrances, which are, in general, nonconsensual, ordinary course of business and incidental encumbrances defined in the Documentation in a manner satisfactory to Assured. (b) Liens will also be permitted to secure permitted Parity Debt and permitted subordinate and Non Recourse Indebtedness, as defined in the Master Indenture, which shall be limited to the lesser of 15% of net patient service revenues or 5% of book value of Property, Plant and Equipment, as defined in the Master Indenture; provided the Extended Group can meet the additional bonds coverage test for the issuance of $1.00 of additional long-term indebtedness at the time that the lien is granted. Rate Covenant. (a) The Extended Group shall maintain a debt service coverage ratio of at least (i) 1.25 times calculated at the end of fiscal year 2006, and (ii) 1.30 times each fiscal year thereafter. If at the end of such fiscal year the Extended Group is not in compliance with the rate covenant, the Borrowers shall promptly employ a Consultant, acceptable to Assured, to make recommendations no later than sixty (60) days following the date of engagement of such consultant. Copies of the recommendations of the Consultant shall be filed with the Authority, the Trustee and Assured no later than sixty (60) days following the date of engagement. (b) Within thirty (30) days of receipt of such Consultant s report the Borrowers shall deliver to the Authority, the Trustee and Assured: (i) a certified copy of a resolution adopted by the C-35

165 board of trustees/directors of the Borrowers accepting such report, (ii) a report setting forth in detail the proposed steps the Borrowers intend to take in order to implement such recommendations, and (ii) quarterly reports demonstrating the progress made by the Borrowers in implementing the recommendations. (c) If the Extended Group complies in all material respects with the reasonable recommendations of the Consultant, the Extended Group will be deemed to have complied with the rate covenant. An event of default will be triggered only upon (i) failure to retain a Consultant, (ii) failure to maintain a debt service coverage ratio of at least 1.0 times or (iii) the failure to maintain the debt service coverage ratio of at least 1.35 times for two consecutive fiscal years. Liquidity Covenant. (a) MMC and the Extended Group shall each maintain unrestricted cash and investments equal to at least eighty (80) days of operating expenses. This ratio shall be tested on a semi-annual basis (the "Liquidity Covenant"). The Liquidity Covenant shall be tested on a semi-annual basis. Failure to maintain the Liquidity Covenant will require the Borrowers to retain a consultant as set forth above under the Rate Covenant. (b) If the MMC and the Extended Group comply in all material respects with the reasonable recommendations of the consultant, the MMC and the Extended Group will be deemed to have complied with the liquidity covenant. An event of default will be triggered only upon (i) failure to retain a consultant, (ii) unrestricted cash and investments equal to at least fifty (50) days of operating expenses or (iii) the failure to maintain unrestricted cash and investments equal to at least ninety (90) days for two consecutive fiscal years. Additional Indebtedness Test: Not withstanding the provisions of the Master Indenture: (a) Parity Long Term Indebtedness can be incurred by the Extended Group if (i) the debt service coverage ratio for the most recent Fiscal Year, calculated to include both the outstanding and proposed Indebtedness was at least 1.35 times, or (ii) the debt service coverage ratio for the two most recent consecutive Fiscal Years, calculated to include outstanding Indebtedness, was at least 1.50 times, and a report of an independent Consultant or accountant shows the projected debt service coverage ratio for the first two fiscal years after the incurrence of the Indebtedness will be at least 1.50 times. (b) Short-Term Indebtedness of the Extended Group may not exceed 15% of net patient service revenues. In addition, for a period of at least thirty (30) consecutive days, Short-Term Indebtedness shall be reduced to 0% of net patient service revenues. (c) Non-recourse debt shall be limited to 10% of net patient service revenues of the Extended Group. (d) Unhedged variable rate debt may be incurred by the Extended Group provided (i) it is subject to the requirements for the issuance of parity Long-Term Indebtedness, and (ii) is not greater than 30% of the Extended Group's total Indebtedness. Unhedged variable rate debt up to an amount not greater than 40% of the Extended Group's total indebtedness may be incurred provided (i) it is subject to the requirements for the issuance of parity Additional Long-Term Indebtedness, and (ii) the Extended Group holds unrestricted cash and investments equal to at least one hundred fifty (150) days of operating expenses. C-36

166 (e) The Extended Group shall not incur any additional indebtedness if the capitalization ratio following such issuance would exceed 70%, determined by dividing the aggregate principal amount of all outstanding long term indebtedness of the Extended Group by the sum of the aggregate principal amount of all outstanding Long Term Indebtedness of the Extended Group plus the unrestricted net assets of the Extended Group. Calculation of Debt Service Requirements. Debt service requirements for Long-Term Indebtedness shall include all principal and interest payments, including capitalized leases and Guarantees of at least one year in duration. (a) Variable Rate Long Term Indebtedness shall be deemed, for the purpose of incurring additional debt, to bear interest at a fixed rate equal to the Thirty-Year Revenue Bond Index as last published in The Bond Buyer. (b) In determining debt service requirements for Guaranties, the Extended Group shall include 100% of the guaranteed debt service for the two Fiscal Years following the Fiscal Year the Extended Group has made any payments for the beneficiary of the Guaranty. If payment has not been made, then the applicable percentage of the guaranteed debt service to be included by the Extended Group shall be calculated as follows: 100% if the beneficiary s debt service coverage ratio is equal to or less than 1.25 times, 75% if the beneficiary s debt service coverage ratio is greater than 1.25 times but less than or equal to 1.50 times, 50% if the beneficiary s debt service coverage ratio is greater than 1.50 times but less than or equal to 1.75 times, 25% if the beneficiary s debt service coverage ratio is greater than 1.75 times but less than or equal to 2.00 times, and 20% if the beneficiary s debt service coverage ratio is greater than 2.0 times. Unhedged Variable Rate Debt. Unhedged Variable Rate Indebtedness may not exceed 30% of the Extended Group s total Indebtedness. This ratio shall be tested on an annual basis. Unhedged Variable Rate Indebtedness up to an amount not greater than forty (40) percent of the Extended Group's total Indebtedness may be maintained, provided that (i) the Extended Group holds unrestricted cash and investments equal to at least one hundred fifty (150) days of operating expenses. Capitalization Ratio. The capitalization ratio (the "Capitalization Ratio") shall be tested annually. The capitalization ratio of the Extended Group may not exceed 70%, determined by dividing the aggregate principal amount of all Outstanding Long Term Indebtedness of the Extended Group by the sum of the aggregate principal amount of all Outstanding Long Term Indebtedness of the Extended Group plus the unrestricted net assets of the Extended Group. The Extended Group may only exceed the Capitalization Ratio with the explicit written consent of the Bond Insurer. Unrestricted Cash and Investment Transfers or Loans. Unrestricted cash and investments may not be disposed, transferred, loaned to any entity, including Affiliates and Restricted Affiliates, as defined in the Master Indenture, or invested in other than marketable or liquid securities (each, a disposition ), unless (i) the Extended Group has ninety (90) days of operating expenses, (ii) the Extended Group is in compliance with the Additional Indebtedness test and (iii) after giving effect to the disposition, unrestricted cash and investments would not decline by more than 15% of the lesser of the unrestricted cash and investments as of the end of the most recent audited Fiscal Year. C-37

167 Transfers of Non-Cash Assets. No sale, lease or other disposition to any entity, including Affiliates and Restricted Affiliates, of real or personal Property in excess of 5% of the Book Value of Property, Plant and Equipment in any Fiscal Year and no sale, lease or other disposition of any programs or services that account for more than 5% of total operating revenues unless: (i) the asset, program or service is inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary and such sale, lease or other disposition will not impair the structural soundness, efficiency or economic value of the remaining assets, programs or services, (ii) the Extended Group receives an asset or service of greater or equivalent value, (iii) such transfer is on fair and reasonable terms not less than favorable to such member than would result from an arm s length transaction, and (iv) the long term debt service coverage ratio for the most recent audited Fiscal Year preceding the proposed date of such transaction, assuming such transaction occurred at the beginning of such period, would not have been reduced by more than 20% or to less than 1.50 times. Consolidation, Mergers and Conveyances. Notwithstanding any other provision of the Loan Agreement or the Master Indenture, the Borrowers shall be permitted to (i) consolidate, merge with or convey substantially all of its assets to any entity, provided the following conditions are met: (a) compliance with the Additional Indebtedness test; (b) compliance with the liquidity covenant; (c) the debt service coverage ratio based on the audited financial statements for each of the two most recent Fiscal Years, calculated as if the consolidation, merger or conveyance had occurred at the beginning of such period, would be at least 1.35 times and 90% of the actual debt service coverage ratio for such period. (d) unrestricted net assets of the Extended Group based on the audited financial statements for the most recent fiscal year, calculated as if the consolidation, merger or conveyance had occurred at the beginning of such period, shall not be reduced by more than 10%. Guarantying Indebtedness. Notwithstanding any provision of the Master Indenture, the Extended Group shall not guaranty debt unless, after applying the applicable debt service related to Guaranteed debt as described in Calculation of Debt Service Requirements of the Loan Agreement, the Extended Group meets the conditions described in Additional Indebtedness Test. Swap Agreements and Maintenance Test. The Extended Group may enter into interest rate swap agreements if the following conditions are met: (i) the swap must be entered into as a hedge against (a) swaps outstanding (including reverse swaps), (b) assets then held, (c) debt then outstanding, and (d) debt reasonably expected to be issued or incurred within twelve months of the proposed interest rate swap, (ii) the swap shall not contain any leverage element or multiplier component unless there is a matching hedge arrangement which effectively off-sets the exposure from any such element or component, (iii) the swap agreement shall not exceed the maximum principal amount of the applicable Bonds, (iv) the net settlement, breakage or other termination amount of uninsured swaps then in effect and the swap to be executed shall be on a parity with the applicable Bonds, (v) the payment of the settlement, breakage or other termination shall be subordinate to debt service on the applicable Bonds and on any Parity Debt and would not result in unrestricted cash and investments equal to less than ninety (90) days of operating expenses, and (vi) the swap provider counterparty or its guarantor must have a rating of at least AA-, AA- or Aa3. C-38

168 Limitation of Draws from the Project Fund Upon the Event of Default, or an event which with notice or lapse of time or both would become an event of default, amounts on deposit in the Project Fund shall be applied exclusively to redeem bonds or to payment of principal on the bonds, unless Assured shall otherwise so provide. No Purchase by Borrowers or Authority. Without the prior consent of Assured, no Obligations insured by Assured shall be purchased by the Authority or the Borrowers, or any of their respective Affiliates, in lieu of redemption; provided, however, that an open market tender by the Authority of such 2005A or 2005B Bonds in order to satisfy sinking fund redemptions shall be permitted. Consent Rights. The prior consent of Assured will be required and Assured shall be deemed to be the holder of all of the 2005A and 2005B Bonds for purposes of the selection, appointment or removal of any Consultant required under the Master Indenture, which consent shall not be unreasonably withheld. Assured as Third Party Beneficiary. To the extent that the Loan Agreement confers upon or gives or grants to Assured any right, remedy or claim hereunder, Assured is explicitly recognized as being a third party beneficiary hereunder and may enforce any such right, remedy or claim conferred, given or granted by the Loan Agreement. Consent Rights of Assured. (a) Consent of Assured. Any rights in or to Assured may not be amended in any manner that affects the rights of Assured hereunder without the prior written consent of Assured. (b) Consent of Assured in the Event of Insolvency. Any reorganization or liquidation plan with respect to the Borrowers must be acceptable to Assured. In the event of any reorganization or liquidation, Assured shall have the right to vote on behalf of all Bondholders who hold the 2005A and 2005B Bonds guaranteed by Assured, absent a default by Assured under the Bond Insurance Policy. Provisions Required by Radian (applicable to the 2005C Bonds only) Definitions: The following definitions apply only to the Loan Agreement provisions required by Radian and all other defined terms used in these provisions not otherwise defined shall have the same meaning as the other defined terms of this Official Statement. "Debt Service Coverage Ratio" means with respect to any Long- Term Debt, Net Revenues Available for Debt Service divided by Maximum Annual Debt Service. Interest Rate Agreement means an agreement, commonly known as an interest rate swap, pursuant to which the Obligor agrees with a third party to pay such party interest on a mutually agreed upon principal amount in exchange for such party s agreement to pay the Obligor interest on such amount, all at such interest rates and over such periods of time as may be mutually agreed upon; provided, however, that no such agreement shall entail any exchange of principal or any assumption of liability for the payment of the principal of or interest on any particular indebtedness of the Obligor or such third party, as the case may be. C-39

