HomeMy WebLinkAbout15 - Hoag Memorial Hospital 2007 Revenue Bonds.pdfCITY OF NEWPORT BEACH
CITY COUNCIL STAFF REPORT
Agenda Item No. 15
April 24, 2007
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Dennis Danner, Administrative Services Director (949) 644 -3123
ddanner@city.newport-beach.ca.us
SUBJECT: Resolution 2007 - Hoag Memorial Hospital Presbyterian Series 2007
Health Care Facility Revenue Bonds
Issue:
Should the City assist Hoag Memorial Hospital Presbyterian in issuing Health Care
Facility Revenue Bonds?
Recommendation:
Hold the public hearing and adopt the resolution authorizing:
• the sale of not to exceed $500 million of City of Newport Beach Insured Demand
Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series 2007;
• the execution and delivery of the Loan Agreement in substantially the form
presented;
• the execution and delivery of the Indenture in substantially the form presented;
• the execution and delivery of the Preliminary Official Statement (including
Appendix A) in substantially the form presented;
• the execution and delivery of the Bond Purchase Contract in substantially the
form presented; and
• staff to take the necessary steps to close the bond sale.
Discussion:
In 1984, 1992, 1996, 1999 and 2005 the City issued similar bonds on behalf of Hoag
Hospital Memorial Presbyterian. The debt service for these bonds is not a City
obligation. The hospital will use the proceeds of this issue to (1) finance the acquisition
and construction of certain additions and improvements to, and equipment for, health
facilities located at the campus of Hoag Memorial Hospital Presbyterian, and (2) provide
for the payment of bond issuance expenses, including the premium for a commercial
bond insurance policy. In each of the previous issues Hoag Hospital paid an issuance
fee to the City that was used for a General Fund paramedic reserve or for infrastructure
improvements. The City is proposing a similar fee for this bond issuance in the amount
Hoag Memorial Hospital Presbyterian Series 2007 Heath Care Facility Revenue Bonds
April 24, 2007
Page 2
of $200,000. Although fees charged for such issues vary by the sponsoring agency, this
fee is in the range of fees charged by the California Health Facilities Financing Authority
and the California Statewide Communities Development Authority for similar sized
issues.
The proposed issue provides a number of benefits to the City. First, Hoag will be able to
save money using the proceeds of tax exempt bonds to finance the construction and
improvements, and purchase equipment; a cost savings is expected to be passed along
to Newport Beach residents and other patients in the form of reduced health care costs.
Second, Hoag will be able to improve the quality of health care and do so quickly
because it will have funds necessary to acquire state -of- the -art equipment and construct
improvements to the campus.
Commonly referred to as "Conduit Debt," it is not unusual for municipalities in California
to assist public service entities such as Hoag hospital with tax exempt financing
agreements of this nature. A significant provision of the agreement between. the City
and Hoag is that the City incurs no independent financial responsibility for the
indebtedness. Existing agreements of this type are disclosed in the City's
Comprehensive Annual Financial Report, which is approved by the City's auditors each
year. We are unaware of any negative comments by the auditors, creditors or Bond
rating agencies concerning the agreements.
The limited nature of the City's participation in the financing is also clearly disclosed to
investors who purchase the Bonds. The bond offering documents state that neither the
full faith nor credit of the City nor the general taxing power of City and State of California
are pledged in connection with the bond offering.
A City is a successful combination of many factors, including the mix of land uses, the
quality of public services, the availability of housing, open space opportunities, and
various other amenities. Certainly one of the key factors in achieving a successful
community is having a quality health care facility and health care providers. The City is
fortunate to have a very high quality hospital in Hoag and its success has attracted a
very high quality physician base to our immediate region. The perpetuation of this asset
is in the City's long term interest. Since there is no cost or risk to the City in approving
the issue, it is in the community's interest to do so.
The Resolution authorizing the issue is attached to this staff report. All other documents
are available in the City Clerk's office for examination.
Public Notice:
Public Notice of this hearing was provided as prescribed by law.
Funding Availability:
No City funding is required by this action.
Hoag Memorial Hospital Presbyterian Series 2007 Heath Care Facility Revenue Bonds
April 24, 2007
Page 3
Alternative:
The alternative is to not assist Hoag Memorial Hospital Presbyterian in the issuance of
Health Care Facility Revenue Bonds.
Prepared and Submitted by:
X4xiJta
Dennis Danner
Administrative Services Director
Attachment: Resolution
RESOLUTION NO.
