PRELIMINARY OFFICIAL STATEMENT DATED JANUARY 12, 2017

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1 This Preliminary Official Statement and the information contained herein are subject to completion or amendment. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration, qualification or filing under the securities laws of any such jurisdiction. PRELIMINARY OFFICIAL STATEMENT DATED JANUARY 12, 2017 NEW ISSUE Ratings: Moody s: Baa3 BOOK-ENTRY ONLY S&P: BBB See RATINGS herein. In the opinion of Bond Counsel, which is based on existing law and assumes continuing compliance by the District with certain covenants to comply with the requirements of the Internal Revenue Code of 1986, as amended (the Code ), interest on the 2017 Bonds will not be includable in the gross income of the owners thereof for purposes of federal income taxation and will not be a specific preference item for purposes of the alternative minimum tax imposed by the Code on corporations and other taxpayers, including individuals; however, such interest will be includable in determining adjusted current earnings of corporations for purposes of computing the alternative minimum tax imposed by the Code on corporations. Furthermore, in the opinion of Bond Counsel, based on existing law, interest on the 2017 Bonds will be exempt from all State of North Carolina income taxes. See LEGAL MATTERS--Tax Treatment herein for a description of certain provisions of the Code that may affect the tax treatment of interest on the 2017 Bonds for certain owners of the 2017 Bonds. $16,470,000* Northern Hospital District of Surry County Health Care Facilities Revenue Refunding Bonds Series 2017 Dated: Date of Delivery Due: October 1, as shown on the inside cover The 2017 Bonds are being issued by the Northern Hospital District of Surry County (the District ). The principal of and interest on the 2017 Bonds are payable solely from, and secured solely by a pledge of, the Revenues (defined herein) of the District and certain funds and accounts and accounts created under the Bond Order (defined herein). Neither the faith and credit nor the taxing power of the County of Surry (the County ), the State of North Carolina (the State ) or any political subdivision thereof, including the District, is pledged to payment of the 2017 Bonds. The 2017 Bonds do not obligate the County, the State or any political subdivision thereof, including the District, to levy any taxes therefor or to make any provision for their payment except from funds made available therefor under the Bond Order. The 2017 Bonds are subject to redemption prior to their maturities as more fully described herein. The 2017 Bonds will be issued as fully registered certificates and initially will be registered in the name of Cede & Co., as nominee for The Depository Trust Company ( DTC ). Individual purchases of the 2017 Bonds will be made in book-entry only form in the denomination of $5,000 or any integral multiple thereof. Purchasers will not receive physical delivery of certificates. Transfers of the 2017 Bonds will be effected through a bookentry only system as described herein. Payments of principal of and interest on the 2017 Bonds will be made to Cede & Co., as nominee for DTC, as registered owner of the 2017 Bonds, by The Bank of New York Mellon Trust Company, N.A., as trustee, to be subsequently disbursed to the beneficial owners of the 2017 Bonds. Interest on the 2017 Bonds is payable each October 1 and April 1, beginning April 1, Principal of the 2017 Bonds is payable, subject to prior redemption, on October 1 in the years and amounts set forth on the inside cover hereof. The 2017 Bonds are offered, subject to prior sale, when, as and if issued by the District and accepted by the Underwriter, subject to the approval of Womble Carlyle Sandridge & Rice, LLP, Raleigh, North Carolina, Bond Counsel, and certain other conditions. Certain legal matters will be passed upon for the District by its counsel, Campbell Law Group, PLLC, Mount Airy, North Carolina, and for the Underwriter by its counsel, Parker Poe Adams & Bernstein LLP, Raleigh, North Carolina. Public Financial Management, Inc. is serving as financial advisor to the District. It is expected that the 2017 Bonds will be available for delivery through the facilities of DTC on or about February 28, Dated: January, 2017 *Preliminary; subject to change.

2 Maturity Schedule* Year Principal Amount Interest Rate Yield CUSIP** Year Principal Amount 2017 $ 500, $1,730, , ,820, , , , , , , , , , , , , , , , , ,650, ,000 Interest Rate Yield CUSIP** * Preliminary; subject to change. ** CUSIP is a registered trademark of the American Bankers Association. CUSIP Global Services is managed on behalf of the American Bankers Association by S&P Capital IQ. Copyright 2017 CUSIP Global Services. All rights reserved. CUSIP data herein is provided by S&P Capital IQ, a division of McGraw Hill Financial, Inc. The CUSIP data herein is provided solely for the convenience of reference only, and neither the County nor the Underwriter take responsibility for the accuracy of such data. Neither the District nor the Underwriter is responsible for selection or use of these CUSIP numbers, and no representation is made as to their correctness on the 2017 Bonds or as indicated above. The CUSIP number for a specific maturity is subject to being changed after the issuance of the 2017 Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part of the 2017 Bonds.

3 IN CONNECTION WITH THIS OFFERING, FTN FINANCIAL CAPITAL MARKETS, A DIVISION OF FIRST TENNESSEE BANK NATIONAL ASSOCIATION (THE UNDERWRITER ) MAY OVERALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 2017 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 2017 Bonds by any person, in any jurisdiction in which it is not lawful for such person to make such offer, solicitation or sale. Neither the 2017 Bonds nor the Bond Order has 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 2017 Bonds and the Bond Order in accordance with applicable provisions of securities laws of the states in which the 2017 Bonds and the Bond Order have been registered or qualified, if any, 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 DISTRICT AND 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 OFFICIAL STATEMENT. 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 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)). 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 2017 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 responsibilities 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. The Bank of New York Mellon Trust Company, N.A. (the Trustee ) has not provided or undertaken to determine the accuracy of any of the information contained in this Official Statement, and the Trustee makes no representation or warranty, express or implied, as to (i) the accuracy or completeness of such information, (ii) the validity of the Series 2017 Bonds, or (iii) the tax-exempt status of the interest on the Series 2017 Bonds. i

4 TABLE OF CONTENTS INTRODUCTION... 1 THE 2017 BONDS... 3 Authorization... 3 General Terms... 3 Redemption Provisions... 3 SECURITY AND SOURCES OF PAYMENT FOR THE 2017 BONDS... 5 Rate Covenant... 5 Debt Service Reserve Fund... 6 Additional Indebtedness... 6 THE PLAN OF REFUNDING... 6 ESTIMATED SOURCES AND USES OF FUNDS... 7 DEBT SERVICE REQUIREMENTS... 8 THE DISTRICT... 9 BONDHOLDER S RISKS... 9 General... 9 Matters Relating to Security for the Bonds... 9 Matters Relating to the Enforceability of the Bond Order Privately Held Bonds Ratings on the 2017 Bonds Risk of Taxability Mergers and Acquisitions Enforcement of Obligations of the District Bankruptcy Union Activity Possible Staffing Shortages Federal Laws Affecting Health Care Facilities Managed Care Regulatory, Licensing and Accreditation Matters Civil and Criminal Enforcement Efforts North Carolina Certificate of Need Program Physician Recruitment, Joint Business Activities and Referrals Licensing, Surveys, Investigations and Audits Environmental Laws and Regulations Competition Malpractice Lawsuits Facilities Constructed for Specific Purposes and Limited to Specific Uses Damage, Destruction or Condemnation Other Factors Generally Affecting Health Care Facilities LEGAL MATTERS Litigation Page ii

5 Page Opinions of Counsel Tax Treatment Legality For Investment CONTINUING DISCLOSURE OBLIGATION Annual Disclosure Quarterly Disclosure VERIFICATION OF MATHEMATICAL COMPUTATIONS MISCELLANEOUS Historical Financial Information Ratings Underwriting Financial Advisor APPENDIX A NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY APPENDIX B DISTRICT FINANCIAL STATEMENTS APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS APPENDIX D FORM OF OPINION OF BOND COUNSEL APPENDIX E THE NORTH CAROLINA LOCAL GOVERNMENT COMMISSION APPENDIX F BOOK-ENTRY-ONLY SYSTEM iii

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7 State of North Carolina Department of State Treasurer DALE R. FOLWELL State and Local Government Finance Division GREG C. GASKINS Treasurer and the Local Government Commission Deputy Treasurer OFFICIAL STATEMENT relating to $16,470,000 * NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY Health Care Facilities Revenue Refunding Bonds, Series 2017 INTRODUCTION This Official Statement, including the cover page and the appendices hereto, is intended to furnish information in connection with the offering of $16,470,000 * Health Care Facilities Revenue Refunding Bonds, Series 2017 (the 2017 Bonds ) of the Northern Hospital District of Surry County (the District ). This introduction provides certain limited information to serve as a guide to this Official Statement, and is expressly qualified by this Official Statement as a whole. Prospective investors should make a full review of the entire Official Statement and of the documents summarized or described herein. This Official Statement speaks only as of its date, and the information contained herein is subject to change. Neither the delivery of this Official Statement nor of the 2017 Bonds shall under any circumstances create any implication that there has been no change in the District's affairs since the date of this Official Statement. For the definition of certain terms used in this Official Statement and a summary of certain provisions of the Bond Order (hereinafter defined), see Appendix C, SUMMARY OF PRINCIPAL LEGAL DOCUMENTS. Capitalized terms used in this Official Statement, unless otherwise defined herein, have the meanings given such terms in the Bond Order and the Series Resolution (hereinafter defined). The District. See the caption THE DISTRICT herein for certain information regarding the District and Appendix A, NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY for particular information regarding the District s operations. Authorization. The 2017 Bonds are to be issued pursuant to (1) The State and Local Government Revenue Bond Act, being Article 5 of Chapter 159 of the General Statutes of North Carolina, as amended (the Act ); (2) a Bond Order adopted by the Board of Commissioners of the County of Surry, North Carolina (the Board of Commissioners ), as the governing body of the District, on June 17, 1991, as amended and supplemented by a Supplemental Bond Order adopted by the Board of County Commissioners on June 21, 1999 and by a Supplemental Bond Order No. 2 adopted by the Board of County Commissioners on March 3, 2008 (collectively, the Bond Order ); and (3) a resolution with respect to the 2017 Bonds adopted by the Board of Commissioners on January 3, 2017 (the Series Resolution ). Under the Bond Order, The Bank of New York Mellon Trust Company, N.A. has been appointed the trustee (the Trustee ). * Preliminary; subject to change.

8 Security. The 2017 Bonds will be limited obligations of the District, payable solely from and secured by a pledge of the Revenues (as defined below), and the money and securities held in certain funds and accounts created by the Bond Order and the Series Resolution. The 2017 Bonds will be payable on a parity under the Bond Order with the District s Health Care Facilities Revenue Refunding Bonds, Series 2012A and Series 2012B issued pursuant to the Bond Order, of which $10,053,000 is currently outstanding (the 2012 Bonds ), and any other additional bonds hereafter issued by the District pursuant to the Bond Order (collectively, the Bonds ). See the caption SECURITY AND SOURCES OF PAYMENT FOR THE 2017 BONDS herein. The District operates the Northern Hospital of Surry County (the Hospital ). NEITHER THE CREDIT NOR THE TAXING POWER OF THE COUNTY OF SURRY, NORTH CAROLINA (THE COUNTY ), THE STATE OF NORTH CAROLINA (THE STATE ) OR ANY POLITICAL SUBDIVISION THEREOF, INCLUDING THE DISTRICT IS PLEDGED FOR THE PAYMENT OF PRINCIPAL OF, PREMIUM, IF ANY, OR INTEREST ON THE 2017 BONDS. THE 2017 BONDS DO NOT OBLIGATE THE COUNTY, THE STATE OR ANY POLITICAL SUBDIVISION THEREOF, INCLUDING THE DISTRICT, TO LEVY ANY TAXES THEREFOR OR TO MAKE ANY PROVISION FOR THEIR PAYMENT EXCEPT FROM THE FUNDS MADE AVAILABLE THEREFOR UNDER THE BOND ORDER AND THE SERIES RESOLUTION. See the caption SECURITY AND SOURCES OF PAYMENT FOR THE 2017 BONDS herein. Purpose. The District is issuing the 2017 Bonds for the purpose of providing funds, together with any other available funds, to (1) currently refund all of the District s outstanding $3,470,000 Health Care Facilities Revenue Bonds, Series 1999 (the 1999 Bonds ) and advance refund all of the District s outstanding $13,355,000 Health Care Facilities Revenue Bonds, Series 2008 (the 2008 Bonds and, together with the 1999 Bonds, the Bonds to be Refunded ), (2) fund a debt service reserve for the 2017 Bonds and (3) pay the fees and expenses incurred in connection with the sale and issuance of the 2017 Bonds. See the captions THE PROJECT and ESTIMATED SOURCES AND USES OF FUNDS herein. The 2017 Bonds. The 2017 Bonds will be dated their date of delivery and will bear interest from their date payable on April 1, 2017, and semiannually thereafter on each October 1 and April 1, at the rates shown on the inside cover. Principal of the 2017 Bonds will be payable, subject to prior redemption as described herein, on October 1 in the years and amounts shown on the inside cover. The 2017 Bonds are offered in denominations of $5,000 and integral multiples thereof. Book-Entry Form. The 2017 Bonds will be issued in book-entry-only form, without physical delivery of 2017 Bonds to beneficial owners of the 2017 Bonds ( Beneficial Owners ). The Trustee will make principal and interest payments to The Depository Trust Company ( DTC ), which will in turn remit such payments to its participants for subsequent distribution to Beneficial Owners. See Appendix F hereto for a further description of DTC and the book-entry-only system. Tax Treatment. See the caption LEGAL MATTERS TAX TREATMENT herein. Professionals. FTN Financial Capital Markets, a division of First Tennessee Bank National Association, Atlanta, Georgia (the Underwriter ), is underwriting the 2017 Bonds. Public Financial Management, Inc. is serving as financial advisor to the District. Womble Carlyle Sandridge & Rice, LLP, Raleigh, North Carolina, is serving as Bond Counsel to the District. Parker Poe Adams & Bernstein LLP, Raleigh, North Carolina, is serving as counsel to the Underwriter. Campbell Law Group, PLLC, Mount Airy, North Carolina, is counsel to the District. The Bank of New York Mellon Trust Company, N.A., acting through its Jacksonville, Florida office, is serving as the Trustee. District Financial Statements. The financial statements of the District for the fiscal years ended September 30, 2016 and 2015 included in Appendix B to this Official Statement have been examined by CliftonLarsenAllen LLP, independent certified public accountants, to the extent and for the periods 2

9 indicated in their report, which appears in Appendix B. Such financial statements have been included in reliance upon the report of such firm, which report is given upon the authority of such firm as experts in accounting and auditing. See MISCELLANEOUS HISTORICAL FINANCIAL INFORMATION herein. Continuing Disclosure. The District has undertaken in the Series Resolution to provide certain annual and quarterly financial information and operating data and to provide notice of certain material events. See the caption CONTINUING DISCLOSURE OBLIGATION herein. AUTHORIZATION THE 2017 BONDS The 2017 Bonds will be issued under the Act, the Bond Order and the Series Resolution. The District's issuance of the 2017 Bonds received the required approval of the North Carolina Local Government Commission (the LGC ) on January 10, The LGC is a division of the North Carolina State Treasurer s office charged with general oversight of local government finance in the State. The LGC's approval is required for substantially all local government bond issues and other local government financing arrangements in the State. In determining whether to allow bonds to be issued under the Act, the LGC has been given wide statutory discretion to consider the need for and feasibility of the projects to be financed, the local government's capability to repay the amount financed from the pledged revenue sources, and the local government's general compliance with State budget and finance laws. Under the Act, the LGC is also responsible, with the issuing unit's approval, for selling bonds issued pursuant to the Act. See Appendix E hereto for additional information on the LGC and its powers and duties. GENERAL TERMS Payment Terms. The 2017 Bonds will be dated the date of their delivery and will bear interest from their date payable on April 1, 2017, and semiannually thereafter on each April 1 and October 1 (the Interest Payment Dates ), at the rates shown on the inside cover (calculated on the basis of a 360-day year consisting of twelve 30-day months). Principal on the 2017 Bonds will be payable, subject to prior redemption as described below, on October 1 in the years and amounts shown on the inside cover. Payments will be effected through DTC. See Appendix F hereto for a further description of DTC and the book-entry only system. Denominations. The 2017 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 2017 Bonds, transfers, registration of transfers and exchanges of beneficial ownership interests in the 2017 Bonds will be available only through DTC participants, as hereinafter described. See Appendix F hereto for a further description of DTC and the book-entry only system. REDEMPTION PROVISIONS Optional Redemption. The 2017 Bonds maturing on or after October 1, 20 are subject to redemption, at the District's option, in whole or in part on any date on or after October 1, 20, at a redemption price equal to 100% of the principal amount of 2017 Bonds to be redeemed, plus accrued interest, if any, to the redemption date. Extraordinary Optional Redemption. The 2017 Bonds are subject to redemption, at the option of the District, in whole or in part on any date at a redemption price equal to 100% of the principal 3

10 amount thereof plus accrued interest to the redemption date, from Net Proceeds in excess of $100,000 resulting from insurance carried or maintained with respect to the Operating Assets by the District, or Net Proceeds resulting in excess of $100,000 from Eminent Domain proceedings. The 2017 Bonds are also subject to redemption in whole on any date, at the option of the District, from money deposited by the District if by reason of any change in any federal or State law or of any legislative, administrative or judicial action or administrative failure of action, in the opinion of the Board (expressed in a resolution), and in the opinion of a Management Consultant, both filed with the Trustee, (a) either the Bond Order or the Series Resolution becomes unenforceable or impossible to perform without unreasonable delay or (b) unreasonable burdens or excessive liabilities are imposed on the District, including the imposition of federal, State or other ad valorem property, income or other taxes not being imposed on the date the Series Resolution is adopted. Any such redemption will be at a redemption price equal to 100% of the principal amount of the 2017 Bonds being redeemed plus accrued interest to the redemption date. Notice of Redemption. At least thirty (30) days but not more than sixty (60) days prior to the redemption date of any 2017 Bonds to be redeemed, whether such redemption be in whole or in part, the Trustee will cause a notice of any such redemption to be mailed, first class, postage prepaid, to all Holders of 2017 Bonds to be redeemed in whole or in part; provided, however, that notice to any Securities Depository shall be sent in the manner prescribed by such Securities Depository; and provided further that failure to mail any such notice to any Holder or any defect in such notice shall not affect the validity of the proceedings for such redemption as to the 2017 Bonds of any other Holder to whom notice was properly given. The Trustee shall also provide a copy such notice of redemption (i) to the Municipal Securities Rulemaking Board by posting the same on its Electronic Municipal Market Access ( EMMA ) system and (ii) to the Local Government Commission by first class mail, postage prepaid, but failure to provide such notice or any defect therein shall not affect the validity of any proceedings for the redemption of any 2017 Bonds. Each such notice shall set forth the designation and date of the 2017 Bonds, the CUSIP numbers of the 2017 Bonds to be redeemed, the date fixed for redemption, the Redemption Price to be paid, the address and phone number of the Trustee, the date of the redemption notice, the maturities of the 2017 Bonds to be redeemed and, if less than all of the 2017 Bonds of any one maturity shall be called for redemption, the distinctive numbers and letters, if any, of such 2017 Bonds to be redeemed and, in the case of 2017 Bonds to be redeemed in part only, the portion of the principal amount thereof to be redeemed. If any 2017 Bond is to be redeemed in part only, the notice of redemption shall state also that on or after the redemption date, upon surrender of such 2017 Bond, a new 2017 Bond in principal amount equal to the unredeemed portion of such 2017 Bond will be issued. Any notice of redemption may state that the redemption to be effected is conditioned upon the receipt by the Trustee on or prior to the redemption date of moneys sufficient to pay the principal of and premium, if any, and interest on the 2017 Bonds to be redeemed and that if such moneys are not so received such notice shall be of no force or effect and such 2017 Bonds shall not be required to be redeemed. In the event that such notice contains such a condition and moneys sufficient to pay the principal of and premium, if any, and interest on such 2017 Bonds to be redeemed in whole or in part are not received by the Trustee on or prior to the redemption date, the redemption will not be made, and the Trustee will within a reasonable time thereafter give notice, in the manner in which the notice of redemption was given, that such moneys were not so received. Selection of 2017 Bonds for Redemption. The 2017 Bonds shall be redeemed only in whole multiples of $5,000. If less than all the 2017 Bonds are called for redemption, the 2017 Bonds of each maturity to be so redeemed will be called for redemption in the manner set forth in an Officer s Certificate filed with the Trustee. If less than all of the 2017 Bonds of any one maturity are to be called 4

11 for redemption, the Trustee shall select the 2017 Bonds to be redeemed by lot, each $5,000 portion of principal being counted as one 2017 Bond for this purpose; provided, however, that so long as the only Holder of the Series 2016 Bonds is a Securities Depository Nominee, such selection will be made by the Securities Depository in accordance with its rules and procedures. Effect of Call for Redemption. On or before the date on which the 2017 Bonds or portions thereof are to be redeemed, the District will deposit with the Trustee money or Defeasance Obligations, or a combination of both, that will be sufficient to pay on the redemption date the Redemption Price of and interest accruing on the 2017 Bonds to be redeemed on such redemption date. If notice is properly given, the 2017 Bonds or portions thereof so called for redemption shall be due and payable at the Redemption Price provided therefor, plus accrued interest to such date, and if moneys sufficient to pay the Redemption Price of the 2017 Bonds or portions thereof to be redeemed plus accrued interest thereon to the date of redemption are held by the Trustee or the Bond Registrar in trust for the Holders of 2017 Bonds to be redeemed, (i) interest on such 2017 Bonds or portions thereof shall cease to accrue from and after such date, (ii) such 2017 Bonds or portions thereof shall cease to be entitled to any benefits or security under the Bond Order or to be deemed Outstanding and (iii) Holders of such 2017 Bonds or portions thereof shall have no right in respect thereof except to receipt of payment of the Redemption Price thereof, plus accrued interest to the date fixed for redemption. SECURITY AND SOURCES OF PAYMENT FOR THE 2017 BONDS The 2017 Bonds are limited obligations of the District payable solely from, and secured by a pledge of, the Revenues of the District, the District s right to receive the same, and the money and securities held in certain funds and accounts created by the Bond Order and the Series Resolution. Revenues for any period means (a) all revenues, income and other money received in any period by the District, including, but without limiting the generality thereof, income (1) from goods and properties sold or leased or services rendered, (2) from agreements and other arrangements with insurance companies, Medicare, Medicaid, Blue Cross, governmental units, agencies and instrumentalities, and prepaid health organizations, and (3) from any award or agreement in lieu of an award resulting from Eminent Domain proceedings, (b) investment income from and revenues realized upon the liquidation of sale of securities held by or on behalf of the District, including those held in any of the funds or accounts established pursuant to the Bond Order or any Series Resolution, (c) all insurance proceeds received by the District, and (d) all gifts, grants, bequests, contributions and donations, including the unrestricted income and profits therefrom, exclusive of gifts, grants, bequests, contributions and donations to the extent specifically restricted to a particular purpose inconsistent with their use as Revenues. Except as provided as described in this paragraph, Revenues shall be determined in accordance with generally accepted accounting principles consistently applied. There shall not be included in Revenues the proceeds of any borrowings the use of which is restricted by the terms of such borrowings for uses inconsistent with the payment of Indebtedness. RATE COVENANT The District covenants under the Series Resolution to charge and collect rates and fees sufficient in each Fiscal Year to provide a Long-Term Debt Service Coverage Ratio at the end of each such Fiscal Year of no less than 1.20 times Maximum Annual Debt Service on the Bonds (the Rate Covenant ). If the District fails to meet the Rate Covenant at the end of any Fiscal Year, the District will retain an independent consultant to review and make recommendations as to how the District can achieve compliance with the Rate Covenant. If the consultant is hired and his recommendations are being followed by the District, no Event of Default will be deemed to have occurred unless the Rate Covenant is not met for two consecutive Fiscal Years or unless the Long-Term Debt Service Coverage Ratio declines below See Appendix C, SUMMARY OF PRINCIPAL LEGAL DOCUMENTS SUMMARY 5

12 OF CERTAIN PROVISIONS OF THE BOND ORDER AND THE SERIES 2017 RESOLUTION General Covenants of the District in the Bond Order Long-Term Debt Service Coverage Ratio for a summary of the District s rate covenant. DEBT SERVICE RESERVE FUND The Series Resolution creates a Debt Service Reserve Fund for the 2017 Bonds. Amounts on deposit in the Debt Service Reserve Fund secure the 2017 Bonds and do not secure any other long-term indebtedness of the District. The Trustee will use amounts in the Debt Service Reserve Fund to make transfers to the Interest Account and the Principal Account to the extent necessary to pay the interest on and principal of (whether at maturity or by acceleration) the 2017 Bonds, whenever and to the extent that the money on deposit in the Interest Account or the Principal Account is insufficient for such purposes. To the extent any money is drawn from the Debt Service Reserve Fund for such purpose, the District must restore the Debt Service Reserve Fund to an amount equal to the DSRF Requirement (as defined in Appendix C) on the 2017 Bonds in 12 equal monthly installments. To the extent the Debt Service Reserve Fund is less than 90% of the DSRF Requirement on the 2017 Bonds because of a valuation of the Investment Obligations on deposit in it, the District must restore the 2017 Debt Service Reserve Fund to an amount equal to the DSRF Requirement in six equal monthly installments. In the event that the Revenues and other available monies of the District are at any time insufficient to cure a deficiency in the Debt Service Reserve Fund or any other debt service revenue fund established by any subsequent Series Resolution adopted by the District pursuant to the Bond Order at the times and in the amounts required under the Series Resolution or any such subsequent Series Resolution, the Revenues and available monies subject to deposit in the Debt Service Reserve Fund and any other such debt service reserve fund shall be deposited into the Debt Service Reserve Fund and any such other debt service reserve fund on a pro rata basis based on the debt service reserve requirement for each Series of Bonds secured by such debt service reserve funds to the total debt service reserve requirements for all such Series of Bonds secured by such debt service reserve funds. ADDITIONAL INDEBTEDNESS The Bond Order permits the District to incur additional Long-Term Indebtedness on a parity with the Outstanding 2012 Bonds and 2017 Bonds, on the terms and under the conditions outlined therein. See Appendix C, SUMMARY OF PRINCIPAL LEGAL DOCUMENTS SUMMARY OF CERTAIN PROVISIONS OF THE BOND ORDER AND THE SERIES 2017 RESOLUTION General Covenants of the District in the Bond Order Incurrence of Indebtedness. THE PLAN OF REFUNDING A portion of the proceeds of the 2017 Bonds will be used, together with other available funds, to refund the Bonds to be Refunded. The 1999 Bonds will be irrevocably called for redemption on the date of issuance of the 2017 Bonds at a redemption price equal to 100% of the principal amount of the 1999 Bonds, plus accrued interest to the redemption date. To accomplish the refunding of the outstanding 2008 Bonds, a portion of the proceeds of the 2017 Bonds and other available funds will be deposited with The Bank of New York Mellon Trust Company, N.A., as escrow agent (the Escrow Agent ), in trust pursuant to the terms and conditions of an Escrow Deposit Agreement, to be dated as of February 1, 2017 (the Escrow Deposit Agreement ), between the District and the Escrow Agent. Funds on deposit with the Escrow Agent will be used to purchase certain non-callable direct obligations of, or obligations guaranteed by, the United States of 6

