$32,590,000 SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC. Hospital Revenue Refunding Bonds, Series 2008D

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1 NEW ISSUE Book-Entry Only RATINGS: Moody s: Aaa/A1 S&P: AAA/A+ Fitch AAA/AA- (Assured Guaranty insured/underlying) (See Ratings herein) In the opinion of Haynsworth Sinkler Boyd, P.A,., Greenville, South Carolina, Bond Counsel, assuming continuing compliance by the District with certain covenants, interest on the 2008D Bonds is excludable from gross income for federal income tax purposes under existing statutes, regulations and judicial decisions. Interest on the 2008D Bonds is not an item of tax preference in computing the alternative minimum taxable income for individuals or corporations. Interest on the 2008D Bonds will, however, be included in the computation of certain taxes including the alternative minimum tax for corporations. See TAX EXEMPTION for a brief description of alternative minimum tax treatment and certain other federal income tax consequences to certain recipients of interest on the 2008D Bonds. The 2008D Bonds and the interest thereon will be exempt from all state, county, municipal and school district and other taxes or assessments imposed within the State of South Carolina, except estate, transfer and certain franchise taxes. $32,590,000 SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC. Hospital Revenue Refunding Bonds, Series 2008D Dated: Date of Delivery Due: April 15, as shown below The 2008D Bonds are issued only in fully registered form, without coupons, and when issued, will be initially registered in the name of Cede & Co., as registered owner and nominee for The Depository Trust Company ( DTC ), New York, New York. DTC will act as securities depository for the 2008D Bonds. Purchasers of the 2008D Bonds will not receive certificates representing their interest in the 2008D Bonds purchased. Purchases of the 2008D Bonds may be made only in book-entry form in the principal amounts of $5,000 or any integral multiple thereof, by credit to participating broker-dealers and other institutions on the books of DTC as described herein. The principal of, premium, if any, and interest on the 2008D Bonds is payable by U.S. Bank National Association in Columbia, South Carolina, as bond trustee, to DTC, which will remit such payment in accordance with its normal procedures, as described herein. THE 2008D BONDS ARE LIMITED OBLIGATIONS OF THE DISTRICT, THE PRINCIPAL, INTEREST AND REDEMPTION PREMIUMS, IF ANY, ON WHICH SHALL BE PAYABLE SOLELY OUT OF PLEDGED REVENUES (AS DEFINED IN THE 2008D BOND INDENTURE). THE 2008D BONDS SHALL NEVER CONSTITUTE AN INDEBTEDNESS OF SPARTANBURG COUNTY, SOUTH CAROLINA WITHIN THE MEANING OF ANY STATE OF SOUTH CAROLINA CONSTITUTIONAL PROVISION OR STATUTORY LIMITATION AND SHALL NEVER CONSTITUTE NOR GIVE RISE TO A PECUNIARY LIABILITY OF SPARTANBURG COUNTY, SOUTH CAROLINA OR A CHARGE AGAINST ITS GENERAL CREDIT OR TAXING POWERS. THE DISTRICT HAS NO TAXING AUTHORITY. MATURITY SCHEDULE $16,435,000 Serial 2008D Bonds Due Principal Interest Due Principal Interest April 15 Amount Rate Yield April 15 Amount Rate Yield 2009 $1,740, % 2.07% 2014 $1,615, % 3.81% ,380, ,680, ,435, ,765, ,515, ,840, ,555, ,910, $4,000, % Term 2008D Bonds, due April 15, 2020 Yield: 4.52%* $4,515, % Term 2008D Bonds, due April 15, 2022 Yield 4.68%* $7,640, % Term 2008D Bonds, due April 15, 2025 Yield 4.75% *Yield to the April 15, 2018 optional redemption date at 100%. The scheduled payment principal of and interest on the 2008D Bonds when due will be guaranteed under a financial guaranty insurance policy to be issued concurrently with the delivery of the 2008D Bonds by Assured Guaranty Corp. The 2008D Bonds will be dated as of their date of delivery, and will bear interest from such date at the rates specified above payable on each October 15 and April 15 beginning October 15, The 2008D Bonds will be subject to redemption prior to maturity as described herein. See THE 2008D BONDS--REDEMPTION PROVISIONS. This cover page contains certain information for quick reference only. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. The 2008D Bonds are offered in book-entry only form when, as and if issued by the District and accepted by the Underwriter, subject to prior sale, withdrawal and modification of the offer without notice, and the approval of the legality by Haynsworth Sinkler Boyd, P.A., Bond Counsel, and certain other conditions. Certain legal matters will be passed upon for the District by its counsel, Judy P. Hamer, Esq., and for the Underwriter by its counsel, Parker Poe Adams & Bernstein LLP. It is expected that the 2008D Bonds will be available for delivery to DTC in New York, New York on or about July 30, Dated: July 18, 2008 Morgan Keegan & Company, Inc.

2 IN CONNECTION WITH THIS OFFERING, MORGAN KEEGAN & COMPANY, INC. (THE "UNDERWRITER"), MAY OVERALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 2008D BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET, AND SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. No dealer, broker, salesman or other person has been authorized to give any information or to make any representation in connection with this offering other than as contained in this Official Statement, and, if given or made, such other information or representation must not be relied upon. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the 2008D Bonds by any person, in any jurisdiction in which it is not lawful for such person to make such offer, solicitation or sale. The information set forth herein has been obtained from sources which are believed to be reliable and is in form deemed final by the District for the purpose of Rule 15c2-12 under the Securities Exchange Act of 1934, as amended (except for certain information permitted to be omitted under Rule 15c2-12(b)(1)). Other than with respect to information concerning the Insurer contained under the caption "INSURANCE FOR THE 2008D BONDS" and Appendix F, the Specimen Insurance Policy herein, none of the information in this Official Statement has been supplied or verified by the Insurer and the Insurer makes no representation or warranty, express or implied, as to (1) the accuracy or completeness of such information, (2) the validity of the 2008D Bonds or (3) the tax-exempt status of the interest with respect to the 2008D Bonds. NEITHER THE BONDS, THE 2008D BOND INDENTURE, NOR THE MASTER INDENTURE, AS SUPPLEMENTED AND AMENDED, HAVE BEEN REGISTERED OR QUALIFIED WITH THE SECURITIES AND EXCHANGE COMMISSION BY REASON OF THE PROVISIONS OF SECTION 3(a)(2) OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 304(a)(4) OF THE TRUST INDENTURE ACT OF 1939, AS AMENDED. THE REGISTRATION OR QUALIFICATION OF THE 2008D BONDS, THE 2008D BOND INDENTURE AND THE MASTER INDENTURE IN ACCORDANCE WITH APPLICABLE PROVISIONS OF SECURITIES LAWS OF THE STATES IN WHICH THE 2008D BONDS HAVE BEEN REGISTERED OR QUALIFIED, AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES, SHALL NOT BE REGARDED AS A RECOMMENDATION THEREOF. IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. All quotations from and summaries and explanations of laws and documents herein do not purport to be complete, and reference is made to such laws and documents for full and complete statements of their provisions. Any statements made in this Official Statement involving estimates or matters of opinion, whether or not expressly so stated, are intended merely as estimates or opinions and not as representations of fact. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale of the 2008D Bonds shall under any circumstances create any implication that there has been no change in the affairs of the District since the date hereof. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibility to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information.

3 TABLE OF CONTENTS Page INTRODUCTORY STATEMENT... 1 THE DISTRICT... 4 SECURITY FOR THE 2008D BONDS... 5 Limited Obligations... 5 Pledged Revenues... 5 Master Indenture; Pledge of Gross Receipts; Parity Debt... 5 Parity Notes... 7 Additional Indebtedness... 8 Rate Covenant... 9 Additional Covenants... 9 Reserve Fund... 9 Bond Insurance THE 2008D BONDS General Terms Redemption Provisions Book-Entry-Only Form INSURANCE FOR THE 2008D BONDS The Policy The Insurer PLAN OF FINANCE Refundings Projects Interest Rate Swap Agreements SOURCES AND USES OF BOND PROCEEDS LONG-TERM DEBT SERVICE REQUIREMENTS INVESTMENT CONSIDERATIONS General Government Regulation of the Health Care Industry Commercial Insurance and Managed Care Possible Increased Competition Managed Health Care Systems Matters Relating to Security for the 2008D Bonds Matters Relating to Membership in the Obligated Group; Substitution of Note Obligors Matters Relating to the Enforceability of the Master Indenture Ratings on the 2008D Bonds Interest Rate Swap Agreements Risk of Taxability Malpractice; Litigation Environmental Laws and Regulations Licensing Certificate of Need Law Equipment Union Activity i

4 Possible Staffing Shortages Other Investment Considerations REGULATION OF THE HEALTH CARE INDUSTRY Federal and State Legislation and Other Actions Payment and Reimbursement HIPAA Privacy and Security Regulations Patient Transfers Antitrust Uncompensated Care Relationships Between Tax-Exempt Hospitals and Physicians State Legislation RATINGS TAX EXEMPTION Federal Income Tax Generally State Tax Exemption Collateral Federal Tax Considerations LEGAL MATTERS CONTINUING DISCLOSURE FINANCIAL STATEMENTS UNDERWRITING LITIGATION VERIFICATION OF MATHEMATICAL COMPUTATIONS MISCELLANEOUS APPENDIX A SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC. APPENDIX B COMBINED FINANCIAL STATEMENTS OF SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC. APPENDIX C DEFINITIONS OF CERTAIN TERMS USED IN THIS OFFICIAL STATEMENT APPENDIX D SUMMARY OF PRINCIPAL DOCUMENTS APPENDIX E FORM OF BOND COUNSEL OPINION APPENDIX F SPECIMEN INSURANCE POLICY APPENDIX G DTC S BOOK-ENTRY-ONLY SYSTEM ii

5 OFFICIAL STATEMENT $32,590,000 Spartanburg Regional Health Services District, Inc. Hospital Revenue Refunding Bonds Series 2008D INTRODUCTORY STATEMENT This Official Statement sets forth information concerning the $32,590,000 Spartanburg Regional Health Services District, Inc. Hospital Revenue Refunding Bonds, Series 2008D (the 2008D Bonds ) being issued by Spartanburg Regional Health Services District, Inc. (the District ). The District is a body corporate and politic and a health services district created under Articles 15 and 16 of Chapter 7, Title 44, Code of Laws of South Carolina 1976, as amended (the Act ). The District is empowered to acquire, construct, own and operate hospitals and health care facilities and to issue revenue bonds to finance such facilities and to refinance outstanding obligations of the District previously issued for such purposes. The District operates a health care system (the "System") in Spartanburg County, South Carolina (the County ) consisting of Spartanburg Regional Medical Center (the Medical Center ) and Spartanburg Hospital for Restorative Care (the Restorative Hospital ), each located in Spartanburg, South Carolina, and, beginning in October of 2008, the Village Hospital (the Village Hospital ), located in Greer, South Carolina. The District s hospital facilities have undergone progressive change and expansion, growing to the present size of 588 licensed beds at the Medical Center (with 503 beds operating), 97 long-term acute and 25 skilled nursing licensed beds at the Restorative Hospital (with 65 beds operating), and effective October 1, 2008, 48 licensed beds at the Village Hospital. The District also owns and operates the Regional Physician Network ( RPN ), a network of 46 physician practices, employing more than 150 physicians, located throughout the Service Area (as defined in Appendix A). In addition, the District owns 100% of SRHS Capital, Inc. ("SRHS Capital"), a holding company for the subsidiary business organizations of the District. See Appendix A, SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC. herein. The 2008D Bonds are being issued by the District pursuant to the Constitution and laws of the State of South Carolina, particularly the Act, and the provisions of a Series D Bond Indenture dated as of July 1, 2008 (the 2008D Bond Indenture ) between the District and U.S. Bank National Association in Columbia, South Carolina, as bond trustee, paying agent and registrar (the Bond Trustee, the Paying Agent and the Registrar ). The scheduled payment of principal of and interest on the 2008D Bonds will be guaranteed under an insurance policy to be issued concurrently with the delivery of the 2008D Bonds by Assured Guaranty Corp. ( Assured Guaranty or the Insurer ). See the caption INSURANCE FOR THE 2008A BONDS herein. The proceeds of the 2008D Bonds will be used by the District (1) to pay the cost of refunding in advance of their maturities all or a portion of the currently outstanding Spartanburg County, South Carolina Hospital Revenue and Revenue Refunding Bonds, Series 1995 maturing on April 15, 2009 through April 15, 2025 (the 1995 Refunded Bonds ) and (2) to pay the costs of issuing the 2008D Bonds, including the premium for the financial guaranty insurance policy. Contemporaneously with the issuance of the 2008D Bonds, the District will execute Supplemental Master Trust Indenture No. 12 dated

6 as of July 1, 2008 ( Supplement No. 12 ) between the District and the Master Trustee and pursuant thereto will issue the District s Series 12 Note dated the date of issuance of the 2008D Bonds (the Series 12 Note ) to the Bond Trustee to secure the District s payment of the principal of, premium, if any, and interest on the 2008D Bonds. The Series 12 Note and Supplement No. 12 will be issued under the Master Indenture. The Series 12 Note will be secured by a pledge of the Gross Receipts of the District pursuant to Supplement No. 12. On June 25, 2008, the District issued its Spartanburg Regional Health Services District, Inc. Hospital Revenue and Revenue Refunding Bonds, Series 2008A (the 2008A Bonds ) under a Series A Bond Indenture dated as of June 1, 2008 (the 2008A Bond Indenture ) between the District and the Bond Trustee, the proceeds of which are being used, together with the proceeds of the 2008B Bonds (as defined below), (1) to pay the cost of refunding in advance of their maturities all or a portion of the currently outstanding Spartanburg County, South Carolina Hospital Revenue Refunding Bonds, Series 2002 maturing on April 15, 2023 through April 15, 2032 (the 2002 Refunded Bonds ), (2) to pay the cost of refunding in advance of their maturities all or a portion of the currently outstanding Spartanburg County, South Carolina Hospital Revenue Bonds, Series 1997A maturing on April 15, 2009 through April 15, 2027 (the 1997A Refunded Bonds ) and the Spartanburg County, South Carolina Hospital Revenue Refunding Bonds, Series 1997B maturing on April 15, 2012 through April 15, 2022 (the 1997B Refunded Bonds ) and (3) to pay the costs of issuing the 2008A Bonds, including the premium for the financial guaranty insurance policy. Contemporaneously with the issuance of the 2008A Bonds, the District executed Supplemental Master Trust Indenture No. 9 dated as of June 1, 2008 ( Supplement No. 9 ) between the District and U.S. Bank National Association, as successor to NCNB National Bank of South Carolina, as Master Trustee (the Master Trustee ) and pursuant thereto issued the District s Series 9 Note dated the date of issuance of the 2008A Bonds (the Series 9 Note ) to the Bond Trustee to secure the District s payment of the principal of, premium, if any, and interest on the 2008A Bonds. The Series 9 Note and Supplement No. 9 will be issued under that certain Master Trust Indenture dated as of December 1, 1989, as amended and supplemented (the Master Indenture ) between Spartanburg Regional Medical Center, as predecessor to the District, and the Master Trustee. The Series 9 Note will be secured by a pledge of the Gross Receipts of the District pursuant to Supplement No. 9. On June 25, 2008, the District also issued its Spartanburg Regional Health Services District, Inc. Hospital Revenue and Revenue Refunding Bonds, Series 2008B (the 2008B Bonds ) under a Series B Bond Indenture dated as of June 1, 2008 (the 2008B Bond Indenture ) between the District and the Bond Trustee, the proceeds of which are being used (1) together with the proceeds of the 2008A Bonds, to pay the cost of refunding in advance of their maturities all or a portion of the currently outstanding 2002 Refunded Bonds, the 1997A Refunded Bonds and the 1997B Refunded Bonds, (2) to finance improvements and renovations to existing System, including the construction and equipping of the Village Hospital, and (3) to pay the costs of issuing the 2008B Bonds, including the premium for the financial guaranty insurance policy. Contemporaneously with the issuance of the 2008B Bonds, the District executed Supplemental Master Trust Indenture No. 10 dated as of June 1, 2008 ( Supplement No. 10 ) between the District and the Master Trustee and pursuant thereto will issue the District s Series 10 Note dated the date of issuance of the 2008B Bonds (the Series 10 Note ) to the Bond Trustee to secure the District s payment of the principal of, premium, if any, and interest on the 2008B Bonds. The Series 10 Note and Supplement No. 10 will be issued under the Master Indenture. The Series 10 Note will be secured by a pledge of the Gross Receipts of the District pursuant to Supplement No. 10. On June 25, 2008, the District also issued its Spartanburg Regional Health Services District, Inc. Hospital Revenue Refunding Bonds, Series 2008C (the 2008C Bonds and collectively with the 2008A Bonds, the 2008B Bonds and the 2008D Bonds, the 2008 Bonds ) under a Series C Bond Indenture dated as of June 1, 2008 (the 2008C Bond Indenture ) between the District and the Bond Trustee, the 2

7 proceeds of which are being used to pay the cost of refunding in advance of their maturities all of the currently outstanding Spartanburg County Health Services District, Inc. Variable Rate Demand Hospital Revenue Bonds, Series 1998 (the 1998 Refunded Bonds and collectively with the 1997A Refunded Bonds, the 1997B Refunded Bonds, the 1995 Refunded Bonds and the 2002 Refunded Bonds, the Refunded Bonds ) and to pay the costs of issuing the 2008C Bonds, including the premium for the financial guaranty insurance policy. Contemporaneously with the issuance of the 2008C Bonds, the District executed Supplemental Master Trust Indenture No. 11 dated as of June 1, 2008 ( Supplement No. 11 ) between the District and the Master Trustee and pursuant thereto will issue the District s Series 11 Note dated the date of issuance of the 2008C Bonds (the Series 11 Note ) to the Bond Trustee to secure the District s payment of the principal of, premium, if any, and interest on the 2008C Bonds. The Series 11 Note and Supplement No. 11 will be issued under the Master Indenture. The Series 11 Note will be secured by a pledge of the Gross Receipts of the District pursuant to Supplement No. 11. See the captions PLAN OF FINANCE and SOURCES AND USES OF BOND PROCEEDS herein. The Series 12 Note will be on a parity with the Series 9 Note, the Series 10 Note and the Series 11 Note and the series of other Notes now or hereafter outstanding under the Master Indenture securing long-term indebtedness of the District as well as on a parity with Hedge Notes referred to below now or hereafter outstanding. See the captions LONG-TERM DEBT SERVICE REQUIREMENTS and SECURITY FOR THE 2008D BONDS PARITY NOTES herein. The 2008D Bonds will also be secured by the 2008D Reserve Fund, but only to the extent it is funded under the terms of the 2008D Bonds Indenture, as described under SECURITY FOR THE 2008D BONDS RESERVE FUND below. In connection with the issuance of the Series 9 Note and the Series 10 Note, the District and the Master Trustee entered into Amendatory Master Trust Indenture No. 1, dated as of June 1, 2008 (the Amendment ), that made certain amendments to the Master Indenture. These amendments expressly provide for the issuance of Notes and Guaranties under the Master Indenture to evidence and secure the obligations of the District or any other member of the Obligated Group under or related to Hedge Agreements ( Hedge Notes ), which Hedge Agreements are defined in the Amendment generally to include an interest rate swap, cap, collar, floor, forward, option, put, call or other agreement or arrangement, howsoever denominated, entered into by the District or any other Note Obligor (as more particularly defined in Appendix C hereto, Hedge Agreements ), as well as to describe how such Hedge Notes and Hedge Agreements will be treated under the terms of the Master Indenture. Thus, among other things, the Amendment provides for (1) the issuance by District of Hedge Notes under the Master Indenture in connection with Hedge Agreements and the extent to which such Hedge Notes are secured by the lien under the Master Indenture; (2) the ability of the District to identify (or re-identify) any Hedge Agreements as pertaining to any particular for certain purposes of the Master Indenture; (3) the means by which all or any portion of Indebtedness subject to a Hedge Agreement (as more particularly defined in Appendix C hereto, Derivative Indebtedness ) shall be treated for purposes such as the computation of any Long-Term Service Requirement applicable under the Master Indenture; (4) the ability for various Hedge Notes issued under the Master Indenture may, at the option of the District, secure any or all of the District s obligations under a related Hedge Agreement, including Regularly Scheduled Payments and/or Other Payments, on parity with (or on a junior basis to) other Notes issued under the Master Indenture; (5) the extent to which Hedge Notes are or may be taken into account for purposes voting requirements and the like that are applicable to the holders of Notes under the Master Indenture; and (6) the provision that any liens created with respect to that Hedge Agreement, including collateral to be posted if applicable, are to be included among the Permitted Liens as defined 3

8 under the Master Indenture. The terms of the Amendment are further described in this Official Statement under the caption SECURITY FOR THE 2008D BONDS below and in Appendix D -- SUMMARY OF PRINCIPAL LEGAL DOCUMENTS. Morgan Keegan & Company, Inc., as the underwriter of the 2008A Bonds and the 2008B Bonds, consented to the Amendment on the date that the 2008A Bonds and the 2008B Bonds were issued. THE 2008D BONDS ARE LIMITED OBLIGATIONS OF THE DISTRICT, THE PRINCIPAL, INTEREST, PURCHASE PRICE AND REDEMPTION PREMIUMS, IF ANY, ON WHICH SHALL BE PAYABLE SOLELY OUT OF PLEDGED REVENUES (AS DEFINED IN THE 2008D BOND INDENTURE). THE 2008D BONDS SHALL NEVER CONSTITUTE AN INDEBTEDNESS OF SPARTANBURG COUNTY, SOUTH CAROLINA WITHIN THE MEANING OF ANY STATE OF SOUTH CAROLINA CONSTITUTIONAL PROVISION OR STATUTORY LIMITATION AND SHALL NEVER CONSTITUTE NOR GIVE RISE TO A PECUNIARY LIABILITY OF SPARTANBURG COUNTY, SOUTH CAROLINA OR A CHARGE AGAINST ITS GENERAL CREDIT OR TAXING POWERS. THE DISTRICT HAS NO TAXING AUTHORITY. This Official Statement contains descriptions of, among other matters, the 2008D Bonds, the District, the 2008D Bond Indenture, the Master Indenture, Supplement No. 12 and the Series 12 Note. Such descriptions and information do not purport to be comprehensive or definitive. All references herein to the 2008D Bond Indenture are qualified in their entirety by reference to the text of the 2008D Bond Indenture, and all references herein to the 2008D Bonds are qualified in their entirety by reference to the form thereof included in the 2008D Bond Indenture. Until the issuance and delivery of the 2008D Bonds, copies of the 2008D Bond Indenture and other documents described herein may be obtained from Morgan Keegan & Company, Inc., 3050 Peachtree Road, N.W., Two Buckhead Plaza, Suite 702, Atlanta, Georgia After delivery of the 2008D Bonds, copies of documents in connection with the 2008D Bonds may be obtained from the Bond Trustee. Definitions of certain terms used in this Official Statement are set forth in Appendix C to this Official Statement. THE DISTRICT The District is a body corporate and politic and a health services district created under Articles 15 and 16 of Chapter 7, Title 44, Code of Laws of South Carolina, 1976, as amended (the Act ). The District is governed by an eleven-member Board of Directors. The District is empowered to acquire, construct, own and operate hospitals and health care facilities and to issue revenue bonds to finance such facilities and to refinance outstanding obligations of the District previously issued for such purposes. The District operates the System in the County consisting of the Medical Center and the Restorative Hospital, each located in Spartanburg, South Carolina, and, beginning in October of 2008, the Village Hospital, located in Greer, South Carolina. The District s hospital facilities have undergone progressive change and expansion, growing to the present size of 588 licensed beds at the Medical Center (with 503 beds operating), 97 long-term acute and 25 skilled nursing licensed beds at the Restorative Hospital (with 65 beds operating), and effective October 1, 2008, 48 licensed beds at the Village Hospital. The District also owns and operates the RPN, a network of 46 physician practices, employing more than 150 physicians, located throughout the Service Area. In addition, the District owns 100% of SRHS Capital, a holding company for the subsidiary business organizations of the District. For more information concerning the District and the Service Area, see Appendix A, SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC. herein. 4

9 SECURITY FOR THE 2008D BONDS LIMITED OBLIGATIONS THE 2008D BONDS ARE LIMITED OBLIGATIONS OF THE DISTRICT, THE PRINCIPAL, INTEREST, PURCHASE PRICE AND REDEMPTION PREMIUMS, IF ANY, ON WHICH ARE PAYABLE SOLELY OUT OF PLEDGED REVENUES. THE 2008D BONDS SHALL NEVER CONSTITUTE AN INDEBTEDNESS OF SPARTANBURG COUNTY, SOUTH CAROLINA WITHIN THE MEANING OF ANY STATE OF SOUTH CAROLINA CONSTITUTIONAL PROVISION OR STATUTORY LIMITATION AND SHALL NEVER CONSTITUTE NOR GIVE RISE TO A PECUNIARY LIABILITY OF SPARTANBURG COUNTY, SOUTH CAROLINA OR A CHARGE AGAINST ITS GENERAL CREDIT OR TAXING POWERS. THE DISTRICT HAS NO TAXING AUTHORITY. PLEDGED REVENUES The 2008D Bonds are payable solely from and are secured by a pledge under the 2008D Bond Indenture of the Pledged Revenues. The 2008D Bond Indenture provides that the Pledged Revenues with respect to the 2008D Bonds secured by the 2008D Bond Indenture are all revenues, proceeds and receipts derived from the payments made by the District under the Series 12 Note and the proceeds of the sale of the 2008D Bonds pending their application in accordance with the 2008D Bond Indenture. The 2008D Bond Indenture also grants the Bond Trustee a security interest in all moneys and investments held for the credit of the funds and accounts established by or under the 2008D Bond Indenture. Payments of the Series 12 Note are required to be in an amount sufficient to pay in full, when due, the aggregate principal of, redemption premium, if any, and interest on the 2008D Bonds at their respective due dates, and to pay related expenses. The Series 9 Note, the Series 10 Note and the Series 11 Note have been issued under the Master Indenture in connection with the issuance of the 2008A Bonds, the 2008B Bonds and the 2008C Bonds, respectively. In addition, certain Hedge Notes were issued under the Master Indenture simultaneously with the issuance of the 2008B Bonds and the 2008C Bonds in connection with interest rate swap agreements more particularly described in this Official Statement under the caption PLAN OF FINANCE INTEREST RATE SWAP AGREEMENTS. The 2008D Bonds will not be payable from payments made on any other series of Notes issued under the Master Indenture. See Appendix D, SUMMARY OF PRINCIPAL DOCUMENTS herein for a summary of the 2008D Bond Indenture, the Master Indenture and Supplement No. 12. MASTER INDENTURE; PLEDGE OF GROSS RECEIPTS; PARITY DEBT The District is the sole member of an obligated group (the Obligated Group ) under the Master Indenture. Under the Master Indenture, the District has pledged to the Master Trustee its Gross Receipts to secure equally and ratably its obligations issued and to be issued thereunder, including (1) the obligation of the District under the Series 12 Note given by the District to secure the 2008D Bonds; (2) the obligation of the District under the Series 9 Note given by the District to secure the 2008A Bonds; (3) the obligation of the District under the Series 10 Note given by the District to secure the 2008B Bonds; (4) the obligation of the District under the Series 11 Note given by the District to secure the 2008C Bonds; (5) certain or all of the obligations of the District under the Hedge Notes described in this Official Statement under the caption PLAN OF FINANCE INTEREST RATE SWAP AGREEMENTS; (6) the obligations of the District under the other series of notes previously issued by the District to secure other long-term indebtedness of the District; and (7) any future obligations of the District or other members of the Obligated Group issued in accordance with the terms of the Master Indenture as parity obligations thereunder. See Appendix D, SUMMARY OF PRINCIPAL DOCUMENTS herein. Other than as set forth in the Master Indenture, the Master Trustee, the Bond Trustee or the Bondholders have no right 5

10 to restrict the District s ability to pledge its Gross Receipts to secure other Indebtedness. The Master Trustee s ability to enforce the Master Indenture may be limited in some cases. See INVESTMENT CONSIDERATIONS--MATTERS RELATING TO THE ENFORCEABILITY OF THE MASTER INDENTURE herein. The District s obligations under the Series 12 Note and under all Notes issued under the Master Indenture, from time to time, are secured by a pledge of the Gross Receipts of the District, provided that the District s obligations in respect of any Hedge Notes will be so secured only to the extent respectively set forth in such Hedge Notes and the respective supplements to the Master Indenture pursuant to which such Hedge Notes are issued. Gross Receipts means the following: all receipts, revenues, income and other moneys received by or on behalf of any one or more members of the Obligated Group, including, but without limiting the generality of the foregoing, revenues derived from the ownership or operation of Property, including insurance and condemnation proceeds with respect to Property or any portion thereof, and all rights to receive the same, whether in the form of accounts, Accounts Receivable, contract rights, instruments, chattel paper, general intangibles and deposit accounts or other rights, and the proceeds of such rights, and whether now owned or held or hereafter coming into existence; provided, however, that (1) gifts, grants, bequests, donations and contributions designated or specified by the granting authority, donor or maker as being made for specified purposes (other than payment of debt service on Indebtedness) and the income derived therefrom to the extent required by such designation or specification, (2) contractual allowances and bad debt allowances, and (3) amounts in the rebate fund to be rebated to the United States Treasury, are excluded from Gross Receipts. The pledge of Gross Receipts by the District will not prevent the District from expending, depositing or commingling Gross Receipts, so long as all required payments with respect to Notes are made when due. THE SERIES 12 NOTE IS NOT SECURED BY A MORTGAGE OR OTHER LIEN ON ANY PHYSICAL ASSETS OF THE DISTRICT. The security interest in Gross Receipts of the Obligated Group has been perfected to the extent, and only to the extent, that such security interest in Gross Receipts may be perfected by filing financing statements under the Uniform Commercial Code of the State of South Carolina (the UCC ). Continuation statements with respect to such filings must be filed every five years to continue the perfection of such security interest, unless the Master Trustee receives an opinion of counsel that such filing is not necessary. The security interest in Gross Receipts is subject to Permitted Liens that exist prior to or that may be created subsequent to the time the security in Gross Receipts attached and subject to the right of each member of the Obligated Group to sell Accounts Receivable or incur Indebtedness secured by Accounts Receivable under certain circumstances. See Appendix D, SUMMARY OF PRINCIPAL DOCUMENTS. The security interest in Gross Receipts may not be enforceable against third parties unless Gross Receipts are transferred to the Master Trustee (which transfer members of the Obligated Group are required to make only if requested by the Master Trustee after a default under the Master Indenture) and is subject to certain exceptions under the UCC. The enforcement of the security interest in Gross Receipts may be further limited by the following: (i) statutory liens. (ii) rights arising in favor of the United States of America or any agency thereof. (iii) present or future prohibitions against assignment in any federal or State of South Carolina statutes or regulations, (iv) constructive trusts, equitable liens or other rights impressed or conferred by any state or federal court in the exercise of its equitable jurisdiction. (v) federal bankruptcy laws. State of South Carolina receivership or fraudulent conveyance laws or similar laws affecting creditors rights that may affect the enforceability of the Master Indenture 6

11 or the security interest in Gross Receipts and (vi) rights of third parties in Gross Receipts not in the possession of the Master Trustee. The actual realization of amounts to be derived upon the enforcement of any security interest securing the 2008D Bonds will depend upon the exercise of various remedies specified by the 2008D Bond Indenture and the Master Indenture. These and other remedies may require judicial action of a nature that is often subject to discretion and delay. Under existing law, the remedies specified by the 2008D Bond Indenture and Master Indenture may not be readily available or may be limited. A court may decide not to order the specific performance of the covenants contained in those documents. The various legal opinions to be delivered concurrently with the delivery of the 2008D Bonds will be qualified 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, fraudulent conveyance, reorganization and other laws affecting the enforcement of creditors rights generally. PARITY NOTES Owners of parity notes issued pursuant to the Master Indenture benefit from security interests and liens which are on a parity with the lien against the Gross Receipts securing the payment of the Series 12 Note. The Notes outstanding under the Master Indenture include (1) the Series 4 Note issued to secure the outstanding principal amount of the $42,280,000 Hospital Revenue and Refunding Bonds, Series 1995 issued by the District (the Series 4 Note and the 1995 Bonds, respectively), (2) the Series 5 Note issued to secure the outstanding principal amount of the $50,000,000 Hospital Revenue Bonds, Series 1997A issued by the District (the Series 5 Note and the 1997A Bonds, respectively), (3) the Series 6 Note issued to secure the outstanding principal amount of the $48,640,000 Hospital Revenue Refunding Bonds, Series 1997B issued by the District (the Series 6 Note and the 1997B Bonds, respectively), (4) the Series 7 Note issued to secure the outstanding principal amount of the $25,000,000 Variable Rate Hospital Revenue Bonds, Series 1998 issued by the District (the Series 7 Note and the 1998 Bonds, respectively) and (5) the Series 8 Note issued to secure the outstanding principal amount of the $49,525,000 Hospital Revenue and Revenue Refunding Bonds, Series 2002 (the Series 8 Note and the 2002 Bonds, respectively). The Master Indenture will also secure the Series 9 Note, the Series 10 Note and the Series 11 Note. In addition, the Master Indenture will also secure the Hedge Notes referred to in this Official Statement under the caption PLAN OF FINANCE INTEREST RATE SWAP AGREEMENTS, if and when issued as more particularly described herein under such caption. The Series 4 Note, the Series 5 Note, the Series 6 Note, the Series 7 Note, the Series 8 Note, the Series 9 Note, the Series 10 Note, the Series 11 Note and Hedge Notes referred to in the preceding paragraph are collectively referred to herein as the Parity Notes and the Parity Notes are collectively referred to with the Series 12 Note issued to secure the 2008D Bonds as the Notes. There are no other Notes outstanding under the Master Indenture. On the occurrence of an Event of Default under the Master Indenture, the Master Trustee is required to take possession of the Gross Receipts of the District and to apply such Gross Receipts, in such order as the Master Trustee determines, to the payment of the expenses of operating the District and to payment of debt service on the Notes, on a pro rata basis, without priority or preference of one series of Notes over any other series of Notes, all as provided in the Master Indenture, provided that the District s obligations in respect of any Hedge Notes will be so secured only to the extent respectively set forth in such Hedge Notes and the respective supplements to the Master Indenture pursuant to which such Hedge Notes are issued (notwithstanding anything elsewhere stated in this Official Statement to the contrary). 7

12 See the caption "LONG-TERM DEBT SERVICE REQUIREMENTS" herein and Note 4 to the District s audited financial statements set forth in Appendix B hereto for information on the outstanding Indebtedness of the District. ADDITIONAL INDEBTEDNESS The District and other members of the Obligated Group have the right under the Master Indenture to issue Additional Indebtedness, which Additional Indebtedness may have a lien which is on a parity with the lien of the Notes against the Gross Receipts. Additional Indebtedness means all outstanding obligations of the District and other members of the Obligated Group, including all Notes and Guaranties (other than any Guaranty by any member of the Obligated Group of Indebtedness of any other member of the Obligated Group), or any other obligation for payment of principal and interest with respect to money borrowed; provided, however, Hedge Notes will not constitute Additional Indebtedness for purposes of any limitation on the incurrence thereof under the Master Indenture. The Master Indenture contains provisions restricting or imposing conditions on the ability of the District and other members of the Obligated Group to incur Additional Indebtedness. With respect to Long-Term Indebtedness, such as the 2008D Bonds, the District may elect to meet one of four different tests as a condition precedent to incurring such Long-Term Indebtedness. The tests are set forth below. Additional definitions of terms used in the tests may be found in Appendix C, DEFINITIONS OF CERTAIN TERMS USED IN THIS OFFICIAL STATEMENT. (i) An Accountant s report or opinion certifying that the Long-Term Debt Service Coverage Ratio for any 24 of the most recent 30 months or the most recent 24 month period for which audited financial statements are available (the Historic Test Period ), taking into account the current aggregate outstanding amount of all Long-Term Indebtedness and the proposed Long-Term Indebtedness, is not less than 1.25; or (ii) (1) An Accountant s report or opinion certifying that the ratio of the Aggregate Income Available for Debt Service to Maximum Annual Debt Service for the Historic Test Period, not taking into account the proposed Long-Term Indebtedness, is not less than 1.20, and (2) a consultant s opinion (A) certifying that the projected Long-Term Debt Service Coverage Ratio for each of the next two full fiscal years following the completion of the facilities being financed, taking into account the proposed Long-Term Indebtedness, is not less than 1.20 and (B) indicating that sufficient revenues and cash flow would be generated to meet operating expenses (including debt service on the proposed Indebtedness) during such two full fiscal years; or (iii) An Officer s Certificate to the effect that the total principal amount of Long-Term Indebtedness to be incurred at such time, when added to other Long-Term Indebtedness theretofore issued pursuant to clause (iii) and then Outstanding, will not exceed 15% of the Operating Revenues of the Obligated Group for the Historic Test Period or (iv) An Officer s Certificate certifying the Long-Term Debt Service Coverage Ratio for the Historic Test Period, taking into account the current aggregate Outstanding principal amount of all Long-Term Indebtedness, and the proposed additional Long-Term Indebtedness, as if it had been incurred at the beginning of such period, is not less than

13 in (iv). With respect to the issuance of the 2008D Bonds, the District has elected to meet the test set forth RATE COVENANT The District has covenanted in the Master Indenture that it will maintain in each fiscal year the ratio of the Aggregate Income Available for Debt Service (the excess of revenue over expenses before depreciation, amortization and interest, as determined in accordance with generally accepted accounting principles consistently applied, but excluding unrealized gains and losses) to Maximum Annual Debt Service of at least ADDITIONAL COVENANTS The District has covenanted in the Master Indenture to subject itself to certain operational and financial restrictions contained therein. See Appendix D, SUMMARY OF PRINCIPAL DOCUMENTS--NOTES ISSUED UNDER MASTER INDENTURE. RESERVE FUND The District has created the Series 2008D Reserve Fund under the 2008D Bond Indenture to secure solely the 2008D Bonds, but only to the extent that the 2008D Reserve Fund is funded under the terms of the 2008D Bond Indenture. The Reserve Fund will be funded by the Obligated Group within 180 Business Days at an amount equal to the Reserve Fund Requirement only on the occurrence of any of the following: (i) failure to maintain at least 95 Days Cash on Hand on any Testing Date; (ii) failure to maintain a Long-Term Debt Service Coverage Ratio of at least 1.15 on any Testing Date; or (iii) failure to maintain a long-term debt rating of at least A from two of the following three rating agencies: Moody s, S&P, or Fitch. The foregoing requirements shall be evidenced by a certificate of the Obligated Group Agent which shall be furnished to the Bond Trustee and the Master Trustee within 30 days of the applicable Testing Date. The Reserve Fund caused to be funded by such a violation must remain in place until the tests in (i), (ii) and (iii) of the prior sentence are met for one audited Fiscal Year. After satisfying the tests described in (i), (ii) and (iii) for one audited Fiscal Year, the amount in the Reserve Fund shall be transferred to the District. The Bond Trustee shall value the Reserve Fund semiannually on each March 31 and September 30. The Bond Trustee shall promptly notify the District of any deficiency in the Reserve Fund upon such semiannual valuation. Deficiencies in the Reserve Fund upon such valuation greater than ten percent (10%) due to market valuation must be made up within 120 days of notification by the Bond Trustee. Deficiencies due to any other reason must be made up in equal monthly installments over a period not to exceed twelve (12) months. When moneys in the Bond Fund are insufficient to pay principal of or interest on 2008D Bonds when due, moneys in the Reserve Fund shall be used to augment payments due for principal or interest on the 2008D Bonds. When moneys in the Reserve Fund are so used, the Bond Trustee shall forthwith give notice to the Master Trustee. The Bond Trustee is hereby directed to make such deposits into the Reserve Fund as are required to be made hereunder, which shall include deposits into the Reserve Fund of payments made pursuant to the Supplement No

14 BOND INSURANCE The scheduled payment of principal and interest with respect to the 2008D Bonds when due will be guaranteed under a financial guaranty insurance policy (the Policy ) to be issued concurrently with the delivery of the 2008D Bonds by Assured Guaranty. See the caption INSURANCE FOR THE 2008D BONDS herein. GENERAL TERMS THE 2008D BONDS Payment Terms. The 2008D Bonds will be dated their date of delivery, and the 2008D Bonds will bear interest from their date payable on October 15, 2008, and semiannually thereafter on each April 15 and October 15 (the Interest Payment Dates ), at the rates shown on the cover page (calculated on the basis of a 360-day year consisting of twelve 30-day months). Principal of the 2008D Bonds will be payable, subject to redemption as described herein, on April 15 in the years and amounts shown on the cover page. Payments will be effected through DTC. See Appendix G, DTC S BOOK-ENTRY-ONLY SYSTEM. Denominations. The 2008D Bonds are issuable only as fully registered bonds in denominations of $5,000 and integral multiples thereof. Transfer, Registration and Exchange. So long as DTC or its nominee is the registered owner of the 2008D Bonds, transfers, registration of transfers and exchanges of beneficial ownership interests in the 2008D Bonds will be available only through DTC participants, as hereinafter described. See Appendix G, DTC S BOOK-ENTRY-ONLY SYSTEM. REDEMPTION PROVISIONS Optional Redemption. The 2008D Bonds maturing before April 15, 2019 are not subject to redemption before their respective maturities. The 2008D Bonds maturing on or after April 15, 2019 are subject to redemption before their respective maturities, at the option of the District, from any moneys that may be available for such purpose, either in whole or in part on any date on or after April 15, 2018, at the redemption price of 100% of the principal amount of the 2008D Bonds to be redeemed), plus accrued interest, if any, to the redemption date. [Remainder of Page Intentionally Left Blank] 10

15 Sinking Fund Redemption. The 2008D Bonds maturing on April 15, 2020, are subject to mandatory sinking fund redemption in part, at a redemption price equal to the principal amount to be redeemed plus accrued interest, if any, to the redemption date, without premium, on April 15 in the years and amounts as follows: *Maturity. YEAR AMOUNT 2019 $1,950, * 2,050,000 The 2008D Bonds maturing on April 15, 2022, are subject to mandatory sinking fund redemption in part, at a redemption price equal to the principal amount to be redeemed plus accrued interest, if any, to the redemption date, without premium, on April 15 in the years and amounts as follows: *Maturity. YEAR AMOUNT 2021 $2,200, * 2,315,000 The 2008D Bonds maturing on April 15, 2025, are subject to mandatory sinking fund redemption in part, at a redemption price equal to the principal amount to be redeemed plus accrued interest, if any, to the redemption date, without premium, on April 15 in the years and amounts as follows: *Maturity. YEAR AMOUNT 2023 $2,435, ,545, * 2,660,000 Extraordinary Optional Redemption. The District will be entitled to redeem the 2008D Bonds, in whole or in part at any time, at a redemption price equal to 100% of the principal amount of 2008D Bonds (or the portion thereof to be redeemed), without penalty, plus interest accrued on such 2008D Bonds to the date fixed for redemption, if the District receives insurance proceeds with respect to casualty losses or condemnation awards where the amount of such proceeds or awards exceed 5% of the Value (as defined in the Master Indenture) of the Property, Plant and Equipment (as defined in the Master Indenture) of the District or if, as a result of such casualty or condemnation, the Operating Revenues (as defined in the Master Indenture) of the District are reduced by more than 5%. Notice of Redemption. The Registrar will cause notice of any redemption to be mailed by first class mail to the holders of Bonds to be redeemed in whole or in part not less than 30 days nor more than 60 days before the redemption date thereof; provided however, that notices to DTC will be sent by registered or certified mail. Failure to mail any such notice to any holder or any defect in such notice will not affect the validity of the proceedings for such redemption as to any other holder to whom such notice is properly given. Each notice will set forth, among other things, the date fixed for redemption, the redemption price to be paid and the portion of the principal amount thereof to be redeemed and may state that such notice is conditioned upon receipt of funds necessary for such redemption. 11

16 Redemption of Portion of Bonds. If less than all of the 2008D Bonds are called for redemption, the District, with the approval of the Insurer, will select the maturities of the 2008D Bonds to be redeemed and the Registrar will select the 2008D Bonds or portions thereof within a maturity by lot. SO LONG AS THE ONLY OWNER OF THE 2008D BONDS IS DTC, SUCH SELECTION WILL, HOWEVER, BE MADE BY DTC. If a portion of a Bond is called for redemption, a new Bond in the principal amount equal to the unredeemed portion thereof will be issued to the holder upon surrender thereof. Upon giving notice and depositing funds or securities with the Bond Trustee or the Registrar as provided in the 2008D Bond Indenture, the 2008D Bonds or portions thereof so called for redemption shall become due and payable on the redemption date, and interest on such Bonds or portions thereof shall cease to accrue from and after such date. BOOK-ENTRY-ONLY FORM Beneficial ownership interests in the 2008D Bonds will be available only in a book-entry system. The actual purchasers of the 2008D Bonds (the Beneficial Owners ) will not receive physical certificates representing their interests in the 2008D Bonds purchased. So long as The Depository Trust Company ( DTC ), New York, New York, or its nominee is the registered owner of the 2008D Bonds, references in this Official Statement to the Owners of the 2008D Bonds shall mean DTC or its nominee and shall not mean the Beneficial Owners. See Appendix G, DTC S BOOK-ENTRY-ONLY SYSTEM for more information on the Book-Entry system. INSURANCE FOR THE 2008D BONDS The following information has been furnished by the Insurer for use in this Official Statement. Reference is made to Appendix F for a specimen of the Policy. Neither the District nor the Underwriter makes any representation as to the accuracy or adequacy of such information or that there has not been any material change in the following information subsequent to the dates set forth therein. Neither the District nor the Underwriter has made any investigation into the Insurer s financial condition, and no representation is made as to the Insurer s ability to meet its obligations under the Policy. THE POLICY Assured Guaranty has made a commitment to issue the Policy relating to the 2008D Bonds, effective as of the date of issuance of such 2008D Bonds. Under the terms of the Policy, Assured Guaranty will unconditionally and irrevocably guarantee to pay that portion of principal of and interest on the 2008D Bonds that becomes Due for Payment but shall be unpaid by reason of Nonpayment (the Insured Payments ). Insured Payments shall not include any additional amounts owing by the District 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 to interest accruing at a default rate, to amounts payable in respect of indemnification, or to any other additional amounts payable by the Bond Trustee by reason of such failure. The Policy is non-cancelable for any reason, including without limitation the non-payment of premium. Due for Payment means, when referring to the principal of the 2008D Bonds, the stated maturity date thereof, or the date on which such 2008D 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 Guaranty in its sole discretion elects to make any principal 12

17 payment, in whole or in part, on such earlier date) and, when referring to interest on such 2008D Bonds, means the stated dates for payment of interest. Nonpayment means the failure of the District to have provided sufficient funds to the Bond Trustee for payment in full of all principal and interest Due for Payment on the 2008D Bonds. It is further understood that the term Nonpayment in respect of a 2008D Bond also includes any amount previously distributed to the Holder (as such term in defined in the Policy) of such 2008D Bond in respect of any Insured Payment by or on behalf of the District, which amount has been recovered from such Holder pursuant to the United States Bankruptcy Code 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. 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 Guaranty will pay each portion of an Insured Payment that is Due for Payment and unpaid by reason of Nonpayment, 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 Guaranty shall have received a completed notice of Nonpayment therefor in accordance with the terms of the Policy. Assured Guaranty shall be fully subrogated to the rights of the Holders of the 2008D Bonds to receive payments in respect of the Insured Payments to the extent of any payment by Assured Guaranty under the Policy. The Policy is not covered by any insurance or guaranty fund established under New York, California, Connecticut or Florida insurance law. THE INSURER Assured Guaranty Corp. ( Assured Guaranty ) is a Maryland-domiciled insurance company regulated by the Maryland Insurance Administration and licensed to conduct financial guaranty insurance business in all fifty states of the United States, the District of Columbia and Puerto Rico. Assured Guaranty commenced operations in Assured Guaranty is a wholly owned, indirect subsidiary of Assured Guaranty Ltd. ( AGL ), a Bermuda-based holding company whose shares are publicly traded and are listed on the New York Stock Exchange under the symbol AGO. AGL, through its operating subsidiaries, provides credit enhancement products to the U.S. and global public finance, structured finance and mortgage markets. Neither AGL nor any of its shareholders is obligated to pay any debts of Assured Guaranty or any claims under any insurance policy issued by Assured Guaranty. Assured Guaranty 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 Guaranty 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 Guaranty, (vi) require the maintenance of contingency reserves, and (vii) govern changes in control and transactions among affiliates. Certain state laws to which Assured Guaranty is subject also require the approval of policy rates and forms. Assured Guaranty s financial strength is rated AAA by Standard & Poor s, a division of The McGraw-Hill Companies, Inc. ( S&P ), AAA by Fitch, Inc. ( Fitch ) and Aaa by Moody s Investors Service, Inc. ( Moody s ). Each rating of Assured Guaranty should be evaluated independently. An explanation of the significance of the above ratings may be obtained from the 13

18 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 Guaranty. Assured Guaranty 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. Recent Developments. On July 21, 2008, Moody s issued a press release stating that it had placed the Aaa insurance financial strength rating of Assured Guaranty under review for possible downgrade. Moody s noted in its press release that, while the outcome of the review was uncertain, a downgrade of Assured Guaranty s insurance financial strength rating below Aa2 was currently seen as unlikely. A copy of the press release is available at Assured Guaranty intends to cooperate with Moody s in connection with its review. Assured Guaranty cannot give any assurance as to the outcome of the review or the timing of when such review may be completed. On July 17, 2008, Fitch issued a report to provide an update on its views with respect to the outlook for the monoline financial guaranty industry. In such report, Fitch stated that Assured Guaranty continues to maintain a AAA insurer financial strength rating from Fitch with a stable rating outlook. On June 18, 2008, S&P issued a press release in which it affirmed its AAA financial strength and financial enhancement ratings on Assured Guaranty. In such press release, S&P stated that Assured Guaranty s outlook is stable. Capitalization of Assured Guaranty Corp. As of March 31, 2008, Assured Guaranty had total admitted assets of $1,518,398,730 (unaudited), total liabilities of $1,138,285,708 (unaudited), total surplus of $380,113,022 (unaudited) and total statutory capital (surplus plus contingency reserves) of $1,001,533,924 (unaudited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. As of December 31, 2007, Assured Guaranty had total admitted assets of $1,361,538,502 (audited), total liabilities of $961,967,238 (audited), total surplus of $399,571,264 (audited) and total statutory capital (surplus plus contingency reserves) of $982,045,695 (audited) 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. Incorporation of Certain Documents by Reference. The portions of the following documents relating to Assured Guaranty are hereby incorporated by reference into this Official Statement and shall be deemed to be a part hereof: The Annual Report on Form 10-K of AGL for the fiscal year ended December 31, 2007 (which was filed by AGL with the Securities and Exchange Commission (the SEC ) on February 29, 2008); 14