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF NEWPORT
BEACH AUTHORIZING THE ISSUANCE OF NOT TO EXCEED
$500,000,000 AGGREGATE PRINCIPAL AMOUNT OF THE CITY OF
NEWPORT BEACH INSURED REVENUE BONDS (HOAG MEMORIAL
HOSPITAL PRESBYTERIAN), SERIES 2007
WHEREAS, the City of Newport Beach (the "City ") is a municipal corporation and
charter city duly organized and existing under a freeholders' charter pursuant to which the City has
the right and power to make and enforce all laws and regulations in respect of municipal affairs and
certain other matters in accordance with and as more particularly provided in Sections 3, 5 and 7 of
Article XI of the Constitution of the State of California and Section 200 of Article II of the Charter
of the City (the "Charter"); and
WHEREAS, the City Council of the City, acting under and pursuant to the powers
reserved to the City under Sections, 3, 5, and 7 of Article XI of the Constitution of the State of
California and Section 200 of Article II of the Charter, has found that the public interest and
necessity require the establishment of a program for the authorization, issuance and sale of revenue
bonds or notes by the City for the purposes of making loans such as those described herein; and
WHEREAS, the City pursuant to Ordinance No. 85 -23 and 84 -4, has adopted the
Health Care and Recreation Facilities Revenue Bond Ordinance of the City of Newport Beach
(the "Lath') to establish procedures for the authorization, issuance and sale of such revenue bonds
or notes; and
WHEREAS, Hoag Memorial Hospital Presbyterian, a California nonprofit public
benefit corporation (the "Corporation ") has requested that the City issue its Insured Revenue Bonds
(Hoag Memorial Hospital Presbyterian), Series 2007, in one or more series (the "Bonds ") for the
purpose of: (1) financing and refinancing the acquisition and construction of certain additions and
improvements to, and equipment for, health facilities (collectively, the "Health Facilities ") located
at the campus of Hoag Memorial Hospital Presbyterian, One Hoag Drive, Newport Beach,
California; and (2) providing for the payment of bond issuance expenses; and
WHEREAS, the Corporation is a "participating health institution" and operates a
"health facility" as those terms are defined in the Law; and
WHEREAS, the loan to be made with the proceeds of said bonds will promote the
purposes of the Law by providing funds to pay the cost of acquiring, constructing, rehabilitating or
improving health facilities and reimbursing the Corporation for certain expenses incurred for the
purposes of acquiring, constructing, rehabilitating or improving the health facilities; and
WHEREAS, pursuant to Section 147(f) of the Internal Revenue Code of 1986
(the "Code "), the Bonds are required to be approved, following a public hearing, by an elected
representative of the City, as the governmental party issuing the Bonds, and an elected
representative of the governmental unit or units having jurisdiction over the area in which the
Health Facilities are located; and
WHEREAS, the Health Facilities are located wholly within the City; and
WHEREAS, the City Council of the City is the elected legislative body of the City
and is the applicable elected representative required to approve the issuance of the Bonds within the
meaning of Section 147(f) of the Code; and
WHEREAS, pursuant to Section 147(f) of the Code, the City Council of the City
has, following notice duly given, held a public hearing regarding the issuance, execution and
delivery of the Bonds, and now desires to approve the issuance of the Bonds; and
WHEREAS, there have been presented to this meeting the following:
(1) Proposed form of Loan Agreement (the "Loan Agreement ") between the
City and the Corporation;
(2) Proposed form of Bond Indenture (the `Bond Indenture ") between the City
and Wells Fargo Bank, National Association (or such other financial institution acceptable
to the City and the Corporation), as bond trustee (the "Bond Trustee "), providing for the
authorization and issuance of the Bonds;
(3) Proposed form of the Official Statement to be used in connection with the
sale of the Bonds (the "Official Statement "); and
(4) Proposed form of Bond Purchase Contract (the "Bond Purchase Contract ")
between the City and Citigroup Global Markets Inc. (the "Underwriter ").
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of
Newport Beach, California, as follows:
Section I. The form, terms and provisions of the Loan Agreement be and they
hereby are approved and the Mayor or the Mayor's designee is hereby authorized and empowered
to execute, and the City Clerk or the City Clerk's designee is hereby authorized and empowered to
attest and deliver, the Loan Agreement, in substantially the form presented to and considered at this
meeting with such changes as the official executing the same shall deem appropriate and in the best
interests of the City, as conclusively evidenced by execution thereof.
Section 2. The form, terms and provisions of the Bond Indenture be and they hereby
are approved, and the Mayor or the Mayor's designee is hereby authorized and empowered to
execute and the City Clerk or the City Clerk's designee is hereby authorized and empowered to
attest and deliver to the Bond Trustee, the Bond Indenture, in substantially the form presented to
and considered at this meeting with such changes as may be approved by the official executing the
same, such approval to be conclusively evidenced by execution thereof.
Section 3. Pursuant to Section 147(1) of the Internal Revenue Code of 1986, this
City Council approves the issuance of the Bonds in an aggregate principal amount not to exceed
$500,000,000. It is the purpose and intent of the Council that this Resolution constitutes approval
of the issuance of the Bonds by the applicable elected representative of the issuer and the applicable
elected representative of the governmental unit having jurisdiction over the area in which the Health
Facilities are located, in accordance with said Section 147(f). Payment of the principal of and the
redemption premium and the interest on the Bonds shall be made solely from the revenues to be
received by the City pursuant to the Loan Agreement, and said Bonds shall not be deemed to
constitute a debt or liability of the City.
Section 4. The issuance, sale and delivery of the Bonds in one or more series
pursuant to the Bond Indenture in an aggregate principal amount of not to exceed $500,000,000 is
hereby authorized and approved.
Section 5. The Official Statement in the form presented to this meeting be and the
same hereby is approved for use by the Underwriter in connection with the public offering of the
Bonds with such changes as may be approved by one or more officers of the City, and the Mayor or
the Mayor's designee is authorized to execute the final Official Statement relating to the Bonds.
The Underwriter is hereby authorized to distribute the Official Statement in preliminary form to
potential purchasers of the Bonds, and the Official Statement in final form to actual purchasers of
the Bonds.
Section 6. The Mayor and the City Clerk (each of whom may sign by facsimile
signature) are hereby authorized and directed to execute, in the name and on behalf of the City, the
Bonds and to cause the Bonds to be delivered to the Bond Trustee for authentication and delivery to
the Underwriter.
Section 7. The Bond Purchase Contract is hereby approved, and the Mayor or the
Mayor's designee and the City Clerk or the City Clerk's designee be and hereby are authorized and
empowered to execute and deliver the Bond Purchase Contract, in substantially the form presented
to and considered at this meeting, with such changes as the officials executing the same shall deem
appropriate and in the best interests of the City as conclusively evidenced by their execution
thereof.
Section 8. The Mayor or the Mayor's designee and the City Clerk or the City
Clerk's designee are hereby authorized and directed, jointly and severally, to do any and all things,
and to execute and deliver any and all documents which they may deem necessary or advisable, in
order to consummate the issuance of the Bonds, including to modify the provisions of the Loan
Agreement, the Bond Indenture, the Official Statement and the Bond Purchase Contract to conform
to any requirements of a bond insurer selected by the Corporation and otherwise to carry out, give
effect to and comply with the terms and intent of this Resolution and the documents referred to
herein.