13 America (as described in the Escrow Deposit Agreement and defined as the Escrow Securities ) maturing at times and in amounts sufficient to provide funds, together with other funds deposited with the Escrow Agent and remaining uninvested, to pay the principal or redemption price of and interest on the 2008 Bonds as the same become due and payable. The 2008 Bonds maturing on or after October 1, 2018 will be irrevocably called for redemption on April 1, 2018 at a redemption price equal to 100% of the principal amount of the 2008 Bonds, plus accrued interest to the redemption date. The sufficiency of the Escrow Securities and any other amounts on deposit pursuant to the Escrow Deposit Agreements will be verified by Bond Resource Partners, LP (the Verification Agent ) as described under the caption VERIFICATION OF MATHEMATICAL COMPUTATIONS herein. Upon payment of the 1999 Bonds, the execution of the Escrow Deposit Agreement and the deposit of funds with the Escrow Agent as described above, the Bonds to be Refunded will no longer be Outstanding pursuant to the Bond Order, but the 2008 Bonds will be secured solely by such Escrow Securities, cash and other monies which may be deposited from time to time under the Escrow Deposit Agreement. ESTIMATED SOURCES AND USES OF FUNDS The following table presents estimated information as to sources and uses of funds for the 2017 Bonds. All amounts are rounded to the nearest thousand dollars. Sources of Funds: Par amount of 2017 Bonds $ Plus/Less net original issue premium/discount Amounts released from bond funds and debt service reserve funds for Bonds to be Refunded TOTAL $ Uses of Funds: Refunding of 1999 Bonds and 2008 Bonds $ Deposit to Debt Service Reserve Fund Costs of Issuance 1 TOTAL $ 1 Includes various professional fees, other financing costs and the underwriter s discount. [remainder of page left intentionally blank] 7

14 DEBT SERVICE REQUIREMENTS The following table presents information on the District's debt service obligations on the 2012 Bonds and the 2017 Bonds and excludes debt service on the Bonds to be Refunded. Amounts shown are rounded to the nearest dollar. 12-MONTH PERIOD ENDING OCTOBER BONDS PRINCIPAL AND INTEREST * 2017 BONDS TOTAL PARITY PRINCIPAL INTEREST INDEBTEDNESS 2017 $1,697, ,696, ,701, ,696, ,697, , , , , * Interest on the 2012A Bonds calculated at 3.46%, the actual interest rate on the 2012A Bonds, and interest on the 2012B Bonds calculated at %, the fixed rate under the interest rate swap agreement related to the 2012B Bonds. See BONDHOLDER S RISKS Privately Held Bonds Interest Rate Swap Agreement hereinafter for more information on the interest rate swap for the 2012B Bonds. 8

15 THE DISTRICT The District is a body corporate and politic that was created in 1953 under Part C of Chapter 131E of the General Statutes of North Carolina, as amended (the District Act ). The Board of Commissioners of the County acts as the governing body of the District. The Board of Commissioners appoints a thirteen-member Board of Trustees, which meets monthly and has been delegated responsibility for the Hospital s operations. The District owns and operates the Hospital but does not operate any other medical care facilities. The District is authorized and empowered by the District Act to (1) acquire, construct, improve, maintain and operate hospitals and other related facilities; (2) establish, revise, charge and collect rates, fees, rentals, tolls and other charges for the use, services, facilities and commodities of or furnished by its facilities; (3) borrow money and issue revenue bonds for the purpose of acquiring, constructing, reconstructing, bettering, improving or otherwise paying the cost of its facilities; (4) pledge to the payment of such revenue bonds and the interest thereon the revenues from one or more of its facilities; and (5) enter into contracts with any person, firm or corporation for the acquisition, construction, extension, improvement, maintenance or operation of its facilities. Taxes may be levied pursuant to the District Act by the Board of Commissioners for the cost of operation, equipment or maintenance of the hospital facilities of the District only if approved by the majority of the qualified voters of the District at an election held for such purpose. In 1953, such a tax was authorized at a referendum of qualified District voters and used to secure general obligation bonds of the District which financed a portion of the costs of the original Hospital facilities. This tax levy was eliminated subsequent to the retirement of the general obligation bonds in No tax levy is authorized for the Hospital or the District, and the Bonds are not payable from or secured by any taxes. GENERAL BONDHOLDER S RISKS As set forth under the caption SECURITY AND SOURCES OF PAYMENT FOR THE 2017 BONDS herein, the principal of and interest on the Bonds are payable from the 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 REVENUES WILL BE REALIZED BY THE DISTRICT IN AMOUNTS SUFFICIENT TO PAY DEBT SERVICE ON THE BONDS WHEN DUE AND TO MAKE PAYMENTS NECESSARY TO MEET THE OTHER OBLIGATIONS OF THE DISTRICT. MATTERS RELATING TO SECURITY FOR THE BONDS The District s facilities are not pledged as security for the 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 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 Bond Order may be made with the consent of the owners of a majority of the aggregate principal amount of the Bonds then outstanding. Any such amendments may adversely affect the security of the Holders of the Bonds. For a summary of such conditions, see Appendix C, SUMMARY OF PRINCIPAL LEGAL DOCUMENTS SUMMARY OF CERTAIN PROVISIONS OF 9

16 THE BOND ORDER AND THE SERIES 2017 RESOLUTION Supplements and Modifications to the Bond Order and the Series 2017 Resolution herein. The remedies available to the Trustee or the Holders of the Bonds upon an Event of Default under the Bonds, the Bond Order or the Series Resolution 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 Bonds or the Bond Order may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the 2017 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 BOND ORDER below. MATTERS RELATING TO THE ENFORCEABILITY OF THE BOND ORDER The obligations of the District under the Bonds 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. PRIVATELY HELD BONDS General. The 2012 Bonds were issued in two series, the 2012A (the 2012A Bonds ) and the 2012B (the 2012B Bonds ). The 2012A Bonds are currently outstanding in the aggregate principal amount of $7,305,000, have a final maturity of October 1, 2025, bear interest at 3.46% per annum and are held by Siemens Public, Inc. The 2012B Bonds are currently outstanding in the aggregate principal amount of $2,748,000, have a final maturity of October 1, 2020, bear interest at a variable rate and are held by First Tennessee Bank National Association. The 2012 Bonds are not subject to tender or redemption at the option of the Holders thereof until their respective maturity dates, so there is no renewal risk associated with the 2012 Bonds. Interest Rate Swap Agreement. The District currently has an outstanding interest rate swap agreement with First Tennessee Bank National Association relating to the 2012B Bonds (the Swap Agreement ) whereby the District pays % and First Tennessee Bank National Association pays a variable rate intended to match the variable rate on the 2012B Bonds. The amortization schedule with respect to the Swap Agreement matches the amortization schedule for the 2012B Bond. The payment obligations of the District under the Swap Agreement, including any termination payment, are limited solely to payment from Revenues, subject to the limitations and conditions set forth in the Bond Order. Under certain circumstances, the Swap Agreement will be subject to termination prior to the scheduled termination date (which is the final maturity date for the 2012B Bonds). Depending on market conditions upon any such termination, the District or First Tennessee Bank National Association may owe a termination payment to the other. There can be no assurance that the District will have sufficient funds to pay a termination payment to First Tennessee Bank National Association or that the District will be able to obtain a replacement swap agreement with comparable terms. Conversely, the District may not receive a termination payment or other the benefit of the Swap Agreement if First Tennessee Bank National Association is facing financial difficulty. In either case, payments due upon early termination may be substantial. 10

17 Enforcement of Remedies; Additional Covenants. Siemens Public, Inc. and First Tennessee Bank National Association collectively will be the Holders of approximately 38% * of the outstanding principal amount of all Bonds outstanding under the Bond Order after the issuance of the 2017 Bonds. The Bond Order requires the consent of 51% of Holders of Bonds then Outstanding to take certain actions in connection with the Bonds and the Bond Order. While Siemens Public, Inc. and First Tennessee Bank National Association will not collectively be able to meet the 51% threshold to vote for any such action, they will nonetheless have a substantial portion the outstanding votes. The Series Resolutions related to the 2012A Bonds and the 2012B Bonds contain certain covenants of the District that either are not contained in the Bond Order or that are similar but vary in some respects from the covenants contained in the Bond Order. These include, but are not limited to, the following financial covenants: (i) a minimum debt service coverage ratio of 1.25 at each fiscal year end, (ii) a minimum days cash on hand test of 100 days at as of March 31 and September 30, and (iii) a maximum debt to capitalization ratio of 65% at all times. RATINGS ON THE 2017 BONDS There is no assurance that the ratings assigned to the 2017 Bonds at the time of issuance (see the caption MISCELLANEOUS RATINGS herein) will not be lowered or withdrawn at any time, the effect of which could adversely effect the market price for and marketability of the 2017 Bonds. RISK OF TAXABILITY Interest on the 2017 Bonds may become subject to 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 Bond Order or loss by the District of its status as a political subdivision for purposes of Section 103 of the Code. MERGERS AND ACQUISITIONS The District may consider certain offers of affiliation, merger, acquisitions or divestures. No such offers are currently being entertained, and no such discussions are currently taking place. However, it is possible that such affiliations, mergers, acquisitions and divestures may take place in the future, and the Bond Order contains only limited restrictions on such transactions. Any such acquisitions, affiliations, divestitures or mergers may have a material financial impact on the District. ENFORCEMENT OF OBLIGATIONS OF THE DISTRICT Both transfers of an interest of the District in property and obligations incurred by the District are subject to being recovered or avoided if the District receives less than fair consideration or reasonably equivalent value for such transfer or obligation and, at the time of such transfer or incurrence, the District (i) was insolvent or was rendered insolvent by reason of such transfer or incurrence, (ii) was engaged or was about to engage in a business or transaction for which the remaining assets of the District were unreasonably small in relation to the business or transaction, or (iii) intended to incur, assume or issue, or believed it would incur, assume or issue debts beyond its ability to pay such debts as they become due. The standards for determining the fairness of consideration and the manner of determining insolvency vary under the Bankruptcy Code, state fraudulent transfer or conveyance statutes and applicable judicial decisions and are subject to further interpretation by a court based on the facts presented in any specific case. * Preliminary, subject to change. 11

18 BANKRUPTCY Chapter 9 of the Title 11 of the United States Code (as amended, the Bankruptcy Code ) provides a process for a political subdivision of a state to voluntarily adjust its debts. An involuntary bankruptcy case may not be commenced against a political subdivision under Chapter 9. Section 109(c) of the Bankruptcy Code sets forth certain conditions that must be met for an entity to be a debtor under Chapter 9, including that the entity is specifically authorized to be a debtor under Chapter 9 by state law (or by a governmental officer or organization empowered by state law to authorize the entity to be a debtor under Chapter 9). Section of the North Carolina General Statutes (the NC Authorizing Statute ) authorizes, with the approval of the Local Government Commission, any taxing district, local improvement district, school district, county, city, town or district in the State of North Carolina to file a Chapter 9 bankruptcy case, but only with the approval of the LGC. While the 2017 Bonds are outstanding, the provisions of the Bankruptcy Code and applicable North Carolina law, including the NC Authorizing Statute, may be amended, supplemented or repealed; therefore, it is not possible to predict whether and under what conditions the District may be authorized to become a debtor in a bankruptcy case and how any such bankruptcy case might affect Holders of the 2017 Bonds in the future. Under existing law, if the District were to become a debtor in a Chapter 9 bankruptcy case, the bankruptcy proceedings could have a material and adverse effect on Holders of the 2017 Bonds, including (a) the incurrence of additional obligations, including the claims of those supplying goods and services to the District after the initiation of bankruptcy proceedings and the expenses of administering the bankruptcy case, which may have a priority of payment superior to that of the Holders; and (b) the possibility of the adoption of a plan for the adjustment of the District s debts without the consent of all of the Holders, which plan may restructure, delay, compromise or reduce the amount of the claim of the Holders if the bankruptcy court finds that such a plan is fair and equitable. To the extent that the Revenues are special revenues as defined in Chapter 9, the automatic stay provisions of the Bankruptcy Code should not prevent their application to payment of the 2017 Bonds in accordance with the provisions of Chapter 9; otherwise, the automatic stay provisions would, until relief is granted, prevent collection of payments from the District or the commencement of any judicial or other action for the purpose of recovering or collecting a claim against the District. The effect of the existing provisions of the Bankruptcy Code on the rights and remedies of the Holders of the 2017 Bonds cannot be predicted with certainty and may be affected significantly by judicial interpretation, general principles of equity, and considerations of public policy. Pursuant to the 2017 Bonds and applicable North Carolina law, the Trustee is granted a pledge, charge and lien upon the Revenues for the benefit of the Holders of the Bonds. Neither the physical assets of the District nor any other property of the District is subject to any security interest, deed of trust, mortgage, or any other lien in favor of the Trustee for the benefit of the Holders of the 2017 Bonds. In the event of a bankruptcy filing by the District, (1) the Trustee s claim would continue to be secured by, and payable solely from, the Revenues, and (2) the Trustee would not have an unsecured claim against the District if the Revenues were to prove insufficient to make the required payments to the Holders. Regardless of any specific adverse determinations in a bankruptcy case of the District, the fact of such a bankruptcy case could have an adverse effect on the liquidity and value of the 2017 Bonds. UNION ACTIVITY As of the date of this Official Statement, the District is not aware of any efforts by any labor union to organize its patient care employees. Health care facilities, however, have been subjected to union organizational efforts from time to time, including at the Hospital. Unionization of employees of the District could have an adverse effect on the financial condition of the District. 12

19 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 District 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 District and on its ability to sustain minimum staffing levels necessary to maintain licensure, certification and accreditation. Although the District 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 District in the future. FEDERAL LAWS AFFECTING HEALTH CARE FACILITIES Health Care Reform Act. In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010 (collectively, the Health Care Reform Act ). A significant component of the Health Care Reform Act is reformation of the sources and methods by which consumers will pay for health care for themselves and their families and by which employers will procure health insurance for their employees and dependents and, as a consequence, expansion of the base of consumers of health care services. One of the primary purposes of the Health Care Reform Act is to provide or make available, or subsidize the premium costs of, health care insurance for some of the millions of currently uninsured (or underinsured) consumers who fall below certain income levels. The Health Care Reform Act proposes to accomplish that objective through various provisions, summarized as follows: (i) the creation of active markets (referred to as exchanges) in which individuals and small employers can purchase health care insurance for themselves and their families or their employees and dependents, (ii) providing subsidies for premium costs to individuals and families based upon their income relative to federal poverty levels, (iii) mandating that individual consumers obtain and certain employers provide a minimum level of health care insurance, and providing for penalties or taxes on consumers and employers that do not comply with these mandates, (iv) expansion of private commercial insurance coverage generally through such reforms as prohibitions on denials of coverage for pre-existing conditions and elimination of lifetime or annual cost caps, and (v) expansion of existing public programs, including Medicaid, for individuals and families. To the extent all or any of those provisions produce the expected result, an increase in utilization of health care services by those who are currently avoiding or rationing their health care can be expected and bad debt expenses may be reduced. Associated with increased utilization will be increased variable and fixed costs of providing health care services, which may or may not be offset by increased revenues. The Health Care Reform Act creates a Center for Medicare and Medicaid Innovation to test payment and service delivery models, to implement various demonstration programs and pilot projects, and to test, evaluate, encourage and expand new payment structures and methodologies, with the goal of reducing health care expenditures while maintaining or improving quality of care. The Health Care Reform Act also establishes a Medicare Shared Savings Program that seeks to promote accountability and coordination of care through the creation of Accountable Care Organizations ( ACOs ). The program will allow hospitals, physicians and others to form ACOs and work together to invest in infrastructure and redesign integrated delivery processes to achieve high quality and efficient 13

20 delivery of services. ACOs that achieve quality performance standards will be eligible to share in a portion of the amounts saved by the Medicare program. DHHS has significant discretion to determine key elements of the program, including what steps providers must take to be considered an ACO, how to decide if Medicare program savings have occurred, and what portion of such savings will be paid to ACOs. It remains unclear to what extent providers will pursue federal ACO status or whether the required investment would be warranted by increased payment. Nevertheless, it is anticipated that private insurers may seek to establish similar incentives for providers, while requiring less infrastructural and organizational change. The potential impacts of these initiatives are unknown, but introduce greater risk and complexity to health care finance and operations. The range of possible effects is almost limitless. Almost every component of operating the District could be adversely affected by the continued implementation of the Health Care Reform Act, related regulations and possible related additional legislation and the effect of these developments on other participants in the health care industry. Efforts to repeal provisions of the Health Care Reform Act are ongoing in Congress and the constitutionality of the Health Care Reform Act was quickly challenged in courts across the nation. In June 2012, the United States Supreme Court upheld the constitutionality of the Health Care Reform Act generally, but struck down certain provisions which would have permitted federal Medicaid funding to be entirely eliminated for states that do not comply with the expanded Medicaid coverage required under the Health Care Reform Act. In June 2015, the United States Supreme Court ruled that a key component of the Health Care Reform Act that provides health insurance subsidies to qualifying participants is legal. It is not possible to predict the ultimate outcomes of legislative attempts to repeal or amend the Health Care Reform Act. Management of the District continues to review and monitor these developments, but it is impossible to predict future developments under the Health Care Reform Act or its particular effects on the operations of the District or the financial condition of the District. Medicare and Medicaid Programs. Medicare and Medicaid are the commonly used names for hospital reimbursement or payment programs governed by certain provisions of the federal Social Security Act. Medicare is an exclusively federal program and Medicaid is jointly funded by federal and state government and governed by both federal and state laws. Medicare provides certain health care benefits to beneficiaries who are 65 years of age or older or disabled, or qualify for the End Stage Renal Disease Program. Medicaid is designed to pay providers for care given to the medically indigent, is funded by federal and state appropriations, and is administered by the individual states. Hospital benefits are available under each participating state s Medicaid program, within prescribed limits, to persons meeting certain minimum income or other eligibility requirements, including children, the aged, the blind and/or disabled. Health care providers have been and will continue to be significantly impacted by changes in the last several years in federal health care laws and regulations, particularly those pertaining to Medicare and Medicaid. The purpose of much of the recent statutory and regulatory activity has been to reduce the rate of increase in health care costs, particularly costs paid under the Medicare and Medicaid programs. Diverse and complex mechanisms to limit the amount of money paid to health care providers under both the Medicare and Medicaid programs have been enacted, and have caused severe reductions in reimbursement from the Medicare program. In addition, there is a continuing impetus to tie Medicare payments to quality or value, and many new payment models put providers at financial risk with respect to efficiency and quality of care. Risk-based payment methodologies could have an impact on revenues. Medicare pays acute care hospitals for most services provided to inpatients under a payment system known as the Prospective Payment System or PPS pursuant to which hospitals are paid for services based on predetermined rates. Separate PPS payments are made for inpatient operating costs and 14

21 inpatient capital costs. Such payments are not based upon a hospital s actual costs of providing services. However, there is a move away from volume-based payments and a move toward value-driven reimbursement as demonstrated in new payment initiatives such as bundled payments, full capitation and risk-based incentive payments. The Medicare program provides additional payment for hospitals that serve a disproportionate share of low income patients, as defined by CMS. The Hospital qualifies as a disproportionate share hospital. There can be no assurance that payments for disproportionate share will not be decreased or eliminated in the future or that the facilities named above will continue to qualify for disproportionate share status. In addition, disproportionate share payments are frequently the target of proposed Medicare payment reductions. Medicare payment for skilled nursing services, psychiatric services, inpatient rehabilitation services, general outpatient services and home health services are based on regulatory formulas or predetermined rates. There is no assurance that these rates will be adequate to cover the actual cost of providing these services to Medicare patients. Further, the reimbursement rates for these services may be reduced or eliminated by Medicare in the future. Approximately 47.6% and 48.3% of the gross patient service revenue of the District for the fiscal years ended September 30, 2016 and 2015, respectively, was derived from Medicare (including Medicare managed care). See SOURCES OF GROSS PATIENT SERVICE REVENUE in Appendix A. Under Medicaid, the federal government provides limited funding to states that have medical assistance programs that meet federal standards. Payments made to health care providers under the Medicaid program are subject to change as a result of federal or state legislative and administrative actions, including changes in the methods for calculating payments, the amount of payments that will be made for covered services and the types of services that will be covered under the program. Such changes have occurred in the past and may be expected to occur in the future, particularly in response to federal and State budgetary constraints. Under existing state laws, state welfare agencies reimburse or pay hospitals for care rendered to indigent patients under several different methods. Such reimbursement or payment is less than normal charge rates and can be less than reimbursement or payment under the Medicare program. In North Carolina, the State Medicaid program reimburses acute care general inpatient services under a PPS based on diagnosed-related group category rates established by the Division of Medical Assistance ( DMA ) within the North Carolina Department of Health and Human Services. Psychiatric and rehabilitative services provided in either specialty hospitals, Medicare-recognized distinct part units or other beds in general acute care hospitals are reimbursed on a per diem methodology. Outpatient hospital services are generally reimbursed at 100% of their allowable costs. Prepaid medical plans or managed care programs involving the Medicaid populations are increasing nationwide. North Carolina currently offers several Medicaid managed care options to eligible residents statewide. They include the Carolina Access, Community Care and Risk Contracting programs. Carolina Access and Community Care operate as a primary care case management program that links beneficiaries with primary care physicians who provide or arrange for medical services for Medicaid beneficiaries. The Risk Contracting program allows DMA to contract with health maintenance organizations ( HMOs ) in select areas to provide medical services to Medicaid beneficiaries on a full risk capitated basis. 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. 15

22 In 2011, the North Carolina General Assembly adopted a Medicaid Provider and Assessment Program, pursuant to which hospitals (other than certain exempt hospitals) are assessed a fee to enable the State to obtain more federal funding and thereby increase Medicaid payments to hospitals in the State. The District continues to participate in this program. However, no assurances can be provided that the federal government and the State of North Carolina will continue to provide reasonable levels of reimbursement to hospitals under this program to cover the costs of providing care to Medicaid patients. The State of North Carolina has not elected to participate in the expansion of Medicaid eligibility under the Health Care Reform Act. Despite the non-election of participation in Medicaid expansion, the District has not experienced an increase in indigent care, but continues to focus on Medicaid eligibility for its patient population under the current program. The District believes that the State of North Carolina will continue to be under pressure to limit its Medicaid expenditures. No assurances can be given that the federal government or the State of North Carolina will continue to provide reasonable levels of reimbursement to health systems to cover the costs of providing care to Medicaid patients. Approximately 16.8% and 16.9% of the gross patient service revenue of the District for the fiscal years ended September 30, 2016 and 2015, respectively, was derived from Medicaid (including Medicaid managed care). See SOURCES OF GROSS PATIENT SERVICE REVENUE in Appendix A. MANAGED CARE Most private health insurance coverage is provided by various types of managed care plans, including HMOs and preferred provider organizations ( PPOs ), that generally use discounts and other economic incentives to reduce or limit the cost and utilization of health care services. Medicare and Medicaid also purchase hospital care using managed care options. Payments to hospitals from managed care plans typically are lower than those received from traditional indemnity or commercial insurers. Many HMOs and PPOs currently pay providers on a negotiated fee-for-service basis or, for institutional care, on a fixed rate per day of care, which, in each case, usually is discounted from the typical charges for the care provided. As a result, the discounts offered to HMOs and PPOs may result in payment to a provider that is less than its actual cost. Additionally, the volume of patients directed to a provider may vary significantly from projections, and/or changes in the utilization may be dramatic and unexpected, thus jeopardizing the provider s ability to manage this component of revenue and cost. Some HMOs employ a capitation payment method under which hospitals are paid a predetermined periodic rate for each enrollee in the HMO who is assigned or otherwise directed to receive care at a particular hospital. The hospital may assume financial risk for the cost and scope of institutional care given. If payment is insufficient to meet the hospital s actual costs of care, or if utilization by such enrollees materially exceeds projections, the financial condition of the hospital could erode rapidly and significantly. Often, HMO contracts are enforceable for a stated term, regardless of hospital losses and may require hospitals to care for enrollees for a certain time period, regardless of whether the HMO is able to pay the hospital. Hospitals also from time to time have disputes with managed care payors concerning payment and contract interpretation issues. Failure to maintain contracts could have the effect of reducing the market share and net patient services revenues of the District. Conversely, participation may result in lower net income if the District is unable to adequately contain its costs. Thus, managed care poses a significant business risk (and opportunity) that hospitals face. The growth of alternative delivery systems such as managed care organizations can have a negative impact on hospitals in several ways. First, a hospital generally will not be able to serve the 16