169 "Long-Term Debt" means debt with a stated term greater than one year or with a term greater than one year or with a term that may be extended beyond one year at the option of the Obligor. "Maximum Annual Debt Service" means with respect to any Long-Term Debt, the maximum amount of principal of and interest on such Long-Term Debt payable or accruing in the then current or any future fiscal year, subject to adjustment as hereinafter described for Long-Term Debt that is Variable Rate Debt, Balloon Debt or Guaranteed Debt. "Net Revenues Available for Debt Service" means the excess of the unrestricted revenues of the Obligor adjusted by subtracting realized and unrealized gains or losses on investments, gains or losses resulting from periodic valuation of Interest Rate Agreements, and pledges made by donors during the relevant period but not actually collected during such period; less all unrestricted operating expenses and nonoperating expenses of the Obligor as shown on its financial statements, less any depreciation, amortization, interest expense and loss or gain on extinguishment of debt included in unrestricted operating or nonoperating expenses. "Obligor" means the institution liable for the repayment of the 2005C Bonds to be insured and, if any Master Trust Indenture or other obligated group structure is used, "Obligor" means the obligated group or a member of an Obligated Group (which shall initially consist of MMC and CHS), as applicable. "Permitted Encumbrances" consists of a detailed Exhibit to the Loan Agreement. Security: The Obligor must to provide the following security for the payment of the 2005C Bonds and all other Indebtedness pursuant to the Master Indenture: (a) The repayment obligation of the Obligor shall be a general obligation secured by a first lien on and pledge of the Gross Revenues of the Obligor. (b) The Obligor shall provide a negative pledge on the Obligor's Gross Revenues and any of its other property (real and personal, including after acquired property) except for Permitted Encumbrances. (c) A Mortgage on the Mortgaged Property. Rate Covenant. The Obligor shall charge and collect rates and fees sufficient in each fiscal year to provide a Debt Service Coverage Ratio for the Extended Group of no less than 1.10X Maximum Annual Debt Service. Failure to meet coverage will necessitate an outside Consultant's review and recommendations to be implemented. If the Consultant is hired and the recommendations are being followed no Event of Default shall be deemed to have occurred unless the rate covenant is not met for two consecutive fiscal years or the Debt Service Coverage Ratio of the Extended Group declines below 1.00X. There shall be no provision for any reduction of Rate Covenant requirements as a result or due to for effect of "applicable laws." Liquidity Covenant. The Obligor shall maintain on a semi annual basis at least 70 Days Cash on Hand. Days Cash on Hand for the Extended Group. Days Cash on Hand is defined as the quotient produced by dividing the sum of unrestricted cash, investments and board designated funds (which cash, investments and funds shall exclude any cash collateral amounts held to support obligations under any Interest Rate Exchange Agreement) by operating expenses minus depreciation and amortization, and then multiplying the quotient by 365. Failure to meet the liquidity covenant will necessitate an outside Consultant's review and recommendations to be implemented. If the Consultant is hired and the recommendations are being followed no Event of Default shall be deemed to have occurred unless the C-40

170 liquidity covenant is not met for an additional two consecutive test periods or Days Cash on Hand for the Extended Group declines below 40 days. There shall be no provision for any reduction of Liquidity Covenant requirements as a result or due to for effect of "applicable laws." Additional Debt. The Obligor shall comply with the follow covenants before incurring Additional Indebtedness to finance capital additions or renovations or refinance existing Indebtedness: (a) Long-Term Debt may be incurred if: (a) the Debt Service Coverage Ratio of the Extended Group for the previous two fiscal years, taking into account outstanding and proposed Long-Term Debt, was at least 1.30X; or (b) the Debt Service Coverage Ratio of the Extended Group for the most recent fiscal year, taking into account outstanding Long-Term Debt of the Extended Group, was at least 1.30X and a report of an independent Consultant or accountant shows the projected Debt Service Coverage Ratios of the Extended Group for the first two fiscal years after project or refinancing completion will be at least 1.40X (or an Officer s Certificate forecasting coverage of at least 1.60X for that same period). In addition, there shall be no provision for reduced requirements for effect of "applicable laws", as applied to the issuance of additional debt. (b) Refunding Debt issued for purposes of refunding Long-Term Debt may be issued without the Bond Insurer's consent provided there is no increase in Maximum Annual Debt Service. (c) Completion Debt (Long-Term Debt incurred to finance costs associated with a capital project that was financed through the issuance of other Long-Term Debt) may be incurred without limitation subject to an independent architect's certification of sufficiency of debt proceeds to complete project. The completion debt must be issued in respect of financing costs within the scope of the original project and in no case exceed 10% of the principal amount of the Long-Term Debt originally issued for the project. (d) Short-Term Debt (any debt that is not Long-Term Debt) may be incurred in an amount up to 10% of operating revenues of the Extended Group, provided all such Short-Term Debt is reduced to zero for a period of seven consecutive days, or it is reduced to an amount equal to 3% of operating revenues for a period of 30 days. (e) Non-Recourse Debt (debt which is not a general obligation of the any member of the Extended Group and which is secured solely by the property acquired or financed with such debt) is limited to 10% of the operating revenues of the Extended Group. (f) Balloon Debt (debt of which 25% or more of the principal amount comes or may come due in any one fiscal year by maturity, mandatory sinking fund redemption or optional or mandatory tender by the holder thereof) if the above conditions for the incurrence of Long- Term Debt of the Extended Group are satisfied, assuming that such Balloon Debt is amortized on a level debt service basis over a period of twenty years or the actual remaining term to maturity, whichever is less. Alternatively, Balloon Debt may be assumed to mature in accordance with the terms of a binding commitment to pay the debt upon maturity from a financial institution rated "Aa" from Moody's or "AA" from Standard and Poor's. (h) Variable Rate Debt (debt which does not bear a fixed rate of interest to maturity) may be incurred if the conditions for incurrence of Long-Term Debt for the Extended Group are met and if such indebtedness is assumed to bear interest at 120% of the average interest rate on the total Restricted Group s Variable Rate Debt outstanding for the most recent 24 month period; provided, however, that (i) if such indebtedness has been outstanding for less than 24 months but for at least 12 months, then the interest rate shall be assumed to be 120% of the average rate for the most recent 12 months or the interest rate in C-41

171 effect on the date of calculation, whichever is higher, and (ii) if such indebtedness has been outstanding for less than 12 months, then the interest rate shall be assumed to be 120% of (a) the Bond Market Association Municipal Swap Index for tax-exempt debt, and (b) LIBOR for taxable debt. (i) Derivative Indebtedness (indebtedness with respect to which the Obligor has obtained an Interest Rate Agreement) shall be deemed to bear interest for the period of time such Interest Rate Agreement is in effect at a net rate that takes into account the interest payments made by the Obligor on such indebtedness and the payments made or received by the Obligor on such Interest Rate Agreement; provided that the long-term credit rating of the provider of such Interest Rate Agreement (or any guarantor thereof) is in one of the two highest rating categories of any Rating Agency (without regard to any refinements of gradation of rating category by numerical modifier or otherwise). In addition, so long as any Indebtedness is deemed to bear interest at a rate taking into account an Interest Rate Agreement, any payments made by the Obligor on such Interest Rate Agreement shall be excluded from expenses and any payments received by a member of the Restricted Group on such Interest Rate Agreement shall be excluded from revenues. Interest Rate Agreements. The Obligor may enter into an Interest Rate Agreement without the consent of the Bond Insurer with respect to obligations incurred after the issuance of the 2005C Bonds so long as the cumulative notional amount under all Interest Rate Agreements entered into by the Obligor is less than 20% of outstanding Long-Term Debt of the Obligor. The Obligor may enter into an Interest Rate Agreement in a notional amount in excess of 20% of outstanding Long-Term Debt of the Obligor without the consent of the Bond Insurer only if the following conditions are met: (a) the Interest Rate Agreement must be entered into as a hedge against debt or assets held at the time of the execution of such Interest Rate Agreement; (b) the Interest Rate Agreement shall not contain any leverage element or multiplier component unless there is a matching hedge arrangement that effectively off-sets the exposure from any such element or component; (c) the payment of the settlement, breakage or other termination amount under such Interest Rate Agreement determined at the time of execution and delivery thereof (based on an assumption of 200 basis points fixed rate reduction for a fixed rate obligation and 200 basis points fixed rate increase for a floating rate obligation) would not cause Days Cash on Hand to be less than 70, days; (d) the counterparty under the Interest Rate Agreement or its guarantor must have a rating of at least AA- from Standard & Poor-s or Aa3 from Moody s Investors Service (or such counterparty must agree to post collateral on terms acceptable to Radian); and (e) the Interest Rate Agreement may not provide for immediate termination for credit events related to the Obligor (other than a ratings downgrade of the Obligor) unless such events would be an event of default under the Master Indenture. Guarantees. The Obligor may guarantee the payment of another entity's debt subject to the following requirements: (a) If the guaranteed entity has a Debt Service Coverage Ratio greater than 2.0 times in its latest fiscal year, then 25% of the guaranteed debt service shall be included in the debt service requirements of the guarantor; C-42

172 (b) if the guaranteed entity has a coverage ratio of 1.5 to 2.0 times, then 50% of the debt service shall be included; (c) if the guaranteed entity has a coverage ratio of 1.25 to 1.50 times, then 75% of the debt service shall be included; and (d) if the Debt Service Coverage Ratio of the guaranteed entity is below 1.25 times or guarantor has made a payment on the guaranteed entity's debt during any of the last three fiscal years, then 100% of the guaranteed entity's debt service shall be included in the debt service calculations for the guarantor. Consolidation, Merger & Transfer. The Obligors shall comply with the following: (a) The Obligors will, among things, preserve and maintain its existence as not-for-profit corporation(s). (b) The Obligors will not consolidate with or merge into any other corporation(s), unless: (i) such consolidation or merger does not cause the Obligor to lose its tax exempt status; (ii) the successor corporation agrees to fulfill the obligations of Obligor under the relevant bond documents, to the same extent as if such successor corporation had been the original borrower under the documents: (iii) immediately after the consolidation or merger, the Obligor, or the successor will not be in default in the performance of any duties, obligations or covenants under the documents; (iv) an officer's certificate is provided stating that the Obligor or successor, as applicable, immediately following the transfer, merger, or consolidation, will be able to issue at least one dollar of additional Long-Term Debt; (v) an officer's certificate is provided stating that the Debt Service Coverage Ratio of the Obligor or successor, as applicable, after giving effect to the transaction, will not be less than 1.40X and 75% of what it was prior to the transaction, or, alternatively, with the consent of Radian, the Debt Service Coverage Ratio must be higher than it was prior to the transaction; (vi) an officer's certificate is provided stating that the Obligor or successor, as applicable, immediately following the transfer, merger, or consolidation, will be in compliance with the Liquidity Covenant; and (g) such sale merger or transfer will not cause the interest payable on any of the successor's debt to become taxable under federal or state law. Transfer of Assets. The Obligor may, among things (a) sublease or license the use of its property pursuant to a resident's agreement or for use in performing services necessary for use of Obligor's facilities for health care and related purposes in accordance with customary practices in the industry; or (b) remove, sell or dispose of operating assets in the ordinary course of business; or (c) remove, sell or dispose of operating assets up to an aggregate value equal to 10% of the fair market value of property, plant and equipment in any two consecutive fiscal years with or without consideration. (d) In addition, the Obligor will not sell, lease, donate, exchange or dispose of any non-operating assets (including cash and cash equivalents) with or without consideration in other than the ordinary course of business without providing: (i) an officer's certificate stating that the Obligor or successor, as applicable, immediately following the transfer or disposition, will be in compliance with the Liquidity Covenant; (ii) an officer's certificate stating that the Obligor or successor, as applicable, immediately following the transfer or disposition, will be able to issue at least one dollar of additional Long-Term Debt; and (iii) an officer's certificate stating that the Debt Service Coverage Ratio of the Obligor or C-43