Section 9. The Bonds authorized to be issued pursuant to this Resolution shall be
issued in strict compliance with the provisions of the Law. The City Clerk shall certify to the
passage of this resolution by the City Council of the City of Newport Beach, and it shall thereupon
take effect.
I hereby certify that the foregoing resolution was adopted by the City Council of the
City of Newport Beach at its meeting of 2007, by the following vote:
ATTEST:
AYES: Councilmembers:
NOES: Councilmembers:
ABSTAIN: Councilmembers:
ABSENT: Councilmembers:
City Clerk
Mayor
Authorized to Publish Advertisements of all kinds including public notices by
Decree of the Superior Court of Orange County, California. Number A -6214,
September 29, 1961, and A -24831 June 11, 1963.
PROOF OF PUBLICATION
STATE OF CALIFORNIA)
) ss.
COUNTY OF ORANGE )
I am a Citizen of the United States and a
resident of the County aforesaid; I am
over the age of eighteen years, and not a
parry to or interested in the below entitled
matter. I am a principal clerk of the
NEWPORT BEACH - COSTA MESA
DAILY PILOT, a newspaper of general
circulation, printed and published in the
City of Costa Mesa, County of Orange,
State of California, and that attached
Notice is a true and complete copy as
was printed and published on the
following dates:
April 9, 2007
I declare, under penalty of perjury, that
the foregoing is true and correct.
Executed on April 11, 2007, at
Costa Mesa, California.
Signature
used by Hoag Memorial
The hearing will -corn-
costs of the Project de-
NOFKEOFFMKFIFENGI
mence at 7:00 pm-', or
scribed above and will
Notice is hereby given
as soon therelifter as
be
be limited obligations of
the City to be repaid
that on April 24, 2007,
the matter can
-
a public hearing as re-
heard, and will be held
solely from revenues re-
quired by Section
at the City Council
calved by the City from
147(f) of the Internal
Chambers, City Hall,
the Corporation.
Revenue Code (the
3300 Newport Boule-
.Additional information
"Code ") will be held
vard.
Newport - Beach.
concerning the above
with respect to the pro-
California
92663. Inter=
matter may be obtained
posed issuance by the
ested persons wishing
from and written com-
City of Newport Beach,
to express their views
menu should be ad-
the City
Californie (the "Cit,. ") of
on the issuance- of the
dressed to
its revenue bonds in
Bonds or on the nature'
Clerk, City of Newport
one or more series in-
and location of, the
health. facilities pro-
Beach, 3300 Newport
Boulevard, Newport
an amount not to ex-
teed. $500,000,000 (the
posed to be financed
Beach, California 92658,
"Bonds"). The oroceeds
may attend the public
Levonne Harktess
used by Hoag Memorial
time of the rearm,.
Hospital Presbyterian
submit written tom:
(the Corporation ") to
menu.
finance and refinance
The Bonds will be is-
the cost of acquisition,
sued by the City under
colistruction, im -.the
powers reserved to
provement, aGGUipp!n6
the City under Sections
3, 5 and 7 of Article XI
renovation. rehabilits-
tion, remodeling and
of.the Constitution of
other capital projects
the State of California
located at the hospital
and Section 200 of Art'-
campus at One Hoagi
eta 11 of the Charter of
Drive, Newport Beach.- I
the City to finance the
CA (tire - Project "). The
facility listed above is
owned and operated by
the Corporation, .a non-
NEW ISSUE — BOOK -ENTRY ONLY
OH &S
DRAFT
423/07
Ratings t
In the opinion of Orrick, Herrington & Sutcliffe LL P, Bond Counsel to the City, based upon w amdysis of existing laws, regulations, rulings and court decisions,
and assuming, among other maters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross
income for federal income ms parposes under section 103 of the Internal Revenue Code of 1986 and is exempt from om State of California personal income rases. In the
further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes,
although Bond Counsel observes that such interest is included in adjusted current earnings in calcularing federal corporate alternative minimum taxable income.
Bond Counsel expresses no opinion regarding any other ms consequences relating to the ownership or disposition of, or the accrual or receipt of interest am the
Bonds. See "TAX AM TERS "herein.
$[AGGREGATE PAR AMOUNT]
City of Newport Beach
Insured Revenue Bonds
(Hoag Memorial Hospital Presbyterian)
(Auction Rate Securities)
S[2007A PAR AMOUNT] $[2007B PAR AMOUNT] $[2007C PAR AMOUNT]
Series 2007A Series 2007B Series 2007C
$[2007D PAR AMOUNT] $[2007E PAR AMOUNT]
Series 2007D Series 2007E
Price: 100%
Dated: Late of Delivery
Due: As shown on the inside cover
The City of Newport Beach Insured Reverwe Bonds (Hoag Memorial Hospital Presbyterian) Series 2007A (the "Series 2007A Bonds" ), Series 2007B (the
"Series 2007B Bonds "), Series 2007C (the "Series 2007C Bonds', Series 2007D (the "Series 2007D Bonds ") and Series 2007E Bonds (the "Series 2007E Bonds and
collectively with the Series 2007A Bonds, the Series 2007B Bonds, the Series 2007C Bonds and the Series 2007D Bonds, the "Bonds" and each a "Series" of Bonds)
will be issued initially as auction rate securities in denominations of $25,000 or any integral multiple thereof. The Binds will initially bear interest at Auction Rates (as
defined in the Bond Indenture) for generally successive seven -day Auction Periods (as defined in the Bond Indenture). Each Auction Rate for a Series of Bonds will,
except in certain cases, be equal to the annual interest rate that results from the implementation of the Auction Procedures for such Series described in Appendix C
hereto. At the election of Hoag Memorial Hospital Presbyterian ( "Hoag Hospital "), a Series of Bonds may be converted, in whole, to bear interest at Auction Rates
determined on the basis of a 35-day Auction Period or to other Interest Rate Periods as described herein. The Bonds will be issued in fully registered form in the name
of Cede & Co., as nomince of The Depository Trust Company, New York, New York ( "DTC "), under the book entry only system maintained by DTC. so long ss
Cede & Co. is the registered owner of the Bonds, (i) principal of, premium, if any, and interest on the Bonds will be payable by Wells Fargo Bank, National
Association, as trustee, to DTC, which in tun will remit such payments to its participants for subsequent disbursement to beneficial owners of the Bonds, as mine fully
described herein, and (ii) all notices, including any notice of redemption or notice of conversion to another Interest Rate Period, shall be mailed only to Cede & Co.