23 patients of alternative delivery systems with which it does not contract. Second, a hospital generally is required to substantially reduce its charges to obtain a contract to service alternative delivery system patients. Third, the alternative delivery systems market is becoming increasingly competitive and many of the alternative delivery systems with which the District has contracted may not survive, which may result in the District being responsible for providing services for which the District may not ultimately be compensated. For the fiscal years ended September 30, 2015 and 2016, respectively, commercial insurance or managed care (other than Medicare and Medicaid managed care) accounted for approximately 15.2% and 14.6% of the gross patient service revenue of the District. See SOURCES OF GROSS PATIENT SERVICE REVENUE in Appendix A. REGULATORY, LICENSING AND ACCREDITATION MATTERS The healthcare industry is subject to extensive federal, state and local laws and regulations. These laws and regulations require that hospitals meet various requirements, including those relating to the adequacy of medical care, equipment, personnel, physician relationships, operating policies and procedures, billing patients for services, filing of Medicare and Medicaid reports, payments for services and supplies, maintenance of adequate records, privacy, building codes and environmental protection. These laws and regulations are extremely complex and subject to interpretation. The District often finds there is little or no regulatory or judicial interpretation of these laws and regulations to guide it. Moreover, routine modification of the laws and regulations creates additional uncertainty when trying to comply with applicable laws and regulations. If the District fails to comply with applicable laws and regulations, it could be subject to civil or criminal penalties, including the loss of its licenses to operate its hospitals and its ability to participate in the Medicare and Medicaid programs. A determination that the District has violated these laws, or even a public announcement that it is being investigated for possible violations of these laws, could harm its business reputation and materially adversely affect its business, financial condition, or results of operations. In the future, different interpretations or enforcement of these laws and regulations could result in allegations that some of the District s current practices are improper or illegal or could require it to make changes in its facilities, equipment, personnel, services, capital expenditure programs or operating expenses. Health facilities, including those of the District, are also subject to numerous professional and private licensing, certification and accreditation requirements. Management of the District currently anticipates no difficulty in renewing or maintaining currently held licenses, certifications or accreditations that are material to its operations, and does not anticipate a reduction in third-party payments that would materially adversely affect the operations or financial condition of the District due to licensing, certification or accreditation difficulties. Nevertheless, actions in any of these areas could occur and could result in a reduction in utilization or revenues or both, or the loss of the District s ability to operate all or a portion of its health care facilities, and, consequently, could adversely affect the District s ability to make principal, interest and any premium payments on the 2017 Bonds. CIVIL AND CRIMINAL ENFORCEMENT EFFORTS The hospital industry is subject to regular, ongoing inquiries, audits and investigations relating to issues such as referrals of patients, physician recruiting practices, Medicare and Medicaid cost reporting, coding and billing practices, physician ownership and joint ventures involving hospitals. 17

24 Federal and state government agencies have engaged in coordinated civil and criminal enforcement efforts. In addition, the Office of Inspector General of DHHS, which is responsible for investigating fraud and abuse, and the United States Department of Justice periodically establish enforcement initiatives focusing on specific patient billing practices or other suspected areas of abuse. To the extent that these enforcement activities are part of the overall effort by federal and state governments to control and reduce health care costs, the District expects these enforcement activities will take on additional importance and may become more intense. The District cooperates with audits, inquiries and investigations whenever it receives requests for information from government agencies. Future audits, inquiries and investigations have the potential to result in claims and lawsuits, the results of which cannot be predicted. The ultimate resolution of these claims and lawsuits, individually or in the aggregate, have the potential to result in a material adverse effect on the businesses of the District (both in the near and long term), financial position, results of operations or cash flows. NORTH CAROLINA CERTIFICATE OF NEED PROGRAM North Carolina has a Certificate of Need Law ( CON Law ) which regulates various types of activities and expenditures on behalf of or for health facilities, including hospitals. The purpose of the CON Law is to prevent unnecessary duplication of expensive health care services in an effort to contain health care costs. Before undertaking certain types of activities or expenditures, any person, including a hospital or other health service facility, is required to obtain a certificate of need ( CON ), which is issued by the Certificate of Need Section, Division of Health Service Regulation, North Carolina Department of Health and Human Services (the CON Section ) 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 CON Section on a competitive basis. The District has received certificates of need, if required, for all currently operational activities. The CON Law may limit or even prevent the District from undertaking certain activities and expenditures which might be financially advantageous. In addition, the statutory and regulatory requirements may be amended in the future to increase or decrease the regulatory restrictions and resulting costs. For all of these reasons, the CON Law and regulations could adversely affect the revenues of the District. PHYSICIAN RECRUITMENT, JOINT BUSINESS ACTIVITIES AND REFERRALS The Medicare PPS creates strong financial incentives for hospitals to recruit and retain active physicians who will admit patients and utilize hospital services. The District s response to these incentives is limited, however, by legal restrictions, including limitations with respect to permitted activities of tax-exempt organizations and federal and state statutes prohibiting fraud and abuse and certain physician self-referrals. As tax-exempt organizations, some members of the District are limited in their use of practice income guarantees, reduced rent on medical office space, low interest loans, joint venture programs and other means of recruiting and retaining physicians. According to certain Internal Revenue Service ( IRS ) rulings, a hospital using such means to recruit and retain physicians must demonstrate that the benefits provided to the physicians are incidental to the public benefits derived from such arrangements and that such benefits do not constitute prohibited private inurement. The IRS has focused particular attention on the physician compensation arrangements of tax-exempt organizations in recent years. The Medicare and Medicaid statutes and other laws prohibit the payment of any remuneration, directly or indirectly, in cash or in kind, to encourage or induce physicians to admit patients 18

25 or order services for patients. Other federal and state statutes generally prohibit physicians from referring patients to health care providers with which they have ownership or other financial interest. One such law, known as the Stark Law, also contains specific requirements with respect to the recruitment of physicians. Violations of these laws may result in civil and criminal penalties. Civil penalties range from monetary fines to temporary or permanent exclusion from the Medicare program. These laws have been construed to apply to many situations where hospitals and physicians conduct joint business activities, including joint ventures, physician recruitment and retention programs, physician referral services, hospital-physician service and management contracts and lending and leasing activities between hospitals and physicians. The District engages in the general types of activities described in the preceding sentence and is not aware of any challenge or investigation of these activities. DHHS has, in recent years, focused particular attention on physician recruitment and compensation arrangements for possible abuses of Medicare and Medicaid fraud and abuse laws. The District intends to comply with these statutes, regulations and rulings; such compliance, however, will limit the District s ability to influence directly the volume of services it provides. LICENSING, SURVEYS, INVESTIGATIONS AND AUDITS Generally. 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 Medicare participation and payment, state licensing agencies, private payors and The Joint Commission. Renewal and continuance of certain of these licenses, certifications and accreditations are based on inspections, surveys, audits, investigations or other reviews, some of which may require or include affirmative action or response by the facility. These activities generally are conducted in the normal course of business of health facilities. Nevertheless, an adverse result could cause a loss or reduction in the facility s scope of licensure, certification or accreditation, or could reduce the payment received or require repayment of amounts previously remitted. Medicare Audits. Hospitals participating in Medicare are subject to audits and retroactive audit adjustments by fiscal intermediaries under the Medicare program. From an audit, a fiscal intermediary may conclude that a patient has been discharged under an incorrect diagnosis-related group, that services may not have been provided under the direct supervision of a physician (to the extent so required), that a patient should not have been characterized as an inpatient, that certain services provided prior to admission as an inpatient should not have been billed as outpatient services or that certain required disclosures or processes were not satisfied. As a consequence, payments may be retroactively disallowed. Under certain circumstances, payments may be determined to have been made as a consequence of improper claims subject to the federal False Claims Act or other federal statutes, subjecting the hospital to civil or criminal sanctions. Medicare regulations also provide for withholding Medicare payment in certain circumstances, and such withholdings could have a substantial adverse effect on the financial condition of the District. 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 the role of an operator of properties or facilities, the District may be subject to liability for investigating and remedying any hazardous substances which have come to be located on its property, including any such substances that may have migrated off of its property. Typical hospital operations include, but are not limited to, the handling, use, storage, transportation, incineration, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants or contaminants. As such, hospital operations are particularly susceptible to the practical, financial and legal risks associated with compliance with such laws and regulations. 19

26 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. COMPETITION The District faces and will continue to face competition from other hospitals that offer comparable health care services (see SERVICE AREA AND COMPETITION in Appendix A). In addition, competition exists from alternative modes of health care delivery that offer lower priced services to the same population. Such alternative modes include ambulatory surgery centers, private laboratories and radiology services, skilled and specialized nursing facilities and home care. No assurance can be given that increasing competition and consolidation of providers in the District s service area will not have a material adverse effect on its financial condition. MALPRACTICE LAWSUITS Although the number of malpractice lawsuits filed against physicians and hospitals has stabilized in recent years, the dollar amounts of patient damage recoveries still remain potentially significant. A number of insurance carriers have withdrawn from this segment of the insurance market citing underwriting losses, and premiums have increased sharply in the last several years. For information regarding the District s insurance coverage and pending litigation, see MISCELLANEOUS Litigation in Appendix A and LEGAL MATTERS LITIGATION herein. FACILITIES CONSTRUCTED FOR SPECIFIC PURPOSES AND LIMITED TO SPECIFIC USES The payment of the 2017 Bonds is not secured by the District s facilities, and bondholders may not be able to rely on the liquidated value of the District s facilities should there be a default. The facilities are not comprised of general purpose buildings and would not generally be suitable for industrial or commercial use. Consequently, if a default resulted from an inability of the facilities to generate sufficient revenues to pay operating expenses and debt service on the 2017 Bonds, it might be difficult to find a buyer or lessee for the facilities that would be willing to pay a sufficient purchase price or rent to avoid loss to the bondholders. Thus, upon any default, or in the event that the District attempted to sell the facilities, it may not be possible to realize the amount of the outstanding 2017 Bonds from a sale or lease of the facilities. Furthermore, in order to operate the facilities as health care facilities, a purchaser of the facilities at a foreclosure sale would under the present law have to obtain operating licenses from the applicable state regulatory agency, appropriate provider agreements from third-party payors and a determination of need. DAMAGE, DESTRUCTION OR CONDEMNATION The District will be required to obtain insurance in the amount and against such risks as are customarily insured against by similar institutions in the area. However, there can be no assurance that the facilities will not suffer extraordinary and unanticipated losses for which insurance cannot be or has not been obtained, or that the amount of any such loss for the period during which the facilities cannot generate revenues will not exceed the coverage of such insurance policies. In addition, in the event of governmental condemnation of any of the facilities, there can be no assurance that any condemnation award received by the District will equal the value of the property taken. 20

27 OTHER FACTORS GENERALLY AFFECTING HEALTH CARE FACILITIES The following factors, among others, may affect the operations of health care facilities, including those of the District, to an extent that cannot be determined at this time: (1) Certain hospital markets, including many communities in the State, are strongly impacted by large health insurers and, in some cases, by major purchasers of health services. In those areas, health insurers may have significant influence over hospital rates, utilization and competition. Rate pressure imposed by health insurers or other major purchasers may have a material adverse effect on hospitals, particularly if major purchasers put increasing pressure on payors to restrict rate increases. Business failures by health insurers also could have a material adverse effect on contracted hospitals in the form of nonpayment or shortfalls or delays in payment, and/or continuing obligations to care for managed care patients without receiving payment. (2) Hospital operations are capital intensive. Regulation, technology and physician/patient expectations require constant and often significant capital investment. Total capital needs may be greater than the availability of funds to provide capital investment. (3) Hospitals are labor intensive. Labor costs, including salary, benefits and other liabilities associated with the workforce, have significant impact on hospital operations and financial condition. Hospital employees across the country are increasingly organized in collective bargaining units, and may be involved in work actions of various kinds, including work stoppages and strikes. Overall costs of the hospital workforce are high, and turnover is often also high. Pressure to recruit, train and retain qualified employees is expected to accelerate. These factors may materially increase hospital costs of operation. Workforce disruption may negatively impact hospital revenues and reputation. (4) As large employers, hospitals may incur significant expenses to fund pension and benefit plans for employees and former employees, and to fund required workers compensation benefits. Funding obligations or contributions in some cases may be erratic or unanticipated and may require significant commitments of available cash needed for other purposes. These factors could adversely affect costs of operation and the financial condition of the District. (5) In recent years, the hospital industry has suffered from an increasing scarcity of nurses and some skilled clinicians to staff its facilities. Because of this nationwide shortage of nurses and skilled technicians, the District may need 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. Over the next ten to twenty years, a nationwide shortage of physicians is expected to emerge as a result of several factors, including increases in the general population, the additional amount of health care needed for an aging population, more physicians reaching retirement age and the expansion of health care coverage resulting from the Health Care Reform Act. A future shortage of physicians in the service area of the District could reduce use of programs and services offered by the District and adversely affect its financial condition. (6) Medical liability litigation is subject to public policy determinations and legal and procedural rules that may be altered from time to time, with the result that the frequency and cost of such litigation, and resultant liabilities, may increase in the future. A hospital may also be adversely affected by negative financial and liability impacts on its physicians. Costs of insurance, including self-insurance, may increase dramatically, or the availability of commercial insurance may be jeopardized. (7) Hospitals are highly dependent on the condition and functionality of their physical facilities. Damage from natural causes, fire, deliberate acts of destruction, or various facilities system failures may have a material adverse effect on hospital operations, financial conditions and results of operations. 21

28 (8) Revenues may be affected by future medical and scientific advances resulting in decreased usage of inpatient hospital facilities, and by efforts by insurers, private employers and governmental agencies to limit the cost of hospital services, and to reduce utilization of hospital facilities by such means as preventive medicine, improved occupational health and safety and outpatient care, including changes in contracts for reimbursement limiting the amount of reimbursement for interest costs. (9) An inflationary economy and difficulties in increasing room charges and other fees charged while at the same time maintaining the scope and quality of health services may affect the health care industry s ability to maintain sufficient operating margins. (10) Hospitals face the possible inability to obtain future governmental approvals to undertake projects which they deem necessary to remain competitive both as to rates and charges and scope of care. (11) Although hospital rates are currently not subject to regulation under North Carolina law, the State could adopt legislation which would establish a mandatory rate-setting agency and procedures which could affect the ability of hospitals to maintain or increase current rates. (12) Failure to comply with certain legal requirements may cause interest on the 2017 Bonds to become subject to federal income taxation retroactive to the date of issuance of the 2017 Bonds. The Bond Order does not provide for the payment of any additional interest or penalty in the event of the taxability of the interest on the 2017 Bonds. (13) As with other large organizations, the District relies on computer networks and other electronic systems and technologies to conduct their operations. Hospitals have increasingly moved to electronic medical records in response to the requirements of the Health Care Reform Act. In the past several years, attempts by third parties to gain unauthorized access to the electronic systems of large organizations has become more prevalent. The goals of such cyber-attacks may include the misappropriation of funds and other assets, obtaining personal, operational, financial or other sensitive information and causing operational disruption. The District maintains systems and policies designed to deter cyber-attacks, and is committed to deterring attacks on its electronic systems and responding to such attacks to minimize the impact on its operations. No assurances can be given, however, that such security measures will prevent cyber-attacks, and no assurances can be given that any cyber-attacks, if successful, would not have a material adverse effect on the operations or financial condition of the District. (14) Public health crises whose impact cannot be anticipated or foreseen, such as Ebola or Zika, could have an adverse effect on the operations or financial condition of the District. (15) 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. There has been an increasing focus by the federal government on healthcare fraud and abuse enforcement. LITIGATION LEGAL MATTERS No litigation is now pending or, to the best of the District's knowledge, threatened, against or affecting the District which seeks to restrain or enjoin the authorization, execution or delivery of the 2017 Bonds, or the adoption of the Bond Order or the Series Resolution, or which contests the validity or the authority or proceedings for the adoption, authorization, execution or delivery of the 2017 Bonds, or the District's creation, organization or corporate existence, or the title of any of the present officers thereof to their respective offices or the authority or proceedings for the District's authorization, adoption, execution or delivery of the Bond Order, the Series Resolution or the 2017 Bonds, or the District's authority to carry 22

29 out its obligations thereunder, or which would have a material adverse impact on the District's condition, financial or otherwise. OPINIONS OF COUNSEL Certain legal matters related to the authorization, execution, sale and delivery of the 2017 Bonds are subject to the approving opinion of Womble Carlyle Sandridge & Rice, LLP, Raleigh, North Carolina Bond Counsel. The proposed form of Bond Counsel's opinion is included in Appendix D hereto. Certain legal matters will be passed on for the District by its counsel, Campbell Law Group, PLLC, Mount Airy, North Carolina, and for the Underwriter by its counsel, Parker Poe Adams & Bernstein LLP, Raleigh, North Carolina. TAX TREATMENT Opinion of Bond Counsel. In the opinion of Bond Counsel, under existing law and assuming continuing compliance by the District with certain covenants to comply with the requirements of the Internal Revenue Code of 1986, as amended (the Code ), regarding, among other matters, use, expenditure and investment of proceeds of the 2017 Bonds, and the timely payment of certain investment earnings to the United States Treasury, interest on the 2017 Bonds will not be includable in the gross income of the owners thereof for purposes of federal income taxation and will not be a specific preference item for purposes of the alternative minimum tax imposed by the Code on corporations and other taxpayers, including individuals; provided, however, such interest will be includable in determining adjusted current earnings of corporations for purposes of computing the alternative minimum tax imposed by the Code on corporations. Bond Counsel is also of the opinion, under existing law, that interest on the 2017 Bonds will be exempt from all State of North Carolina income taxes. The Code and other laws of taxation, including the laws of taxation of the State of North Carolina, of other states and of local jurisdictions, may contain other provisions that could result in tax consequences, upon which Bond Counsel renders no opinion, as a result of the ownership or transfer of the 2017 Bonds or the inclusion in certain computations of interest that is excluded from gross income for purposes of federal and North Carolina income taxation. Original Issue Premium. The initial public offering prices of the 2017 Bonds maturing on October 1, (the Premium Bonds ) are greater than the amounts payable at maturity. The difference between (a) the initial offering prices to the public (excluding bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents, wholesalers or other intermediaries) at which a substantial amount of each maturity of the Premium Bonds is sold and (b) the principal amount payable at maturity of such Premium Bonds constitutes original issue premium. In general, an owner of a Premium Bond must amortize the bond premium over the remaining term of the Premium Bond based on the owner s yield over the remaining term of the Premium Bond, determined based on constant yield principles (in certain cases involving a Premium Bond callable prior to its stated maturity date, the amortization period and yield may be required to be determined on the basis of an earlier call date that results in the lowest yield on such Premium Bond). An owner of a Premium Bond must amortize the bond premium by offsetting the qualified stated interest allocable to each interest accrual period under the owner s regular method of accounting against the bond premium allocable to that period and subtract such bond premium from the owner s basis in such Premium Bond. If the bond premium allocable to an accrual period exceeds the qualified stated interest allocable to that accrual period, the excess is a nondeductible loss. Under certain circumstances, the owner of a Premium Bond may realize a taxable gain upon disposition of the Premium Bond even though it is sold or redeemed for an amount less than or equal to the owner s original acquisition cost. Owners and prospective purchasers of Premium Bonds should consult their own tax advisors regarding the treatment of bond premium for federal income tax purposes, including various special rules 23

30 relating thereto, and state and local tax consequences in connection with the ownership and disposition of Premium Bonds. Original Issue Discount. The initial public offering prices of the 2017 Bonds maturing on October 1, (the Discount Bonds ) are less than the amounts payable at maturity. An amount not less than the difference between the initial offering price to the public (excluding bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents, wholesalers or other intermediaries) of the Discount Bonds and the amounts payable at maturity constitutes original issue discount. Under existing federal income tax law and regulations, the original issue discount on a Discount Bond is interest not includable in the gross income of an owner who purchases such Discount Bond in the original offering at the initial public offering price thereof and holds it to maturity, and such owner will not realize taxable gain upon payment of such Discount Bond at maturity. Owners who purchase Discount Bonds at a price other than the initial offering price or who do not purchase Discount Bonds in the initial public offering should consult their tax advisors with respect to the consequences of the ownership of such Discount Bonds. An owner who purchases a Discount Bond in the initial offering at the initial offering price and holds such Discount Bond to maturity is deemed under existing federal tax laws and regulations to accrue original issue discount on a constant yield basis under Section 1288 of the Code from the date of original issue. An owner s adjusted basis in a Discount Bond is increased by accrued original issue discount for purposes of determining gain or loss on sale, exchange or other disposition of such Discount Bond. Accrued original issue discount may be taken into account as an increase in the amount of tax-exempt interest received or deemed to have been received for purposes of determining various other tax consequences of owning a Discount Bond, including in the calculation of adjusted current earnings of corporations for purposes of computing the alternative minimum tax imposed by the Code on corporations, even though there will not be a corresponding cash payment. Owners and prospective purchasers of Discount Bonds should consult their own tax advisors regarding the calculation of accrued original issue discount for federal income tax purposes, including various special rules relating thereto, and state and local tax consequences, in connection with the ownership or disposition of Discount Bonds. LEGALITY FOR INVESTMENT Section of the General Statutes of North Carolina provides that the 2017 Bonds are securities in which all public officers and public bodies of the State of North Carolina and its political subdivisions and agencies and insurance companies, trust companies, investment companies, banks, savings banks, building and loan associations, savings and loan associations, credit unions, pension or retirement funds, other financial institutions engaged in business in the State of North Carolina, executors, administrators, trustees and other fiduciaries may properly and legally invest funds, including capital in their control or belonging to them, and the 2017 Bonds are securities that may properly and legally be deposited with and received by any State of North Carolina or municipal officer or any agency or political subdivision of the State for any purpose for which the deposit of bonds, notes or obligations of the State is now or may hereafter be authorized by law. ANNUAL DISCLOSURE CONTINUING DISCLOSURE OBLIGATION In the Series Resolution, the County has undertaken, for the benefit of the beneficial owners of 2017 Bonds to provide to the Municipal Securities Rulemaking Board (the MSRB ): (a) by not later than seven months after the end of each fiscal year, beginning with the fiscal year ending September 30, 2017, the audited financial statements of the District for such preceding fiscal year, if available, prepared in accordance with Section of the 24

31 General Statutes of North Carolina, as it may be amended from time to time, or any successor statute, or if such audited financial statements are not then available, unaudited financial statements of the District for such fiscal year to be replaced subsequently by audited financial statements of the District to be delivered within 15 days after such audited financial statements become available for distribution; (b) by not later than seven months after the end of each fiscal year, beginning with the fiscal year ending September 30, 2017, the financial and statistical data as of a date not earlier than the end of the preceding fiscal year for the type of information included in the tables under the following captions in Appendix A to this Official Statement, to the extent such items are not included in the audited financial information referred to in (a) above: (1) OPERATING DATA; (2) SOURCES OF GROSS PATIENT SERVICE REVENUE; and (3) FINANCIAL INFORMATION CERTAIN FINANCIAL RATIOS ; (c) in a timely manner not in excess of ten (10) business days after the occurrence of the event, notice of any of the follow events with respect to the 2017 Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (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, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the 2017 Bonds or other material events affecting the tax status of the 2017 Bonds; (7) modification to the rights of the beneficial owners of the 2017 Bonds, if material; (8) bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution or sale of any property securing repayment of the 2017 Bonds, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the District; 25

32 (13) the consummation of a merger, consolidation or acquisition involving the District or the sale of all or substantially all of the assets of the District, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material, and (14) appointment of a successor or additional Trustee or the change of name of the Trustee, if material; and (d) in a timely manner to the MSRB, notice of the failure by the District to provide the required annual financial information or operating data described in (a) and (b) above on or before the date specified. At present, Section of the General Statutes of North Carolina requires that the District's financial statements be prepared in accordance with generally accepted accounting principles and that they be audited in accordance with generally accepted auditing standards. All information provided to the MSRB as described under this subheading shall be provided in an electronic format as prescribed by the MSRB and accompanied by identifying information as prescribed by the MSRB. The District may also discharge the undertaking described above by transmitting such information in any other manner subsequently authorized or required by the U.S. Securities and Exchange Commission in lieu of the manner described above. If the District fails to comply with the undertaking described above, the Trustee or any beneficial owner of the 2017 Bonds may take action to protect and enforce the rights of all beneficial owners with respect to such undertaking, including an action for specific performance; provided, however, that failure to comply with such undertaking shall not be a default under the Bond Order or the Series Resolution and will not result in any acceleration of the 2017 Bonds. All actions will be instituted, had and maintained in the manner provided in this paragraph for the benefit of all beneficial owners of the 2017 Bonds. The District reserves the right to modify from time to time the information to be provided to the extent necessary or appropriate in the judgment of the District, provided that: (a) any such modification may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of the District; (b) the information to be provided, as modified, would have complied with the requirements of Rule 15c2-12 issued under the Securities Exchange Act of 1934 ( Rule 15c2-12 ) as of the date of this Official Statement, after taking into account any amendments or interpretations of Rule 15c2-12, as well as any changes in circumstances; and (c) any such modification does not materially impair the interests of the Owners of the 2017 Bonds, as determined by the Trustee or bond counsel to the District, or by approving vote of the Holders of a majority in aggregate principal amount of the 2017 Bonds then Outstanding pursuant to the terms of the Bond Order and the Series Resolution at the time of the amendment. In the event that the District makes such a modification, the annual financial information containing the modified operating data or financial information will explain, in narrative form, the reasons for the modification and the impact of the change in the type of operating data or financial information being provided. To the best of the District s knowledge, the District has complied in all material respects with its previous undertakings under Rule 15c2-12 for the past five years. It is noted, however, that, in connection with the sale and issuance of the 2008 Bonds, the District additionally covenanted to provide its audited financial statements to the MSRB within five months of the end of each fiscal year. This 26