173 successor, as applicable, after giving effect to the transaction, will not be less than 1.40X and 75% of what it was prior to the transaction, or alternatively, with the consent of Radian, the Debt Service Coverage Ratio must be higher than it was prior to the transaction. Additions to Obligated Group. The Obligor agreed that it will not admit additional obligated group members unless: status; (a) the admission of such additional members does not cause the obligor to lose its tax exempt (b) the additional members agree to fulfill the obligations under the Master Indenture and other relevant bond documents; (c) immediately after the admission of such additional members the Obligor will not be in default in the performance of any duties, obligations or covenants under the documents; (d) an officer's certificate stating that the Obligor or successor, as applicable, immediately following the transfer, merger, or consolidation, will be able to issue at least one dollar of additional Long-Term Debt; (e) an officer's certificate stating that the Debt Service Coverage Ratio of the Obligor or successor, as applicable, after giving effect to the transaction, will not be less than 1.40X and 75% of what it was prior to the transaction, or, alternatively, with the consent of the Bond Insurer, the Debt Service Coverage Ratio must be higher than it was prior to the transaction; (f) an officer's certificate stating that the Restricted Group immediately following the addition of the member, will be in compliance with the Liquidity Covenant; and (g) admission of the additional member will not cause the interest payable on any of the obligated group's debt to become taxable under federal or state law. Withdrawal from Restricted Group. (a)the Obligor will not allow a member to withdraw from the obligated group unless: (i) the withdrawal of such member does not cause the Obligor to lose its tax exempt status; (ii) the member proposing to withdraw is not a related party with respect to any bonds outstanding under the Master Trust Indenture; (iii) immediately after the withdrawal, the members will not be in default in the performance of any duties, obligations or covenants under the documents; Debt; (iv) the obligated group will be able to issue at least one dollar of additional Long-Term (v) an officer's certificate is provided stating that the Debt Service Coverage Ratio of the Obligor or successor, as applicable, after giving effect to the withdrawal, will not be less than 1.40X and 75% of what it was prior to the transaction, or, alternatively, with the consent of Radian, the Debt Service Coverage Ratio must be higher than it was prior to the transaction; C-44

174 (vi) an officer's certificate is provided stating that the Obligor or successor, as applicable, immediately following the withdrawal of the member, will be in compliance with the Liquidity Covenant; and (vii) withdrawal of the member will not cause the interest payable on any of the obligated group's debt to become taxable under federal or state law. (b) MMC shall always be a member of the Restricted Group. Amendments to Loan Agreement The Loan Agreement may be amended, changed or modified only as provided in the Bond Indenture and the Loan Agreement. C-45

175 SUMMARY OF THE MASTER TRUST INDENTURE General The Master Indenture authorizes the Borrowers to issue Master Indenture Notes and Guaranties thereunder which are general obligations of the Corporation, secured by a pledge of the Borrowers' Gross Revenues and an assignment of the Borrowers' right, title and interest under the Contribution Agreements, which include a pledge of and security interest in the Gross Revenues of the Restricted Affiliates, and are entitled to the benefit and security of certain operational and financial restrictions and other contractual obligations contained in the Master Indenture. Such operational and financial restrictions and contractual obligations apply directly only to the Borrowers. However, the Borrowers have agreed in the Master Indenture that it will cause each Restricted Affiliate to comply with such restrictions and obligations as well. In addition, pursuant to its Contribution Agreement, each Restricted Affiliate will agree to comply with all such restrictions applicable to it. Set forth below is a summary of certain provisions of the Master Indenture primarily relating to restrictions imposed by the Borrowers on itself and its Restricted Affiliates with respect to debt service coverage requirements, the incurrence of additional indebtedness and certain other matters. Authorization of Notes and Guaranties Notes and Guaranties may be created under the Master Indenture to evidence or secure Indebtedness as permitted under the Master Indenture except Non-Recourse Indebtedness. All Notes and Guaranties issued under the Master Indenture are on a parity with each other. Payment on Notes Each of the Borrowers agrees that it will promptly pay the principal of, premium, if any, and interest on each Note in the manner and at the places required by such Note or the Supplemental Master Indenture relating thereto. The Master Indenture Note payments are to be made through the Master Trustee as paying agent, unless otherwise required by the Supplemental Master Indenture authorizing the particular series of Master Indenture Notes. In cases where a Related Trustee is the holder of a Note, payment will be made directly to the Related Trustee or its designated paying agent. However, the Borrowers are required to report each Note payment to the Master Trustee. Restriction on Pledging Revenues Each of the Borrowers agrees that it will not, and that it will not cause or permit any Restricted Affiliate to, pledge or grant a security interest in any of its Gross Revenues or other items pledged under the Master Indenture and the Contribution Agreements except as provided under the Master Indenture. Covenants as to Corporate Existence The Borrowers are required to: (i) cause each Restricted Affiliate to remain a Restricted Affiliate throughout the term of the Master Indenture, except as permitted by the Master Indenture; (ii) promptly satisfy all of its obligations and Indebtedness other than that being contested in good faith and (iii) take no action, and assure that no Restricted Affiliate which is a Tax-Exempt Organization (as defined in the Master Indenture) takes any action to cause the interest on any Related Bonds to be subject to federal income taxes. C-46

176 Rate Covenant; Accounts Receivable Each of the Borrowers covenants to set rates and charges for its facilities and to cause its Restricted Affiliates to set rates and charges such that the Long-Term Debt Service Coverage Ratio of the Restricted Group, calculated at the end of each fiscal year of the Borrowers, is not less than In addition, each of the Borrowers covenants that the net accounts receivable for the Restricted Group, as shown on the Financial Statements, will not at any time exceed thirty percent (30%) of the Total Operating Revenues of the Restricted Group, as shown on the Financial Statements. If such ratio is below 1.10 or the amount of net accounts receivable exceeds such limit, the Borrowers are required to retain a Consultant to make recommendations to increase such ratio to the required level or to the highest practicable level if, in the opinion of the Consultant, the achievement of the required level is impracticable and to make recommendations to improve methods of collection of such receivables so as to reduce the amount of net accounts receivable to the required level or to the lowest practicable level if, in the opinion of the Consultant, reduction to the required level is impracticable. The Borrowers are required to follow and to cause each Restricted Affiliate to follow the Consultant's recommendations, to the extent permitted by law. So long as the Borrower shall retain a Consultant and the Restricted Group shall follow the recommendations of such Consultant, the provisions mentioned herein shall be deemed to have been met even if such ratio for any subsequent fiscal year is below the required level or the net accounts receivable exceed the permitted level; provided that the revenues of the Restricted Group are not less than the amount required in cash to pay the operating expenses of the Restricted Group and debt service on all Indebtedness of the Restricted Group for such fiscal year. If a report of a Consultant is delivered to the Trustee stating that Governmental Restrictions have been imposed which make it impossible for the coverage requirement to be met, then such coverage requirement shall be reduced to the maximum permitted level but not below 1.00, or which make it impossible for the net accounts to receivable requirement to be met, then such requirement will be reduced to a level which can be met and still comply with such Governmental Restrictions. Limitations on Additional Indebtedness Each of the Borrowers agrees that it will not incur, nor will it permit any Restricted Affiliate to incur, any Additional Indebtedness, whether represented by Notes, Guaranties or otherwise, except as set forth in (a) through (k) below. (a) Long-Term Indebtedness, including Notes and Guaranties, may be incurred by the Borrowers or any Restricted Affiliate if there is delivered to the Master Trustee an Officer's Certificate (accompanied by the report of an independent certified public accountant) certifying that either (i) the Long-Term Debt Service Coverage Ratio for the most recent twelve (12) month period for which the Financial Statements of the Restricted Group have been reported on by certified public accountants, including the proposed Additional Indebtedness as if it had been incurred at the beginning of such period, is at least 1.50, or (ii) the Long-Term Debt Service Coverage Ratio for the most recent twelve (12) month period for which the Financial Statements of the Restricted Group have been reported on by the certified public accountants, not considering the proposed Additional Indebtedness, is at least 1.15, and the forecasted Long-Term Debt Service Coverage Ratio for each of the two (2) periods of twelve (12) consecutive months immediately following the borrowing or the completion of the facilities being financed is at least Forecasted Long-Term Debt Service Coverage Ratios must be demonstrated in pro forma combined financial statements of the Restricted Group, confirmed by a Consultant. The Borrowers and the Restricted Affiliates may incur Long-Term Indebtedness in an amount up to ten C-47

177 percent (10%) of the Total Operating Revenues of the Restricted Group for the most recent twelve (12) month period for which the Financial Statements of the Restricted Group have been reported on by certified public accountants without complying with either test. (b) Completion Indebtedness may be incurred by the Borrowers or Restricted Affiliates without limitation. (c) Long-Term Indebtedness for the purpose of refunding any Outstanding Long-Term Indebtedness may be incurred by the Borrowers or any Restricted Affiliate if it is in the best interests of the Borrowers and the Trustee receives either (i) an opinion of counsel stating that, after refunding, the Outstanding Long-Term Indebtedness to be refunded will no longer be Outstanding or (ii) evidence that the Long-Term Indebtedness to be incurred would meet the tests under (a)(i) or (ii) above. If indebtedness incurred for refunding purposes increases Maximum Annual Debt Service by 10% or more, the requirements of paragraph (a) above must be satisfied. (d) Intermediate-Term Indebtedness may be incurred by the Borrowers or any Restricted Affiliate if such Indebtedness does not, in total aggregate amount, exceed fifteen percent (15%) of the Total Operating Revenues of the Restricted Group for the most recent twelve (12) month period for which the Financial Statements of the Restricted Group were reported on by certified public accountants. (e) Short-Term Indebtedness may be incurred by the Borrowers or any Restricted Affiliate in the ordinary course of business if the aggregate of such Indebtedness outstanding, including the proposed Indebtedness, will not exceed fifteen percent (15%) of the Total Operating Revenues of the Restricted Group for the most recent twelve (12) month period for which the Financial Statements of the Restricted Group were reported on by certified public accountants; provided, however, that the Borrowers and each Restricted Affiliate is required to be free from Short-Term Indebtedness but for an amount equal to three percent (3%) of Total Operating Revenues for a period of twenty (20) consecutive days during each fiscal year. (f) Interim Indebtedness having a term of sixty (60) months or less issued in anticipation of the incurrence of Long-Term Indebtedness may be incurred by the Borrowers or any Restricted Affiliate if there is delivered to the Master Trustee an Officer's Certificate stating that the financing by Long-Term Indebtedness is reasonably expected to be completed within the next sixty (60) months and if such Interim Indebtedness would meet the tests set forth in (a)(i) or (ii) above using assumed debt service requirements, based upon a twenty (20) year amortization period and an interest rate (confirmed by an institution experienced in health care finance) at which the Borrowers or such Restricted Affiliate could secure a similar amount by issuing a twenty (20) year term note, or the actual debt service requirements for permanent financing if there is a binding commitment of a responsible financial institution to provide permanent financing within such sixty (60) month period. (g) Non-Recourse Indebtedness may be incurred by the Borrowers or any Restricted Affiliate (i) in an aggregate amount not exceeding fifteen percent (15%) of the Total Operating Revenues of the Restricted Group for the most recent period of twelve (12) full consecutive calendar months or (ii) in excess of such percentage if a Consultant determines that the facilities being financed with such Non- Recourse Indebtedness will have, for the first two twelve (12) month periods following completion of the project being financed, a projected long term debt service coverage ratio of at least (h) The Borrowers or any Restricted Affiliate is permitted to incur Balloon Long-Term Indebtedness and Optional Tender Indebtedness, in an aggregate amount outstanding up to 15% of Total Operating Revenues of the Restricted Group for the most recent period of twelve (12) full consecutive C-48