19 The Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008 (which was filed by AGL with the SEC on May 9, 2008); and The Current Reports on Form 8-K filed by AGL with the SEC, as they relate to Assured Guaranty. All consolidated financial statements of Assured Guaranty and all other information relating to Assured Guaranty 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 2008D 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. Any statement contained in a document incorporated herein by reference or contained herein under the heading INSURANCE FOR THE 2008D BONDS THE INSURER 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. Copies of the consolidated financial statements of Assured Guaranty incorporated by reference herein and of the statutory financial statements filed by Assured Guaranty with the Maryland Insurance Administration are available upon request by contacting Assured Guaranty at 1325 Avenue of the Americas, New York, New York or by calling Assured Guaranty at (212) In addition, the information regarding Assured Guaranty that is incorporated by reference in this Official Statement that has been filed by AGL with the SEC are available to the public over the Internet at the SEC s web site at and at AGL s web site at from the SEC s Public Reference Room at 450 Fifth Street, N.W., Room 1024, Washington, D.C , and at the office of the New York Stock Exchange at 20 Broad Street, New York, New York Assured Guaranty makes no representation regarding the 2008D Bonds or the advisability of investing in the 2008D Bonds. In addition, Assured Guaranty has not independently verified, makes no representation regarding, and does not 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 Guaranty supplied by Assured Guaranty and presented under the heading INSURANCE FOR THE 2008D BONDS. REFUNDINGS PLAN OF FINANCE The 2008A Bonds, together with a portion of the proceeds of the 2008B Bonds, were issued for the purpose of providing funds necessary to refund in advance of their maturities all or a portion of the currently outstanding Spartanburg County, South Carolina Hospital Revenue Bonds, Series 1997A maturing on April 15, 2009 through April 15, 2027 (the 1997A Refunded Bonds ) and the Spartanburg County, South Carolina Hospital Revenue Refunding Bonds, Series 1997B maturing on April 15, 2012 through April 15, 2022 (the 1997B Refunded Bonds and together with the 1997A Refunded Bonds, the 1997 Refunded Bonds ). The Refunded 1997A Bonds and the Refunded 1997B Bonds have now been redeemed. 15

20 The 2008A Bonds, together with a portion of the proceeds of the 2008B Bonds, were issued for the purpose of providing funds necessary to refund in advance of their maturities all or a portion of the currently outstanding Spartanburg County, South Carolina Hospital Revenue Refunding Bonds, Series 2002 maturing on April 15, 2023 through April 15, 2032 (the 2002 Refunded Bonds ). To provide for the refunding of the Refunded 2002 Bonds, a portion of the proceeds of the 2008A Bonds and the 2008B Bonds was transferred to U.S. Bank National Association, as successor to NCNB National Bank of South Carolina, as escrow agent (the "Escrow Agent ) under the Escrow Deposit Agreement dated July 30, 2008 between the District and the Escrow Agent. Funds on deposit with the Escrow Agent were used to purchase certain eligible securities maturing at the times and in the amounts sufficient to provide funds, together with other available funds on deposit with the Escrow Agent, to pay the principal or redemption price of and interest on the Refunded 2002 Bonds when the same become due and payable. The Refunded 2002 Bonds have been irrevocably called for redemption on April 15, 2012, at a redemption price equal to the principal amount of the Refunded 2002 Bonds to be redeemed. See VERIFICATION OF MATHEMATICAL COMPUTATIONS herein. Simultaneously with the issuance of the 2008A Bonds and the 2008B Bonds, the District issued its Spartanburg Regional Health Services District, Inc. Hospital Revenue Refunding Bonds, Series 2008C (the 2008C Bonds ) for the purpose of refunding in advance of their maturities all of the currently outstanding Spartanburg County Health Services District, Inc. Variable Rate Demand Hospital Revenue Bonds, Series 1998 (the 1998 Refunded Bonds ). The Refunded 1998 Bonds have now been redeemed. The District is issuing the 2008D Bonds for the purpose of refunding in advance of their maturities all or a portion of the currently outstanding Spartanburg County, South Carolina Hospital Revenue and Revenue Refunding Bonds, Series 1995 maturing on April 15, 2009 through April 15, 2025 (the 1995 Refunded Bonds ). The Refunded 1995 Bonds will be redeemed on September 2, 2008 at a redemption price of 100% of the principal amount thereof plus accrued interest to the redemption date. PROJECTS The District will use a portion of the proceeds of the 2008B Bonds, issued simultaneously with the 2008A Bonds, for the construction of a new satellite hospital in Pelham, South Carolina (the Village Hospital), to defray the cost of certain improvements and renovations to the System, and to reimburse the District for improvements, constructions, and equipment previously paid by the District. INTEREST RATE SWAP AGREEMENTS The District issued the 2008B Bonds and the 2008C Bonds as variable rate demand obligations. However, with respect to each such series of 2008B and 2008C Bonds, the District has entered into interest rate swap agreements (respectively, the 2008B Swap Agreement and the 2008C Swap Agreement ; collectively, the 2008 Swap Agreements ) with Morgan Keegan Financial Products, Inc., as swap provider (the Swap Provider ). Pursuant to each of the 2008 Swap Agreements, the Swap Provider will pay to the District monthly floating amounts based on 63% of the one-month USD-LIBOR- BBA index plus.031% (31 basis points), which index has been selected with the expectation of providing the District with amounts generally correlated with (and sufficient to enable it to pay) the interest on the 2008B Bonds and the 2008C Bonds, respectively, and the District will in turn pay to the Swap Provider monthly fixed amounts based on a % per annum rate under the 2008B Swap Agreement and % per annum rate under the 2008C Swap Agreement as applied to notional amounts corresponding to the scheduled principal amortization schedules for the 2008B Bonds and the 2008C Bonds, respectively. The goal of the 2008 Swap Agreements is thus effectively to convert the District s variable 16

21 rate exposure under the 2008B Bonds and 2008C Bonds to a hedged fixed rate (subject to applicable basis risks associated with the actual correlation of the index described in this paragraph with the actual variable rate of such bonds). The terms of the 2008B Swap Agreement and the 2008C Swap Agreement coincide with the final maturity of the 2008B Bonds and of the 2008C Bonds, respectively. In connection with the 2008 Swap Agreements, the District also entered into a Replacement Transaction Agreement with the Swap Provider and Deutsche Bank AG, New York Branch (the Replacement Swap Provider ) under which, among other things and under certain circumstances, such original swap agreements between the District and the Swap Provider would be effectively replaced by substitute swap agreements between the District and the Replacement Swap Provider, having the same primary economic terms as such original swap agreements, and thus with the effect of providing a form of credit enhancement for the benefit of the District in respect of such original swap agreements. In connection with the 2008B Swap Agreement and the 2008C Swap Agreement, the District also issued under the Master Indenture its Hedge Note No. 1 and Hedge Note No. 2, respectively, each dated the date on which the 2008 Swap Agreements were entered, which evidence, and to the extent provided therein will secure, the joint and several obligations of the District and any other members of the Obligated Group to the Swap Provider in respect of such swap agreements. To the extent so required of the District in obtaining such Swap Agreements and the agreement with the Replacement Swap Provider referred to above, the District may also provide for comparable benefits in favor of the Replacement Swap Provider, either by the operation of such Hedge Notes themselves or through additional Hedge Notes issued under the Master Indenture in favor of such Replacement Swap Provider. See APPENDIX D SUMMARY OF PRINCIPAL DOCUMENTS SUPPLEMENTAL MASTER TRUST INDENTURE FOR HEDGE NOTE NOS. 1 AND 2; HEDGE NOTE NOS. 1 AND 2 attached hereto. Each of the 2008 Swap Agreements and related Hedge Obligations, along with any future swap agreements and Hedge Obligations that may be entered into by the District, present certain risks and other issues, certain of which are described in this Official Statement under the caption INVESTMENT CONSIDERATIONS INTEREST RATE SWAP AGREEMENTS herein. The Swap Provider, Morgan Keegan Financial Products, Inc., is an affiliate of Morgan Keegan & Company, Inc., the underwriter of the 2008 Bonds. [Remainder of Page Left Intentionally Blank] 17

22 SOURCES AND USES OF BOND PROCEEDS The following table sets forth the estimated sources and uses of the proceeds of the 2008D Bonds: Sources of Funds: Par amount of 2008D Bonds $32,590,000 Net original issue premium 415,560 TOTAL $33,005,560 Uses of Funds: Refunding of Refunded 1995 Bonds $32,227,408 Costs of issuance 1 778,152 TOTAL $33,005,560 1 Includes various professional fees and other financing costs, the Policy premium and the Underwriter s discount. [Remainder of Page Intentionally Left Blank] 18

23 LONG-TERM DEBT SERVICE REQUIREMENTS FISCAL YEAR ENDING PRINCIPAL & INTEREST REQUIREMENTS ON 2008A BONDS 2008B BONDS C BONDS D BONDS EXISTING DEBT SERVICE REQUIREMENTS 3 TOTAL DEBT SERVICE REQUIREMENTS 9/ $724, $150, $875, $1,867, ,520, ,354, $2,780, $4,284, ,807, ,318, ,643, ,346, ,779, ,088, ,176, ,318, ,638, ,342, ,779, ,097, ,177, ,238, ,605, ,411, ,802, ,138, ,196, ,191, ,566, ,497, ,781, ,143, ,180, ,148, ,573, ,529, ,779, ,145, ,176, ,124, ,561, ,573, ,779, ,139, ,178, ,077, ,559, ,615, ,780, ,142, ,176, ,039, ,556, ,658, ,780, ,142, ,178, ,010, ,544, ,703, ,777, ,139, ,174, ,951, ,557, ,750, ,740, ,137, ,137, ,865, ,599, ,799, ,738, ,136, ,139, ,776, ,629, ,848, ,780, ,142, ,178, ,697, ,662, ,904, ,780, ,136, ,181, ,390, ,473, ,951, ,778, , ,176, ,635, ,000, ,779, , ,176, ,642, ,993, ,779, , ,177, ,507, ,911, , ,179, ,511, ,909, , ,180, ,816, ,343, ,159, ,816, ,338, ,154, ,819, ,338, ,157, ,812, ,342, ,155, ,762, ,341, ,103, ,076, ,076, ,071, ,071, ,075, ,075, ,072, ,072, ,076, ,076, Assumes an interest rate on the 2008B Bonds of %, which the District has projected as the approximate hedged rate on the 2008B Bonds after giving effect to the swap agreement being entered in connection therewith. See PLAN OF FINANCE INTEREST RATE SWAP AGREEMENTS herein. 2 Assumes an interest rate on the 2008C Bonds of %, which the District has projected as the approximate hedged rate on the 2008C Bonds after giving effect to the swap agreement being entered in connection therewith. See PLAN OF FINANCE INTEREST RATE SWAP AGREEMENTS herein. 3 Excludes the debt service on the Refunded 1995 Bonds that will be refunded with the proceeds of the 2008D Bonds. 19

24 INVESTMENT CONSIDERATIONS GENERAL As set forth under the caption SECURITY FOR THE 2008D BONDS, the principal of, premium, if any, and interest on the 2008D Bonds are payable from the Pledged Revenues of the District. The revenues and expenses of the District are subject to, among other things, the capabilities of the management of the District, the confidence of physicians in management, the availability of physicians and trained support staff, changes in the population or the economic condition of the District s service area, the level of and restrictions on federal funding of Medicare and federal and state funding of Medicaid, imposition of government wage and price controls, the demand for the District s services, competition, rates, government regulations and licensing requirements, inflation and future economic and other conditions which are unpredictable and may not be quantifiable or determinable at this time. NO REPRESENTATION OR ASSURANCE IS GIVEN OR CAN BE MADE THAT GROSS RECEIPTS WILL BE REALIZED BY THE DISTRICT IN AMOUNTS SUFFICIENT TO PAY DEBT SERVICE ON THE 2008D BONDS WHEN DUE AND TO MAKE PAYMENTS NECESSARY TO MEET THE OTHER OBLIGATIONS OF THE DISTRICT. Some of the identifiable risks which should be considered when making an investment decision regarding the 2008D Bonds are discussed below. Such discussion is not, and is not intended to be, exhaustive. GOVERNMENT REGULATION OF THE HEALTH CARE INDUSTRY See discussion under the caption REGULATION OF THE HEALTH CARE INDUSTRY. COMMERCIAL INSURANCE AND MANAGED CARE During the fiscal years ended September 30, 2005, 2006 and 2007, managed care organizations accounted for approximately 46%, 47% and 45%, respectively, of the District s net patient service revenue. See Appendix A, SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC.- -SELECTED SUMMARY FINANCIAL DATA--Sources of Patient Revenues herein. Commercial insurers and managed care programs may in the future revise their payment methodology to reduce the amounts paid to hospitals or to reduce the rate of increase in payments. No assurance can be given that the number of patients using the services of the District which participate in managed care programs will remain unchanged. An increase in the use of such plans or the loss of managed care contracts could adversely impact the District s patient service revenues. Managed care entities negotiate directly with the hospitals for discounted rates or rates based on anticipated utilization of hospital services. Increased patient participation in managed care programs can have a negative impact on hospitals in several ways. First, a hospital generally will not be able to serve the patients enrolled in managed care programs with which it does not contract. Second, a hospital may be required to substantially reduce the amounts it accepts as payment for services in order to obtain a contract to serve managed care program patients. Third, the managed care program market is becoming increasingly competitive, and some managed care programs may not survive. Fourth, a hospital that has a contract with a managed care program in poor financial condition may render services for which the hospital is not ultimately compensated, or receive compensation that is significantly delayed in payment. Fifth, the effect of such contracts on the District s financial statements may be different in the future than reflected in the financial statements for the current period. If payment under a managed care contract is insufficient to meet a hospital s costs of care, the financial condition of the hospital may erode rapidly and 20

25 significantly. Often, managed care contracts are enforceable for a stated term, regardless of provider losses. No assurance can be given that the number of patients using the services of the District which participate in managed care programs will remain unchanged. An increase in the use of such plans or the loss of managed care contracts could adversely impact the District s patient service revenues. POSSIBLE INCREASED COMPETITION The District could face increased competition in the future from other providers of health care that offer health care services to the residents of the District s service area. See Appendix A, SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC.--MARKET PROFILE- -Hospitals Within the Service Area herein. The District s costs and revenues could be substantially affected by future changes in the number and mix of both patients and services brought about by increased competition among health care providers and insurers. This competition could take several different forms, including: (1) Competition among hospitals to sell their services at lower prices to third-party payor plans; (2) Competition from hospitals which draw patients from the District s service areas to offer new services or expand existing services or to reduce charges or to increase their market share within the District s primary, secondary and referral markets; (3) Competition from nursing homes, home health agencies, ambulatory care facilities, surgical centers, rehabilitation and therapy centers, increasingly sophisticated physician group practices, and other non-hospital providers for many services for which patients currently rely on hospitals; (4) Competition for patients between physicians, who generally use hospitals, and non-physician practitioners such as nurse-midwives, nurse practitioners, chiropractors, physical and occupational therapists and others, who may not generally use hospitals; (5) Competition for enrollees between traditional insurers, whose patients generally have a free choice of hospitals and other providers, and health maintenance organizations or other prepaid plans, who usually substantially restrict the providers from whom their enrollees can receive services; and (6) Competition from proprietary providers of health care, the operations of which providers are not subject to the restrictions which are imposed on nonprofit hospitals by state nonprofit, tax-exemption and other laws, and which proprietary providers may have access to equity capital markets to obtain funds with which to compete under financing instruments which generally do not restrict the operational flexibility of such providers to the degree that the tax-exempt capital market restricts the operations of nonprofit hospitals. For example, Mary Black Memorial Hospital ("MBH"), a 226-bed hospital located in the District s service area, was purchased in 1996 by Quorum Healthcare, a proprietary hospital chain. In April 2001, MBH was purchased from Quorum Healthcare by Triad Hospitals, Inc. During the spring of 2007, MBH s parent organization, Triad Hospitals, Inc. was acquired by Community Health Systems Inc. 21

26 Limitations on, or the elimination of, the State of South Carolina s existing planning system could result in the entry of additional providers of health care in the District s service area and affect its ability to attract physicians and patients. There are some services that could be provided by others which could be substituted for some of the revenue generating services presently offered by the District. For example, home care, intermediate nursing care, preventive care, ambulatory care and drug and alcohol abuse programs are services that could serve as alternatives to inpatient hospital treatment. See Appendix A, SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC. for information on the service area of the District and existing competition. MANAGED HEALTH CARE SYSTEMS HMO s, PPO s and other managed health care systems (collectively, Managed Health Care Systems ) are payors through health care coverage significantly different from traditional indemnity insurers. Managed Health Care Systems represent a broad continuum of systems generally designed to favorably affect the cost, the site and/or the utilization of health care services from a cost containment standpoint. As such, they include health maintenance organizations, which generally accept uniform per-employee payments from employers and/or employees with fees based on the enrollee s projected health care needs, and preferred provider arrangements. Management of the District has developed strategies which adapt to and utilize the market forces of Managed Health Care Systems. See Appendix A, SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC.--GENERAL for a discussion of the Regional Physician Network and the Regional HealthPlus program of the District. Managed Health Care Systems often rely upon case management analysis to reduce utilization of health care services, including discouraging an enrollee s admission to a hospital unless determined to be absolutely necessary. As Managed Health Care Systems enrollment increases, such entities also become significant purchasers of health care services from hospitals and other providers enabling them to negotiate separate pricing terms and select health providers offering the most cost-effective services. Such case and cost management efforts on behalf of Managed Health Care Systems may adversely affect utilization of the District and/or patient revenues. MATTERS RELATING TO SECURITY FOR THE 2008D BONDS The District s facilities are not pledged as security for the 2008D Bonds. In addition, such facilities are not comprised of general purpose buildings and generally would not be suitable for industrial or commercial use. Consequently, it could be difficult to find a buyer or lessee for such facilities and, on a default, the Bond Trustee may not obtain an amount equal to the amount of outstanding Bonds from sale or lease of such facilities whether pursuant to a judgment against the District or otherwise. Certain amendments to the 2008D Bond Indenture may be made with the consent of the owners of a majority of the aggregate principal amount of the 2008D Bonds then outstanding, and certain amendments to the Master Indenture may be made with the consent of the owners of 60% of the aggregate principal amount of Notes then outstanding. After the payment of the 1995 Bonds, or earlier provision for defeasance thereof, certain amendments to the Master Indenture may be made with the consent of the owners of 51% of the aggregate principal amount of Notes then outstanding. Any such amendments may adversely affect the security of the holders of the 2008D Bonds, and such holders of the Notes may be composed wholly or partially of the owners of Notes securing long term debt of the District or other members of the Obligated Group other than the 2008D Bonds. In addition, on compliance with certain conditions set forth in the Master Indenture, amendments to certain of the operational, procedural or financial covenants set forth in the Master Indenture may be amended without consent of the holders of the 2008D Bonds or the holders of Notes. Such amendments may adversely affect the security for the 22

27 2008D Bonds. For a summary of such conditions, see Appendix D, SUMMARY OF PRINCIPAL DOCUMENTS--SUPPLEMENTS AND AMENDMENTS herein. The remedies available to the Bond Trustee, the Master Trustee, or the registered holders of the 2008D Bonds upon an Event of Default under the 2008D Bonds, the 2008D Bond Indenture, the Master Indenture or the Series 12 Note are in many respects dependent on judicial actions which are often subject to discretion and delay. Under existing constitutional and statutory law and judicial decisions, including, specifically, Title 11 of the United States Code (the Federal Bankruptcy Code), the remedies provided in the 2008D Bonds, the 2008D Bond Indenture, the Master Indenture or the Series 12 Note may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the 2008D Bonds will be qualified as to the enforceability of the various legal instruments by limitations imposed by general principles of equity and by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally. See also the caption --MATTERS RELATING TO ENFORCEABILITY OF THE MASTER INDENTURE below. MATTERS RELATING TO MEMBERSHIP IN THE OBLIGATED GROUP; SUBSTITUTION OF NOTE OBLIGORS The Master Indenture provides for an Obligated Group concept. The District is presently the sole member of the Obligated Group. The Master Indenture permits persons in addition to the District to become members of the Obligated Group and to become obligated under the Master Indenture to the same extent to which the District is obligated to make payments and perform actions under the Master Indenture. Since it is not known which entities, if any, may become additional members of the Obligated Group, it is unknown what risks the addition of such entities to the Obligated Group, in light of their financial condition and the nature of their businesses, may present to the holders of Bonds. See Appendix D, SUMMARY OF PRINCIPAL DOCUMENTS--THE OBLIGATED GROUP--Persons Becoming Note Obligors. In addition, members may withdraw from the Obligated Group if certain conditions summarized under the caption --THE OBLIGATED GROUP--Withdrawal From the Obligated Group in Appendix D to this Official Statement are met. The District, however, may not withdraw from the Obligated Group. The Master Indenture also allows issuance of a substitute note to replace an existing Note upon satisfaction of certain conditions described in the Master Indenture, including execution of a Replacement Master Indenture. Additional parties may execute the Replacement Master Indenture and become obligors under the substitute note. See Appendix D, SUMMARY OF PRINCIPAL DOCUMENTS--NOTES ISSUED UNDER MASTER INDENTURE--Substitution of Note Obligor. MATTERS RELATING TO THE ENFORCEABILITY OF THE MASTER INDENTURE The obligations of the members of the Obligated Group (currently only the District) under the Series 12 Note will be limited to the same extent as the obligations of debtors typically are affected by bankruptcy, insolvency, fraudulent conveyance and other laws affecting creditors rights generally and the application of general principles of creditors rights ( Debtor Relief Laws ) and as additionally described below. The accounts of the members of the Obligated Group will be combined for purposes of determining whether various covenants and tests contained in the Master Indenture (including tests relating to the incurrence of Additional Indebtedness) are met, notwithstanding uncertainties as to the enforceability of obligations of the members of the Obligated Group contained in the Master Indenture which bear on the availability of the assets and revenues of the members of the Obligated Group for payment of debt service on Notes, including the Series 12 Note pledged under the 2008D Bond Indenture as security for the 2008D Bonds. 23

28 A member of the Obligated Group may not be required to make any payment or to provide for the payment of any Notes, or portions thereof, the proceeds of which were not loaned or otherwise disbursed to such member of the Obligated Group, to the extent that such transfer would render the member of the Obligated Group insolvent or which would conflict with, not be permitted by or is subject to recovery for the benefit of other creditors of such member of the Obligated Group under applicable laws. There is no clear precedent in the law as to whether such payments from a member of the Obligated Group in order to pay debt service on a Note may be avoided by a trustee in bankruptcy in the event of bankruptcy of such member of the Obligated Group, or by third-party creditors in an action brought pursuant to state fraudulent conveyance statutes. Under the United States Bankruptcy Code, a trustee in bankruptcy, and, under state fraudulent conveyance statutes and common law, a creditor of a related guarantor, may avoid any obligation incurred by a related guarantor if, among other bases therefor, (1) the guarantor has not received fair consideration or reasonably equivalent value in exchange for the guaranty and (2) the guaranty renders the guarantor insolvent, as defined in the United States Bankruptcy Code or state fraudulent conveyance statutes, or the guarantor is undercapitalized. RATINGS ON THE 2008D BONDS There is no assurance that the rating assigned to the 2008D Bonds at the time of issuance (see the caption RATINGS ) will not be lowered or withdrawn at any time, the effect of which could adversely effect the market price for and marketability of the 2008D Bonds. INTEREST RATE SWAP AGREEMENTS The District entered into the 2008 Swap Agreements in connection with the 2008B Bonds and the 2008C Bonds as previously described under the caption PLAN OF FINANCE INTEREST RATE SWAP AGREEMENTS above. Entering into the 2008 Swap Agreements created a variety of risks to the District that could have an adverse financial impact on the District. Certain of such risks are as follows: (i) Under certain circumstances, each the 2008 Swap Agreements may become subject to termination prior to its scheduled termination date and prior to the maturity of the 2008B Bonds and the 2008C Bonds, respectively. Such circumstances include without limitation (a) failure to pay or deliver any payments required to be made under such agreements when due, (b) breach of the ISDA documentation and accompanying agreements governing the 2008 Swap Agreements, (c) credit support default, (d) misrepresentation, (e) default under specified derivatives transactions if applicable, (f) certain cross defaults to other obligations, (g) the occurrence of bankruptcy related events, (h) certain mergers or comparable transaction undertaken on the part of the District not in compliance with the documents governing the 2008 Swap Agreements, (i) the occurrence of certain events of Incipient Illegality (as defined for purposes of the 2008 Swap Agreements) and (j) certain other events delineated in the 2008 Swap Agreements. In addition to the foregoing, the Swap Provider has the right, but not the obligation, to terminate either (or both) of the 2008 Swap Agreements in the event that certain long-term, unsecured, unenhanced and unsubordinated indebtedness of the District shall cease to be rated at least Baa2 by Moody s or BBB by S&P, or such indebtedness ceases to be rated by Moody s or S&P or either of such ratings is withdrawn or suspended. Following any such termination, either the District or the Swap Provider (or the Replacement Swap Provider, if applicable) may then owe a termination payment to the other, depending upon market conditions at such time. In the event of an early termination of either of the 2008 Swap Agreements, there can be no assurance that (a) the District will receive any termination payment payable to it by the 24

29 Swap Provider (or the Replacement Swap Provider, if applicable), (b) the District will have sufficient amounts to pay a termination payment payable by it to the Swap Provider (or the Replacement Swap Provider, if applicable), and (c) the District will be able to obtain a replacement swap agreement with comparable terms. Payment due upon early termination may be substantial. In addition, a partial termination of either of the Series 2008 Swap Agreements could occur to the extent that any 2008B Bonds or 2008C Bonds, respectively, are redeemed pursuant to an optional redemption. If such an optional redemption occurs, a termination payment related to the portion of the 2008 Swap Agreements terminated may be owed to either the District or the Swap Provider (or the Replacement Swap Provider, if applicable), depending on market conditions at that time. Moreover, the Series 2008 Swap Agreements can be terminated upon mutual agreement of the District and the Swap Provider (and, if required or otherwise applicable, the Replacement Swap Provider). There is no guarantee that either of the 2008 Swap Agreements will continue in effect throughout their respective stated terms. (ii) The floating rate payable by the Swap Provider (or the Replacement Swap Provider, if applicable) pursuant to each of the 2008 Swap Agreements is intended to approximate the variable interest rate on the 2008B Bonds and the 2008C Bonds, respectively. However, there is no guarantee that such rates will match at all times or at any time. To the extent of a mismatch, the District is exposed to basis risk in that the floating rate it receives from the such provider pursuant to each of the 2008 Swap Agreements will not equal the variable interest rate it is required to pay on the 2008B Bonds and the 2008C Bonds, respectively. The agreements by the Swap Provider or the Replacement Swap Provider to pay certain amounts to the District pursuant to each of the 2008 Swap Agreements and/or the Replacement Swap Transaction do not alter or affect the District s obligation to pay the principal of, interest on, and redemption price of, any of the 2008B Bonds or the 2008C Bonds. Neither the Swap Provider nor the Replacement Swap Provider has any obligation to make any payments with respect to the principal of, interest on, and redemption price of, any of the 2008B Bonds or the 2008C Bonds. Neither the owners of the 2008B Bonds, the 2008C Bonds nor any other person other than the District will have any rights under the 2008 Swap Agreements or against the Swap Provider or the Replacement Swap Provider. Swap agreements generally are subject to periodic mark-to-market valuations and may, at any given time, have a negative value (which could be substantial) to the Obligated Group. In addition, and as is the case with each of the 2008 Swap Agreements, on the occurrence of certain events, the Obligated Group may be required to collateralize its obligations under its swap agreements by a deposit of cash or securities on a custodial basis. Such a deposit of cash and securities could adversely affect the Obligated Group s liquidity. The District may, from time to time, enter into other interest rate swap agreements or other similar hedging agreements which will carry similar risks. 25

30 RISK OF TAXABILITY Interest on the 2008D Bonds may become subject to state and federal income taxes retroactively on the occurrence of certain events, including but not limited to failure of the District to comply with certain covenants in the 2008D Bond Indenture or loss by the District of its status as a political subdivision for purposes of Section 103 of the Code. MALPRACTICE; LITIGATION In recent years, the number of malpractice suits and the dollar amounts of patient damage recoveries have increased nationwide. Litigation arises from the business activities of the District, from its status as an employer and as a result of its ownership and use of property. The District currently maintains insurance coverage with respect to malpractice and other liability claims which management believes to be sufficient. A series of large judgments awarded against the District could exceed the amount of insurance coverage and necessitate payment from other assets of the District. Since June 2004, uninsured patients have filed more than 70 putative class action lawsuits against nonprofit hospitals and hospital systems across the United States of America. Lawsuits brought in federal court allege that the defendants provide an insufficient amount of charity healthcare, that they overcharge patients who are uninsured, and that they use improper debt collection methods when uninsured patients fail to pay their medical bills. Counsel for plaintiffs have unsuccessfully sought to consolidate the majority of the cases in a single multidistrict proceeding. No class has been certified in any of the federal suits. Several federal lawsuits have since been dismissed, and it is unclear as of the date of this Official Statement whether any of the federal lawsuits will be successful. ENVIRONMENTAL LAWS AND REGULATIONS The District is subject to a wide variety of federal, state and local environmental, health and safety laws and regulations. In their role as owners and/or operators of properties or facilities, health care providers may be subject to liability for investigating and remedying any hazardous substances which have come to be located on the property, as well as for any such substances that may have migrated off of the property. Typical health care provider operations include, but are not limited to, in various combinations, the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants or contaminants and air and water quality control requirements. As such, health care provider operations are particularly susceptible to the practical, financial and legal risks associated with compliance with such laws and regulations. Such risks may result in damage to individuals, property or the environment; may interrupt operations and/or increase their costs; may result in legal liability which could in turn result in significant damages, injunctions or fines and may result in investigations, administrative proceedings, penalties or other governmental agency actions. At the present time, the District is not aware of any pending or threatened claim, investigation or enforcement action regarding environmental, health or safety issues which, if determined adversely to the District, would have material adverse consequences to the operations or financial condition of the District. There can be no assurance given, however, that the District will not encounter environmental, health or safety-related risks in the future, and such risks may result in material adverse consequences to the operation or financial condition of the District. 26

31 LICENSING On a regular basis, health facilities, including those of the District, are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. These include, but are not limited to, requirements relating to state licensing agencies, private payors and the Joint Commission on Accreditation of Healthcare Organizations ( JCAHO ). The District is fully accredited by JCAHO, which accreditation, as is the case for all hospitals, is subject to renewal. JCAHO last surveyed the District in July, Accreditation is significant because the Medicare program deems a provider to be in compliance with the Conditions of Participation for Medicare and Medicaid if accredited by JCAHO. The loss of such accreditation by a provider results in a loss of this deemed status, which means representatives of the Medicare program must survey such provider, which can be a very rigorous process. Failure to comply with any of the Conditions of Participation can result in the loss of moneys received pursuant to the Medicare and Medicaid programs. Management of the District currently anticipates no difficulty renewing or continuing currently held licenses, certifications or accreditations, nor does it anticipate a reduction in third-party payments resulting from such events which would materially adversely affect the operations or financial condition of the District. Nevertheless, actions in any of these areas could result in the loss of utilization or revenues, or the ability of the members of the District to operate all or a portion of their facilities, and, consequently, could adversely affect the ability of the District to pay the principal of, interest and premium, if any, on the 2008D Bonds. CERTIFICATE OF NEED LAW The State has adopted a certificate of need law ( CON Law ) which regulates various types of activities and expenditures made by or on behalf of health facilities including hospitals. The purpose of the CON Law is to prevent unnecessary duplication of expensive health care services and equipment in an effort to contain health care costs. Before undertaking certain types of activities or expenditures, a hospital or other health service facility is required to file an application for a certificate of need, which is evaluated by the State on the basis of various statutory and regulatory criteria. These criteria include the need cost-effectiveness and financial feasibility of each proposal, as well as the accessibility of the facility to indigent and other medically underserved patients. In some cases, applications to develop or operate a new service or facility are reviewed by the State on a competitive basis. The District has received certificates of need, if required, for all current activities. However, there can be no assurances that the District will receive certificates of need for future activities. If in the future the CON Law is repealed by the State, the healthcare facilities operated by the District may be subject to competition from other health care providers who would be free to construct and operate health care facilities in the District's service areas without regard to duplication of services and equipment. Such competition could have a material adverse effect on the District's financial condition. EQUIPMENT 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 District to offer such equipment or services may be subject to governmental approval, the availability of equipment or specialists, or the ability to finance such acquisitions or operations. 27

32 UNION ACTIVITY As of the date of this Official Statement, management of the District is not aware of any efforts by any labor union to organize its employees. Health care facilities, however, have been subjected to an increasing amount of union organizational efforts. The United States Supreme Court has upheld the authority of the National Labor Relations Board to issue new rules which establish, with narrow exceptions, eight separate bargaining units in the health care industry, including a separate bargaining unit for registered nurses. These new rules may lead to increased organizational activity in the health care industry. Unionization of the District s employees could have an adverse effect on the District s financial condition. POSSIBLE STAFFING SHORTAGES In recent years, the hospital industry has suffered from an increasing scarcity of nurses and skilled technicians to staff its facilities. Factors underlying this industry trend include an increase in the proportion of the population that is elderly, an increase in the tendency to institutionalize senior citizens as opposed to providing nursing care in the home, a decrease in the number of persons entering the nursing profession and an increase in the number of nurses specializing in home health care. These factors may intensify in years to come, aggravating the shortage of skilled personnel. Nationally there is a shortage of registered nurses and licensed practical nurses. This shortage of nurses and skilled technicians could force the Obligated Group to pay higher than anticipated salaries to such personnel or to hire such personnel on a temporary basis through outside agencies at a higher cost. As competition for such employees intensifies, staffing shortages could have the continued effect of significantly increasing personnel costs and could have a material adverse effect on the financial results of the Obligated Group and on its ability to sustain minimum staffing levels necessary to maintain licensure, certification and accreditation. Although the Obligated Group has achieved adequate nurse and skilled technician staffing levels to date through the use of employed and contract personnel, it is uncertain whether qualified candidates will continue to be available to the Obligated Group in the future. OTHER INVESTMENT CONSIDERATIONS The following factors, among others, may also affect the operations or financial performance of the District: 1. Efforts by insurers and governmental agencies to limit the cost of hospital services and to reduce the utilization of hospital facilities by such means as preventive medicine, improved occupational health and safety and outpatient care or by increased copayments, deductibles and other financial incentives or penalties. 2. Employment-related risks. Hospitals are major employers, combining a mix of professional, quasi-professional, technical, clerical, housekeeping, maintenance, dietary and other types of workers in a single operation. The District bears a wide variety of risks in connection with its employees. These risks include strikes and other related work actions, contract disputes, discrimination claims, personal tort actions, work-related injuries, exposure to hazardous materials, discrimination claims, personal tort actions, work-related injuries, exposure to hazardous materials, interpersonal torts (such as between employees, between physicians or management and employees, or between employees and patients), and other risks that may flow from the relationships between employer and employee. or between physicians, patients and employees. Many of these 28

33 risks are not covered by insurance, and certain of them cannot be anticipated or prevented in advance. 3. Any increase in the quantity of uncompensated care for indigents or others for which the District may be required by law or agreement to provide. 4. Any termination or alteration of existing agreements between an Obligated Group member and individual physicians and physician groups who render services to the patients of an Obligated Group member or any termination or alteration of referral patterns by individual physicians and physician groups who render services to the patients of an Obligated Group member with whom such member of the Obligated Group does not have contractual arrangements. 5. Future contract negotiations between public and private insurers, employers and participating hospitals, including the Obligated Group members hospitals, and other efforts by these insurers and employers to limit hospitalization costs and coverage could adversely affect the level of reimbursement to the members of the Obligated Group and hence the revenues of the Obligated Group. 6. Scientific and technological advances, new procedures, drugs and appliances, preventive medicine, occupational health and safety and outpatient health care delivery that could reduce utilization and revenues of the District in the future. 7. Cost and availability of any insurance, such as malpractice, fire, automobile and general comprehensive liability that institutions of similar size and type generally carry. 8. Imposition of wage and price controls for the health care industry. 9. An inflationary economy and difficulties in increasing room charges and other fees, while at the same time maintaining the amount and quality of health services, may affect the ability of the District to maintain sufficient operating margins. 10. The reduced need for hospitalization or other services arising from future medical and scientific advances or from decreases in the service area of the District s facilities. 11. The occurrence of natural disasters that may damage the facilities of the District, interrupt utility service to the facilities of the District or otherwise impair the operation of the District and the generation of revenues. 12. Proposals to eliminate the tax-exempt status of interest on bonds issued to finance health facilities, or to limit the use of such tax-exempt bonds, have been made in the past, and may be made again in the future. The adoption of such proposals would increase the cost to the members of the Obligated Group of financing future capital needs. The occurrence of one or more of the foregoing, or the occurrence of other unanticipated events, could adversely affect the District s occupancy percentage and/or financial performance. 29

34 REGULATION OF THE HEALTH CARE INDUSTRY FEDERAL AND STATE LEGISLATION AND OTHER ACTIONS Members of the Obligated Group are subject to regulation by a number of governmental agencies, including those which administer the Medicare and Medicaid programs, federal, State and local agencies responsible for the administration of health planning programs, and other federal, State and local agencies. As a result, the Obligated Group is sensitive to legislative and regulatory changes in and limitations on governmental spending for the governmental programs which affect it, and the constant shifts in laws and regulations may be detrimental to the Obligated Group and its financial condition. The rapidly rising cost of health care and the consequent drain on the federal budget through federal funding of the Medicare program and through federal participation in the Medicaid program has been a major area of federal executive and Congressional concern, especially in recent years. State and federal legislatures are continuously taking action to curb the amount of federal and State expenditures in health care. For example, the Balanced Budget Act of 1997 (the BBA ) cut health care spending and was expected, at its enactment, to generate up to $115 billion in savings over five years. Additionally, state legislatures have historically frozen or reduced state healthcare benefit programs in tight budget years. Federal and state governments have also sought to indirectly curb health care spending in various ways: by reducing the share of federal matching payments paid to the states to subsidize the cost of their Medicaid programs; by making program changes that affect reimbursement; and, increasingly, by emphasizing the prevention of health care fraud, with a resultant rise in investigation and prosecution of health care providers. There will most likely be a continuing effort to achieve legislative and regulatory reform in these areas on the federal level, including the Medicare, Medicaid and State Children s Health Insurance Program Balanced Budget Refinement Act of 1999 (the BBRA ). Other legislation proposing to regulate, control, or alter the methods of delivering and financing health care is regularly introduced and debated in Congress. Examples include bills that incentivize managed care enrollment, impose mandatory or voluntary cost controls on the health care industry, increase competition among health care providers, establish new patient rights and prohibit healthcare fraud or certain provider relationships deemed as incentivizing behavior detrimental to the healthcare system. Future health care legislation and proposals are likely to vary widely, and no determination can be made at this time as to whether any such legislation will be enacted into law or, if enacted, what effect, if any, it may have on the operations or revenues of the Obligated Group. Health care legislation has been and continues to be the subject of much debate in Congress. Because of the many possible financial effects that could result from enactment of any bills or regulatory actions proposing to regulate the health care industry, it is not possible at this time to predict with assurance the effect on the business of the Obligated Group, if any, of such laws, bills or regulatory actions. PAYMENT AND REIMBURSEMENT Net patient revenues realized by the Obligated Group come from a variety of sources. A substantial portion of the patient service revenues of the Obligated Group is derived from third-party payors which reimburse or pay for the services provided to hospital, rehabilitation and psychiatric patients covered by such third parties for such services. Third-party payors include the federal Medicare program, state Medicaid programs and private health plans and insurers, including health maintenance organizations ( HMOs ) and preferred provider organizations ( PPOs ). Many of these third-party programs make payments to the Obligated Group at rates other than the direct charges that such entities 30

35 would charge for any of the above services, which rates may be determined other than on the basis of the actual costs incurred in providing services to affected patients. Accordingly, there can be no assurance that payments made under these programs will be adequate to cover the actual costs of the Obligated Group. In addition, the financial performance of the Obligated Group could be adversely affected by the insolvency of, or other delay in receipt of payments from, third-party payors that provide coverage for services to their patients. Medicare. --Introduction. During recent years, there have been numerous federal legislative and administrative actions that have affected the Medicare and Medicaid programs, including reductions in payments to hospitals and other health care providers. In 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the MMA ) was signed into law and, in 2005, the Deficit Reduction Act of 2005 (the DRA ) was signed into law. Although it remains unclear how the MMA and the DRA will directly impact the Obligated Group in the future, it does contain various provisions relevant to hospitals and reimbursement of their products and services. Government reports have also raised questions about the long-term solvency of the Medicare Part A program, which is used to pay Medicare hospitalization coverage. According to the actuarial estimates contained in the March 2005 report of the Board of Trustees of the Medicare trust fund, the Medicare Part A trust fund could be depleted by It is therefore likely that the federal government will consider and could implement other reductions in Medicare reimbursement or other changes that affect the Obligated Group s ability to participate in these programs. Any such changes could adversely affect the financial condition of the Obligated Group. --Inpatient Services. Currently, providers are reimbursed for most Medicare inpatient services under a prospective payment system ( PPS ), which pays hospitals fixed amounts for specific services based on patient diagnosis. Under PPS, each Medicare patient discharge is classified into diagnosisrelated group categories ( DRGs ) and the hospital is reimbursed a specific fixed predetermined rate established by Medicare for that particular patient s DRG, regardless of the actual costs incurred by the hospital for the treatment of such patient. For each DRG category a nationwide rate has been set. The rate varies based on the particular region s wage rates, and the DRG rate for each hospital within a region depends on the weights (based upon the hospital s case-mix) for each DRG. If a hospital treats a patient for less than the applicable DRG rate, the hospital is entitled to retain the difference. Generally, if a hospital s cost of treating the patient exceeds the DRG rate, the hospital will not be entitled to any additional payment, and it will realize a loss. Furthermore, a hospital is precluded from charging the patient any costs beyond the coinsurance and deductible required under Medicare. Payments to hospitals under a DRG system may not reflect the actual costs incurred by many hospitals. DRG rates are updated periodically, and the Obligated Group cannot predict how future adjustments that may be made by Congress and the Centers for Medicare and Medicaid Services ( CMS ) may affect the financial condition of the Obligated Group. With certain exceptions, PPS payments are not adjusted for actual costs or variations in lengths of stay or intensity of services. Additional payments, however, are made under PPS for cases involving unusually high costs in comparison with other discharges in the same DRG category, known as outliers. Consequently, if a hospital s costs of treating Medicare patients exceed the prospective payment for such services, the hospital will have a loss from treating Medicare patients, which loss will have to be recovered, if at all, from other sources of revenue; however, if the hospital s costs are less than the prospective payment rate, the hospital will realize a profit. Many other third-party payors, including alternative delivery systems, are implementing their own prospective payment systems and/or requiring 31

36 contractual terms designed to prevent cost shifting to such payors and otherwise are seeking to reduce their payment obligations to hospitals. When the PPS was first implemented, DRG rates were supposed to have been updated each year pursuant to discretionary authority vested in the Secretary of Health and Human Services to increase the rates, unless Congress were to intervene. Although the costs of providing health care services increase annually, Congress has not always authorized adequate inflationary increases in the Medicare prospective payment rates since 1983, when the PPS was implemented. In some years, Congress has frozen or reduced the Medicare prospective payment rates. A hospital s capital-related costs for treating Medicare inpatients, which include interest expense, depreciation, lease expense, property taxes, building costs and return on equity capital of proprietary providers, are reimbursed on the basis of a prospective capital rate (e.g. under the PPS system), adjusted for case mix, area wage index, urban location, disproportionate share factors and outlier cases. Certain operating costs associated with Medicare patients, including deductible and coinsurance amounts not paid by Medicare patients, the cost of certain training and educational activities, limited research costs not otherwise covered by grants, the value of service of non-paid workers, compensation of owners, payments for therapy services provided under arrangement, organ transplant services and providers cost of compensation to provider-based physicians, may be reimbursed on a reasonable cost or prospective basis depending on the cost category. Medicare payments for capital or operating costs rarely cover the actual costs incurred by a hospital. The Obligated Group cannot predict how future adjustment of the cost-based methodologies or PPS rates may affect the financial condition of the Obligated Group. --Outpatient Services. The BBA established a PPS for outpatient hospital services. Outpatient PPS ( OPPS ) became effective August 1, 2000 for hospital outpatient services and October 7, 2000 for provider-based facilities owned by hospitals. OPPS was phased-in over a three-year period ending Under OPPS, hospital outpatient services are divided into ambulatory payment classifications ( APCs ). APC groups define the clinically-related and resource-similar items and services that contribute to the cost of a procedure or service. Each APC is assigned a weight, which is based on the median cost of the services in the group. Payment rates for the APCs are established by applying a conversion factor to the APC weight. Under the Benefits Improvement and Protection Act of 2000, the conversion factor may be adjusted in subsequent fiscal years if CMS determines that the adjustment factor has resulted or is likely to result in hospitals changing their coding or classification of covered services. Depending on the type of service provided, hospitals may be eligible for payment under more than one APC per patient encounter. Hospitals are also eligible to receive an outlier payment for outpatient services for which the hospital s charges, adjusted to cost, exceed a fixed multiple of the OPPS payment. Payments to hospitals under OPPS may not reflect the actual costs incurred by many hospitals. The Obligated Group cannot predict how future adjustments that may be made by Congress and CMS may affect the financial condition of the Obligated Group. --Fraud and Abuse. A number of federal laws, loosely referred to as fraud and abuse laws, are used to prosecute health care providers and physicians that fraudulently or wrongfully obtain reimbursement that increases costs to any federal health care program. The anti-kickback provisions of the Social Security Act (the Anti-Kickback Law ) prohibit the exchange of anything of value with the intent to encourage utilization of services payable under a federal health care program. The intent standard under the Anti-Kickback Law has been interpreted by some courts to be satisfied if the intent to induce referrals or other business is simply one of many reasons to enter into the arrangement. To protect legitimate and cost-effective arrangements among health care providers, the Office of the Inspector General (the OIG ) of the Department of Health and Human Services ( HHS ), has issued numerous safe harbor regulations that specify certain financial arrangements deemed not to violate the Anti- 32

37 Kickback Law. The safe harbor regulations generally are narrowly drawn and protect very few arrangements. In addition, the OIG asserts the authority to prosecute entities that enter into sham transactions that technically comply with a safe harbor if the OIG determines the substance of the transaction is not reflected by its form. Non-compliance with one or more elements of a safe harbor does not make conduct illegal; however, non-compliance with a safe harbor does make it more difficult to determine whether activities in which Members of the Obligated Group are engaged are likely to be considered a violation of the Anti-Kickback Law. Penalties for violation of the Anti-Kickback Law are severe. Conviction could result in up to five years imprisonment, a $25,000 fine per offense, exclusion from the federal health care programs, and loss of tax-exempt status. In lieu of or in addition to criminal proceedings under the Anti-Kickback Law, violators of the Anti-Kickback Law may also be subject to civil monetary penalties. Civil monetary penalties can range from $10,000 to $50,000 per offense, as well as damage assessments equal to three times the total amount of the kickback. Under the Health Insurance Portability and Accountability Act of 1996 ( HIPAA ), a provider must be excluded from participation in the federal health care programs if convicted of any felony under federal or state law. For exclusions related to program abuse, patient abuse, health care fraud or a controlled substance, the minimum period of exclusion is five years. A minimum one-year exclusion was also created for providers sanctioned for failure to comply with statutory obligations related to quality of care. Because of the breadth of the Anti-Kickback Law and the narrowness of the safe harbors, no assurance can be given as to what effect this law will have on the Obligated Group. Federal fraud and abuse laws also prohibit the filing of false claims for payment by Medicare, if the claim is filed with the knowledge that the claim is false or with deliberate ignorance or reckless disregard for the truth or falsity of the claim. Each violation of this prohibition is a felony punishable by a fine of up to $25,000, up to five years imprisonment and/or program exclusion. In addition, violators may be subject to civil penalties up to $10,000, plus damages of three times amounts paid by Medicare based on false claims. Unlike the other fraud and abuse laws, the act implementing this prohibition allows suits by individuals in addition to enforcement action by the government. Disgruntled or unhappy employees or competitors may become plaintiffs and have a financial incentive to bring suit, as they can recover a portion of the damages awarded. HIPAA increased the scope of healthcare fraud and abuse laws by applying them to prohibit fraudulent conduct against any health care benefit program funded in part by the federal government, not only Medicare and Medicaid. HIPAA also authorized new criminal penalties, ranging from monetary fines to life imprisonment depending on the particular crime and the severity of the outcome, for a variety of old and new healthcare offenses involving any public or private healthcare benefits program. HIPAA also created a new crime for falsifying, concealing or covering up a material fact in connection with the delivery of or payment for health care benefits, or making any materially false, fictitious or fraudulent statement or representation, or making or using any materially false writing or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry, which is punishable by fines or imprisonment up to five years, or both. The BBA further increased the penalties associated with healthcare fraud and abuse. Under the BBA, individuals or entities convicted of three health care related crimes must be permanently excluded from the Medicare and Medicaid programs. The BBA gave CMS the authority to refuse to enter into Medicare agreements with a physician or supplier convicted of a single felony that is determined to be detrimental to Medicare. Additionally, the BBA authorizes civil monetary penalties to be assessed 33