See "THE AUCTION RATE SECURITIES —Book- Entry-Only system" herein.
This Official statement describes certain terms of each Series of Bonds applicable while such Series bears interest at Auction Rates. There are
significant changes in the terms of the Bonds while such Bonds amore interest in other Interest Rate Periods. This Official Statement is not Intended to
provide information with respect to any series of Bonds other than Bonds that bear interest at Auction Rates.
The Bonds are limited obligations of the City of Newport Beach (the "City"), secured under the provisions of the Bond Indenture and the Loan Agreement as
described herein, and will be payable from Loan Repayments made by Hoag Hospital under the Loan Agreement and from certain funds held under the Bond
Indenture. The obligation of Hoag Hospital to make such payments is evidenced and secured by Obligation No. I issued under the Muster Indenture, described herein,
whereunder the members of the obligated group (the "Obligated Group "), in which Hoag Hospital is the Credit Group Representative, is obligated to make payments
on Obligation No. I in amounts sufficient to pay principal of and premium, if any, and interest on the Bonds when due.
THE BONDS ARE LIMITED OBLIGATIONS OF THE CITY PAYABLE SOLELY FROM PAYMENTS REQUIRED TO BE MADE BY HOAG HOSPITAL
PURSUANT TO THE LOAN AGREEMENT AND OBLIGATION NO. 1 ISSUED PURSUANT TO THE MASTER INDENTURE, NEITHER THE STATE OF
CALIFORNIA NOR THE CITY SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF THE BONDS, OR THE PREMIUM OR INTEREST THEREON,
EXCEPT FROM THE FUNDS PROVIDED UNDER THE LOAN AGREEMENT, OBLIGATION NO. I AND THE BOND INDENTURE, AND NEITHER THE
FAITH AND CREDIT NOR THE TAXING POWER OF THE CITY, THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF, Is
PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR THE PREMIUM OR INTEREST ON THE BONDS. THE ISSUANCE OF THE BONDS SHALL
NOT DIRECTLY OR INDIRECTLY OR CONTINGENTLY OBLIGATE THE CITY, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION
THEREOF TO LEVY OR TO PLEDGE ANY FORM OF TAXATION OR TO MAKE ANY APPROPRIATION FOR THOR PAYMENT.
The Bonds are subject to optional, mandatory sinking fund and extraordinary optional redemption prior to their stated maturity as described herein.
While the Bonds of a series bear interest at an Auction Rate such Bonds will not be subject to optional tender for purchase nor will they be purchased in the
event of an Auction Failure (although they will, provided certain conditions are satisfied, be subject to mandatory tender upon a Conversion to another Interest Rate
Period, as described herein).
The scheduled payment of the principal of and interest on the Bonds when due will be guaranteed under a financial guaranty insurance: policy (the "Bond
Insurance Policy") to be issued concurrently with the delivery of the Bonds by Ambac Assurance Corporation (the "Bond Insurer "), see "BOND INSURANCE"
herein.
]AMBAC Logo]
This cover page contains certain information for quick reference only. It is not intended to be a summary of the security or terms of the Bonds. Investors should
read the entim Official Statement to obtain information essential to the making of an informed investment decision.
The Bonds are offered when, as and if received by the Underwriter, subject to prior sale and to the approval of the validly of the Bonds and certain legal matters
by Orrick, Herrington & Sutcliffe up, Bond Counsel to the City, the approval of certain matters for the City by the City Attorney, for Hoag Hospital by stradling
Yocca Carlson & Rauth, a Professional Corporation, and for the Underwriter by its counsel, Foley & Lardner LLP, Chicago, Illinois. It is expected that the Bonds in
book entry form will beavailable for delivery to DTC in New York, New York, on or about May _ 2007.
Citigroup
Date: , 2007
t For an explanation of the ratings, see "RATINGS" herein.
OHS West:260185418.3
MATURITY SCHEDULE
$[AGGREGATE PAR AMOUNT]
City of Newport Beach
Insured Revenue Bonds
(Hoag Memorial Hospital Presbyterian)
(Auction Rate Securities)
$[2007A PAR AMOUNT] Series 2007A Bonds
Length of Interest
Initial Initial Interest Auction Date Payment Date
Initial Auction Period Payment Date Generally Generally Final Maturity Date
$[2007B PAR AMOUNT] Series 2007B Bonds
Interest
Length of Payment
Initial Initial Interest Auction Date Date
Initial Auction Period Payment Date Generally Generally Final Maturity Date
$[2007C PAR AMOUNT] Series 2007C Bonds
Length of Interest
Initial Initial Interest Auction Date Payment Date
Initial Auction Period Payment Date Generally Generally Final Maturity Date
$[2007D PAR AMOUNT] Series 2007D Bonds
Interest
Length of Payment
Initial Initial Interest Auction Date Date
Initial Auction Period Payment Date Generally Generally Final Maturity Date
Initial Auction
OHS West:260185418.3
S[2007E PAR AMOUNT] Series 2007E Bonds
Length of
Initial
Period
Interest
Initial Interest Auction Date Payment Date
Payment Date Generally Generally Final Maturity Date
Each Series of Bonds will bear interest from the date of original delivery for the applicable initial period set
forth above at the applicable rate for that Series established prior to the date of delivery by the Underwriter.