33 additional reporting requirement was not undertaken pursuant to Rule 15c2-12. For the fiscal year ended September 30, 2011, the District posted its audited financial statements 22 days after the five-month filing deadline. The District does not consider this delay in filing to be material. QUARTERLY DISCLOSURE The District has agreed to furnish to the MSRB within 45 days from the end of each of the first three fiscal quarters of each fiscal year the cumulative unaudited financial statements of the District and its combined affiliates, if any, as of the end of such fiscal quarter. The provisions disclosed under this subcaption are not governed by the requirements of Rule 15c2-12. VERIFICATION OF MATHEMATICAL COMPUTATIONS Bond Resource Partners, LP (the Verification Agent ) will deliver to the District and the Underwriter on or before the date of delivery of the 2017 Bonds its attestation report 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) a verification of the mathematical accuracy of the mathematical computations of the adequacy of the cash and the maturing principal of and interest on the Escrow Securities held in escrow by the Escrow Agent to pay, when due, the maturing principal or redemption price and interest on the 2008 Bonds and (b) the mathematical computations supporting the conclusion of Bond Counsel that the 2017 Bonds are not arbitrage bonds under the Code and the regulations promulgated thereunder. Bond Counsel will rely on such verification in rendering its opinion as to the excludability of interest on the 2017 Bonds from gross income of the recipients thereof for federal income tax purposes. The examination performed by the Verification Agent is to be solely based on data, information and documents provided to the Verification Agent by the Underwriter. The attestation report of its examination will state that the Verification Agent has no obligation to update the report because of events occurring, or data or information coming to their attention, subsequent to the date of the report. HISTORICAL FINANCIAL INFORMATION MISCELLANEOUS The combined financial statements of the District and its affiliates included in Appendix B to this Official Statement have been examined by CliftonLarsenAllen LLP independent certified public accountants, to the extent and for the periods indicated in their report, which appears in Appendix B. Such financial statements have been included in reliance upon the report of such firm, which report is given upon the authority of such firm as experts in accounting and auditing. See page 2 of the Appendix A hereto and Note 17 to Appendix B relating to certain affiliates of the District. RATINGS Moody s and S&P have assigned independent ratings of Baa3 and BBB, respectively, with respect to the 2017 Bonds. Further explanation of the significance of such ratings may be obtained from Moody s at 7 World Trade Center, 23 rd Floor, New York, New York 10007, (212) and S&P at 55 Water Street, New York, New York ( ). The District has provided certain information to such rating agencies not included in this Official Statement. The ratings are not a recommendation to buy, sell or hold the 2017 Bonds and should be evaluated independently. There is no assurance that such ratings will not be withdrawn or revised downward by Moody s and S&P. Any such action may have an adverse effect on the market price of the 2017 Bonds. Neither the District nor the 27

34 Underwriter have undertaken any responsibility after the execution and delivery of the 2017 Bonds to assure maintenance of the ratings or to oppose any such revision or withdrawal. UNDERWRITING The Underwriter is offering the 2017 Bonds pursuant to a firm underwriting contract. The Underwriter s contract for offering the 2017 Bonds sets forth their obligation to offer publicly and sell all the 2017 Bonds at the initial public offering prices set forth on the inside cover less an underwriter s discount of $ and plus/less a net original issue premium/discount of $ and is subject to certain terms and conditions, including the approval of certain legal matters by counsel. The Underwriter may offer and sell the 2017 Bonds to certain dealers (including dealers depositing the 2017 Bonds into investment trusts) and others at prices different from the public offering prices shown on the inside cover. The Underwriter may change the public offering prices from time to time at its discretion. FINANCIAL ADVISOR Public Financial Management, Inc. ( PFM ) has served as financial advisor to the District for the issuance of the 2017 Bonds. PFM is not obligated to undertake, and has not undertaken, either to make an independent verification of, or to assume responsibility for, the accuracy, completeness, or fairness of the information contained in this Official Statement. PFM is an independent financial advisory firm and is not engaged in the business of underwriting, trading or distributing securities. 28

35 APPENDIX A NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY

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37 APPENDIX A NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY GENERAL Northern Hospital of Surry County (the Hospital ) is a general, acute-care, public hospital with 133 licensed beds (excluding 10 bassinets). It is owned and operated by the Northern Hospital District of Surry County (the District ) and is located at 830 Rockford Street in Mount Airy, North Carolina. Since opening in April 1957, it has been in continuous operation on its present site of approximately 15 acres. The campus consists of approximately 258,000 square feet of space. This includes 37,000 square feet of 100 inpatient acute-care beds, a 15,000 square foot 33 bed skilled nursing unit, a 13,000 square foot emergency department and a 50,000 square foot surgical services unit. The District also owns nine offsite physician practices and a wellness center, all of which total 104,000 square feet. The governance of the District and the Hospital is controlled by the Board of Commissioners of Surry County, North Carolina (the Board of County Commissioners ), all as more particularly described in the front part of this Official Statement. The Board of County Commissioners has delegated the day-to-day operation of the Hospital to a board of trustees as more fully described below under GOVERNANCE. HOSPITAL SERVICES In accordance with Federal and State of North Carolina regulations and professional practice standards and codes, the Hospital provides the community with an extensive range of health care services, including outpatient care, acute care, and post-acute care or skilled nursing services. Within the acute care area, the Hospital provides medical, surgical, obstetrical and pediatric care. In addition, the Hospital provides anesthesiology, pathology, cardiology, internal medicine, gynecology, nephrology, ophthalmology, orthopedic, radiology and urology services. The Hospital provides magnetic resonance imaging, lithotripsy, and PET/CT services. A ten-bed ICU/CCU unit and a twelve-bed Step-Down Unit provide services for both cardiac and intensive care patients. These units are equipped with physiological monitoring equipment and are staffed with critical care nurses. The Hospital is staffed with full-time, around the clock hospitalists and a 24-hour emergency room staffed with board-certified emergency physicians. BED COMPLEMENT The table below sets forth the current licensed and staffed bed complement of the Hospital. SERVICE LICENSED BEDS STAFFED BEDS Medical/Surgical Obstetric (including LDRP) Step-Down Telemetry Intensive Care Skilled Nursing TOTAL CORPORATE AND ORGANIZATIONAL STRUCTURE The District is a body corporate and politic created under the authority of Part 3 of Article 2 of Chapter 131E of the General Statutes of North Carolina. A-1

38 THE 2017 BONDS ARE LIMITED OBLIGATIONS OF THE DISTRICT PAYABLE SOLELY FROM THE FUNDS AND REVENUES PLEDGED TO THE PAYMENT THEREOF UNDER THE BOND ORDER AND THE SERIES RESOLUTION AND ARE NOT A DEBT NOR A LIABILITY OF SURRY COUNTY OR ANY POLITICAL SUBDIVISION THEREOF, OR A PLEDGE OF THE FAITH AND CREDIT OF SURRY COUNTY OR ANY POLITICAL SUBDIVISION THEREOF. The District has two affiliated organizations: Surry Regional Health Services, Inc. ( SRHS ), and the Northern Surry Foundation for Better Health, Inc. (the Foundation ). SRHS is a North Carolina nonprofit corporation that acquires and manages physician practices on behalf of the District when employing the physicians of such practices is determined by the District to be beneficial to the community. The Board (as defined below) serves as the governing body of SRHS. The revenues of SRHS do not constitute Revenues as defined in the Bond Order and are not pledged to the payment of the 2017 Bonds. The District, however, is considering a plan of reorganization pursuant to which SRHS would merge into the District. The District anticipates that this merger will take place within the next 18 months. Upon such merger, the revenues of SRHS will become Revenues as defined in the Bond Order and will be pledged to the payment of the Bonds. For the fiscal ended September 30, 2013, 2014, 2015 and 2016, SRHS accounted for 17%, 21%, 20% and 27%, respectively, of the combined total operating revenues of the District, SRHS and the Foundation; SRHS accounted for 23%, 28%, 24% and 30%, respectively, of the combined total operating expenses of the District; and SRHS and the Foundation and SRHS accounted for -254%, -105%, -37% and -56%, respectively, of the combined excess of revenues over expenses of the District, SRHS and the Foundation. The Foundation, a nonprofit corporation, collects gifts, donations, income and funds for the advancement of medicine, medical facilities and services to promote better healthcare in the community that the Hospital serves. The revenues of Foundation do not constitute Revenues as defined in the Bond Order and are not pledged to the payment of the Bonds. The revenues and expenses of the Foundation are not a material part of the combined revenues or expenses of the District, SRHS and the Foundation. The District is also a 50% partner with Hugh Chatham Memorial Hospital, Inc. in Hospice of Surry County, Incorporated ( Hospice ), which does business as Mountain Valley Hospice and provides hospice services to the residents of Surry County and the surrounding area. GOVERNANCE The day-to-day operation of the Hospital has been delegated by the Board of County Commissioners to a thirteen-member Board of Trustees (the Board ) which meets monthly. The members of the Board are appointed to staggered four-year terms by the Board of County Commissioners and may serve multiple terms. The Board elects its own officers each October. The Hospital s Chief Executive Officer serves as the Treasurer and Secretary to the Board. The Board of County Commissioners has the ability to remove appointed Board members. Although the Board of County Commissioners appoints the Hospital s Board, Surry County provides no financial support for the Hospital, is not obligated on the Hospital s debts, nor is it entitled to any of its surpluses. Standing committees of the Board include Executive, Finance, Planning and Development, Professional Relations, By-laws, Pension and Joint Conference Committees. A Trustee Continuing Education program is in place and includes focused Trustee training conferences sponsored by Quorum Health Resources, LLC. The members of the Board, their occupations and their terms are listed below: A-2

39 NORTHERN HOSPITAL OF SURRY COUNTY BOARD OF TRUSTEES TRUSTEE OCCUPATION TERM William K. Woltz, Jr. Chairman Mount Airy, NC Monty K. Venable Vice-Chairman Mount Airy, NC Daron Atkins Dobson, NC Former President and CEO Perry Manufacturing President/CEO United Plastics Corp. Educator North Surry High School 9/6/2016 9/30/2020 9/21/2015 9/30/ /7/2013 9/30/2017 Doug Cook Dobson, NC Retired School Principal 9/21/2015 9/30/2019 Dr. Druery DeVore Chief of Staff Winston-Salem, NC David Andrew Gillespie Mount Airy, NC Obstetrician at Northern Hospital of Surry County Owner Blue Ridge Tree Service 1/01/2017-1/31/2018 9/6/2016 9/30/2020 R.F. Buck Golding Retired Airline Pilot County Commissioner Lowgap, NC (1) Teresa D. Lewis Mount Airy, NC Warren C. Nichols Mount Airy, NC Paul Patterson Mount Airy, NC President/Founder Work Force Unlimited Outside Chairman/Retired Renfro Corporation Former President Patterson Automotive, Inc. 11/3/2014 9/30/ /3/2014 9/30/ /3/2014 9/30/2018 Tom Riggs Mount Airy, NC Retired Business Owner 11/17/2014 9/30/2018 Dr. David Shockley Dobson, NC President Surry Community College 10/7/2013 9/30/2017 Philip Snow Toast, NC Retired Hearing Officer State of NC 9/21/2015 9/30/2019 (1) Board of County Commissioners seat. Serves as liaison between Board of County Commissioners and the Hospital Board. Term is decided by the Board of County Commissioners. A-3

40 CONFLICT OF INTEREST POLICY From time to time, the District conducts business transactions with organizations, corporations or individuals with which one or more of the members of the Board may be affiliated. The Board has a conflict of interest policy which requires that any such duality of interest or possible conflict of interest on the part of any officer or director be disclosed and be made a matter of record. In addition to disclosure, the policy requires that additional specified steps be taken, as appropriate, to assure that the conflict does not impact objective deliberation or vote. QUORUM HEALTH RESOURCES, LLC Since 1994, the District has contracted with Quorum Health Resources, LLC ( QHR ), a subsidiary of Quorum Health Corporation, to provide administrative and operational support for the Hospital. QHR is headquartered in Brentwood, Tennessee. QHR provides administrative manpower and expertise, financial and reimbursement expertise, departmental operational support, and group purchasing activities. The District s Chief Executive Officer and Chief Financial Officer are employees of QHR. The District pays QHR through an annual fixed fee contract arrangement. The District maintains absolute authority for decision-making and governance of the Hospital. ADMINISTRATIVE OFFICERS Resumes of certain administrative officers of the Hospital are as follows: Ned Hill, President and Chief Executive Officer (40). Mr. Hill has served as the Chief Executive Officer of the District since October He is employed by QHR. He received a Bachelor of Arts Degree from the University of Utah in 2001 and a Master s Degree in Public Administration from the University of Utah in Prior to joining the District, he served as Chief Executive Officer of The Memorial Hospital of Carbon County in Rawlins, Wyoming. Mr. Hill has served in executive leadership roles in acute care hospitals across the country since Andrea Hickling, Vice President of Finance and Chief Financial Officer (48). Mrs. Hickling has served as the Chief Financial Officer of the District since August She is employed by QHR. A native of Virginia, she received a Bachelor of Business Administration degree with a concentration in Accounting from the College of William & Mary in 1990 and is a Certified Public Accountant. Prior to joining the District, she served as Interim Chief Financial Officer for the Bon Secours Charity Health System located in Suffern, New York, and, preceding that position, she was the Senior Director of Operational Finance for Novant Health located in Winston-Salem, North Carolina. Mrs. Hickling has over 25 years of healthcare finance experience. Robin Hodgin, Vice President of Patient Services and Chief Nursing Officer (55). Mrs. Hodgin has served as the Chief Nursing Officer of the District since 2001 and as the Vice President of Patient Services since A native of Mount Airy, North Carolina, she received an Associate Degree of Nursing from Surry Community College in 1981, a Bachelor of Science degree in Nursing, graduating summa cum laude from Winston-Salem State University in 1995, and a Master s Degree in Health Administration from The University of North Carolina Chapel Hill in Mrs. Hodgin has been employed by the District since 1981 in various nursing and leadership roles. Prior to joining the District, she was a staff nurse at Wake Forest Baptist Medical Center. Brian K. Beasley, Vice President, Clinic Operations and Executive Director of SRHS (47). Mr. Beasley has served as the Vice President, Clinic Operations and Executive Director of SRHS since January He has been employed by the District since June A native of Mount Airy, NC, he received his Associate of Science degree in Nursing from Surry Community College in 1998 and a A-4

41 Bachelor of Science degree in Nursing from Winston-Salem State University in May Prior to serving in his current role, he served as the Assistant Vice President, Patient Services of the District ( ), Director of Ambulatory Services ( ), Director of Surgical Services ( ), Staff Development Coordinator ( ), Emergency Department Registered Nurse ( ) and Surry County Emergency Medical Services ( ). Julia Nelson, Vice President, Human Resources (50). Ms. Nelson has served as the Vice President, Human Resources since January A native of Illinois, she received her Bachelor of Science degree in Business Personnel Management from Eastern Illinois University. Prior to joining the District, she served as the Director of Human Resources of The Memorial Hospital of Carbon County in Rawlins, Wyoming ( ). Ms. Nelson is a member of the North Carolina Human Resources Association. LICENSURE, ACCREDITATION MEMBERSHIPS AND AFFILIATIONS The Hospital is licensed, fully accredited, approved by or a member of the following: Licensure: State of North Carolina Department of Health and Human Services, Division of Health Service Regulation. Accreditation: The Joint Commission on Accreditation of Healthcare Organizations three-year accreditation, granted July Approvals: Social Security Administration (United States Department of Health and Human Services) for Medicare; North Carolina Medical Assistance Program (North Carolina Department of Social Services) for Medicaid; Virginia Medical Assistance Program (Virginia Department of Health) for Medicaid. Memberships: American Hospital Association; North Carolina Hospital Association; Greater Mount Airy Chamber of Commerce; Surry County Economic Development Partnership, Inc. Affiliations: The District has formed partnerships with Surry Community College and surrounding colleges and universities to train healthcare students, such as registered nurses, pharmacists, radiology technicians, respiratory therapist, medical technologists, and physical therapists. EMPLOYEES As of September 30, 2016, the District had 747 employees representing 589 full-time equivalent employees (FTEs). FTEs per adjusted occupied bed for the fiscal year ended September 30, 2016 were The composition of the labor force at the Hospital as of September 30, 2016 was as follows: TYPE OF EMPLOYEE NUMBER OF EMPLOYEES RN 201 LPN 32 Management 38 Other 476 TOTAL 747 A-5

42 At the present time, no District employees are represented by a labor union. In the fiscal year ended September 30, 2016, the District had an overall employee turnover rate of 17.9% and a nursing staff turnover rate of 19.1%. GENERAL MEDICAL STAFF Primary care physicians represent approximately 80% of the Hospital s total admissions. Primary care physicians are defined to include those physicians practicing full-time in internal medicine, family practice medicine, hospitalists, obstetrics/gynecology and pediatrics who do not specialize in certain aspects of these practice areas. As of October 1, 2016, the Hospital s Medical Staff consisted of 47 active and provisional (for later advancement to active) members and 153 courtesy and consulting members. There are also 51 allied health professionals who hold hospital privileges. The classification of the active Medical Staff by specialty is as follows: SPECIALTY NUMBER OF ACTIVE PHYSICIANS NUMBER BOARD CERTIFIED AVERAGE AGE AGE RANGE Anesthesiology Cardiology Emergency Medicine Family Practice Gastroenterology General Surgery Hospitalists Internal Medicine OB/GYN Ophthalmology Orthopedics Otolaryngology Pathology Pediatrics Podiatry Radiology Urology Vascular Surgery TOTAL The Hospital has recently added ear, nose and throat services and is in the process of adding cardiac rehabilitation, sleep lab, neurology, neurosurgery and vascular surgery services. Its goal with these addition is to keep local patients from traveling to other health care facilities. A-6

43 TOP TEN ADMITTERS A profile of the ten physicians with the highest number of discharges during the fiscal year ended September 30, 2016 is illustrated in the following table: TOP 10 ADMITTING PHYSICIANS # OF RANK SPECIALTY AGE DISCHARGES % OF TOTAL 1 Hospitalist (a) % 2 Hospitalist (a) Hospitalist (a) Hospitalist (a) Hospitalist (a) Cardiology OB/GYN OB/GYN Hospitalist (a) Orthopedics TOTAL OR AVERAGE , % (a) In same hospitalist group which is owned by the District. ADDITIONS AND DELETIONS The number of physicians on staff at the Hospital has increased as population growth demands more physicians. The following table reveals a net increase in the number of physicians over a five-year period. Overall, the number of physicians has increased by 20 over the past five years. MEDICAL STAFF CHANGES (ACTIVE AND CONSULTING) Staff at beginning of FY Additions to staff Departures from staff Net change Staff at end of FY A-7

44 OPERATING DATA Information indicating the usage of facilities and services provided by the Hospital for its last five fiscal years are summarized below: DEPARTMENT Staffed beds (excluding skilled nursing facility) Admissions Adult & Ped 4,428 4,004 3,703 3,832 3,913 Births Patient Days Adult & Ped 14,273 13,232 12,432 12,782 12,732 Average Census Adult & Ped Average Length of Stay Adult & Ped Case Mix Index Medicare Skilled Nursing Patient Days 12,009 11,918 11,534 11,418 11,392 Observation Patients 1,287 1,329 1,286 1,362 1,435 Emergency Department Visits 36,645 35,899 36,431 37,951 37,598 Operating Room Cases 3,834 3,498 3,441 3,329 3,286 CT Scans 18,463 16,964 16,944 18,413 19,886 MRI Scans 2,899 2,645 2,548 2,742 3,067 Ultrasounds 9,488 8,308 8,559 8,622 9,167 FTEs (Full Time Equivalents) [remainder of page intentionally left blank] A-8

45 SOURCES OF GROSS PATIENT SERVICE REVENUE The District receives payments from Medicare, Medicaid, Blue Cross, various commercial insurance carriers, and from patients directly. Medicare and Medicaid reimburse the District with a prospective payment based on specific diagnosis and procedures. The District participates in several PPO and HMO contracts and receives payments based upon a combination of per diems, per case and percentage of charges. The following table presents the sources of revenue of the District and SRHS based on percentages of patient days and gross patient service revenue for the periods indicated: FISCAL YEAR ENDED SEPTEMBER 30, PAYMENT SOURCE % OF PATIENT DAYS Medicare 64.7% 66.7% 65.4% 64.8% 64.2% Medicaid Commercial / Managed Care Self-Pay / Other % 100.0% 100.0% 100.0% 100.0% % OF GROSS PATIENT SERVICE REVENUE Medicare 48.7% 49.2% 49.3% 48.3% 47.6% Medicaid Commercial / Managed Care Self-Pay / Other % 100.0% 100.0% 100.0% 100.0% INPATIENT/OUTPATIENT MIX The following table presents the District s source of revenue and the percentages of inpatient and outpatient revenue for the periods indicated: FISCAL YEAR ENDED SEPTEMBER 30, SOURCE OF REVENUE Inpatient 31.5% 29.5% 25.9% 25.7% 24.1% Outpatient % 100.0% 100.0% 100.0% 100.0% A-9

46 FINANCIAL INFORMATION The following selected financial data are derived from the financial statements of the District, which have been audited by CliftonLarsonAllen LLP for fiscal years ended September 30, 2012, 2013, 2014, 2015 and The data should be read in conjunction with the financial statements, related notes and other financial information included herein. The data below includes the combined financial data of the District, SRHS and the Foundation. See page 2 in CORPORATE AND ORGANIZATIONAL STRUCTURE hereof regarding the relative percentages attributable to SRHS and the Foundation of the statements below. STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS FISCAL YEARS FISCAL YEAR ENDED SEPTEMBER 30, OPERATING REVENUE: Net Patient Service Revenue $74,088,785 $72,750,177 $77,010,818 $81,368,361 $84,218,950 Other Operating Revenues 3,278,326 4,927,192 3,250,944 2,726,544 6,927,241 Total Operating Revenues $77,367,111 $77,677,369 $80,261,762 $84,094,905 $91,146,191 OPERATING EXPENSES: Salaries and Wages $31,036,844 $31,893,134 $30,795,185 $33,111,126 $37,679,004 Employee Benefits 7,846,887 7,549,218 6,687,688 7,672,359 7,770,381 Supplies 10,496,400 10,456,752 10,057,167 10,710,018 14,423,365 Purchased Services * - * - * 14,069,602 * 13,125,631 12,787,441 Other * 19,062,319 18,423,841 9,027,667 * 9,670,505 10,129,851 Depreciation 5,884,629 5,953,246 5,418,185 5,065,881 5,039,268 Total Operating Expenses $74,327,079 $74,276,191 $76,055,494 $79,355,520 $87,829,310 INCOME FROM OPERATIONS $ 3,040,032 $ 3,401,178 $ 4,206,268 $ 4,739,385 $3,316,881 NON-OPERATING INCOME (EXPENSE): Investment income (Loss), Net $ 1,439,400 (780,452) $ 1,625,743 $ 1,700,561 $1,346,689 Interest Expense (1,997,180) (1,526,809) (2,104,314) (1,648,776) (1,566,823) Equity Earnings from Joint Venture 146, , , , ,424 Non-Capital Grants and Contributions 51, ,272 54,150 56, ,973 Non-Operating Income (Expenses), Net $ (359,727) $(2,009,184) $ (231,430) $ 312,355 $158,263 EXCESS OF REVENUES OVER EXPENSES $ 2,680,305 $ 1,391,994 $ 3,974,838 $ 5,051,740 $3,475,144 Net Position Beginning of Year 77,482,855 78,883,603 ** 74,578,678 *** $78,553,516 $83,605,256 NET POSITION END OF YEAR $80,163,160 $80,275,597 $78,553,516 $83,605,256 $87,080,400 * These categories were changed commencing with the fiscal year ended September 30, 2015 such that Purchased Services are shown as a separate line item. ** The adoption of GASB 65 in FY14 required an adjustment to Net position as of 10/1/12. *** The adoption of GASB 68 and 71 in FY15 required an adjustment to Net position as of 10/1/13. MANAGEMENT S DISCUSSION Fiscal Year Admissions decreased 5.3% from the prior fiscal year, with the decline completely in medical cases, while Emergency Department visits decreased 1.7%, with a similar mix of patients admitted and not admitted. Operating Room cases increased 10.4%, with most of the increase coming in the outpatient setting. CT scans decreased 28.0%, while MRI scans decreased by 10.0%. Total operating revenues decreased 0.9% while total operating expenses increased 0.8%. The excess margin A-10