38 against entities that contract with an excluded individual or entity and established a toll-free number for beneficiaries to report fraud and billing irregularities. The health care industry is governed by a complex web of statutes and regulations which are not always clear in their interpretation or application. The Obligated Group s policy is to comply with all applicable statutes and regulations, and the Obligated Group has adopted and implemented a corporate compliance program to detect, correct and, if necessary, report deficiencies. --Billing Investigations. HHS, through the OIG or through fiscal intermediaries of CMS that pay Medicare claims on behalf of HHS, routinely conducts national investigations of hospital Medicare billings for certain types of services. When such billing investigations occur, the Obligated Group may be investigated and required to pay penalties, sanctions and other amounts that reimburse the Medicare program for billing deficiencies. --Voluntary Repayments. The Obligated Group regularly conducts audits of its billing practices as part of its corporate compliance program. When billing errors are discovered as a result of these audits, the Obligated Group has voluntarily refunded incorrect payments to the Medicare and Medicaid programs. These programs may investigate the circumstances under which the billings were made for improper practices. --Laws on Patient Referrals. The Ethics in Patient Referrals Act, known as the Stark Law, also prohibits certain types of referral arrangements between physicians and health care entities. Physicians are prohibited under the original Stark Law enactment and its 1993 amendment, Stark II, from referring patients for designated health services which are reimbursed under the Medicare and Medicaid programs to entities with which they have a financial relationship or in which they have an ownership interest. Designated health services include an array of health care and physician services, including inpatient and outpatient hospital care. The entity to which a prohibited referral is made is barred from billing for the designated health service. Violations of the statute can result in civil monetary penalties of up to $15,000 per improper referral and exclusion from the Medicare and Medicaid programs. A hospital may be fined up to $10,000 per day for failure to disclose a physician s improper financial relationship. On January 4, 2001, CMS published the first of two final rule phases implementing the Stark Law. Phase I implements a majority of the provisions of the Stark Law, certain exceptions and related definitions. The effect of Phase I of the final rule has been to clarify certain exceptions to the Stark Law, to create additional exceptions, and to increase flexibility for hospital providers entering into financial arrangements with physicians. Phase II, which became effective July 26, 2004, responds to comments CMS received on Phase I, addresses the remaining issues not addressed in Phase I and creates new regulatory exceptions for nonabusive financial relationships. The Stark Law s unqualified prohibition against self-referral and the complexities of its statutory and regulatory exceptions continue to substantially inhibit financial relationships with physicians. On September 5, 2007, CMS published the third phase of the final Stark Law regulations as a final rule with an effective date of December 4, Among other changes, this new regulation revamps the rules governing physician recruitment and will force reexamination of a wide range of financial relationships involving physicians and DHS providers such as the District. CMS has also set forth Stark Law revisions in the 2008 Medicare Physician Fee Schedule proposed rule. 72 Fed. Reg (July 12, 2007). It is anticipated that CMS will continue to issue regulations in connection with the Stark Law, some of which may change or restrict existing Stark Law exceptions or expand its application. Any such new regulations may require the District or any future members of the Obligated Group to amend or 34

39 terminate certain arrangements with physicians or their immediate family members to comply with the regulations requirements, which may impact the financial condition and results of operations of the members of the Obligated Group. The South Carolina Provider Self-Referral Act prohibits a health care provider from referring a patient for the provision of designated health services to an entity in which the health care provider is an investor or has an investment interest, subject to certain exemptions. A health care provider is any physician or other person licensed, certified or registered under the laws of the State of South Carolina to provide health care services. Designated health services means any health care procedure, service or item provided by a health care provider. No claim for payment may be submitted to any third party payor for a service furnished pursuant to a prohibited referral and any sums collected must be refunded on a timely basis. A provider who makes a prohibited referral, fails to disclose required information, or makes a claim for services and fails to make a refund as required, is subject to a civil penalty of up to $5,000 for each service and may be subjected to disciplinary action by its respective licensing board. In addition, a provider which enters into an arrangement or scheme in an effort to circumvent the Act is subject to a civil penalty of up to $25,000. Where a portion of the charges for services rendered are paid back to the referring provider pursuant to an investment interest, compensation arrangement or otherwise, as an inducement to refer patients for future services and the payment is not tax deductible as an ordinary and necessary expense, it is deemed to be a kickback, receipt of which is a misdemeanor carrying a fine of up to $1,000 or imprisonment of up to thirty days. Penalties for violation of the anti-referral provisions of the Medicare fraud and abuse laws, Stark Law and the South Carolina Provider Self-Referral Act could be applied to many joint business activities between hospitals and physicians, physician recruiting and retention programs, physician referral services, hospital-physician service and management contracts, loans to physicians, space and equipment rentals and other service and vendor relationships. The District will conduct certain activities of these general types and similar activities. While management of the District does not believe that the District is or will be involved in any prohibited activity and is not aware of any challenge or investigation with respect to these matters, there can be no assurance that such challenge or investigation will not occur in the future. If the District s activities are determined to violate any of these laws, this determination may have a material adverse effect on the financial position of the District, especially if violations were identified and prosecuted and resulted in exclusion from the Medicare program or substantial fines. --Prepaid Plans. Under current HHS regulations, eligible prepaid medical plans may receive payment on a prospective, per capita basis for the cost of services provided to Medicare beneficiaries. Current Medicare reform efforts may cause the number of these plans and of Medicare beneficiaries enrolled in such plans to increase, which may result in significant reductions in Medicare admissions and/or payments to hospitals. The Obligated Group may lose Medicare patients to prepaid medical plans and may be required to provide services to such patients as enrollees of prepaid medical plans. --Federally Designated Quality Improvement Organization. The health care facilities of the Obligated Group are reviewed by a federally designated quality improvement organization ( QIO ), which reviews the necessity and appropriateness of hospital admissions, the appropriateness of the classifications of discharges, the necessity of patient transfers and the propriety of practices that have the potential to increase hospital payments improperly. The QIO may, subject to appeal by the health care facility under review, recommend sanctions to CMS, including denial of payments, requirements for corrective action or termination from the Medicare program. 35

40 --Costs of Medical Education. The Medical Education Department at Spartanburg Regional Medical Center sponsors three community-based training programs for residents, including family medicine, general surgery and a one-year transitional internship. Each program is organized and supervised by a full-time faculty. Volunteer faculty members supplement the teaching effort and provide rotations in several subspecialties. The faculty members have teaching appointments at the Medical University of South Carolina in Charleston and/or the University of South Carolina School of Medicine in Columbia. The District is affiliated through a statewide consortium of teaching hospitals with both medical schools. Senior residents in obstetrics-gynecology rotate from Charleston and serve as junior faculty members for transitional internship and family medicine residents. Under Medicare, hospitals may be eligible to receive additional payments for the direct and indirect costs of approved graduate medical education activities. Payments for costs associated with direct medical education and certain indirect medical education activities are reimbursed using formulas which do not necessarily reflect the actual costs of providing such education. There can be no assurance that the formulas used in the past will continue to be applied or that Medicare payments will be adequate to cover the District s direct and indirect costs of providing medical education. State Medicaid Regulations. The District is a participating provider in the South Carolina Medicaid program, a combined Federal and State program that provides reimbursement for medical care provided to qualifying indigent South Carolina residents. Approximately 7% of the net patient service revenues of the District were derived from the Medicaid program for the fiscal year ended September 30, While Federal laws impose certain basic requirements on the individual Medicaid plans developed by South Carolina and other states, each state develops its own payment system. Payments for services rendered to South Carolina Medicaid beneficiaries are subject to an appropriation by the South Carolina General Assembly of sufficient funds to pay the incurred payment obligations for the Medicaid program. Delays in appropriations and state budget deficits, which may occur from time to time, create a risk that payment for services to Medicaid beneficiaries will be delayed or withheld. The District is reimbursed for acute care general inpatient services to indigent patients under South Carolina's State Medicaid program based on the cost of such care. The State-Medicaid Program reimburses acute care general inpatient services provided by the District s facilities under a PPS based on DRG rates established by the Division of Medical Assistance ( DMA ) within the South Carolina Department of Health and Human Services. Psychiatric and rehabilitative services provided in either specialty hospitals, Medicare recognized cost-based units or other beds in general acute care hospitals are reimbursed on a per diem methodology. Outpatient hospital services are generally reimbursed at 80% of their allowable costs. South Carolina also provides reimbursement for intermediate care facilities services to Medicaid patients of a prospective, per diem basis, including a direct patient care rate and an indirect rate for administration, etc., subject to certain limitations. Prepaid medical plans or managed care programs involving persons eligible for Medicaid are increasing nationwide. South Carolina is in the process of implementing pilot managed care programs for Medicaid recipients and is considering more expansive proposals in this regard. Depending on the type of managed care approach eventually adopted by the State for the Medicaid population, the District could suffer a loss in patients and revenues that could affect its financial condition adversely. The BBA permits states to require a Medicaid beneficiary to enroll in a managed care organization if the state permits a choice between at least two entities. Significantly for providers, states 36

41 may restrict the number of managed care provider agreements as long as access to services is not substantially impaired. The DMA may also modify the Medicaid reimbursement methodology in other ways from time to time within its statutory mandate The impact on the District of any future Medicaid reimbursement methodology is uncertain. Commercial Insurance. Many commercial insurance plans, including group plans, reimburse their enrollees and make payments to the Obligated Group for charges at established rates. Generally, these plans pay semi-private rates plus ancillary service charges, which are subject to various limitations and deductibles depending on the plan. Patients carrying such coverage are responsible to the hospital for any deficiency between the commercial insurance proceeds and total contracted charges. Managed Care. The Obligated Group receives a significant portion of its revenues from nongovernmental payors, which provide third-party reimbursement to the Obligated Group on the basis of various formulas. Renegotiation of such formulas and changes in such reimbursement systems may reduce third-party reimbursement to the Obligated Group. Certain private insurance companies and other organizations contract with hospitals on a preferred provider basis, and some insurers have introduced plans known as preferred provider organizations or PPOs. Under such plans, there may be financial incentives for subscribers to use only those hospitals which contract with the plans. Most PPOs and HMOs currently pay hospitals on a discounted fee-for-service basis or on a discounted fixed rate per day of care. The discounts offered to HMOs and PPOs may result in payment at less than actual cost and the volume of patients directed to a hospital under an HMO or PPO contract may vary significantly from projections. Some HMOs offer or mandate a capitation payment method under which hospitals are paid a predetermined periodic rate for each enrollee in the HMO who is assigned to, or otherwise directed to receive care at a particular hospital. In a capitation payment system, the hospital assumes an insurance risk for the cost and scope of care given to such HMO s enrollees. If payment under an HMO or PPO contract is not sufficient to meet the hospital s costs of care, the financial condition of the hospital may be adversely affected. The Obligated Group currently has contracts with both HMOs and PPOs, but no contracts contain a capitation payment method. HIPAA PRIVACY AND SECURITY REGULATIONS When Congress enacted HIPAA, it required HHS to implement national standards to protect the privacy and security of individually-identifying health information. Final privacy regulations were published on December 28, 2000 and then modified on August 14, The privacy regulations became effective on April 14, 2001, though healthcare providers were not required to be fully compliant until April 14, The privacy regulations prohibit any covered entity, including hospitals and health systems, from using or disclosing an individual s protected health information unless the use or disclosure is authorized by the individual (or his or her personal representative) or is specifically required or permitted under the final regulations. The regulations also establish certain patient rights with respect to protected health information. The regulations impose a complex system of requirements for meeting these basic rules, among others. HHS published final security regulations on February 20, Healthcare providers were required to become compliant with the regulations by April 20, The regulations specify a series of administrative, technical and physical security procedures for healthcare providers to use to assure the security of protected health information in electronic form. 37

42 The regulations provide for the imposition of both civil and criminal penalties for violations of the statute. General civil penalties for failure to comply with HIPAA requirements and standards can range up to $25,000 per violation. Criminal penalties for wrongful disclosure of protected health information include fines of up to $50,000 and imprisonment of up to 1 year. These criminal penalties increase substantially if the offense occurs under false pretenses or with the intent to sell, transfer, or use individually identifiable health information for commercial advantage, personal gain or malicious harm. On January 23, 2004, HHS published final regulations requiring a single national identifier for covered health care organizations ( National Provider Identifier Rule ). The identifier replaces a number of different numbers that covered organizations are currently required to use. Most covered entities must have obtained and began using this identifier by May 23, The District is in compliance with the National Provider Identifier Rule. Certain compliance costs have been incurred by the District in connection with the National Provider Identifier Rule. The administrative and financial burden of complying with the privacy and security regulations has been, and may continue to be, substantial. Even when a healthcare provider comes into compliance, there are expected to be continuing costs associated with compliance. The Obligated Group cannot predict the extent to which future costs of compliance with the privacy and security regulations will affect its financial performance. PATIENT TRANSFERS Federal law requires hospitals that participate in Medicare and Medicaid to comply with the Emergency Medical Treatment and Active Labor Act of 1986 ( EMTALA ), and the Obligated Group is therefore required to adhere to EMTALA s requirements. Under EMTALA, any individual, not just a Medicare or Medicaid beneficiary, that comes to the emergency department of a hospital seeking medical examination or treatment must be provided an appropriate medical screening examination. If an emergency medical condition exists or a woman is in active labor, the hospital must provide sufficient examination and treatment to stabilize the patient or may transfer the patient, if the transfer meets EMTALA s requirements for an appropriate transfer. EMTALA requires hospitals to provide the medical screening exam and stabilizing treatment regardless of the individual s ability to pay and prohibits hospitals from inquiring into the individual s method of payment or insurance status before providing the treatment. Additionally, EMTALA prohibits hospitals from delaying treatment in order to obtain prior authorization for treatment from an individual s managed care plan. Because of these prohibitions, the Obligated Group may be required to provide substantial amounts of care and services for which they will not receive reimbursement. Hospitals that knowingly and willfully, or negligently, fail to comply with EMTALA s requirements are subject to termination as a Medicare provider. Additionally, the OIG may impose civil monetary penalties of up to $50,000 per violation. EMTALA may create a private right of action for individuals who suffer harm as a result of a hospital s EMTALA violations. ANTITRUST Enforcement of the antitrust laws against health care providers has become more common in recent years. Antitrust liability may arise in a wide variety of circumstances, including medical staff privilege disputes, third party contracting, physician relations, joint ventures, mergers and affiliations, and acquisition activities. Violations of the antitrust laws could subject a hospital to criminal and civil enforcement by Federal and State agencies, as well as by private litigants. At various times, a hospital 38

43 may be subject to an investigation by a governmental agency charged with the enforcement of the antitrust laws, or may be subject to administrative or judicial action by a Federal or State agency or a private party. Hospitals, including the District s, regularly have disputes regarding credentialing and peer review, and may be subject to antitrust liability in such a capacity. In addition, hospitals occasionally indemnify medical staff members who are involved in such credentialing and peer review activities, and therefore hospitals may also be liable with respect to such indemnity. Also, court decisions have established private causes of action against hospitals that use their local market power to promote ancillary health care businesses in which they have an interest. Such activities may result in liability for the hospitals under certain circumstances where a competitor suffers business damage. The ability of hospitals to consummate mergers, acquisitions, or affiliations may also be impaired by the antitrust laws. Liability in any of these or other antitrust areas may be substantial, depending on the facts and circumstances of each case. From time to time, the District is or will be involved in a variety of activities which may be subject to scrutiny under the antitrust laws, and it cannot be predicted when or to what extent liability may arise. The precise degree to which certain activities may expose the District to antitrust risk from governmental or private sources is dependent on a myriad of factual matters which may change from time to time. UNCOMPENSATED CARE Although the District attempts to assure payment or reimbursement for most of the care it renders, it provides a substantial volume of uncompensated care to the medically indigent. Obligations to provide uncompensated care can derive from anti-dumping, emergency care, continuity of care, and other laws. In the fiscal year ended September 30, 2007, the District incurred approximately $91,492,000 in uncompensated care, not counting policy discounts, write-offs for bad debts and inadequate Medicaid reimbursement. Increased unemployment or other adverse economic conditions could increase the proportion of patients who are unable to pay all or any of the cost of their care. Uncompensated care has historically been funded partly by cost-shifting to those who can pay for care, but changes in private and public reimbursement mechanisms have made cost-shifting increasingly difficult. Numerous proposals have been made for state and federal legislation to address the problems of uncompensated care and medical indigence, but there is no assurance that any such program will be enacted. RELATIONSHIPS BETWEEN TAX-EXEMPT HOSPITALS AND PHYSICIANS Hospitals and other health care facilities are frequently financed by the issuance of tax-exempt bonds and owned and operated by entities which are exempt from taxation under the Internal Revenue Code. When these facilities are used by physicians, professional corporations or other non tax-exempt entities, the Internal Revenue Service will examine the arrangement to determine whether the facilities are being used in the trades or businesses of the nongovernmental persons. Such a finding may result in loss of tax exemption for interest payable pursuant to the bonds. Private business use or private inurement can arise out of the use of the exempt organization s property pursuant to a lease or pursuant to a management or service contract. IRS Revenue Procedure sets forth specific guidelines for management contracts and other service contracts entered into 39

44 prior to May 16, 1997; and IRS Revenue Procedure 97-13, as supplemented by IRS Revenue Procedure 01-39, sets forth updated guidelines for management contracts and other service contracts entered into on or after May 16, Use of an exempt organization s facilities will generally be allowed without loss of the tax-exempt status of the organization, provided the compensation is reasonable and not based on net profits from the organization s operations and the contracts comply with various compensation parameters, term limits and requirements respecting the hospital s right to terminate the contract. In addition, the service provider may not have any role or relationship with the organization that, in effect, substantially limits the organization s ability to exercise its rights, including cancellation rights, under the contract. Revenue Procedure sets forth a safe harbor for determining whether the service provider has a controlling relationship with the organization. Under the safe harbor, not more than 20% of the voting power of the governing body of the organization in the aggregate may be vested in the service provider and its directors, officers, shareholders and employees; overlapping board members may not include the chief executive officers of the service provider and the organization, or their respective governing bodies and members of the governing body of the organization may not own a controlling interest in the service provider. Management of the District does not believe the District is engaged in any activities that would cause the interest on the 2008D Bonds to be taxable pursuant to the private business use rules, but there can be no assurance that the Internal Revenue Service will not challenge the District on this issue. STATE LEGISLATION General. Medicaid is a medical assistance program funded by the federal government and the states and administered by the various states. Hospital benefits are available under each participating state s Medicaid program, within prescribed limits, to persons meeting certain minimum income and other need requirements. Payments for such medical and health services are made to hospitals in an amount determined in accordance with procedures and standards established by state law under federal guidelines. HHS has published rules which include limits on payments to hospitals for various services. The South Carolina Medicaid Program. Under the South Carolina Medicaid payment system, health care facilities are compensated for the treatment of Medicaid patients on the basis of fixed payments for certain diagnoses or on a per diem basis for other diagnoses. While the District has not experienced any material adverse impact to date as a result of this payment system, there is no assurance that such payments will be sufficient to cover the actual cost of treating Medicaid patients. The South Carolina Medically Indigent Assistance Act (the Indigent Assistance Act ) was created in 1985 and significantly amended in 1989 and The Indigent Assistance Act converted the Medicaid hospital reimbursement system from a retrospective payment system to a prospective payment system, created a Medically Indigent Assistance Program, provided for expansion of Medicaid coverage and created a Medicaid Expansion Fund to pay the costs of the additional coverage and conversion to the new reimbursement system. Under the Indigent Assistance Act, every fiscal year the State Treasurer withholds from the portion of the Local Government Fund allotted to counties a sum equal to $0.50 per capita based on the latest official United States Census, to fund Medicaid services. In addition, counties are assessed $13,000,000 annually for use as matching funds for Medicaid services. Of this $13,000,000, $7,500,000 is deposited into the Medical Expansion Fund. The Medical Expansion Fund also receives deposits from hospitals and the State. Every hospital licensed as a general hospital by the Department of Health and Environmental Control must pay an annual excise, license or privilege tax. Each hospital s tax is based on the total expenditures of each hospital as a percentage of total hospital expenditures statewide. Hospitals 40

45 licensed in other states, but doing business in the State, pay this tax based on a different formula. The tax must be calculated to provide total annual revenues, exclusive of penalties and interest, of $21.5 million. The Medical Expansion Fund also receives State appropriations equal to the estimated additional State revenue to be generated in the next fiscal year by the expenditure of federal matching funds received for the expanded Medicaid services authorized by the Indigent Assistance Act. During the fiscal year which ended on September 30, 2007, the District s contribution to the Medical Expansion Fund was $13,336,000. During the fiscal year ended on September 30, 2006, the District s contribution to the Medical Expansion Fund was $14,045,000. The State Medical Facilities Plan and the State Certificate of Need and Health Facility Licensure Act, as amended, contain standards or criteria for the adding or substantial expansion of certain health care services provided by the hospitals in the State. The State Medical Facilities Plan is adopted annually. In order for a hospital to add to its bed complement, to add a new health care service, to expand substantially an existing health care service identified in the State Medical Facilities Plan, to acquire certain medical equipment having a value in excess of that set forth by regulation (currently $600,000) or to make certain capital expenditures which are in an amount in excess of that set forth by regulation (currently $1,000,000), a hospital must obtain a Certificate of Need from the State. From time to time the State Medical Facilities Plan is amended to include health care services for which a need has not been previously identified. In addition, the sale of a health care facility or the providing of certain outpatient services or facilities may require Certificate of Need approval. Consequently, the ability of the District to develop or eliminate facilities or services may be limited. RATINGS Moody s Investors Service ( Moody s ) will assign the 2008D Bonds a rating of Aaa, Standard & Poor s Ratings Services, a division of The McGraw-Hill Companies, Inc. ( S&P ), will assign the 2008D Bonds a rating of AAA and Fitch Inc. ( Fitch Ratings ) will assign the 2008D Bonds a rating of AAA on the understanding that the Policy of the Insurer will be issued on or before the issuance and delivery of the 2008D Bonds. In addition, Moody s, S&P and Fitch Ratings have assigned independent underlying ratings of A1, A+ and AA-, respectively, to the 2008D Bonds, which ratings do not take into account the issuance of the Policy. Further explanation of the significance of such ratings may be obtained from Moody s, S&P and Fitch Ratings. In a July 21, 2008 rating action, Moody s has placed under review for possible downgrade the financial strength rating of the Insurer s Aaa rating. Moody s stated the Insurer s credit profile may no longer be consistent with its current ratings given uncertainty about the firm s portfolio risk profile, material shifts in the demand function of financial guarantees and...potential sensitivity of its franchise and financial flexibility if losses continue to rise. Moody s further noted that a downgrade below Aa2 is currently seen as unlikely. There can be no assurance that the view expressed in Moody s July 21, 2008 rating action represents the current view of Moody's or that its view will not change in the future. The District has provided to Moody s, S&P and Fitch Ratings certain information that has not been included in this Official Statement. The ratings are not a recommendation to buy, sell or hold the 2008D Bonds and should be evaluated independently. There is no assurance that such ratings will not be withdrawn or revised downward by Moody s, S&P or Fitch Ratings. Such action may have an adverse effect on the market price of the 2008D Bonds. Neither the District nor the Underwriter have undertaken 41

46 any responsibility after the issuance of the 2008D Bonds to assure maintenance of the ratings or to oppose any such revision or withdrawal. The District has not requested any other organization to consider the assignment of a rating for the 2008D Bonds. FEDERAL INCOME TAX GENERALLY TAX EXEMPTION On the date of issuance of the 2008D Bonds, Haynsworth Sinkler Boyd, P.A., Greenville, South Carolina ( Bond Counsel ), will render an opinion that, assuming continuing compliance by the District with the requirements of the Internal Revenue Code of 1986, as amended ( the Code ), and the applicable regulations promulgated thereunder (the Regulations ) and further subject to certain considerations described in --COLLATERAL FEDERAL TAX CONSIDERATIONS below, under existing statutes, regulations and judicial decisions, interest on the 2008D Bonds is excludable from the gross income of the registered owners thereof for federal income tax purposes. Interest on the 2008D Bonds will not be treated as an item of tax preference in calculating the alternative minimum taxable income of individuals or corporations; however, interest on the 2008D Bonds will be included in the calculation of adjusted current earnings in determining the alternative minimum tax liability of corporations. The Code contains other provisions that could result in tax consequences, upon which no opinion will be rendered by Bond Counsel, as a result of (i) ownership of the 2008D Bonds or (ii) the inclusion in certain computations (including, without limitation those related to the corporate alternative minimum tax) of interest that is excluded from gross income. The opinion of Bond Counsel will be limited to matters relating to the authorization and validity of the 2008D Bonds and the tax-exempt status of interest on the 2008D Bonds as described herein. Bond Counsel makes no statement regarding the accuracy and completeness of this Official Statement. The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel s judgment as to the proper treatment of the 2008D Bonds for federal income tax purposes. Bond Counsel s opinions are based upon existing law, which is subject to change. Such opinions are further based on factual representations made to Bond Counsel as of the date thereof. Bond Counsel assumes no duty to update or supplement its opinions to reflect any facts or circumstances that may thereafter come to Bond Counsel s attention or to reflect any changes in law that may thereafter occur or become effective. Moreover, Bond Counsel s opinions are not a guarantee of a particular result, and are not binding on the Internal Revenue Service (the IRS ) or the courts; rather, such opinions represent Bond Counsel s professional judgment based on its review of existing law, and in reliance on the representations and covenants that it deems relevant to such opinions. The opinion of Bond Counsel described above is subject to the condition that the District comply with all requirements of the Code and the Regulations, including, without limitation, certain restrictions on the use, expenditure and investment of the gross proceeds of the 2008D Bonds and the obligation to rebate certain earnings on investments of such gross proceeds to the United States Government, that must be satisfied subsequent to the issuance of the 2008D Bonds in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The District has covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the 2008D Bonds in gross income for federal income tax purposes retroactive to the date of issuance of the 2008D Bonds. The opinion of Bond Counsel delivered on the date of issuance of the 42

47 2008D Bonds is conditioned on compliance by the District with such requirements and Bond Counsel has not been retained to monitor compliance with the requirements subsequent to the issuance of such 2008D Bonds. STATE TAX EXEMPTION Bond Counsel is of the further opinion that the 2008D Bonds and the interest thereon are exempt from all taxation by the State of South Carolina, its counties, municipalities and school districts except estate, transfer or certain franchise taxes. Interest paid on the 2008D Bonds is currently subject to the tax imposed on banks by Section , Code of Laws of South Carolina 1976, as amended, which is enforced by the South Carolina Department of Revenue as a franchise tax. The opinion of Bond Counsel is limited to the laws of the State of South Carolina and federal tax laws. No opinion is rendered by Bond Counsel concerning the taxation of the 2008D Bonds or the interest thereon under the laws of any other jurisdiction. COLLATERAL FEDERAL TAX CONSIDERATIONS Prospective purchasers of the 2008D Bonds should be aware that ownership of tax-exempt obligations may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, financial institutions, property and casualty insurance companies, life insurance companies, certain foreign corporations, certain S corporations, individual recipients of Social Security or Railroad Retirement benefits and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations. Bond Counsel expresses no opinion concerning such collateral income tax consequences and prospective purchasers of 2008D Bonds should consult their tax advisors as to the applicability thereof. Future legislation, if enacted into law, or clarification of the Code may cause interest on the 2008D Bonds to be subject, directly or indirectly, to federal income taxation, or otherwise prevent owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislation or clarification of the Code may also affect the market price for, or marketability of, the 2008D Bonds. Prospective purchasers of the 2008D Bonds should consult their own tax advisers regarding any pending or proposed federal tax legislation, as to which Bond Counsel expresses no opinion. The IRS has established an ongoing program to audit tax-exempt obligations to determine whether interest on such obligations is includable in gross income for federal income tax purposes. Bond Counsel cannot predict whether the IRS will commence an audit of the 2008D Bonds. Bond Counsel s engagement with respect to the 2008D Bonds ends with the issuance of the 2008D Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the District or the Owners regarding the taxexempt status of the 2008D Bonds in the event of an audit examination by the IRS. The IRS has taken the position that, under the standards of practice before the IRS, Bond Counsel must obtain a waiver of a conflict of interest to represent an issuer in an examination of tax exempt bonds for which Bond Counsel had issued an approving opinion. Under current procedures, parties other than the Issuer and their appointed counsel, including the Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the District legitimately disagrees may not be practicable. Any action of the IRS, including but not limited to selection of the 2008D Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the 2008D Bonds, and may cause the District or the Owners to incur significant expense, regardless of the ultimate 43

48 outcome. Under certain circumstances, the District may be obligated to disclose the commencement of an audit under the Continuing Disclosure Agreement. See CONTINUING DISCLOSURE herein. Original Issue Discount. The 2008D Bonds maturing in the years 2017, 2018 and 2025 have been sold at initial public offering prices which are less than the amount payable at maturity (the Discount Bonds ). The difference between the initial public offering prices to the public (excluding bond houses and brokers) at which price a substantial amount of each maturity of the Discount Bonds is sold and the amount payable at maturity constitutes original issue discount, which will be treated as interest on such Discount Bonds and to the extent properly allocable to particular owners who acquire such Discount Bonds at the initial offering thereof, will be excludable from gross income for federal income tax purposes to the same extent as other interest on the 2008D Bonds. As discount is accrued, the purchaser s basis in such Discount Bond is increased by a corresponding amount, resulting in a decrease in the gain (or an increase in the loss) to be recognized for federal income tax purposes upon a sale or disposition of such Discount Bond prior to its maturity. A portion of the original issue discount that accrues in each year to an owner of a Discount Bond that is a corporation will be included in the calculation of the corporation s federal alternative minimum tax liability. Consequently, an owner of any Discount Bond that is a corporation should be aware that the accrual of original issue discount in each year may result in an alternative minimum tax liability although the owner of such Discount Bond has not received cash attributable to such original issue discount in such year. The Code contains certain provisions relating to the accrual of original issue discount in the case of subsequent purchasers of obligations such as the Discount Bonds. Owners who do not purchase Discount Bonds in the initial offering at the initial offering price at which a substantial amount of such Discount Bonds were sold should consult their own tax advisors with respect to the tax consequences of the ownership of the Discount Bonds. Owners who may acquire 2008D Bonds that are Discount Bonds should consult their tax advisors with respect to the determination for federal income tax purposes of the amount of original issue discount or interest properly accruable with respect to such 2008D Bonds, other tax consequences of owning Discount Bonds and the state and local tax consequences of owning Discount Bonds. Original Issue Premium. The 2008D Bonds maturing in the years 2009 through 2016, inclusive, and in the years 2020 and 2022 have been sold at an initial public offering price which is greater than the amount payable at maturity (the Premium Bonds ). An amount equal to the excess of the purchase price of the Premium Bonds over their stated redemption prices at maturity constitutes premium on such 2008D Bonds. A purchaser of a Premium Bond must amortize any premium over such 2008D Bond s term using constant yield principles, based on the purchaser s yield to maturity. As premium is amortized, the purchaser s basis in such Premium Bond is reduced by a corresponding amount, resulting in an increase in the gain (or decrease in the loss) to be recognized for federal income tax purposes upon a sale or disposition of such Premium Bond prior to its maturity. Even though the purchaser s basis is reduced, no federal income tax deduction is allowed. Purchasers of any 2008D Bonds at a premium, whether at the time of initial issuance or subsequent thereto, should consult with their own tax advisors with respect to the determination and treatment of premium for federal income tax purposes and with respect to state and local tax consequences of owning such 2008D Bonds. 44

49 LEGAL MATTERS Certain legal matters incident to the authorization, issuance, validity and exclusion from gross income for federal income tax purposes of interest on the 2008D Bonds are subject to the approval of Haynsworth Sinkler Boyd, P.A., Bond Counsel, copies of whose approving opinion will be printed on the 2008D Bonds and the form of which is included in Appendix E. Certain other legal matters will be passed upon for the District by its Counsel, Judy P. Hamer, Esq., and for the Underwriter by its counsel, Parker Poe Adams & Bernstein LLP. From time to time, Haynsworth Sinkler Boyd, P.A. has served as bond counsel for the District, and it and Parker Poe Adams & Bernstein LLP have represented the Underwriter as counsel in other financing transactions. Neither the District nor the Underwriter has conditioned its future employment of any of these firms in connection with any proposed bond issues for which it has been or may be named underwriter on the successful closing of the 2008D Bonds. CONTINUING DISCLOSURE The District has undertaken for the benefit of holders of the 2008D Bonds to provide certain financial information and operating data relating to the District by not later than February 28 in each year commencing February 28, 2009 (the Annual Information ), and to provide notices of the occurrence of certain enumerated events, if material. The Annual Information will be filed by or on behalf of the District with each Nationally Recognized Municipal Securities Information Repository (the NRMSIRS ) and with a state depository within the State of South Carolina, if any (the State Depository ). Notices of material events will be filed by or on behalf of the District with the NRMSIRS or the Municipal Securities Rulemaking Board (the MSRB ) and with the State Depository, if any. The District's Annual Report shall contain or include by reference the following: (a) The audited financial statements of the District for the prior fiscal year, currently prepared in accordance with Governmental Accounting Standards Board principles. If the District's audited financial statements are not available by the time the Annual Report is required to be filed, the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available. (b) The statistics for the fiscal year then concluded of the type contained in the following tables in Appendix A to the Official Statement: DISTRICT UTILIZATION DATA, SOURCES OF PATIENT REVENUES, CAPITALIZATION RATIO and LONG TERM DEBT SERVICE COVERAGE RATIOS. (c) In a timely manner, to each NRMSIR or to the Municipal Securities Rulemaking Board ( MSRB ), and to the SID, if any, notice of any of the following events with respect to the Bonds, if material: (1) principal and interest payment delinquencies; (2) non-payment related defaults; 45

50 (3) unscheduled draws on any debt service reserves reflecting financial difficulties; (4) unscheduled draws on any credit enhancements reflecting financial difficulties; (5) substitution of any credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the 2008D Bonds; (7) modification to the rights of the beneficial owners of the 2008D Bonds; (8) bond calls; (9) defeasances; (10) release, substitution or sale of any property securing repayment of the 2008D Bonds; and (11) rating changes; and (d) In a timely manner, to each NRMSIR or to the MSRB, and to the SID, if any, notice of a failure of the Corporation to provide required annual financial information described in (a) or (b) above on or before the date specified. The District has also undertaken for the benefit of holders of the 2008D Bonds to provide by not later than 45 days after the last day of each fiscal quarter, to each NRMSIR and to the State Depository, unaudited, internally prepared financial statements of the District for the preceding quarter. The District may meet the continuing disclosure filing requirements described above either by providing the required information directly to the NRMSIRs or SID, if any, or, in such other manner as may at the time be permitted by the U.S. Securities and Exchange Commission, including providing such information to the Municipal Advisory Council of Texas as provided at for subsequent transmission to the NRMSIRs and SID, if any, without separately providing such information to the NRMSIRs or SID. The District has not failed to comply with the terms of any prior undertaking by the District under Rule 15c2-12 promulgated by the Securities and Exchange Commission. FINANCIAL STATEMENTS The combined financial statements of the District as of and for the years ended September 30, 2006 and September 30, 2007, included herein as a part of Appendix B, have been audited by Ernst & Young LLP, independent auditors, whose report appears in Appendix B. 46

51 UNDERWRITING The Underwriter is offering the 2008D Bonds pursuant to a firm underwriting contract. The Underwriter has agreed to purchase the 2008D Bonds at an aggregate purchase price of $32,801,149.47, which represents the par amount of the 2008D Bonds, plus net original issue premium of $415,560.40, less the underwriter s discount of $204,410.93, subject to certain terms and conditions, including the approval of certain legal matters by counsel. The Underwriter may offer and sell the 2008D Bonds to certain dealers (including dealers depositing the 2008D Bonds into investment trusts) and others at prices different from the public offering prices shown on the cover. The Underwriter may change the public offering prices from time to time at their discretion. An affiliate of the Underwriter, Morgan Keegan Financial Products, Inc., is serving as the Swap Provider with respect to the 2008 Swap Agreements in connection with the 2008B Bonds and the 2008C Bonds as described above in this Official Statement under the caption PLAN OF FINANCE INTEREST RATE SWAP AGREEMENTS and elsewhere herein. The Swap Provider and/or its affiliates received additional fees for entering in to the 2008 Swap Agreements. LITIGATION There is not now pending or, to the knowledge of the District threatened, any litigation restraining or enjoining the issuance, sale or delivery of the 2008D Bonds or questioning or affecting the validity of the 2008D Bonds or the proceedings or authority under which the 2008D Bonds are to be issued. There is no litigation pending or, to the District s knowledge, threatened which in any manner questions the right of the District to enter into the 2008D Bond Indenture or to secure the 2008D Bonds in the manner provided in the 2008D Bond Indenture, or which questions the right of the District to use the proceeds of the 2008D Bonds in accordance with the 2008D Bond Indenture or to execute and deliver the Series 12 Note and Supplement No. 12. No litigation, proceedings or investigations are pending or, to the knowledge of the District, threatened against the District except: (1) litigation in which the probable recoveries and the estimated costs and expenses of defense, in the opinion of counsel to the District, will be entirely within the District s applicable insurance policy limits (subject to applicable deductibles) or will not be in excess of the total reserves held under its applicable self-insurance program, including, without limitation, the litigation described in the next succeeding paragraph, or (2) litigation in which, in the opinion of counsel to the District, an adverse determination would not have a materially adverse effect on the operations or condition, financial or otherwise, of the District. VERIFICATION OF MATHEMATICAL COMPUTATIONS The Arbitrage Group, Inc., Buhl, Alabama, will deliver to the District and the Underwriter on or before the date of delivery of the 2008D Bonds its report or reports indicating that it has examined, in accordance with standards established by the American Institute of Certified Public Accountants, certain information and assertions provided by the Underwriter on behalf of the District. Included in the scope of its examination will be (a) the verification of the mathematical accuracy of the mathematical computations of the adequacy of the cash and the maturing principal of and interest on the Federal Securities held in the Escrow Fund to pay all of the principal of and premium and interest on each series of the Refunded 1995 Bonds, as such interest payments become due and the principal of the Refunded 1995 Bonds is redeemed and (b) the mathematical computations supporting the conclusion of Bond 47

52 Counsel that the 2008D Bonds are not arbitrage bonds under the Code and the regulations promulgated thereunder. Bond Counsel will rely on said verification in rendering its opinion as to the exclusion of interest on the 2008D Bonds from gross income of the owners thereof for federal income tax purposes. MISCELLANEOUS The District has furnished the information in Appendix A and Appendix B to this Official Statement relating to its operations and facilities. The Underwriter has furnished the information contained in this Official Statement with respect to the public offering prices of the 2008D Bonds and the information under the caption UNDERWRITING. Any statements made in this Official Statement involving matters of opinion or of estimates, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized. References herein, including the summaries set forth in the Appendices, to the Master Indenture, Supplement No. 12, the Series 12 Note and the 2008D Bond Indenture, and certain other matters are brief discussions of certain provisions thereof. Such discussions do not purport to be complete, and reference is made to such documents for full and complete statements of such provisions. The District has duly authorized this Official Statement. SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC. By: /s/ Randall G. Nyp Senior Vice President and Chief Operating Officer 48

53 APPENDIX A SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC.

54 TABLE OF CONTENTS PAGE A- GENERAL... 1 HISTORY AND BACKGROUND... 1 FACILITIES... 3 SERVICES... 3 GOVERNING BOARD... 7 MANAGEMENT... 8 MEDICAL STAFF... 9 EMPLOYEES RETIREMENT SYSTEM THE SERVICE AREA GENERAL THE SERVICE AREA MAP MARKET PROFILE HOSPITALS WITHIN THE SERVICE AREA HISTORICAL DISCHARGES - SERVICE AREA (SOUTH CAROLINA) SERVICE AREA UTILIZATION COMPARISON HISTORICAL PATIENT ORIGIN DISTRICT UTILIZATION COMPARISONS POPULATION TRENDS MAJOR EMPLOYERS IN SPARTANBURG COUNTY ANNUAL UNEMPLOYMENT RATE FOR SPARTANBURG COUNTY PER CAPITA PERSONAL INCOME FOR SPARTANBURG COUNTY SELECTED SUMMARY FINANCIAL DATA MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS CAPITAL OUTLOOK SOURCES OF PATIENT REVENUES CAPITALIZATION RATIO LONG-TERM DEBT SERVICE COVERAGE RATIOS INSURANCE A-i

55 APPENDIX A SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC. GENERAL HISTORY AND BACKGROUND The Spartanburg General Hospital System (the Hospital System ) was organized under the authority of the South Carolina General Assembly in The Hospital System officially became the Spartanburg Regional Health Services District, Inc. (the District ), and a political subdivision of the state of South Carolina, as chartered by the Secretary of State on May 1, The District is the major community health care provider in a three county region, consisting of Spartanburg, Union, and Cherokee Counties in South Carolina. This region has a population of approximately 350,000 persons. The District also draws patients from two western North Carolina Counties, Polk and Rutherford, as well as from other South Carolina counties. A map showing the location of the District's hospital facilities and its service area of Spartanburg, Union, and Cherokee Counties in South Carolina and Polk and Rutherford Counties in North Carolina (collectively, the Service Area ) is included under the caption THE SERVICE AREA herein. The District is accredited by the Joint Commission on Accreditation of Health Care Organizations ( JCAHO ). JCAHO last surveyed the District in July, The District is an integrated health care system and offers a complete array of medical services. The District's hospital facilities consist of Spartanburg Regional Medical Center (the Medical Center ), located at 101 East Wood Street, Spartanburg, South Carolina, Spartanburg Hospital for Restorative Care (the Restorative Hospital ), located at 389 Serpentine Drive, Spartanburg, South Carolina, and, beginning in October of 2008, the Village Hospital (the Village Hospital ), located at 250 Westmoreland Drive, Greer, South Carolina. The original medical center opened its doors in 1921 with a capacity of 140 beds. The District s hospital facilities have undergone progressive change and expansion, growing to the present size of 588 licensed beds at the Medical Center (with 503 beds operating), 97 longterm acute and 25 skilled nursing licensed beds at the Restorative Hospital (with 65 beds operating), and effective October 1, 2008, 48 licensed beds at the Village Hospital. The District also owns and operates the Regional Physician Network ( RPN ), a network of 46 physician practices, employing more than 150 physicians, located throughout the Service Area (defined below). For more information regarding the Medical Center, the Restorative Hospital, the Village Hospital and the RPN, see --FACILITIES herein. In addition, the District owns 100% of SRHS Capital, Inc. ( SRHS Capital ), a holding company for the subsidiary business organizations of the District. The District is an independent governmental body which allows it the ability to pursue collaborative relationships with other health care providers, governmental, charitable and proprietary. Through SRHS Capital, the District owns and operates SRMC Holdings, L.L.C. ( SRMC Holdings ) and SRMC Ventures, L.L.C. ( SRMC Ventures ). Together, SRMC Holdings and SRMC Ventures formed Regional Management Services, L.L.C. ( RMS ) to sell services and supplies to the District and outside entities. RMS, along with AnMed Health, owns Upstate Teleservices, L.L.C., which provides telephone access to medical information for residents in the Service Area. Nurses are on call 24 hours per day to assist with medical needs. SRMC Ventures and a group of area physicians formed Regional HealthPlus, L.L.C. ( RHP ), an integrated physician-hospital organization or PHO, to provide physician management services for area physicians, organize a collaborative network of health care providers and execute and manage various contracts with third-party payors. RHP currently manages in excess of 30 managed care contracts for the District, with most major third party payors participating. SRMC Ventures also owns Greer Group Practice, L.L.C. and the North Carolina Regional Network of physician practices; all A-1

56 considered part of the RPN. In addition, SRMC Ventures, along with Greenville Hospital System and AnMed Health, owns Upstate Linen Services, L.L.C., which supplies linen to the District, Greenville Hospital System, AnMed Health and other outside customers. The District, through SRMC Ventures and a group of area physicians, formed the Ambulatory Surgery Center of Spartanburg, L.L.C. ( ASCS ) in 2002 and the Ambulatory Surgery Center of Pelham ( ASCP ) in The District s financial statements in Appendix B include SRMC Holdings, SRMC Ventures, RMS and SRHS Capital as blended component units that are not part of the Obligated Group. For each of the fiscal years ended September 30, 2006 and 2007, the blended component units that are not part of the Obligated Group contributed less than 0.5% of the combined total revenue and approximately 6% of the combined total assets reported in such financial statements. An organizational chart of the Hospital System is as follows: Spartanburg Regional Health Services District, Inc. Corporate Organization Chart December, 2007 SRHS Capital, Inc. Spartanburg Regional Health Services District, Inc. 100% 100% 100% 100% 100% SRMC SHRC Village Hospital NC Regional Network, Inc. 99% 1% 1% 99% SRMC Holdings, LLC SRMC Ventures, LLC 99% 1% Regional Management Services, LLC 100% 50% 50% 50% 33% Greer Group Practice Ambulatory Surgery Of Spartanburg, LLC Surgery Center At Pelham, LLC Regional Health Plus, LLC Upstate Linen Services, LLC 62% Upstate Teleservices, LLC In 1995, the District formed the Regional Primary Physician Network ( RPPN ) and in 1996 formed the Regional Specialty Physician Network ( RSPN ). RPPN and RSPN were subsequently combined into the Regional Physician Network ( RPN ). The RPN is the entry point for the patient to the Hospital System and is intended to secure long-term patient loyalty to the District and increase the District s market share in the Service Area. RPN consists of 46 physician offices located throughout the Service Area, employing more than 150 physicians. The RPN practices are reported as an accounting entity, named the Regional Physician Network, that is a component of the District for financial reporting purposes. Services offered through the RPN include cardiovascular services, gastroenterology, gynecology and obstetrics, internal medicine, Bariatric surgery, general surgery, endocrinology and diabetes, occupational medicine, minor care, and pediatrics. The RPN supports the mission of the District to provide cost effective, quality healthcare for the residents of Spartanburg County and the surrounding area. The District receives support from the Spartanburg Regional Healthcare System Foundation (the Foundation ), a 501(c)(3) organization, established by the District. The Foundation is not a part of the A-2

57 District or the Obligated Group and does not receive financial support from the District. The Foundation s mission is to act as a catalyst to stimulate and receive charitable gifts to strengthen educational programs and community services and to assist in acquiring superior technology and perpetuating medical excellence for the District. Since its beginnings in the early 1990s, the Foundation has spent over $14 million funding educational programs, treatment services and advanced medical technology and providing funding for hospital and community projects, including a neonatal intensive care unit, a free medical clinic, a behavioral health garden, a blood center, a regional hospice home and a regional emergency center. FACILITIES The current facilities of the Medical Center are located on a 21-acre site in downtown Spartanburg. The original facility was built in 1921, with many upgrades and expansions occurring since then. Important changes include the addition of the surgical suite, Psychiatry and Radiation Oncology departments in 1980, the construction of the parking garage in 1984, the construction of the Heart Center in 1988, the expansion of the parking garage in 1990, the construction of a 168-bed Patient Tower in 1992, the construction of an Outpatient Diagnostic Center in 1996, the construction of the Gibbs Cancer Center in 1999, the construction of a new Emergency Center with adjoining parking deck in 2004, and a Hospice House in The Medical Center has 588 licensed beds and is presently operating 503 beds. The Restorative Hospital opened in 1995 and occupies the building of the former Doctor s Memorial Hospital, which the District purchased in The Restorative Hospital is a long-term acute care hospital (defined by Medicare as a hospital with an average length of stay exceeding 25 days). The Restorative Hospital has 97 acute care and 25 skilled nursing licensed beds and is presently operating 65 beds. The Village at Pelham is a medical office complex located in Greer, South Carolina, which was developed by a private developer and houses the joint venture entity Ambulatory Surgery Center of Pelham (ASCP), physician practices, and ancillary services. The first tenant in the building was the ASCP which opened in Subsequent to this, the District purchased condominium space in this building. This space that is owned by the District now includes Medical Center outpatient departments for the provision of ancillary services including Laboratory, Vascular, Imaging, Occupational Health, Rehabilitation, and Minor Care. RPN also operates ten physician practices in the condominium space. The Village Hospital, located in Greer, South Carolina, is currently under construction and is scheduled to open on October 1, This hospital is licensed for 48 beds and will focus on medical and surgical patients as well as obstetrics. The facility will provide Emergency Services, general surgery, gynecology and obstetrics, orthopedics, nursery, cardiology (non-invasive), endocrinology, gastroenterology, general medicine, oncology, and intensive care services. SERVICES The District contains the largest hospital facilities in Spartanburg County, offering services which include primary, secondary and tertiary care, general and specialty hospital care, and acute and diagnostic outpatient care. The District is the only provider in its primary service area to have the following services: Level III Neonatal Intensive Care, Open Heart Surgery, Hospice Home and Radiation Therapy. The Medical Center is also the only facility in the Service Area to offer a Level I Trauma Center. The following are the major services offered by the District: A-3