178 calendar months. The Borrowers or any Restricted Affiliate may incur Balloon Long-Term Indebtedness and Optional Tender Indebtedness, in the aggregate, in excess of such percentage if the Borrowers or the Restricted Affiliate funds a sinking fund for the amount in excess of such limit and payments into the sinking fund on account of such Indebtedness comply with the tests mentioned in (a) above. (i) Convertible Indebtedness may be incurred by the Borrowers or any Restricted Affiliate. The nature of the debt at the time it is incurred will determine the test or limit to be imposed on the Convertible Indebtedness. Upon conversion, the Indebtedness must meet the tests applicable to the type of Indebtedness into which it has been converted. (j) The Borrowers or any Restricted Affiliate is permitted to incur Variable Rate Long-Term Indebtedness if the test set forth in (a) is met with respect thereto. In determining compliance with the test set forth in (a) and in determining the Long-Term Debt Service Requirement for any period of twelve (12) full consecutive calendar months the amount of principal and interest for that period based upon the assumption that the interest rate for the whole of such twelve (12) month period on such Variable Rate Long-Term Indebtedness is equal to fifty-five percent (55%) of the Thirty (30) Year Revenue Bond Index as published in The Bond Buyer, or its successor, on the date of calculation or the next preceding date closest thereto and such calculation shall be made based on the actual term of the debt or twenty years, whichever, is less; provided, however, that if any liquidity facility supporting such Variable Rate Long- Term Indebtedness has been drawn upon, the term of the debt shall be the pay-back period permitted by such liquidity facility and the interest rate shall be the rate which is in effect on such liquidity facility. (k) The total principal amount of any Additional Indebtedness, the incurrence of which is limited to a percentage of Total Operating Revenues, may not exceed twenty-five percent (25%) of Total Operating Revenues. However, should the ability of the Restricted Group to generate sufficient revenues to pay such indebtedness, previously incurred within the percentage limits mentioned above without being reported upon by a Consultant, be reported upon by a Consultant, the percentage limits mentioned herein represented by such portion of such indebtedness so reported upon by a Consultant shall be reinstated. Guaranties Each of the Borrowers agrees that it will not, and that it will not permit any Restricted Affiliate to, enter into any Guaranty (which, in general, means an obligation guaranteeing in any manner the obligations of another person which, if that person were either of the Borrowers or such Restricted Affiliate, as the case may be, would constitute Indebtedness, unless the guaranteed obligation is other than for payment of a sum certain) of obligations of an entity which is not a member of the Restricted Group unless there is delivered to the Trustee a Consultant's report showing the total of the income available for debt service for the person whose indebtedness is being guaranteed and the Net Income Available for Debt Service for two periods of twelve (12) consecutive months following the date of the proposed Guaranty. So long as any such Guaranty shall constitute a contingent liability, only the percentage of the principal and interest which is payable annually on the Long-Term Indebtedness being guaranteed which is indicated on the following table (which percentage is derived from dividing the total mentioned in the preceding sentence by the total of the maximum annual debt service in any year thereafter on the indebtedness being guaranteed and Maximum Annual Debt Service of the Restricted Group) shall be included in the computation of the Long-Term Debt Service Requirement: C-49

179 Percent Derived From Calculation Above Percent of Guaranty to be Included 125% and below 100% 125% to 149% 75% 150% to 174% 50% 175% and above 20% Sale, Lease or Other Disposition of Operating Assets; Disposition of Liquid Assets Each of the Borrowers agrees that it will not, and that it will not permit any Restricted Affiliate to, sell, lease or otherwise dispose of Operating Assets in any fiscal year, the Book Value of which would, in the aggregate, exceed one half (1/2) of one percent (1%) of the Book Value of Property, Plant and Equipment, except in the ordinary course of business and except for transfers of Operating Assets (i) to any person if in the judgment of the Borrowers, stated in an Officer's Certificate, the Operating Assets are or will, within the next twenty-four (24) calendar months, become obsolete, worn out, unnecessary or unprofitable; (ii) to another member of the Restricted Group; (iii) to a person which is not a member of the Restricted Group if the Borrowers states in an Officer's Certificate that assuming such transfer occurred on the first day of the most recent twelve (12) month period for which the Financial Statements of the Restricted Group have been reported on by certified public accountants, the Long-Term Debt Service Coverage Ratio for such period would not have been reduced by more than twenty percent (20%) or to less than 1.50 or the average of the forecasted Long-Term Debt Service Coverage Ratios for the two (2) periods of twelve (12) consecutive months following the date of the transaction would be greater than 1.50 and not reduced to less than eighty percent (80%) of the historic level; or (iv) to an affiliate of the Borrowers which is not a Restricted Affiliate if such affiliate becomes a Restricted Affiliate pursuant to the Master Indenture. The Borrowers or any Restricted Affiliate may transfer liquid assets (i) to another member of the Restricted Group without limit or (ii) to another person provided that there is stated in an Officer's Certificate that the Long-Term Debt Service Coverage Ratio for the most recent twelve (12) month period for which the Financial Statements of the Restricted Group were reported on by certified public accountants would not be below 1.75 if the amount of Net Transfers of Liquid Assets were deducted from Income Available for Debt Service for such period. Net Transfers of Liquid Assets means (i) transfers of liquid assets during such period to any person which is not a Restricted Affiliate minus (ii) the amount of liquid assets transferred to the Borrowers or a Restricted Affiliate during such period by any person which is not a Restricted Affiliate which transfers to the Borrowers or Restricted Affiliate would, under generally accepted accounting principles, have no effect on Net Income Available for Debt Service of the Restricted Group. Consolidation and Merger Each of the Borrowers covenants that it will not, and that it will not permit any Restricted Affiliate to, merge or consolidate with any other corporation, partnership, joint venture, business trust or other entity which is not a member of the Restricted Group or sell or convey all or substantially all of its assets to any such entity who is not a member of the Restricted Group except as stated below. (a) If the Brrowers or a Restricted Affiliate is the continuing entity, immediately after such merger, consolidation, sale or conveyance (the "Corporate Action"), the Restricted Group must be in compliance with all covenants of the Master Indenture and must meet the tests mentioned under C-50

180 paragraph (a) under the heading "Limitations on Additional Indebtedness" for the incurrence of one dollar of additional Long-Term Indebtedness; and (b) If neither the Borrowers nor a Restricted Affiliate is the continuing entity, then (i) any successor entity to the Borrowers must assume the obligations of the Borrowers under the Note, and the Master Indenture and, immediately after the corporate action, the Restricted Group must be in compliance with the covenants of the Master Indenture and meet the tests mentioned under paragraph (a) under the heading "Limitations on Additional Indebtedness" for the incurrence of one dollar ($1.00) of additional Long-Term Indebtedness and (ii) any successor entity to a Restricted Affiliate must either become a Restricted Affiliate or the conditions relating to the cessation of restricted status described below under "Cessation of Status as Restricted Affiliate; Limitation On Preferred Stock" must be complied with; and (c) Such merger, consolidation or sale will not, in the Opinion of Bond Counsel, have an adverse effect on the tax-exempt status of any Related Bond. Cessation of Status as Restricted Affiliate; Limitation On Preferred Stock Each of the Borrowers covenants that it will not, and that it will not permit any Restricted Affiliate to, take any action which would cause any Restricted Affiliate to cease to be a Restricted Affiliate unless prior to taking such action there is delivered to the Master Trustee a report by a Consultant to the effect that immediately after such action (i) the Long-Term Debt Service Coverage Ratio for the most recent twelve (12) month period for which the Financial Statements of the Restricted Group were reported on by certified public accountants, assuming such action was taken at the beginning of such period, would not have been reduced by more than twenty percent (20%) or to less than 1.50 or (ii) the average of the Long-Term Debt Service Coverage Ratios for the two twelve month periods succeeding such action will be greater than 1.50 and not less than eighty percent (80%) of the figure in (i) or higher than it would have been if such action had not been taken. Each of the Borrowers also covenants that it will not permit any Restricted Affiliate to issue any equity securities the payment of any dividend on which ranks prior to payments under a Contribution Agreement or which require distribution of assets following liquidation to any person prior to distribution to another Restricted Affiliated. Addition of Restricted Affiliates Affiliates may become Restricted Affiliates upon compliance with the following conditions, among others. (a) The Affiliate's articles of incorporation, by-laws or other organic document pursuant to which the Affiliate is organized contain the Required Charter Provisions. (b) The Affiliate executes and delivers a Contribution Agreement. (c) Consultant's report shows that immediately upon such Affiliate becoming a Restricted Affiliate, the Borrowers would not be in default under the Master Indenture and the Borrowers or any Restricted Affiliate could thereupon incur at least one dollar of additional Long-Term Indebtedness. C-51

181 Depreciation Reserve Fund The Borrowers agrees to create and maintain, and agrees to cause its Restricted Affiliates to create and maintain, one or more depreciation reserve funds, and to fund the same and to restrict the expenditure of funds contained therein in accordance with the judgment of management as stated from time to time in an Officer's Certificate, such judgment to be based on standards of the industries or business, including the health care delivery industry, in which the Borrowers and, the Restricted Affiliates may be engaged from time to time. Noteholders In determining whether the requisite number of Master Indenture Noteholders have concurred in amendments to the Master Indenture, and in directing the Master Trustee to declare any Master Indenture Note immediately due and payable or to take other action upon an Event of Default, Master Indenture Notes, owned by the Borrowers, a Restricted Affiliate or affiliated entities are disregarded. Except in certain circumstances, the holders of the bonds secured by other Notes are treated as holders of an equal principal amount of each Note. No amendment of the provisions of Article V of the Master Indenture, pertaining to certain covenants of the Borrowers, may be made which would materially and adversely affect the interests of any Noteholder without the consent of all Noteholders, treating the Related Trustees and any other trustees or other persons holding a Note as Noteholders for. purposes of such consent. Default and Remedies Events of Default. An Event of Default under the Master Indenture includes any of the following events: the failure to make any payment on any Note or Guaranty when due or the failure to make any required payment into a debt service reserve fund established pursuant to any Related Bond Indentures, in either case after the expiration of any applicable grace period; the failure to observe or perform any covenant or agreement under the Master Indenture for a period of sixty (60) calendar days after written notice shall have been given to the Borrowers by the Master Trustee or to the Borrowers and the Master Trustee by Noteholders having at least twenty (20%) aggregate principal amount of Notes then Outstanding; any event of default under a Related Bond Indenture or a Related Bond; any default in the payment of any Indebtedness of the Restricted Group for borrowed moneys (other than Non-Recourse Indebtedness) and any applicable grace period shall have expired, or any default in the performance of any instrument evidencing or securing such Indebtedness; or the entry of a decree or order by a court adjudging the Borrowers or any Restricted Affiliate bankrupt or insolvent, or approving as properly filed a petition seeking reorganization or arrangement of the Borrowers or any Restricted Affiliate under the Federal Bankruptcy Code or any other similar applicable Federal or state law, or appointing a receiver, liquidator, assignee, or sequestrator (or other similar official) of any member of the Restricted Group or of any substantial part of their Property, or ordering the winding up or liquidation of their affairs, and such decree or order shall have continued undischarged and unstayed for a period of ninety (90) consecutive days; the institution by either of the Borrowers of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under the Federal Bankruptcy Code or any other 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, assignee, trustee or sequestrator (or other similar official) of any member of the Restricted Group or of any substantial part of their property, or the making by any of them of an assignment for the benefit of creditors, or the admission by any of them in writing of their inability to pay their debts generally as they become due. C-52