47 decreased from 5.1% in fiscal year 2011 to 3.5% in fiscal year 2012 driven by a reduction of overall patient volumes. Fiscal Year Admissions decreased 9.6% from the prior year, with a decrease in surgical cases (primarily General Surgery and OB/GYN) versus medical cases, while Emergency Department visits decreased 2.0% with a higher mix of patients not admitted. Operating Room cases decreased 8.8%, with decreases in both the inpatient and outpatient settings. CT scans decreased 8.1%, and MRI s decreased 8.8%. Utilization of healthcare services both locally and nationally decreased with concerns about provisions of the Affordable Care Act. Total operating revenues increased 0.4% while total operating expenses decreased 0.1%. The excess margin decreased from 3.5% in fiscal year 2012 to 1.8% in fiscal year 2013 as the result of poor returns on investments. Fiscal year 2013 saw the departure of the District s Chief Financial Officer, who had served for the past 18 years. The Hospital hired a new Chief Financial Officer in August Fiscal Year Admissions decreased 7.5% from the prior year (with similar decreases in medical versus surgical cases) while Emergency Department visits increased 1.5% with a higher mix of patients not admitted. Operating Room cases decreased 1.6%, with inpatient cases dropping by nearly 8.0% with the greatest decline in Orthopedics. CT scans decreased 0.1% from the prior year and MRI s decreased by 3.7%. Total operating revenues increased 3.3%, in spite of reduced inpatient volumes, due mostly to implementing a patient loan program that substantially reduced bad debt expense, while total operating expenses increased 2.4%. The excess margin increased from 1.8% in fiscal year 2013 to 5.0% in fiscal year 2014 due to strong returns on investments. Fiscal year 2014 saw the departure of the District s Chief Executive Officer, who had served for the past 19 years. Fiscal Year Admissions increased 3.5% from the prior year, with a higher mix of medical cases versus surgical cases, while Emergency Department visits increased 4.2%, with a similar mix of patients admitted and not admitted. Operating Room cases decreased 3.3%, with the decline completely in the outpatient setting, particularly in Ophthalmology procedures. CT scans increased 8.7%, while MRI procedures increased by 7.6%. Total operating revenues increased 4.8% while total operating expenses increased 4.3%. The excess margin increased from 5.0% in fiscal year 2014 to 6.0% in fiscal year 2015, due mostly to the increase in operating income. The Hospital hired a new Chief Executive Officer in October Fiscal Year Admissions increased 2.1% from the prior year, with a higher mix of surgical cases, while Emergency Department visits decreased 0.9% with a shift to more patients being admitted. Operating Room cases decreased 1.3% with the decline entirely in the outpatient setting, particularly in OB/GYN and Ophthalmology services. CT scans increased 8.0%, while MRI procedures increased 11.9%. Total operating revenues increased 8.4% while total operating expenses increased 10.7%. The excess margin decreased from 6.0% in fiscal year 2015 to 3.8% in fiscal year Revenues and expenses increased dramatically due to the acquisition of a very large family medicine practice, pharmacy, and wellness center at the beginning of fiscal year CAPITAL LEASE OBLIGATIONS The District has entered into certain capital lease obligations in order to acquire certain equipment. For more information regarding the capital lease obligations, see Note 8 in the District s financial statements in Appendix B. Payments on the capital lease obligations are not secured by a pledge of Revenues which secures the 2017 Bonds. If the District fails to pay the capital lease obligations, the applicable lender may foreclose on such property and the Hospital may lose the equipment financed thereby. A-11

48 CERTAIN FINANCIAL RATIOS The following financial ratios include the combined financial data of the District, SRHS and the Foundation. See page 2 in CORPORATE AND ORGANIZATIONAL STRUCTURE hereof regarding the relative percentages attributable to SRHS and the Foundation of the combined financial statements. DAYS CASH ON HAND FISCAL YEAR ENDED SEPTEMBER 30, Cash and Cash Equivalents $ 2,774,073 $ 5,855,129 $ 5,028,327 $ 3,661,134 $ 5,156,798 Assets limited as to use by Board for capital improvements 42,577,024 39,545,899 44,736,697 50,176,516 51,166,274 $45,351,097 $45,401,028 $49,765,024 $53,837,650 $56,323,072 Total Operating Expenses $74,327,079 $74,276,191 $76,055,494 $79,355,520 $87,829,310 Add: Interest Expense $1,997,180 $1,526,809 $2,104,314 $1,648,776 1,566,823 Less: Depreciation and Amortization (5,884,629) (5,953,246) (5,418,185) (5,065,881) (5,039,268) $70,439,630 $69,849,754 $72,741,623 $75,938,415 $84,356,865 Days Cash Expenses per Day 192, , , , , Days Cash on Hand LONG-TERM DEBT SERVICE COVERAGE RATIO FISCAL YEAR ENDED SEPTEMBER 30, Excess of Revenues over Expenses $ 2,680,305 $ 1,391,994 $ 3,974,838 $ 5,051,740 $3,475,144 Add (Less): Unrealized Losses (Gains) (387,556) 1,817,228 (490,612) (669,707) (197,772) Add: Depreciation and Amortization 5,884,629 5,953,246 5,418,185 5,065,881 5,039,268 Add: Interest Expense 1,997,180 1,526,809 2,104,314 1,648,776 1,566,823 Add (Less): Loss (Gain) on Extinguishment of Debt Add (Less): Loss (Gain) on Sale of Assets Not in Ordinary Course of Business Income Available for Debt Service $10,174,558 $10,689,277 $11,006,725 $11,096,690 $9,883,463 Maximum Annual Debt Service 2,994,834 3,396,552 3,396,552 3,346,257 3,342,863 Long-Term Debt Service Coverage Ratio OPERATING MARGIN FISCAL YEAR ENDED SEPTEMBER 30, Operating Income $ 3,040,032 $ 3,401,178 $ 4,206,268 $ 4,739,385 $ 3,316,881 Total Operating Revenue $77,367,111 $77,677,369 $80,261,762 $84,094,905 $91,146,191 Operating Margin 3.9% 4.4% 5.2% 5.6% 3.6% A-12

49 EXCESS MARGIN FISCAL YEAR ENDED SEPTEMBER 30, Operating Revenue $77,367,111 $77,677,369 $80,261,762 $84,094,905 $91,146,191 Non-Operating Income (359,727) (2,009,184) (231,430) 312, ,263 Excess of Revenues over Expenses 2,680,305 1,391,994 3,974,838 5,051,740 3,475,144 Excess Margin 3.5% 1.8% 5.0% 6.0% 3.8% EMPLOYEE BENEFIT AND PENSION PLAN The District offers employees a program of benefits which include medical and pharmacy benefits, dental insurance, short and long-term disability insurance, life insurance, tuition assistance and, at the employees option, a tax-sheltered annuity. The District previously provided all eligible employees with a non-contributory defined benefit pension plan. This plan was frozen as of December 31, Plan benefits were based on years of service and the employees compensation. The funding policy for the pension plan is determined by the Board and is an amount actuarially required to fund benefits. The District s defined benefit plan is currently funded in the amount recommended by the District s actuary. The District also sponsors two defined contribution plans: a 457(b) plan and a 403(b) plan. Although both plans cover substantially all employees who have completed three months of service, the 457(b) plan only allows for contributions from employees. With the 403(b) plan, the District has the option to contribute 2% of the compensation earned by each eligible employee who is employed on the last day of the plan year. The District also has the option to match employee contributions to the 403(b) plan based on the employee s years of service up to an amount of 75% of the first 4% of the employee s contributions. The Board has the power to change the contribution and matching rates at its discretion. The District maintains certain self-insurance programs. See Note 5 in Appendix B for more information. FUTURE FINANCIAL PLANS For fiscal year 2017, the District budgeted an operating margin of 3.6% and an excess margin of 3.8%. The District has recently added full-time/expanded ENT services and is in the process of adding Cardiac Rehab, Sleep Lab, Neurology, Neurosurgery and Vascular service lines. Significant physician recruitment is underway in the specialties of OB/GYN, Internal Medicine, Family Medicine, Pulmonology and Orthopedics. Capital expenditures are expected to reach $3,000,000 in fiscal year 2017, to be paid out of budgeted funds, with a focus on facility and clinic upgrades, surgical equipment, information technology investment and a fetal monitoring system. The long-term strategic direction of the organization is to keep local patients local. The District currently has no plans to issue additional indebtedness. A-13

50 SERVICE AREA AND COMPETITION The Hospital is approximately 37 miles north of Winston-Salem, North Carolina and is near the North Carolina/Virginia boarder. The Hospital s primary service area includes Mount Airy, along with its surrounding communities within a 15-mile radius of the Hospital. Those surrounding communities include Dobson, Pilot Mountain, and Lowgap in Surry County, NC; Cana in Carroll County, VA; and Ararat in Patrick County, VA. PRIMARY SERVICE AREAS POPULATION Mount Airy (City Limits), NC 10,411 Dobson, NC 1,550 Pilot Mountain, NC 1,752 Lowgap, NC 2,536 Cana, VA 1,254 Ararat, VA 2,971 *Source: United States Census Bureau (2010, 2013) Secondary service areas include the communities of Westfield, Pinnacle, Siloam, and Elkin within Surry County, NC, and the Claudville community in Patrick County, VA. A map of the primary and secondary service areas follows. The Hospital maintains an average 34% market share of inpatients in its primary service area, sharing this area with the competitor tertiary medical centers of Novant Health Forsyth Medical Center A-14

51 and Wake Forest Baptist Medical Center, both located in Winston-Salem, NC, and Hugh Chatham Memorial Hospital located in Surry County in Elkin, NC. The Hospital s outpatient market share is higher, with an estimated emergency department visit share of 62%. Novant Health Forsyth Medical Center ( Forsyth ) is a tertiary facility operating 921 beds in the urban area of Winston-Salem. Forsyth offers a large array of services including the Heart & Vascular Institute, Derrick L. Davis Cancer Center, Stoke & Neurosciences Center, Maya Angelou Women s Health & Wellness Center, Orthopedic Center/Rehabilitation, the only birthing center in Forsyth County with a Level III NICU, and Behavioral Health. Forsyth s parent, Novant Health, is an integrated system of physician practices, hospitals, outpatient centers, and community health. Wake Forest Baptist Health, the operator of Wake Forest Baptist Medical Center, is an integrated system that operates 885 acute care, rehabilitation and psychiatric care beds, outpatient services, community health and information centers. Wake Forest Baptist Medical Center, the general medical, surgical and teaching facility, is located in Winston-Salem. Wake Forest Baptist Health offers experts in more than 100 areas of medicine including the Brenner Children s Hospital, Comprehensive Cancer Center, Heart & Vascular Center and Institute for Regenerative Medicine. Hugh Chatham Memorial Hospital is an 81-bed community hospital, similar in size and service offerings to the Hospital. Hugh Chatham Memorial Hospital is located in Elkin and is also in Surry County. FACILITY LOCATION TOTAL BEDS APPROXIMATE MILES FROM HOSPITAL OWNERSHIP TYPE Hugh Chatham Memorial Hospital Elkin, NC Nonprofit corporation Wake Forest Baptist Medical Center Winston-Salem, NC Nonprofit corporation Novant Health Forsyth Medical Center Winston-Salem, NC Nonprofit corporation MALPRACTICE AND OTHER INSURANCE MISCELLANEOUS The District maintains coverage with a third party provider for professional/general liability in the amount of $1,000,000 for each occurrence, with annual aggregate limit of $3,000,000 (indemnity only) and $50,000 deductible (loss only) per occurrence, and umbrella excess liability coverage of $10,000,000. LITIGATION There is no action, suit, proceeding or investigation pending, or to the best of its knowledge threatened, against the District except (a) litigation and proceedings involving claims for professional liability in which the probable recoveries and the estimated costs and expenses of defense, will be entirely within the limits of the District s insurance coverage and (b) litigation and proceedings other than those described in (a) that if adversely determined, would not materially and adversely affect the financial condition or results of operations of the District, the transaction contemplated by this Official Statement or the validity of the 2017 Bonds. A-15

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53 APPENDIX B DISTRICT FINANCIAL STATEMENTS Audited Financial Statements for the Fiscal Years Ended September 30, 2016 and September 30, 2015

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55 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY COMBINED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS REPORT YEARS ENDED SEPTEMBER 30, 2016 AND 2015

56 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY TABLE OF CONTENTS YEARS ENDED SEPTEMBER 30, 2016 AND 2015 INDEPENDENT AUDITORS REPORT 1 MANAGEMENT S DISCUSSION AND ANALYSIS 3 FINANCIAL STATEMENTS COMBINED STATEMENTS OF NET POSITION 11 COMBINED STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION 13 COMBINED STATEMENTS OF CASH FLOWS 14 NOTES TO COMBINED FINANCIAL STATEMENTS 16 REQUIRED SUPPLEMENTARY INFORMATION HOSPITAL EMPLOYEES PENSION PLAN (UNAUDITED) 40

57 CliftonLarsonAllen LLP CLAconnect.com INDEPENDENT AUDITORS REPORT Report on the Combined Financial Statements Management s Responsibility for the Combined Financial Statements Auditors Responsibility the combined financial statements. The procedures selected depend on the auditors judgment, s preparation and fair presentation of the combined financial statements in order to entity

58 Opinion Report on Required Supplementary Information management s discussion and analysis on pages Hospital Employee s Retirement Plan on page information and comparing the information for consistency with management s responses to our CliftonLarsonAllen LLP

59 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY MANAGEMENT S DISCUSSION AND ANALYSIS YEARS ENDED SEPTEMBER 30, 2016 AND 2015 Overview Mission, Vision and Values Mission: Vision: Values:

60 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY MANAGEMENT S DISCUSSION AND ANALYSIS YEARS ENDED SEPTEMBER 30, 2016 AND 2015 Financial Highlights The Hospital s net Current Year Events ng emergency services as evidenced by a higher admissions rate. n years past, t increases for managed care payers are small or non As government payers and more managed care payers move from a pay for volume to a pay for value model, a portion of hospital payments and in the near future physician payments are/will be tied A for an outstanding record in patient safety.the Becker s Institute recognized the Hospital as a Top

61 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY MANAGEMENT S DISCUSSION AND ANALYSIS YEARS ENDED SEPTEMBER 30, 2016 AND 2015 related to payments for information technology provided under the 2009 American Recovery and Reinvestment Act. The s Using this Annual Report Combined Statements of Net Position - Combined Statements of Revenues, Expense s, and Changes in Net Position -

62 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY MANAGEMENT S DISCUSSION AND ANALYSIS YEARS ENDED SEPTEMBER 30, 2016 AND 2015 Combined Statements of Cash Flows - Notes to Combined Financial Statements - Condensed Combined Statements of Net Position - Current Assets -

63 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY MANAGEMENT S DISCUSSION AND ANALYSIS YEARS ENDED SEPTEMBER 30, 2016 AND 2015 Capital Assets - Net - Assets Limited as to Use - Other Assets - Current Liabilities - Unfunded Pension Liability - Long-Term Debt - Total Net Position - Net Position Invested in Capital Assets - Net Position Restricted for Debt Service - Unrestricted Net Position

64 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY MANAGEMENT S DISCUSSION AND ANALYSIS YEARS ENDED SEPTEMBER 30, 2016 AND 2015 Condensed Combined Statements of Revenue, Expenses, and Changes in Net Position - OPERATING EXPENSES EXCESS OF REVENUES OVER EXPENSES NET POSITION - BEGINNING OF YEAR NET POSITION - END OF YEAR Income from Operations Net Patient Service Revenue Other Operating Revenue Salaries and Wages

65 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY MANAGEMENT S DISCUSSION AND ANALYSIS YEARS ENDED SEPTEMBER 30, 2016 AND 2015 Employee Benefits This increase was the result of higher costs of the Hospital s medical plan Supplies Purchased Services Other Depreciation Expense Non-Operating Income (Expense) - Net Hospital Payer Mix

66 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY MANAGEMENT S DISCUSSION AND ANALYSIS YEARS ENDED SEPTEMBER 30, 2016 AND 2015 Capital Assets - Net Community Benefit The Hospital s involv their ability to pay. Based on the Hospital s established charge structure, total charges foregone for Contacting the Hospital s Financial Management the Hospital s s finances.

67 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY COMBINED STATEMENTS OF NET POSITION SEPTEMBER 30, 2016 AND 2015 ASSETS AND DEFERRED OUTFLOWS OF RESOURCES CURRENT ASSETS ASSETS LIMITED AS TO USE CAPITAL ASSETS, NET OTHER ASSETS DEFERRED OUTFLOWS OF RESOURCES See accompanying Notes to Combined Financial Statements.

68 LIABILITIES, DEFERRED INFLOWS OF RESOURCES, AND NET POSITION CURRENT LIABILITIES UNFUNDED PENSION LIABILITY LONG-TERM DEBT DEFERRED INFLOWS OF RESOURCES NET POSITION

69 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY COMBINED STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION YEARS ENDED SEPTEMBER 30, 2016 AND 2015 OPERATING REVENUE OPERATING EXPENSES INCOME FROM OPERATIONS NON-OPERATING INCOME (EXPENSE) EXCESS OF REVENUES OVER EXPENSES NET POSITION - END OF YEAR See accompanying Notes to Combined Financial Statements.

70 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2016 AND 2015 CASH FLOWS FROM OPERATING ACTIVITIES CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS - END OF YEAR RECONCILIATION OF CASH AND CASH EQUIVALENTS TO THE COMBINED STATEMENTS OF NET POSITION See accompanying Notes to Combined Financial Statements.

71 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY COMBINED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED SEPTEMBER 30, 2016 AND 2015 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES See accompanying Notes to Combined Financial Statements.

72 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization not obligated for the Hospital s debts or entitled to any surpluses of the Hospital. Surry County is accountable for the Hospital in that it appoints the Hospital s governing board; component units discussed below are included in the Hospital s reporting entity be Surry Regional Health Services, Inc. Northern Surry Foundation for Better Health, Inc.

73 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basis of Presentation Codification of Accounting and Financial Reporting Guidance Contained in Pre -November 30, 1989 FASB and AICPA Pronouncements. This statement incorporates into the GASB s Use of Estimates Cash and Cash Equivalents Patient Accounts Receivable Concentration of Credit Risk

74 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Concentration of Credit Risk (Continued) Unconditional Promises to Give Inventories Assets Limited as to Use Capital Assets

75 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Capital Assets (Continued) Investment in Joint Venture Deferred Outflows/Inflows of Resources

76 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Combined Statements of Revenues, Expenses and Changes in Net Position Net Patient Service Revenue Charity Care Net Position Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, Donor-Restricted Gifts

77 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes Risk Management Fair Value Measurements Organization s Fair Value Measurement and Application observable inputs reflect the entity s assumptions A financial instrument s level within the fai Level 1: Level 2: Level 3:

78 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 2 DEPOSITS ing amount of the Organization s ing amount of the Organization s All of the Organization s dep coverage are collateralized with securities held by the Organization s agent in the Organization s name. are collateralized with securities held by the State Treasurer s agent in the name of the these deposits are considered to be held by the Organization s agent in the Organization s name. The amount of the p

79 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 3 ASSETS WHOSE USE IS LIMITED quality issues of commercial paper and bankers acceptances and the North

80 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 3 ASSETS WHOSE USE IS LIMITED (CONTINUED) Custodial Credit Risk - either the counterparty or the counterparty s trust department or agent, but not in the Organization s name. As of, all of the counterparty s fixed income investments are held by the Organization s custodial bank in the Organization s Interest Rate Risk - Credit Risk- the investment. The Hospital s investments in U.S. AA+ by Standard & Poor s as of term and that such changes could materially affect the Hospital s investment balance

81 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 4 PATIENT ACCOUNTS RECEIVABLE NOTE 5 CAPITAL ASSETS

82 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 5 CAPITAL ASSETS (CONTINUED) NOTE 6 SELF-INSURED EMPLOYEE GROUP HEALTH PLAN

83 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 7 BONDS PAYABLE

84 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 7 BONDS PAYABLE (CONTINUED)

85 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 8 LEASE COMMITMENTS

86 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 9 NOTE PAYABLE NOTE 10 CHARITY CARE NOTE 11 spital s charity ca NET PATIENT SERVICE REVENUE

87 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 11 NET PATIENT SERVICE REVENUE (CONTINUED) Medicare thereof by the Medicare fiscal intermediary. The Hospital s classification of patients under Hospital s Medicare cost reports have been audited by the Medicare fiscal intermediary Medicaid aid fiscal intermediary. The Hospital s Medicaid cost reports the Hospital s pati

88 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 11 NET PATIENT SERVICE REVENUE (CONTINUED) Medicaid (Continued) Managed Care Contracts NOTE 12 PENSION PLANS Defined Benefit Plan employees compensation. Contributions

89 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 12 PENSION PLANS (CONTINUED) Defined Benefit Plan (Continued)

90 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 12 PENSION PLANS (CONTINUED) Defined Benefit Plan (Continued)

91 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 12 PENSION PLANS (CONTINUED) Defined Benefit Plan (Continued) Actuarial assumptions - Discount Rate pension plan s fiduciary net position was projected to be avai Sensitivity of the Hospital s Net Pension Liability to Changes in the Discount Rate the Hospital s 7.0%, as well as what the Hospital s Defined Contribution Plans ospital s Board of Trustees. The Hospital s 403(b) plan covers substantially all employees who have completed three

92 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 12 PENSION PLANS (CONTINUED) Defined Contribution Plans (Continued) NOTE 13 FAIR VALUE MEASUREMENTS The following table summarizes the Organization s investments within the fair value Assets Limited as to Use The following table summarizes the Organization s investments within the fair value Assets Limited as to Use Treasury Notes and Debt Securities

93 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 14 NOTE 15 NOTE 16 COMMITMENTS AND CONTINGENCIES contract s service fee is adjusted by the The Hospital s liability insurance coverage discussed above is provided under a claims identified through the Hospital s incident rep have a material effect on the Hospital s operations or financial position. In any event, RELATED PARTY TRANSACTIONS ELECTRONIC HEALTH RECORD INCENTIVE PROGRAM

94 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 16 ELECTRONIC HEALTH RECORD INCENTIVE PROGRAM (CONTINUED) Hospital s cost report for t NOTE 17 CONDENSED COMBINING FINANCIAL INFORMATION ASSETS AND DEFERRED OUTFLOWS OF RESOURCES LIABILITIES, DEFERRED INFLOWS OF RESOURCES, AND NET POSITION LIABILITIES NET POSITION

95 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 AND 2015 NOTE 17 CONDENSED COMBINING FINANCIAL INFORMATION (CONTINUED) OPERATING REVENUE OPERATING EXPENSES INCOME (LOSS) FROM OPERATIONS NON-OPERATING INCOME (EXPENSE) EXCESS OF REVENUES OVER (UNDER) EXPENSES

96 NORTHERN HOSPITAL DISTRICT OF SURRY COUNTY REQUIRED SUPPLEMENTARY INFORMATION HOSPITAL EMPLOYEES PENSION PLAN (UNAUDITED) SEPTEMBER 30, 2016 Total Pension Liability Net Change in Total Pension Liability Total Pension Liability (Beginning) Total Pension Liability (Ending) Plan Fiduciary Net Position Net Change in Plan Fiduciary Net Position Plan Fiduciary Net Position (Beginning) Plan Fiduciary Net Position (Ending) Net Pension Liability (Ending) Net Position as a % of Pension Liability Covered Employee Payroll Net Pension Liability as a % of Payroll

97 APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS

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99 APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The following is a summary of certain terms and provisions of the Bond Order and the 2017 Series Resolution. Such summary is not intended to be a complete statement of all of the terms and provisions of the Bond Order and the 2017 Series Resolution. Reference is made to the complete copy of the Bond Order and the 2017 Series Resolution on file with the Trustee for a complete description of the terms and provisions of the Bond Order and the 2017 Series Resolution. DEFINITIONS OF CERTAIN TERMS The following is a summary of definitions of certain terms used in the Bond Order, the 2017 Series Resolution and this Official Statement. Account Lien Amount means an amount equal to ten percent (10%) of Total Operating Revenues of the District as shown on the Financial Statements for the prior Fiscal Year. Accountant means the firm of independent certified public accountants at the time serving as such pursuant to the Bond Order. Accounts means any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance. Act means The State and Local Government Revenue Bond Act, (Sections to , inclusive, as amended, of the North Carolina General Statutes), as the same may be amended from time to time. Balloon Long-Term Indebtedness means Long-Term Indebtedness 25% or more of the principal payments of which are due in a single year which portion of the principal is not required by the documents pursuant to which such Indebtedness is issued to be amortized by redemption prior to such date. Board means the Board of Commissioners for the County of Surry, North Carolina, or any successor board or body in which the power to govern the District shall be vested. Bond Fund means the Northern Hospital District of Surry County 2017 Health Care Facilities Revenue Refunding Bond Fund created and so designated by the 2017 Series Resolution comprised of the Interest Account and the Principal Account. Bond Order means the bond order adopted by the Board on June 17, 1991, pursuant to the provisions of the Act, as supplemented by two supplemental bond orders adopted by the District on June 21, 1999 and March 3, 2008, and as may be further supplemented or amended from time to time as permitted thereby. Bond Year means the period commencing on October 1 of any year and ending on September 30 of the following year. Bonds means the Series 2017 Bonds and any additional Bonds authorized under and secured by the Bond Order. C-1