58 Cardiac Services: The Spartanburg Regional Heart Center (the Heart Center ) was designated as a Top 100 Cardiovascular Hospital by Solucient, LLC for Most recently the Heart Center was designated as #1 for overall heart services in South Carolina by HealthGrades (2007). The Heart Center has five levels, comprising 116,000 square feet, including 84 beds, 20 of which are critical care beds. The remaining beds are post-surgical and post-medical coronary care beds, all of which are in private rooms. Cardiac services offered range from diagnostic to intervention and rehabilitation. There are four cardiac catheterization laboratories serving the Heart Center in which over 4,000 diagnostic and interventional catheterizations are performed annually. In addition, more than 500 cardiac surgeries are performed each year in three operating rooms dedicated to cardiac surgery located in the Heart Center. Other services include echocardiography, vascular ultrasound, and diagnostic heart CT scans. The Cardiac Rehabilitation Program is state certified and has served the community for more than 20 years and at any particular time, there are more than 700 patients enrolled. The Heart Center s Rehabilitation Program successfully returns more patients to work following a cardiac event than any other program in South Carolina and is the only one of its kind in the Service Area. The Heart Center houses an active electrophysiology and Congestive Heart Failure (CHF) program and is a participant in national and international research programs and studies. The Regional Vascular Center is also a component of the Cardiac Services offered by the District. It offers an interdisciplinary team of interventional radiologists, vascular surgeons and cardiologists as well as a nationally accredited vascular imaging lab. Women s Services: More than 2,500 babies are born each year at the Center for Women. The Center for Women at the Medical Center consists of a 5-bed triage area, 9 Labor and Delivery beds, 28 postpartum beds, 5 operating rooms, a well-baby nursery and a Level III Neonatal Intensive Care Unit (NICU) which consists of 35 beds, including 13 intensive care and 22 intermediate care beds. The NICU is the highest level of Neonatal Intensive Care for seriously ill and premature infants. 4D ultrasound services are available. For Women requiring non-maternity related healthcare services, the Center for Women offers 28 spacious, private rooms for women s health needs. In addition, a classroom for seminars and community wellness programs is available. Surgical: Currently, Surgical Services at the Medical Center consists of 12 general operating rooms and two cystoscopy operating rooms specifically for urology located in antiquated space. Renovations are beginning to relocate the existing rooms into shelled space above the new Emergency Center to allow for larger rooms and increased operational efficiencies. The pre- and post-operative areas will be relocated into the existing operating suite and the number of beds will be expanded as well. The Medical Center also offers a new, minimally invasive treatment for patients with prostate cancer called the da Vinci Prostatectomy. This procedure is performed using the da Vinci Surgical System, a state-ofthe-art robotic surgical platform designed to enable complex, minimally invasive surgery. The da Vinci Prostatectomy helps surgeons see vital anatomical structures more clearly and perform procedures more precisely. In fiscal year ended September 30, 2007, approximately 13,000 surgical cases were performed in the Medical Center. The District had the first same day surgery program in South Carolina. The unit was originally housed in Restorative Hospital, adjacent to the Medical Center. The Medical Center and several local physicians entered into a joint venture and transferred those seven operating rooms into a new free-standing for-profit ambulatory surgery center (ASCS) several blocks from the main campus. The success of that joint-ventured ASCS led to a second ASCS joint-venture with physicians on the Village at Pelham Campus in Western Spartanburg County (ASCP). Oncology Services: The Marsha and Jimmy Gibbs Regional Cancer Center opened in 1999 and is the only comprehensive cancer center in the Service Area. At the Gibbs Cancer Center, the latest cancer technology meets the light of healing, bringing powerful medicine to the residents of the Upstate. It is a place where hope and action are joined together, bringing comprehensive cancer care under one roof. The inpatient unit consists of 23 beds located in a calming environment with views of the healing gardens. In addition, to medical oncology, there is a Radiation Oncology department consisting of three A-4

59 Linear Accelerators, including one tomotherapy unit, a Beam simulator, a 3-D treatment planning system and a CT Scanner. High Dose Brachytherapy and Intensity Modulated Radiation Therapy services are also available. Gibbs Cancer Center is the area s only radiation oncology center with three full-time radiation oncologists and two physicists. Plans are currently underway to relocate one of the existing linear accelerators to the proposed Village at Pelham Cancer Center to increase access to patients living in Western Spartanburg County. In 2007, the District received approval for the construction of the Bearden- Josey Breast Center which will be a state-of-the-art imaging center consolidating digital mammography, ultrasound, stereotactic breast biopsy and bone densitometry into one easily accessible outpatient location. The services are currently available, but are in multiple locations. The goal of the Breast Center will be to provide a seamless multidisciplinary experience for breast health services allowing women to receive all breast health services in a single location with significantly reduced wait times between services. The technologic advances and efficiencies would be supported by a Clinical Breast Health Nurse, who would assist the patient and family through the numerous health care services, emotions and questions associated with a cancer diagnosis. Other services that will be available include a second opinion clinic, genetic counseling, social work/emotional support, dietician, occupational/physical therapy, massage therapy, art therapy and a chaplain. Cancer prevention, screening, educational and support group public events will continue to occur as well. A Breast MRI is also proposed for the Breast Center. Both the Center and the Breast MRI are expected to open in June Spartanburg Regional is one of only seven healthcare systems in the nation to provide services under the M. D. Anderson Cancer Manager program, a fullservice cancer disease management program developed and directed by physicians at M. D. Anderson Cancer Center in Houston. Gibbs Cancer Center was recognized by the American College of Surgeons Commission on Cancer as being in the top 6 percent of cancer programs in the United States in The Commission on Cancer s Outstanding Achievement Award recognizes cancer programs that strive for excellence in providing quality care to cancer patients. A facility receives the award following an on-site evaluation by a physician surveyor during which the facility demonstrates a commendable level of compliance with cancer committee leadership, cancer data management, clinical services, research, community outreach and quality improvement standards. Gibbs Cancer Center is an affiliate of the National Cancer Institute through the Upstate Carolina Community Clinical Oncology Program. Emergency Services: The Emergency Center (EC) at the Medical Center is designated as a Level I Trauma Center certified to begin treatment of any injury 24 hours a day, including massive trauma. In order to handle the overwhelming growth in visits, the Medical Center designed a new EC which opened in 2004 and is one of the busiest Emergency Departments in the Carolinas, with more than 80,000 patients seen annually. At the core of the Regional Emergency Center is its designation as a Level One Trauma center, one of only four in South Carolina. The Emergency Center was designed, first and foremost, to respond to these cases. Specific features that get patients in crisis closer to treatment include: four dedicated trauma bays featuring filmless and wireless technology, a center to coordinate care with first responders and have trauma bays prepared for incoming cases, a self-contained radiology department, including CT, portable X-ray and ultrasound equipment, designated elevators to surgery, closer access to the emergency helipad, dedicated ambulance entrance, and optimum road entry for first responders. Beyond the specialized area for Level One Trauma, the new Emergency Center features seven other dedicated areas of care: Major Care, Chest Pain, Women s, Pediatric, Urgent Care, Disaster Preparedness and Behavioral Health. The major care area is designed to treat patients that have a wide variety of emergency conditions, which are the majority of patients who enter the Center. It was designed to blend an open, modular-based work area used by many people with a high degree of patient privacy. All treatment rooms are private, with walls instead of curtain dividers. The main feature of this area is its size, giving it the ability to accommodate large numbers of staff and patients. Patients who arrive at the Emergency Center with chest pain immediately bypass triage and are taken to a Critical Decision Unit A-5

60 within the chest pain area, which is part of a nationally accredited program, where they are either admitted to the hospital or are observed for up to 24 hours. The mini-observation rooms provide a private, light-filled area to allow staff to monitor patients during this period in a quiet, comfortable setting. The Emergency Center, with seven private rooms, features a women s area to meet the specialized treatment needs of female abuse victims, as well as to treat women with specific gynecologic or obstetric conditions. The new pediatric area, featuring a child-friendly waiting area with colorful décor, is dedicated to delivering emergency care to children and their families and also serves to shelter children from other potentially disturbing areas of the Emergency Center. Custom equipment, treatment protocols and specially trained medical staff ensure children receive the unique clinical care and comfort they deserve. Urgent Care is dedicated to lesser injuries and illnesses those that require attention by fewer medical staff to treat, use limited internal resources and are easily diagnosable. This area of the Center utilizes different protocols to facilitate prompt treatment and works efficiently by separating the trauma cases from those that are less severe. The Disaster Preparedness area is specifically designed to provide decontamination services in the event of industrial accidents, chemical spills or other bio-hazardous situations. It has self-contained rooms with all the gear needed to handle decontamination efforts. The Emergency Center's site location allows for large tents to be set up outside to accommodate mass decontamination/triage for larger numbers of patients. The Emergency Center has a designated area for behavioral health patients in order to accommodate their safety and the safety and comfort of other Emergency Center patients and visitors. It is a heavily monitored area where they can receive the specialized treatment they need while the appropriate course of care is determined. Pediatrics: Pediatrics at the Medical Center consists of a 12-bed pediatric unit and a 4-bed Pediatric Intensive Care Unit. There is a pediatric surgeon on the faculty of the medical education program. The Medical Center also offers a variety of outpatient pediatric services including educational programs on parenting issues and children s health and wellness. The Regional Physician Network includes Pediatric physician offices located conveniently throughout Spartanburg. Neuro-Sciences: At the Medical Center, there are 10 Neuro Critical Care beds dedicated for the department of Neuro Surgery. There is also a 28-bed general neurology floor that cares for less critical patients. The Medical Center was the first healthcare provider in South Carolina to be named a Primary Stroke Center by the Joint Commission on Accreditation of Healthcare Organizations ( JCAHO ), which serves as the standard for measuring excellence in national care. No other institution in the state has been recognized by JCAHO for its commitment to caring for stroke victims. JCAHO's Certificate of Distinction for Primary Stroke Centers recognizes centers that make exceptional efforts to foster better outcomes for stroke care. Behavioral Health Services: The Medical Center provides both inpatient and outpatient psychiatry services. The inpatient Psychiatry Unit is licensed for 56 beds and is located on the third floor of the main hospital building. Services include treatment for any type of behavioral, emotional, mental health or substance abuse problem. Specialized programs include: Behavioral Health Clinical Assessment Program, Partial hospitalization and Intensive Outpatient program, Programs specializing in geriatric patients/elderly, Inpatient/acute care, Employee assistance programs, Psychiatric home health services, Outpatient appointments with psychiatrists and counselors, Outpatient therapy and support programs and Nursing home consultation services. Palliative Care and Hospice Home: The Medical Center offers a 7-bed inpatient Palliative Care unit. Palliative care is provided by an experienced team, which includes a palliative medicine physician, a nurse practitioner, a medical social worker, an advance care planner and a chaplain. The palliative care team works with the patient's physician and the hospital staff. The goal of palliative care is to keep patients as active and independent as possible so they can cope with their illness. Palliative care provides A-6

61 emotional and spiritual support for patients, educates patients and answers questions, assists with living wills and health care power of attorney issues, treats pain and other symptoms, coordinates care among specialists and others, helps patients find and access services they need outside the hospital, and supports families and caregivers. Studies show that palliative care improves quality of life for seriously ill patients. By offering expert medical, emotional, spiritual and practical support, palliative care helps patients feel better and remain more active and independent while living with an illness. The Regional Hospice Home is a 15-bed facility located on a 20-acre wooded property. The Hospice Home is a comforting, home-like setting where patients can receive professional medical care at the end of life. It offers terminally ill patients a comfortable, family-friendly alternative to the hospital or their own home. Trained hospice professionals including a physician, registered nurses, nursing assistants, chaplains, social workers and volunteers are on duty 24 hours a day, seven days a week. Outpatient Services: Regional Outpatient Service arena offers a wide range of diagnostic, laboratory and surgical test and procedures. Diagnostic tools include state-of-the-art equipment and technology combined with nationally registered and state licensed technical and nursing personnel. Technology includes Stereotactic breast biopsy, 1.5 Tesla (high-field) MRI units, Digital radiographic (xray) and fluoroscopic equipment, and Picture Archive and Communications System (PACS) designed to move computerized images electronically throughout the hospital. Imaging (Radiology) Services have expanded greatly in the last several years with upgraded angio-vascular labs, state-of-the-art MRI systems, GE Lightspeed-16 and GE VCT-64 CT scanners. The latest addition to Imaging's comprehensive patient care tools is a GE Discovery-STE PET'CT scanner located in the Gibbs Regional Cancer center for patient convenience and physician access. An outpatient Imaging Center is also located on the Village at Pelham Campus which offers general radiography, CT, MRI, general and vascular sonography, mammography, nuclear medicine and bone densitometry using state-of-the-art equipment to maximize the diagnostic capabilities of the Center. Home Health Services Division: The Home Health Services Division provides the full-spectrum of home-bound patient services, including: I.V. Pharmacy, Durable Medical Equipment, Skilled Nursing, Physical Therapy, Speech Therapy, Occupational Therapy, Medical Social Services and Home Health Aide support. Additionally, an I.V. Outpatient Treatment Center is located on the main campus of the Medical Center. GOVERNING BOARD The governing body of the District is an 11 member Board of Directors (the Board ) whose members are appointed by the Spartanburg County Council with input from the Board, including one appointment from each election district and at least one member of the medical staff. The Board has eight standing committees, including the Executive Committee, Finance, Audit and Compliance, Strategic Planning, Governance, Quality, Joint Conference and Spartanburg Hospital for Restorative Care. The Board meets monthly and committees meet quarterly, bi-monthly or monthly. The current members of the Board, and their respective offices, occupations, and terms, are as follows: A-7

62 NAME BOARD POSITION OCCUPATION TERM EXPIRES Terry Cash Chairman Camen Group, Inc. - Owner 09/30/2008 Dan B. Maultsby, PH.D. Vice Chairman Retired 09/30/2009 Jimmy I. Gibbs Secretary President/CEO Gibbs International 09/30/2011 Ken E. Compton CEO/President Advance America 09/30/2011 Susan Dent USC Upstate Nursing Faculty 09/30/2011 James E. Crook Owner Allstate Insurance 09/30/2011 William F. James, M.D. OB/GYN Physician 09/30/2011 Eddie McAbee, CPA McAbee, Talbert, Halliday - CPA 09/30/2010 Alinda Mahaffey Retired 09/30/2009 Marsha Ann Dowell, Ph.D Mary Black School of Nursing, Dean 09/30/2011 Henry Spencer King Attorney, The Ward Law Firm, PA 09/30/2011 William Devore, M.D.* SRHS Dept. of Anesthesia 09/30/2008 Ingo Angermeier* SRHS * Dr. Devore, as Chief of Staff, and Mr. Angermeier, as President and CEO, serve ex-officio and are non-voting members. MANAGEMENT Ingo Angermeier, 57, President and Chief Executive Officer of the District. Mr. Angermeier received an MHA from the University of Minnesota, and a Bachelor of Arts Degree in Economics and Philosophy from Ripon College in Ripon, Wisconsin. He is a master s prepared fellow of the American College of Healthcare Executives with 35 years experience in both general and teaching hospitals and multi-specialty group practices both in urban and rural settings. Mr. Angermeier has served as President and Chief Executive Officer of the District since April 1, From 1995 to March 2001, he served as CEO at Louisiana State University Medical Center, a 600-bed teaching facility. He was also an assistant dean and professor there. Prior to this, he held executive level positions at four different hospitals in Oklahoma, Kansas, and Nebraska. These hospitals range in size from 400 beds to 900 beds. He has also written several articles published in professional journals. Randall G. Nyp, 53, Senior Vice President and Chief Operating Officer of the District. Mr. Nyp received a Masters of Business Administration and Bachelor of Business Administration Degree from Washburn University in Topeka, Kansas. He is a fellow of the American College of Healthcare Executives with over 25 years experience in top executive positions such as Chief Financial Officer, Chief Operating Officer, and Chief Executive Officer. Mr. Nyp has served as COO of the district for two years. Prior experience includes: CEO Large Teaching Medical Center with 1600 beds, COO Large Teaching Hospital with 600 beds, and CFO Acute Care Hospital with 350 beds. Matt Meyers, 42, Vice President, Regional Physicians Network. Mr. Meyers earned Bachelor of Science Degrees from University of Kansas in Accounting and Business and a Master of Health Services Administration also from the University of Kansas. He has nearly 20 years of professional, management, consulting and executive experience. He has served as Vice President Regional Physician Network since Mr. Meyers has 15 years of healthcare experience in the hospital, HMO, laboratory and physician practice management sector. He is a member of the Medical Group Management Association. P. Larry Barnette retired as the Senior Vice President and Chief Financial Officer of the District on April 30, 2008 and the position is currently vacant. The District is currently considering candidates and expect to have the position filled in the near future. A-8

63 MEDICAL STAFF As of January 1, 2008, the medical staff of the District is composed of 534 physicians who are on active or provisional status. The members of the active medical staff account for virtually all of the admissions to the District. The medical staff is 91% board certified and is evenly composed of primary and specialist physicians with an average age of 49. The following table lists the current specialties, average ages and number of board certified active staff and numbers of employed physicians. SERVICES AND SPECIALTIES OF THE SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC. NUMBER OF ACTIVE STAFF NUMBER OF BOARD CERTIFIED ACTIVE STAFF* AVERAGE AGE OF ACTIVE STAFF EMPLOYED PHYSICIANS SPECIALTY Admitting Physicians Family Practice Medicine OB/GYN Pediatrics/Neonatology Psychiatry Surgery Dental Total Admitting and Active Physicians Non-admitting Physicians: Anesthesiology Emergency Medicine Pathology Radiology Total Non-admitting Active Physicians Total Active Staff *Some physicians are double-boarded A-9

64 The following table describes the District s ten leading physician specialties by discharges for the fiscal year ended September 30, 2007: Rank Specialty Percent of Total Discharges 1 Ob/Gyn 3% 3% 2 Hospitalist/Internal 2% 5% Medicine 3 Psych Hospitalist 2% 7% 4 Hospitalist/Internal 2% 9% Medicine 5 Neonatology/Peds 1% 10% 6 Internal Medicine 1% 11% 7 Cardiology 1% 12% 8 Orthopedics 1% 13% 9 Neonatology/Peds 1% 14% 10 Hospitalist/Internal Medicine 1% 15% Cumulative Percent The cumulative total for the top 20 leading doctors by discharges for the fiscal year ended September 30, 2007 was approximately 25%. EMPLOYEES The following table presents a breakdown of employees of the District as of September 30, 2007: Area of Service Number of Full-Time Equivalents Nursing 1,181 Administrative 348 Clerical 815 Technical 671 Physician 166 Residents 57 Other 1,162 Total 4,400 As of September 30, 2007, there were approximately 1,070 Registered Nurses and 111 Licensed Practical Nurses employed by the District (these numbers do not include nursing administration nurses or staff development nurses). Management believes that the nursing staff currently available is sufficient for current programs. The annual turnover rate for registered nurses employed by the District in the fiscal year ended September 30, 2007 was approximately 13.18%. None of the District s employees is represented by a labor organization. There have been attempts to organize unions at other hospitals in the Service Area, but management is not aware of any A-10

65 attempts to organize the District s employees. The District considers its relationship with its employees to be excellent. RETIREMENT SYSTEM The District offers a qualified noncontributory defined benefit plan for full-time employees who meet the eligibility requirements for participation, through the South Carolina Retirement System, which is administered by an agency of the State of South Carolina. Forfeitures of the District's contributions in cases of termination of employment prior to full vesting as well as unfunded vested benefits, if any, are the responsibility of the State of South Carolina. The District s contributions to the retirement system were approximately $15,968,000 in fiscal year ended September 30, 2007 and $13,274,000 in fiscal year ended September 30, GENERAL THE SERVICE AREA The District draws primarily from the five-county region consisting of Spartanburg, Union, and Cherokee Counties, located in the Piedmont Region of South Carolina, and Polk and Rutherford, located in Western North Carolina (the Service Area ). Spartanburg County is the primary service area, Cherokee and Union Counties are considered the secondary service area and Polk and Rutherford Counties are the tertiary service area. The Medical Center is located in the City of Spartanburg, the largest municipality in the Service Area, with a 2000 population of 39,673. In 2006 and 2007, the Service Area accounted for an average of 94% of total admissions to the District. The remainder of admissions came primarily from other South Carolina and North Carolina counties. THE SERVICE AREA MAP The map on the following page shows the Service Area and the respective locations of the facilities of the District and the District's competitors. For additional information on the District's competitors, see MARKET PROFILE herein. A-11

66 THE SERVICE AREA MAP A-12

67 HOSPITALS WITHIN THE SERVICE AREA MARKET PROFILE There are seven hospitals within the Service Area. Two of these are the primary facilities of the District: the Medical Center and the Restorative Hospital both of which are in Spartanburg County. The other hospitals in the District's primary and secondary Service Area in South Carolina are as follows: Mary Black Memorial Hospital in Spartanburg; Upstate Carolina Medical Center in Gaffney; and Wallace Thomson Hospital in Union. The two main hospitals in the District's tertiary service area in North Carolina are as follows: St. Luke s Hospital in Tryon; and Rutherford Hospital in Rutherfordton. The following table lists each of the other facilities within the Service Area, the location and number of licensed beds of each, and the approximate distance from the Medical Center of each: Facility Name Location Licensed Beds Miles from Medical Center Mary Black Spartanburg, SC Upstate Carolina Medical Center Gaffney, SC Wallace Thompson Union, SC St. Luke's Hospital Columbus, NC Rutherford Hospital Rutherfordton, NC Source: Facility Websites, South Carolina Hospital Association, MapQuest HISTORICAL DISCHARGES - SERVICE AREA (SOUTH CAROLINA) The following table shows comparative discharge data for South Carolina's Service Area hospitals for the following fiscal years. HISTORICAL DISCHARGE DATA (1) Hospital District (2) 28,199 26,587 26,663 26,858 Mary Black 7,115 7,360 7,749 7,638 Upstate Carolina Medical Center (3) 4,520 4,598 4,417 N/A Wallace Thomson Hospital 3,430 3,226 2,824 2,651 (1) Does not include observations. (2) Includes BJ Workman which closed in October (3) Information not available for Source: State Budget and Control Board, Office of Research and Statistical Services & internal records. A-13

68 SERVICE AREA UTILIZATION COMPARISON The following table shows comparative utilization statistics for South Carolina Service Area hospitals for their respective fiscal year 2007 (as of April 22, 2008): SERVICE AREA UTILIZATION DATA (1) LICENSED BED AVG LENGTH OF STAY INPATIENT DAYS PERCENT OCCUPANCY (2) AVG DAILY CENSUS HOSPITAL DISCHARGES SRMC , , % SHRC , Mary Black 209 7, , Upstate Carolina Medical Center 125 4, , Wallace Thomson Hospital 143 2, , (1) Does not include observations. (2) Licensed beds. Source: ORS "2006 Joint Annual Report Data for General and Acute Care Hospitals in South Carolina & internal records. A-14

69 HISTORICAL PATIENT MARKET SHARE OF SOUTH CAROLINA SERVICE AREA The following tables show the market share by hospital in each of the South Carolina counties in the primary Service Area: Spartanburg County HOSPITAL District (SRMC) 67.0% 66.9% Mary Black 18.1% 18.9% Greenville Memorial 5.2% 5.3% St. Francis 1.5% 1.4% Allen Bennett 2.7% 2.6% Upstate Carolina 0.2% 0.3% Wallace Thomson 0.2% 0.2% Other Hospitals 5.1% 4.4% 100% 100% Union County HOSPITAL District (SRMC) 28.2% 30.6% Mary Black 5.3% 5.4% Greenville Memorial 2.0% 2.2% Allen Bennett 0.0% 0.0% Upstate Carolina 0.2% 0.1% Wallace Thomson 59.0% 56.3% Other Hospitals 5.3% 5.4% 100% 100% Cherokee County HOSPITAL District (SRMC) 21.4% 21.3% Mary Black 9.7% 9.1% Greenville Memorial 1.3% 1.2% Upstate Carolina 51.6% 50.7% Wallace Thomson 0.0% 0.0% Other Hospitals 16.0% 17.7% 100% 100% Source: South Carolina State Budget and Control Board, Office of Research and Statistics A-15

70 HISTORICAL PATIENT ORIGIN The following table shows historical patient origin based on county of residence: HISTORICAL PATIENT ORIGIN FOR THE MEDICAL CENTER PERCENTAGE OF MEDICAL CENTER INPATIENT DISCHARGES (1) BY COUNTY OF RESIDENCE County Service Area Counties/(South Carolina) Spartanburg 78.2% 78.1% 77.8% 77.4% Cherokee 7.0% 7.0% 7.2% 6.8% Union 5.8% 6.0% 6.7% 6.7% Subtotal Service Area 91.0% 91.1% 91.7% 90.9% Other Counties (South Carolina) Greenville 2.3% 2.2% 2.3% 2.6% Laurens 0.7% 0.8% 0.8% 0.8% Other South Carolina 1.3% 1.3% 1.5% 1.4% Subtotal South Carolina 95.3% 95.4% 96.3% 95.7% Out of State 4.7% 4.6% 3.7% 4.3% Total Discharges 100% 100% 100% 100% (1) Does not include observations. Source: Internal Records DISTRICT UTILIZATION COMPARISONS The following table shows the District s comparative utilization statistics for fiscal years ended September 30, 2003 through 2007: A-16

71 DISTRICT UTILIZATION DATA (1) Licensed Beds (2) Discharges 27,380 28,199 26,587 26,663 26,858 Average Length of Stay Inpatient Days , , , ,946 Percent Occupancy % 60.82% 58.06% 60.17% Average Daily Census Newborn Deliveries 2,525 2,458 2,459 2,735 2,822 ER Visits 84,296 88,517 92,237 92,956 95,739 Surgical Cases - Inpatient 9,075 9,045 8,525 8,279 8,731 Surgical Cases Outpatient 4,300 4,111 4,074 4,136 4,229 (1) Does not include observations. (2) The decrease from 2004 to 2005 is a result of the closing of BJ Workman. The increase from 2005 to 2006 is a result of the addition of skilled nursing beds. POPULATION TRENDS The following table provides the population growth of Spartanburg County for the years given and a projection for the year 2012: Percent Change Percent Change Spartanburg County 248, , , % 10.93% South Carolina 4,012,012 4,332,294 4,562, % 13.73% United States 281,421, ,045, ,920, % 11.90% Source: Thomson/Claritas Projections based off 2000 Census counts. A-17

72 MAJOR EMPLOYERS IN SPARTANBURG COUNTY The largest employers within Spartanburg County and their major activity are shown in the following table: Major Employers by Facility (500+) Spartanburg County, SC Company Product / Service Number of Employees (1) Spartanburg Regional Medical Center Health Services 4,727 BMW Manufacturing Corp Automobiles 4,415 SC State Budget and Control Board State Government 2,387 Spartanburg County Government Government 1,379 Spartanburg County School District 7 Public Education 1,300 Spartanburg County School District 6 Public Education 1,200 Cryovac Division-Sealed Air Corporation Flexible plastic packaging material 1,152 Mary Black Health System, LLC Health Services 1,006 Michelin North America Inc Radial truck tires 952 Spartanburg County School District 2 Public Education 935 Kohler Co China plumbing fixtures 909 Spartanburg County School District 5 Public Education 700 Reeves Brothers Inc-PBG Plant Offset printing blankets 672 Spartanburg County School District 1 Public Education 650 Tietex International Ltd Nonwoven material 625 Spartanburg Steel Products Inc Automotive stampings & assemblies 601 BMG Distribution Distribution 600 R R Donnelley Catalog printing & binding 580 Schwan's Bakery Bakery products 500 Source: Spartanburg County Economic Development Corporation and SC Appalachian Council of Governments; internal records. (1) The employment shown may have been reduced by layoffs occurring after the date of the above-referenced report. Updated March ANNUAL UNEMPLOYMENT RATE FOR SPARTANBURG COUNTY The annual unemployment rates for Spartanburg County, the State of South Carolina, and the United States for the years shown are as follows: Spartanburg South United Year County Carolina States % 6.7% 6.0% Source: National Bureau of Labor and Statistics A-18

73 PER CAPITA PERSONAL INCOME FOR SPARTANBURG COUNTY The following table shows the per capita personal income in Spartanburg County, the State of South Carolina and the United States, for the last five years for which data is available: Year Spartanburg County South Carolina United States 2002 $25,184 $25,370 $30, ,278 25,880 31, ,057 27,090 33, ,179 28,285 34, ,261 29,515 36,276 Source: Regional Economic Information System, Bureau of Economic Analysis: June SELECTED SUMMARY FINANCIAL DATA The following selected summary of combined revenues and expenses of the District for the fiscal years ended September 30, 2005, September 30, 2006 and September 30, 2007 are derived from the audited combined financial statements of the District. The selected summary of combined revenues and expenses for the three-month periods ended December 31, 2007 and December 31, 2006 are derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which are considered necessary for a fair presentation of the results of operations for the three-month periods. The interim results are not necessarily indicative of results that may be expected for the entire fiscal year ending September 30, The summary should be read in conjunction with the audited combined financial statements, related notes and other financial information included in Appendix B. A-19

74 SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC. SUMMARY OF COMBINED REVENUES AND EXPENSES (in Thousands) Six month period Fiscal Year ended September 30, ended March 31, Fiscal Years: 2005 (1) 2006 (1) 2007 (1) 2007 (2) 2008 (2) Net patient services revenues $499,741 $513,049 $544,817 $269,045 $296,108 Other revenues 21,828 20,319 20,262 9,478 10,721 Total revenues $521,569 $533,368 $565, , ,829 Expenses: Professional care of patients 305, , , , ,596 Fiscal and administrative 137, , ,229 66,118 73,592 Household and plant operations 14,587 15,307 16,917 8,186 8,569 Dietary 4,997 5,422 6,086 2,988 3,080 Provision for depreciation and amortization 28,984 31,605 34,762 16,724 18,610 Interest expense 10,252 10,577 10,445 5,222 4,978 Total expenses $501,801 $513,630 $553,022 $269,139 $292,425 Income from operations 19,768 19,738 12,057 9,384 14,404 Nonoperating activities: Investment income 10,744 11,970 19,176 9,543 (122) Other 3,256 5,340 9,286 3,961 3,433 $14,000 $17,310 $28,462 $13,504 $3,311 Excess of revenues over expenses $33,768 $37,048 $40,519 $22,888 $17,715 (1) These figures were derived from audited financial statements. (2) These figures were derived from unaudited financial statements. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS General. The District's positive operating performance is attributable to: the District s ability to maintain a competitive rate structure; an internal quality management program that strives for total customer satisfaction; utilization, cost, and contract management procedures in place, resulting in tight controls on costs; an increase in the complexity and intensity of services provided; an increase in outpatient services; and actions taken toward forming a partnership with physicians and the community. The District has been actively adapting to recent changes in the healthcare industry. Overview of Financial Performance. The following is a brief discussion of the financial results for the period from fiscal year ended September 30, 2006 through and including the six-month interim period ended March 31, 2008: Fiscal Year In fiscal year ended September 30, 2006, the District exhibited strong financial performance with an operating margin ratio of 3.70%, an excess margin ratio (the ratio of total revenue, including non-operating gains or losses, to total expenses) of 6.72%, and EBIDA (earnings before interest, depreciation and amortization) margin ratio of 14.39%. Income from operations was $19,738,000 while the excess margin was $37,048,000. A-20

75 Net patient revenues increased 2.66% due to new revenue initiatives, a price increase that was implemented on October 1, 2005 and increases in Emergency Department Physician Revenue. Operating expense increased from 2005 to 2006 at a rate of 2.4% compared to the increase in operating expense from 2004 to 2005 of 2.65%. The increase in net non-operating gains was due to realized and unrealized gains in the market value of investments as the result of increases in cash balances and a favorable interest rate environment. Total inpatient and skilled nursing facility admissions increased by less than 1.0% from 2005 to Net Assets increased approximately $35,559,000 or 8.83% from 2005 to The increase in net asset position was primarily the result of increase in current assets, net capital assets, and other long-term assets. Cash balances increased due to increased collections of patient receivables. Fiscal Year In fiscal year ended September 30, 2007, the District exhibited strong financial performance with an operating margin ratio of 2.13%, an excess margin ratio of 6.83%, and EBIDA margin ratio of 14.44%. Income from operations was $12,057,000 while the excess margin was $40,519,000. Net patient revenues increased 6.2% due to new revenue initiatives, a price increase that was implemented on October 1, 2006, increase in revenue from new Regional Physician Network practices, and increases in Emergency Department Physician Revenue. Operating expense increased from 2006 to 2007 at a rate of 7.7% compared to the increase in operating expense from 2005 to 2006 of 2.4%. The increase in operating expense was due primarily to an increase in salaries, benefits and supply expense. The increase in salaries was due to the employment of Emergency Department physicians, other new physician employees, an increase in FTEs and pay raises. The increase in benefits was due to increased utilization of employee health insurance. The increase in supply expense was due to inflationary increases and introduction of new supplies. Other expense increases were due to increases in medical specialist fees and contract physician fees and a $2,000,000 payment to the South Carolina Health Sciences Foundation. The increase in net non-operating gains was due to realized and unrealized gains in the market value of investments as the result of increases in cash balances and a favorable interest rate environment and donations received from the Foundation for major capital projects such has the Hospice House and the Breast Health Center. Total inpatient and skilled nursing facility admissions increased by approximately 1.0% from 2006 to 2007 Net Assets increased approximately $40,519,000 or 9.25% from 2006 to The increase in net asset position was primarily the result of increase in current assets, net capital assets, and other assets. Cash balances increased due to increased collections of patient receivables. First Six Months of Fiscal Year For the six months ended March 31, 2008, the District exhibited strong financial performance with an operating margin ratio of 4.69%, an excess margin ratio of 5.71%, and EBIDA margin ratio of 13.32%. The following relate to the periods ended March 31, 2008 and March 31, 2007: Income from operations was $14,414,000 while the excess margin was $17,715,000. A-21

76 Net patient revenues increased 10% from the six months ended March 31, 2007, to the six months ended March 31, 2008, due to new revenue initiatives, increases in negotiated managed care payments, and a price increase that was implemented on October 1, Operating expense increased at a rate of 9%. The increase in operating expense was due primarily to an increase in salaries and purchased services expense. The increase in salaries was due an increase in FTEs and pay raises. Purchased services expense increase was due to consultants, maintenance agreements, and other contractual services payments. The decrease of $10,193,000 in net non-operating gains was due to primarily to unrealized losses in the market value of investments as the result of changes in investment markets. Total inpatient and skilled nursing facility admissions increased by approximately 4%. The following relate to the changes between the balance sheets for period ended September 30, 2007 versus the period ended March 31, 2008: Net Assets increased approximately $17,715,000 or 3.70%. The increase in net asset position was primarily the result of increase in current assets, net capital assets, and other assets. Cash balances decreased by 12.16%. Joint Ventures. The following listing reflects the net gain/(loss) for each of the District's joint ventures for fiscal years ended September 30, 2005, 2006 and 2007: NET GAIN/(LOSS) (1) COMPANY NAME 2005 (2) 2006 (2) 2007 (2) Regional HealthPlus $(11,874) $1,715,924 $2,239,304 Upstate Teleservices $210,405 $52,014 $213,976 Upstate Linen $(309,206) $26,639 $(558,768) ASC Pelham $294,024 $1,738,154 $2,024,615 ASC Spartanburg $3,716,848 $3,174,385 $3,494,048 (1) Based on tax returns of such entities and/or the District's internal records. (2) Un-audited. Change in Investment Policy. Due to some recent litigation being considered by the South Carolina Supreme Court (in which the District is not involved) related to the way in which governmental entities can investment their cash under South Carolina law, the District has determined to review its policy of investing its cash in equities. The District will consider if it is necessary to maintain an investment policy of only investing its cash in certain fixed income investments and the process by which it can make an orderly transition of its current investment portfolio. The investment by the District of its cash in only fixed income could have an adverse affect on its investment income (recorded as nonoperating income on the financial statements), depending on market conditions. The following table shows the District s investment mix and average returns over the past five years for which audited financial statements are available: A-22

77 Fiscal Year ended September 30 Equity Investments Fixed Income Investments Alternative Investments Cash and Cash Equivalents Percentage Average Return Percentage Average Return Percentage Average Return Percentage Average Return % 27.8% 20.8% 6.4% N/A N/A 53.9% 0.83% % 0.3% CAPITAL OUTLOOK The capital requirements of the District are a major priority. The District must continuously replace outdated or obsolete equipment while also investing in new technologies. The District has identified several projects to consider over the next five years, including information systems software and hardware, a breast health center, an infill project and a linear accelerator. The District evaluates future capital needs on a continuing basis and the method of financing those capital needs, including from additional indebtedness, operating revenues and contributions from the Foundation, will be considered as needed. SOURCES OF PATIENT REVENUES A substantial amount of the gross patient service revenues of the Medical Center is derived from third party payers. The table below lists the approximate percentages of gross patient service revenues by category for the past three fiscal years Medicare 46% 47% 47% Medicaid 11% 12% 11% Managed Care & Insurance 31% 29%. 29% Self Pay, Charity & Other 12% 12% 13% TOTAL 100% 100% 100% CAPITALIZATION RATIO The following table sets forth the historical capitalization ratio for the District as of September 30, 2007 and the pro forma capitalization ratio assuming as of September 30, 2007, the 2008 Bonds were issued in an aggregate principal amount of $191,675,000 and the Refunded 1995 Bonds, the Refunded 1997 Bonds, the Refunded 1998 Bonds and the Refunded 2002 Bonds were each refunded as set forth under the caption PLAN OF FINANCE in the Official Statement. A-23

78 September 30, 2007 (1) Pro Forma September 30, 2007 (2) Total Outstanding Long-Term Indebtedness $177,304,000 $223,455,000 Unrestricted Net Assets 478,615, ,615,000 Total Capitalization $655,919,000 $695,919,000 Total Outstanding Long-Term Indebtedness as a Percentage of Total Capitalization 27.03% 32.11% (1) Derived from the District s un-audited financial statements as of September 30, (2) Assuming no increase in net assets attributed to the proceeds of such 2008 Bonds. LONG-TERM DEBT SERVICE COVERAGE RATIOS The following table sets forth the Long-Term Debt Service Coverage Ratios for the District s (1) current Long-Term Indebtedness for the past three years and (2) proposed Long-Term Indebtedness on a pro-forma basis for the past three years using the projected Maximum Annual Debt Service on the District s proposed Long-Term Indebtedness Net Revenue available for Debt Service $68,873,000 $78,876,000 $80,385,000 Total Existing Maximum Annual Debt Service $14,465,951 $14,465,951 $14,465,951 Historical Coverage of Existing Maximum Annual Debt Service 4.76x 5.45x 5.56x Total Projected Maximum Annual Debt Service (1) $14,196,098 $14,196,098 $14,196,098 Historical Coverage of Projected Maximum Annual Debt Service 4.85x 5.56x 5.66x (1) Total Projected Maximum Annual Debt Service occurs in fiscal year ending September 30, It is an amount equal to the sum of (i) Maximum Annual Debt Service on Existing Debt Requirements and (ii) projected Maximum Annual Debt Service on the 2008 Bonds. Assumes an interest rate on the 2008B Bonds of % and an interest rate on the 2008C Bonds of % reflecting the fixed rates to be paid by the District under the interest rate swap agreements with respect to the 2008B Bonds and the 2008C Bonds. Assumes that the 2008A Bonds, the 2008B Bonds, the 2008C Bonds and the 2008D Bonds have been issued. See LONG-TERM DEBT SERVICE REQUIREMENTS in the Official Statement. INSURANCE The District maintains property insurance on its facilities through Zurich Insurance Company and casualty insurance through Continental Casualty Company. Currently, the District has the following limits of coverage: property limit is $750,000,000, business income limit is $750,000,000, equipment breakdown limit is $750,000,000, professional and general liability limit is $300,000 per claim, $600,000 aggregate, umbrella liability limit is $20,000,000 A-24

79 per claim, $30,000,000 aggregate, automobile liability limit is $1,000,000 combined single limit, and directors and officers liability limit is $10,000,000. Section 120 of Chapter 78, Title 15, Code of Laws of South Carolina 1976, as amended, provides that the total amount that may be recovered arising out of a single occurrence of liability of any governmental entity for any tort caused by a licensed physician or dentist, employed by a governmental entity and acting within the scope of his profession, may not exceed $1,200,000 regardless of the number of agencies or political subdivisions or claims or actions involved. A-25

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81 APPENDIX B COMBINED FINANCIAL STATEMENTS OF SPARTANBURG REGIONAL HEALTH SERVICES DISTRICT, INC.

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83 F INANCIAL S TATEMENTS Spartanburg Regional Health Services District, Inc. Years Ended September 30, 2007 and 2006 With Report of Independent Auditors B-1

84 Spartanburg Regional Health Services District, Inc. Financial Statements Years Ended September 30, 2007 and 2006 Contents Report of Independent Auditors...1 Management s Discussion and Analysis...2 Financial Statements Balance Sheets...9 Statements of Revenues and Expenses...11 Statements of Changes in Net Assets...12 Statements of Cash Flows...13 Notes to Financial Statements B-2

85 Ernst & Young LLP Phone: (864) Beattie Place Suite 800 P.O. Box Greenville, South Carolina Report of Independent Auditors The Board of Directors Spartanburg Regional Health Services District, Inc. We have audited the accompanying balance sheets of Spartanburg Regional Health Services District, Inc. (District) as of September 30, 2007 and 2006, and the related statements of revenues and expenses, changes in net assets, and cash flows for the years then ended. These financial statements are the responsibility of the District s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the District s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Spartanburg Regional Health Services District, Inc. at September 30, 2007 and 2006, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. The Management s Discussion and Analysis on pages 2 through 8 is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. January 10, 2008 ey A member firm of Ernst & Young Global Limited B-3 1

86 Spartanburg Regional Health Services District, Inc. Management s Discussion and Analysis Years Ended September 30, 2007 and 2006 This section of Spartanburg Regional Health Services District, Inc. s (the District) financial statements presents management s analysis of the District s financial performance during the fiscal year that ended on September 30, Please read it in conjunction with the financial statements, which follow this section. Financial Highlights The District s financial position continues to remain strong as a result of operations in fiscal year Some highlights include: Net patient service revenues increased from fiscal 2006 to 2007 by 6.19% primarily due to new employed physician practices, new services, a price increase that was implemented on October 1, 2006 and volume increases. Operating expense increased from fiscal 2006 to fiscal 2007 at a rate of 7.67% compared to the increase in operating expense from fiscal 2005 to fiscal 2006 of 2.36%. Increases in Salaries and Benefits are the largest components of the overall increase from fiscal 2006 to fiscal 2007, caused primarily by new employed physician practices, an increase in FTEs, salary raises, and increased utilization of employee health insurance. Other expense increases relate to volume increases, inflation, and an increase in depreciation expense. Net non operating gains increase 64.4% from 2006 to 2007 due to an increase in realized and unrealized gains on investments caused by market conditions and SRHS Foundation contributions. Overview of the Financial Statements The financial statements consist of two parts: Management s Discussion and Analysis and the Required Basic Financial Statements. The required basic financial statements also include notes that explain in more detail some of the information in the financial statements. Required Basic Financial Statements The District uses accounting methods similar to those used by private sector companies. These statements offer short-term and long-term financial information about its activities. The Balance Sheets include all of the District s assets and liabilities and provides information about the nature and amounts of investments in resources (assets) and the obligations to District creditors (liabilities). The assets and liabilities are presented in a classified format, which distinguishes between current and long-term assets and liabilities. These statements also provide the bases for computing rate of return, evaluating the capital structure of the District, and assessing the liquidity and financial flexibility of the District. B

87 Spartanburg Regional Health Services District, Inc. Management s Discussion and Analysis (continued) All of the current year s revenues and expenses are accounted for in the Statements of Revenues and Expenses. This statement measures the performance of the District s operations over the past year. The final required statement is the Statement of Cash Flows. The primary purpose of this statement is to provide information about the District s cash receipts and cash payments during the reporting period. The statement reports cash receipts, cash payments, and net changes in cash resulting from operating, investing, noncapital financing, and financing activities and information concerning sources and uses of cash. Financial Analysis Table A-1 Condensed Balance Sheets (In Thousands of Dollars) Fiscal Year 2007 Fiscal Year 2006 Dollar Increase (Decrease) Percentage Increase (Decrease) Current assets $ 241,323 $ 234,156 $ 7, % Capital assets, net 366, ,152 23, % Other long-term assets 145, ,455 8, % Total assets $ 753,660 $ 714,763 $ 38, % Current liabilities $ 97,741 $ 93,502 $ 4, % Long-term liabilities 177, ,165 (5,861) (3.20)% Total liabilities 275, ,667 (1,622) (.59)% Invested in capital assets, net 186, ,840 27, % Unrestricted 292, ,256 13, % Total net assets 478, ,096 40, % Total liabilities and net assets $ 753,660 $ 714,763 $ 38, % As can be seen in Table A-1, net assets increased approximately $40.52 million to approximately $ million in fiscal The increase in the net asset position was primarily the result of increases in net capital assets. There were also increases in current and other long-term assets. The increases in current assets and other long-term assets are due to increases in cash balances. Cash balances increased due to increased collections of patient receivables. B

88 Spartanburg Regional Health Services District, Inc. Management s Discussion and Analysis (continued) Financial Analysis Table A-2 Condensed Balance Sheets (In Thousands of Dollars) Fiscal Year 2006 Fiscal Year 2005 Dollar Increase (Decrease) Percentage Increase (Decrease) Current assets $ 234,156 $ 210,432 $ 23, % Capital assets, net 343, ,293 7, % Other long-term assets 137, ,428 5, % Total assets $ 714,763 $ 678,153 $ 36, % Current liabilities $ 93,502 $ 87,933 $ 5, % Long-term liabilities 183, ,683 (4,518) (2.41%) Total liabilities 276, ,616 1,051.38% Invested in capital assets, net 158, ,523 11, % Unrestricted 279, ,014 24, % Total net assets 438, ,537 35, % Total liabilities and net assets $ 714,763 $ 678,153 $ 36, % As can be seen in Table A-2, net assets increased approximately $35.6 million to approximately $438.1 million in fiscal The increase in the net asset position was primarily the result of increases in current assets, net capital assets, and other long-tem assets. The increases in current assets and other long-term assets are due to increases in cash balances. Cash balances increased due to increased collections of patient receivables. B

89 Spartanburg Regional Health Services District, Inc. Management s Discussion and Analysis (continued) Table A-3 Condensed Statements of Revenues, Expenses and Changes in Net Assets (In Thousands of Dollars) Fiscal Year 2007 Fiscal Year 2006 Dollar Increase (Decrease) Percentage Increase (Decrease) Net patient service revenues $ 544,817 $ 513,049 $ 31, % Other revenue 20,262 20,319 (57) (.28%) Total revenues 565, ,368 31, % Salaries, temporary personnel, and benefit expenses 303, ,045 28, % Supply expenses 93,828 87,932 5, % Other expenses 155, ,653 4, % Total operating expenses 553, ,630 39, % Operating income 12,057 19,738 (7,681) (38.91%) Net nonoperating gains 28,462 17,310 11, % Change in net assets 40,519 37,048 3, % Donated building and equipment (1,489) 1,489 (100%) Beginning net assets 438, ,537 35, % Ending net assets $ 478,615 $ 438,096 $ 40, % The increase in operating revenues was due to increases in charges and reimbursement due to new employed physician practices including the Emergency Department physicians, new services, price increases, and certain volume increases. The increase in operating expenses was due primarily to increases in salaries, benefits, supplies and depreciation expense. The increase in salaries was due to employment of Emergency Department physicians, other new physician employees, an increase in FTE s, and pay increases. The increase in benefits was due to increased utilization of employee health insurance. The increase in supply expense was due to inflationary increases, volume increases, and introduction of new supplies. The increase in net nonoperating gains was due to the increases in realized and unrealized gains on investments caused by market conditions and SRHS Foundation contributions. B

90 Spartanburg Regional Health Services District, Inc. Management s Discussion and Analysis (continued) Table A-4 Condensed Statements of Revenues, Expenses and Changes in Net Assets (In Thousands of Dollars) Fiscal Year 2006 Fiscal Year 2005 Dollar Increase (Decrease) Percentage Increase (Decrease) Net patient service revenues $ 513,049 $ 499,741 $ 13, % Other revenue 20,319 21,828 (1,509) (6.91%) Total revenues 533, ,569 11, % Salaries, temporary personnel, and benefit expenses 275, ,916 13, % Supply expenses 87,932 86,093 1, % Other expenses 150, ,792 (3,139) (2.04%) Total operating expenses 513, ,801 11, % Operating income 19,738 19,768 (30) (.15%) Net nonoperating gains 17,310 14,000 3, % Change in net assets 37,048 33,768 3, % Donated building and equipment (1,489) (1,489) (100%) Beginning net assets 402, ,769 33, % Ending net assets 438,096 $ 402,537 $ 35, % The increase in operating revenues was due to increases in charges and reimbursement due to new revenue initiatives, price increases, and certain volume increases. The increase in operating expenses was due primarily to an increase in salaries and supply expense. The increase in salaries was due to employment of Emergency Department physicians, other new physician employees, and increase in FTE s, and pay increases. The increase in supply expense was due to inflationary increases and introduction of new supplies. The increase in net nonoperating gains was due to the increases in cash balances and the change in the interest rate environment. Capital Assets and Long-Term Debt Capital Assets As of September 30, 2007, the District had approximately $366.9 million invested in capital assets, as reflected in Table A-5, which represents a net increase (additions, deductions and depreciation) of approximately $23.7 million or 6.9% from the end of last year. B

91 Spartanburg Regional Health Services District, Inc. Management s Discussion and Analysis (continued) Table A-5 Capital Assets (In Thousands of Dollars) Fiscal Year 2007 Fiscal Year 2006 Land and land improvements $ 46,295 $ 43,296 Building and building fixtures 148, ,803 Equipment 493, ,849 Construction-in-progress 31,150 16,409 Equipment under capital lease obligations 7,527 5,997 Total capital assets 726, ,354 Less accumulated depreciation 359, ,202 Net capital assets $ 366,858 $ 343,152 As of September 30, 2006, the District had approximately $343.2 million invested in capital assets, as reflected in Table A-6, which represents a net increase (additions, deductions and depreciation) of approximately $7.9 million or 2.34% from the end of Table A-6 Capital Assets (In Thousands of Dollars) Fiscal Year 2006 Fiscal Year 2005 Land and land improvements $ 43,296 $ 38,423 Building 134, ,719 Equipment 480, ,444 Projects-in-progress 16,409 27,591 Equipment under capital lease obligations 5,997 5,997 Total capital assets 681, ,174 Less accumulated depreciation 338, ,881 Net capital assets $ 343,152 $ 335,293 B