Thereafter, each Series of Bonds will bear interest at the applicable Auction Rate for its respective Auction Periods,
until a conversion to another Interest Rate Period as described herein. Interest will be payable on the first interest
payment date set forth above and, thereafter, on the Business Day following the end of each Auction Period for the
applicable Series of Bonds.
Wells Fargo Bank, National Association will act as the Auction Agent for each Series of Bonds, and
Citigroup Global Markets Inc. will serve as the initial Broker - Dealer with respect to the Bonds.
The information relating to the City contained herein under the headings "THE CITY" and
"LITIGATION —The City" has been furnished by the City. The information relating to the Bond Insurer and the
Bond Insurance Policy set forth herein under the caption `BOND INSURANCE" and in APPENDIX G has been
furnished by the Bond Insurer. Such information is believed to be reliable but is not guaranteed as to accuracy or
completeness and is not to be construed as a representation by the City or the Underwriter. All other information
contained herein has been obtained from Hoag Hospital, DTC, the Bond Insurer and other sources (other than the
City) that are believed to be reliable. Such other information is not guaranteed as to accuracy or completeness and is
not to be relied upon or construed as a promise or representation by the City or the Underwriter. 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.
No dealer, broker, salesperson or other person has been authorized by the City, Hoag Hospital or the
Underwriter to give any information or to make any representations, other than those contained in this Official
Statement, and, if given or made, such information or representation must not be relied upon as having been
authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of
an offer to buy, nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawful for
such person to make such offer, solicitation or sale. The information and expressions of opinion herein are subject
to change without notice, and neither the delivery of this Official Statement nor any statement nor any sale made
hereunder shall create under any circumstances any implication that there has been no change in the affairs of the
City, Hoag Hospital, DTC or the Bond Insurer since the date hereof This Official Statement is submitted in
connection with the issuance of securities referred to herein and may not be used, in whole or in part, for any other
purpose.
IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITER MAY OVER -
ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THE BONDS AND OBLIGATION NO. 1 14AVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THE BOND INDENTURE OR THE MASTER
INDENTURE 14AVE BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED,
IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS. THE REGISTRATION OR
QUALIFICATION OF THE BONDS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF LAWS OF
THE STATES IN WHICH T14E BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION
FROM REGISTRATION OR QUALIFICATION IN OTHER STATES CANNOT BE REGARDED AS A
RECOMMENDATION THEREOF. NEITHER THESE STATES NOR ANY OF THEIR AGENCIES HAVE
PASSED UPON THE MERITS OF THE BONDS OR THE ACCURACY OR COMPLETENESS OF THIS
OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL
OFFENSE.
OHS West260185418.3
CAUTIONARY STATEMENTS REGARDING
FORWARD - LOOKING STATEMENTS IN
THIS OFFICIAL STATEMENT
Certain statements included or incorporated by reference in this Official Statement constitute "forward -
looking statements." Such statements generally are identifiable by the terminology used such as "plan," "expect,"
"estimate," "budget' or other similar words. Such forward - looking statements include but are not limited to certain
statements contained in the information under the captions `BONDHOLDERS' RISKS," and APPENDIX A —
"INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTH
CARE CENTER LLC AND OTHER AFFILIATES — FACILITIES DESIGN AND CONSTRUCTION" and "-
SELECTED UTILIZATION AND FINANCIAL INFORMATION— Management's Discussion and Analysis of
Financial Information" in this Official Statement. The achievement of certain results or other expectations
contained in such forward - looking statements involve known and unknown risks, uncertainties and other factors that
may cause actual results, performance or achievements described to be materially different from any future results,
performance or achievements expressed or implied by such forward - looking statements. Hoag Hospital does not
plan to issue any updates or revisions to those forward - looking statements if or when its expectations or events,
conditions or circumstances on which such statements are based occur.
OHS West260185418.3
TABLE OF CONTENTS
INTRODUCTORYSTATEMENT
Purpose of the Official Statement ....................................... ...............................
The Obligated Group and the Master Indenture ................. ...............................
AuctionRate ....................................................................... ...............................
Securityfor the Bonds ........................................................ ...............................
BondInsurance ................................................................... ...............................
Plan of Finanrr
THECITY ...................................... ...............................
THE AUCTION RATE SECURITIES .........................
Auction Rate Securities ..... ...............................
Concerning the Auction Rate Securities...........
Book -Entry-Only System .. ...............................
No Assurance Regarding DTC Practices .........
Redemption....................... ...............................
SECURITY FOR THE BONDS .... ...............................
General................................................................................ ...............................
TheMaster Indenture .......................................................... ...............................
Security and Enforceability ................................................. ...............................
Other................................................................................ ...............................
BONDINSURANCE ....................................................................... ...............................
Payment Pursuant to Bond Insurance Policy ....................... ...............................
Ambac Assurance Corporation ............................................ ...............................
AvailableInformation ......................................................... ...............................
Incorporation of Certain Documents by Reference ............. ...............................
DISCLAIMER.................................................................................. ...............................
PLANOF FINANCE ....................................................................... ...............................
General................................................................................ ...............................
TheProject .......................................................................... ...............................
InterestRate Swaps ............................................................. ...............................
ESTIMATED SOURCES AND USES OF FUNDS ........................ ...............................
CONTINUINGDISCLOSURE ....................................................... ...............................
BONDHOLDERS' RISKS ............................................................... ...............................
General................................................................................ ...............................
Significant Risk Areas Summarized .................................... ...............................
Nonprofit Health Care Environment ................................... ...............................
Patient Service Revenues .................................................... ...............................