100 Business Day means any day (other than a Saturday or Sunday) on which banks located in New York, New York or in the city in which the principal corporate trust office of the Trustee is located are not required or authorized to remain closed and on which the New York Stock Exchange is not closed. Capitalization means the sum of all Long-Term Indebtedness of the District, plus the aggregate unrestricted fund balance of the District, all as calculated in accordance with generally accepted accounting principles. Code means the Internal Revenue Code of 1986, as amended. Completion Indebtedness means any Long-Term Indebtedness incurred for the purpose of financing the completion of facilities, for the acquisition, construction or equipping of which Long-Term Indebtedness has theretofore been incurred in accordance with the provisions of the Bond Order, to the extent necessary to provide a completed and equipped facility of the type and scope contemplated at the time that such Long-Term Indebtedness theretofore incurred was originally incurred, and, to the extent the same shall be applicable, in accordance with the general plans and specifications for such facility as originally prepared with only such changes as have been made in conformance with the documents pursuant to which such Long-Term Indebtedness theretofore incurred was originally incurred. County means the County of Surry, North Carolina. Cross-over Date means, with respect to Cross-over Refunding Indebtedness, the date on which the principal portion of the related Cross-over Refunded Indebtedness is to be paid or redeemed from the proceeds of such Cross-over Refunding Indebtedness. Cross-over Refunded Indebtedness means Indebtedness refunded by Cross-over Refunding Indebtedness. Cross-over Refunding Indebtedness means Indebtedness issued for the purpose of refunding other Indebtedness if the proceeds of such Refunding Indebtedness are irrevocably deposited in escrow to secure the payment on the applicable redemption date or maturity date of the Refunded Indebtedness, and the earnings on such escrow deposit are required to be applied to pay interest on such Refunding Indebtedness until the Cross-over Date. Costs of Issuance Fund means the Northern Hospital District of Surry County 2017 Costs of Issuance Fund created and so designated by the 2017 Series Resolution. Debt Service Reserve Fund means the Northern Hospital District of Surry County 2017 Health Care Facilities Revenue Refunding Bond Debt Service Reserve Fund created and so designated by the 2017 Series Resolution. Defaulted Interest means any interest on any Bond of any Series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date. Defeasance Obligations means (i) non-callable Government Obligations, (ii) evidences of ownership of a proportionate interest in specified Government Obligations, which Government Obligations are held by a bank or trust company organized and existing under the laws of the United States of America or any state thereof in the capacity of custodian, and (iii) Defeased Municipal Obligations. C-2

101 Defeased Municipal Obligations means obligations of state or local government municipal bond issuers which are rated in the highest rating category by S&P and Moody s, respectively, provision for the payment of the principal of and interest on which shall have been made by deposit with a trustee or escrow agent of (i) Government Obligations or (ii) evidences of ownership of a proportionate interest in specified Government Obligations, which Government Obligations are held by a bank or trust company organized and existing under the laws of the United States of America or any state thereof in the capacity of custodian, the maturing principal of and interest on such Government Obligations or evidences of ownership, when due and payable, shall provide sufficient money to pay the principal of, redemption premium, if any, and interest on such obligations of state or local government municipal bond issuers. Depositary means one or more banks or trust companies authorized under the laws of the United States of America or the State to engage in the banking business within the State and designated by the District as a depositary of money under the provisions of the Bond Order. District Representative means any officer or officers of the District or any other Person designated as such by resolution of the District. DSRF Requirement means the least of (a) the Maximum Annual Debt Service on the Series 2017 Bonds; (b) 125% of the average annual principal and interest requirements of the Series 2017 Bonds and (c) 10% of the stated principal amount of the Series 2017 Bonds; provided, however, that if the Series 2017 Bonds have original issue discount or premium that exceeds 2% of the stated redemption price at maturity plus any original issue premium attributable exclusively to underwriters compensation, the initial offering prices to the public shall be used in lieu of the stated principal amount for purposes of the 10% limitation. Eminent Domain means the eminent domain or condemnation power by which all or any part of the Operating Assets may be taken for public use or any agreement that is reached in lieu of proceedings to exercise such power. Escrow Agent means the escrow agent serving in such capacity from time to time pursuant to the Escrow Deposit Agreement. Escrow Deposit Agreement means the Escrow Deposit Agreement, to be dated as of February 1, 2017, between the District and the Escrow Agent, and any supplements or amendments thereto. Financial Statements means the consolidated financial statements of the District for a twelvemonth period, or for such other period for which an audit has been performed, prepared in accordance with generally accepted accounting principles, which have been audited and reported upon by independent certified public accountants. Fiscal Year means the fiscal year of the District which shall be the period commencing on the first day of October of any year and ending on the last day of September of the following year, unless the Trustee is notified in writing by the District of a change in such period, in which case the Fiscal Year shall be the period set forth in such notice. Government Obligations means direct obligations of, or obligations the timely payment of principal of and interest on which are fully and unconditionally guaranteed by, the United States of America. C-3

102 Governmental Restrictions means federal, state or other applicable governmental laws or regulations affecting the District, placing restrictions and limitations on the (i) fees and charges to be fixed, charged and collected by the District or (ii) the amount or timing of the receipt of such revenues. Guaranty means any obligation of the District guaranteeing in any manner, directly or indirectly, any obligation of any Person, which obligation of such other Person would, if such obligation were the obligation of the District, constitute Indebtedness under the Bond Order. For the purposes of the Bond Order, a Guaranty shall be valued at 25% of the obligation so guaranteed at the interest rate borne by such obligation on the date calculated; provided, however, that for purposes of determining whether the District may issue a Guaranty, such Guaranty shall be valued at 100% of the principal amount of the obligation so guaranteed at the interest rate borne by such indebtedness on the date calculated; and further provided that in the event such Guaranty shall have been drawn upon, such Guaranty shall be valued at 100% of the principal amount of the obligation so guaranteed at the interest rate borne by such obligation on the date calculated for a period ending two (2) years after the date that such Guaranty was drawn upon. Holder means a person in whose name a Bond is registered in the registration books provided for in the Bond Order. Improvements means any future additions, enlargements, improvements, extensions, alterations, fixtures, equipment, land, appurtenances and other facilities to, for or on any of the District s Operating Assets. Income Available for Debt Service means, with respect to the District as to any Fiscal Year, (a) the District s excess of revenues over expenses prepared in conformity with generally accepted accounting principles, plus (b) unrealized losses, depreciation, amortization of deferred expenses, and interest expense on Long-Term Indebtedness, minus (c) unrealized gains of the District; and excluding from the foregoing any extraordinary items, and any gain or loss resulting from either the extinguishment of debt or the sale, exchange or other disposition of assets not made in the ordinary course of business. Restricted gifts shall be included in the computation of Income Available for Debt Service to the extent that, and with respect to the period of time during which, the expenditure of such restricted gifts has been included in the computation of expenses. Indebtedness means (i) all indebtedness of the District for borrowed money, (ii) all installment sales, conditional sales and capital lease obligations incurred or assumed by the District and (iii) all Guarantees, whether constituting Long-Term Indebtedness or Short-Term Indebtedness, all as properly reflected on the Financial Statements. Independent Architect means any independent architect or firm of architects of favorable repute for skill and experience in work related to the particular activity or function for which it is selected by the District. Insurance Advisor means a person or a firm of persons of favorable repute for skill and experience in dealing with the insurance requirements of hospitals, health-related facilities and services and organizations engaged in such operations, selected by the District. Insurance and Condemnation Award Fund means the Northern Hospital District of Surry County, North Carolina Insurance and Condemnation Award Fund created and so designated by the Bond Order. Interest Account means the account in the Bond Fund created and so designated by the 2017 Series Resolution. C-4

103 Interest Payment Date means, with respect to any of the 2017 Bonds, April 1 or October 1, as the case may be, beginning April 1, Investment Obligations means any investments then permitted by Section (c) of the North Carolina General Statutes, as amended, and any other applicable laws. Lien means any mortgage, deed of trust or pledge of, security interest in or encumbrance on the Operating Assets, the Revenues or the Pledged Assets which secures any Indebtedness or any other obligation of the District or which secures any obligation of any Person. Long-Term Debt Service Coverage Ratio means for any period of twelve consecutive calendar months the ratio determined by dividing the Income Available for Debt Service for that period by the Maximum Annual Debt Service. Long-Term Debt Service Requirement means, for any period of twelve consecutive calendar months for which such determination is made, the aggregate of the payments to be made in respect of principal and interest (whether or not separately stated) on Outstanding Long-Term Indebtedness during such period, also taking into account: (a) with respect to Balloon Long-Term Indebtedness which is not amortized by the terms thereof (i) the amount of principal which would be payable in such period if such principal were amortized from the date of incurrence thereof over a period of 20 years (or if the term thereof exceeds 20 years, over a period equal to such term but no longer than 25 years) on a level debt service basis at an interest rate equal to the rate borne by such Indebtedness on the date calculated, except that if the date of calculation is within 12 months of the actual maturity of such Indebtedness, the full amount of principal payable at maturity shall be included in such calculation or (ii) principal payments or deposits with respect to Indebtedness secured by an irrevocable letter of credit issued by, or an irrevocable line of credit with, a bank having a combined capital and surplus of at least $75,000,000 and rated in one of the two highest rating categories by both Moody s and S&P, or insured by an insurance policy issued by an insurance company whose claim-paying ability is rated in one of the two highest rating categories by Moody s or S&P, nominally due in the last Fiscal Year in which such Indebtedness matures may be treated as if such principal payments or deposits were due as specified in any loan agreement issued in connection with such letter of credit, line of credit or insurance policy or pursuant to the repayment provisions of such letter of credit, line of credit or insurance policy, and interest on such Indebtedness after such Fiscal Year shall be assumed to be payable pursuant to the terms of such loan agreement or repayment provisions; and (b) with respect to Long-Term Indebtedness which is Variable Rate Indebtedness the interest on such Indebtedness shall be calculated at the rate which is equal to the average of the actual interest rates which were in effect (weighted according to the length of the period during which each such interest rate was in effect) for the most recent twelve-month period immediately preceding the date of calculation for which such information is available (or shorter period if such information is not available for a twelve-month period), except that with respect to new Variable Rate Indebtedness the interest rate for such Indebtedness for the initial interest rate period shall be the initial rate at which such Indebtedness is issued and thereafter shall be calculated as set forth above. Long-Term Indebtedness means all Indebtedness having a maturity of a term longer than one year incurred or assumed by the District, including Guarantees, Short-Term Indebtedness if a commitment by an institutional lender exists to provide financing to retire such Short-Term Indebtedness and such commitment provides for the repayment of principal on terms which would, if such commitment C-5

104 were implemented, constitute Long-Term Indebtedness, and the current portion of Long-Term Indebtedness for any of the following: (a) money borrowed for an original term or renewable at the option of the borrower for a period from the date originally incurred, longer than one year; (b) leases which are required to be capitalized in accordance with generally accepted accounting principles having an original term, or renewable at the option of the lessee for a period from the date originally incurred, longer than one year; and year. (c) installment sale or conditional sale contracts having an original term in excess of one Management Consultant means a nationally recognized firm of independent management consultants of favorable repute for skill and experience in performing the duties to be imposed upon it by the Bond Order, selected by the District. Maximum Annual Debt Service means the highest Long-Term Debt Service Requirement for any succeeding twelve-month accounting reporting period. Moody s means Moody s Investors Service, Inc., its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, Moody s shall be deemed to refer to any other nationally recognized securities rating agency designated by the District. Net Book Value means, at the time of determination, net property, plant and equipment as shown on the Financial Statements for the most recent Fiscal Year for which the Financial Statements are available. Net Proceeds means the gross proceeds derived from insurance or any Eminent Domain award or agreement in lieu of an award in Eminent Domain proceedings, less payments of attorney s fees and expenses properly incurred in the collection of gross proceeds. Non-Recourse Indebtedness means any Indebtedness secured by a Lien, the liability for which is effectively limited to the property subject to such Lien with no recourse, directly or indirectly, to any other Property or Revenues. Officer s Certificate means a certificate signed by a District Representative. Operating Assets means any and all land, leasehold interests, buildings, machinery, equipment, hardware and inventory of the District used in its trade or business, but not including cash, investment securities and other Property held for investment purposes. Operating Expenses means the expenses of maintaining and operating the District and its Operating Assets, including, without limiting the generality of the foregoing, all administrative, general and commercial expenses, insurance and surety bond premiums, architectural expenses, legal expenses, refunds of overpayments on patient accounts, any taxes which may be lawfully imposed on the District or the Operating Assets or the income or operations thereof or the property forming a part thereof, rentals of equipment or other property, usual expenses of operations, maintenance and repair, amounts owed to others and collected by the District on their behalf and any other current expenses required to be paid by the District under the provisions of the Bond Order or by law, all as determined in accordance with C-6

105 generally accepted accounting principles consistently applied, and the expenses, liabilities and compensation of the Trustee and Bond Registrar required to be paid under the Bond Order, but not including reserves for operation, maintenance or repair or any allowance for depreciation, amortization of financing expenses, principal of and interest on Indebtedness, or similar charges. Operating Fund means the Northern Hospital District of Surry County, North Carolina Trustee Operating Fund created by the Bond Order. Outstanding when used with reference to Bonds means, as of a particular date, all Bonds theretofore issued under the Bond Order, except: (1) Bonds theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (2) Bonds for the payment of which money, Defeasance Obligations, or a combination of both, have been deposited with the Trustee in an amount sufficient to pay on the date when such Bonds are to be paid or redeemed the principal or the Redemption Price of, and the interest accruing to such date on, the Bonds to be paid or redeemed, provided that if any of such Bonds are to be redeemed prior to maturity, notice has been given in accordance with the Series Resolution relating to such Bonds or arrangements for the giving of notice have been made; Defeasance Obligations shall be deemed to be sufficient to pay or redeem Bonds on a specified date if the principal of and the interest on such Defeasance Obligations, when due, will be sufficient to pay on such date the principal or Redemption Price of, as the case may be, and the interest accruing on, such Bonds to such date; and (3) Bonds deemed to have been paid in accordance with the redemption or defeasance provisions of the Bond Order. Person means any individual, corporation, limited liability company, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. Pledged Assets means all Accounts of the District, now owned or hereafter acquired, and all proceeds thereof. Principal Account means the account in the Bond Fund created and so designated by the 2017 Series Resolution. Property means any and all rights, titles and interests of the District in and to any and all property whether real or personal, tangible or intangible and wherever situated. Put Indebtedness means Long-Term Indebtedness 25% or more of the principal of which is required, at the option of the owner thereof, to be purchased or redeemed at one time, which portion of the principal is not required by the documents pursuant to which such Indebtedness is issued to be amortized by redemption prior to such date. Redemption Fund means the Northern Hospital District of Surry County 2017 Health Care Facilities Revenue Refunding Bond Redemption Fund created and so designated by the 2017 Series Resolution. Redemption Price means, with respect to Bonds or a portion thereof, the principal amount of such Bonds or portion thereof plus the applicable premium, if any, payable upon redemption thereof in C-7

106 the manner contemplated in accordance with its terms, the terms of the Series Resolution providing for the issuance thereof and the Bond Order. Regular Record Date means, with respect to the Series 2017 Bonds, the 15th day of the month (whether or not a Business Day) preceding each Interest Payment Date. Revenues means (a) all revenues, income and other money received in any period by the District including, but without limiting the generality thereof, income (1) from goods and properties sold or leased or services rendered, (2) from agreements and other arrangements with insurance companies, Medicare, Medicaid, Blue Cross, governmental units, agencies and instrumentalities, and prepaid health organizations, and (3) from any award or agreement in lieu of an award resulting from Eminent Domain proceedings, (b) investment income from and revenues realized upon the liquidation or sale of securities held by or on behalf of the District, including those held in any of the funds or accounts established pursuant to the Bond Order or any Series Resolution, (c) all insurance proceeds received by the District, and (d) all gifts, grants, bequests, contributions and donations, including the unrestricted income and profits therefrom, exclusive of gifts, grants, bequests, contributions and donations to the extent specifically restricted to a particular purpose inconsistent with their use as Revenues. Except as provided in this paragraph, Revenues shall be determined in accordance with generally accepted accounting principles consistently applied. There shall not be included in Revenues the proceeds of any borrowings the use of which is restricted by the terms of such borrowings for uses inconsistent with the payment of Indebtedness. Series Certificate means the certificate of the Chief Financial Officer described in the 2017 Series Resolution and delivered on the issue date of the Series 2017 Bonds. Series, whenever used herein with respect to Bonds or other Long-Term Indebtedness, means all of the Bonds or other Long-Term Indebtedness designated as being of the same series. Series Resolution means the resolution of the District providing for the issuance of any particular Series of Bonds that is required to be adopted prior to the issuance of such Series. Series 1991 Bonds means the $16,945,000 Northern Hospital District of Surry County, North Carolina Health Care Facilities Revenue Refunding Bonds, Series 1991, issued on June 15, Series 1999 Bonds means the $18,700,000 Northern Hospital District of Surry County Health Care Facilities Revenue Bonds, Series 1999, issued on July 8, Series 2008 Bonds means the $15,225,000 Northern Hospital District of Surry County Health Care Facilities Revenue Bonds, Series 2008, issued on April 3, Short-Term Indebtedness means all Indebtedness, other than the current portion of Long-Term Indebtedness, incurred or assumed by the District, for any of the following: (a) money borrowed for an original term, or renewable at the option of the borrower for a period from the date originally incurred, of one year or less; (b) 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 C-8

107 less. (c) installment purchase or conditional sale contracts having an original term of one year or S&P means Standard & Poor s Rating Services, a division of McGraw Hill Companies, Inc., its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, S&P shall be deemed to refer to any other nationally recognized securities rating agency designated by the District. State means the State of North Carolina. Total Operating Revenues means as to any period of time, total operating revenues, as determined in accordance with generally accepted accounting principles consistently applied Series Resolution means the Series Resolution adopted by the Board of Commissioners for the County of Surry, North Carolina, in its capacity as the governing body of the District, on January 3, 2017, with respect to the 2017 Bonds. Transfer means any act or occurrence the result of which is to dispossess any Person of any asset or interest therein, including specifically, but without limitation, the forgiveness of any debt. Trustee means The Bank of New York Mellon Trust Company, N.A., a national banking association organized and existing under the laws of the United States of America, and any successor trustee. Variable Rate Indebtedness means any portion of Indebtedness the interest rate on which is not established at the time of incurrence at a fixed or constant rate. C-9

108 SUMMARY OF CERTAIN PROVISIONS OF THE BOND ORDER AND THE 2017 SERIES RESOLUTION Various Funds and Accounts Created by the Bond Order and the 2017 Series Resolution The Bond Order creates the Operating Fund and the Insurance and Condemnation Award Fund. The 2017 Series Resolution creates the Costs of Issuance Fund, the Bond Fund, the Debt Service Reserve Fund and the Redemption Fund. The 2017 Series Resolution also creates two separate accounts in the Bond Fund, which accounts are designated the Interest Account and the Principal Account. The money in the aforementioned funds and accounts will be held in trust and will be subject to a lien and charge in favor of the Holders of the respective Series of Bonds for which such accounts were established in the applicable Series Resolution until paid out or transferred as provided in the Bond Order or the applicable Series Resolution. Costs of Issuance Fund The money in the Costs of Issuance Fund will be held by the Trustee in trust and, subject to the provisions of the 2017 Series Resolution, shall be applied to pay all or a portion of the issuance costs, within the meaning of Section 147(g) of the Code (collectively, the Issuance Costs ), incurred in connection with the sale and issuance of the Series 2017 Bonds. Following the payment of all of Issuance Costs incurred in connection with the issuance of the Series 2017 Bonds, the balance, if any, in the Costs of Issuance Fund, will be transferred by the Trustee to the credit of the Interest Account, the Principal Account or the Redemption Fund, as the District shall direct in writing. Application of Revenues If no Event of Default has occurred and is continuing, at the times specified in the applicable Series Resolution, the District will deposit or cause to be deposited with the Trustee the amounts required to satisfy the requirements of the applicable Series Resolution (subject to any credits permitted in said Series Resolution). The District agrees that, so long as any of the Bonds are Outstanding, all of the Revenues will, subject only to the provisions of the Bond Order, be pledged pursuant to the Bond Order to secure the payment of the Bonds and any other Indebtedness secured pari passu therewith or subordinate thereto and the performance by the District of its obligations under the Bond Order. Revenues may be used by the District at any time for any lawful purpose, except as provided in the Bond Order. If the Trustee will, pursuant to the Bond Order, have notice that an Event of Default will have occurred and be continuing, or if the Long-Term Debt Service Coverage Ratio, as provided to the Trustee pursuant to the Bond Order, will, for two consecutive Fiscal Years, be less than the amount required pursuant to the Bond Order, the Trustee will notify the District of such event and thereafter the District will cause all Revenues to be deposited, as received, with the Trustee. The Trustee will apply such Revenues first to the Operating Fund in such amounts as it shall determine to pay Operating Expenses and thereafter to make the deposits pro rata to any funds and accounts created by any Series Resolution and to any payments of principal or interest due with respect to other Indebtedness that is secured by the Revenues on a parity with the Bonds. All Revenues will continue to be so deposited with the Trustee until all Events of Default have been cured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall have been made therefor and the Long-Term Debt Service C-10

109 Coverage Ratio will be not less than the amount required pursuant to the Bond Order, as the case may be, whereupon the Revenues will be returned to the name and credit of the District. During any such period that Revenues are held by the Trustee, the District will not be entitled to use or withdraw any of the Revenues unless and to the extent that the Trustee in its sole discretion so directs for the payment of current or past due Operating Expenses. Deposits The District covenants under the 2017 Series Resolution that on the tenth day of each of the months described in the clauses below, it will deposit with the Trustee an amount equal to the amounts payable under each of said clauses. The Trustee will deposit the amounts so received to the credit of the appropriate accounts in the order set forth below as such payments are received by the Trustee: (a) into the Interest Account, on the 10 th day of the month immediately preceding each Interest Payment Date, the amount required to pay the interest due on the Series 2017 Bonds on such Interest Payment Date; (b) into the Principal Account, on the 10 th day of the month immediately preceding each October 1, the amount required to pay the principal of all Series 2017 Bonds coming due on such October 1; and (c) (i) on the 10 th day of the month following any month in which money is transferred from the Debt Service Reserve Fund to the Interest Account or the Principal Account to cure a deficiency therein pursuant to the 2017 Series Resolution, and on the 10 th day of each of the eleven succeeding months, into the Debt Service Reserve Fund, one-twelfth (1/12) of the amounts so transferred until the amount then on deposit in the Debt Service Reserve Fund is equal to DSRF Requirement, and (ii) on the 10 th day of the month following a valuation made in accordance with the 2017 Series Resolution in which the amount on deposit in the Debt Service Reserve Fund is computed to be less than 90% of the DSRF Requirement resulting from a decline in the value of Investment Obligations held for the credit of the Debt Service Reserve Fund and on the 10 th day of each of the five succeeding months, into the Debt Service Reserve Fund, one-sixth (1/6) of the amount by which the DSRF exceeds such balance until the amount on deposit in the Debt Service Reserve Fund is equal to the DSRF Requirement. In addition, the Trustee will deposit to the Redemption Fund all amounts as shall be delivered to the Trustee by the District from time to time with instructions that such amounts be so deposited. If, after giving effect to the credits described in the next paragraph, any payment should be required above, the Trustee will so notify the District and request that each future deposit be increased as may be necessary to make up any previous deficiency in any of the required payments and to make up any deficiency or loss in any of the above-mentioned accounts and funds. In the event that the Revenues and other available monies of the District are at any time insufficient to cure a deficiency in the Debt Service Reserve Fund or any other debt service revenue fund established by any subsequent Series Resolution adopted by the District pursuant to the Bond Order at the times and in the amounts required under the 2017 Series Resolution or any such subsequent Series Resolution, the Revenues and available monies subject to deposit in the Debt Service Reserve Fund and any other such debt service reserve fund will be deposited into the Debt Service Reserve Fund and any such other debt service reserve fund on a pro rata basis based on the debt service reserve requirement for each Series of Bonds secured by such debt service reserve funds to the total debt service reserve requirements for all such Series of Bonds secured by such debt service reserve funds. C-11

110 To the extent that investment earnings are credited to the Interest Account or the Principal Account or the Debt Service Reserve Fund in accordance with the 2017 Series Resolution or amounts are credited thereto as a result of the application of bond proceeds or a transfer of investment earnings on any other fund or account held by the Trustee, or otherwise, future deposits to such accounts shall be reduced by the amount so credited, and the deposits following the date upon which such amounts are credited shall be reduced by the amounts so credited. Application of Money in the Operating Fund Upon the happening of an Event of Default under the Bond Order or the Long-Term Debt Service Coverage Ratio being less than the amount required by the Bond Order for two consecutive Fiscal Years, the Operating Expenses will be paid from the Operating Fund as the same become due and payable. Payments from the Operating Fund will be made on behalf of the District only in conformity with the applicable budget and procedures, in accordance with the budgetary laws of the State generally applicable to public hospitals. Application of Money in the Bond Fund Interest Account. Not later than the close of business each Interest Payment Date or date upon which the Series 2017 Bonds or a portion thereof is to be redeemed, the Trustee will withdraw from the Interest Account and remit to each Holder of the Series 2017 Bonds the amount required for payment of the interest on the Series 2017 Bonds then due and payable. In the event the balance in the Interest Account on the second Business Day next preceding an Interest Payment Date or date on which Series 2017 Bonds are to be redeemed is insufficient for the payment of interest coming due on the Series 2017 Bonds on the next ensuing Interest Payment Date or date on which Series 2017 Bonds are to be redeemed, the Trustee will notify the District of the amount of the deficiency. Upon notification, the District will immediately deliver to the Trustee an amount sufficient to cure the same. In the event the balance in the Interest Account on any Interest Payment Date or date upon which Series 2017 Bonds are to be redeemed is insufficient for the payment of interest coming due on the Series 2017 Bonds on the next ensuing Interest Payment Date or date upon which Series 2017 Bonds are to be redeemed, the Trustee will withdraw from the Debt Service Reserve Fund the amount required to cure such deficiency. Principal Account. Not later than the close of business on each October 1, the Trustee will withdraw from the Principal Account and remit to each Holder of the Series 2017 Bonds the amount required for paying the principal of the Series 2017 Bonds then due and payable on such October 1. In the event the balance in the Principal Account on the second Business Day next preceding each October 1 is insufficient to pay the principal of Series 2017 Bonds coming due on such October 1, the Trustee will notify the District of the amount of the deficiency. Upon notification, the District will immediately deliver to the Trustee an amount sufficient to cure the same. In the event the balance in the Principal Account on each October 1 is insufficient to pay the principal of Series 2017 Bonds coming due on such October 1, the Trustee will withdraw from the Debt Service Reserve Fund the amount required to cure such deficiency. C-12