92 Spartanburg Regional Health Services District, Inc. Management s Discussion and Analysis (continued) Long-Term Debt As of September 30, 2007, the District had approximately $180.6 million in outstanding longterm debt and as of September 30, 2006, the District had approximately $186.6 million in outstanding long-term debt. This represents a net decrease of $6.0 million over the prior fiscal year due to principal payments of existing debt and amortization of refunding loss and bond discount decreased long-term debt. As of September 30, 2006, the District had approximately $186.6 million in outstanding longterm debt and as of September 30, 2005, the District had approximately $189.3 million in outstanding long-term debt. This represents a net decrease of $2.7 million over the prior fiscal year. Long-term debt increased by $2.9 million as the result of a promissory note payable while principal payments of existing debt and amortization of refunding loss and bond discount decreased long-term debt by $5.6 million. For more detailed information regarding the District s capital assets and long-term debt, refer to the notes to the financial statements. Future Outlook The Board of Directors and management have a positive outlook about the future of the District. Increases in volume are expected to continue as the District continues to add new services, expand existing services and increase its market share. Increases in net patient services revenues are expected to continue as the District continues to focus its efforts on revenue initiatives. Requests for Information This financial report is designed to provide a general overview of the District s finances for all those with an interest in the District s finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the District. B

93 Spartanburg Regional Health Services District, Inc. Balance Sheets Assets Current assets: Cash and cash equivalents 131,709 September (In Thousands) $ $ 127,289 Patient accounts receivable, net of estimated uncollectible accounts of approximately $61,533 (2007) and $59,962 (2006) 79,142 76,111 Inventories 3,495 2,954 Other current assets 15,454 16,786 Assets whose use is limited required for current liabilities 11,523 11,016 Total current assets 241, ,156 Assets whose use is limited: Board designated assets 134, ,662 Assets held by trustee 5,738 5, , ,482 Less amounts required for current liabilities 11,523 11, , ,466 Property, plant, and equipment, net 366, ,152 Other assets: Investments in joint ventures 12,146 11,257 Debt issue costs 3,656 3,849 Other ,459 15,989 Total assets $ 753,660 $ 714, B-11

94 Liabilities and net assets Current liabilities: Accounts payable 26,919 September (In Thousands) $ $ 19,069 Accrued expenses 39,400 37,758 Estimated third-party payor settlements 23,846 29,708 Current portion of obligations under capital leases Current portion of long-term debt 6,601 6,333 Total current liabilities 97,741 93,502 Long-term debt, less current portion 174, ,225 Long-term obligations under capital leases, less current portion 3,296 2,940 Net assets: Unrestricted 292, ,256 Invested in capital assets, net of related financing 186, , , ,096 Total liabilities and net assets $ 753,660 $ 714,763 See accompanying notes B-12

95 Spartanburg Regional Health Services District, Inc. Statements of Revenues and Expenses Year Ended September (In Thousands) Net patient service revenues $ 544,817 $ 513,049 Other revenues 20,262 20,319 Total revenues 565, ,368 Expenses: Professional care of patients 347, ,185 Fiscal and administrative 137, ,534 Household and plant operations 16,917 15,307 Dietary 6,086 5,422 Depreciation and amortization 34,762 31,605 Interest 10,445 10,577 Total expenses 553, ,630 Operating income 12,057 19,738 Nonoperating gains and losses: Investment income 19,176 11,970 Other 9,286 5,340 Revenues and gains in excess of expenses and losses $ 40,519 $ 37,048 See accompanying notes B-13

96 Spartanburg Regional Health Services District, Inc. Statements of Changes in Net Assets Year Ended September (In Thousands) Net assets at beginning of year $ 438,096 $ 402,537 Revenues and gains in excess of expenses and losses 40,519 37,048 Donated building and equipment (1,489) Net assets at end of year $ 478,615 $ 438,096 See accompanying notes B-14

97 Spartanburg Regional Health Services District, Inc. Statements of Cash Flows Year Ended September (In Thousands) Operating activities Cash receipts from patients $ 535,924 $ 509,073 Other operating revenues 20,262 20,319 Cash payments to vendors (197,041) (195,547) Cash payments for salaries and benefits (303,802) (275,045) Net cash provided by operating activities 55,343 58,800 Noncapital financing activities Proceeds from contributions 4,904 2,431 Other 4,382 2,909 Net cash provided by noncapital financing activities 9,286 5,340 Capital and related financing activities Purchases of property, plant, and equipment (57,378) (38,352) Disposals of property, plant, and equipment, net of accumulated depreciation Principal payments on long-term debt, net of amortization of refunding loss (6,213) (6,001) Interest payments on long-term debt (10,281) (10,304) Principal payments on capital lease obligations (833) (618) Net cash used in capital and related financing activities (74,265) (54,886) Investing activities Purchases of investments (53,842) (25,539) Proceeds from sales of investments 42,481 19,829 Investment income realized 19,176 11,970 Distributions from joint ventures, net 2,941 2,632 Net cash provided by investing activities 10,756 8,892 Net increase in cash and cash equivalents 1,120 18,146 Cash and cash equivalents at beginning of year 165, ,887 Cash and cash equivalents at end of year $ 166,153 $ 165,033 Continued on next page B-15

98 Spartanburg Regional Health Services District, Inc. Statements of Cash Flows (continued) Year Ended September (In Thousands) Reconciliation of cash and cash equivalents Cash and cash equivalents on the balance sheet $ 131,709 $ 127,289 Cash and cash equivalents in assets with limited use 34,444 37,744 Total cash and cash equivalents $ 166,153 $ 165,033 Reconciliation of operating income to net cash provided by operating activities Operating income $ 12,057 $ 19,738 Interest considered capital financing activity 10,281 10,304 Amortization of bond discount Adjustments to reconcile operating income to net cash provided by operating activities: Provision for bad debts 60,900 57,213 Provision for depreciation and amortization 34,762 31,605 Changes in operating assets and liabilities: Patient accounts receivable (63,931) (61,271) Inventories (541) (139) Other current assets 1,332 (375) Other assets (3,411) (2,943) Accounts payable 7,850 (1,879) Estimated third-party settlements (5,862) 82 Accrued expenses 1,642 6,202 Net cash provided by operating activities $ 55,343 $ 58,800 Supplemental non-cash information Land acquired under promissory note $ $ 2,990 Property, plant, and equipment acquired under a capital lease $ 1,530 $ Donated building and equipment $ $ 1,489 See accompanying notes B-16

99 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements September 30, 2007 and Description of Reporting Entity and Summary of Significant Accounting Policies Reporting Entity Spartanburg Regional Health Services District, Inc. (District) is a statutory public hospital corporation and a political subdivision of the state of South Carolina, and, as such, is exempt from federal and state income tax. The District is governed by an eleven member Board of Directors (the Board) appointed by the Spartanburg County Council, the primary government. The District operates a health care system in Spartanburg County consisting of Spartanburg Regional Medical Center (SRMC) and Spartanburg Hospital for Restorative Care, and the Home Office, which provides common services for the District. Accordingly, these affiliated entities are reported as blended component units of the District. The District owns SRMC Holdings, LLC; SRMC Ventures, LLC; Regional Management Services, LLC; and, Greer Group, LLC, which are organized as limited liability companies under South Carolina limited liability company statutes. The District also owns SRHS Capital which is organized as a South Carolina corporation and NC Network, Inc., which is organized as a North Carolina corporation. SRMC Ventures, LLC and Regional Management Services, LLC hold investments in joint ventures as further described in this note under Investments in Joint Ventures. Operating and Nonoperating Activities The mission of the District is delivering quality care for life. Only those activities directly associated with the furtherance of this mission are considered to be operating activities. Activities not directly related to the provision of health care services or activities considered peripheral or incidental are reported as nonoperating activities. Nonoperating activities include interest earned on investments other than trustee-held investments related to borrowed funds, gains and losses resulting from the retirement or sale of fixed assets, restricted contributions, and gains and losses resulting from investments in joint ventures. B

100 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 1. Description of Reporting Entity and Summary of Significant Accounting Policies (continued) Basis for Combination The financial statements include the accounts of SRMC; Spartanburg Hospital for Restorative Care; SRMC Holdings, LLC; SRMC Ventures, LLC; Regional Management Services, LLC; the Home Office; NC Network, Inc.; Greer Group, LLC; and, SRHS Capital. All balances and transactions between the entities have been eliminated. Net Assets The District classifies its net assets for accounting and reporting purposes as unrestricted or restricted: Unrestricted resources of the District that bear no external restrictions as to use or purpose. These resources include amounts generated from operations and undesignated gifts. Invested in capital assets, net of related financing resources of the District invested in property, plant, and equipment. Restricted resources that are designated as to use by donors, grantors, or contractual requirements for capital improvements and certain District programs. There are no restricted net assets on the balance sheet. Accounting Standards and Methods The District follows the provisions of the American Institute of Certified Public Accountants Audit and Accounting Guide, Health Care Organizations (Guide). Under the provisions of the Guide, the District qualifies as a governmental organization and is subject to the pronouncements of the Governmental Accounting Standards Board (GASB). The District is reported as an enterprise fund under GASB pronouncements. The proprietary fund method of accounting is used whereby revenues and expenses are recognized on the accrual basis. Pursuant to GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary and Fund Accounting, the District has elected to apply the provisions of all relevant pronouncements from the Financial Accounting Standards Board (FASB) that do not conflict with or contradict GASB pronouncements, including those issued after November 30, B

101 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 1. Description of Reporting Entity and Summary of Significant Accounting Policies (continued) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Compensated Absences The District accrues vacation and other compensated absences in accordance with GASB Statement No. 16, Accounting for Compensated Absences. Cash and Cash Equivalents Cash and cash equivalents include investments in highly liquid debt instruments with an original maturity of three months or less when purchased. Investments and Investment Income The District s cash, cash equivalents, and investments, including assets whose use is limited, are reported at fair value based on quoted market prices in accordance with GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools. All monies are invested in United States government obligations, common stocks, mutual funds, certificates of deposit, and corporate bonds that are in accordance with the District s investment policy. The calculation of realized gains and losses is independent of a calculation of the net change in the fair value of investments. Realized gains and losses on investments that had been held in more than one fiscal year and sold in the current year were included as a change in the fair value of investments reported in the prior year and the current year. Investment income on proceeds of borrowings that are held by a trustee, to the extent not capitalized, is reported as other revenues. Investment income from all other investments is reported as nonoperating activities. B

102 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 1. Description of Reporting Entity and Summary of Significant Accounting Policies (continued) Investments in Joint Ventures The District s investments in joint ventures are held by SRMC Ventures, LLC and Regional Management Services, LLC. SRMC Ventures, LLC s investments consist of a 50% interest in Regional HealthPlus, LLC; a 33% interest in Upstate Linen Services, LLC; a 50% interest in the Ambulatory Surgery Center of Spartanburg, LLC; and, a 50% interest in the Ambulatory Surgery Center of Pelham, LLC. Regional Management Services, LLC s investment consists of a 62% interest in Upstate Teleservices, LLC. These investments in joint ventures are accounted for using the equity method. Regional HealthPlus, LLC (RHP) is a limited liability company formed to organize a collaborative network of health care providers and execute and manage various contracts with third-party payors. RHP is owned 50% by SRMC Ventures, LLC and 50% by area physicians. Upstate Linen Services, LLC is a limited liability company formed to offer a collaborative linen service. Upstate Linen Services, LLC is owned 33% by SRMC Ventures, LLC and 67% by other area hospitals. The Ambulatory Surgery Center of Spartanburg, LLC (ASCS, LLC) is a limited liability company formed to assist the District in serving the ambulatory surgical needs of Spartanburg County residents. ASCS, LLC is owned 50% by SRMC Ventures, LLC and 50% by area physicians. The Ambulatory Surgery Center of Pelham, LLC (ASC Pelham, LLC) is a limited liability company formed to assist the District in serving the ambulatory surgical needs of Spartanburg County residents. ASC Pelham, LLC is owned 50% by SRMC Ventures, LLC and 50% by area physicians. Upstate Teleservices, LLC is a limited liability company formed to offer medical teleservices. Upstate Teleservices, LLC is owned 62% by Regional Management Services, LLC and 38% by another area hospital. B

103 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 1. Description of Reporting Entity and Summary of Significant Accounting Policies (continued) The District s investments in joint ventures are as follows: September (In Thousands) Regional HealthPlus, LLC $ 4,544 $ 3,847 Upstate Linen Services, LLC 1,881 2,073 Ambulatory Surgery Center of Spartanburg, LLC 2,607 2,246 Ambulatory Surgery Center of Pelham, LLC 2,409 2,519 Upstate Teleservices, LLC $ 12,146 $ 11,257 Inventories Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. Property, Plant, and Equipment Property, plant, and equipment is stated at cost. The cost of contributed property is recorded at its fair value at date of donation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as determined by industry standards. Routine maintenance, repairs, and replacements are charged to expense. Expenditures that materially increase values, change capacities, or extend useful lives are capitalized. The amortization of capital leases is included in depreciation expense. When properties are retired or otherwise disposed of, the cost of the assets and related allowances for depreciation are removed from the accounts, and any resulting gain or loss is recognized as a nonoperating activity in the Statements of Revenues and Expenses. B

104 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 1. Description of Reporting Entity and Summary of Significant Accounting Policies (continued) Risk Management The District is exposed to various risks of loss from torts; theft of, damage to, and destruction of assets; business interruption; errors and omissions; employee injuries and illnesses; and, natural disasters. Insurance coverage is purchased to cover the majority of claims arising from such matters. The District is self-insured for amounts up to a specified level for health and medical coverages for its employees. The estimated liability recorded by the District is an estimate of the loss for claims or incidents and an accrual for incurred but not reported claims. Capitalization of Interest Interest costs, net of investment income, incurred during the period of construction of qualifying capital assets are capitalized as a component of the cost of these assets and amortized over the life of the asset. Advance Refunding In accordance with GASB Statement No. 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities, losses on advance refundings are amortized using the straight-line method over the shorter of the remaining term of the refunded bonds or the term of the refunding bonds. Net Patient Service Revenues The District has agreements with third-party payors for health care services 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. A summary of the payment arrangements with major third-party payors follows: Medicare: Inpatient acute care services and outpatient services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Approximately 37% and 36% of the District s net patient service revenues for the years ended September 30, 2007 and 2006, respectively, were derived from Medicare. B

105 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 1. Description of Reporting Entity and Summary of Significant Accounting Policies (continued) Medicaid: Inpatient reimbursement is based upon prospectively determined rates per discharge. Outpatient services rendered to Medicaid program beneficiaries are reimbursed under various reimbursement methodologies. The District is reimbursed for outpatient services at tentative rates with final settlement determined after submission of annual cost reports by the District and audits thereof by the fiscal intermediary. Approximately 7% and 9% of the District s net patient service revenues for the years ended September 30, 2007 and 2006, respectively, were derived from Medicaid. Other: The District has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The bases for payments to the District under these agreements include prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates. Net patient service revenues are reported at estimated net realizable amounts from patients, thirdparty payors and others for services rendered and includes estimated retroactive revenue adjustments due to future audits, reviews and investigations. Retroactive adjustments are considered in the recognition of revenues on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as cost report years are no longer subject to such audits, reviews and investigations. Net patient service revenues are also reduced by bad debt expense. Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. The District 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 such regulatory inquiries have been made, compliance with such laws and regulations can be subject to further government review and interpretation as well as significant regulatory action including fines, penalties and exclusion from the Medicare and Medicaid programs. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. B

106 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 1. Description of Reporting Entity and Summary of Significant Accounting Policies (continued) The District receives payments for serving a disproportionately high volume of Medicaid patients. The District received approximately $36,301,000 and $36,045,000 of Medicaid disproportionate share program reimbursement for the years ended September 30, 2007 and 2006, respectively. These amounts have been included in net patient service revenues. South Carolina requires that the District pay a Hospital Tax that is used as matching funds for the Medicaid disproportionate share program. The amount of Hospital Tax paid by the District was approximately $13,336,000 and $14,045,000 for the years ended September 30, 2007 and 2006, respectively. The Hospital Tax is included as a fiscal and administrative expense. Charity Care The District accepts all patients regardless of their ability to pay. A patient is classified as a charity patient by reference to certain established policies of the District. Essentially, these policies define charity services as those services for which no payment is anticipated. In assessing a patient s inability to pay, the District utilizes the generally recognized poverty income levels of South Carolina, and also includes certain cases where incurred charges are significant when compared to the patient s income. Patients that qualify for the state Medically Indigent Act Program are a component of charity care. The District receives no reimbursement for services provided to these patients. Charity care is not reflected in net patient service revenues. The gross amount of charges written off to charity care under these policies for the year ended September 30, 2007 and 2006 were approximately $91,492,000 and $76,279,000, respectively. The net cost of charity care provided was approximately $29,287,000 in 2007 and $25,349,000 in Assets Whose Use is Limited Assets whose use is limited primarily includes assets designated by the Board for future capital improvements and amounts held by Bond Trustees in accordance with indenture agreements. These assets consist principally of investments in U.S. government obligations, common stock, mutual funds, certificates of deposit, and corporate bonds. Amounts that are to be used to pay current liabilities are classified as current assets. Amortization Debt issue costs and bond discounts are amortized over the life of the related bonds. B

107 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 1. Description of Reporting Entity and Summary of Significant Accounting Policies (continued) Income Taxes The District is a political subdivision of the state of South Carolina and also has been granted exemption from income taxes as an organization described in Section 115 of the Internal Revenue Code. SRMC Holdings, LLC; SRMC Ventures LLC; Regional Management Services, LLC; SRHS Capital; and, Greer Group, LLC, nonexempt affiliates that file informational tax returns with appropriate federal and state taxing authorities in compliance with Internal Revenue Service and state provisions, are current on all tax payments. Reclassifications Reclassifications have been made in the 2007 financial statements to conform to the 2006 presentation. 2. Cash and Assets Whose Use is Limited At September 30, 2007 and 2006, the District had cash on hand and deposits as follows: September (In Thousands) Insured (FDIC) or collateralized with securities held by the District $ 371 $ 367 Collateralized by securities held by the pledging financial institution s trust department, but not in the District s name 131, ,922 Total $ 131,709 $ 127,289 The types of securities which are permitted investments for District funds are established by the District s Investment Policy in accordance with South Carolina Statutes. All funds of the District may be invested in obligations of or guaranteed by the U.S. government. In addition, certain funds of the District may be invested in obligations of agencies of the U.S. government; collateralized certificates of deposit and repurchase agreements commercial paper; and other asset classes including fixed income, domestic equities, international equities, and diversified investment funds. B

108 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 2. Cash and Assets Whose Use is Limited (continued) Investments and assets whose use is limited are comprised of the following: September (In Thousands) Cash and short-term investments $ 28,706 $ 31,924 Trustee funds 5,738 5,820 U.S. Treasury Securities 11,679 9,251 Corporate and U.S. agency bond funds 6,135 7,660 Equity securities 40,636 57,139 Diversified investment funds 47,649 20,688 Total $ 140,543 $ 132,482 In 2007 and 2006, the District had approximately $28,706,000 and $31,924,000, respectively, invested in short-term investments which include a sweep account secured by securities held by the Trustee. Investments are carried at fair value with the exception of diversified investment funds, which are carried at the lower of cost or market value. The District implemented the disclosure requirements of GASB Statement No. 40, Deposit and Investment Risk Disclosures (GASB 40) and, accordingly, the District has assessed the custodial credit risk, the concentration of credit risk, credit risk, and interest rate risk of its cash and assets whose use is limited. (a) Custodial Credit Risk The District s deposits are exposed to custodial credit risk if they are not covered by depository insurance and the deposits are uncollateralized or are collateralized with securities held by the pledging financial institution s trust department or agent but not in the depositor-government s name. The deposit risk is that, in the event of the failure of a depository financial institution, the District will not be able to recover deposits or will not be able to recover collateral securities that are in the possession of an outside party. The District s investment securities are exposed to custodial credit risk if the securities are uninsured, are not registered in the name of the District, and are held by either the counterparty or the counterparty s trust department or agent but not in the District s name. The investment risk is that, in the event of the failure of the counterparty to a transaction, the District will not be able to recover the value of the investment or collateral securities that are in the possession of an outside party. B

109 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 2. Cash and Assets Whose Use is Limited (continued) The District s bank balances were not exposed to custodial credit risk since the full amount was covered by FDIC insurance or collateralized by securities held by the pledging financial institution s Trust department. As of September 30, 2007 and 2006, the District s investments were comprised of various short-term investments, trustee funds, corporate and U.S. agency bond funds, real estate mortgage funds, equity securities, and diversified investment funds. Since the investments are registered in the District s name they are not exposed to custodial credit risk. In addition, the District s investment policy requires that specific qualifications be met in order to represent the District as a custodian. (b) Concentration of Credit Risk This is the risk associated with the amount of investments the District has with any one issuer that exceeds 5 percent or more of its total investments. Investments issued or explicitly guaranteed by the U.S. government and investments in mutual funds, external investment pools, and other pooled investments are excluded from this requirement. The District s investment policy states that no equity holding may represent more than 10% of any individual portfolio manager. (c) Credit Risk GASB 40 requires that disclosure be made as to the credit rating of all debt security investments except for obligations of the U.S. government or obligations explicitly guaranteed by the U.S. government. This is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The District s investment policy provides guidelines for its fund managers and lists specific allowable investments. The policy provides for the utilization of varying styles of managers so that portfolio diversification is maximized and total portfolio efficiency is enhanced. The credit risk profile of the District s investments as of September 30, 2007 is as follows: Rating September 30, Investment Type 2007 AAA N/A (In Thousands) Short-term investments $ 28,706 $ 28,706 $ Trustee funds 5,738 5,738 U.S. Treasury securities 11,679 11,679 Corporate & U.S. agency bond funds 6,135 6,135 Equity securities 40,636 40,636 Diversified investment funds 47,649 47,649 Total $ 140,543 $ 52,258 $ 88,285 B

110 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 2. Cash and Assets Whose Use is Limited (continued) (d) Investment Rate Risk This is the risk that changes in interest rates will adversely affect the fair value of an investment. The District s investment policy authorizes a strategic asset allocation that is designed to provide an optimal return over the District s investment horizon and within the District s risk tolerance and cash requirements. The distribution of the District s investments by maturity as of September 30, 2007 is as follows (in thousands): Investment Type September 30, 12 Months 2007 or Less Remaining Maturity (In Months) 13 Months 25 Months Greater to 24 to 60 than 60 Months Months Months N/A Short-term investments $ 28,706 $ 28,706 $ $ $ $ Trustee funds 5,738 5,738 U.S. Treasury Securities 11,679 3,064 3,304 5,311 Corporate & U.S. agency bond funds 6,135 1,181 2,856 1, Equity securities 40,636 40,636 Diversified investment funds 47,649 47,649 $ 140,543 $ 38,689 $ 6,160 $ 6,777 $ 632 $ 88,285 For the years ended September 30, 2007 and 2006, investment income is comprised of the following: (In Thousands) Interest and dividends, net of fees $ 11,793 $ 9,113 Net increase in the fair value of investments (includes net realized gain of $2,040 and $503 for 2007 and 2006, respectively) 7,383 2,857 $ 19,176 $ 11,970 B

111 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 3. Property, Plant, and Equipment A summary of property, plant, and equipment and the related accumulated depreciation for 2007 and 2006 is as follows (in thousands): Balance October 1, 2006 Additions Transfers Deletions Balance September 30, 2007 Land and land improvements $ 43,296 $ 1,249 $ 2,137 $ (387) $ 46,295 Buildings and building fixtures 134,803 3,008 10,618 (5) 148,424 Fixed equipment 236,394 1,413 8,710 (2,131) 244,386 Major movable equipment 244,455 13,459 2,043 (11,035) 248,922 Equipment under capital lease obligations 5,997 1,530 7,527 Construction-in-progress 16,409 38,249 (23,508) 31, ,354 58,908 (13,558) 726,704 Less accumulated depreciation and amortization 338,202 (34,762) (13,118) (359,846) Net fixed assets $ 343,152 $ 24,146 $ $ (440) $ 366,858 Balance October 1, 2005 Additions Transfers Deletions Balance September 30, 2006 Land and land improvements $ 38,423 $ 5,696 $ 33 $ (856) $ 43,296 Buildings and building fixtures 124,719 7,142 5,911 (2,969) 134,803 Fixed equipment 236, (686) 236,394 Major movable equipment 213,994 17,750 15,362 (2,651) 244,455 Equipment under capital lease obligations 5,997 5,997 Construction-in-progress 27,591 10,542 (21,724) 16, ,174 41,342 (7,162) 681,354 Less accumulated depreciation and amortization 311,881 31,605 (5,284) 338,202 Net fixed assets $ 335,293 $ 9,737 $ $ (1,878) $ 343,152 Depreciation and amortization expense was approximately $34,762,000 and $31,605,000 for the years ended September 30, 2007 and 2006, respectively. B

112 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 3. Property, Plant, and Equipment (continued) The District had outstanding commitments of approximately $42,294,000 at September 30, 2007, for completion of construction-in-progress and for the purchase of equipment. 4. Long-Term Debt A summary of long-term debt obligations are as follows: September (In Thousands) Hospital Revenue and Refunding Bonds, Series 2002 $ 46,020 $ 46,785 Variable Rate Demand Hospital Revenue Bonds, Series ,220 20,990 Hospital Revenue and Refunding Bonds, Series 1997A 45,705 46,260 Hospital Revenue and Refunding Bonds, Series 1997B 36,850 38,605 Hospital Revenue and Refunding Bonds, Series ,765 33,845 Notes Payable 5,169 6, , ,097 Less: Current portion 6,601 6,333 Unamortized loss on advance refunding 2,378 2,533 Unamortized bond discount 3,742 4,006 $ 174,008 $ 180,225 Hospital Revenue and Refunding Bonds, Series 2002 (Series 2002) were issued on April 15, 2002, and consist of term and serial bonds. The proceeds of the Series 2002 were used to refund in advance of their maturities the Series 1992A, to reimburse the District for certain capital improvements, and to pay the issuance costs of the bonds, including a bond insurance premium. A portion of the proceeds were deposited in an irrevocable trust with an escrow agent to provide future debt service payments on the Series 1992A. As a result, the Series 1992A are considered legally defeased and the liability for those bonds has been removed from long-term debt. The Series 2002 are secured by a pledge of revenues of the District. Interest is payable semi-annually on October 15 and April 15. The interest rate on the Series 2002 ranges from 4.20% to 6.00%. The Series 2002 serial bonds will mature in The Series 2002 term bonds will mature in B

113 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 4. Long-Term Debt (continued) Variable Rate Demand Hospital Revenue Bonds, Series 1998 (Series 1998) are variable rate demand bonds bearing interest determined weekly by the Remarketing Agent under prevailing market conditions. In accordance with the Trust Agreement, the District may convert the weekly interest rate to a bond interest term rate or a long-term interest rate. While the bonds bear interest at a weekly rate, interest is payable monthly in arrears on the first Wednesday of each month, commencing July 1, When the bonds bear interest at a long-term interest rate, interest will be payable semiannually in arrears, on each April 15 and October 15. The interest rate on the Series 1998 ranged from 3.22% and 4.42% during 2007 and 2.40% to 4.02% during The bonds are secured by a pledge of revenues of the District and a municipal bond insurance policy. The Series 1998 will mature on April 15, The holders may tender (put) their bonds for payment at specified times. The Bond Agreement contains a Standby Bond Purchase Agreement with a bank that will be placed into effect if the Remarketing Agent is unable to resell, under a best efforts arrangement, bonds that are tendered. In accordance with the Standby Bond Purchase Agreement, the District is required to pay to the Tender Agent the necessary amount to cover the purchase price for all Series 1998 bonds tendered by the holders. The District shall pay interest to the bank at the Purchased Bond Rate, as defined in the Standby Bond Purchase Agreement. Bond purchase draws under the Standby Bond Purchase Agreement are payable by the District in quarterly installments over a ten year period commencing twelve months after such purchase draws. Hospital Revenue and Refunding Bonds, Series 1997A (Series 1997A) consist of term and serial bonds. The bonds are secured by a pledge of revenues of the District. Interest is payable semiannually on October 15 and April 15. The interest rate on the Series 1997A debt ranges from 4.75% to 5.75%. The Series 1997A serial bonds will mature in The Series 1997A term bonds will mature in Hospital Revenue and Refunding Bonds, Series 1997B (Series 1997B) consist of term and serial bonds. The proceeds of the Series 1997B were used to refund in advance of their maturities a portion of the Series 1992B and to pay the issuance costs of the bonds, including a bond insurance premium. Those proceeds were deposited in an irrevocable trust with an escrow agent to provide future debt service payments on the Series 1992B. As a result, a portion of the Series 1992B are considered legally defeased and the liability for those bonds has been removed from long-term debt. The Series 1997B are secured by a pledge of revenues of the District. Interest is payable semi-annually on October 15 and April 15. The interest rate on the Series 1997B debt ranges from 4.20% to 6.00%. The Series 1997B serial bonds will mature in The Series 1997B term bonds will mature in B

114 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 4. Long-Term Debt (continued) Hospital Revenue and Refunding Bonds, Series 1995 (Series 1995) consist of term and serial bonds. The bonds are secured by a pledge of revenues of the District and a municipal bond insurance policy. Interest is payable semi-annually on April 15 and October 15. The interest rate on the Series 1995 ranges from 4.30% to 5.50%. The Series 1995 serial bonds will mature in The Series 1995 term bonds will mature in Hospital Revenue and Refunding Bonds, Series 1992A (Series 1992A) and Hospital Revenue Bonds, Series 1992B (Series 1992B) were issued by Spartanburg County on April 15, The proceeds of the issuance were simultaneously loaned to SRMC under a loan agreement dated April 15, Certain components of the Series 1992B were refunded in advance of their maturities with proceeds from the Series 1997B and the remaining portion of the bonds were repaid at September 30, The Series 1992A were refunded in advance of their maturities with proceeds from the Series The partial advance refunding of the Series 1992B bonds resulted in a difference between the reacquisition price and the net carrying amount of the refunded debt, including unamortized financing costs, of approximately $3,500,000. This difference, reported in the accompanying financial statements as a deduction from long-term debt, is being charged to operations through the year 2022 using the straight line method, which approximates the effective interest method. The District completed the advance refunding to reduce its total debt service payments over the next 25 years by approximately $2,700,000 and to obtain an economic gain (difference between the present values of the old and new debt service payments) of approximately $1,500,000. The partial advance refunding of the Series 1992A bonds resulted in a difference between the reacquisition price and the net carrying amount of the refunded debt, including unamortized financing costs, of approximately $389,000. This difference, reported in the accompanying financial statements as a deduction from long-term debt, is being charged to operations through the year 2032 using the straight line method, which approximates the effective interest method. The District completed the advance refunding to reduce its total debt service payments over the next 30 years by approximately $2,500,000 and to obtain an economic gain (difference between the present values of the old and new debt service payments) of approximately $1,500,000. Trust agreements for Series 2002, Series 1998, Series 1997A, Series 1997B, and Series 1995 contain certain restrictive covenants which, among other matters, require the District to maintain its rates, fees and charges to the extent necessary in order for the District to maintain certain earnings levels as defined. In addition, the Trust agreements name banks as Trustees to receive, transfer and disburse all monies. B

115 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 4. Long-Term Debt (continued) On August 23, 2005, the District entered into a loan agreement with a financial institution that provided $5,000,000 with a fixed interest rate of 5.25%. The proceeds of the loan were used to purchase a medical office/condo suite at the Village at Pelham. The loan is being repaid over ten years in monthly installments of interest and principal and will mature in On November 21, 2005, the District entered into a promissory note with an individual for $2,990,000 with a fixed interest rate of 5.50% for the purchase of land near the Village at Pelham. The promissory note will be repaid over a period of twenty seven months and will mature in Investments of the trusteed funds are restricted to government obligations. Funds held by the Trustee are: September (In Thousands) Series 2002 General $ 331 $ 328 Interest 991 1,014 Series 1998 General Series 1997A Project Interest 1,060 1,086 Series 1997B Principal Interest Series 1995 Principal Interest $ 5,738 $ 5,820 B

116 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 4. Long-Term Debt (continued) A summary of interest paid, interest expense, and interest income follows: (In Thousands) Interest paid $ 10,281 $ 10,304 Total interest incurred $ 10,181 $ 10,314 Amortization of bond discount Interest expense $ 10,445 $ 10,577 Interest income, included in other revenues $ 250 $ 233 Future principal and interest payments, excluding the unamortized losses on advance refundings of the Series 1992A and 1992B and the unamortized bond discount, under the District s longterm debt agreements are: Year Ending September 30 Principal Payments Interest Total Payments Debt Service (In Thousands) 2008 $ 6,601 $ 9,550 $ 16, ,876 9,264 15, ,161 8,981 15, ,477 8,679 15, ,774 8,357 15, ,075 36,303 74, ,615 25,844 72, ,650 13,946 56, ,500 4,479 31,979 $ 186,729 $ 125,403 $ 312,132 B

117 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 4. Long-Term Debt (continued) Activity related to long-term debt for the year ended September 30, 2007 and 2006 is summarized as follows (in thousands): (In Thousands) Beginning balance $ 186,558 $ 189,306 Proceeds from note payable 2,990 Payments on long-term debt (6,368) (6,156) Amortization of refunding loss Amortization of bond discount Ending balance $ 180,609 $ 186, Net Patient Service Revenues Net patient service revenues for the years ended September 30, 2007 and 2006 consisted of the following: (In Thousands) Gross patient charges at established rates, including charges foregone for charity care $ 1,607,411 $ 1,438,581 Deductions: Contractual adjustments (910,202) (792,040) Charity care provided at established billing rates (91,492) (76,279) Provision for bad debts (60,900) (57,213) Net patient service revenues $ 544,817 $ 513, Retirement System The District participates in the South Carolina Retirement System (System), which is administered by an agency of the State of South Carolina. The System provides a defined benefit retirement plan to substantially all the employees of the District. Forfeitures of the District s contributions in cases of termination of employment prior to full vesting as well as unfunded vested benefits, if any, are the benefit and responsibility of the State of South Carolina. Provisions for contributions to the retirement system were approximately $15,968,000 and $13,274,000 in 2007 and 2006, respectively. B

118 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 7. Commitments and Contingencies Leases The District leases certain equipment and facilities used in its operations under capital and operating leases that have noncancelable terms in excess of one year. Future minimum lease payments as of September 30, 2007 under leases classified as capital and operating leases are as follows (in thousands): Fiscal Year Capital Leases Operating Leases 2008 $ 1,356 $ 4, , , , , , Total minimum lease payments 5,678 $ 19,258 Less amounts representing interest 1,407 Present value of minimum lease payments 4,271 Less current portion 975 $ 3,296 Lease expenses relating to operating leases were approximately $4,314,000 and $4,257,000 in 2007 and 2006, respectively. The assets recorded under capital leases are pledged as collateral for the capital lease obligations. Amortization of assets recorded under capital lease obligations is included with depreciation expenses. Litigation The District is involved in litigation arising in the course of business. After consultation with legal counsel, management estimates that these matters will be resolved without material adverse effect on the District s financial position or results of operations. B

119 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 7. Commitments and Contingencies (continued) Professional Malpractice Liability Insurance The District participates in a multiprovider captive for professional and general liability insurance coverage on a claims made basis. The District s premiums are accrued based on the experience to date of the participating health care providers. Various claimants have asserted malpractice claims against the District, and additional claims could be asserted for incidents occurring through September 30, At September 30, 2007, management is aware of no claims that might lead to significant amounts not adequately covered by insurance or that would have a material adverse effect on the financial position of the District. An accrual has been established for an estimate of incurred but not reported claims. The District would be subject to retroactive premium adjustments should the captive s loss experience exceed premiums. The District has an irrevocable letter of credit, expiring September 30, 2007, in the amount of approximately $4,081,000. Any amounts in excess of the letter of credit would be assessed to the District. There were no outstanding borrowings under the irrevocable letter of credit at September 30, Self-Insurance Plan The District s health insurance plan (Plan) is a self-insured plan that provides certain benefits for covered employees. The employee pays a monthly premium and the Plan will pay for certain medical expenses, as defined in the Plan document. Changes in the balances of the claims liability during the years ended September 30, 2007 and 2006 were as follows (in thousands): September Beginning balance $ 3,021 $ 3,684 Claims and changes in estimates 33,453 27,526 Claim payments (32,316) (28,189) Ending balance $ 4,158 $ 3,021 B

120 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 7. Commitments and Contingencies (continued) Workers Compensation The District participates in a workers compensation self-insurance pool operating as Palmetto Hospital Trust (PHT). Beginning in July 2005, the District elected to accept legal and financial responsibility for a per claim deductible of $100,000 in exchange for a deductible credit against its deposit premium. In order to facilitate the efficient administration of the program and the payment of claims and expenses, PHT from time to time will advance funds on behalf of the District equal to the deductible obligation of the District. As security for the payments of all amounts advanced by PHT on behalf of the District, the District has an irrevocable letter of credit, expiring December 31, 2007, in the amount of $2,828,000. Any amounts in excess of the letter of credit would be assessed to the District. There were no outstanding borrowings under the letter of credit at September 30, Concentrations of Credit Risk Financial instruments that potentially subject the District to a concentration of credit risk consist principally of cash, investments, and accounts receivable from patients and third-party payors. The District places its cash and investments with high credit quality financial institutions. Concentration of credit risk with respect to patient accounts receivable is managed by an inhouse credit staff. The District generally does not require collateral. Third-party payors are primarily Medicare and Medicaid that provide reimbursement on patient accounts on a regular basis. Managed care receivables are distributed among several primary payors. The credit worthiness of all managed care payors is considered by the District prior to entering into an agreement with the payor. The mix of receivables from patients and third-party payors at September 30 was as follows: Medicare 36% 39% Medicaid 12 8 Managed care payors Other % 100% B

121 Spartanburg Regional Health Services District, Inc. Notes to Financial Statements (continued) 9. Fair Value of Financial Instruments The carrying amount reported in the balance sheets for cash and cash equivalents approximates its fair value. The fair value of the District s investments and assets whose use is limited is presented in Note 2 and is based on quoted market prices. The carrying values of accounts receivable, other assets, accounts payable, accrued expenses, and estimated third-party payor settlements approximate fair value due to the short-term nature of these instruments. The fair value of the long-term debt was estimated using discounted cash flows based on market yield on comparable bonds for a similar type of borrowing arrangement. The carrying values of the District s long-term debt at September 30, 2007 and 2006 are approximately $186,729,000 and $193,097,000, respectively. The fair values are approximately $189,970,000 and $197,724,000, respectively. The District intends to hold the United States government obligations and certificates of deposit included in assets whose use is limited until maturity. Current operating activities of the District will be funded through current operating income and the use of nondesignated investments. B

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123 APPENDIX C DEFINITIONS OF CERTAIN TERMS USED IN THIS OFFICIAL STATEMENT

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125 DEFINITIONS The following are definitions of certain words and terms used in this Official Statement. Accountant shall mean a firm of nationally recognized independent certified public accountants to whom the Master Trustee makes no reasonable objection. Accounts Receivable shall mean any and all right to payment for services rendered or for goods sold or leased which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance. Accreted Value shall mean with respect to any Discount Indebtedness, as of any Valuation Date (as defined in the Supplemental Master Trust Indenture authorizing such Discount Indebtedness), the amount set forth on such date in the Supplemental Master Trust Indenture authorizing such Discount Indebtedness, and as of any date other than a Valuation Date, the sum of (a) the Accreted Value on the preceding Valuation Date and (b) the product of (1) a fraction, the numerator of which is the number of days having elapsed from the preceding Valuation Date and the denominator of which is the number of days from such preceding Valuation Date to the next succeeding Valuation Date, and (2) the difference between the Accreted Values for such Valuation Dates. Additional Indebtedness shall mean any Indebtedness issued under the Master Indenture or otherwise (including all Notes and all Guaranties other than any Guaranty by any member of the Obligated Group of Indebtedness of any other member of the Obligated Group) incurred subsequent to the issuance of the Series 1 Note under Supplemental Master Trust Indenture No. 1 to the Master Indenture dated as of December 1, Aggregate Income Available for Debt Service shall mean, as to any period of time, the aggregate of Income Available for Debt Service of each member of the Obligated Group for such period, determined in such manner that no portion of Income Available for Debt Service of any such member is included more than once. Annual Debt Service shall mean the Long-Term Debt Service Requirement for the Fiscal Year in question. Annual Debt Service Requirement shall mean for any Bond Year the amount required to be paid in such Bond Year by the District to the Bond Trustee pursuant to the Bond Indenture with respect to the Series 12 Note for payment of principal and interest on the Bonds during such Bond Year. Balloon Indebtedness shall mean (i) Long-Term Indebtedness, or Short-Term Indebtedness which is intended to be refinanced upon or prior to its maturity (and which is subject to a commercially reasonable binding commitment for such refinancing) so that such Short-Term Indebtedness will be Outstanding for more than one year as certified in an Officer s Certificate, forty percent (40%) or more of the initial principal amount of which matures (or is payable at the option of the holder) in the same twelve month period, or (ii) Long-Term Indebtedness, or Short-Term Indebtedness which is intended to be refinanced upon or prior to its maturity (and which is subject to a commercially reasonable binding commitment for such refinancing) so that such Short-Term Indebtedness will be Outstanding for more than one year as certified in an Officer s Certificate, forty percent (40%) or more of the initial principal amount of which is payable at the option of C-1

126 the holder in any twelve-month period, if such forty percent (40%) or more is not to be amortized to below forty percent (40%) by mandatory redemption prior to such twelve month period, or (iii) any portion of an issue of Long-Term Indebtedness which, if treated as a separate issue of Indebtedness, would meet the test set forth in clause (i) of this definition and which Indebtedness is designated as Balloon Indebtedness in an Officer s Certificate stating that such portion shall be deemed to constitute a separate issue of Balloon Indebtedness. Basis Swap has the meaning provided in the definition of Hedge Agreement. Bond Indenture shall mean the Bond Indenture dated as of July 1, 2008, between the District and the Bond Trustee, as such may be amended. Bond Index shall mean (i) in respect of any Outstanding Indebtedness, the average interest rate on such Indebtedness for the twelve (12) months immediately preceding the month prior to such calculation, or if such Indebtedness shall have had a variable rate for less than a twelve (12) month period, the average interest rate on such Indebtedness for such lesser period; (ii) in respect of any proposed tax-exempt Indebtedness to bear interest at a fixed rate, the rate that is equal to the thirty (30) year Revenue Bond Index as then published most recently by The Bond Buyer, New York, New York, or, if such index is no longer available, such index for comparable thirty (30) year maturity tax-exempt revenue bonds or an equivalent interest rate reasonably reflecting the terms and provisions of the Master Indenture as may be certified to the Master Trustee by a firm of investment bankers or a financial advisory firm; (iii) in respect of any proposed tax-exempt Variable Rate Indebtedness, the SIFMA Index (or any successor index) as then most recently published prior to the issuance of such Variable Rate Indebtedness; or (iv) in respect of any proposed taxable Indebtedness, such treasury bill, note or bond of a comparable maturity determined within thirty (30) days prior to the issuance of such indebtedness. For so long as any part of the 2002 Bonds remains Outstanding, there shall be added the sum of 0.50% to any calculation of the Bond Index pursuant to the preceding sentence. For purposes of any application of the Bond Index for purposes of Sections 5.04(h) or 5.18 or any other provision of this Master Indenture concerning Balloon Indebtedness, at the election of the Obligated Group Agent, the Bond Index may, as an alternative to that provided in the preceding paragraph, mean the projected yield at par of an obligation, as set forth in the report of a Consultant, which report shall state that in determining such yield such Consultant reviewed the yield evaluations at par of not less than five obligations selected by such Consultant, the interest on which is exempt from federal income tax (or, if it is not expected that it will be possible to issue such tax-exempt obligations to refinance the indebtedness with respect to which debt service is being estimated, obligations the interest on which is subject to federal income tax), which obligations such Consultant states in its opinion are reasonable comparators to be utilized in developing such yield and which obligations: (i) were outstanding on a date selected by the Consultant, which date so selected occurred during the 45-day period preceding the date of the calculation utilizing such yield in question; (ii) to the extent practicable, are obligations of persons engaged in operations similar to those of the District and having a credit rating or standing similar to that of the District or the Obligated Group; and (iii) to the extent practicable, have a remaining term and amortization schedule substantially the same as the obligation with respect to which such yield is being determined. Bond Payment Date shall mean each date on which interest or both principal and interest shall be payable on any of the Bonds according to their respective terms so long as any Bonds are Outstanding. C-2

127 Bond Trustee shall mean U.S. Bank National Association, and any successor to its duties under the Bond Indenture. Bond Year shall mean the one-year period beginning on the day after the expiration of the preceding Bond Year. The first Bond Year begins on the date of issuance of the Bonds and ends on April 15, Bonds shall mean the $32,590,000 Spartanburg Regional Health Services District, Inc., Hospital Revenue Refunding Bonds, Series 2008D. Business Day shall mean any day of the week other than Saturday, Sunday or a day which shall be in the state or in the jurisdiction of the Master Trustee, the Bond Trustee or in the State of South Carolina or the State of North Carolina a legal holiday or a day on which banking corporations are authorized or obligated by law or executive order to close. Capitalization Ratio shall mean the sum of the Long-Term Indebtedness of the members of the Obligated Group, divided by the Long-Term Indebtedness plus the aggregate unrestricted fund balances of the members of the Obligated Group, all as calculated in accordance with Generally Accepted Accounting Principles. Capitalized Interest shall mean that portion of the proceeds of any Indebtedness or any other funds (other than Debt Reserves) that are held in trust and are restricted to be used to pay interest due or to become due on Indebtedness. Completion Indebtedness shall mean any Indebtedness incurred by the District or any Note Obligor for the purpose of financing the completion of construction or equipping facilities for the construction or equipping of which Indebtedness has theretofore been incurred, to the extent necessary to provide a completed and equipped facility of the type and scope contemplated at the time, and in accordance with the general plans and specifications for such facility as originally prepared with only such changes as have been made in conformity with the documents pursuant to which such Indebtedness was originally incurred, including funding Debt Reserves. Consultant shall mean a person or firm which is not, and no member, stockholder, director, officer or employee of which is, an officer or employee of the District or any other Note Obligor, and which is a management consultant (which may be the District s external auditing firm) of favorable reputation and acceptable to the Master Trustee for having the skill and experience necessary to render reports required by the Master Indenture. Cushion Ratio shall mean Unrestricted Cash and Investments divided by Maximum Annual Debt Service. Days Cash on Hand, when used in reference to the Master Trust Indenture, means Net Operating Expenses divided by 365, the quotient of which is divided by Cash on Hand; when used in reference to Series 3 Note Indenture, means for the period tested, the aggregate amount of unrestricted and unencumbered (i) cash, (ii) cash equivalents, and (iii) marketable debt and equity securities internally designated for capital replacement and expansion, divided by the quotient of (x) Net Operating Expenses, divided by (y) the number of calendar days in the period. Notwithstanding any of the foregoing to the contrary, Days Cash on Hand shall not include (A) funds internally designated in connection with a self- C-3

128 insurance program, (B) proceeds of any Short-Term Indebtedness including, without limitation, internal affiliate loans and draws on lines of credit regardless of the maturity date of the line of credit, (C) proceeds of accounts receivable financing or factoring, (D) proceeds of the issuance of Put Indebtedness, if such Put Indebtedness is not supported by a liquidity facility which provides a term-out loan feature, (E) investments limited as to use for donor purposes, (F) interest in collateral pools, or (G) any cash, cash equivalents or equity securities posted as collateral pursuant to the terms of a Hedge Agreement. Days Cash on Hand, when used in reference to the Bond Indenture and the Series 12 Note Indenture, shall mean, for the period tested, the aggregate amount of unrestricted and unencumbered (i) cash, (ii) cash equivalents, and (iii) marketable debt and equity securities internally designated for capital replacement and expansion, divided by the quotient of (x) Net Operating Expense, excluding depreciation expense and bad debts, if applicable, divided by (y) the number of calendar days in the period. Debt Reserves shall mean that portion of the proceeds of any Indebtedness or any other funds (other than Capitalized Interest) that are held in trust and are restricted to be used to pay principal or principal and interest due or to become due on Indebtedness. Depository shall mean any securities depository that is a clearing corporation within the meaning of the New York Uniform Commercial Code and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, operating and maintaining, with its Participants or otherwise, a Book-Entry System to record ownership of beneficial interests in the Bonds, and to effect transfers of the Bonds, in Book-Entry Form, and includes and means initially The Depository Trust Company (a limited purpose trust company), New York, New York. Derivative Indebtedness shall mean all or any portion of Indebtedness with respect to which the District or any other Note Obligor shall have entered into a Hedge Agreement in respect to all or such portion of such Indebtedness. Discount Indebtedness shall mean Indebtedness sold to the original purchaser thereof (other than any underwriter or other similar intermediary) at a discount from the par amount of such Indebtedness. District shall mean Spartanburg Regional Health Services District, Inc., a body corporate and politic and a health services district created under Articles 15 and 16 of Chapter 7, Title 44, Code of Laws of South Carolina 1976, as amended. Encumbered shall mean subject to certain of the Liens mentioned in subsection (e), (f), (g), (h) or (i) of the definition of Permitted Liens below. Fiscal Year shall mean the fiscal year of the Obligated Group, which shall be the fiscal year designated from time to time in writing by the Obligated Group Agent to the Master Trustee. Fixed Rate Indebtedness means any Indebtedness during any period in which such Indebtedness does not constitute Variable Rate Indebtedness. Fixed-to-Variable Hedge Agreement has the meaning provided in the definition of Hedge Agreement. C-4