182 Acceleration. Upon the occurrence of any Event of Default, the Master Trustee may, and upon the request of the holders of not less than twenty percent (20%) of the principal amount of all Notes Outstanding must, declare all Notes Outstanding immediately due and payable, whereupon such Master Indenture Notes shall become and be immediately due and payable. In such event, there shall be due and payable on the Master Indenture Notes an amount equal to the total principal amount of all such Master Indenture Notes, plus all interest accrued thereon and, to the extent permitted by applicable law, which accrues to the date of payment. At any time after the principal of the Master Indenture Notes shall have been 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, if (i) the Borrowers have paid or caused to be paid or deposited with the Master Trustee moneys sufficient to pay all matured installments of interest and interest on installments of principal and interest and principal or redemption prices then due (other than the principal due only because of such declaration) of all Notes Outstanding; (ii) the Borrowers have paid or caused to be paid or deposited with the Master Trustee moneys sufficient to pay the charges, compensation, expenses, disbursements, advances and liabilities of the Master Trustee and any paying agents; (iii) all other amounts then payable by the Borrowers 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 (iv) every Event of Default (other than a default in the payment of the principal of such Master Indenture Notes then due only because of such declaration) shall have been remedied, then the Trustee may annul such declaration and its consequences with respect to any Master Indenture Notes or portion 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. 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 twenty percent (20%) in aggregate principal amount of the Notes 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 Noteholders by such proceedings as the Master Trustee deems expedient. Regardless of the happening of an Event of Default, the Master Trustee, if requested in writing by the Holders of not less than twenty percent (20%) in aggregate principal amount of the Master Indenture Notes then Outstanding, shall when indemnified to its satisfaction, institute and maintain 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 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 Holders of Notes not making such request. Application of Revenues and Other Monies After Default. During the continuance of an Event of Default all monies received by the Master Trustee, after payment of costs and expenses, shall be applied as follows: Unless the principal of all Outstanding Notes shall have been declared due and payable: First: to the payment of interest then due on the Master Indenture Notes 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 Master Indenture Notes 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 C-53

183 full all the Master Indenture Notes due on any date, then ratably, according to the amounts of principal installments due on such date, without discrimination or preference. If the principal of all Outstanding Notes 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 other installment of interest, or of any Master Indenture Note over any other Master Indenture Note, ratably, according to the amounts due respectively for principal and interest, without discrimination or preference. 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 monies 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 dates shall cease to accrue. The Master Trustee shall give notice as it may deem appropriate of such date. Noteholders' Control of Proceedings. If any Event of Default shall have occurred and be continuing, the Holders of at least a majority in aggregate principal amount of Notes then Outstanding shall have the right subject to the terms of the Master Indenture to direct the method and place of conducting any enforcement proceeding. Waiver of Events of Default. No delay or omission of the Master Trustee or of any Holder of the Notes to exercise any right or power upon an Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default. Every power and remedy given to the Master Trustee and the Holders of the Notes, 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 Notes then Outstanding, shall waive any Event of Default hereunder (except a continuing default in payment of principal, premium, if any, or interest on any Master Indenture Note which may be waived only by Holders of all the Master Indenture Notes then Outstanding) 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. 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 Borrowers with such powers as the court shall confer. Notice of Default. The Master Trustee shall, within ten (10) days after it has knowledge of the occurrence of an Event of Default, mail to all Holders of Notes as the names and addresses of such Holders appear on the books of the Master Trustee, notice of such Event of Default known to the Master Trustee unless the same shall have been cured prior to the mailing thereof; but, except in the case of nonpayment of any Notes or bankruptcy defaults, the Master Trustee may withhold such notice if it determines that such withholding is in the interests of the Holders of Notes. C-54

184 Supplements and Amendments Supplements Not Requiring Consent of Noteholders. 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 or adversely affect theinterests of the Holders; to grant or confer ratably upon all Holders any additional rights, remedies, powers or authority that may lawfully be granted 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 a series of Master Indenture Notes or a Guaranty as permitted under the Master Indenture; to obligate a successor to the Borrowers; and to amend the covenants on provisions of the Master Indenture in the event there is a material change in the method or practices of third party reimbursement. Supplements Requiring Consent of Noteholders. Other than supplements referred to in the preceding paragraph, the Holders of not less than fifty-one percent (51%) in aggregate principal amount of the Master Indenture Notes then Outstanding have the right to approve execution of Supplements modifying, in any particular, the Master Indenture and becoming a part of the Master Indenture, except a Supplement which would: extend the stated maturity of or time for paying interest on any Master Indenture Note or reduce the principal amount of or the redemption premium or ratio of interest payable on any Master Indenture Note without the consent of the Holder of such Master Indenture Note; modify, alter, amend, add to or rescind any of the terms or provisions concerning covenants of the Borrowers and the Restricted Affiliates contained in Article V of the Master Indenture in any manner which would materially and adversely affect the interests of the Noteholders or any of them without the consent of the Holders of all Master Indenture Notes then outstanding; or reduce the aggregate principal amount of Master Indenture Notes then outstanding the consent of which is required for Supplements without the consent of the Holders of all Master Indenture Notes then outstanding. All Supplements executed pursuant to the Master Indenture shall be binding on all Holders of Master Indenture Notes. Execution and Effect of Supplements. In executing any Supplement, the Master Trustee may rely upon an Opinion of Counsel stating that the execution of such Supplement is authorized or permitted by the Master Indenture. C-55

185 APPENDIX D: SUMMARY OF AUCTION RATE PROCEDURES

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187 Summary of Auction Rate Procedures The following Auction Procedures apply to the 2005 Variable Rate Bonds while they are Auction Rate Securities. Definitions Agent Member means a member of, or participant in, the Securities Depository who will act on behalf of a Bidder. All Hold Rate means, as of any Auction Date, a per annum rate equal to 55% of the Auction Rate Index in effect on such Auction Date. Auction means each periodic implementation of the Auction Procedures. Auction Agent means the auction agent appointed in accordance with the provisions of the Bond Indenture summarized under the captions Auction Agent and Qualifications of the Auction Agent; Resignation; Removal below and shall initially be Wilmington Trust Company. Auction Agreement means an agreement, the terms and provisions of which are acceptable to the related Bond Insurer, among the Auction Agent and the Restricted Group Agent pursuant to which the Auction Agent agrees to follow the procedures specified in the Bond Indenture and summarized in this APPENDIX D, as such agreement may from time to time be amended or supplemented. Auction Date means the Business Day immediately preceding the first day of each Auction Period (or such other day that the Auction Agent shall establish as the Auction Date therefor pursuant to the provisions of the Bond Indenture summarized in paragraph (b) under the caption Changes in Auction Period or Auction Date below); provided, however, that the last Auction Date in an Auction Period shall be the earlier of (i) the Business Day next preceding the last Scheduled Interest Payment Date before a Mode Change Date and (ii) the Business Day next preceding the last Scheduled Interest Payment Date before the Maturity Date. Auction Period means for any Auction Rate Security while it is in the Auction Mode: (i) the period from and including any Auction Mode Change Date, to and including the first Auction Date following such Auction Mode Change Date, as applicable; and (ii) thereafter until a Mode Change Date or until the Maturity Date of such Auction Rate Security, each period of seven days (unless changed as described in the provisions of the Bond Indenture summarized under the caption Changes in Auction Period or Auction Date below) from and including the last Scheduled Interest Payment Date for the immediately preceding Auction Period, to and including the next succeeding Auction Date or, in the event of an Auction Period with an Scheduled Interest Payment Date on a Monday, the Sunday following the next succeeding Auction Date, or in the event of a change to a different Mode, to but excluding the Mode Change Date; provided, if any day that would be the last day of any such period does not immediately precede a Business Day, such period shall end on the next day which immediately precedes a Business Day. D-1

188 Auction Procedures means the procedures for conducting Auctions for the Auction Rate Securities during an Auction Period set forth in the Bond Indenture and summarized in this APPENDIX D. Auction Rate means the rate of interest to be borne by the Auction Rate Securities during each Auction Period, not greater than the Maximum Rate, determined in accordance with certain provisions of the Bond Indenture and the provisions of the Bond Indenture summarized under the caption Determination of Auction Rate below which (i) if Sufficient Clearing Bids exist, will be the Winning Bid Rate; provided, however, that if all of the Auction Rate Securities are the subject of Submitted Hold Orders, the Auction Rate will be the All Hold Rate and (ii) if Sufficient Clearing Bids do not exist, will be the Maximum Rate. Auction Rate Index has the meaning specified in the provisions of the Bond Indenture summarized under the caption Auction Rate Index below. Auction Rate Securities means the 2005 Variable Rate Bonds bearing interest in the Auction Rate Mode. Auction Mode Change Date means the date on which the Auction Rate Securities convert from a Mode other than an Auction Mode and begin to bear interest at an Auction Rate. Auction Rate Securities means the Bonds during any Auction Period. Available Bonds means the aggregate principal amount of the Auction Rate Securities that are not the subject of Submitted Hold Orders. Beneficial Owner of Auction Rate Securities means the customer of the Broker-Dealer for such Auction Rate Securities who is listed on the records of that Broker-Dealer (or, if applicable, the Auction Agent) as the holder of such Auction Rate Securities. Bid has the meaning specified in the provisions of the Bond Indenture summarized in paragraph (a) under the caption Orders by Existing Owners and Potential Owners below. Bidder means each Existing Owner and Potential Owner who places an Order. Broker-Dealer means any entity that is permitted by law to perform the function required of the Broker-Dealer as described in this APPENDIX D that is a member of, or a direct participant in, the Securities Depository, that has been selected by the Restricted Group Agent, and that is a party to the Broker-Dealer Agreement with the Auction Agent. Broker-Dealer Agreement means an agreement between the Auction Agent and the Broker- Dealer pursuant to which the Broker-Dealer agrees to follow the procedures specified in this APPENDIX D, as such agreement may from to time be amended or supplemented. Broker-Dealer Rate means a rate of 0.25% or such different rate as may be established pursuant to the Broker-Dealer Agreement, provided that the Broker-Dealer Rate must be the same in all Broker-Dealer Agreements. Existing Owner means a Person or the Broker-Dealer who is listed as the Beneficial Owner of the Auction Rate Securities in the records of the Auction Agent. D-2