111 Application of Money in the Redemption Fund Money held for the credit of the Redemption Fund will be applied by the Trustee to the redemption of the Series 2017 Bonds in whole or in part in accordance with the Officer s Certificate filed by the District with the Trustee pursuant to the 2017 Series Resolution. Application of Money in the Debt Service Reserve Fund No amounts shall be required to be deposited to the credit of the Debt Service Reserve Fund except as provided in the 2017 Series Resolution. The Trustee will use amounts, if any, in the Debt Service Reserve Fund to make transfers to the Interest Account and the Principal Account to the extent necessary to pay interest on and principal of (whether at maturity or by acceleration) the Series 2017 Bonds, whenever and to the extent that the money on deposit in the Interest Account or the Principal Account is insufficient for such purposes. If on any date of valuation the money held in the Debt Service Reserve Fund exceeds the DSRF Requirement, including any excess created in whole or in part by the investment earnings on the Debt Service Reserve Fund, an amount equal to such excess will be transferred by the Trustee to the Interest Account. Any such excess transferred to the Interest Account shall be credited against future transfers to the Interest Account, unless transferred to cure deficiencies therein, and shall be credited by the Trustee against future payments to be made by the District. Application of Money in the Insurance and Condemnation Award Fund The Trustee will use money in the Insurance and Condemnation Award Fund, upon written direction of the District, in accordance with the disposition of insurance and condemnation proceeds provisions of the Bond Order (see General Covenants of the District in the Bond Order Insurance and Condemnation Proceeds below) or will apply such money to redeem Bonds. Disposition of Fund Balances After provision shall be made for the payment of all the Series 2017 Bonds, including the interest thereon, and for the payment of all other obligations, expenses and charges required to be paid under or in connection with the Bond Order or any Series Resolution, and assuming the existence of no other bond orders, indentures or other agreements imposing a continuing lien on the balances mentioned in the Bond Order, the Trustee will pay any balance in any fund or account as the District directs; provided, however, that if a continuing lien has been imposed on any such balance by another bond order, indenture or agreement, the Trustee will pay such balance to such person as such bond order, indenture or agreement provides. Investments Money held for the credit of all funds and accounts created under the 2017 Series Resolution or the Bond Order, with the exception of the Operating Fund, will be continuously invested and reinvested by the Trustee at the direction of the District in Investment Obligations to the extent practicable. Any such Investment Obligations will mature not later than the respective dates when the money held for the credit of such funds or accounts will be required for the purposes intended; provided, however, that any Investment Obligations deposited in the Debt Service Reserve Fund will mature not later than ten (10) years from the date on which such Investment Obligations were deposited therein. Notwithstanding the foregoing, no Investment Obligations in any fund or account may mature beyond the final maturity date C-13

112 of the Series 2017 Bonds at the time such Investment Obligations are deposited. For the purposes described under this clause, the scheduled termination date of repurchase agreements or similar investment agreements may exceed the maturity date limitation for the underlying obligations. Investment Obligations acquired with money and credited to any fund or account established under the 2017 Series Resolution or the Bond Order will be held by or under the control of the Trustee and while so held will be deemed at all times to be part of such fund or account in which such money was originally held, and the interest accruing thereon and any profit or loss realized upon the disposition or maturity of such investment will be credited to or charged against such fund or account. The Trustee will reduce to cash a sufficient amount of such Investment Obligations whenever it will be necessary so to do in order to provide moneys to make any payment or transfer of moneys from any such fund or account. The Trustee will not be liable or responsible for any loss resulting from any such investment. Valuation For the purpose of determining the amount on deposit in any fund or account established pursuant to the 2017 Series Resolution, Investment Obligations in which money in such fund, account or subaccount is invested will be valued by the Trustee (a) at par value if such Investment Obligations mature within twelve (12) months from the date of valuation thereof and (b) if such Investment Obligations mature more than twelve (12) months after the date of valuation thereof, at the price at which such Investment Obligations are redeemable by the holder at its option, if so redeemable, or, if not so redeemable, at the lesser of (i) the cost of such Investment Obligations minus the amortization of any premium or plus the amortization of any discount thereon and (ii) the market value of such Investment Obligations. All Investment Obligations in all of the funds and accounts created under the 2017 Series Resolution will be valued as of the last day of each Fiscal Year. When a valuation is made by the Trustee, the Trustee will report the result of such valuation to the District within thirty (30) days after such valuation. In addition, Investment Obligations will be valued at any time requested by the District on reasonable notice to the Trustee (which period of notice may be waived or reduced by the Trustee); provided, however, that the Trustee will not be required to value Investment Obligations more than once in any calendar month. If upon valuation of the Debt Service Reserve Fund, the balance in the Debt Service Reserve Fund, including accrued interest to the date of valuation, is less than 90% of the DSRF Requirement, the Trustee will compute the amount by which the DSRF Requirement exceeds such balance and will immediately give the District notice of such deficiency and the amount necessary to cure the same. Compliance with Local Government Budget and Fiscal Control Act The District covenants that it will comply with all provisions of the Local Government Budget and Fiscal Control Act (Sections et. seq. of the North Carolina General Statutes) as the same applies to public hospitals. General Covenants of the District in the Bond Order The District has covenanted in the Bond Order for the benefit of the Owners of any Series of its Bonds (including without limitation the Owners of the Series 2017 Bonds) as follows: C-14

113 Transfers of Property. The District agrees that it will not transfer any Operating Assets in any 12 month period for which Financial Statements will be reported upon by an Accountant, except for Transfers of Operating Assets that satisfy one of the following requirements: (a) To any Person, Operating Assets the Net Book Value of which does not exceed 5% of the unrestricted fund balance of the District, as shown on the Financial Statements for the most recent period of 12 full consecutive calendar months for which such Financial Statements are available. (b) To any Person, Operating Assets that have 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 Operating Assets. (c) To any Person provided that, if the fair market value of the Operating Assets to be transferred exceeds 5% of the unrestricted fund balance of the District as shown on the Financial Statements for the most recent period of 12 full consecutive calendar months for which such Financial Statements are available, then there will be delivered to the Trustee prior to such Transfer either: (i) an Officer s Certificate (accompanied by the report of the Accountant mentioned below) certifying the Long-Term Debt Service Coverage Ratio, adjusted to exclude the Revenues and Operating Expenses derived from the Operating Assets proposed to be disposed of, for the most recent period of 12 full consecutive calendar months preceding the date of delivery of the Officer s Certificate for which the Financial Statements have been reported upon by an Accountant and such Long-Term Debt Service Coverage Ratio is not less than 1.30 and not less than 65% of what it would have been were such Transfer not to take place; or (ii) the report of a Management Consultant to the effect that the projected Long-Term Debt Service Coverage Ratio, taking such Transfer into account, for each of the two (2) Fiscal Years succeeding the date on which the Transfer is expected to occur, and the Long-Term Debt Service Coverage Ratio for each such period is not less than 1.30 and not less than 65% of what it would have been were such Transfer not to take place, accompanied by a statement of the relevant assumptions upon which such projections are based. The District has covenanted that it will not dispose of any cash or investments unless (i) such disposition is in the ordinary course of business, or (ii) prior to such disposition, there is delivered to the Trustee an Officer s Certificate to the effect that either (A) the Long-Term Debt Service Coverage Ratio for the most recent Fiscal Year for which Financial Statements are available next preceding such disposition would not be reduced below 1.75 or by more than 10% (such calculation to be made assuming such disposition had occurred at the beginning of such Fiscal Year) or (B) the average Long-Term Debt Service Coverage Ratio, as projected in such Officer s Certificate, for the two Fiscal Years immediately following such disposition, will be not less than 2.00 and will not be reduced by more than 10% from what such ratio would have been in the absence of such disposition, or (iii) such disposition and all other dispositions of cash or investments by the District in the then-current Fiscal Year pursuant to this clause (iii) do not exceed 20% of the cash and investments of the District as of the end of the most recent Fiscal Year for which Financial Statements are available. Notwithstanding the foregoing provisions, nothing therein shall be construed as limiting the ability of the District to purchase or sell Property (other than Operating Assets) or inventory in the ordinary course of business or to transfer cash, securities and other investment properties in connection with ordinary investment transactions where such purchases, sales and transfers are for substantially equivalent value. C-15

114 The District has agreed that it will not Transfer Accounts, provided, however, that prior to the occurrence of an Event of Default the District will have the right to sell, in any Fiscal Year, its Accounts in an amount not to exceed the difference between (i) the Account Lien Amount and (ii) the amount of Accounts that have been pledged to secure Outstanding Indebtedness incurred by the District pursuant to Section 1301(h) of the Bond Order, if the District shall (i) receive as consideration for such sale cash, services or Property equal to the fair market value of the Accounts so sold, with the fair market value thereof to be determined in the following manner: (1) as certified to the Trustee in an Officer s Certificate of the District that the cash, services or Property received in exchange for the Accounts had a value at least equal to 80% of the net book value of such Accounts as reflected on the balance sheet of the District or (2) if the value of the cash, services or Property to be received in exchange for the Accounts has a value less than 80% of the net book value of such Accounts, then as certified in a report by a Consultant that the value of the cash, services or Property to be received in exchange for the Accounts is the reasonable fair market value of such Accounts based on standards applicable to the health care industry and (ii) deliver to the Trustee a statement from the certified public accountants for the District that such sale of Accounts constitutes a sale under generally accepted accounting principles. Security for the Bonds. As security for the payment of the Bonds and the interest thereon, the District has granted to the Holders and to the Trustee, on behalf of the Holders, subject to Permitted Liens, a pledge of (a) the Revenues, and (b) its rights to receive the same. It is the intent of the District that this pledge will be effective and operate immediately and that the Trustee will have the right to collect and receive the Revenues in accordance with the provisions of the Bond Order at all times during the period from and after the date of the Bonds issued under the Bond Order until no Bonds are Outstanding thereunder. As security for the Bonds and the interest thereon, subject to Permitted Liens, the District has granted and assigned to the Trustee a security interest in the Pledged Assets. The District represents that the aforementioned security interest in the Pledged Assets is a first security interest, subject to Permitted Liens. Limitations on Creation of Liens. The District has agreed that it will not create or suffer to be created or permit the existence of any Lien upon Pledged Assets, Revenues or Operating Assets other than Permitted Liens. Permitted Liens consist of the following: (i) Liens arising by reason of good faith deposits with the District in connection with leases of real estate, bids or contracts (other than contracts for the payment of money), deposits by the District 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; (ii) 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 to maintain self-insurance or to participate in any funds established to cover any insurance risks or in connection with workers compensation, unemployment insurance, pension or profit sharing plans or other social security, or to share in the privileges or benefits required for companies participating in such arrangements; (iii) Any judgment lien against the District so long as such judgment is being contested in good faith and execution thereon is stayed; C-16

115 (iv) (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 the Operating Assets, the Pledged Assets or the Revenues; (B) any liens on the Operating Assets, the Pledged Assets or the Revenues for taxes, assessments, levies, fees, water and sewer rents, and other governmental and similar charges and any liens of mechanics, materialmen, laborers, suppliers or vendors for work or services performed or materials furnished in connection with the Operating Assets, which are not due and payable or which are not delinquent or which, or the amount or validity of which, are being contested and execution thereon is stayed or, with respect to liens of mechanics, materialmen, laborers, suppliers or vendors, have been due for less than 90 days; (C) easements, rights-of-way, servitudes, restrictions, oil, gas or other mineral reservations and other minor defects, encumbrances, and irregularities in the title to the Operating Assets which do not materially impair the use of the Operating Assets materially and adversely affect the value thereof; (D) the Bond Order and the Series Resolution; and (E) landlord s liens. (v) Any Lien on the Operating Assets which is existing on the date of authentication and delivery of the Series 1991 Bonds provided that no such Lien may be increased, extended, renewed or modified to apply to any portion of the Operating Assets not subject to such Lien on such date or to secure Indebtedness not Outstanding as of the date of the Bond Order, unless such Lien as so extended, renewed or modified otherwise qualifies as a Permitted Lien under the Bond Order; Order; (vi) Any Lien securing Non-Recourse Indebtedness permitted by the provisions of the Bond (vii) Any Lien on Property acquired by the District if the indebtedness secured by the Lien is Indebtedness permitted under the provisions of the Bond Order, and if an Officer s Certificate is delivered to the Trustee certifying that (A) the Lien and the indebtedness secured thereby were created and incurred by a Person other than the District, and, (B) the Lien was not created for the purpose of enabling the District to avoid the limitations of the Bond Order on creation of Liens; (viii) So long as no Event of Default exists under the Bond Order and subject to the provisions of clause (xviii) below, any Lien on property which is part of the Operating Assets securing Long-Term Indebtedness in an amount not exceeding 15% of Total Operating Revenues, for the most recent Fiscal Year for which Financial Statements are available; provided, however, that the total of all indebtedness secured by any Lien permitted under this clause (viii) and secured by any Lien permitted under clause (xviii) below does not exceed 20% of Total Operating Revenues as shown on the Financial Statements for the prior Fiscal Year; (ix) Any Lien on pledges, gifts or grants to be received in the future including any income derived from the investment thereof; (x) Any Lien on inventory which does not exceed 25% of the Net Book Value thereof for the most recent Fiscal Year for which Financial Statements are available; (xi) Any Lien in favor of a creditor or a trustee on the proceeds of Indebtedness and any earnings thereon prior to the application of such proceeds and such earnings; (xii) Any Lien securing all Bonds on a parity basis; (xiii) The pledge of Revenues and the security interest in Pledged Assets created by the Bond Order and any pledge of Revenues or security interest in Pledged Assets on a parity with or junior to such pledge or security interest that may be granted by the District in the future to Holders of Indebtedness to secure such Indebtedness; C-17

116 (xiv) Liens on moneys deposited by patients or others with the District as security for or as prepayment for the cost of patient care; (xv) Liens on property received by the District through gifts, grants or bequests, such Liens being due to restrictions on such gifts, grants or bequests of property or the income thereon; (xvi) Liens on the Operating Assets, the Pledged Assets or the Revenues due to rights of third party payors for recoupment of amounts paid to the District; (xvii) amended; Rights of the United States of America under Title 42 United States Code Section 291, as (xviii) Any Lien on moveable equipment (as such term is defined under generally accepted accounting principles) securing Indebtedness incurred to purchase such moveable equipment, provided that the total of such Indebtedness does not exceed 15% of Total Operating Revenues as shown on the Financial Statements for the prior Fiscal Year; provided, however, that the total of all Indebtedness secured by any Lien permitted under this clause (xviii) and secured by any Lien on the Operating Assets permitted under clause (viii) above does not exceed 20% of Total Operating Revenues as shown on the Financial Statements for the prior Fiscal Year; and (xix) Any Lien on Pledged Assets to secure Short-Term Indebtedness if after giving effect to such Lien, the aggregate principal amount of Short-Term Indebtedness secured by such Liens does not exceed 10% of Total Operating Revenues for the most recent Fiscal year for which Financial Statements are available. Long-Term Debt Service Coverage Ratio. The District has covenanted under the Bond Order to set rates and charges for its facilities, services and products such that the Long-Term Debt Service Coverage Ratio, calculated at the end of each Fiscal Year, will not be less than 1.20; provided, however, that in any case where Long-Term Indebtedness has been incurred to acquire or construct capital improvements, the Long-Term Debt Service Requirement with respect thereto will not be taken into account in making the foregoing calculation until the first Fiscal Year commencing after the occupation or utilization of such capital improvements unless the Long-Term Debt Service Requirement with respect thereto is required to be paid from sources other than the proceeds of such Long-Term Indebtedness prior to such Fiscal Year. If at any time the Long-Term Debt Service Coverage Ratio required by the foregoing paragraph is not met, the District covenants immediately to retain a Management Consultant to make recommendations to increase such Long-Term Debt Service Coverage Ratio in the following Fiscal Year to the level required or, if in the opinion of the Management Consultant the attainment of such level is impracticable, to the highest level attainable. The District agrees that it will, to the extent permitted by law, follow the recommendations of the Management Consultant. So long as a Management Consultant is retained and the District follows such Management Consultant s recommendations to the extent permitted by law, the provisions described under this heading will be deemed to have been complied with even if the Long-Term Debt Service Coverage Ratio for the following Fiscal Year is below the required level; provided, however, that the Revenues will not be less than the amount required in cash to pay the total Operating Expenses of and to pay the debt service on all Indebtedness for such Fiscal Year. If a report of a Management Consultant is delivered to the Trustee, which report states that Governmental Restrictions have been imposed which make it impossible for the coverage requirement referred to in the first paragraph of this section to be met, then such coverage requirement will be reduced to the maximum coverage permitted by such Governmental Restrictions but in no event less than C-18

117 Insurance. The District has agreed that it will maintain, or cause to be maintained, the following types of insurance (including one or more self-insurance programs considered to be adequate) in such amounts as, in its judgment, are adequate to protect it and its Property and operations: (i) comprehensive general public liability insurance, including blanket contractual liability and automobile insurance including owned and hired automobiles (excluding collision and comprehensive coverage thereon), (ii) fire, lightning, windstorm, hail, explosion, riot, riot attending a strike, civil commotion, damage from aircraft, smoke and uniform standard coverage and vandalism and malicious mischief endorsements and business interruption insurance covering such periods, (iii) workers compensation insurance and (iv) boiler insurance. The District further agrees that it will maintain, or cause to be maintained, professional liability or medical malpractice insurance in the minimum amount of $1,000,000 per person and per occurrence and $3,000,000 annual aggregate. The District will employ an Insurance Advisor to review the insurance requirements of the District from time to time (but not less frequently than biennially). Notwithstanding anything herein to the contrary, the District will have the right, without giving rise to an Event of Default solely on such account, (i) to maintain insurance coverage below that most recently recommended by the Insurance Advisor, if the District furnishes to the Trustee a report of the Insurance Advisor to the effect that the insurance so provided affords either the greatest amount of coverage available for the risk being insured against at rates which in the judgment of the Insurance Advisor are reasonable in connection with reasonable and appropriate risk management, or the greatest amount of coverage necessary by reason of State or federal laws now or hereafter in existence limiting medical and malpractice liability, or (ii) to adopt alternative risk management programs which the Insurance Advisor determines to be reasonable, including, without limitation, to self-insure in whole or in part individually or in connection with other institutions, to participate in programs of captive insurance companies, to participate with other health care institutions in mutual or other cooperative insurance or other risk management programs, to participate in State or federal insurance programs, to take advantage of State or federal laws now or hereafter in existence limiting medical and malpractice liability, or to establish or participate in other alternative risk management programs; all as may be approved by the Insurance Advisor as reasonable and appropriate risk management by the District. Any program of self-insurance shall be reviewed annually by the Insurance Advisor. The District may not self-insure, except for reasonable deductibles, its property, plant and equipment. Insurance and Condemnation Proceeds. Amounts received by the District as insurance proceeds with respect to any casualty loss or as condemnation awards may be used in such manner as it may determine, including, without limitation, applying such moneys to the payment or prepayment of any Indebtedness in accordance with the terms thereof, subject to compliance with the following provisions; provided that if the amount of such proceeds or awards received with respect to any casualty loss or condemnation exceeds 10% of the Net Book Value, the District agrees that it will immediately notify the Trustee and that it will, within 12 months after the casualty loss or taking, deliver to the Trustee: (a) (i) An Officer s Certificate certifying the expected Long-Term Debt Service Coverage Ratio for each of the 2 periods of 12 full consecutive calendar months following the date on which such proceeds or awards are expected to have been fully applied, which Long-Term Debt Service Coverage Ratio for each such period is not less than 1.50, as shown by pro forma financial statements for each such period, accompanied by a statement of the relevant assumptions including assumptions as to the use of such proceeds or awards, upon which such pro forma statements are based, along with the Officer s Certificate, and (ii) if the amount of such proceeds or awards received with respect to any casualty loss or condemnation exceeds 20% of the Net Book Value, a written report of a Management Consultant confirming such certification; or C-19

118 (b) A written report of a Management Consultant stating the Management Consultant s recommendations, including recommendations as to the use of such proceeds or awards, to cause the Long-Term Debt Service Coverage Ratio for each of the periods described in the foregoing paragraph to be not less than 1.20, or, if in the opinion of the Management Consultant the attainment of such level is impracticable, to the highest practicable level. The District has agreed that it will use such proceeds or awards only in accordance with the assumptions described under clause (a) above or the recommendations described under clause (b) above. Incurrence of Indebtedness. Subject to the conditions described below, the District has the right, as long as no Event of Default has occurred and be continuing, to incur the following Indebtedness (including Indebtedness secured pari passu with the Bonds as to the Revenues and Pledged Assets): (a) Long-Term Indebtedness, including Bonds, if prior to the incurrence of such Indebtedness one of the following conditions is met: (i) there is delivered to the Trustee an Officer s Certificate certifying the Long-Term Debt Service Coverage Ratio, taking all outstanding Long-Term Indebtedness (excluding any Long-Term Indebtedness to be refunded by the Long-Term Indebtedness to be incurred) and the Long-Term Indebtedness then to be incurred into account as if it had been incurred at the beginning of the most recent Fiscal Year for which Financial Statements are available preceding the date of delivery of such Certificate, and such Long-Term Debt Service Coverage Ratio for such period is not less than 1:35; or (ii) (A) there is delivered to the Trustee an Officer s Certificate certifying the Long-Term Debt Service Coverage Ratio, taking into account all outstanding Long-Term Indebtedness, but not the Long-Term Indebtedness then to be incurred, for the most recent Fiscal Year for which Financial Statements are available preceding the date of delivery of such Certificate, and such Long-Term Debt Service Coverage Ratio is not less than 1.20; and (B) there is delivered to the Trustee an Officer s Certificate to the effect that the estimated Long-Term Debt Service Coverage Ratio, taking the proposed Long-Term Indebtedness into account, for (I) in the case of Long-Term Indebtedness (other than a Guaranty) to finance Improvements, each of the first two Fiscal Years succeeding the date on which such Improvements are expected to be completed and in operation, or (II) in the case of Long-Term Indebtedness not financing Improvements or in the case of a Guaranty, each of the first two Fiscal Years succeeding the date on which such Long-Term Indebtedness is incurred, for each such period is not less than 1.50; or (iii) (A) there is delivered to the Trustee an Officer s Certificate certifying the Long-Term Debt Service Coverage Ratio, taking into account all outstanding Long-Term Indebtedness, but not the Long-Term Indebtedness then to be incurred, for the most recent Fiscal Year for which Financial Statements are available preceding the date of delivery of such Certificate, and such Long-Term Debt Service Coverage Ratio is not less than 1.20; and (B) there is filed with the Trustee a report of a Management Consultant to the effect that the projected Long-Term Debt Service Coverage Ratio, taking the proposed Long-Term Indebtedness into account, for (I) in the case of Long-Term Indebtedness (other than a Guaranty) to finance Improvements, each of the first two Fiscal Years succeeding the date on which such Improvements are expected to be completed and in operation, or (II) in the case of Long-Term Indebtedness not financing Improvements or in the case of a Guaranty, each of the first two Fiscal Years succeeding the date on which such Long-Term Indebtedness is incurred, for each such period is not less than 1.35; and C-20

119 (iv) and immediately after the incurrence of the proposed Long-Term Indebtedness the aggregate principal amount of all Long-Term Indebtedness does not exceed sixty-five percent (65%) of Capitalization. (b) Notwithstanding the provisions described in paragraph (a) above, Completion Indebtedness, including Bonds, may be incurred without compliance with any of the tests mentioned in paragraph (a) above if there is delivered to the Trustee (i) an Officer s Certificate stating the reason why such Completion Indebtedness is required and (ii) a report of an Independent Architect stating that the amount of such Completion Indebtedness, together, if applicable, with other available funds, is sufficient to pay the costs of completion of the Project or the Improvements, as the case may be. (c) Long-Term Indebtedness may be incurred for the purpose of refunding all or any part of any outstanding Long-Term Indebtedness if, prior to the incurrence of such Long-Term Indebtedness, there is delivered to the Trustee an Officer s Certificate demonstrating that Maximum Annual Debt Service will not increase by more than 5% after the incurrence of such proposed refunding Long-Term Indebtedness and after giving effect to the disposition of the proceeds thereof; provided, however, if the Indebtedness proposed to be issued is Cross-over Refunding Indebtedness, there is delivered to the Trustee 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, 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 along, immediately prior to the issuance of the Cross-over Refunding Indebtedness, by more than 5%. (d) Short-Term Indebtedness may be incurred subject to the limitation that the aggregate of all Short-Term Indebtedness will not at any time exceed 15% of Total Operating Revenues as reflected in the Financial Statements for the most recent Fiscal Year for which Financial Statements are available; provided, however, that there is a period of at least 20 consecutive calendar days during each such Fiscal Year during which Short-Term Indebtedness will not exceed 3% of Total Operating Revenues. (e) Non-Recourse Indebtedness may be incurred up to but not in excess of an aggregate of 20% of Total Operating Revenues for the most recent Fiscal Year for which Financial Statements are available. (f) Indebtedness may be incurred without limitation under a line of credit, letter of credit, standby bond purchase agreement or similar liquidity or credit support facility established in connection with the incurrence of any Indebtedness; provided, however, if such liquidity facility is used or drawn upon, then the liability represented by such use or draw may be incurred without meeting the requirements of this section; provided further, however, that such liability will be included in Indebtedness for all other purposes in the Bond Order. (g) Put Indebtedness may be incurred, if prior to the incurrence of such Put Indebtedness (i) one of the conditions described in paragraph (a) above is met and (ii) a binding commitment from a bank or other financial institution exists to provide financing sufficient to pay the purchase price or principal of such Put Indebtedness on any date on which the owner of such Put indebtedness may demand payment thereof pursuant to the terms of such Put Indebtedness. (h) Indebtedness secured by Accounts may be incurred if prior to the incurrence of such Indebtedness there is delivered to the Trustee an Officer s Certificate of the District certifying that immediately after the incurrence of such Indebtedness, the amount of Accounts that have been pledged to secure Indebtedness that has been issued pursuant to this subsection (h) and is then Outstanding will not exceed the difference between (i) the Account Lien Amount and (ii) an amount equal to the Net Book C-21