129 Government Obligations shall mean (a) noncallable direct obligations of the United States of America for the payment of which the full faith and credit of the United States of America is pledged ( Treasuries ); (b) obligations issued by any agency controlled or supervised by and acting as an instrumentality of the United States of America, the payment of the principal of and interest on which is fully guaranteed as full faith and credit obligations of the United States of America (including any securities described in (a) or (b) issued or held in the name of the Trustee in book entry form on the books of the Department of the Treasury of the United States of America), which obligations, in either case, are held in the name of the Trustee and are not subject to redemption or purchase prior to maturity at the option of anyone other that the owners; and (c) evidences of ownership of proportionate interests in future interest and principal payments on Treasuries held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor and the underlying Treasuries are not available to any person claiming through the custodian or to whom the custodian may be obligated. Gross Receipts shall mean all receipts, revenues, income and other moneys received by or on behalf of any one or more members of the Obligated Group, including, but without limiting the generality of the foregoing, revenues derived from the ownership or operation of Property, including insurance and condemnation proceeds with respect to Property or any portion thereof, and all rights to receive the same, whether in the form of accounts, Accounts Receivable, contract rights, instruments, chattel paper, general intangibles and deposit accounts or other rights, and the proceeds of such rights, and whether now owned or held or hereafter coming into existence; provided, however, that (i) gifts, grants, bequests, donations and contributions heretofore or hereafter made and designated or specified by the granting authority, donor or maker thereof as being for specified purposes (other than payment of debt service on Indebtedness) and the income derived therefrom to the extent required by such designation or specification, and (ii) contractual allowances and bad debt allowances shall be excluded from Gross Receipts. Guaranty shall mean all obligations of the District or any Note Obligor guaranteeing in any manner, whether directly or indirectly, any obligation of any other person which would, if such other person were a member of the Obligated Group, constitute Indebtedness. Hedge Agreement shall mean an interest rate swap, cap, collar, floor, forward, option, put, call or other agreement or arrangement, howsoever denominated, entered into by the District or any other Note Obligor with a Swap Counterparty with respect to Indebtedness, with the effect that the net economic exposure on such Indebtedness is, subject to the following sentence, effectively converted: (i) (ii) from Variable Rate Indebtedness to Fixed Rate Indebtedness, meaning accordingly that during the effective term of such agreement or arrangement the District or other Note Obligor, as applicable, pays a fixed rate (the Hedged Fixed Rate ) and the Swap Counterparty thereunder pays a variable rate either equal to the variable rate on such Indebtedness or based upon (or calculated by reference to, whether with or without adding or subtracting any applicable spread) an index such as the SIFMA Index or the London Interbank Offered Rate (a Variable-to-Fixed Hedge Agreement ); from Fixed Rate Indebtedness to Variable Rate Indebtedness, meaning accordingly that during the effective term of such agreement or arrangement the District or other Note Obligor pays a variable rate (the Hedged Variable Rate ) and the Swap Counterparty thereunder pays a fixed rate (a Fixed-to-Variable Hedge Agreement ); or C-5

130 (iii) from Variable Rate Indebtedness to Variable Rate Indebtedness, meaning accordingly that during the effective term of such agreement or arrangement the District or other Note Obligor, as applicable, on the one hand, and the Swap Counterparty, on the other hand, effectively swap (1) cash flows based upon (or calculated by reference to) an index such as the SIFMA Index or the London Interbank Offered Rate for (2) cash flows based upon (or calculated by reference to) a different such index (a Basis Swap ). Any determination of whether a Hedge Agreement has been entered into by the District or any other Note Obligor with respect to Related Bonds or other Indebtedness will be set forth in an Officer s Certificate from time to time in the manner provided in the Master Trust Indenture as described in Appendix D hereof under the section entitled THE MASTER INDENTURE - Debt Service on Variable Rate Indebtedness or Derivative Indebtedness. Hedged Fixed Rate has the meaning provided in the definition of Hedge Agreement. Hedged Variable Rate has the meaning provided in the definition of Hedge Agreement. Hedge Note or Hedge Notes have the meaning provided in Appendix D in the section entitled SUMMARY OF SUPPLEMENTAL MASTER TRUST INDENTURE FOR HEDGE NOTE NO. 1; HEDGE NOTE NO. 1; SUPPLEMENTAL MASTER TRUST INDENTURE FOR HEDGE NOTE NO. 2; AND HEDGE NOTE NO. 2. Historic Test Period shall mean at the option of the Obligated Group Agent, either (i) any twentyfour (24) consecutive calendar months out of the most recent period of thirty (30) full calendar months; provided, however, that if the Long-Term Debt Service Coverage Ratio for such twenty-four (24) consecutive months is less that 1.50, any financial statements for such twenty-four (24) consecutive months must be verified by an independent certified public accountant; or (ii) the most recent period of twenty-four (24) full consecutive calendar months for which the financial statements of each member of the Obligated Group have been reported upon by independent certified public accountants. Holder or Bondholder shall mean the registered owner of any Bond; provided that such Holder or Bondholder shall include any person or entity that claims in writing to be a Bondholder (or beneficial holder of Bonds in the event that all or part of the Bonds are registered in the name of the Depository), but only for purposes of requesting or receiving information available under Sections 6.07, 7.01 and 11.07(c) of the Bond Indenture. Income Available for Debt Service shall mean, with respect to each member of the Obligated Group, as to any period of time, excess of revenue over expenses (including investment income, gifts, grants and bequests, but excluding donor restricted funds and the income thereon to the extent restricted by the donor thereof to other than operating expenses) before depreciation, amortization and interest, as determined in accordance with generally accepted accounting principles consistently applied; provided that no determination thereof shall take into account any revenue or expense of any person which is not a member of the Obligated Group or any gain or loss resulting from either the extinguishment of Indebtedness or the sale, exchange or other disposition of capital assets not in the ordinary course of business. Indebtedness shall mean all Outstanding obligations incurred or assumed by one or more members of the Obligated Group, including Guaranties (other than any Guaranty by any member of the Obligated Group of Indebtedness of any other member of the Obligated Group), or any other obligation for C-6

131 payments of principal and interest with respect to money borrowed, except obligations of a member of the Obligated Group to another member. Nothing in this definition or otherwise shall be construed to count Indebtedness more than once. Insurance Consultant shall mean a person or firm selected by the District and qualified to survey risks and to recommend insurance coverage for hospitals, health-related facilities and services and organizations engaged in such operations. Insurer shall mean Assured Guaranty Corp., a Maryland insurance company, and its successors. Insurer Covenants shall mean the covenants set forth in Section 9 of the Series 12 Note Indenture which are for the sole benefit of the Insurer. Investment Securities shall mean and include each and any of the following securities, to the extent permitted by law: (a) bonds or obligations of the State of South Carolina or other counties, municipal corporations, and political subdivisions of the State rated in one of the two highest categories (without considering subcategories) of Moody s Investors Service, Inc. or Standard & Poor s Ratings Group; (b) (c) bonds or other obligations of the United States; obligations of agencies of the United States government; (d) certificates of deposit of national or state banks which have deposits insured by the Federal Deposit Insurance Corporation and certificates of deposit of federal savings and loan associations and state building and loan or savings and loan associations which have deposits insured by the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation, including the certificates of deposit of any bank, savings and loan association, or building and loan association acting as depository, custodian, or trustee for any such bond proceeds; provided the portion of the certificates of deposit in excess of the amount insured by the Federal Deposit Insurance Corporation, or the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation, if any, must be secured by deposit with the Federal Reserve Bank of Atlanta, Georgia, or with any national or state bank or federal savings and loan association or state building and loan or savings and loan association, of one or more of the following securities in an aggregate principal amount equal at least to the amount of such excess: direct and general obligations of the State of South Carolina or of any county or municipal corporation in the State of South Carolina, or obligations of the United States; (e) securities of or other interests in any no load, open end management type investment company or investment trust registered under the Investment Company Act of 1940, as from time to time amended, or any common trust fund maintained by any bank or trust company which holds such proceeds as trustee or by an affiliate thereof so long as: (i) the portfolio of such investment company or investment trust or common trust fund is limited to the obligations described in paragraph (a) or (b) above and repurchase agreements fully collateralized by any such obligations; C-7

132 (ii) such investment company or investment trust or common trust fund takes delivery of such collateral either directly or through an authorized custodian and is rated in one of the two highest categories (without considering subcategories) by Moody s Investors Service, Inc. or Standard & Poor s Ratings Group; (iii) such investment company or investment trust or common trust fund is managed so as to maintain its shares at a constant net asset value; and (iv) securities of or other interest in such investment company or investment trust or common trust fund are purchased and redeemed only through the use of national or state banks having corporate trust powers; and (f) any other securities permitted by law and consented to in writing by the Insurer. Law or Regulation Circumstances shall mean the occurrence of the following: (i) applicable laws, governmental regulations, third-party reimbursement methods or private or governmental insurance programs shall prevent, have prevented or will prevent and have caused or will have caused the Obligated Group from generating sufficient Aggregate Income Available for Debt Service to comply with the particular requirement of the Master Indenture in question, (ii) the effect upon the Obligated Group of the circumstances set forth in clause (i) above shall have been confirmed by a signed Consultant s opinion delivered to the Master Trustee, (iii) an Officer s Certificate shall have been delivered to the Master Trustee stating that the Obligated Group has generated the maximum Aggregate Income Available for Debt Service which, in the opinion of such officer, could reasonably be generated given the circumstances set forth in clause (i) above, and (iv) there shall have been delivered to the Master Trustee an Opinion of Counsel as to any conclusions of law supporting the opinion or report of the Consultant. Lien shall mean any mortgage, pledge, security interest, lien, judgment lien, easement, or other encumbrance on title, including, but not limited to, any mortgage or pledge of, security interest in or lien or encumbrance on any Property of the District or any Note Obligor which secures any Indebtedness or any other obligation of the District or any Note Obligor, or which secures any obligation of any person other than an obligation to the District or any Note Obligor excluding liens applicable to Property in which the District or any Note Obligor has only a leasehold interest unless the lien secures Indebtedness of the District or any Note Obligor. Long-Term Debt Service Coverage Ratio shall mean the ratio for the period in question of Aggregate Income Available for Debt Service to Maximum Annual Debt Service. "Long-Term Debt Service Requirement" shall mean, for any period of time, the aggregate of the payments to be made (other than amounts irrevocably deposited with a Related Bond Trustee or a lender for purposes of such payments) in respect of principal and interest on Outstanding Long-Term Indebtedness of each member of the Obligated Group during such period, also taking into account (i) with respect to Balloon Indebtedness, the provisions of the Master Trust Indenture as described in Appendix D hereof under the section entitled THE MASTER INDENTURE - Limitations on Incurrence of Additional Indebtedness, (ii) with respect to Variable Rate Indebtedness or Derivative Indebtedness, the provisions of the Master Trust Indenture as described in Appendix D hereof under the section entitled THE MASTER INDENTURE - Debt Service on Variable Rate Indebtedness or Derivative Indebtedness, (iii) with respect to Discount Indebtedness, the provisions of the Master Trust Indenture, (iv) with respect to Put Indebtedness, the C-8

133 provisions of the Master Trust Indenture as described in Appendix D hereof under the section entitled Limitations on Incurrence of Additional Indebtedness, (v) with respect to Debt Reserves, the provisions of Master Trust Indenture, (vi) with respect to Capitalized Interest, the provisions of the Master Trust Indenture, and (vii) with respect to Indebtedness represented by a Guaranty of obligations of a person which is not a member of the Obligated Group, the provisions of the Master Trust Indenture as described in Appendix D hereof under the section entitled THE MASTER INDENTURE Restrictions on Guaranties. Long-Term Indebtedness shall mean all Indebtedness, other than Short-Term Indebtedness and Subordinated Indebtedness, for any of the following: (i) 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; (ii) 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; and (iii) Payments under installment purchase contracts having an original term in excess of one year. Master Indenture shall mean the Master Trust Indenture, dated as of December 1, 1989, by and between the District and the Master Trustee, as the same may be amended or supplemented from time to time in accordance with the provisions of the Master Indenture. Master Trustee shall mean U.S. Bank National Association (successor to NCNB National Bank of South Carolina), and its successors under the Master Indenture. Maximum Annual Debt Service shall mean, when used in reference to the Master Indenture, the highest Long-Term Debt Service Requirement for the then current or any future Fiscal Year and, when used in reference to the Bond Indenture, at the time of computation, the greatest Annual Debt Service Requirement for any Bond Year thereafter. Net Operating Expenses shall mean, for the period tested, total expenses of the Obligated Group less depreciation and amortization. Non-Recourse Indebtedness shall mean any Indebtedness secured by a Lien, which Indebtedness is not a general obligation of the Obligated Group or of any Note Obligor or of the District and the liability for which Indebtedness is effectively limited to the Property subject to such Lien with no recourse, directly or indirectly, by deficiency judgment or otherwise, to any other Property of the District or any other Note Obligor. Note shall mean any Note issued, authenticated and delivered under the Master Indenture. References to a series of Notes or to Notes of a series shall mean the Notes or series of Notes issued pursuant to a single Related Supplement. Noteholder or Holder shall mean the registered owner of any Note or the beneficiary of any Guaranty. C-9

134 Note Obligor shall mean the District and any other person which subsequently becomes a Note Obligor in accordance with the provisions of the Master Indenture or enters into or becomes liable with respect to a Guaranty in accordance with the provisions of the Master Indenture. Obligated Group shall mean the District and each Note Obligor. Obligated Group Agent shall mean the District, or such other member of the Obligated Group as the then incumbent Obligated Group Agent shall designate as a successor by an Officer s Certificate delivered to the Master Trustee. Officer s Certificate shall mean a certificate signed by the chairman of the governing body, or the president or chief executive officer, or the chief financial officer, or the Obligated Group Agent. Operating Revenues shall mean the total operating revenues of the Obligated Group less applicable deductions from operating revenues as determined in accordance with generally accepted accounting principles consistently applied. Opinion of Bond Counsel shall mean an opinion in writing signed by an attorney or firm of attorneys acceptable to the Master Trustee and experienced in the field of municipal bonds whose opinions are generally accepted by purchasers of municipal bonds. Opinion of Counsel shall mean a written opinion of an attorney or firm of attorneys, who may be counsel for the District, or other counsel acceptable to the Master Trustee. Other Payments means any settlement, termination, close-out amount and any other amounts payable by the District or any other Note Obligor, other than Regularly Scheduled Payments, with respect to any Hedge Agreement. Outstanding (a) when used with reference to Notes, Guaranties and all other Indebtedness, shall mean, as of any date of determination, all Notes, Guaranties and all other Indebtedness theretofore issued or incurred and not paid and discharged other than (i) Notes theretofore cancelled by the Master Trustee or delivered to the Master Trustee for cancellation, (ii) Notes or Guaranties deemed paid and no longer Outstanding, (iii) Notes for which provision for payment has been made, (iv) Notes and any coupons appurtenant thereto in lieu of which other Notes have been authenticated and delivered or have been paid unless proof satisfactory to the Master Trustee has been received that any such Note is held by a bona fide purchaser, and (v) Indebtedness not represented by Notes or Guaranties which has been cancelled, paid in full, discharged in full by the obligee or defeased; and (b) when used with reference to the Bonds, shall mean, as of any date of determination, all Bonds theretofore authenticated and delivered except (i) Bonds theretofore cancelled by the Bond Trustee or delivered to the Bond Trustee for cancellation, (ii) Bonds which are deemed paid and no longer Outstanding as provided in the Bond Indenture, (iii) Bonds in lieu of which other Bonds have been issued pursuant to the provisions of the Bond Indenture relating to Bonds destroyed, stolen or lost, and (iv) for purposes of any consent or other action to be taken under the Bond Indenture by the Holders of a specified percentage of principal amount of Bonds, Bonds held by or for the account of the District, or any person controlling, controlled by, or under common control with it. C-10

135 Paying Agent shall mean the banks or trust companies and their successors designated as the paying agencies or places of payment for the Bonds and which shall initially be U.S. Bank National Association. Permitted Investments shall mean those investments set forth below, provided such investments are described in Section , Code of Laws of South Carolina 1976, as now or hereafter amended, if then applicable to the District or the South Carolina Pooled Investment Fund established at Sections to , Code of Laws of South Carolina 1976, as now or hereafter amended. (a) (b) Defeasance Obligations. Federal Housing Administration debentures. (c) The listed obligations of government-sponsored agencies which are not backed by the full faith and credit of the United States of America: (i) Federal Home Loan Mortgage Corporation (FHLMC) senior debt obligations and Participation certificates (excluded are stripped mortgage securities which are purchased at prices exceeding their principal amounts); (ii) Farm Credit System (formerly Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives) consolidated system-wide bonds and notes; (iii) Federal Home Loan Banks (FHL Banks) consolidated debt obligations; (iv) Federal National Mortgage Association (FNMA) senior debt obligations and mortgage-backed securities (excluded are stripped mortgage securities which are purchased at prices exceeding their principal amounts). (d) Unsecured certificates of deposit, time deposits, and bankers' acceptances (having maturities of not more than 365 days) of any bank the short-term obligations of which are rated A-1+ or better by S&P and Prime-1 by Moody s. (e) Deposits the aggregate amount of which are fully insured by the Federal Deposit Insurance Corporation, in banks which have capital and surplus of at least $15 million. (f) Commercial paper (having original maturities of not more than 270 days) rated A-1+ by S&P and Prime-1 by Moody's. (g) Money market funds rated Aam or AAm-G by S&P, or better and if rated by Moody s rated Aa2 or better. (h) State Obligations, which means: (i) Direct general obligations of any state of the United States of America or any subdivision or agency thereof to which is pledged the full faith and credit of a state the unsecured general obligation debt of which is rated at least A3 by Moody's and at least A- C-11

136 by S&P, or any obligation fully and unconditionally guaranteed by any state, subdivision or agency whose unsecured general obligation debt is so rated. (ii) Direct general short-term obligations of any state agency or subdivision or agency thereof described in (a) above and rated A-1+ by S&P and MIG-1 by Moody's. (iii) Special Revenue Bonds (as defined in the United States Bankruptcy Code) of any state or state agency described in (b) above and rated AA- or better by S&P and Aa3 or better by Moody's. (i) Pre-refunded municipal obligations rated AAA by S&P and Aaa by Moody's meeting the following requirements: (i) the municipal obligations are (1) not subject to redemption prior to maturity or (2) the trustee for the municipal obligations has been given irrevocable instructions concerning their call and redemption and the issuer of the municipal obligations has covenanted not to redeem such municipal obligations other than as set forth in such instructions; (ii) the municipal obligations are secured by cash or U.S. Treasury Obligations which may be applied only to payment of the principal of, interest and premium on such municipal obligations; (iii) the principal of and interest on the U.S. Treasury Obligations (plus any cash in the escrow) has been verified by the report of independent certified public accountants to be sufficient to pay in full all principal of, interest, and premium, if any, due and to become due on the municipal obligations ( Verification Report ); (iv) the cash or U.S. Treasury Obligations serving as security for the municipal obligations are held by an escrow agent or trustee in trust for owners of the municipal obligations; (v) no substitution of a U.S. Treasury Obligation shall be permitted except with another U.S. Treasury Obligation and upon delivery of a new Verification Report; and (iv) the cash or U.S. Treasury Obligations are not available to satisfy any other claims, including those by or against the trustee or escrow agent. (j) Repurchase agreements: with (1) any domestic bank, or domestic branch of a foreign bank, the long term debt of which is rated at least A- by S&P and A3 Moody s; or (2) any broker-dealer with retail customers or a related affiliate thereof which broker-dealer has, or the parent company (which guarantees the provider) of which has, long-term debt rated at least A- by S&P and A3 by Moody's, which broker-dealer falls under the jurisdiction of the Securities Investors Protection Corporation; or (3) any other entity rated at least A- by S&P and A3 Moody s and acceptable to the Insurer (each an Eligible Provider ), provided that: (i) (A) permitted collateral shall include U.S. Treasury Obligations, or senior debt obligations of GNMA, FNMA or FHLMC (no collateralized mortgage obligations shall be permitted for these providers), and (B) collateral levels must be at least 102% of the total C-12

137 principal when the collateral type is U.S. Treasury Obligations, 103% of the total principal when the collateral type is GNMA s and 104% of the total principal when the collateral type is FNMA and FHLMC ( Eligible Collateral ); (ii) the trustee or a third party acting solely as agent therefore or for the issuer (the Custodian ) has possession of the collateral or the collateral has been transferred to the Custodian in accordance with applicable state and federal laws (other than by means of entries on the transferor's books) and such collateral shall be marked to market; (iii) the collateral shall be marked to market on a daily basis and the provider or Custodian shall send monthly reports to the Bond Trustee, the Issuer and the Insurer setting forth the type of collateral, the collateral percentage required for that collateral type, the market value of the collateral on the valuation date and the name of the Custodian holding the collateral; (iv) the repurchase agreement (or guaranty, if applicable) may not be assigned or amended without the prior written consent of the Insurer; (v) the repurchase agreement shall state and an opinion of counsel shall be rendered at the time such collateral is delivered that the Custodian has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof; (vi) the repurchase agreement shall provide that if during its term the provider s rating by either Moody s or S&P is withdrawn or suspended or falls below A- by S&P or A3 by Moody s, as appropriate, the provider must notify the Issuer, the Bond Trustee and the Insurer within five (5) days of receipt of such notice. Within ten (10) days of receipt of such notice, the provider shall either: (A) provide a written guarantee acceptable to the Insurer, (ii) post Eligible Collateral, or (iii) assign the agreement to an Eligible Provider. If the provider does not perform a remedy within ten (10) business days, the provider shall, at the direction of the Bond Trustee (who shall give such direction if so directed by the Insurer) repurchase all collateral and terminate the repurchase agreement, with no penalty or premium to the Issuer or the Bond Trustee. (k) Investment agreements: with a domestic or foreign bank or corporation the longterm debt of which, or, in the case of a guaranteed corporation the long-term debt, or, in the case of a monoline financial guaranty insurance company, claims paying ability, of the guarantor is rated at least AA- by S&P and Aa3 by Moody s, and acceptable to the Insurer (each an Eligible Provider ); provided that: (i) interest payments are to be made to the trustee at times and in amounts as necessary to pay debt service (or, if the investment agreement is for the construction fund, construction draws) on the Bonds; (ii) the invested funds are available for withdrawal without penalty or premium, at any time upon not more than seven (7) days prior notice; the Issuer and the Bond Trustee hereby agree to give or cause to be given notice in accordance with the terms of the investment agreement so as to receive funds thereunder with no penalty or premium paid; C-13

138 (iii) the provider shall send monthly reports to the Bond Trustee, the Issuer and the Insurer setting forth the balance the Issuer or the Bond Trustee has invested with the provider and the amounts and dates of interest accrued and paid by the provider; (iv) the investment agreement shall state that is an unconditional and general obligation of the provider, and is not subordinated to any other obligation of, the provider thereof or, if the provider is a bank, the agreement or the opinion of counsel shall state that the obligation of the provider to make payments thereunder ranks pari passu with the obligations of the provider to its other depositors and its other unsecured and unsubordinated creditors; (v) the investment agreement (or guaranty, if applicable) may not be assigned or amended without the prior written consent of the Insurer; (vi) the Issuer, the Bond Trustee and the Insurer shall receive an opinion of domestic counsel to the provider that such investment agreement is legal, valid, binding and enforceable against the provider in accordance with its terms; (vii) the Issuer, the Bond Trustee and the Insurer shall receive an opinion of foreign counsel to the provider (if applicable) that (i) the investment agreement has been duly authorized, executed and delivered by the provider and constitutes the legal, valid and binding obligation of the provider, enforceable against the provider in accordance with its terms, (b) the choice of law of the state set forth in the investment agreement is valid under that country s laws and a court in such country would uphold such choice of law, and (c) any judgment rendered by a court in the United States would be recognized and enforceable in such country; (viii) the investment agreement shall provide that if during its term: (A) the provider s rating by either S&P or Moody s falls below AA- or Aa3, the provider shall, at its option, within ten (10) days of receipt of publication of such downgrade, either (i) provide a written guarantee acceptable to the Insurer, (ii) post Eligible Collateral with the Issuer, the Bond Trustee or a third party acting solely as agent therefor (the Custodian ) free and clear of any third party liens or claims, or (iii) assign the agreement to an Eligible Provider, or (iv) repay the principal of and accrued but unpaid interest on the investment; (B) the provider s rating by either S&P or Moody s is withdrawn or suspended or falls below A- or A3, the provider must, at the direction of the Issuer or the Bond Trustee (who shall give such direction if so directed by the Insurer), within ten (10) days of receipt of such direction, repay the principal of and accrued but unpaid interest on the investment, in either case with no penalty or premium to the Issuer or the Bond Trustee. (ix) in the event the provider is required to collateralize, permitted collateral shall include U.S. Treasury Obligations, or senior debt obligations of GNMA, FNMA or FHLMC (no collateralized mortgage obligations shall be permitted for these providers) and collateral levels must be 102% of the total principal when the collateral type is U.S. Treasury Obligations, 103% of the total principal when the collateral type is GNMA s and 104% of the total principal when the collateral type is FNMA and FHLMC ( Eligible Collateral ). In addition, the collateral shall be marked to market on a daily basis and the provider or Custodian shall send monthly reports to the Bond Trustee, the Issuer and the Insurer setting forth the type of collateral, the C-14

139 collateral percentage required for that collateral type, the market value of the collateral on the valuation date and the name of the Custodian holding the collateral; (x) the investment agreement shall state and an opinion of counsel shall be rendered, in the event collateral is required to be pledged by the provider under the terms of the investment agreement, at the time such collateral is delivered, that the Custodian has a perfected first priority security interest in the collateral, any substituted collateral and all proceeds thereof; (xi) the investment agreement must provide that if during its term: (i) the provider shall default in its payment obligations, the provider s obligations under the investment agreement shall, at the direction of the Issuer or the Bond Trustee (who shall give such direction if so directed by the Insurer), be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the Issuer or the Bond Trustee, as appropriate, and (ii) the provider shall become insolvent, not pay its debts as they become due, be declared or petition to be declared bankrupt, etc. ( event of insolvency ), the provider s obligations shall automatically be accelerated and amounts invested and accrued but unpaid interest thereon shall be repaid to the Issuer or the Bond Trustee, as appropriate. (l) Such other investments (or departures from any of the above investment requirements) as may be consented to by the Insurer in writing Permitted Liens shall mean: (a) Liens arising by reason of good faith deposits with the District or any Note Obligor in connection with leases of real estate, bids or contracts (other than contracts for the payment of money), deposits by the District or any Note Obligor to secure public or statutory obligations, or to secure, or in lieu of, surety, stay or appeal bonds, and deposits as security for the payment of taxes or assessments or other similar charges; (b) Any Lien arising by reason of deposits with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulation for any purpose at any time as required by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege or license, or to enable the District, any Note Obligor or a Subsidiary to maintain self-insurance or to participate in any funds established to cover any insurance risks or in connection with workmen's compensation, unemployment insurance, pension or profit sharing plans or other social security, or to share in the privileges or benefits required for companies participating in such arrangements; (c) Any judgment lien or notice of pending action against the District or any Note Obligor so long as such judgment or pending action is being contested and execution thereon is stayed or while the period for responsive pleadings has not lapsed; (d) (A) Rights reserved to or vested in any municipality or public authority by the terms of any right, power, franchise, grant, license, permit or provision of law, affecting any Property, to (1) terminate such right, power, franchise, grant, license or permit, provided that the exercise of such right would not materially impair the use of such Property or materially and adversely affect the value thereof, or (2) purchase, condemn, appropriate or recapture, or designate a purchaser of, such Property; (B) any liens on any Property for taxes, assessments, levies, fees, water and sewer rents, C-15

140 and other governmental and similar charges and any liens of mechanics, materialmen, laborers, suppliers or vendors for work or services performed or materials furnished in connection with such Property, which are not due and payable or which are not delinquent or which, or the amount or validity of which, are being contested and execution thereon is stayed or, with respect to liens of mechanics, materialmen and laborers, have been due for less than sixty (60) days; (C) easements, rights-of-way, servitudes, restrictions and other minor defects, encumbrances, and irregularities in the title to any Property which do not materially impair the use of such Property or materially and adversely affect the value thereof; (D) rights reserved to or vested in any municipality or public authority to control or regulate any Property or to use such Property in any manner, which rights do not materially impair the use of such Property or materially and adversely affect the value thereof; and (E) to the extent that it affects title to any Property, the Master Indenture; (e) Certain Liens described in the Master Indenture and disclosed to the Master Trustee existing on the date of authentication and delivery of the initial series of Notes, including renewals thereof, provided that no such Lien may be extended or modified to apply to any Property of the District or any Note Obligor not subject to such Lien on such date, unless such Lien as so extended or modified otherwise qualifies as a Permitted Lien; (f) Any Lien securing Non-Recourse Indebtedness; (g) Any Lien on Property acquired by the District or a Note Obligor if the assumption of the Indebtedness secured by the Lien by the District or Note Obligor is Additional Indebtedness permitted under the provisions of the Master Indenture, and if an Officer s Certificate is delivered to the Master Trustee certifying that (A) the Lien and the Indebtedness secured thereby were created and incurred by a person other than the District or Note Obligor acquiring such Property prior to acquisition of such Property by the District or Note Obligor, and (B) the Lien was created prior to the decision of the District or Note Obligor to acquire the Property and was not created for the purpose of enabling the District or Note Obligor to avoid limitations on creation of Liens on Property of the Obligated Group; (h) Any Lien on Property, other than a Lien on the Property described in (e) or (i) of this definition, if, prior to the creation of such Lien or the acquisition of Property subject to such Lien an Officer's Certificate is delivered to the Master Trustee stating that (A) after giving effect to the Lien, the Value of the Property which is Encumbered will not exceed twenty percent (20%) of the Value of the Property, Plant and Equipment of the Obligated Group as of the end of the Historic Test Period; and (B) the creation of the proposed Lien will not adversely affect the repayment of any Notes issued under the Master Indenture; (i) Any Lien on inventory, Accounts Receivable, or pledges of gifts or grants to be received in the future, which Lien secures either Short-Term Indebtedness or Non-Recourse Indebtedness if, prior to the creation of such Lien or the acquisition of Property subject to such Lien an Officer s Certificate is delivered to the Master Trustee stating that after giving effect to the Lien, the Value of the Property which is subject to such Lien will not exceed seventy-five percent (75%) of the aggregate net Accounts Receivable of the Obligated Group as of the end of the Historic Test Period; C-16

141 (j) Any Lien representing statutory rights of the United States of America by reason of federal funds made available under 42 U.S.C. 291 et seq. and similar rights under other federal and state statutes; (k) Liens on Property received by any member of the Obligated Group through gifts, grants or bequests, such Liens being due to restrictions on such gifts, grants or bequests of Property or the income thereon, up to the fair market value thereof; basis; (l) (m) Any Lien in favor of the Master Trustee securing all Notes and Guarantees on a parity Any Lien on the proceeds of Indebtedness prior to the application of such proceeds; (n) Liens on moneys deposited by patients or others with any member of the Obligated Group as security for or as prepayment for the cost of patient care; (o) Any Lien due to rights of third-party payors for recoupment of amounts paid to any member of the Obligated Group; (p) Any Lien on Gross Receipts granted by a member of the Obligated Group to secure any Outstanding Long-Term Indebtedness; (q) Any Lien representing rights of setoff and banker s liens with respect to funds on deposit in a financial institution in the ordinary course of business; (r) Operating leases; and (s) Any lien consisting of pledges, pursuant to a Supplement to the Master Indenture, a Hedge Agreement, a Hedge Note, a Credit Support Annex or other collateral undertaking on the part of the District or any other Note Obligor to secure amounts owing under any Hedge Agreement. Person shall include an individual, association, unincorporated organization, corporation, partnership, joint venture, or government or agency or political subdivision thereof. Pledged Revenues shall mean all revenues, proceeds and receipts derived from the Note Payments, and the proceeds of the Bonds pending their application in accordance with the Bond Indenture. Policy shall mean the financial guaranty insurance policy issued by the Insurer with respect to the scheduled payments of principal of and interest on the Bonds to the Paying Agent on behalf of the Holders of the Bonds. Property shall mean any and all land, leasehold interests, buildings, machinery, equipment, hardware, and inventory of the District and each Note Obligor, wherever located and whether now or hereafter acquired, any and all rights, titles and interests in and to any and all property whether real or personal, tangible or intangible and wherever situated and whether now or hereafter acquired and shall include all revenues, receipts or other moneys, or right to receive any of the same, including, without limitation, total assets of each member of the Obligated Group, Gross Receipts, accounts, Accounts Receivable, contract rights and general intangibles, and all proceeds of all of the foregoing. C-17

142 Property, Plant and Equipment shall mean all Property of the members of the Obligated Group which is property, plant or equipment under generally accepted accounting principles. Rate Covenant shall mean the ratio of Aggregate Income Available for Debt Service to Maximum Annual Debt Service. Regularly Scheduled Payments means regularly scheduled payments required to be made by the District or any other Note Obligor to a Swap Counterparty with respect to any Hedge Agreement. Regularly Scheduled Receipts means regularly scheduled payments required to be made by the Swap Counterparty to the District or any other Note Obligor with respect to any Hedge Agreement. Related Bonds shall mean the revenue bonds or other obligations issued by any state, territory or possession of the United States or any municipal corporation or political subdivision, including but not limited to, the District, formed under the laws thereof or any constituted authority or agency or instrumentality of any of the foregoing empowered to issue obligations on behalf thereof ( governmental issuer ), pursuant to a single Related Bond Indenture, the proceeds of which are loaned or otherwise made available to (i) the District or a Note Obligor in consideration of the execution, authentication and delivery of a Note or Notes to or for the order of such governmental issuer, or (ii) any person other than the District or a Note Obligor in consideration of the issuance to such governmental issuer (A) by such person of any indebtedness or other obligation of such person, and (B) by the District or a Note Obligor of a Guaranty issued under the Master Indenture in respect of such indebtedness or other obligation. Related Bonds shall include Bonds of the District. Related Bond Indenture shall mean any indenture, bond resolution or other comparable instrument pursuant to which a series of Related Bonds is issued. Related Bond Issuer shall mean the governmental issuer, including the District, of any issue of Related Bonds. Related Bond Trustee shall mean the trustee and its successors in the trusts created under any Related Bond Indenture, and if there is no such trustee, shall mean the Related Bond Issuer. Related Supplement shall mean an indenture supplemental to, and authorized and executed pursuant to the terms of, the Master Indenture for the purpose of creating a particular series of Notes or a particular Guaranty. Reserve Fund shall mean the fund created pursuant to Section 5.01 of the Bond Indenture. Reserve Fund Requirement shall mean the then Maximum Annual Debt Service on the Bonds. Series 12 Note shall mean the Note created and issued pursuant to the Master Indenture, issued by the District to evidence the receipt of the proceeds of the Bonds, in substantially the form set forth in the Series 12 Note Indenture, such Note to be designated $32,590,000 Series 12 Note. C-18

143 Series 12 Note Indenture shall mean Supplemental Master Trust Indenture No. 12 to the Master Indenture, dated as of July 1, 2008, by and between the District and the Master Trustee, creating and authorizing the issuance of the Series 12 Note. Short-Term Indebtedness shall mean all Indebtedness, other than Long-Term Indebtedness, for any of the following: (i) 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; (ii) 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. (iii) Payments under installment purchase contracts having an original term of one year or SIFMA Index shall mean, as of any computation date, The Securities Industry and Financial Markets Association Municipal Swap Index as disseminated by Municipal Market Data, a Thomson Financial Services Company, or its successor or, if such index is not available at any computation date, as of the first date immediately prior to such computation date that such index has been determined, or if such index is not available, another index determined to be comparable by a Consultant as may be certified to the Master Trustee by such Consultant. Subordinated Indebtedness shall mean all obligations incurred or assumed by one or more members of the Obligated Group, the payment of which is by its terms specifically subordinated to payments on all Notes, or the principal of and interest on which would not be paid (whether by the terms of such obligation or by agreement of the obligee) when the Notes are in default or while bankruptcy, insolvency, receivership or other similar proceedings are instituted and implemented. Subsidiary shall mean a corporation, partnership, joint venture, association, business trust or similar entity organized under the laws of the United States of America or a state thereof which is directly or indirectly controlled by, or under common control by the same person as, the District or any other Subsidiary. For purposes of this definition, control means the power to direct the management and policies of a person through the ownership of a majority of its voting securities, the right to designate or elect a majority of the members of its board of directors or other governing board or body or the power or right to direct the management and policies of a person by contract or otherwise. Swap Counterparty means any counterparty with which the District or any other Note Obligor enters into a Hedge Agreement, but only if the long-term unsecured, unsubordinated debt securities of such counterparty or its guarantor (including without limitation a party agreeing to enter, with the District or Note Obligor, a substitute or replacement agreement to such Hedge Agreement) or insurer thereunder, if applicable, are rated, at the time that such Hedge Agreement is entered into, as follows: A3 or higher by Moody s Investors Service, Inc., A- or higher by Standard & Poor s Ratings Service, a division of The McGraw-Hill Companies, Inc. or A- or higher by Fitch Ratings, or are rated in any comparable rating category or higher by another nationally-recognized rating agency in the event that none of the aforementioned entities provides ratings of such securities. The rating requirements of the preceding C-19

144 sentence, however, shall not operate to limit any separate agreements by the District or any other Note Obligor, such as with one or more bond insurers, regarding the minimum ratings requirements for any Swap Counterparty. Tax-Exempt Organization shall mean a person organized under the laws of the United States of America or any state thereof which is an organization described in Section 501(c)(3) and exempt from federal income taxes under Section 501(a) of the Internal Revenue Code of 1986, as amended, or corresponding provisions of federal income tax law from time to time in effect, or a political subdivision or other entity exempt from federal income taxes under Section 115 of the Internal Revenue Code of 1986, as amended, or corresponding provisions of federal income tax laws from time to time in effect. Transaction Test shall mean the Master Trustee shall have received any one of the following: (A) a Consultant s opinion or report demonstrating that the ratio of Aggregate Income Available for Debt Service for the Historic Test Period, to projected Maximum Annual Debt Service for the full Fiscal Year immediately after the transaction in question, is not less than 1.50, (B) an Officer s Certificate or a Consultant s opinion or report, as the case may be, demonstrating that the projected Long-Term Debt Service Coverage Ratio for the full Fiscal Year immediately after the transaction in question will be greater than the Long-Term Debt Service Coverage Ratio for such period had the transaction not occurred, or (C) an Officer s Certificate or a Consultant s opinion or report, as the case may be, demonstrating that (1) the projected Long-Term Debt Service Coverage Ratio for the full Fiscal Year immediately after the transaction in question will not be less than 1.15, and (2) the projected Long-Term Debt Service Coverage Ratio for the full Fiscal Year immediately after the transaction in question will not be more than twenty percent (20%) lower than the Long-Term Debt Service Coverage Ratio had the transaction not occurred. Unencumbered shall mean not subject to a Lien mentioned in Section (e), (f), (g), (h) or (i) of the definition of Permitted Liens above. Unrestricted Cash and Investments shall mean cash, short-term investments and unrestricted longterm investments, but shall exclude trustee-held funds, malpractice funds, self-insurance and captive insurer funds, and pension and retirement funds. Value when used in connection with Property, Plant and Equipment or other Property of the District or any Note Obligor, shall mean at the option of the Note Obligor (a) the cost basis of such property, net of accumulated depreciation, as it is carried on the books of such person and in conformity with generally accepted accounting principles consistently applied, and when used in connection with Property, Plant and Equipment or other Property of the Obligated Group, means the aggregate of the cost basis so determined with respect to such Property of each member of the Obligated Group determined in such a manner that no portion of such cost basis of Property of any member is included more than once, or (b) the appraised value of such property as determined by an appraiser acceptable to the Master Trustee, such appraisal taking place within two (2) years of the date such value is used in any computation or calculation herein. C-20

145 Variable Rate Indebtedness shall mean Indebtedness that bears interest at a variable, adjustable or floating rate. Variable-to-Fixed Hedge Agreement has the meaning provided in the definition of Hedge Agreement. C-21

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147 APPENDIX D SUMMARY OF PRINCIPAL DOCUMENTS

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149 THE MASTER INDENTURE The Master Indenture sets forth, among other things, the terms pursuant to which the District and other members of the Obligated Group may incur and secure debt and imposes restrictions upon the members of the Obligated Group. There follows a summary of certain provisions of the Master Indenture; however, it is not a comprehensive description and reference is made to the full text of the Master Indenture for a complete recital of its terms. Words and terms used in this summary which are defined in the Master Indenture shall have the same meanings as in such Master Indenture. THE OBLIGATED GROUP Persons Becoming Note Obligors. (a) If at any time the District and any person shall determine that such person should become a Note Obligor under the Master Indenture, the District and the person may execute and deliver to the Master Trustee an appropriate instrument, satisfactory to the Master Trustee, containing the agreement of such person (A) to become a Note Obligor under the Master Indenture and thereby become subject to compliance with all provisions of the Master Indenture pertaining to a Note Obligor, including the performance and observance of all covenants and obligations of a Note Obligor, and (B) guaranteeing to the Master Trustee and each other member of the Obligated Group that all Notes and Guaranties issued and then Outstanding thereunder will be paid in accordance with the terms thereof and of the Master Indenture, when due. (b) Each instrument executed and delivered to the Master Trustee in accordance with (a) above shall be accompanied by an Opinion of Counsel, addressed to and satisfactory to the Master Trustee, (i) to the effect that such instrument has been duly authorized, executed and delivered by the District and such person and constitutes a valid and binding obligation enforceable in accordance with its terms to the extent of the fair market value of any consideration received by such person in exchange for its becoming a Note Obligor, except that such Opinion of Counsel may state that enforceability may be limited by bankruptcy laws, insolvency laws and other laws affecting creditor s rights generally, and may contain such other qualifications as shall be satisfactory to the Master Trustee, and (ii) as to such matters incidental to the transactions contemplated by this Section as the Master Trustee may deem necessary. (c) It shall be a condition precedent to the consummation of any transaction involving an instrument to be executed and delivered to the Master Trustee in accordance with subsection (a) of this Section that the Master Trustee shall also have received (i) an Officer s Certificate which demonstrates that, immediately upon any person becoming a Note Obligor as part of such transaction, no member of the Obligated Group would be in default in the performance or observance of any covenant or condition to be performed or observed by it and any member of the Obligated Group would meet the conditions described in subsections (b)(viii)(a) or (d) of Section 5.11 for the creation of a Lien on Property, Plant and Equipment and subsection (a) of Section 5.04, as modified by the Supplemental Master Trust Indenture No. 8, dated as of May 15, 2002, for the incurrence of one dollar of additional Long-Term Indebtedness, (ii) if all amounts due or to become due on any Related Bond have not been paid to the holder thereof, an Opinion of Bond Counsel, in form and substance satisfactory to the Master Trustee, the Related Bond Issuer, and the Related Bond Trustee, to the effect that under then existing law the consummation of such transaction, whether or not contemplated on any date of the delivery of any such Related Bond, would not adversely affect the validity of such Related Bond or the interest on such Related Bond not being includable in gross income for federal income tax purposes, and (iii) the Transaction Test shall have been satisfied; provided, however, that D-1

150 the Transaction Test shall be deemed satisfied if Law or Regulation Circumstances exist, and if there is delivered to the Master Trustee a signed Consultant s opinion to the effect that the projected Long-Term Debt Service Coverage Ratio for each of the next two full Fiscal Years following the transaction in question will not be less than (d) The District is the initial member of the Obligated Group. Paragraph (c) above shall be applicable to any additional members of the Obligated Group. Effects of Person Becoming a Note Obligor. Upon any person becoming a Note Obligor: (a) All Notes thereafter issued and any Related Supplement subsequently entered into may be executed and delivered by the District or any Note Obligor. (b) All of the provisions, terms, covenants and representations set forth in the Master Indenture shall apply to each member of the Obligated Group from the time that each person becomes a member of the Obligated Group. All indebtedness and liens of a person becoming a member of the Obligated Group that were in existence prior to the time of such person becoming a member of the Obligated Group shall be permitted under the Master Indenture only to the extent of compliance with the Indebtedness provisions of the Master Indenture. Withdrawal from the Obligated Group. (a) The District may not withdraw from the Obligated Group and no other member of the Obligated Group may withdraw from the Obligated Group unless: (i) the District consents to such withdrawal; (ii) such member is not primarily obligated under an agreement with a Related Bond Issuer whereby such member has agreed to pay debt service with respect to Related Bonds then outstanding; (iii) if all amounts due on any Related Bond which bears interest that is not includable in gross income for federal income tax purposes have not been paid to the holder thereof, the Master Trustee shall have received an Opinion of Bond Counsel, in form and substance satisfactory to the Master Trustee, to the effect that under then existing law such member s withdrawal from the Obligated Group would not adversely affect the validity of the Related Bond or cause the interest payable on such Related Bond to become subject to federal income taxation; (iv) the Transaction Test shall have been satisfied and shall be deemed satisfied if Law or Regulation Circumstances exist, and if there is delivered to the Master Trustee a signed Consultant's opinion to the effect that the projected Long-Term Debt Service Coverage Ratio for each of the next two full Fiscal Years following the transaction in question will not be less than 1.00; and (v) the Master Trustee shall have received an Officer s Certificate to the effect that, immediately after the withdrawal of such member from the Obligated Group, the Obligated Group will not be in default under the Master Indenture. (b) Upon compliance with the conditions contained in subsection (a), the Master Trustee shall execute any documents reasonably requested by the withdrawing member to evidence the termination of D-2

151 such member s obligations under the Master Indenture, under any Supplemental Indentures and under all Notes and Guaranties issued pursuant to the Master Indenture. NOTES ISSUED UNDER MASTER INDENTURE Indebtedness secured by the Master Indenture may be incurred by the issuance of Notes thereunder. All Notes issued under the Master Indenture are to be equally and ratably secured, except for any Notes issued with respect to Subordinated Indebtedness. At the time of the issuance of the Bonds, the Series 12 Note will be issued under the Master Indenture and the Series 12 Note Indenture and assigned to the Bond Trustee for the Bonds as collateral for the obligations of the District. Substitution of Note Obligor. A Related Bond Trustee will, with the prior written consent of the bond insurer or credit facility provider, if any, for such Related Bonds, surrender to the Master Trustee any Note issued to the Related Bond Trustee upon presentation to the Related Bond Trustee of the following: (A) an original replacement note or similar obligation issued by the Obligated Group (the Substitute Note ) under and pursuant to and secured by a master trust indenture (the Replacement Master Indenture ) executed by the District, any other current Note Obligor and any other parties named therein (collectively, the New Group ) and an independent corporate trustee which may be the Master Trustee or Related Bond Trustee (the New Trustee ) meeting the eligibility requirements of this Master Trustee as set forth in the Master Indenture, which Substitute Note has been duly authenticated by the New Trustee; (B) the Replacement Master Indenture containing the agreement of each member of the New Group (a) to become a member of the New Group and thereby to become subject to compliance with all provisions of the Replacement Master Indenture and (b) unconditionally and irrevocably (subject to the right of such Person to cease its status as a member of the New Group pursuant to the terms and conditions of the Replacement Master Indenture) to jointly and severally make payments upon each note and obligation, including the Substitute Note, issued under the Replacement Master Indenture at the times and in the amounts provided in each such note or obligation; (C) an Opinion of Counsel addressed to the Bond Trustee and the Obligated Group Agent to the effect that: (1) the Replacement Master Indenture has been duly authorized, executed and delivered by each member of the New Group, the Substitute Note has been duly authorized, executed and delivered by the Obligated Group, and the Replacement Master Indenture and the Substitute Note are each a legal, valid and binding obligation of each member of the New Group, subject in each case to customary exceptions for bankruptcy, insolvency and other laws generally affecting enforcement of creditors' rights and application of general principles of equity; (2) all requirements and conditions to the issuance of the Substitute Note set forth in the Replacement Master Indenture have been complied with and satisfied; (3) registration of the Substitute Note under the Securities Act of 1933, as amended, is not required; (4) all requirements of the Master Indenture have been satisfied with respect to this Section; and (5) an Opinion of Bond Counsel stating that this Master Indenture has been validly terminated and replaced by the Replacement Master Indenture; D-3

152 (D) an Officer s Certificate certifying that (a) the New Group could, after giving effect to the Substitute Note, meet the conditions of the Master Indenture for the incurrence of one dollar of additional Long-Term Indebtedness described in Section 5.04(a), as demonstrated in such certificate, and (b) the New Group would not be in default under the provisions of Section 5.11 of this Master Indenture; (E) an Opinion of Bond Counsel that the surrender of the Obligation and the acceptance by the Bond Trustee of the Replacement Note will not adversely affect the validity of the Related Bonds or any exemption for the purposes of federal income taxation to which interest on the Related Bonds would otherwise be entitled; (F) an original executed counterpart of the Replacement Master Indenture; and (G) such other opinions and certificates as the Bond Trustee or the bond insurer or credit facility provider, if any, may reasonably require, together with such reasonable indemnities as the Bond Trustee or the bond insurer or credit facility provider, if any, may request. In addition to the above, the New Group shall supply to the Master Trustee evidence that (1) written notice of such substitution, together with a copy of such Replacement Master Indenture, has been given by the New Group to each Rating Agency then maintaining a rating on any Obligation or Related Bond and (2) the then current rating on the Related Bonds shall not be withdrawn or reduced by any such Rating Agency as a result of such substitution. Limitations on Incurrence of Additional Indebtedness. The District and each Note Obligor, respectively, agrees that it will not incur any Additional Indebtedness other than Additional Indebtedness consisting of one or more of the following: (a) Long-Term Indebtedness, including Long-Term Indebtedness incurred for the purpose of refunding or advance refunding any Outstanding Long-Term Indebtedness, Short-Term Indebtedness and Subordinated Indebtedness, and including Notes and Guaranties, if prior to incurrence of the Long-Term Indebtedness, there is delivered to the Master Trustee: (i) An Accountant s report or opinion certifying the Long-Term Debt Service Coverage Ratio for the Historic Test Period, taking into account the current aggregate Outstanding principal amount of all Long-Term Indebtedness, and the proposed additional Long-Term Indebtedness, as if it had been incurred at the beginning of such period, and such Long-Term Debt Service Coverage Ratio is not less than 1.25; or (ii) (1) An Accountant s report or opinion certifying that the ratio of Aggregate Income Available for Debt Service to Maximum Annual Debt Service for the Historic Test Period mentioned above not taking the proposed additional Long-Term Indebtedness into account, is not less than 1.20, and (2) a Consultant s opinion (A) certifying that the projected Long-Term Debt Service Coverage Ratio for each of the next two full Fiscal Years following the borrowing or, in the case of a borrowing for capital improvements, following the completion of the facilities being financed, taking the proposed additional Long-Term Indebtedness into account, is not less than 1.20, as shown by pro forma balance sheets, statements of income and statements of changes in financial position for each such period, accompanied by a statement of the relevant assumptions upon which D-4