189 Hold Order has the meaning specified in the provisions of the Bond Indenture summarized in paragraph (a) under the caption Orders by Existing Owners and Potential Owners below. Initial Auction Rate means for any Additional 2005 Bonds issued bearing interest in the Auction Mode or any subsequent occurrence of an Auction Mode Change Date, the period specified in a supplement to the Bond Indenture. LIBOR has the meaning specified in the provisions of the Bond Indenture summarized in paragraph (a) under the caption Auction Rate Index below. Order means a Hold Order, Bid or Sell Order. Potential Owner means any Person, including any Existing Owner, who may be interested in acquiring a beneficial interest in Auction Rate Securities in addition to the Auction Rate Securities at the time owned by such Person, if any. Principal Office of the Auction Agent means the office of the Auction Agent designated in writing to the Authority, the Bond Trustee, and each Broker-Dealer. Securities Depository means The Depository Trust Company and its successors and assigns or any other securities depository selected by the Bond Trustee which agrees to follow the procedures required to be followed by such securities depository in connection with the Auction Rate Securities. Sell Order has the meaning specified in the provisions of the Bond Indenture summarized in paragraph (a) under the caption Orders by Existing Owners and Potential Owners below. Submission Deadline means 1:00 p.m., New York City time, on each Auction Date, or such other time on such date as shall be specified from time to time by the Auction Agent pursuant to the Auction Agreement as the time by which Broker-Dealers are required to submit Orders to the Auction Agent. Submitted Bid has the meaning specified in the provisions of the Bond Indenture summarized in paragraph (b) under the caption Determination of Auction Rate below. Submitted Hold Order has the meaning specified in the provisions of the Bond Indenture summarized in paragraph (b) under the caption Determination of Auction Rate below. Submitted Order has the meaning specified in the provisions of the Bond Indenture summarized in paragraph (b) under the caption Determination of Auction Rate below. Submitted Sell Order has the meaning specified in the provisions of the Bond Indenture summarized in paragraph (b) under the caption Determination of Auction Rate below. Sufficient Clearing Bids means an Auction for which the aggregate principal amount of the Auction Rate Securities that are the subject of Submitted Bids by Potential Owners specifying one or more rates not higher than the Maximum Rate is not less than the aggregate principal amount of the Auction Rate Securities that are the subject of Submitted Sell Orders and of Submitted Bids by Existing Owners specifying rates higher than the Maximum Rate. D-3

190 Winning Bid Rate means the lowest rate in any Submitted Bid which, if selected by the Auction Agent as the Auction Rate, would cause the aggregate principal amount of Auction Rate Securities that are the subject of Submitted Bids specifying rates not greater than such rate to be at least equal to the aggregate principal amount of Available Bonds. Auction Procedures While the Auction Rate Securities bear interest at the Auction Rate, Auctions shall be conducted on each Auction Date (other than the Auction Date immediately preceding each Auction Period commencing after the ownership of the Auction Rate Securities is no longer maintained in the book-entry system pursuant to the Bond Indenture). If there is an Auction Agent on such Auction Date, Auctions shall be conducted in the manner set forth in the Bond Indenture and summarized in this APPENDIX D. Orders by Existing Owners and Potential Owners (a) Prior to the Submission Deadline on each Auction Date: (i) each Existing Owner may submit to the Broker-Dealer, in writing or by such other method as shall be reasonably acceptable to the Broker-Dealer, information as to: (A) the principal amount of the Auction Rate Securities, if any, held by such Existing Owner which such Existing Owner irrevocably commits to continue to hold for the next succeeding Auction Period without regard to the rate determined by the Auction Procedures for such Auction Period, (B) the principal amount of the Auction Rate Securities, if any, held by such Existing Owner which such Existing Owner irrevocably commits to continue to hold for the next succeeding Auction Period if the rate determined by the Auction Procedures for such Auction Period shall not be less than the rate per annum then specified by such Existing Owner (and which such Existing Owner irrevocably offers to sell on the next succeeding Scheduled Interest Payment Date if the rate determined by the Auction Procedures for the next succeeding Auction Period shall be less than the rate per annum then specified by such Existing Owner), and/or (C) the principal amount of the Auction Rate Securities, if any, held by such Existing Owner which such Existing Owner irrevocably offers to sell on the next succeeding Scheduled Interest Payment Date without regard to the rate determined by the Auction Procedures for the next succeeding Auction Period; and (ii) for the purpose of implementing the Auctions and thereby to achieve the lowest possible interest rate on the Auction Rate Securities, the Broker-Dealer shall contact Potential Owners, including Persons that are Existing Owners, to determine the principal amount of the Auction Rate Securities, if any, which each such Potential Owner irrevocably offers to purchase if the rate determined by the Auction Procedures for the next succeeding Auction Period is not less than the rate per annum then specified by such Potential Owner. An Order containing the information referred to in clause (i)(a) of this paragraph (a) is herein referred to as a Hold Order, an Order containing the information referred to in clause (i)(b) or clause (ii) of this paragraph (a) is herein referred to as a Bid, and an Order containing the information referred to in clause (i)(c) of this paragraph (a) is herein referred to as a Sell Order. D-4

191 (b)(i) A Bid by an Existing Owner shall constitute an irrevocable offer to sell: (A) the principal amount of the Auction Rate Securities specified in such Bid if the rate determined by the Auction Procedures on such Auction Date shall be less than the rate specified therein; or (B) such principal amount or a lesser principal amount of the Auction Rate Securities to be determined as set forth in subparagraph (a)(v) under the caption Allocation of the Auction Rate Securities if the rate determined by the Auction Procedures on such Auction Date shall be equal to such specified rate; or (C) a lesser principal amount of the Auction Rate Securities to be determined as set forth in subparagraph (b)(iv) under the caption Allocation of the Auction Rate Securities if such specified rate shall be higher than the Maximum Rate and Sufficient Clearing Bids do not exist. (ii) A Sell Order by an Existing Owner shall constitute an irrevocable offer to sell: (A) Order; or the principal amount of the Auction Rate Securities specified in such Sell (B) such principal amount or a lesser principal amount of the Auction Rate Securities as set forth in subparagraph (b)(iv) under the caption Allocation of the Auction Rate Securities if Sufficient Clearing Bids do not exist. (iii) A Bid by a Potential Owner shall constitute an irrevocable offer to purchase: (A) the principal amount of the Auction Rate Securities specified in such Bid if the rate determined by the Auction Procedures on such Auction Date shall be higher than the rate specified therein; or (B) such principal amount or a lesser principal amount of the Auction Rate Securities as set forth in subparagraph (a)(vi) under the caption Allocation of the Auction Rate Securities if the rate determined by the Auction Procedures on such Auction Date shall be equal to such specified rate. (C) Anything in the Bond Indenture to the contrary notwithstanding: (1) for purposes of any Auction, any Order which specifies the Auction Rate Securities to be held, purchased or sold in a principal amount which is not $25,000 or an integral multiple thereof shall be rounded down to the nearest $25,000, and the Auction Agent shall conduct the Auction Procedures as if such Order had been submitted in such lower amount; (2) for purposes of any Auction, any portion of an Order of an Existing Owner which relates to an Auction Rate Security which has been called for redemption on or prior to the Scheduled Interest Payment Date next succeeding such Auction shall be invalid with respect to such portion and the Auction Agent shall conduct the Auction Procedures as if such portion of such Order had not been submitted; and D-5

192 (3) for purposes of any Auction, no portion of an Auction Rate Security which has been called for redemption on or prior to the Scheduled Interest Payment Date next succeeding such Auction shall be included in the calculation of Available Bonds for such Auction. Submission of Orders by Broker-Dealers to Auction Agent (a) Each Broker-Dealer shall submit to the Auction Agent in writing or by such other method as shall be reasonably acceptable to the Auction Agent, prior to the Submission Deadline on each Auction Date, all Orders obtained by the Broker-Dealer and specifying with respect to each Order: (i) (ii) of such Order; (iii) the name of the Bidder placing such Order; the aggregate principal amount of the Auction Rate Securities that are the subject to the extent that such Bidder is an Existing Owner: (A) the principal amount of the Auction Rate Securities, if any, subject to any Hold Order placed by such Existing Owner; (B) the principal amount of the Auction Rate Securities, if any, subject to any Bid placed by such Existing Owner and the rate specified in such Bid; and (C) the principal amount of the Auction Rate Securities, if any, subject to any Sell Order placed by such Existing Owner; and (iv) to the extent such Bidder is a Potential Owner, the rate specified in such Bid. (b) If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent shall round such rate up to the next highest one thousandth of one percent (0.001%). (c) If an Order or Orders covering all of the Auction Rate Securities held by an Existing Owner is not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold Order to have been submitted on behalf of such Existing Owner covering the principal amount of the Auction Rate Securities held by such Existing Owner and not subject to Orders submitted to the Auction Agent; provided, however, that if there is a conversion from one Auction Period to another Auction Period and Orders have not been submitted to the Auction Agent prior to the Submission Deadline covering the aggregate principal amount of the Auction Rate Securities held by such Existing Owner, the Auction Agent shall deem a Sell Order to have been submitted on behalf of such Existing Owner covering the principal amount of the Auction Rate Securities held by such Existing Owner not subject to Orders submitted to the Auction Agent. (d) If one or more Orders covering in the aggregate more than the principal amount of the Outstanding Auction Rate Securities held by any Existing Owner are submitted to the Auction Agent, such Orders shall be considered valid as follows: (i) all Hold Orders shall be considered Hold Orders, but only up to and including in the aggregate the principal amount of the Auction Rate Securities held by such Existing Owner; D-6

193 (ii) (A) any Bid of an Existing Owner shall be considered valid as a Bid of an Existing Owner up to and including the excess of the principal amount of the Auction Rate Securities held by such Existing Owner over the principal amount of the Auction Rate Securities subject to Hold Orders referred to in subparagraph (d)(i) above; (B) subject to clause (A), all Bids of an Existing Owner with the same rate shall be aggregated and considered a single Bid of an Existing Owner up to and including the excess of the principal amount of the Auction Rate Securities held by such Existing Owner over the principal amount of the Auction Rate Securities held by such Existing Owner subject to Hold Orders referred to in subparagraph (d)(i) above, (C) subject to clause (A), if more than one Bid with different rates is submitted on behalf of such Existing Owner, such Bids shall be considered Bids of an Existing Owner in the ascending order of their respective rates up to the amount of the excess of the principal amount of the Auction Rate Securities held by such Existing Owner over the principal amount of the Auction Rate Securities held by such Existing Owner subject to Hold Orders referred to in subparagraph (d)(i) above, and (D) the principal amount, if any, of such Auction Rate Securities subject to Bids not considered to be Bids of an Existing Owner under this subparagraph (d)(ii) shall be treated as the subject of a Bid by a Potential Owner; and (iii) all Sell Orders shall be considered Sell Orders, but only up to and including a principal amount of the Auction Rate Securities equal to the excess of the principal amount of the Auction Rate Securities held by such Existing Owner over the sum of the principal amount of the Auction Rate Securities considered to be subject to Hold Orders pursuant to subparagraph (d)(i) above and the principal amount of the Auction Rate Securities considered to be subject to Bids of such Existing Owner pursuant to subparagraph (d)(ii) above. (e) If more than one Bid is submitted on behalf of any Potential Owner, each Bid submitted with the same rate shall be aggregated and considered a single Bid and each Bid submitted with a different rate shall be considered a separate Bid with the rate and the principal amount of the Auction Rate Securities specified therein. (f) The Restricted Group Agent, the Authority, the Bond Trustee, and the Auction Agent shall not be responsible for the failure of the Broker-Dealer to submit an Order to the Auction Agent on behalf of any Existing Owner or Potential Owner. Determination of Auction Rate (a) Not later than 9:30 a.m., New York City time, on each Auction Date, the Auction Agent shall advise the Broker-Dealer and the Bond Trustee by telephone of the All Hold Rate and the Auction Rate Index. (b) Promptly after the Submission Deadline on each Auction Date, the Auction Agent shall assemble all Orders submitted or deemed submitted to it by the Broker-Dealer (each such Order as submitted or deemed submitted by the Broker-Dealer being hereinafter referred to as a Submitted Hold Order, a Submitted Bid or a Submitted Sell Order, as the case may be, and collectively as a Submitted Order ) and shall determine (i) the Available Bonds, (ii) whether there are Sufficient Clearing Bids, and (iii) the Auction Rate. D-7