Regulatory Environment ..................................................... ...............................
Business Relationships and Other Business Matters ........... ...............................
Tax- Exempt Status and Other Tax Matters ......................... ...............................
FutureLegislation ................................................................ ...............................
BondInsurance ....................................................... ...............................
OtherRisk Factors .................................................. ...............................
Page
...................... I
OHS Wmtt260185418.3 -i-
iL
......................... 16
......................... 17
......................... 20
......................... 22
23
............. 23
............. 24
............. 24
............. 25
...................... 25
...................... 26
.......... 26
.......... 26
.......... 27
28
28
29
.... ............................... .
.... ............................... 47
TABLE OF CONTENTS
(continued)
TAX MATTERS ....................
APPROVAL OF LEGALITY,
INDEPENDENT AUDITORS
LITIGATION .........................
Hoag Hospital...........
The City ....................
Page
RATINGS................................................................................................... ...............................
UNDERWRITING..................................................................................... ...............................
CERTAINRELATIONSHIP ..................................................................... ...............................
FINANCIAL ADVISOR TO HOAG HOSPITAL ..................................... ...............................
MISCELLANEOUS................................................................................... ...............................
APPENDIX A — INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL
PRESBYTERIAN AND AFFILIATES ....................... ...............................
APPENDIX B — FINANCIAL STATEMENTS OF HOAG MEMORIAL HOSPITAL
PRESBYTERIAN AND AFFILIATES ....................... ...............................
APPENDIX C — AUCTION PROCEDURES ......................................... ...............................
APPENDIX D — SUMMARY OF PRINCIPAL DOCUMENTS ............ ...............................
APPENDIX E — FORM OF OPINION OF BOND COUNSEL ............. ...............................
APPENDIX F — FORM OF CONTINUING DISCLOSURE AGREEMENT ......................
APPENDIX G — SPECIMEN OF BOND INSURANCE POLICY ........ ...............................
OHS West:260185418.3 -ii-
....... 52
....... 52
....... 52
....... 52
....... 53
... A -1
............ B -1
............. C -1
............ D -1
............ E -1
............ F -1
............. G -1
OFFICIAL STATEMENT
$[AGGREGATE PAR AMOUNT]
City of Newport Beach
Insured Revenue Bonds
(Hoag Memorial Hospital Presbyterian)
(Auction Rate Securities)
$[2007A PAR AMOUNT] $12007B PAR AMOUNT] $[2007C PAR AMOUNT]
Series 2007A Series 2007B Series 2007C
$[2007D PAR AMOUNT] $[2007B PAR AMOUNT]
Series 2007D Series 2007E
INTRODUCTORY STATEMENT
The following introductory statement is subject in all respects to the more complete information
set forth in this Official Statement. All descriptions and summaries of documents referred to herein do
not purport to be comprehensive or definitive and are qualified in their entirety by reference to each such
document. Terms used in this Official Statement and not otherwise defined have the same meanings as in
the Bond Indenture (as defined below) or if not defined therein in the Master Indenture (as defined
below). See APPENDIX D — "SUMMARY OF PRINCIPAL DOCUMENTS— Definitions of Certain
Terms,"
Purpose of the Official Statement
This Official Statement, including the cover page, the inside cover page and the appendices
hereto, is provided to furnish information in connection with the sale and delivery of the following Series
of Bonds issued by the City of Newport Beach (the "City "): $[2007A PAR AMOUNT] aggregate
principal amount of the Insured Revenue Bonds (Hoag Memorial Hospital Presbyterian), Series 2007A
(the "Series 2007A Bonds "), $[2007B PAR AMOUNT] aggregate principal amount of the Insured
Revenue Bonds (Hoag Memorial Hospital Presbyterian), Series 2007B (the "Series 2007B Bonds ") ,
$[2007C PAR AMOUNT] aggregate principal amount of the Insured Revenue Bonds (Hoag Memorial
Hospital Presbyterian), Series 2007C (the "Series 2007C Bonds ") , $[2007D PAR AMOUNT] aggregate
principal amount of the Insured Revenue Bonds (Hoag Memorial Hospital Presbyterian), Series 2007D
(the "Series 2007D Bonds ")and $[2007E PAR AMOUNT] aggregate principal amount of the Insured
Revenue Bonds (Hoag Memorial Hospital Presbyterian), Series 2007E (the "Series 2007E Bonds "). The
Series 2007A Bonds, the Series 2007B Bonds, the Series 2007C Bonds, the Series 2007D Bonds and the
Series 2007E Bonds, collectively, are referred to herein as the "Bonds" and each series as a "Series" of
Bonds.
The Bonds will be issued pursuant to and secured by a bond indenture (the "Bond Indenture "),
dated as of May 1, 2007, between the City and Wells Fargo Bank, National Association, as bond trustee
(the "Bond Trustee "). The City will lend the proceeds of the Bonds to Hoag Hospital, which loan will be
evidenced by a Loan Agreement, dated as of May 1, 2007 (the "Loan Agreement'), between the City and
Hoag Hospital.
The Obligated Group and the Master Indenture
Hoag Memorial Hospital Presbyterian is a California nonprofit public benefit corporation which
owns and operates a general acute care hospital in Newport Beach, California (both the corporation and
the facility are referred to as "Hoag Hospital'). Hoag Hospital is licensed to operate a total of 511 general
OHS West260185418.3
acute care beds. Newport Healthcare Center, LLC ( "NHC "), a wholly -owned subsidiary of Hoag
Hospital Corporation, owns and operates a medical office building providing medical services and certain
administrative functions. For a description of Hoag Hospital and NHC, their facilities and financial
performance, see APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL
PRESBYTERIAN, NEWPORT HEALTH CARE CENTER LLC AND OTHER AFFILIATES."