153 such pro forma statements are based, and (B) indicating that sufficient revenues and cash flow would be generated to meet the projected operating expenses (including debt service on the proposed Indebtedness) of the Obligated Group during such two full Fiscal Years; or (iii) An Officer s Certificate to the effect that the total principal amount of Long-Term Indebtedness to be incurred at such time, when added to the aggregate principal amount of all other Long-Term Indebtedness theretofore issued pursuant to this clause (iii) and then Outstanding, will not exceed fifteen percent (15%) of the Operating Revenues of the Obligated Group for the Historic Test Period. Any Long-Term Indebtedness or portion thereof incurred under this subsection (a)(iii) which is Outstanding at any time shall be deemed to have been incurred under one of the other authorizing provisions of the Master Indenture if at any time subsequent to the incurrence thereof there shall be filed with the Master Trustee an Officer's Certificate to the effect that such Outstanding Indebtedness or portion thereof would satisfy such other provision, specifying such other provision, and thereupon the amount deemed to have been incurred and to be Outstanding under this subsection (a)(iii) shall be deemed to have been reduced by such amount and to have been incurred under such other provision. If the terms of such other provision require a Consultant s report or opinion, such report or opinion shall also be obtained and filed with the Master Trustee; or (iv) An Officer s Certificate certifying the Long-Term Debt Service Coverage Ratio for the Historic Test Period, taking into account the current aggregate Outstanding principal amount of all Long-Term Indebtedness, and the proposed additional Long-Term Indebtedness, as if it had been incurred at the beginning of such period, and such Long-Term Debt Service Coverage Ratio is not less than The requirements of (a)(ii) above shall be deemed satisfied if Law or Regulation Circumstances exist, and if there is delivered to the Master Trustee a signed Consultant s opinion to the effect that the projected Long-Term Debt Service Coverage Ratio for each of the next two full Fiscal Years following the borrowing in question will not be less than (b) Completion Indebtedness, to the extent that there is submitted to the Master Trustee a certificate of an architect to the effect that the net proceeds of such proposed Completion Indebtedness, other than amounts required to be deposited into any Debt Reserves, is needed for the completion of the construction or equipping of the facilities in question. (c) Long-Term Indebtedness incurred to refund any Outstanding Long-Term Indebtedness if prior to incurrence thereof: (i) either (A) the Master Trustee receives an Officer s Certificate stating that, taking into account the Long-Term Indebtedness proposed to be incurred, the existing Long-Term Indebtedness to remain Outstanding after the refunding and the refunding of the existing Long-Term Indebtedness to be refunded, Maximum Annual Debt Service will not be increased by more than 10%, or (B) the conditions described in subparagraphs (a)(i) or (a)(ii) above are met with respect to such proposed Long-Term Indebtedness, taking into account the existing Long-Term Indebtedness to remain Outstanding after the refunding and the refunding of the existing Long-Term Indebtedness to be refunded; and (ii) the Master Trustee receives either (A) an Opinion of Counsel stating that upon the incurrence of such proposed Long- Term Indebtedness and the application of the proceeds thereof, the Outstanding Long-Term Indebtedness to be refunded will no longer be Outstanding, or (B) if the Indebtedness proposed to be issued is Cross-Over Refunding Indebtedness, an Officer's Certificate stating that the total Maximum Annual Debt Service on the proposed Cross-Over Refunding Indebtedness and the Related Cross-Over Refunded Indebtedness, D-5

154 immediately after the issuance of the proposed Cross-Over Refunding Indebtedness, will not exceed the Maximum Annual Debt Service on the Cross-Over Refunded Indebtedness alone, immediately prior to the issuance of the Cross-Over Refunding Indebtedness, by more than five percent (5%). (d) Short-Term Indebtedness, provided that immediately after the incurrence of such Indebtedness the aggregate Outstanding principal amount of all such Short-Term Indebtedness does not exceed twenty percent (20%) of the aggregate of Operating Revenues for the most recent period of twelve (12) consecutive calendar months for which the financial statements of the Obligated Group have been reported upon by the Accountant; provided that for a period of at least thirty (30) days in each Fiscal Year the Outstanding principal amount of all such Indebtedness shall not exceed eight percent (8%) of the aggregate of Operating Revenues or five percent (5%) of gross operating revenues (determined in accordance with generally accepted accounting principles) of the Obligated Group for the previous year, unless there is filed with the Master Trustee an Officer s Certificate to the effect that such Short-Term Indebtedness, because of changes in law or regulations, must or reasonably should remain Outstanding in excess of such respective eight percent (8%) or five percent (5%) limitation. Notwithstanding the foregoing, Short-Term Indebtedness may also be incurred if such Short-Term Indebtedness could be incurred as Long-Term Indebtedness. (e) Non-Recourse Indebtedness which is: (i) Secured by a Lien on Property which is part of the Property, Plant and Equipment which Lien is created in compliance with the provisions of paragraph (h) under the definition of Permitted Liens; or (ii) Secured by a Lien on Property which is inventory or pledges of gifts or grants to be received in the future without limit, provided that such gifts or grants shall be excluded from the calculation of Income Available for Debt Service so long as such Indebtedness is Outstanding. (f) Subordinated Indebtedness, without limitation. (g) Any Indebtedness incurred by way of endorsement for collection or deposit of checks or drafts or commercial paper received by the District or any Note Obligor or otherwise in the ordinary course of business. (h) Balloon Indebtedness, provided that (i) (A) the final maturity of such Balloon Indebtedness is more than eighteen (18) months from the later of the date of its incurrence or the date of any calculation in respect of any such Balloon Indebtedness or (B) the Obligated Group has obtained a commitment on commercially reasonable terms from a financial institution providing for the refinancing of such Balloon Indebtedness; and (ii) all conditions to the incurrence of Indebtedness described in subparagraph (a)(i) or (ii) above are satisfied assuming that such Indebtedness will be amortized over a twenty-five (25) year period from the date of such calculation, with level annual debt service, at a rate of interest equal to that derived from the Bond Index, as determined by an Officer s Certificate. (i) Put Indebtedness if (i) there is greater than one year to the Put Date or there is in effect at the time such Put Indebtedness is incurred a binding commitment by a financial institution generally regarded as responsible, which commitment provides for the amortization of indebtedness incurred under such commitment commencing with the next succeeding Put Date, to provide financing sufficient to pay such Put D-6

155 Indebtedness on any Put Date occurring during the term of such commitment, and (ii) the conditions set forth in subparagraph (a)(i) or (ii) above are met with respect to such Put Indebtedness when it is assumed that such Put Indebtedness bears interest at the Projected Rate (as defined in the Master Indenture) and is payable assuming repayment equivalent to the shorter of the term of the commitment by the financial institution plus the term of the Put Date or the long-term schedule of the debt as provided in the Master Indenture. (j) Any Indebtedness represented by a letter of credit reimbursement agreement or other similar reimbursement agreement entered into by a member of the Obligated Group and an institution providing either a liquidity or credit support with respect to any other Indebtedness. Notwithstanding anything in the Master Indenture to the contrary, Hedge Obligations shall not constitute Additional Indebtedness for purposes of any limitations on the incurrence thereof under the Master Indenture. Rate Covenant. (a) The Obligated Group shall maintain for each Fiscal Year a Rate Covenant of at least If such ratio, as calculated at the end of any Fiscal Year, is below 1.15, the Obligated Group covenants to retain a Consultant, within thirty (30) days after the financial statements for such Fiscal Year reported upon by the Accountant are received by the Obligated Group, to make recommendations to increase such ratio for subsequent Fiscal Years of the Obligated Group at least to the required level of 1.15 or, if in the opinion of the Consultant the attainment of such level is impracticable due to Law or Regulation Circumstances, to the highest practicable level. The District and each Note Obligor, respectively, agrees that it will, to the extent permitted by law, immediately implement the recommendations of the Consultant. So long as the Obligated Group shall retain a Consultant and the District and each Note Obligor shall follow such Consultant s recommendations to the extent permitted by law, this requirement shall be deemed to have been complied with even if such ratio for any subsequent Fiscal Year of the Obligated Group is below the required level of 1.15, unless such ratio at the end of any Fiscal Year of the Obligated Group is less than The Obligated Group shall no longer be required to retain such Consultant if and for so long as such ratio is restored to and maintained at not less than (b) If Law or Regulation Circumstances exist which prevent compliance with the above ratio, the requirements set forth above shall be deemed satisfied as long as: (i) the opinion or report of a Consultant issued with respect to the Law or Regulation Circumstances is received by the Master Trustee within six months of the Obligated Group s failure to maintain the coverage ratio and is received at least once during every uninterrupted three-year period thereafter that the Obligated Group fails to maintain such ratio; and (ii) an Officer s Certificate is received by the Master Trustee at least once during each year during which the Consultant s opinion or report referred to in clause (i) above is not received by the Master Trustee, which Officer s Certificate confirms the continued existence of the factual circumstances giving rise to the Law or Regulation Circumstances. Restrictions on Encumbering Revenues. The District and each Note Obligor, respectively, covenants that it will not cause or permit any of its revenues, receipts or other moneys, or right to receive any of the same, including, without limitation, accounts, Gross Receipts, Accounts Receivable, contract rights and general intangibles, and all proceeds of all of the foregoing, whether cash or non-cash, to become D-7

156 Encumbered except (i) with respect to a Permitted Lien or (ii) as permitted with respect to insurance or condemnation proceeds or awards. Restrictions on Guaranties. (a) The District and each Note Obligor, respectively, agrees that it shall not enter into, or become liable after the date of the Master Indenture in respect of, any Guaranty unless (i) such Guaranty is of Indebtedness of another member of the Obligated Group, or (ii) such Guaranty is of obligations of a person which is not a member of the Obligated Group, and such Guaranty could then be incurred as Long-Term Indebtedness under Section 5.04(a), as Short-Term Indebtedness under Section 5.04(d), as Balloon Indebtedness under Section 5.04(h), or as Put Indebtedness under Section 5.04(i), in each case taking the following subsection (b) into account. (b) For purposes of any covenants or computations provided for in the Master Indenture, the aggregate annual principal and interest payments on, and the principal amount of, any indebtedness of a person which is not a member of the Obligated Group which is the subject of a Guaranty under the Master Indenture and which would, if such obligation were incurred by a member of the Obligated Group, constitute Short-Term Indebtedness or Long-Term Indebtedness, shall be deemed equivalent to all of the actual Annual Debt Service on, and principal amount of, such indebtedness (assuming the definitions of the Master Indenture apply to such Indebtedness), unless, so long as such Guaranty constitutes a contingent liability under generally accepted accounting principles, the Obligated Group, for each Fiscal Year for which a determination under the Master Indenture shall be made, shall deliver to the Master Trustee an Officer s Certificate that demonstrates that the Long-Term Debt Service Coverage Ratio (for these purposes only, assuming such term applies to such person only) with respect to the person primarily responsible for the indebtedness which is the subject of the Guaranty (i) was at least 1.20 for such person's most recent audited fiscal year, and (ii) is projected to be at least 1.20, if such indebtedness is being incurred at such time, for such person's fiscal year immediately subsequent to the date of such calculation, in which case such Annual Debt Service on, and principal amount of, any Short-Term Indebtedness or Long-Term Indebtedness represented by a Guaranty shall be deemed equivalent to twenty percent (20%) of the annual payment of principal and interest on a hypothetical Short-Term Indebtedness or Long-Term Indebtedness, as the case may be, other than a Guaranty incurred on the date the Guaranty in question is made; provided, however, that if the Long-Term Debt Service Coverage Ratio of the Obligated Group for the Historic Test Period is below 1.50, then the projection described in clause (ii) above shall be confirmed by a Consultant s opinion or report delivered to the Master Trustee, and, provided, further, however, that the Annual Debt Service on, and principal amount of, any Short-Term Indebtedness or Long-Term Indebtedness, as the case may be, represented by a Guaranty shall be deemed equivalent to 100% of the actual Annual Debt Service, and principal amount of, such Indebtedness, if a payment has been made by any member of the Obligated Group on such Guaranty within three years of the date of any computation to be made under the Master Indenture (assuming the definitions of the Master Indenture apply to such Indebtedness). Limitation on Creation of Liens. The District and each Note Obligor, respectively, agrees that it will not create or suffer to be created or exist any Lien upon Property now owned or hereafter acquired by it other than Permitted Liens. Sale, Lease or Other Disposition of Property. The District and each Note Obligor, respectively, agrees that it will not in any Fiscal Year sell, lease or otherwise dispose of Property the Value of which would cause the aggregate Value of Property so transferred by members of the Obligated Group in such Fiscal Year to exceed five percent (5%) of the Value of the Property at the end of the most recent Fiscal Year, except for transfers, sales or leases of Property: D-8

157 (a) to any person if prior to the sale, lease or other disposition there is delivered to the Master Trustee an Officer s Certificate stating that in the judgment of the signer such Property has, or within the next succeeding twenty-four (24) calendar months is reasonably expected to, become inadequate, obsolete, worn out, unsuitable, unprofitable, undesirable or unnecessary and the sale, lease, removal or other disposition thereof will not impair the structural soundness, efficiency or economic value of the remaining Property; or (b) (c) (d) to another member of the Obligated Group; or in the ordinary course of business; or if such Property is replaced promptly by other Property of comparable utility; or (e) if the Obligated Group receives fair market value therefor and the proceeds of such disposition are applied to the purchase of additional capital assets, applied to the defeasance, discharge, redemption or retirement of Indebtedness or deposited into a depreciation reserve fund; or (f) to a person, including a Subsidiary, which is not a member of the Obligated Group provided that prior to the sale, lease or other disposition the Transaction Test shall have been satisfied. The requirements of this clause (f) shall be deemed satisfied if Law or Regulation Circumstances exist, and if there is delivered to the Master Trustee a signed Consultant s opinion to the effect that the projected Long-Term Debt Service Coverage Ratio for each of the next two full Fiscal Years following the transaction in question will not be less than 1.00; or (g) any member of the Obligated Group may transfer cash and investments: (i) to another member of the Obligated Group without limit; (ii) to any Person if there is filed with the Master Trustee an Officer s Certificate, accompanied by and based upon financial statements for the most recent period of twelve (12) full consecutive calendar months for which such statements were reported on by independent certified public accountants, demonstrating that the Long-Term Debt Service Coverage Ratio for such period would not be reduced below 1.75 if the amount of the proposed transfer were deducted from Income Available for Debt Service for such period; and (iii) to any Person provided that an Officer s Certificate is filed with the Master Trustee demonstrating that the member of the Obligated Group will receive as consideration for such transfer property, cash, securities or services, the fair market value of which is at least equal to the amount of the cash, securities and other investment properties so transferred; provided, however, that after the transfer, the Obligated Group will have at least 60 days cash on hand; and provided, further, that investments shall be deemed cash for this purpose. Insurance Provisions. The District and each Note Obligor, respectively, agrees to maintain insurance covering such risks and in such amounts consistent with prudent industry practice. The insurance D-9

158 coverage is subject to review by an Insurance Consultant every three years. The members of the Obligated Group agree to follow the recommendations of the Insurance Consultants to the extent feasible. Filing of Financial Statements, Certificate of No Default, Other Information. (a) As soon as practicable but in no event later than five months after the end of each Fiscal Year, the Obligated Group Agent shall file with the Master Trustee (i) a revenue and expense statement for the District and each Note Obligor (or a revenue and expense statement of any consolidated group of companies of which it is a member) for such Fiscal Year and (ii) a balance sheet for the District and each Note Obligor (or a balance sheet of any consolidated group of companies of which it is a member) as of the end of such Fiscal Year, each accompanied by the certificate or opinion of an Accountant. (b) As soon as practicable but in any event no later than five months after the end of each Fiscal Year, the Obligated Group Agent shall file, or cause to be filed, with the Master Trustee (i) a combining revenue and expense statement of the District (or of any consolidated group of companies of which the District is a member) and each Note Obligor (or of any consolidated group of companies of which such Note Obligor is a member) presenting each separately and combined, along with combining entries eliminating material intercompany balances and transactions, for such Fiscal Year and (ii) a combining balance sheet presented on the basis described in (i) above as of the end of such Fiscal Year, each accompanied by the certificate or opinion of an Accountant. (c) As soon as practicable but in no event later than five months after the end of each Fiscal Year, the Obligated Group Agent shall file with the Master Trustee an Officer s Certificate stating whether or not to the best knowledge of the signers the District or any Note Obligor is in default in the performance of any covenant contained in the Master Indenture, and, if so, specifying each such default of which the signer may have knowledge. (d) If an Event of Default shall have occurred and be continuing, the Obligated Group Agent shall (i) file with the Master Trustee such other financial statements and information concerning its operations and financial affairs (or of any consolidated group of companies of which it is a member) as the Master Trustee may from time to time reasonably request, excluding specifically donor records, patient records and personnel records, and (ii) provide access to its facilities for the purpose of inspection by the Master Trustee during regular business hours or at such other times as the Master Trustee may reasonably request. (e) Within thirty (30) days after its receipt thereof, the Obligated Group Agent shall file with the Master Trustee a copy of each report which any provision of the Master Indenture requires to be prepared by a Consultant or an Insurance Consultant. Debt Service on Variable Rate Indebtedness or Derivative Indebtedness (as amended pursuant to the Amendatory Master Trust Indenture No. 1 dated as of June 1, 2008.) For purposes of any computation of the Long-Term Debt Service Requirement: (a) Variable Rate Indebtedness. Variable Rate Indebtedness (other than Derivative Indebtedness) shall be deemed Indebtedness which bears interest at a rate equal to the Bond Index at the time such computation is determined. (b) Derivative Indebtedness. D-10

159 (i) With respect to Indebtedness that is subject to a Variable-to-Fixed Hedge Agreement, the interest on such Indebtedness shall be calculated at the Hedged Fixed Rate (plus, so long as any Series 2002 Bonds remain Outstanding, 0.50%); (ii) With respect to Indebtedness that is subject to a Fixed-to-Variable Hedge Agreement, the interest on such Indebtedness shall be calculated at the Hedged Variable Rate (plus, so long as any Series 2002 Bonds remain Outstanding, the sum of (A) the fixed rate payable on such Indebtedness minus (B) the fixed rate receivable by the District or any other Note Obligor under such Hedge Agreement plus (C) 0.50%); and (iii) With respect to Indebtedness that is subject to a Basis Swap, the interest on such Indebtedness shall be calculated by adding the interest on such Indebtedness (after application of the preceding clauses (i) and (ii) if applicable) to the net effect of the cash flows (and/or rates or other indexes, as applicable) under such Basis Swap (plus, so long as any Series 2002 Bonds remain Outstanding, 0.50%). For purposes of any such calculation under (ii) or (iii) above or the following paragraph, any component of a Hedge Agreement based upon a fluctuating index shall be calculated using the actual average value of such index during the period of twelve (12) consecutive calendar months immediately preceding the month in which such calculation is made; provided, however, that for such purposes of any test based on a Historic Test Period or otherwise upon a historic calculation of interest on Indebtedness that is subject to a Hedge Agreement (rather than a projection for periods following such test date) shall instead be made taking into account the actual net payments and receipts by the parties under such Hedge Agreement as Regularly Scheduled Payments and Regularly Scheduled Receipts under such Hedge Agreement over such historic period of determination. Notwithstanding the foregoing, if at the time of any calculation pursuant to the provisions of the Master Indenture described in this section so long as any Series 2002 Bonds remain outstanding, a Swap Counterparty or its guarantor (including without limitation a party agreeing to enter, with the District or Note Obligor, a substitute or replacement agreement to such Hedge Agreement) is not rated at least A- or above by S&P, at least A3 or above by Moody s or at least A3 or above by Fitch Ratings, or has had its ratings withdrawn by either S&P, Moody s or Fitch Ratings, then the Long-Term Debt Service Requirement shall be calculated with respect to such Indebtedness at the higher of (x) the amount determined in accordance with the above provisions of the Master Indenture described in this subsection (b); or (y) the amount determined to be such requirement disregarding the above provisions of this subsection (b) plus (to the extent not taken into account under the above provisions of this subsection (b)) amounts payable under the related Hedge Agreement. (c) Allocation of Hedge Agreements to Indebtedness. For purposes of any calculation pursuant to the above subparagraph (b), the determination of which Indebtedness (or portions of Indebtedness) is subject to any Hedge Agreement shall be set forth in an Officer s Certificate using any method of allocation certified by the officer(s) executing such certificate as being deemed reasonable and economically appropriate in such officer(s) discretion in such Officer s Certificate delivered to the Master Trustee. In the event that the applicable officer(s) determine in any Officer s Certificate that a reallocation of any prior allocation of one or more Hedge Agreements among Indebtedness (or portions of Indebtedness) is reasonable and economically appropriate from time to time, then each such reallocation shall be as set forth in such Officer s Certificate delivered to the Master Trustee. In the event of conflicting allocation certificates, the latest such Officer s Certificate to have been executed and delivered D-11

160 to the Master Trustee shall control to the extent of such conflict. Any certificate executed pursuant to this subparagraph (c) shall be conclusive and binding for all purposes (until modified by any subsequent certificate executed pursuant to this paragraph, which subsequent certificate shall then be conclusive and binding as described in this paragraph). Consolidation, Merger, Sale or Conveyance. (a) The District and each Note Obligor may merge or consolidate with any member of the Obligated Group and may sell or convey all or substantially all of its assets to any member of the Obligated Group. The District and each Note Obligor, respectively, covenants that it will not merge or consolidate with any other entity not a member of the Obligated Group or sell or convey all or substantially all of its assets to any entity not a member of the Obligated Group unless: (i) Either it will be the continuing organization or entity, or the successor organization or entity (if other than a member of the Obligated Group) shall be an entity organized and existing under the laws of the United States of America or a state thereof and such entity shall become a member of the Obligated Group or shall otherwise expressly assume the due and punctual payment of the principal of and premium, if any, and interest on all Outstanding Notes and Guaranties issued under the Master Indenture according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of the Master Indenture by a Supplement satisfactory to the Master Trustee, executed and delivered to the Master Trustee by such entity; and (ii) No member of the Obligated Group immediately after such merger or consolidation, or such sale or conveyance, would be in default in the performance or observance of any covenant or condition contained in the Master Indenture and any applicable conditions would be met for the creation of a Lien on Property, Plant and Equipment and the conditions related to the incurrence of one dollar of additional Long-Term Indebtedness would be met; and (iii) The Transaction Test shall have been satisfied; and (iv) If all amounts due or to become due on any Related Bond have not been fully paid to the holder thereof, there shall have been delivered to the Master Trustee, the Related Bond Issuer, and the Related Bond Trustee, an Opinion of Bond Counsel, in form and substance satisfactory to the Master Trustee, the Related Bond Issuer, and the Related Bond Trustee, to the effect that under then existing law the consummation of such merger, consolidation, sale or conveyance, whether or not contemplated on any date of the delivery of such Related Bond, would not adversely affect the validity of such Related Bond or the exemption from federal income taxation of interest payable on such Related Bond. DEFAULT AND REMEDIES Events of Default. Event of Default shall mean any of the following events: (a) The Obligated Group shall fail to make, within five (5) business days of the due date thereof, any payment of the principal of, the premium, if any, and interest on any Note or any payment required by any Guaranty issued and Outstanding when and as the same shall become due and payable, whether at maturity, by proceedings for redemption, by acceleration or otherwise, in accordance with the terms thereof, of the Master Indenture and the Related Supplement. D-12

161 (b) The District or any Note Obligor shall fail duly to observe or perform any covenant or agreement under the Master Indenture or any Related Supplement for a period of thirty (30) days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Obligated Group Agent by the Master Trustee, or to the Obligated Group Agent and the Master Trustee by the holders of at least twenty-five percent (25%) in aggregate principal amount of Notes then Outstanding. If the breach of covenant or agreement is one which cannot be completely remedied within the thirty (30) days after written notice has been given, it shall not be an Event of Default as long as the District or Note Obligor has taken active steps within the thirty (30) days after written notice has been given to remedy the failure and is diligently pursuing such remedy. (c) The District or any Note Obligor shall default in the payment of any Indebtedness for borrowed moneys (other than Notes or Guaranties issued and Outstanding which are, and other than any other Indebtedness which is, Non-Recourse Indebtedness), in an amount in excess of two percent (2%) of Operating Revenues of the Obligated Group, whether such Indebtedness now exists or shall hereafter be created, and any period of grace with respect thereto shall have expired where the effect of such default is to accelerate the maturity of such Indebtedness or to permit the holders thereof (or a trustee on behalf of such holders) to cause such Indebtedness to become due prior to its stated maturity, or an event of default as defined in any mortgage, indenture or instrument, under which there may be issued or by which there may be secured or evidenced, any Indebtedness, whether such Indebtedness now exists or shall hereafter be created, shall occur; provided, however, that such default shall not constitute an Event of Default if within thirty (30) days, or within the time allowed for service of responsive pleading if any proceeding to enforce payment of the Indebtedness is commenced (i) the members of the Obligated Group in good faith commence proceedings to contest the existence or payment of such Indebtedness, and (ii) sufficient moneys are escrowed with a bank or trust company for the payment of such Indebtedness. (d) (e) Certain events of bankruptcy or insolvency occur involving the District or a Note Obligor. An event of default under any Related Supplement. Provided, however, that an event described in subsection (d) above shall not be an Event of Default if, excluding from the Obligated Group the member or members as to which the event described in subsection (d) above has occurred, there is compliance with the provisions of Article V of the Master Indenture and an Officer s Certificate as to such compliance is delivered to the Master Trustee within sixty (60) days of the receipt of notice of the existence of such event. Acceleration; Annulment of Acceleration. (a) Upon the occurrence and during the continuation of an Event of Default, the Master Trustee may and, upon the written request of the Holders of not less than twenty-five percent (25%) in aggregate principal amount of Notes Outstanding (other than Notes which represent Non-Recourse Indebtedness), shall, by notice to the Obligated Group Agent, declare all Notes Outstanding immediately due and payable, whereupon such Notes shall become and be immediately due and payable, anything in the Notes or the Master Indenture to the contrary notwithstanding. In such event, there shall be due and payable on the Notes an amount equal to the total principal amount of all such Notes, plus all interest accrued thereon and, to the extent permitted by applicable law, which accrues to the date of payment. D-13

162 (b) At any time after the principal of the Notes shall have been so declared to be due and payable and before the entry of final judgment or decree in any suit, action or proceeding instituted on account of such default, if (i) the Obligated Group has paid or caused to be paid or deposited with the Master Trustee moneys sufficient to pay all matured installments of interest and interest on installments of principal and interest and principal or redemption prices then due (other than the principal then due only because of such declaration) of all Notes Outstanding; (ii) the Obligated Group has paid or caused to be paid or deposited with the Master Trustee moneys sufficient to pay the charges, compensation, expenses, disbursements, advances and liabilities of the Master Trustee and any paying agents; (iii) all other amounts then payable by the Obligated Group 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 Notes then due only because of such declaration) shall have been remedied, then the Master Trustee shall annul such declaration and its consequences with respect to any Notes or portions thereof not then due by their terms. No annulment shall extend to or affect any subsequent Event of Default or impair any right consequent thereon. Additional Remedies and Enforcement of Remedies. (a) 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-five percent (25%) in aggregate principal amount of the Notes Outstanding, together with indemnification of the Master Trustee to its satisfaction therefor, shall, proceed forthwith to protect and enforce its rights and the rights of the Noteholders by such suits, actions or proceedings as the Master Trustee, being advised by counsel, shall deem expedient, including but not limited to: (i) Enforcement of the right of the Noteholders to collect and enforce the payment of amounts due or becoming due under the Notes; (ii) Suit upon all or any part of the Notes; (iii) Civil action to require any person holding moneys, documents or other property pledged to secure payment of amounts due or to become due on the Notes to account as if it were the trustee of an express trust for the Holders of Notes so secured; (iv) Civil action to enjoin any acts or things, which may be unlawful or in violation of the rights of the Holders of Notes; and (v) Indenture. Enforcement of any other right of the Noteholders conferred by law or by the Master (b) Regardless of the happening of an Event of Default, the Master Trustee, if requested in writing by the Holders of not less than twenty-five percent (25%) in aggregate principal amount of the Notes then Outstanding, shall, upon being indemnified to its satisfaction therefor, institute and maintain such suits and proceedings as it may be advised shall be necessary or expedient (i) to prevent any impairment of security by any acts which may be unlawful or in violation of the Master Indenture, or (ii) to preserve or protect the interests of the Holders, provided that such request and the action to be taken by the Master Trustee are not in conflict with any applicable law or the provisions of the Master Indenture and, in the sole judgment of the Master Trustee, is not unduly prejudicial to the interest of the Holders of Notes not making such request. D-14

163 Application of Revenues and Other Moneys After Default. During the continuance of an Event of Default all moneys received by the Master Trustee pursuant to any right given or action taken under the Master Indenture, after payment of the costs and expenses of the proceedings resulting in the collection of such moneys and of the expenses and advances incurred or made by the Master Trustee with respect thereto shall be applied as follows: (a) and payable: Unless the principal of all Outstanding Notes shall have become or have been declared due First: To the payment to the persons entitled thereto of all installments of interest then due on the Notes in the order of the maturity of such installments, and, if the amount available shall not be sufficient to pay in full any installment or installments maturing on the same date, then to the payment thereof ratably, according to the amounts due thereon to the Persons entitled thereto, without any discrimination or preference; and Second: To the payment to the persons entitled thereto of the unpaid principal installments of any Notes which shall have become due, whether at maturity or by call for redemption, in the order of their due dates, and if the amounts available shall not be sufficient to pay in full all the Notes due on any date, then to the payment thereof ratably, according to the amounts of principal installments due on such date, to the persons entitled thereto, without any discrimination or preference. (b) If the principal of all Outstanding Notes shall have become or have been declared due and payable, to the payment of the principal and interest then due and unpaid upon the Notes 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 Note over any other Note, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto without any discrimination or preference. (c) If the principal of all Outstanding Notes shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled, then, subject to the provisions of paragraph (b) in the event that the principal of all Outstanding Notes shall later become due or be declared due and payable, the moneys shall be applied in accordance with the provisions of paragraph (a) of this Section. Whenever moneys are to be applied by the Master Trustee pursuant to the provisions of this Section, such moneys shall be applied by it at such times, and from time to time, as the Master Trustee shall determine, having due regard for the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application 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 such notice as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date, and shall not be required to make payment to the Holder of any unpaid coupon or Note until such coupon or such Note and all unmatured coupons, if any, appertaining to such Note shall be presented to the Master Trustee for appropriate endorsement of any partial payment or for cancellation if fully paid. Whenever all Notes and interest thereon have been paid and all expenses and charges of the Master Trustee have been paid, any balance remaining shall be paid to the Person entitled to receive the same; if no D-15

164 other Person shall be entitled thereto, then the balance shall be paid to the members of the Obligated Group, their successors, or as a court of competent jurisdiction may direct. Noteholders Control of Proceedings. If an Event of Default shall have occurred and be continuing, notwithstanding anything in the Master Indenture to the contrary, the Holders of at least a majority in aggregate principal amount of Notes then Outstanding shall have the right, at any time, by any instrument in writing executed and delivered to the Master Trustee, to direct the method and place of conducting any proceeding to be taken in connection with the enforcement of the terms and conditions of the Master Indenture or for the appointment of a receiver or any other proceedings, provided that such direction is not in conflict with any applicable law or the provisions of the Master Indenture (including indemnity to the Master Trustee) and, in the sole judgment of the Master Trustee, is not unduly prejudicial to the interest of Noteholders not joining in such direction and provided further that such authorization shall not impair the right of the Master Trustee in its discretion to take any other action which it may deem proper and which is not inconsistent with such direction by Noteholders. SUPPLEMENTS AND AMENDMENTS Supplements Not Requiring Consent of Noteholders. The District, and each Note Obligor, when authorized by resolution or other action of equal formality by its Governing Body, and the Master Trustee may, without the consent of or notice to any of the Holders, enter into one or more Supplements for one or more of the following purposes: (a) To cure any ambiguity or formal defect or omission in the Master Indenture. (b) To correct or supplement any provision of the Master Indenture which may be inconsistent with any other provision thereof, or to make, add, delete, or modify any other provisions with respect to matters or questions arising which shall not materially adversely affect the interest of the Holders. (c) To grant or confer ratably upon all of the Holders any additional rights, remedies, powers or authority that may lawfully be granted or conferred upon them. (d) 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. (e) (f) To create and provide for the issuance of a series of Notes or a Guaranty. To obligate a successor to the District or other Note Obligor. Supplements Requiring Consent of Noteholders. So long as any Note issued prior to the Series 5 Note of the District, dated as of April 1, 1997, is Outstanding, the Holders of not less than sixty percent (60%) in aggregate principal amount of the Notes then Outstanding shall have the right, from time to time, anything contained in the Master Indenture to the contrary notwithstanding, to consent to and approve the execution by the District, and each Note Obligor, when authorized by resolution or other action of equal formality by its Governing Body, and the Master Trustee of such Supplements as shall be deemed necessary and desirable for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, D-16

165 any of the terms or provisions contained in the Master Indenture; provided, however, this authorization shall not permit or be construed as permitting a Supplement which would: (i) Extend the stated maturity of or time for paying interest on any Note or reduce the principal amount of or the redemption premium or rate of interest payable on any Note without the consent of the Holder of such Note; (ii) Modify, alter, amend, add to or rescind any of the terms or provisions 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 Notes then Outstanding; or (iii) Reduce the aggregate principal amount of Notes then Outstanding the consent of the Holders of which is required to authorize such Supplement without the consent of the Holders of all Notes then Outstanding. At such times as no Notes issued prior to the Series 5 Note are Outstanding, the Holders of not less than fifty-one percent (51%) in aggregate principal amount of the Notes then Outstanding shall have the right, from time to time, anything contained in the Master Indenture to the contrary notwithstanding, to consent to and approve the execution by the District, and each Note Obligor, when authorized by resolution or other action of equal formality by its Governing Body, and the Master Trustee of such Supplements as shall be deemed necessary and desirable for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in the Master Indenture; provided, however this authorization shall not permit or be construed as permitting a Supplement which would permit items (i), (ii) and (iii) above. SUMMARY OF BOND INDENTURE The following is a summary of certain provisions of the Bond Indenture to which reference is made for a complete recital of its terms. Words and terms used in this summary which are defined in the Bond Indenture shall have the same meanings as in the Bond Indenture. Creation of Trust. In order to secure the payment of principal, premium and interest on the Bonds and the observance and performance of the other obligations of the District set forth in the Bond Indenture, for the equal and proportionate benefit and protection of all present and future holders of the Bonds, the District grants a security interest in and pledges to the Bond Trustee the following: A. All right, title and interest of the District in and to the Series 12 Note. B. All right, title and interest of the District in and to all moneys and securities held from time to time in the funds and accounts created pursuant to the Bond Indenture, including the earnings thereon, subject to certain provisions permitting the application of such amounts for the purpose and on the terms and conditions set forth in the Bond Indenture. C. Any and all other property rights and interests of any kind from time to time hereafter by delivery or by writing specifically conveyed, pledged, assigned or transferred, as and for additional security D-17

166 for the Bonds, by the District or by anyone in its behalf or with its written consent, in favor of the Bond Trustee. Application of Bond Proceeds and Other Moneys. All proceeds of the sale of the Bonds shall be paid to the Bond Trustee. Such proceeds shall be deposited in the following manner: (i) To the Escrow Account, pursuant to the Escrow Deposit Agreement between the District and U.S. Bank National Association, as escrow agent, the amount set forth in the Bond Indenture; and (v) To the Costs of Issuance Fund, the balance of the proceeds of the Bonds. Creation and Application of Funds. The Bond Indenture provides for the creation of the Bond Fund (and accounts therein), the Costs of Issuance Fund, and the Reserve Fund. So long as any Bonds are Outstanding, in each Bond Year, Note Payments for the Series 12 Note received by the Bond Trustee shall be applied under the Bond Indenture in the following manner and order of priority: (a) Interest Account. The Bond Trustee shall deposit to the Interest Account on the fifth Business Day prior to each Bond Payment Date, commencing on the fifth Business Day prior to October 15, 2008, the amount, if any, necessary to cause the amount credited to the Interest Account, together with investment earnings on investments then on deposit in the Interest Account, if such earnings will be received on or before that fifth Business Day prior to the Bond Payment Date and are not otherwise required to be transferred to another fund or account, to be the amount of interest to be paid on such Bond Payment Date. Moneys in the Interest Account shall be used to pay interest on the Bonds as it becomes due. (b) Principal Account. The Bond Trustee shall next deposit to the Principal Account on the fifth Business Day prior to the last day of each Bond Year ending on a date on which Serial Bonds mature, commencing on the fifth Business Day prior to April 15, 2009, the amount necessary to cause the amount credited to the Principal Account, together with the investment earnings on investments then on deposit in the Principal Account, if such earnings will be received before the fifth Business Day prior to the last day of the Bond Year, to be not less than the principal amount of Serial Bonds Outstanding which will mature on the last day of such Bond Year. Moneys in the Principal Account shall be used to retire Serial Bonds by payment at their scheduled maturity. (c) Sinking Fund Account. The Bond Trustee shall next deposit to the Sinking Fund Account on the fifth Business Day prior to a Sinking Fund Account Retirement Date, commencing on the fifth Business Day prior to the first Sinking Fund Account Retirement Date, during each Bond Year ending on a date which is a Sinking Fund Account Retirement Date, the aggregate amount necessary to cause the amount credited to the Sinking Fund Account, together with investment earnings on investments then on deposit if such earnings will be received before the fifth Business Day prior to the last day of the Bond Year, to be not less than the unsatisfied Sinking Fund Account Requirements to be satisfied on or before the last day of such Bond Year. Moneys in the Sinking Fund Account shall be used to retire Term Bonds by purchase, by mandatory redemption or by payment at their scheduled maturity. The Bond Trustee shall, upon direction of the District, apply moneys credited to the Sinking Fund Account to purchase Term Bonds in satisfaction of Sinking Fund Account Requirements for such Term Bonds for a Sinking Fund Account Retirement Date. The Bond Trustee shall not purchase any Bond at a D-18

167 price or cost (including any brokerage fees or commissions or other charges) which exceeds the principal amount thereof plus interest accrued to the date of purchase. Such accrued interest shall be paid from the Interest Account. The principal amount of Term Bonds of each maturity so purchased shall be credited against the unsatisfied balance of Sinking Fund Account Requirements for such maturity in order of Sinking Fund Account Retirement Dates. All Bonds so purchased shall be cancelled. (d) Redemption Account. If the District makes an optional prepayment of any installment on the Series 12 Note, the amount so paid shall be credited to the Redemption Account and applied promptly by the Bond Trustee, first, to cause the amounts credited to the Interest Account, the Principal Account or the Sinking Fund Account of the Bond Fund, in that order, to be not less than the amounts then required to be credited thereto and, then, to retire the Bonds by purchase, redemption or both in accordance with the District s directions. No Bond shall be so purchased at a cost or price (including brokerage fees or commissions or other charges) which exceeds the Redemption Price at which such Bond could be redeemed on the date of purchase or on the next succeeding date upon which such Bond is subject to optional redemption plus accrued interest to the date of purchase. Any such redemption shall be of Bonds then subject to optional redemption at the Redemption Price then applicable. The principal amount of any Term Bonds so purchased or redeemed at the option of the District pursuant to the optional and extraordinary optional redemption provisions of the Bond Indenture shall be credited against the unsatisfied balance of Sinking Fund Account Requirements for such maturity of such Bonds in order of Sinking Fund Account Retirement Dates. Upon receipt by the Bond Trustee of moneys accompanied by a certificate of a District Representative stating that such moneys are insurance proceeds with respect to casualty losses or condemnation awards, that the amount of such proceeds or awards exceeds five percent (5%) of the Value of the Property, Plant and Equipment or that the Operating Revenues of the District are reduced by more than five percent (5%) as a result of such casualty or condemnation, and that such moneys are to be applied to redeem Bonds and specifying the amount and maturities of Bonds to be redeemed, the Bond Trustee shall credit such moneys to the Redemption Account and shall apply such moneys to an extraordinary optional redemption of Bonds. Any balance remaining in the Redemption Account after the purchase or redemption of Bonds in accordance with the District s directions, or in any event on the day following the Bond Payment Date next succeeding the prepayment by the District, shall be transferred to the Interest Account. Reserve Fund. The Reserve Fund shall be funded by the Obligated Group within 180 Business Days at an amount equal to the Reserve Fund Requirement upon the occurrence of any of the following: (i) failure to maintain at least 95 Days Cash on Hand on any Testing Date (as such terms are defined in the Series 12 Note Indenture); (ii) failure to maintain a Long-Term Debt Service Coverage Ratio of at least 1.15 on any Testing Date; or (iii) failure to maintain a long-term debt rating of at least A from two of the following three rating agencies: Moody s, S&P, or Fitch. The foregoing requirements shall be evidenced by a certificate of the Obligated Group Agent which shall be furnished to the Bond Trustee and the Master Trustee within 30 days of the applicable Testing Date. The Reserve Fund caused to be funded by such a violation must remain in place until the tests in (i), (ii) and (iii) of the prior sentence are met for one audited Fiscal Year. After satisfying the tests described in (i), (ii) and (iii) for one audited Fiscal Year, the amount in the Reserve Fund shall be transferred to the District. The Bond Trustee shall value the Reserve Fund semiannually on each March 31 and September 30. The Bond Trustee shall promptly notify the District of any deficiency in the D-19

168 Reserve Fund upon such semiannual valuation. Deficiencies in the Reserve Fund upon such valuation greater than ten percent (10%) due to market valuation must be made up within 120 days of notification by the Bond Trustee. Deficiencies due to any other reason must be made up in equal monthly installments over a period not to exceed twelve (12) months. When moneys in the Bond Fund are insufficient to pay principal of or interest on Bonds when due, moneys in the Reserve Fund shall be used to augment payments due for principal or interest on the Bonds. When moneys in the Reserve Fund are so used, the Bond Trustee shall forthwith give notice to the Master Trustee. The Bond Trustee is hereby directed to make such deposits into the Reserve Fund as are required to be made under the Bond Indenture, which shall include deposits into the Reserve Fund of payments made pursuant to the Series 12 Note Indenture. In addition to the foregoing, on March 15, 2025, amounts, if any, in the Reserve Fund shall be transferred from the Reserve Fund to the credit of the Bond Fund. Investment of Funds. Moneys in all Funds and Accounts held by the Bond Trustee shall be invested in Permitted Investments as directed by the District, provided that the maturity date or the date on which such Permitted Investments may be redeemed at the option of the holder thereof shall coincide as nearly as practicable with (but in no event later than) the date or dates on which moneys will be required for the purposes thereof. Moneys in the Funds or Accounts held by the Bond Trustee shall be invested in Permitted Investments maturing or redeemable at the option of the Bond Trustee not later or no less frequently than the following dates or periods of time: (A) Principal Account and Sinking Fund Account, the last day of each Bond Year; (B) Interest Account, the day preceding the next Bond Payment Date; and (C) Redemption Account, the day preceding the next date on which Bonds are to be redeemed or are expected to be purchased. Joint investment of amounts credited to one or more Funds or Accounts are permitted so long as each such investment complies in all respects with the limitations referred to above and the Bond Trustee maintains separate records for each Fund and Account and such investments are accurately reflected therein. The Bond Trustee may make any investment through or with its own commercial banking or investment departments unless otherwise directed by the District. The District shall not knowingly use or direct or permit the use of any moneys of the District in its or the Bond Trustee s possession or control in any manner which would cause any Bond to be an arbitrage bond within the meaning ascribed to such term in Section 148 of the Code, or any successor section of the Code. Events of Default. The following are Events of Default under the Bond Indenture: (a) payable; Payment of any interest on any Bond is not made by the District as it becomes due and (b) Payment by the District of the principal of or any redemption premium on any Bond is not made when it becomes due and payable, whether at maturity or by proceedings for redemption or by declaration of acceleration or otherwise; D-20

169 (c) The District fails to observe or perform any other covenant or agreement on its part under the Bond Indenture for a period of 30 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the District by the Bond Trustee, or to the District and the Bond Trustee by the holders of at least twenty-five percent (25%) in aggregate principal amount of Bonds then Outstanding. If the breach of covenant or agreement is one which cannot be completely remedied within 30 days after written notice has been given, it shall not be an Event of Default as long as the District has taken active steps within the 30 days to remedy the failure and is diligently pursuing such remedy; (d) The occurrence of certain events of bankruptcy with respect to the District; (e) With respect to the Bonds, the Series 12 Note is declared by the Master Trustee to be immediately due and payable; and (f) Indenture. If there occurs any Event of Default under the Master Indenture or the Series 12 Note Acceleration; Annulment of Acceleration. (a) Upon the occurrence of an Event of Default, the Bond Trustee may, with the prior written consent of the Insurer, and shall, at the direction of the Insurer or the Holders of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds then Outstanding with the prior written consent of the Insurer, by written notice to the District and the Insurer, declare the principal of the Bonds to be immediately due and payable, whereupon that portion of the principal of the Bonds thereby coming due and the interest thereon accrued to the date of payment shall, without further action, become and be immediately due and payable, anything in the Bond Indenture or in the Bonds to the contrary notwithstanding. The Bond Trustee shall give written notice of such acceleration to the District, the Registrar and the Master Trustee, and the Registrar shall give notice to the Bondholders stating the accelerated date on which the Series 12 Note and the Bonds shall be due and payable. (b) At any time after the principal of the Series 12 Note and the Bonds shall have been declared to be due and payable, if such declaration that the Series 12 Note is immediately due and payable is annulled in accordance with the provisions of the Master Indenture, such declaration that the Bonds are immediately due and payable shall also, with the consent of the Insurer, be annulled and the Registrar shall promptly give notice of such annulment. 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. The Bond Indenture provides that: (a) Upon the occurrence and continuance of any Event of Default, the Bond Trustee may, and upon the written request of the Holders of not less than twenty-five percent (25%) in an aggregate principal amount of the Bonds Outstanding, together with indemnification of the Bond Trustee to its satisfaction therefor, shall, proceed forthwith to protect and enforce its rights and the rights of the Bondholders under the Bond Indenture and under the Act and the Bonds by such suits, actions or proceedings as the Bond Trustee, being advised by counsel, shall deem expedient, including but not limited to: (i) Civil action to recover money or damages due and owing; (ii) Civil action to enjoin any acts or things, which may be unlawful or in violation of the rights of the Holders of Bonds; and D-21

170 (iii) Enforcement of any other right of the Bondholders conferred by law or by the Bond Indenture. (b) Regardless of the happening of an Event of Default, the Bond Trustee, if requested in writing by the Holders of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds then Outstanding, shall upon being indemnified to its satisfaction therefor, institute and maintain suits (i) to prevent any impairment of the security granted under the Bond Indenture, or (ii) to preserve or protect the interests of the Holders, provided that such request is in accordance with law and the provisions of the Bond Indenture and, in the sole judgment of the Bond Trustee, is not unduly prejudicial to the interest of the Holders of Bonds not making such request. Application of Revenues and Other Moneys After Default. The Bond Indenture provides that during the continuance of an Event of Default all moneys received by the Bond Trustee shall, after payment of the reasonable costs and expenses of the proceedings resulting in the collection of such moneys and of the reasonable fees, expenses and advances incurred or made by the Bond Trustee with respect thereto, be deposited in the Bond Fund, and all such amounts held by the Bond Trustee shall be applied as follows: (a) and payable: Unless the principal of all Outstanding Bonds shall have become or have been declared due First: To the payment to the Persons entitled thereto of all installments of interest then due on the Bonds in the order of maturity, and, if the amount available shall not be sufficient to pay in full any installment or installments maturing on the same date, then to the payment thereof ratably, without any discrimination or preference; and Second: To the payment to the Persons entitled thereto of the unpaid principal amounts or Redemption Price of any Bonds which shall have become due (other than Bonds previously called for redemption for the payment of which moneys are held), whether at maturity or by call for redemption, in the order of their due dates or redemption dates, and if the amounts available shall not be sufficient to pay in full all the Bonds due or called for redemption on any date, then to the payment thereof ratably without any discrimination or preference. Third: above. To the payment of amounts owed to the Insurer not covered by First and Second (b) If the principal amounts of all Outstanding Bonds shall have become or have been declared due and payable, to the payment of the principal amounts and interest then due and unpaid upon the Bonds without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, ratably, according to the amounts due respectively for principal amounts and interest, to the Persons entitled thereto. (c) If the principal amounts of all Outstanding Bonds shall have been declared due and payable, and if such declaration is later rescinded, then the moneys shall be applied in accordance with the provisions of paragraph (a) above. D-22