120 Value of any Accounts that have been sold in the then current Fiscal Year pursuant to Section 606(c) of the Bond Order; provided, however, that (A) the determination of whether a disposition of Accounts is a sale or loan shall be made in accordance with generally accepted accounting principles and (B) any Indebtedness issued pursuant to this provision shall be considered to be Short-Term Indebtedness subject to the incurrence test set forth in the Bond Order. Events of Default and Remedies Each of the following events constitutes an Event of Default under the Bond Order and the 2017 Series Resolution: (a) payment of any installment of interest on any Bond is not made when the same becomes due and payable; (b) payment of the principal or of the redemption premium, if any, of any Bond shall not be made when the same becomes due and payable, whether at maturity or by proceedings for redemption or pursuant to a mandatory redemption requirement or otherwise; (c) failure of the District to perform, observe or comply with any of the other covenants, agreements, conditions or provisions in the Bond Order or any Series Resolution, and the continuance thereof for period of 30 days after receipt by the District of a written notice from the Trustee specifying such default and requesting that it be corrected; provided, however, if prior to the expiration of such 30-day period the District institutes action reasonably designed to cure such default, no Event of Default will be deemed to have occurred upon the expiration of such 30-day period for so long as the District pursues such curative action with reasonable diligence and provided that such curative action can be completed within a reasonable time; (d) the District: (i) becomes insolvent or the subject of insolvency proceedings; or (ii) is unable, or admits in writing its inability, to pay its debts as they mature; or (iii) makes a general assignment for the benefit of creditors or to an agent authorized to liquidate any substantial amount of its Property; or (iv) files a petition or other pleading seeking reorganization, composition, readjustment, or liquidation of assets, or requesting similar relief; or (v) applies to a court for the appointment of a receiver for any of its assets; or (vi) has a receiver or liquidator appointed for any of its assets (with or without the consent of the District) and such receiver is not discharged within 90 consecutive days after his appointment; or (vii) becomes the subject of an order for relief within the meaning of the United States Bankruptcy Code or; (viii) files an answer to a creditor s petition admitting the material allegations thereof for liquidation, reorganization, readjustment or composition or to effect a plan or other arrangement with creditors or fails to have such petition dismissed within 90 consecutive days after the same is filed against the District; or (e) the acceleration of the payment of any Indebtedness upon the occurrence and continuation of an event of default under the instrument pursuant to which such Indebtedness was incurred; provided, however, that disputes relating to the payment of Indebtedness between the District and vendors of Equipment relating to the acquisition of and payment for such Equipment shall not constitute an Event of Default. Upon the happening and continuance of any Event of Default specified in the preceding subparagraphs, the Trustee may, and upon the written request of the Holders of not less than 51% in aggregate principal amount of Bonds then Outstanding will, by notice in writing to the District, declare the principal of all Bonds then Outstanding (if not then due and payable) to be due and payable immediately, and upon such declaration the same will become and be immediately due and payable, C-22

121 anything contained in the Bonds, the Bond Order or in any Series Resolution to the contrary notwithstanding. If the conditions described below in clauses (a), (b) and (c) of this paragraph have been satisfied after the principal of and interest on the Bonds have been declared to be due and payable, and before the entry of final judgment or decree in any suit, action or proceeding instituted on account of such default, or before the completion of the enforcement of any other remedy under the Bond Order, then and in every such case the Trustee may, and upon the written request of the Holders of not less than 51% in aggregate principal amount of Bonds not then due except by virtue of such declaration and then Outstanding will, by written notice to the District, rescind and annul such declaration and its consequences, but no such rescission or annulment will extend to or affect any subsequent Event of Default or impair any right consequent thereon: (a) money has accumulated in the Bond Fund sufficient to pay the principal of all matured Bonds and all arrears of interest, if any, upon all such Bonds then Outstanding (except the principal of any such Bonds not then due except by virtue of such declaration and the interest accrued on such Bonds since the last Interest Payment Date), (b) all amounts then payable by the District under the Bond Order have been paid or a sum sufficient to pay the same has been deposited with the Trustee, and (c) every other default known to the Trustee in the observance or performance of any covenant, condition or agreement contained in the Bonds, in the 2017 Series Resolution or in the Bond Order (other than a default in the payment of the principal of such Bonds then due only because of a declaration under this section) has been remedied to the satisfaction of the Trustee. Enforcement of Remedies Upon the happening and continuance of any Event of Default specified in the Bond Order, then and in every such case the Trustee may proceed and upon the written request of the Holders of not less than fifty-one percent (51%) in aggregate principal amount of Bonds then Outstanding will proceed, subject to the provisions of the Bond Order, to protect and enforce its rights and the rights of the Holders under the laws of the State or under the Bond Order by such suits, actions or special proceedings in equity or at law, or by proceedings in the office of any board or officer having jurisdiction, either for the specific performance of any covenant or agreement contained in the Bond Order or in aid or execution of any power therein granted or for the enforcement of any proper legal or equitable remedy, as the Trustee will deem most effectual to protect and enforce such rights. In the enforcement of any remedy under the Bond Order, the Trustee will be entitled to sue for, enforce payment of and receive any and all amounts then or during any Event of Default becoming and remaining due from the District for principal, interest or otherwise under any of the provisions of the Bond Order or of the Bonds, together with interest on overdue payments of principal at the highest rate of interest payable on any Bonds Outstanding and all costs and expenses of collection and of all proceedings thereunder, without prejudice to any other right or remedy of the Trustee or of the Holders and to recover and enforce any judgment or decree against the District, but solely as provided in the Bond Order, for any portion of such amounts remaining unpaid and interest, costs and expenses as above provided, and to collect (but solely from money available for such purposes), in any manner provided by law, the money adjudged or decreed to be payable. Pro Rata Application of Funds Anything in the Bond Order to the contrary notwithstanding, if at any time the money in the applicable funds and accounts created under any Series Resolution or under the Bond Order will not be sufficient to pay the interest on or the principal of the related Series of Bonds as the same shall become due and payable (either by their terms or by acceleration of maturities under the provisions of the Bond Order), such money, together with any money then available or thereafter becoming available for such C-23

122 purpose, whether through the exercise of the remedies provided for in the Bond Order or otherwise, will be applied as follows: (a) if the principal of all Bonds of such Series will not have become or will not have been declared due and payable, all such money in the applicable funds and accounts will be applied: first: to the payment to the Persons entitled thereto of all installments of interest on such Bonds then due and payable in the order in which such installments became due and payable and, if the amount available will not be sufficient to pay in full any particular installment, then to the payment, ratably according to the amounts due on such installment, to the Persons entitled thereto, without any discrimination or preference except as to any difference in the respective rates of interest specified in such Bonds; second: to the payment to the Persons entitled thereto of the unpaid principal of any such Bonds that will have become due and payable (other than Bonds called for redemption for the payment of which money or Defeasance Obligations are held pursuant to the provisions of the Bond Order), in the order of their due dates, and, if the amount available will not be sufficient to pay in full the principal of such Bonds due and payable on any particular date, then to the payment ratably according to the amount of such principal due on such date, to the Persons entitled thereto without any discrimination or preference; and third: to the payment of the interest on and the principal of such Bonds, to the purchase and retirement of Bonds, and to the redemption of Bonds, all in accordance with the provisions of the Bond Order and the applicable Series Resolution. (b) If the principal of all Bonds will have become or will have been declared due and payable, all such money will be applied to the payment of principal and interest then due upon the Bonds without preference to the Persons entitled thereto without preference or priority of principal over interest or interest over principal, or of any installment of interest over any other installment of interest or any Bond over any other Bond ratably, according to the amounts due respectively for principal and interest, to the Persons entitled thereto, without any discrimination or preference. (c) If the principal of all Bonds will have been declared due and payable and if such declaration will thereafter have been rescinded and annulled under the provisions of the Bond Order, then, subject to the provisions of paragraph (b) above in the event that the principal of all Bonds will later become due and payable or be declared due and payable, the money then remaining in and thereafter accruing to the related Bond Fund shall be applied in accordance with the provisions of paragraph (a) above. Whenever money is to be applied by the Trustee pursuant to the provisions of the Bond Order, such money will be applied by the Trustee at such times and from time to time, as the Trustee in its sole discretion shall determine, having due regard for the amount of such money available for such application and the likelihood of additional money becoming available for such application in the future; the setting aside of such money, in trust for the proper purpose will constitute proper application by the Trustee, and the Trustee will incur no liability whatsoever to the District, to any Holder or to any other Person for any delay in applying any such money so long as the Trustee acts with reasonable diligence, having due regard for the circumstances, and ultimately applies the same in accordance with such provisions of the Bond Order as may be applicable at the time of application by the Trustee. Whenever the Trustee will exercise such discretion in applying such money, it shall fix the date (which shall be an Interest Payment Date unless the Trustee will deem another date more suitable) upon which such application is to be made and upon such date interest on the amounts of principal to be paid on such date shall cease to accrue. The C-24

123 Trustee will give notice by first class mail, postage prepaid, to all Holders of the fixing of any such date, and shall not be required to make payment to the Holder of any Bonds until such Bonds will be surrendered to the Trustee for appropriate endorsement, or for cancellation if fully paid. Control of Proceedings by Holders; Restrictions Upon Actions; Notice of Default Anything in the Bond Order to the contrary notwithstanding, the Holders of not less than fifty-one percent (51%) in aggregate principal amount of Bonds then Outstanding will have the right, subject to the provisions of the Bond Order, by an instrument or concurrent instruments in writing executed and delivered to the Trustee, to direct the method and place of conducting all remedial proceedings to be taken by the Trustee thereunder, provided that such direction will be in accordance with law and the provisions of the Bond Order. Except as provided in the Bond Order, no Holder will have any right to institute any suit, action or proceeding in equity or at law on any Bond or for the execution of any trust thereunder or for any other remedy hereunder unless such Holder previously will have given to the Trustee written notice of the Event of Default on account of which such suit, action or proceeding is to be instituted, and unless also the Holders will have made a written request of the Trustee after the right to exercise such powers or right of action as the case may be, will have accrued, and will have afforded the Trustee a reasonable opportunity either to proceed to exercise the powers hereinabove granted or to institute such action, suit or proceedings in its or their name, and unless, also, there will have been offered to the Trustee reasonable security and indemnity against the costs, expenses and liabilities to be incurred therein or thereby as provided in the Bond Order, and the Trustee will have refused or neglected to comply with such request within a reasonable time. Such notification, request and offer of indemnity have been declared in every such case, at the option of the Trustee, to be conditions precedent to the execution of the powers and trusts of the Bond Order or to any other remedy hereunder. Notwithstanding the foregoing provisions described under this clause and without complying therewith, the Holders of not less than fifty-one percent (51%) in aggregate principal amount of Bonds then Outstanding may institute any such suit, action or proceeding in their own names for the benefit of all Holders hereunder. It is understood and intended that, except as otherwise above provided, no one or more Holders will have any right in any manner whatsoever by his or their action to affect, disturb or prejudice the security of the Bond Order, or to enforce any right thereunder except in the manner provided, that all proceedings at law or in equity shall be instituted, had and maintained in the manner therein provided and for the benefit of all Holders and that any individual rights of action or other right given to one or more of such Holders by law are restricted by the Bond Order to the rights and remedies therein provided. The Trustee will mail to the District, the Local Government Commission and all Holders written notice of the occurrence of such an Event of Default within thirty (30) days after the Trustee will have notice of the same, pursuant to the provisions of the Bond Order. However, the Trustee will not be subject to any liability to any Holder by reason of its failure to mail any such notice. Concerning the Trustee; Acceptance of Duties by the Trustee The Trustee has signified its acceptance of the duties and obligations and has agreed to execute the trusts imposed upon it by the Bond Order by delivery to the District of its written acceptance thereof, but only upon the terms and conditions set forth in the Bond Order and subject to the provisions of the Bond Order, to all of which the District, the Trustee and the respective Holders agree. Prior to the occurrence of any Event of Default and after the curing of all such Events of Default that may have occurred, the Trustee will perform such duties and only such duties of the Trustee as are specifically set forth in the Bond Order and any Series Resolution. During the existence of any such Event of Default that C-25

124 has not been cured the Trustee will use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of the Bond Order or any Bond will be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own misconduct, except that: (a) prior to any such Event of Default hereunder, and after the curing of any other Events of Default that may have occurred: (i) the duties and obligations of the Trustee will be determined solely by the express provisions of the Bond Order and any Series Resolution and the Trustee will not be liable except for the performance of such duties and obligations of the Trustee as are specifically set forth in the Bond Order and any Series Resolution, and no implied covenants or obligations will be read into the Bond Order or any Series Resolution against the Trustee, and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the accuracy of the statements and the correctness of the opinions expressed therein, upon any certificate or opinion furnished to it conforming to the requirements of the Bond Order or any Series Resolution, but in the case of any such certificate or opinion by which any provision is specifically required to be furnished to the Trustee, the Trustee will be under a duty to examine the same to determine whether or not it conforms to the requirements of the Bond Order or any Series Resolution; and (b) at all times, regardless of whether or not any such Event of Default will exist: (i) the Trustee under the Bond Order or any Series Resolution will not be liable for any error of judgment made in good faith by a responsible officer or officers of the Trustee unless it will be proved that the Trustee was negligent in ascertaining the pertinent facts, and (ii) the Trustee under the Bond Order or any Series Resolution will not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than twenty percent (20) in aggregate principal amount of Bonds then Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any power conferred upon the Trustee under the Bond Order or any Series Resolution. None of the provisions contained in the Bond Order or any Series Resolution will require the Trustee to expend or risk its own funds or otherwise incur individual financial liability in the performance of any of its duties or in the exercise of any of its rights or powers. The Trustee will be under no obligation to institute any suit or to take any remedial proceeding (including, but not limited to, the acceleration of the maturity date of any or all Bonds) under the Bond Order or any Series Resolution or to enter any appearance or in any way defend in any suit in which it may be made defendant, or to take any steps in the execution of any of the trusts thereby created or in the enforcement of any rights and powers thereunder or under any Series Resolution, until it shall be indemnified to its satisfaction against any and all costs and expenses, outlays and counsel fees and other reasonable disbursements, and against all liability. The Trustee nevertheless may begin suit, or appear in and defend suit, or do anything else in its judgment proper to be done by it as such Trustee, without indemnity, and in such case the District, at the request of the Trustee, will reimburse the Trustee from the Revenues for all costs, expenses, outlays and counsel fees and other reasonable disbursements properly incurred in connection therewith. If the District will fail to make such reimbursement, the Trustee may C-26

125 reimburse itself from any money in its possession under the provisions of the Bond Order or any Series Resolution and will be entitled to a preference therefor over any Bonds Outstanding thereunder. The Trustee under the Bond Order or any Series Resolution will be under no obligation to effect or maintain insurance or to renew any policies of insurance or to inquire as to the sufficiency of any policies of insurance carried by the District, or to report, or make or file claims or proof of loss for, any loss or damage insured against or that may occur, or to keep itself informed or advised as to the payment of any taxes or assessments, or to require any such payment to be made. Except as to the acceptance of the trusts by its execution of the certificate of authentication on the Bonds, the Trustee will have no responsibility in respect of the validity or sufficiency of the Bond Order, or, except as to the authentication thereof, in respect of the validity of Bonds or the due execution or issuance thereof. The Trustee under the Bond Order or any Series Resolution will be under no obligation to see that any duties therein or under any Series Resolution imposed upon the District, the Accountant, the Management Consultant, any Independent Architect, any Insurance Advisor, any Depositary other than the Trustee acting as Depositary, or any Person other than itself, or any covenants therein contained on the part of any Person other than itself to be performed, shall be done or performed, and the Trustee will be under no obligation for failure to see that any such duties or covenants are so done or performed. Except upon the happening of (i) any Event of Default specified in clauses (a) or (b) under Events of Default and Remedies above, (ii) notification in the certificate of the Accountant or the Officer s Certificate of the District required under the Bond Order that an Event of Default has occurred or (iii) written notification from any holder of Indebtedness or such holder s legal representative of an event of default under any Indebtedness, the Trustee will not be obliged to take notice or be deemed to have notice of any Event of Default under the Bond Order, unless specifically notified in writing of such Event of Default by the District or the Holders of not less than 20% in aggregate principal amount of Bonds then Outstanding. Resignation of Trustee The Trustee under the Bond Order or under any Series Resolution may resign and thereby become discharged from the trusts created by the Bond Order, by notice in writing given to the District and the Local Government Commission, and mailed, postage prepaid, to all Holders, not less than thirty (30) days before such resignation is to take effect, but such resignation will take effect immediately upon the appointment of a new Trustee thereunder if such new Trustee will be appointed before the time limited by such notice and will then accept the trusts of the Bond Order and any Series Resolution. Removal of Trustee The Trustee may be removed at any time by an instrument or concurrent instruments in writing, executed by the Holders of not less than 51% in aggregate principal amount of Bonds then Outstanding or, if no Event of Default exists and is continuing, by the District and filed with the District, not less than 30 days before such removal is to take effect as stated in said instrument or instruments. The Trustee may also be removed at any time for acting or proceeding in violation of, or for failing to act or proceed in accordance with, any provisions of the Bond Order or any Series Resolution with respect to the duties and obligations of the Trustee by any court of competent jurisdiction upon the application of the District or the Holders of not less than 20% in aggregate principal amount of Bonds then Outstanding. C-27

126 Payment of Trustee s Fees If the District fails to cause required payments to be made to the Trustee for compensation and expenses, the Trustee may make such payment from any money in its possession under the provisions of the Bond Order and will be entitled to a preference therefor over any of the Outstanding Bonds. No Recourse Against Members, Officers or Employees of the District No recourse under, or upon, any statement, obligation, covenant, or agreement contained in the Bond Order; or in any Bond. No recourse under, or upon, any statement, obligation, covenant, or agreement contained in the Bond Order; or in any Bond thereby secured; or in any document or certification whatsoever; or under any judgment obtained against the District or by the enforcement of any assessment or by any legal or equitable proceeding by virtue of any constitution or statute or otherwise or under any circumstances, shall be had against any member, officer or employee, as such, of the District, either directly or through the District, or otherwise, for the payment for or to, the District or any receiver thereof, or for, or to, any Holder or otherwise, of any sum that may be due and unpaid by the District upon any such Bond. Any and all personal liability of every nature, whether at common law or in equity or by statute or by constitution or otherwise, of any such member, officer or employee, as such, to respond by reason of any act or omission on his or her part or otherwise, for the payment for, or to, the District or any receiver thereof, or for, or to, any Holder or otherwise, of any sum that remain due and unpaid upon the Bonds secured by the Bond Order or any of them, is expressly waived and released as an express condition of, and in consideration of, the adoption of the Bond Order and the issuance of the Bonds. Supplements and Modifications to the Bond Order and the 2017 Series Resolution The District may from time to time and at any time adopt such bond orders or series resolutions supplemental to the Bond Order and the 2017 Series Resolution, respectively, as are consistent with the terms and provisions of the Bond Order and the 2017 Series Resolution and, in the opinion of the Trustee, will not affect materially and adversely the interest of the Holders for any of the following purposes: to cure any ambiguity or formal defect or omission, to grant to or confer upon the Trustee for the benefit of the Holders any additional rights, remedies, powers, authority or security that may lawfully be granted to or conferred upon the Holders or the Trustee, to add to the conditions, limitations and restrictions on the issuance of Bonds and other Indebtedness under the provisions of the Bond Order or the 2017 Series Resolution, to add to the covenants and agreements of the District in the Bond Order or the 2017 Series Resolution other covenants and agreements thereafter to be observed by the District or to surrender any right or power reserved to or conferred upon the District therein, to permit the qualification of the Bond Order or the 2017 Series Resolution under any federal statute now or hereafter in effect or under any state Blue Sky law or to provide for the issuance of Bonds in bearer form. The Holders of not less than 51% in aggregate principal amount of Bonds then Outstanding that will be affected by a proposed supplemental bond order or series resolution have the right, from time to time, to consent to and approve the adoption by the District and the acceptance by the Trustee of such supplemental bond order or supplemental series resolution as is deemed necessary or 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 Order, the 2017 Series Resolution, any supplemental bond order or any supplemental series resolution; provided, however, that nothing contained in the Bond Order will permit, or be construed as permitting (a) an extension of the maturity of the principal of or the interest on any Bond issued under the Bond Order, or (b) a reduction in the principal amount of any Bond or the redemption premium or the rate of interest thereon, or (c) the creation of a pledge of Revenues C-28

127 other than any pledge created or permitted by the Bond Order, or (d) a preference or priority of any Bond over any other Bond, or (e) a reduction in the aggregate principal amount of Bonds required for consent to such supplemental bond order or supplemental series resolution. Defeasance If, when (a) the Bonds have become due and payable in accordance with their terms or have been duly called for redemption, or (b) irrevocable instructions to pay such Bonds at their respective maturities or to call such Bonds for redemption, have been given by the District to the Trustee, the whole amount of the principal and the interest and premium, if any, so due and payable upon all Bonds will be paid or if the Trustee holds sufficient money or non-callable Defeasance Obligations the principal of, and the interest on which, when due and payable, will provide sufficient money to pay the principal of, and the interest and redemption premium, if any, on all Bonds then Outstanding to the maturity date or dates of such Bonds or to the date or dates specified for the redemption thereof, and (c) sufficient funds also have been provided or provision made for paying all other obligations payable under the 2017 Series Resolution by the District, in connection with an advance refunding, as shown by a verification report of an Accountant as to the adequacy of the escrow then and in that case the right, title and interest of the Trustee under the 2017 Series Resolution and the obligations of the District under the 2017 Series Resolution will thereupon cease, and the District will repeal the 2017 Series Resolution and the Trustee, on demand of the District, will distribute any surplus and all balances remaining in all funds and accounts, other than money held for the redemption or payment of Bonds, as provided in the 2017 Series Resolution. Otherwise, the 2017 Series Resolution will continue and remain in full force and effect; provided that, in the event Defeasance Obligations are deposited with and held by the Trustee as hereinabove provided, (i) in addition to the requirements set forth in the 2017 Series Resolution with respect to the redemption of the Bonds, the Trustee, within 30 days after such Defeasance Obligations have been deposited with it, will cause a notice signed by the Trustee to be mailed, postage prepaid, to all Holders setting forth (a) the date or dates, if any, designated for the redemption of the Bonds, (b) a description of the Defeasance Obligations so held by it, and (c) that the 2017 Series Resolution has been repealed in accordance with the provisions thereof, but failure to mail any such notice to any Holder will not affect the validity of the defeasance of the Bonds pursuant thereto and (ii) (a) the Trustee will nevertheless retain such rights, powers and privileges under the 2017 Series Resolution as may be necessary and convenient in respect of the Bonds for the payment of the principal, interest and any premium for which such Defeasance Obligations have been deposited and (b) the Trustee will retain such rights, powers and privileges under the 2017 Series Resolution as may be necessary and convenient for the registration, transfer and exchange of Bonds. C-29

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129 APPENDIX D FORM OF OPINION OF BOND COUNSEL

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131 APPENDIX D [Form of Opinion of Bond Counsel] February, 2017 Northern Hospital District of Surry County Dobson, North Carolina We have examined, as bond counsel to Northern Hospital District of Surry County (the District ), (a) the Constitution and laws of the State of North Carolina, including The State and Local Government Revenue Bond Act and Chapter 131E of the North Carolina General Statutes, as amended, (b) certified copies of the proceedings showing the adoption of an order adopted by the Board of Commissioners (the Board ) for the County of Surry, North Carolina, as the governing body of the District, on June 17, 1991, as supplemented by two supplemental bond orders adopted by the Board on June 21, 1999 and March 3, 2008, respectively (collectively, the Order ), and a series resolution with respect to the issuance by the District of its Northern Hospital District of Surry County Health Care Facilities Revenue Refunding Bonds, Series 2017 (the Series 2017 Bonds ) adopted by the Board on January 3, 2017 (the Series Resolution ), and (c) other proofs submitted relative to the sale and issuance of the Series 2017 Bonds. The Series 2017 Bonds are being issued under and pursuant to the Order and the Series Resolution. Capitalized terms used herein and not otherwise defined have the meanings given such terms in the Order and the Series Resolution. The Series 2017 Bonds are dated the date hereof, bear interest from their date and mature, subject to redemption prior to their stated maturities, as provided in the Series Resolution. The Series 2017 Bonds are being issued for the purpose of providing funds, together with other available funds, to (a) refund all or a portion of the outstanding Series 1999 Bonds and Series 2008 Bonds, (b) fund the Debt Service Reserve Fund for the Series 2017 Bonds and (c) pay the fees and expenses incurred in connection with the sale and issuance of the Series 2017 Bonds. The District has heretofore issued various series of Bonds in addition to the Series 2017 Bonds pursuant to the Order. As security for the payment of the Bonds and the interest thereon, pursuant to the Order, the District has pledged Revenues, the District s rights to receive the same, and the funds and accounts held by the Trustee under the Order and the Series Resolution and the income from the investment thereof. Additional Bonds may be issued upon the terms specified in the Order and upon such issuance may be equally and ratably secured with the Bonds as to the pledge of Revenues. D-1