As of the date of the issuance of the Bonds, Hoag Hospital and NHC are the only Members
(defined below) of the Obligated Group (the "Obligated Group ") established under the Master Indenture
dated as of May 1, 2007, between Hoag Hospital and Wells Fargo Bank, National Association, as master
trustee (the Master Trustee "). Other entities may become members of the Obligated Group (each, a
"Member') in accordance with the procedures set forth in the Master Indenture. Each Member of the
Obligated Group is jointly and severally obligated to pay when due the principal of premium, if any, and
interest on each Obligation issued under the Master Indenture, including Obligation No. I (as hereinafter
defined), which will evidence and secure the loan of the proceeds of the Bonds from the City to Hoag
Hospital. In addition, Hoag Hospital intends to authenticate Interest Rate Swap Agreements described
below (See "PLAN OF FINANCE — Interest Rate Swaps "), as Obligations entitled to certain benefits of
the Master Indenture. For more information about Hoag Hospital and its affiliates, see APPENDIX A —
"INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT
HEALTH CARE CENTER LLC AND OTHER AFFILIATES — GENERAL."
Under the Master Indenture, Hoag Hospital, as Credit Group Representative, may designate
"Designated Affiliates" from time to time and rescind any such designation at any time. Designated
Affiliates are not obligated to make payments with respect to the Obligation or any other Obligations
issued under the Master Indenture, but may be required to pay or otherwise transfer to the Credit Group
Representative amounts necessary to enable Hoag Hospital to pay when due the principal of and
premium, if any, and interest on Outstanding Obligations. No entities have been designated as of the date
hereof as Designated Affiliates.
Provision is made in the Master Indenture for adding Members to the Obligated Group and for the
withdrawal of Members from the Obligated Group under certain circumstances. For more information,
see APPENDIX D — "SUMMARY OF PRINCIPAL DOCUMENTS — MASTER INDENTURE —
Membership in the Obligated Group" and "— Withdrawal From the Obligated Group." Hoag Hospital,
NHC and any other party, upon becoming a Member of the Obligated Group under the Master Indenture,
are herein sometimes collectively referred to as the "Obligated Group," "Obligated Group Members" or
the "Members of the Obligated Group" and individually as a "Member of the Obligated Group" or an
"Obligated Group Member."
Auction Rate
Each Series of Bonds initially will bear interest at Auction Rates for successive seven -day
Auction Periods. Interest on the Bonds will be payable on the Business Day immediately following the
applicable Auction Period. While a Series of Bonds bears interest at an Auction Rate, such Bonds are
referred to in this Official Statement as "Auction Rate Securities." The applicable Auction Rate for each
Series of Auction Rate Securities will generally be established from time to time pursuant to the Auction
Procedures described in an Auction Agent Agreement, dated as of May 1, 2007 (the "Auction Agent
Agreement'), between the Bond Trustee and Wells Fargo Bank, National Association, as auction agent
(the "Auction Agent'), and in Appendix C hereto. Subject to the provisions of the Bond Indenture, the
Auction Period for any Series of Auction Rate Securities may be changed to 35 days, and the Auction
Date for any Series of Auction Rate Securities may be changed to another day of the week. In addition,
any Series of Bonds may be converted to other Interest Rate Periods. See "THE AUCTION RATE
OHS Wcst:260185418.3 2
SECURITIES" herein. See also APPENDIX C – "AUCTION PROCEDURES" and APPENDIX D –
"SUMMARY OF PRINCIPAL DOCUMENTS– BOND INDENTURE."
Auction Rate Securities will not be subject to optional tender for purchase by the Holders thereof
(although they will be subject to mandatory tender upon conversion to a different Interest Rate Period,
provided certain conditions to conversion are satisfied as described herein). See "THE AUCTION RATE
SECURITIES — Auction Rate Securities -- Converting Interest Rate Periods and Mandatory Tender for
Purchase" herein.
Citigroup Global Markets Inc. will serve as the initial Broker - Dealer for the Auction Rate
Securities.
Security for the Bonds
Each Series of Bonds will be payable from payments made by Hoag Hospital under the Loan
Agreement (the "Loan Repayments "), the Loan Repayments are secured by payments made by the
Members of the Obligated Group on Obligation No. 1 (defined below) and from certain funds held under
the Bond Indenture.
In order to secure the obligation of Hoag Hospital to make payments under the Loan Agreement,
Hoag Hospital will deliver to the Bond Trustee its Master Indenture Obligation No. 1 ( "Obligation No.
1 ") issued pursuant to the Master Indenture, as supplemented and amended by the Supplemental Master
Indenture for Obligation No. 1, dated as of May 1, 2007, between Hoag Hospital, as Credit Group
Representative and the Master Trustee ( "Supplement No. 1 "). Pursuant to the Master Indenture, Hoag
Hospital and NHC and any future Members of the Obligated Group agree to make payments on
Obligation No. 1 in amounts sufficient to pay, when due, the principal of and premium, if any, and
interest on each Series of Bonds. Each Member of the Obligated Group is jointly and severally obligated
to make payments on all Master Indenture Obligations issued under the Master Indenture, including
Obligation No. 1. The Members of the Obligated Group receive a credit on payments due on Obligation
No. 1 to the extent of payments made by Hoag Hospital under the Loan Agreement. Obligation No. 1
will entitle the Bond Trustee, as the holder thereof, to the benefit of the covenants, restrictions and other
obligations imposed upon the Obligated Group under the Master Indenture. Currently, Hoag Hospital and
NHC are the only Members of the Obligated Group.
Bond Insurance
The scheduled payment of the principal of and interest on the Bonds when due will be guaranteed
under a municipal new issue insurance policy (the "Bond Insurance Policy ") to be issued concurrently
with the delivery of the Bonds by Ambac Assurance Corporation (the "Bond Insurer").