194 (c) Promptly after the Auction Agent has made the determinations pursuant to paragraph (b) above, the Auction Agent shall advise the Bond Trustee and the Restricted Group Agent by telephone (promptly confirmed in writing), telex or facsimile transmission of the Auction Rate for the next succeeding Auction Period. (d) In the event the Auction Agent shall fail to calculate, or for any reason shall fail to timely provide the Auction Rate for any Auction Period, (i) if the preceding Auction Period was a period of 28 days or less, the new Auction Period shall be the same as the preceding Auction Period and the Auction Rate for the new Auction Period shall be the same as the Auction Rate for the preceding Auction Period, and (ii) if the preceding Auction Period was a period of greater than 28 days, the preceding Auction Period shall be extended to the seventh day following the day that would have been the last day of such Auction Period had it not been extended (or if such seventh day is not followed by a Business Day then to the next succeeding day which is followed by a Business Day) and the Auction Rate in effect for the preceding Auction Period shall continue in effect for the Auction Period as so extended. In the event the Auction Period is extended as set forth in clause (ii) of the preceding sentence, an Auction shall be held on the last Business Day of the Auction Period as so extended. (e) In the event of a failed change of Mode to a Unit Pricing Mode, a Daily Mode, a Weekly Mode, an R-FLOATs Mode, a Term Rate Mode or a Fixed Rate Mode, or in the event of a failure to change the length of the current Auction Period due to the lack of Sufficient Clearing Bids at the Auction on the Auction Date for the first new Auction Period, the Auction Period shall automatically convert to a seven day period commencing on the failed conversion or change date and the interest borne by the Auction Rate Securities during the Auction Period commencing on such failed Mode Change Date shall be the Maximum Rate until the first Auction Date after the proposed conversion or change date. (f) In the event that the Auction Rate Securities are not rated or if the Auction Rate Securities are no longer held in book-entry form by the Securities Depository, no Auctions will be held and the Auction Rate for the Auction Rate Securities shall be the Maximum Rate. (g) The Auction Procedures shall be suspended during the period commencing on the date of the Auction Agent s receipt of notice from the Bond Trustee or the Restricted Group Agent of the occurrence of an event of default under the Bond Indenture resulting from a failure by the Authority to pay principal, premium or interest on any Auction Rate Security when due, together with the failure by the Bond Insurer to honor its obligations under the Insurance Policy, but shall resume two Business Days after the date on which the Auction Agent receives written notice from the Bond Trustee that such Event of Default (or failure by the Bond Insurer) has been waived or cured, with the next Auction to occur on the next regularly scheduled Auction Date occurring thereafter. The Auction Rate during this period shall be the Maximum Rate. Allocation of the Auction Rate Securities (a) In the event of Sufficient Clearing Bids, subject to the further provisions of paragraphs (c) and (d) below, Submitted Orders shall be accepted or rejected in the following order of priority: (i) the Submitted Hold Order of each Existing Owner shall be accepted, thus requiring each such Existing Owner to continue to hold the Auction Rate Securities that are the subject of such Submitted Hold Order; (ii) the Submitted Sell Order of each Existing Owner shall be accepted and the Submitted Bid of each Existing Owner specifying any rate that is higher than the Winning Bid D-8

195 Rate shall be rejected, thus requiring each such Existing Owner to sell the Auction Rate Securities that are the subject of such Submitted Sell Order or Submitted Bid; (iii) the Submitted Bid of each Existing Owner specifying any rate that is lower than the Winning Bid Rate shall be accepted, thus requiring each such Existing Owner to continue to hold the Auction Rate Securities that are the subject of such Submitted Bid; (iv) the Submitted Bid of each Potential Owner specifying any rate that is lower than the Winning Bid Rate shall be accepted, thus requiring each such Potential Owner to purchase the Auction Rate Securities that are the subject of such Submitted Bid; (v) the Submitted Bid of each Existing Owner specifying a rate that is equal to the Winning Bid Rate shall be accepted, thus requiring each such Existing Owner to continue to hold the Auction Rate Securities that are the subject of such Submitted Bid, but only up to and including the principal amount of the Auction Rate Securities obtained by multiplying (A) the aggregate principal amount of the Outstanding Auction Rate Securities which are not the subject of Submitted Hold Orders described in subparagraph (a)(i) above or of Submitted Bids described in subparagraphs (a)(iii) or (a)(iv) above by (B) a fraction the numerator of which shall be the principal amount of the Outstanding Auction Rate Securities held by such Existing Owner subject to such Submitted Bid and the denominator of which shall be the aggregate principal amount of the Outstanding Auction Rate Securities subject to such Submitted Bids made by all such Existing Owners that specified a rate equal to the Winning Bid Rate, and the remainder, if any, of such Submitted Bid shall be rejected, thus requiring each such Existing Owner to sell any excess amount of the Auction Rate Securities; (vi) the Submitted Bid of each Potential Owner specifying a rate that is equal to the Winning Bid Rate shall be accepted, thus requiring each such Potential Owner to purchase the Auction Rate Securities that are the subject of such Submitted Bid, but only in an amount equal to the principal amount of the Auction Rate Securities obtained by multiplying (A) the aggregate principal amount of the Outstanding Auction Rate Securities which are not the subject of Submitted Hold Orders described in subparagraph (a)(i) above or of Submitted Bids described in subparagraphs (a)(iii), (a)(iv) or (a)(v) above by (B) a fraction the numerator of which shall be the principal amount of the Outstanding Auction Rate Securities subject to such Submitted Bid and the denominator of which shall be the sum of the aggregate principal amount of the Outstanding Auction Rate Securities subject to such Submitted Bids made by all such Potential Owners that specified a rate equal to the Winning Bid Rate, and the remainder of such Submitted Bid shall be rejected; and (vii) the Submitted Bid of each Potential Owner specifying any rate that is higher than the Winning Bid Rate shall be rejected. (b) In the event there are not Sufficient Clearing Bids, subject to the further provisions of paragraphs (c) and (d) below, Submitted Orders shall be accepted or rejected as follows in the following order of priority: (i) the Submitted Hold Order of each Existing Owner shall be accepted, thus requiring each such Existing Owner to continue to hold the Auction Rate Securities that are the subject of such Submitted Hold Order; D-9

196 (ii) the Submitted Bid of each Existing Owner specifying any rate that is not higher than the Maximum Rate shall be accepted, thus requiring each such Existing Owner to continue to hold the Auction Rate Securities that are the subject of such Submitted Bid; (iii) the Submitted Bid of each Potential Owner specifying any rate that is not higher than the Maximum Rate shall be accepted, thus requiring each such Potential Owner to purchase the Auction Rate Securities that are the subject of such Submitted Bid; (iv) the Submitted Sell Orders of each Existing Owner shall be accepted as Submitted Sell Orders and the Submitted Bids of each Existing Owner specifying any rate that is higher than the Maximum Rate shall be deemed to be and shall be accepted as Submitted Sell Orders, in both cases only up to and including the principal amount of the Auction Rate Securities obtained by multiplying (A) the aggregate principal amount of the Auction Rate Securities subject to Submitted Bids described in subparagraph (b)(iii) by (B) a fraction the numerator of which shall be the principal amount of the Outstanding Auction Rate Securities held by such Existing Owner subject to such Submitted Sell Order or such Submitted Bid deemed to be a Submitted Sell Order and the denominator of which shall be the principal amount of the Outstanding Auction Rate Securities subject to all such Submitted Sell Orders and such Submitted Bids deemed to be Submitted Sell Orders, and the remainder of each such Submitted Sell Order or Submitted Bid shall be deemed to be and shall be accepted as a Hold Order and each such Existing Owner shall be required to continue to hold such excess amount of the Auction Rate Securities; and (v) the Submitted Bid of each Potential Owner specifying any rate that is higher than the Maximum Rate shall be rejected. (c) If, as a result of the procedures described in paragraph (a) or (b) above, any Existing Owner or Potential Owner would be required to purchase or sell an aggregate principal amount of Auction Rate Securities which is not an integral multiple of $25,000 on any Auction Date, the Auction Agent shall by lot round up or down the principal amount of the Auction Rate Securities to be purchased or sold by any Existing Owner or Potential Owner on such Auction Date so that the aggregate principal amount of the Auction Rate Securities purchased or sold by each Existing Owner or Potential Owner on such Auction Date shall be an integral multiple of $25,000, even if such allocation results in one or more of such Existing Owners or Potential Owners not purchasing or selling any of the Auction Rate Securities on such Auction Date. (d) If, as a result of the procedures described in paragraph (a) above, any Potential Owner would be required to purchase less than $25,000 in principal amount of the Auction Rate Securities on any Auction Date, the Auction Agent shall by lot allocate the Auction Rate Securities for purchase among Potential Owners so that the principal amount of Auction Rate Securities purchased on such Auction Date by any Potential Owner shall be an integral multiple of $25,000, even if such allocation results in one or more of such Potential Owners not purchasing the Auction Rate Securities on such Auction Date. Notice of Auction Rate (a) On each Auction Date, the Auction Agent shall notify by telephone each Broker-Dealer that participated in the Auction held on such Auction Date and submitted an Order on behalf of any Existing Owner or Potential Owner of: (i) the Auction Rate fixed for the succeeding Auction Period; D-10

197 (ii) Bid Rate; whether Sufficient Clearing Bids existed for the determination of the Winning (iii) if the Broker-Dealer submitted a Bid or a Sell Order on behalf of an Existing Owner, whether such Bid or Sell Order was accepted or rejected, in whole or in part, and the principal amount of the Auction Rate Securities, if any, to be sold by such Existing Owner; (iv) if the Broker-Dealer submitted a Bid on behalf of a Potential Owner, whether such Bid was accepted or rejected, in whole or in part, and the principal amount of the Auction Rate Securities, if any, to be purchased by such Potential Owner; (v) if the aggregate principal amount of the Auction Rate Securities to be sold by all Existing Owners on whose behalf the Broker-Dealer submitted Bids or Sell Orders is different from the aggregate principal amount of the Auction Rate Securities to be purchased by all Potential Owners on whose behalf the Broker-Dealer submitted a Bid, the name or names of one or more Broker-Dealers (and the Agent Member, if any, of each such other Broker-Dealer) and the principal amount of the Auction Rate Securities to be (A) purchased from one or more Existing Owners on whose behalf such other Broker-Dealers submitted Bids or Sell Orders or (B) sold to one or more Potential Owners on whose behalf the Broker-Dealer submitted Bids; and (vi) the immediately succeeding Auction Date. (b) On each Auction Date, each Broker-Dealer that submitted an Order on behalf of any Existing Owner or Potential Owner shall: (i) advise each Existing Owner and Potential Owner on whose behalf the Broker- Dealer submitted a Bid or Sell Order whether such Bid or Sell Order was accepted or rejected, in whole or in part; (ii) instruct each Potential Owner on whose behalf the Broker-Dealer submitted a Bid that was accepted, in whole or in part, to instruct such Potential Owner s Agent Member to pay to the Broker-Dealer (or its Agent Member) through the Securities Depository the amount necessary to purchase the principal amount of the Auction Rate Securities to be purchased pursuant to such Bid against receipt of such Auction Rate Securities; (iii) instruct each Existing Owner on whose behalf the Broker-Dealer submitted a Sell Order that was accepted or a Bid that was rejected, in whole or in part, to instruct such Existing Owner s Agent Member to deliver to the Broker-Dealer (or its Agent Member) through the Securities Depository the principal amount of the Auction Rate Securities to be sold pursuant to such Bid or Sell Order against payment therefor; (iv) advise each Existing Owner on whose behalf the Broker-Dealer submitted an Order and each Potential Owner on whose behalf the Broker-Dealer submitted a Bid of the Auction Rate for the next succeeding Auction Period; (v) advise each Existing Owner on whose behalf the Broker-Dealer submitted an Order of the Auction Date of the next succeeding Auction; and (vi) advise each Potential Owner on whose behalf the Broker-Dealer submitted a Bid that was accepted, in whole or in part, of the Auction Date of the next succeeding Auction. D-11