171 Bondholders' Control of Proceedings. So long as an Insurer Default does not exist, the Bond Insurer shall control all proceedings upon an Event of Default. The Bond Indenture provides that, if an Event of Default shall have occurred and be continuing, and an Insurer Default exists, the Holders of a majority in aggregate principal amount of Bonds then Outstanding shall have the right, at any time, to direct the method and place of conducting any proceeding to be taken in connection with the enforcement of the Bond Indenture, provided that such direction is in accordance with law and the provisions of the Bond Indenture (including indemnity to the Bond Trustee) and, in the sole judgment of the Bond Trustee is not unduly prejudicial to the interest of Bondholders not joining in such direction and provided, further, that such right shall not impair the right of the Bond Trustee in its discretion to take any other action under the Bond Indenture which it may deem proper and which is not inconsistent with such direction by Bondholders. Individual Bondholder Action Restricted. The Bond Indenture provides that: (a) No Holder of any Bond shall have any right to institute any suit, action or proceeding in equity or at law for the enforcement of the Bond Indenture or for the execution of any trust thereunder or for any remedy thereunder unless: (i) an Event of Default has occurred and the Bond Trustee is deemed to have notice or, with respect to certain Events or Default, has actual knowledge; (ii) the Holders of at least twenty-five percent (25%) in aggregate principal amount of Bonds Outstanding shall have made written request to the Bond Trustee to proceed to exercise powers granted or to institute such action, suit or proceeding in its own name; (iii) such Bondholders shall have offered the Bond Trustee indemnity; (iv) the Bond Trustee shall have failed or refused to exercise the powers granted in the Bond Indenture or to institute such action, suit or proceedings in its own name for a period of 60 days after receipt of such request and offer of indemnity; and (v) during such 60-day period no direction inconsistent with such written request has been delivered to the Bond Trustee by the Holders of a majority in aggregate principal amount of Bonds then Outstanding. (b) No one or more Holders of Bonds shall have any right in any manner whatsoever to affect, disturb or prejudice the security or to enforce any right under the Bond Indenture except in the manner therein provided and for the equal benefit of the Holders of all Bonds Outstanding. (c) The right of the Holder of any Bond (i) to receive timely payment of the principal of or interest on such Bond or (ii) to institute suit for the enforcement of payment shall not be impaired; provided, however, no Holder of any Bond may institute or prosecute any such suit or enter judgment therein if the institution or prosecution of such suit would result in the surrender, impairment, waiver or loss of the lien of the Bond Indenture on the moneys, funds and properties pledged thereunder. D-23

172 Waiver of Event of Default. The Bond Indenture provides that: (a) No delay or omission of the Bond Trustee or of any Holder of the Bonds to exercise any right or power accruing upon any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein. Every power and remedy given to the Bond Trustee and the Holders of the Bonds, respectively, may be exercised from time to time and as often as may be deemed expedient by them. (b) The Bond Trustee may waive any Event of Default which in its opinion shall have been remedied before the entry of final judgment or decree in any suit, action or proceeding instituted by it, or before the completion of the enforcement of any other remedy. (c) The Bond Trustee, upon the written request of the Holders of at least a majority of the aggregate principal amount of Bonds then Outstanding, shall waive any Event of Default and its consequences; provided, however, that except for any acceleration of payment which is subsequently annulled, a default in the payment of the principal amount of, premium, if any, or interest on any Bond, when the same shall become due and payable by the terms thereof or upon call for redemption, may not be waived without the written consent of the Holders of all the Bonds at the time Outstanding. (d) In case of any waiver by the Bond Trustee of an Event of Default, the District, the Bond Trustee and the Bondholders shall be restored to their former positions and rights, respectively, but no such waiver shall extend to any subsequent or other Event of Default or impair any right consequent thereon. The Bond Trustee shall not be responsible to any one for waiving or refraining from waiving any Event of Default in accordance with the provisions of the Bond Indenture. Supplements Not Requiring Consent of Bondholders. The Bond Indenture provides that the District and the Bond Trustee may, without the consent of or notice to any of the Holders of the Bonds, enter into one or more Supplements for one or more of the following purposes: (a) to cure any ambiguity or formal defect or omission; (b) to correct or supplement any inconsistent provisions which shall not materially adversely affect the interest of the Holders; (c) to grant or confer upon the Holders any additional rights, remedies, powers or authority that may lawfully be granted or conferred upon them; (d) Bonds; and (e) to secure additional revenues or provide additional security or reserves for payment of the to preserve federal income tax exemption. D-24

173 Supplements Requiring Consent of Bondholders. The Bond Indenture provides that: (a) Other than the Supplements referred to above and subject to certain rights of the Insurer set forth in the Bond Indenture, the Holders of not less than a majority in aggregate principal amount of Bonds then Outstanding shall have the right, from time to time, to consent to and approve the execution by the District and the Bond Trustee of such Supplements as shall be deemed necessary and desirable by the District for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in the Bond Indenture, except that no such Supplement may: (i) extend the stated maturity of or time for paying interest on any Bond or reduce the principal amount of or the redemption premium or rate of interest payable on any Bond without the consent of the Holder of such Bond; (ii) prefer or give a priority to any Bond over any other Bond without the consent of the Holder of the Bond then Outstanding not receiving such preference or priority; or (iii) reduce the aggregate principal amount of Bonds then Outstanding the consent of the Holders of which is required to authorize such Supplement without the consent of the Holders of all Bonds then Outstanding. (b) If at any time the District shall request a Bond Trustee to enter into a Supplement pursuant to this Section, the Bond Trustee shall, upon being satisfactorily indemnified with respect to expenses, cause notice of the proposed Supplement to be mailed by first-class mail, postage prepaid, to all Holders of Bonds then Outstanding at their addresses as they appear on the registration books. The Bond Trustee shall not, however, be subject to any liability to any Bondholder by reason of its failure to mail, or the failure of such Bondholder to receive, such notice, and any such failure shall not affect the validity of such Supplement when consented to and approved. Such notice shall briefly set forth the nature of the proposed Supplement and shall state that copies thereof are on file at the office of the Bond Trustee for inspection by all Bondholders. (c) If within such period, not exceeding three years, as shall be prescribed by the District, following the first publication of such notice, the Bond Trustee shall receive an instrument purporting to be executed by the requisite number of Holders for the Supplement in question which instrument shall refer to the proposed Supplement described in such notice and shall specifically consent to and approve the execution thereof in substantially the form of the copy thereof referred to in such notice as on file with the Bond Trustee, the Bond Trustee may execute such Supplement in substantially such form, without liability or responsibility to any Holder of any Bond. (d) Any such consent shall be binding upon the Holder of the Bond giving such consent and upon any subsequent Holder of such Bond and of any Bond issued in exchange therefor (whether or not such subsequent Holder has notice thereof), unless such consent is revoked in writing by the Holder of such Bond giving such consent or by a subsequent Holder thereof by filing with the Bond Trustee, prior to the execution by the Bond Trustee of such Supplement, such revocation. At any time after the Holders of the required principal amount or number of Bonds shall have filed their consents to the Supplement, the Bond Trustee shall file with the District a written statement to that effect. Such written statement shall be conclusive that such consents have been filed. D-25

174 (e) If the Holders of the required principal amount or number of the Bonds Outstanding shall have consented to and approved the execution of such Supplement as provided above, no Holder of any Bond shall have any right to object to the execution thereof, or to object to any of the terms and provisions contained therein or the operation thereof, or in any manner to question the propriety of the execution thereof, or to enjoin or restrain the Bond Trustee or the District from executing the same or from taking any action pursuant to the provisions thereof. Defeasance. The Bond Indenture provides for its termination and discharge when, among other things, there is payment for and discharge of all of the Bonds or, except for certain provisions which survive until such payment, when irrevocable provision is made for payment and discharge of all of the Bonds at the maturity or redemption date thereof. Rights of Insurer. The Insurer has the right to control certain remedies, including the waiver of certain Events of Default, and approve Supplements as well as other rights so long as the Insurance Policy is in effect and the Insurer is not in default thereunder. SUMMARY OF SERIES 12 NOTE INDENTURE All terms used in Supplemental Master Trust Indenture No. 1, Supplemental Master Trust Indenture No. 2, Supplemental Master Trust Indenture No. 3, Supplemental Master Trust Indenture No. 4, Supplemental Master Trust Indenture No. 5, Supplemental Master Trust Indenture No. 6, Supplemental Master Trust Indenture No. 7, Supplemental Master Trust Indenture No. 8, Supplemental Master Trust Indenture No. 9, Supplemental Master Trust Indenture No. 10, Supplemental Master Trust Indenture No. 11, and the Series 12 Note Indenture (collectively, the Supplemental Master Indentures ) which are defined in the Master Indenture shall have the meanings assigned to them in the Master Indenture. An Event of Default under the Bond Indenture is an Event of Default under the Series 12 Note Indenture. Creation of Series of Notes. The Series 12 Note Indenture creates and authorizes a series of Notes of the District which shall be dated as of July 30, 2008, shall be designated Spartanburg Regional Health Services District, Inc., Series 12 Note, and shall be payable in such amounts, at such times and in such manner and shall have such other terms and provisions as are set forth in the form of the Series 12 Note. The face amount of the Series 12 Note is limited to the amount initially authorized by such Supplement, except for any Note authenticated and delivered in lieu of another Note, as provided in the Master Indenture with respect to Notes mutilated, destroyed, lost or stolen, or upon transfer of registration or exchange of such Notes. Payments on the Notes and Credits. The District agrees to make payments upon the Notes at the times and in the amounts equal to the amounts to be paid as principal or redemption price of or interest on the Bonds from time to time Outstanding under the Bond Indenture as the same shall become due whether at maturity, upon redemption, by declaration of acceleration or otherwise. In addition, the District shall pay all amounts required by the Bond Indenture to be deposited into the Reserve Fund in such amounts and at such times as required by the Bond Indenture. D-26

175 Event of Default. The occurrence of a violation of any covenant under the Bond Indenture shall be an Event of Default under the Series 12 Note Indenture. Additional Covenants and Restrictions for the Benefit of the Insurer. So long as an Insurer Default has not occurred, the Insurer covenants set forth below are for the sole benefit of the Insurer and which apply in addition to, and not in substitution of, the provisions of the Master Indenture as described above under the heading THE MASTER INDENTURE. The Insurer Covenants shall only be applicable during the period any Bonds are Outstanding and the Insurer has not lost its consent rights pursuant to the provisions of the Bond Indenture. The Insurer Covenants may only be enforced by the Insurer or the Master Trustee on behalf of the Insurer and may be modified, amended or waived at any time with the prior written consent of the Insurer and without the consent of the Master Trustee, the Bond Trustee, any Related Bond Trustee, any Noteholder of the Series 12 Note, or any other Obligation or any owner of the Bonds or any other Related Bonds. Section 5.03(a) of the Master Indenture is amended thereto to state, but solely for the benefit of the Insurer: (a) The Obligated Group shall maintain for each Fiscal Year a Long-Term Debt Service Coverage Ratio at least at Compliance with the Long-Term Debt Service Coverage Ratio shall be demonstrated at the end of each Fiscal Year by a Certificate of the Obligated Group Agent based on the most recent audited financial statements of the Obligated Group for the Historic Test Period. Such Certificate of the Obligated Group Agent shall be furnished at the same time as such audit is provided to the Insurer. If at the end of any such Fiscal Year the Obligated Group is not in compliance with the Long-Term Debt Service Coverage Ratio, the Obligated Group Agent shall promptly (but not later than 60 days after delivery of the audited financial statements for the Historic Test Period and accompanying Certificate of the Obligated Group Agent) employ a Consultant acceptable to the Insurer 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 Issuer, the Master Trustee and the Insurer no later than sixty (60) days following the date of engagement. Within thirty (30) days of receipt of such Consultant s report the Obligated Group Agent shall deliver to the District, the Master Trustee and the Insurer: (i) a certified copy of a resolution adopted by the Board of Trustees of the Obligated Group accepting such report, (ii) a report setting forth in detail the proposed steps the Obligated Group intends to take in order to implement such recommendations, and (ii) quarterly reports (within 45 days of the end of each fiscal quarter) demonstrating the progress made by the Obligated Group in implementing the recommendations. As long as the Obligated Group is reasonably complying with the recommendations of the Consultant, an Event of Default will be triggered only upon (i) failure to retain a Consultant, or (ii) failure to maintain a Long-Term Debt Service Coverage Ratio of at least 1.0 times for the Historic Test Period. D-27

176 The following is hereby added to the Master Indenture thereto for the sole benefit of the Insurer: Liquidity Covenant. The Obligated Group Agent hereby covenants to deliver to the Insurer and the Master Trustee within 45 days after the close of the sixth month of each Fiscal Year and within 150 days after the end of each Fiscal Year a Certificate of the Obligated Group Agent demonstrating that Days Cash on Hand as of the last day of such sixth month or such Fiscal Year based on the audited financial statements of the Obligated Group for the Historic Test Period, as the case may be, was not less than 75. If Days Cash on Hand as so calculated by such Certificate of the Obligated Group Agent is less than 75 as of the last day of such sixth month or such Fiscal Year, as the case may be, the Obligated Group at its expense shall retain within 45 days (after delivery of a Certificate of the Obligated Group Agent) a Consultant, the identify of and scope of work to be performed to be acceptable to the Insurer, to make recommendations with respect to the rates, fees and charges of the members and the Obligated Group s methods of operation and other factors affecting its financial condition in order to increase Days Cash on Hand to at least 75. A copy of the Consultant s report and recommendations, if any, shall be filed with each member, the Master Trustee, and the Insurer within 60 days of retaining the Consultant. Each member of the Obligated Group shall follow each recommendation of the Consultant applicable to it; provided, however, that a member need not follow any such recommendation in any year in which there is delivered to the Insurer and the Master Trustee an Opinion of Independent Counsel that such member cannot follow such recommendation without violating applicable law. This Section shall not be construed to prohibit any member from serving indigent patients to the extent required for such member to continue its qualification as a tax-exempt organization or from serving any other class or classes of patients without charge or at reduced rates so long as such service does not prevent the Obligated Group from satisfying the other requirements of this Section. Within thirty (30) days of receipt of such Consultant s report, the Obligated Group Agent shall deliver to the Issuer, the Master Trustee and the Insurer: (i) a certified copy of a resolution adopted by the governing board of each member of the Obligated Group accepting such report, (ii) a report setting forth in detail the proposed steps the Obligated Group intends to take in order to implement such recommendations, and (ii) quarterly reports (within 45 days after the end of each fiscal quarter) demonstrating the progress made by the Obligated Group in implementing the recommendations. As long as the Obligated Group is reasonably complying with the recommendations of the Consultant, an event of default hereunder will be triggered only upon (i) failure to retain a Consultant, or (ii) failure to maintain Days Cash on Hand of not less than 65 as evidenced by a Certificate of the Obligated Group Agent. Sections 5.04(a) and (d) of the Master Indenture shall be amended thereto as follows, but solely for the benefit of the Insurer: Limitation on Incurrence of Additional Indebtedness. Any member of the Obligated Group shall be permitted to incur additional Indebtedness as follows, provided that no such Indebtedness may be incurred if such Indebtedness would cause the Capitalization Ratio (excluding any temporarily restricted net assets) to exceed 65%: D-28

177 (a) Long-Term Indebtedness, provided the Long-Term Debt Service Coverage Ratio for the Historic Test Period (calculated for each of the prior two Fiscal Years based on the audited financial statements of the Obligated Group) was not less than 1.25, as evidenced by a Certificate of the Obligated Group Agent, calculated to include both the Outstanding and the proposed Indebtedness; or the Long-Term Debt Service Coverage Ratio is not less than 1.20 and a written report of a Consultant demonstrating and concluding that the forecasted average Long-Term Debt Service Coverage Ratio for the two Fiscal Years commencing after the incurrence of the proposed Additional Long-Term Indebtedness would be not less than (d) Short-Term Indebtedness, provided such Indebtedness shall not exceed twenty percent (20%) of the Net Patient Revenues of the Obligated Group for the Historic Test Period. The following sections shall be added to the Master Indenture thereto, but solely for the benefit of the Insurer: Capitalization Ratio. The Capitalization Ratio of the Obligated Group may not exceed 0.65:1. The Capitalization Ratio shall be tested (i) at the end of each Fiscal Year, based on the Historic Test Period for which the last audited financial statements of the Obligated Group are available, and (ii) prior to the issuance of any Additional Long-Term Indebtedness (the Testing Date ). If the Obligated Group is not in compliance with the Capitalization Ratio, the Obligated Group Agent shall promptly (not more than 60 days after delivery of financial statements and accompanying Certificate of the Obligated Group Agent) employ a Consultant acceptable to the Insurer 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 Issuer, the Master Trustee and the Insurer no later than sixty (60) days following the date of engagement. Within thirty (30) days of receipt of such Consultant s report the Obligated Group Agent shall deliver to the Issuer, the Master Trustee and the Insurer: (i) a certified copy of a resolution adopted by the Board of Trustees of the District and the governing board of each member of the Obligated Group accepting such report, (ii) a report setting forth in detail the proposed steps the Obligated Group intends to take in order to implement such recommendations, and (ii) quarterly reports (within 45 days after the end of each fiscal quarter) demonstrating the progress made by the Obligated Group in implementing the recommendations. As long as the Obligated Group is reasonably complying with the recommendations of the independent Consultant, an event of default will be triggered only upon (i) failure to retain a Consultant, or (ii) incurrence of additional Indebtedness when the Capitalization Ratio, as evidenced by a Certificate of the Obligated Group Agent based on the audited financial statements of the Obligated Group for the Historic Test Period, exceeds 0.70:1. Section 5.05 of the Master Indenture is amended thereto to state the following, but solely for the benefit of the Insurer: D-29

178 Sale, Lease or Other Disposition of Property. Any transfer of non-cash assets pursuant to Section 5.05(a) through (f) thereof shall require that the Long-Term Debt Service Coverage Ratio not decline by more than 20% as a result of such transfer. Any transfer of cash assets pursuant to Section 5.05(g) thereof are permitted only if (i) such transfer would not cause the Obligated Group to be in violation of the Liquidity Covenant set forth in Section 9 therein, and (ii) such transfer would not result in a decline in the Obligated Group s unrestricted cash and investments (as of the last audited financial statements of the Obligated Group by more than 20% as a result of such transfer. Section 5.06 of the Master Indenture shall be amended thereto as follows, but solely for the benefit of the Insurer: Consolidation, Mergers, Conveyances. Add: The Obligated Group shall comply with Section 5.06 of the Master Indenture, provided that the Long-Term Debt Service Coverage Ratio shall not decline by more than 20% as a result of such transfer based on the most recent audited financial statements of the Obligated Group. Section 5.07(d) thereof shall be added to the Master Indenture, but solely for the benefit of the Insurer: (d) any admission to the Obligated Group shall not be permitted if such action would result in the Long-Term Debt Service Coverage Ratio declining by more than twenty percent (20%) based on the most recent audited financial statements of the Obligated Group. Section 5.09(v) thereof shall be added to the Master Indenture, but solely for the benefit of the Insurer: (v) any withdrawal from the Obligated Group shall not be permitted if such action would result in the Long-Term Debt Service Coverage Ratio declining by more than twenty percent (20%) based on the most recent audited financial statements of the Obligated Group. Section 5.11(viii) of the Master Indenture shall be amended thereto as follows, but solely for the benefit of the Insurer: (viii) Any Lien on Property, Plant and Equipment of the Obligated Group if, prior to the creation of such Lien, an Officer s Certificate is delivered to the Master Trustee stating that (A) after giving effect to the Lien, such Lien is not more than the lesser of twenty-five percent (25%) of the Net Patient Revenues of the Obligated Group or twenty-five percent (25%) of the net value of Property, Plant and Equipment. The Obligated Group shall comply with Section 5.13 of the Master Indenture. D-30

179 The following additional sections shall be added to the Master Indenture thereto, but solely for the benefit of the Insurer: Hedge Agreements. Any member of the Obligated Group may enter into an interest rate hedge agreement (a Hedge Agreement ) if the following conditions are met: (i) the Hedge Agreement must be entered into to manage interest costs related to, or a hedge against (a) assets then held by the Obligated Group, or (b) Indebtedness then outstanding, or (c) Indebtedness proposed to be incurred within the next twelve (12) months; and (ii) the Hedge Agreement shall not contain any leverage element or multiplier component greater than 1.0x unless there is a matching hedge arrangement which effectively off-sets the exposure from any such element or component. Unless otherwise consented to by the Insurer, the net settlement, breakage or other termination amount then in effect, which is uninsured, shall be subordinate in right of payment to debt service on the Notes, the Obligations and on any debt on parity with the Bonds. In addition, such member shall not voluntarily terminate the Hedge Agreement unless it demonstrates to the satisfaction of the Insurer prior to making such termination amount that (a) after such payment the Obligated Group will not be in default of the Liquidity Covenant set forth in Section 9 thereof, and (b) such payment will not cause the Obligated Group to be in default under the Master Indenture, as amended or supplemented, including but not limited to, any monetary obligations thereunder. All counterparties or guarantors (including without limitation a party agreeing to enter, with the District or Note Obligor, a substitute or replacement agreement to such Hedge Agreement) to the Hedge Agreement must at the time of entering such Hedge Agreement have a rating of at least A and A2 by Standard & Poor s ( S&P ) and Moody s Investors Service ( Moody s ). If the counterparty or guarantor s rating falls below A- or A3 by either S&P or Moody s, the Obligated Group shall cause the counterparty or guarantor to execute a credit support annex to the Hedge Agreement, which credit support annex shall be acceptable to the Insurer. If the counterparty or the guarantor s long-term unsecured rating falls below certain minimum credit ratings that may be required by the Insurer, then a replacement counterparty or guarantor, acceptable to the Insurer, shall be required. SWAPS AND RELATED MATTERS The following summaries the provisions of a new Article XII added to the Master Indenture pursuant to the Amendatory Master Trust Indenture No. 1 dated as of June 1, 2008 between the District and the Master Trustee. Creation of Hedge Obligations (a) The Notes and Guaranties permitted to be issued under the Master Trust Indenture may include, among other permitted purposes, Notes and Guaranties to secure the obligations of the District or any other Note Obligor under or related to a Hedge Agreement (each, a Hedge Note ). Given the likelihood that the size of the obligations secured by a Hedge Note will fluctuate over time, any Hedge Note may be issued in such notional dollar denomination or temporal schedule thereof (on the basis of which the actual amount owing thereunder is calculated) or on such other basis as may be determined by the District and set forth in the Related Supplement pursuant to which such Hedge Note is issued. Also, a Hedge Note may be issued to secure all obligations that shall become due under a related Hedge Agreement without reference or limitation D-31

180 as to specific amounts that may become due. Except as otherwise provided in this section and in the section of the Master Indenture described below under Treatment of Hedge Agreements and Hedge Notes for Voting, Application of Revenues and Other Moneys After Default and Other Master Indenture Purposes, each Hedge Note shall be deemed to constitute a Note or Guaranty, as applicable, Outstanding at any time of determination in the principal amount equal to the amount actually owing at such time under such Hedge Note corresponding to a payment obligation then due and unpaid under the related Hedge Agreement; provided, however, that so long as any amount actually owing under a Hedge Agreement subject to a Hedge Note is paid (including without limitation paid through refinancing) within ten (10) Business Days of the due date, then THE CORRESPONDING OBLIGATION UNDER SUCH HEDGE NOTE SHALL IN NO EVENT BE CONSIDERED INDEBTEDNESS OUTSTANDING FOR ANY PURPOSE (SUCH AS ANY RATE COVENANT OR ADDITIONAL INDEBTEDNESS TEST) AT ANY TIME UNDER THE MASTER TRUST INDENTURE. Except as provided in the preceding sentence and in Sections 5.19 and of the Master Indenture, and notwithstanding any other provision in the Master Indenture to the contrary, amounts owing under (or any notional or other amount stated in) any Hedge Agreement or Hedge Note shall not otherwise be considered Indebtedness for purposes of calculating any Long-Term Debt Service Requirement or for any other purposes of the Master Indenture. Notwithstanding anything in the Master Indenture to the contrary, Hedge Notes shall not constitute Additional Indebtedness for purposes of any limitations on the incurrence thereof under the Master Indenture. The Master Trustee shall be entitled to rely fully and without responsibility on a written certificate delivered by the Swap Counterparty at any time as to the amount owing at such time under the applicable Hedge Agreement and Hedge Note and, absent notice of such effect from the Swap Counterparty from time to time, shall be entitled to assume for its purposes that no amounts are then owing thereunder until otherwise notified by the Swap Counterparty. (b) The Related Supplement pursuant to which a Hedge Note is issued may provide that (i) the District or other applicable Note Obligor shall pay the amounts owing thereunder directly to the applicable Swap Counterparty (without funding through the Master Trustee) at the dates and in the places and manner provided with respect to the Hedge Agreement; and that (ii) the District or any Note Obligor shall give (or shall cause to be given) to the Master Trustee notice of each Regularly Scheduled payment or Other Payment secured by such Hedge Note, specifying the amount paid directly to the Swap Counterparty and identifying that such payment is made in respect of the Hedge Note. (c) The Related Supplement pursuant to which a Hedge Note is issued may also provide (i) that by the District s execution of such Related Supplement, the District or other applicable Note Obligor for itself and, if applicable, as agent of one or more other members of the Obligated Group, binds all such parties, jointly and severally, absolutely and unconditionally, to promptly pay or cause to be paid the amount owing to the applicable Swap Counterparty in respect of Regularly Scheduled Payments and/or any Other Payments owing under the applicable Hedge Agreement from time to time, subject to any applicable restrictions in the Master Indenture and such Related Supplement; (ii) that the Master Trustee shall not take any of the following actions (or any one or subset thereof to the extent provide in such Related Supplement) with respect to such Hedge Note without the written consent of the Holder thereof: (A) any acceleration of such Hedge Note (or annulment thereof) under the provisions of the Master Trust Indenture described above under the caption, THE MASTER INDENTURE DEFAULT AND REMEDIES Acceleration, Annulment of Acceleration ; (B) the exercise of any remedies under the provisions of the Master Trust Indenture described above under the caption, THE MASTER INDENTURE DEFAULT AND REMEDIES Additional Remedies and Enforcement of Remedies ; (C) any waiver of any Event of Default resulting from the nonpayment of any amount owed under such Hedge Note; (D) as to such Hedge Note or the Supplement D-32

181 under which it is issued, execute or consent to any Supplement contrary to the provisions of the Master Trust Indenture described above under the caption, THE MASTER INDENTURE DEFAULT AND REMEDIES Supplements Requiring Consent of Noteholders ; or (E) supplement or amend the Master Indenture in a manner that would materially adversely effect the rights of the Swap Counterparty (or its related guarantor or the like) in relation to such Hedge Note or the related Hedge Agreement; and (iii) that an event of default, termination event or other condition described in such Hedge Obligation or the related Hedge Agreement shall constitute an Event of Default as contemplated by the provisions of the Master Trust Indenture described above under the caption, THE MASTER INDENTURE DEFAULT AND REMEDIES Events of Default. Treatment of Hedge Agreements and Hedge Notes for Voting, Application of Revenues and Other Moneys After Default and other Master Indenture Purposes (a) Treatment for Purposes of Application of Revenues and Other Moneys After Default. The Related Supplement pursuant to which a Hedge Note is issued may designate the extent, if any, to which payments owing by the District or other applicable Note Obligor under such Hedge Note are taken into account for purposes of the provisions of the Master Indenture described above in this Appendix under the caption THE MASTER INDENTURE DEFAULT AND REMEDIES Application of Revenues and Other Moneys After Default, subject to the following: (i) such payments owing in respect of Regularly Scheduled Payments may be designated in such Related Supplement as: (A) being deemed interest for such purposes; (B) being deemed principal for such purposes; (C) being deemed neither interest or principal for such purposes but secured by a pledge of the Gross Receipts on a basis subordinate to the payments of interest and principal for such purposes; or (D) being unsecured; (ii) such payments owing in respect of Other Payments may be designated in such Related Supplement as: (A) being deemed principal for such purposes; (B) being deemed neither interest or principal for such purposes but secured by a pledge of the Gross Receipts on a basis subordinate to the payments of interest and principal for such purposes; or (C) being unsecured; (iii) a Related Supplement may (but need not) provide dollar limitations or other means for determining the extent to which amounts owing in respect of Regularly Scheduled Payments and/or Other Payments fall within any one or more of the subcategories referred to in the preceding clauses (i) and/or (ii); and (iv) in making any application contemplated by the preceding clauses (i) through (iii) the Master Trustee shall be entitled to rely conclusively on a certificate of the applicable Swap Counterparty (on which certificate the Master Trustee shall be entitled to conclusively rely) as to the amounts then owing under any Hedge Note in respect of Regularly Scheduled Payments and Other Payments and, in the absence of any such certificate with respect to a Hedge Note, the Master Trustee shall likewise be entitled to assume that no such amounts are then owing under such Hedge Note until such certificate is so provided; and (b) Treatment of Hedge Agreement Payments and Receipts for Certain Definitions. Actual payments and receipts by the District or any other Note Obligor in respect of any Hedge Agreement (whether D-33

182 through a Hedge Note or otherwise shall not be taken into account in any mathematical computation of the amount of Gross Receipts or Operating Revenues for any purpose under the Master Indenture. (c) Treatment of Hedge Agreement Valuations for Certain Definitions. The mark-to-market or other valuation of any Hedge Agreement (or any change therein) shall not be taken account for purposes of any mathematical computation of the amounts of Income Available for Debt Service for any purpose under the Master Indenture. (d) Voting and Other Provisions. Except as expressly provided to the contrary pursuant to the Master Indenture or any Hedge Note issued in accordance with the Master Indenture, Hedge Notes shall not be considered Outstanding or otherwise taken into account voting and other purposes of the provisions of the Master Indenture. Notwithstanding anything in the Master Indenture to the contrary but subject to the following sentence, Hedge Agreements and Hedge Notes shall not constitute Additional Indebtedness for purposes of any limitations on the incurrence thereof under the Master Indenture. Hedge Notes shall, however, constitute Indebtedness for purposes of the Master Indenture described above under the caption, THE MASTER INDENTURE NOTES ISSUED UNDER MASTER INDENTURE Limitations on Creation of Liens. (e) No Interest on Hedge Notes. For purposes of all provisions of the Master Indenture, no interest shall be deemed to actually accrue on any Hedge Agreement or Hedge Note. For the avoidance of doubt, however, the preceding sentence shall in no manner limit any obligation for the payment of interest as such under the terms of any Hedge Agreement itself. (f) Avoidance of Double-Counting. To avoid double-counting, in no event shall the obligation evidenced by any Hedge Note be considered duplicative of any corresponding obligations of the District or other Note Obligor under the related Hedge Agreement. (g) Liens Securing Hedge Agreements. Liens consisting of pledges, pursuant to a Supplement to the Master Indenture, a Hedge Agreement, a Hedge Note, a Credit Support Annex or other collateral undertaking on the part of the District or any other Note Obligor to secure amounts owing under any Hedge Agreement, shall henceforth constitute Permitted Liens for purposes of the provisions of the Master Trust Indenture described above under the captions, THE MASTER INDENTURE NOTES ISSUED UNDER MASTER INDENTURE Limitations on Creation of Liens and THE MASTER INDENTURE NOTES ISSUED UNDER MASTER INDENTURE Restrictions on Encumbering Revenues, and the other provisions of the Master Indenture (in addition to the items heretofore constituting Permitted Liens ). Such Liens will not constitute Liens included within the term Encumbered but will, instead, constitute Liens included within the term Unencumbered. In addition and for the avoidance of doubt, the provisions of the Master Indenture described above under the caption THE MASTER INDENTURE NOTES ISSUED UNDER MASTER INDENTURE Sale, Lease or Other Disposition of Property will not be construed to prohibit any realization, by the applicable secured party, upon any such Liens referred to in this paragraph. Additional Requirements Applicable to Hedge Agreements and Hedge Notes so Long as any 2002 Bonds Remain Outstanding The Master Indenture also provides that, for so long as any part of the 2002 Bonds remains Outstanding, the prior written consent of the bond insurer for the 2002 Bonds will be required for the entering of any Hedge Agreement, provided that notwithstanding the foregoing or anything in the Master Indenture to D-34

183 the contrary, such consent shall not be required if the following conditions are satisfied: (a) the Hedge Agreement is entered into as a hedge against swaps outstanding (as in basis swaps or reverse swaps) or against indebtedness then outstanding or debt to be issued or as a means of achieving forward transactions or against assets held at the time of the execution of the Hedge Agreement; (b) the Hedge Agreement shall not contain any leverage element or multiplier component greater than 1.0x unless there is a matching Hedge Agreement which effectively off-sets the exposure from any such element or component; (c) unless the obligation of the Obligated Group in respect of such Hedge Agreement to be executed is insured, the net settlement, breakage or other termination amount of uninsured Hedge Agreements then in effect and the Hedge Agreement to be executed, determined at the time of execution and delivery of the Hedge Agreement to be executed would not result in less than 75 Days Cash on Hand (tested with respect to the Historic Test Period); (d) the long-term unsecured, unsubordinated debt securities of the Swap Counterparty or its guarantor (including without limitation a party agreeing to enter, with the District or such Note Obligor, a substitute or replacement agreement to such Hedge Agreement) or insurer thereunder, if applicable, are rated, at the time that such Hedge Agreement is entered into, as follows: A2 or higher by Moody s Investors Service, Inc., A or higher by Standard & Poor s Ratings Service, a division of The McGraw-Hill Companies, Inc. or A or higher by Fitch Ratings, or are rated in any comparable rating category or higher by another nationallyrecognized rating agency in the event that none of the aforementioned entities provides ratings of such securities; and (e) the Hedge Agreement to be executed contains no provisions enabling it to be terminated without the consent of the District or other member of the Obligated Group for events related to the Swap Counterparty (except as provided in a replacement transaction agreement). For purposes of clause (c) of the preceding paragraph, (A) Days Cash on Hand means, for the period tested, the aggregate amount of unrestricted and unencumbered (I) cash, (II) cash equivalents, and (III) marketable debt and equity securities internally designated for capital replacement and expansion, divided by the quotient of (aa) Net Operating Expense, excluding depreciation expense, divided by (bb) the number of calendar days in the period; and (B) Net Operating Expenses means, for the period tested, total expenses of the Obligated Group less depreciation and amortization. The Master Indenture may provide for additional restrictions or other protections for the benefit of the bond insurer for the 2002 Bonds or the Insurer, provided that such additional restrictions or other protections may be for the sole benefit of such parties and are thus not described or summarized herein. The provisions of the Master Indenture described in this section and any other provisions of Amendatory Master Trust Indenture No. 1 dated as of June 1, 2008, provide for their effectiveness only for so long as any part of the Series 2002 Bonds remains Outstanding, are for the sole benefit of the bond insurer of the 2002 Bonds and are enforceable solely by such bond insurer. A failure to comply with any such provisions will not constitute an Event of Default under the Master Indenture unless so directed in writing by such bond insurer. SUMMARY OF SUPPLEMENTAL MASTER TRUST INDENTURE FOR HEDGE NOTE NO. 1; HEDGE NOTE NO. 1; SUPPLEMENTAL MASTER TRUST INDENTURE FOR HEDGE NOTE NO. 2; AND HEDGE NOTE NO. 2 Supplemental Master Trust Indenture for Hedge Note No. 1 and Supplemental Master Trust Indenture for Hedge Note No. 2 are entered among the parties to the Master Indenture as of June 1, 2008 ( Hedge Supplements Nos. 1-2 ). Pursuant to the Hedge Supplements, the District will issue the Hedge D-35

184 Notes described below. All terms used in the Hedge Supplements which are defined in the Master Indenture shall have the meanings assigned to them in the Master Indenture. Creation of Hedge Notes Hedge Supplement No. 1 creates and authorizes a Hedge Note of the District dated June 1, 2008, designated Spartanburg Regional Health Services District, Inc. Hedge Note No. 1, ( Hedge Note No. 1 ) issued in the initial Notional Amount (for reference purposes) of $90,770,000 and payable in such amounts, at such times and in such manner and having such other terms and provisions as are set forth therein. Hedge Supplement No. 2 creates and authorizes a Hedge Note of the District dated June 1, 2008, designated Spartanburg Regional Health Services District, Inc. Hedge Note No. 2, ( Hedge Note No. 2 and together with Hedge Note No. 1, Hedge Notes Nos. 1-2 ) issued in the initial Notional Amount (for reference purposes) of $20,045,000 and payable in such amounts, at such times and in such manner and having such other terms and provisions as are set forth therein. Hedge Note No. 1 and Hedge Note No. 2 are issued to evidence the amounts owing by the District and the Obligated Group under the 2008 Swap Agreements described in the front part of this Official Statement under the caption PLAN OF FINANCE - INTEREST RATE SWAP AGREEMENTS. The Notional Amounts referred to in Hedge Notes Nos. 1-2 are solely for reference purposes and do not limit the amounts owing thereunder except to the specific extent (if any) described therein. The District is required to make payments upon Hedge Notes Nos. 1-2 directly to Swap Provider (without funding through the Master Trustee) at the dates and in places and manner so provided in the documents related to the 2008 Swap Agreements. Defined Terms For purposes of Hedge Supplements Nos. 1-2 as well as Hedge Notes Nos. 1-2 (as respectively applicable): Notional Amount means (a) with respect to Hedge Note No. 1, $90,770,000 and with respect to Hedge Note No. 2, $20,045,000 and (b) thereafter such respective amount adjusted, from time to time, downward to any reduced amount provided in a written notice from the Swap Provider to the Master Trustee, in the form attached as an exhibit to such Hedge Notes, respectively, to the effect that the notional amount of the related respective Hedge Agreement has been reduced to the new amount stated in such notice. The Master Trustee will be entitled to rely conclusively on the statements set forth in any such notice. Other Payments means any settlement amount and any other amounts payable by the District, other than Regularly Scheduled Payments, with respect to the related respective 2008 Swap Agreement pursuant to the Master Agreement and the Swap Confirmation. D-36

185 Hedge Notes By its execution of each of Hedge Supplements Nos. 1-2, but only for so long the Hedge Notes Nos. 1-2 remain respectively outstanding, the District for itself and as agent of the Obligated Group binds all such parties, jointly and severally, absolutely and unconditionally, to promptly pay or cause to be paid the amount owing to the Swap Provider in respect of Regularly Scheduled Payments and Other Payments owing under the related respective 2008 Swap Agreement from time to time. Such joint and several obligation is NOT LIMITED by the Notional Amount applicable to such respective Hedge Notes or otherwise, provided that such joint and several obligation applicable to each such Hedge Note at any one time: (a) (b) to the extent pertaining to Regularly Scheduled Payments, will be deemed evidenced by such Hedge Note and secured by a pledge of the Gross Receipts (on parity with the security interest in Gross Receipts securing interest on all Notes or Guaranties issued and outstanding under the Master Indenture) as provided therein and, for purposes of the provisions of the Master Indenture described above in this Appendix under the caption THE MASTER INDENTURE DEFAULT AND REMEDIES Application of Revenues and Other Moneys After Default, will accordingly be deemed to constitute interest on a Note for such purposes; and to the extent pertaining to Other Payments will be deemed evidenced by such Hedge Note (if any) and secured by a pledge of the Gross Receipts as provided therein and, for purposes of the provisions of the Master Indenture described above in this Appendix under the caption THE MASTER INDENTURE DEFAULT AND REMEDIES Application of Revenues and Other Moneys After Default, shall be deemed neither interest nor principal for such purposes but shall be secured by a pledge of the Gross Receipts on a basis immediately subordinate (on a parity with any other obligations so immediately subordinated) to the payments of interest and principal for such purposes of the Master Indenture. As security for its obligation to pay the Obligations evidenced from time to time by the Hedge Notes Nos. 1-2 with respect to the 2008 Swap Agreements, the District has agreed to comply with the terms of the Master Indenture and the District and each member of the Obligated Group has granted to the Master Trustee, pursuant to the Master Indenture, a security interest in all Gross Receipts to the extent and on such parity or other bases described above and in such Hedge Notes. Hedge Notes Nos. 1-2 and the 2008 Swap Agreements constitute a Hedge Note and Hedge Agreements, respectively, for all applicable purposes under the Master Indenture. The Form of Hedge Note (as incorporated into each of Hedge Supplements Nos. 1-2) includes language which states that the Master Trustee will not, without the consent of the Holder of such Hedge Note, either (a) extend the stated maturity of or the time for paying amounts under such Hedge Note or reduce the amounts payable thereunder (except to the extent in accordance with the terms thereof); or (b) reduce the aggregate principal amount of Notes then Outstanding the consent of the Holders of which is required to authorize a Supplement to the Master Indenture without the consent of the Holders of all Notes then Outstanding. D-37

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187 APPENDIX E FORM OF BOND COUNSEL OPINION

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189 APPENDIX E FORM OF BOND COUNSEL OPINION July 30, 2008 Board of Directors of Spartanburg Regional Health Services District, Inc. 101 East Wood Street Spartanburg, South Carolina Re: $32,590,000 Spartanburg Regional Health Services District, Inc. Hospital Revenue Refunding Bonds, Series 2008D Ladies and Gentlemen: At your request we have examined into the validity of $32,590,000 principal amount of Hospital Revenue Refunding Bonds, Series 2008D (the Bonds ), of the Spartanburg Regional Health Services District, Inc. (the District ), a body corporate and politic and a health services district created under Articles 15 and 16 of Chapter 7, Title 44, Code of Laws of South Carolina 1976, as amended. The Bonds are dated as of the date of initial issuance, and bear interest from their date payable on October 15, 2008, and semiannually thereafter on April 15 and October 15 of each year, at the rates per annum set in the Bond Indenture (hereinafter defined) and mature on April 15 in each of the years and in the principal amounts as shown in the Bond Indenture. The Bonds are subject to redemption prior to their maturity on the terms and conditions set forth therein. The Bonds recite that they are issued under and equally secured by the Series D Bond Indenture, dated as of July 1, 2008 (the Bond Indenture ), by and between the District and U.S. Bank National Association (the Bond Trustee ), and are entitled to the benefits of the Master Trust Indenture dated as of December 1, 1989 (the Master Trust Indenture ), between the District, as successor to Spartanburg Regional Medical Center, and U.S. Bank National Association (successor to NCNB National Bank of South Carolina), as master trustee (the Master Trustee ), and are issued under the authority of and pursuant to and in full compliance with the Constitution and statutes of the State of South Carolina. The Bonds further recite that they are payable solely from the Pledged Revenues, as defined in the Bond Indenture, and the District s Series 12 Note has been issued to evidence and secure the obligations of the District. Such Series 12 Note has been issued under the Master Trust Indenture and Supplemental Master Trust Indenture No. 12 dated as of July 1, 2008 (the Series 12 Note Indenture ), between the Master Trustee and the District. The District has issued to the Bond Trustee, for the ratable benefit of the holders of the Bonds, the District s Series 12 Note. We have examined (i) the Constitution and laws of the State of South Carolina; (ii) a duplicate executed copy of the Master Trust Indenture, the Series 12 Note Indenture, and the Bond Indenture; (iiii) certified or duplicate executed copies of proceedings of the District authorizing the issuance of the Bonds and the execution and delivery by the District of the Series 12 Note Indenture and the Bond Indenture; and (iv) such E-1

190 Board of Directors of Spartanburg Regional Health Services District, Inc. July 30, 2008 Page 2 other papers, instruments and documents in this matter as we have deemed necessary or advisable. We have also examined an executed Bond. Based on the foregoing, we are of the opinion that: 1. The Bonds have been duly authorized and issued in accordance with the Constitution and laws of the State of South Carolina and constitute valid and legally binding limited obligations of the District, the principal of and interest on which are payable solely out of and secured by the Pledged Revenues, as defined in the Bond Indenture. 2. The Master Trust Indenture, the Series 12 Note Indenture and the Bond Indenture have been duly authorized, executed and delivered by the District and constitute valid and binding agreements of the District enforceable in accordance with their terms. 3. Interest on the Bonds (including any original issue discount properly allocable to an owner thereof) is excludable from gross income of the registered owners thereof for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations. The opinion set forth in the preceding sentence is subject to the condition that the District comply with all requirements of the Internal Revenue Code of 1986, as amended, that must be satisfied subsequent to the issuance of the Bonds in order that interest thereon be (or continue to be) excludable from gross income for federal income tax purposes. Failure to comply with certain of such requirements may cause interest on the Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. The District has covenanted to comply with all such requirements. It should be noted, however, that for the purpose of computing the alternative minimum tax imposed on certain corporations (as defined for federal income tax purposes), interest on the Bonds is taken into account in determining adjusted current earnings. We express no opinion regarding other federal tax consequences arising with respect to the Bonds. 4. The Bonds and the interest thereon (including any original issue discount property allocable to an owner thereof) are exempt from all state, county, school, district, municipal and all other taxes or assessments of the State of South Carolina, except inheritance, estate, transfer or certain franchise taxes. It should be noted, however, that Section of the Code of Laws of South Carolina 1976, as amended, imposes upon every bank engaged in business in the State of South Carolina a fee or franchise tax computed on the entire net income of such bank, which includes interest paid on the Bonds. It is to be understood that the rights of the holders of the Bonds and the parties under the Master Trust Indenture, the Series 12 Note Indenture and the Bond Indenture and the enforceability of the Master Trust Indenture, the Series 12 Note Indenture, the Bond Indenture, or the Bonds, as the case may be, are subject to general principles of equity which may permit the exercise of judicial discretion, the exercise of the sovereign police powers of the State of South Carolina and the constitutional powers of the United States of America and to applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors rights generally. E-2

191 Board of Directors of Spartanburg Regional Health Services District, Inc. July 30, 2008 Page 3 We express no opinion herein regarding the accuracy, adequacy or completeness of the Official Statement dated July 18, 2008, relating to the Bonds, or regarding the perfection or priority of the lien on the Pledged Revenues or other funds created under the Master Trust Indenture or the Bond Indenture (or any other document or instrument mentioned herein). This opinion is given as of the date hereof, and we assume no obligation to revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention or any changes in law that may hereafter occur. Very truly yours, HAYNSWORTH SINKLER BOYD, P.A. E-3

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193 APPENDIX F SPECIMEN INSURANCE POLICY

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195 Assured Guaranty Corp Avenue of the Americas New York, NY t Financial Guaranty Insurance Policy Issuer: Policy No.: Obligations: Premium: Effective Date: Assured Guaranty Corp., a Maryland corporation ( Assured Guaranty ), in consideration of the payment of the Premium and on the terms and subject to the conditions of this Policy (which includes each endorsement hereto), hereby unconditionally and irrevocably agrees to pay to the trustee (the Trustee ) or the paying agent (the Paying Agent ) for the Obligations (as set forth in the documentation providing for the issuance of and securing the Obligations) for the benefit of the Holders, that portion of the Insured Payments which shall become Due for Payment but shall be unpaid by reason of Nonpayment. Assured Guaranty will make such Insured Payments to the Trustee or the Paying Agent 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 Nonpayment. If a Notice of Nonpayment by Assured Guaranty is incomplete or does not in any instance conform to the terms and conditions of this Policy, it shall be deemed not Received, and Assured Guaranty shall promptly give notice to the Trustee or the Paying Agent. Upon receipt of such notice, the Trustee or the Paying Agent may submit an amended Notice of Nonpayment. The Trustee or the Paying Agent will disburse the Insured Payments to the Holders only upon receipt by the Trustee or the Paying Agent, in form reasonably satisfactory to it of (i) evidence of the Holder's right to receive such payments, and (ii) evidence, including without limitation any appropriate instruments of assignment, that all of the Holder's rights to payment of such principal or interest Due for Payment shall thereupon vest in Assured Guaranty. Upon and to the extent of such disbursement, Assured Guaranty shall become the Holder of the Obligations, any appurtenant coupon thereto and right to receipt of payment of principal thereof or interest thereon, and shall be fully subrogated to all of the Holder's right, title and interest thereunder, including without limitation the right to receive payments in respect of the Obligations. Payment by Assured Guaranty to the Trustee or the Paying Agent for the benefit of the Holders shall discharge the obligation of Assured Guaranty under this Policy to the extent of such payment. This Policy is non-cancelable by Assured Guaranty for any reason. The Premium on this Policy is not refundable for any reason. This Policy does not insure against loss of any prepayment premium or other acceleration payment which at any time may become due in respect of any Obligation, other than at the sole option of Assured Guaranty, nor against any risk other than Nonpayment. Except to the extent expressly modified by any endorsement hereto, the following terms shall have the meanings specified for all purposes of this Policy. Avoided Payment means any amount previously distributed to a Holder in respect of any Insured Payment by or on behalf of the Issuer, which amount has been recovered from such Holder pursuant to the United States Bankruptcy Code 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. Business Day means any day other than (i) a Saturday or Sunday, (ii) any day on which the offices of the Trustee, the Paying Agent or Assured Guaranty are closed, or (iii) any day on which banking institutions are authorized or required by law, executive order or governmental decree to be closed in the City of New York or in the State of Maryland. Due for Payment means (i) when referring to the principal of an Obligation, the stated maturity date thereof, or the date on which such Obligation 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 Guaranty in its sole discretion elects to make any principal payment, in whole or in part, on such earlier date) and (ii) when referring to interest on an Obligation, the stated date for payment of such interest. Holder means, in respect of any Obligation, the person or entity who, at the time of Nonpayment, is entitled under the terms of such Obligation to payment of principal or interest thereunder, except that Holder shall not include the Issuer or any person or entity whose direct or indirect obligation constitutes the underlying security for the Obligations. Insured Payments means that portion of the principal of and interest on the Obligations that shall become Due for Payment but shall be unpaid by reason of Nonpayment. Insured Payments shall not include any additional amounts owing by the Issuer solely as a result of the failure by the Trustee or the Paying Agent 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 or the Paying Agent by reason of such failure. Nonpayment means, in respect of an Obligation, the failure of the Issuer to have provided sufficient funds to the Trustee or the Paying Agent for payment in full of all principal and interest Due for Payment on such Obligation. It is further understood that the term "Nonpayment" in respect of an Obligation includes any Avoided Payment. Receipt or Received means actual receipt or notice of or, if notice is given by overnight or other delivery service, or by certified or registered United States mail, by a delivery receipt signed by a person authorized to accept delivery on behalf of the person to whom the notice was given. Notices to Assured Guaranty may be mailed by registered mail or personally delivered or telecopied to it at 1325 Avenue of the Americas, New York, New York 10019, Telephone Number: (212) , Facsimile Number: (212) , Attention: Risk Management Department Public Finance Surveillance, with a copy to the General Counsel, or to such other address as shall be specified by Assured Guaranty to the Trustee or the Paying Agent in writing. A Notice of Nonpayment will be deemed to be Received by Assured Guaranty on a given Business Day if it is Received prior to 12:00 noon (New York City time) on such Business Day; otherwise it will be deemed Received on the Page 1 of 2 Form FG001 (05/07) F-1