198 (c) On the basis of the information provided to it pursuant to paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell Order shall allocate any funds received by it pursuant to subparagraph (b)(ii) above, and any Auction Rate Securities received by it pursuant to subparagraph (b)(iii) above, among the Potential Owners, if any, on whose behalf the Broker-Dealer submitted Bids, the Existing Owners, if any, on whose behalf the Broker-Dealer submitted Bids or Sell Orders, and any Broker-Dealer identified to it by the Auction Agent pursuant to subparagraph (a)(v) above. (d) On the Business Day after the Auction Date, the Securities Depository shall execute the transactions described above, debiting and crediting the accounts of the respective Agent Members as necessary to effect the purchase and sale of Auction Rate Securities as determined in the Auction. Auction Rate Index (a) The Auction Rate Index on any Auction Date shall be LIBOR. LIBOR means, on any date of determination for an Auction Period, the offered rate (rounded up to the next highest one one-thousandth of one percent (0.001%)) for deposits in U.S. dollars for a onemonth period which appears on the Telerate Page 3750 at approximately 11:00 a.m., London time, on such date, or if such date is not a date on which dealings in U.S. dollars are transacted in the London interbank market, then on the next preceding day on which such dealings were transacted in such market. (b) If for any reason on any Auction Date, the Auction Rate Index shall not be determined as provided for above, the Auction Rate Index shall be the Auction Rate Index for the Auction Period ending on such Auction Date. (c) The determination of the Auction Rate Index shall be conclusive and binding upon the Authority, the Restricted Group Agent, the Bond Trustee, the related Bond Insurer, the Broker-Dealer, the Auction Agent and the Holders and Beneficial Owners of the Auction Rate Securities. Miscellaneous Provisions Regarding Auctions (a) In this APPENDIX D, each reference to the purchase, sale or holding of Auction Rate Securities shall refer to beneficial interests in the Auction Rate Securities, unless the context clearly requires otherwise. (b) During an Auction Period, with the prior written consent of each Bond Insurer, the provisions of the Bond Indenture summarized in this APPENDIX D including, without limitation, the definitions of All-Hold Rate, Auction Rate Index, Maximum Rate, Scheduled Interest Payment Date and Auction Rate may be amended pursuant to the Bond Indenture. If the amendment is pursuant to the provisions of the Bond Indenture summarized in APPENDIX C under the caption SUMMARY OF THE BOND INDENTURES Modification or Amendment of the Bond Indenture, on the first Auction Date occurring at least 20 days after the date on which the Bond Trustee mailed notice of such proposed amendment to the Holders of the Outstanding Auction Rate Securities affected by such amendment, as required by such provisions, (i) Sufficient Clearing Bids have been received or all of the Auction Rate Securities are subject to Submitted Hold Orders, and (ii) there is delivered to the Authority and the Bond Trustee a Favorable Opinion of Bond Counsel with respect to such amendment, the proposed amendment shall be deemed to have been consented to by the Holders of all Outstanding Auction Rate Securities affected by such amendment. D-12

199 (c) During an Auction Period, so long as the ownership of the Auction Rate Securities is maintained in book-entry form by the Securities Depository, an Existing Owner or a Beneficial Owner may sell, transfer or otherwise dispose of an Auction Rate Security only pursuant to a Bid or Sell Order in accordance with the Auction Procedures or to or through the Broker-Dealer, provided that (i) in the case of all transfers other than pursuant to Auctions, such Existing Owner or its Broker-Dealer or its Agent Member advises the Auction Agent of such transfer and (ii) a sale, transfer or other disposition of the Auction Rate Securities from a customer of the Broker-Dealer who is listed on the records of that Broker- Dealer as the Holder of such Auction Rate Securities to that Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to be a sale, transfer or other disposition for purposes of the provisions of the Bond Indenture summarized under this caption if the Broker-Dealer remains the Existing Owner of the Auction Rate Securities so sold, transferred or disposed of immediately after such sale, transfer or disposition. Changes in Auction Period or Auction Date (a) Changes in Auction Period (i) During any Auction Period, the Restricted Group Agent may, from time to time, on any Scheduled Interest Payment Date, change the length of any Auction Period with respect to the Auction Rate Securities to a period of any integral multiple of 7 days or to a six-month or any integral multiple of six months Auction Period (provided that the length of the first Auction Period after such change in length or a change in Auction Date may be the number of days necessary to result in the immediately following Auction Period having a length which is an integral multiple of seven days or six months, as applicable) in order to accommodate economic and financial factors that may affect or be relevant to the length of the Auction Period and the interest rate borne by such Auction Rate Securities. The Restricted Group Agent shall initiate the change in the length of the Auction Period by giving written notice at least 10 Business Days prior to the Auction Date for such Auction Period to the Authority, the Bond Trustee, the Auction Agent, the Broker-Dealer, the related Bond Insurer and the Securities Depository that the Auction Period for the Bonds specified in such notice will change if the conditions described in the Bond Indenture and summarized herein are satisfied and the proposed effective date of the change. Any notice of a change in the length of an Auction Period shall be accompanied by a Favorable Opinion of Bond Counsel. (ii) Except as permitted by the proviso appearing in subparagraph (a)(i) immediately above, any such changed Auction Period shall be for a period of any integral multiple of 7 days or for a period of six months or any integral multiple of six months and shall be for all of the Auction Rate Securities identified in the Borrower s notice referred to in subparagraph (a)(i) immediately above. (iii) The change in the length of the Auction Period shall not be allowed unless Sufficient Clearing Bids existed at both the Auction before the date on which the notice of the proposed change was given as provided in this paragraph (a) and the Auction immediately preceding the proposed change. (iv) The change in length of the Auction Period shall take effect only if Sufficient Clearing Bids exist at the Auction on the Auction Date for such first Auction Period. For purposes of the Auction for such first Auction Period only, each Existing Owner shall be deemed to have submitted Sell Orders with respect to all of its Auction Rate Securities except to the extent such Existing Owner submits an Order with respect to such Auction Rate Securities. If the D-13

200 condition referred to in the first sentence of this subparagraph (a)(iv) is not met, the Auction Rate for the next Auction Period shall be the Maximum Rate, and the Auction Period shall be a sevenday Auction Period. (b) Changes in Auction Date. During any Auction Period, the Auction Agent, with the written consent of the Restricted Group Agent, may specify an earlier Auction Date (but in no event more than five Business Days earlier) than the Auction Date that would otherwise be determined in accordance with the definition of Auction Date in order to conform with then current market practice with respect to similar securities or to accommodate economic and financial factors that may affect or be relevant to the day of the week constituting an Auction Date and the interest rate borne on the Auction Rate Securities. The Auction Agent shall provide notice of its determination to specify an earlier Auction Date for an Auction Period by means of a written notice delivered at least 45 days prior to the proposed changed Auction Date to the Bond Trustee, the Restricted Group Agent, the Authority, the related Bond Insurer, the Broker-Dealer, the Auction Agent and the Securities Depository. (c) No Auction Mode Change Date. The date on which a change in the length of an Auction Period or a change in an Auction Date occurs is not an Auction Mode Change Date. Auction Agent (a) The initial Auction Agent shall be Wilmington Trust Company. The Auction Agent shall designate its Principal Office and signify its acceptance of the duties and obligations imposed upon it under the Bond Indenture by a written instrument, delivered to the Authority, the Bond Trustee, the Restricted Group Agent, the related Bond Insurer and each Broker-Dealer which will set forth such procedural and other matters relating to the implementation of the Auction Procedures as shall be satisfactory to the Restricted Group Agent and the Bond Trustee. (b) Subject to any applicable governmental restrictions, the Auction Agent may be or become the owner of or trade in the Auction Rate Securities with the same rights as if such entity were not the Auction Agent. Qualifications of Auction Agent; Resignation; Removal The Auction Agent shall be (a) a bank or trust company organized under the laws of the United States or any state or territory thereof having a combined capital stock, surplus and undivided profits of at least $30,000,000, or (b) a member of NASD having a capitalization of at least $30,000,000 and, in either case, authorized by law to perform all of the duties imposed upon it by the Bond Indenture and a member of or a participant in, the Securities Depository. The Auction Agent may at any time resign and be discharged of the duties and obligations created by the Bond Indenture by giving at least 90 days notice to the Authority, the Restricted Group Agent, the Bond Trustee and the related Bond Insurer. The Auction Agent may be removed at any time by the Restricted Group Agent by written notice, delivered to the Auction Agent, the Bond Trustee and the related Bond Insurer. Upon any such resignation or removal, the Restricted Group Agent shall appoint a successor Auction Agent meeting the requirements of the Bond Indenture summarized under this caption. In the event of the resignation or removal of the Auction Agent, the Auction Agent shall pay over, assign and deliver any moneys and Auction Rate Securities held by it in such capacity to its successor. The Auction Agent shall continue to perform its duties under the Bond Indenture until its successor has been appointed by the Restricted Group Agent. In the event that the Auction Agent has not been compensated for its services, the Auction Agent may resign by giving 45 days notice to the Authority, the Restricted Group Agent, the Bond Trustee and the related Bond Insurer even if a successor Auction Agent has not been appointed. D-14

201 APPENDIX E: FORM OF FINANCIAL GUARANTY INSURANCE POLICY OF ASSURED GUARANTY CORP. Assured Guaranty Corp Avenue of the Americas New York, NY Issuer: Bonds: Financial Guaranty Insurance Policy No. Premium: Effective Date: Term: The period from and including the Effective Date to and including the date on which all Insured Payments (including Avoided Payments) have been paid. Assured Guaranty Corp., a Maryland insurance company ( Assured Guaranty ), in consideration of the payment of the premium set forth above and subject to the terms of this financial guaranty insurance policy number [insert policy number] (the Policy ), hereby unconditionally and irrevocably agrees to pay to [insert name of trustee], as trustee (the Trustee ) (as set forth in the documentation providing for the issuance of and securing the above-referenced Bonds (the Bonds ; such documentation, the Transaction Documentation )) for the benefit of the holders of the Bonds (the Holders ), and in any case subject to the terms of this Policy, that portion of the principal of and interest on the Bonds that shall become Due for Payment (as hereinafter defined) but shall be unpaid by reason of Nonpayment by the Issuer (as hereinafter defined; such portion of principal and interest, hereinafter the Insured Payments ). Insured Payments shall not include any additional amounts owing by the Issuer solely as a result of the failure by the Trustee to pay such amount when due and payable, including without limitation any such additional amounts as may be attributable to penalties or to interest accruing at a default rate, to amounts payable in respect of indemnification, or to any other additional amounts payable by the Trustee by reason of such failure. Capitalized terms used in this Policy are used with the meanings ascribed thereto elsewhere herein. Assured Guaranty will make such Insured Payments to the Trustee on the later to occur of (i) the date applicable principal or interest becomes Due for Payment, or (ii) the Business Day next following the day on which Assured Guaranty shall have Received a completed notice of claim in the form attached hereto as Exhibit A. Payment by Assured Guaranty to the Trustee for the benefit of the Holders shall discharge the obligation of Assured Guaranty under this Policy to the extent of such payment. The Trustee will disburse the Insured Payments to the Holders in accordance with the terms of the Transaction E-1