Plan of Finance
Hoag Hospital will use the proceeds of the Bonds to (a) finance and refinance the costs for
certain capital expenditures at facilities owned or operated by Hoag Hospital, (b) refinance the Prior
Bonds identified under the Caption "PLAN OF FINANCE;" and (c) pay certain of the costs of issuing
the Bonds, including the premium for the Bond Insurance Policy. For a description of the 2007 Financing
Plan, see "PLAN OF FINANCE" herein.
OHS West260185418.3
THE CITY
The City of Newport Beach, California was incorporated in 1906. The City operates under a
freeholder's charter providing for a Council- Manager form of government with a Council- member City
Council. Councilpersons are elected by district for four -year terms, and the Mayor is elected by the
Council from among its members. On February 13, 1984, the City Council adopted the "Health Care
Facility Revenue Bond Ordinance" (the "Law ") establishing a method and powers and procedures
whereby revenue bonds may be issued for the purpose of providing financing to participating health
institutions for specified purposes.
THE AUCTION RATE SECURITIES
The following is a summary of certain provisions of the Bonds. Reference is made to the Bonds
for the complete text thereof and to the Bond Indenture for all of the provisions relating to each Series of
Bonds. The discussion herein is qualified by such reference.
This Official Statement describes certain terms of each Series of Bonds applicable while
such Series are Auction Rate Securities. There are significant changes in the terms of the Bonds
while such Bonds accrue interest in another Interest Rate Period. This Official Statement is not
intended to provide information with respect to any Series of Bonds other than Bonds that are
Auction Rate Securities.
Auction Rate Securities
General The Series 2007A Bonds, the Series 2007B Bonds, the Series 2007C Bonds, the Series
2007D Bonds and the Series 2007E Bonds initially will be issued as Auction Rate Securities in the
aggregate principal amount of $[2007A PAR AMOUNT], $[2007B PAR AMOUNT], $[2007C PAR
AMOUNT], $[2007D PAR AMOUNT] and $[2007E PAR AMOUNT], respectively. The Bonds will be
dated the date of their initial authentication and delivery (the "Closing Date ") and will mature on the
maturity date set forth on the inside cover page of this Official Statement. The Auction Rates for the
Auction Periods beginning on the Closing Date shall be determined by the Underwriter for the Auction
Rate Securities. Thereafter, the Auction Rate for the Auction Rate Securities will be determined for
generally successive seven -day Auction Periods through the implementation of the Auction Procedures
described under APPENDIX C — "AUCTION PROCEDURES," unless the Auction Periods for the
Auction Rate Securities of any Series is changed to a 35 -day Auction Period or a Series of Auction Rate
Securities is converted to another Interest Rate Period, as provided in the Bond Indenture. Auction Rate
Securities will be issued in fully registered form without coupons in denominations of $25,000 or any
integral multiple thereof, subject to the book -entry procedures described herein.
While the Auction Rate Securities are book -entry bonds, as described below, payment of the
principal and tender price of, premium, if any, and interest on any Auction Rate Securities will be made
by wire transfer to The Depository Trust Company, New York, New York ( "DTC "), to the account of
Cede & Co. The interest on the Auction Rate Securities will be payable on the Business Day immediately
following each Auction Period for such Auction Rate Securities (an "ARS Interest Payment Date "). In
the event the Auction Rate Securities are no longer book -entry bonds, principal and tender price of and
premium, if any, on the Auction Rate Securities will be payable at the designated corporate trust office of
the Bond Trustee, and interest payments on the Auction Rate Securities are to be made by check mailed
on the date due by the Bond Trustee to the registered owners of such Auction Rate Securities as of the
ARS Record Date (as defined below herein); provided, however, that, if a Holder of $1,000,000 or more
aggregate outstanding principal amount of the Auction Rate Securities gives the Bond Trustee written
notice of such holding accompanied by sufficient wire transfer instructions, the payments of interest on
OHS West:260185418.3 4
the Auction Rate Securities (other than the final payment of principal thereof) will be payable by wire
transfer of immediately available funds on the date due. The "ARS Record Date" with respect to the
Auction Rate Securities will be the second business day next preceding each ARS Interest Payment Date
for the applicable Series of Auction Rate Securities.
Transfer and Payment. In the event the book -entry system is discontinued, the following
provisions will apply. The Auction Rate Securities may be transferred by the registered owner thereof or
such owner's attorney duly authorized in writing, upon presentation thereof accompanied by a written
instrument or instruments of transfer or authorization for exchange, in form and with guaranty of
signature satisfactory to the Bond Trustee, duly executed by the registered owner or by such owner's duly
authorized attorney. Any Auction Rate Security may be exchanged at the designated corporate trust
office of the Bond Trustee for a like aggregate principal amount of Bonds of the same Series and maturity
and of other authorized denominations. The Bond Trustee and the City may charge a fee covering taxes,
fees or other governmental charges required to be paid in connection with any exchange or registration of
transfer of any Auction Rate Security, except in the case of issuance of an Auction Rate Security for the
unredeemed portion of an Auction Rate Security surrendered for redemption. Neither the City nor the
Bond Trustee will be required to register the transfer of or exchange of any Auction Rate Security (i) after
notice calling such Auction Rate Security or portion thereof for redemption has been mailed or (ii) during
the 15 -day period next preceding the mailing of a notice of redemption of Auction Rate Securities or for
any Auction Rate Securities, during a 35 -day Auction Period the 15 day period and during a 7 -day
Auction Period the three Business Days, next preceding the Business Day immediately following each
Auction Period for such Auction Rate Securities. For a description of the registration of transfer
procedures while the Auction Rate Securities are in the book -entry-only system, see "THE AUCTION
RATE SECURITIES —Book -Entry-Only System" herein.
Applicable ARS Rate. Except for the Auction Period beginning on the Closing Date and except
as otherwise described herein, each Series of Auction Rate Securities will bear interest at rates (the
"Applicable ARS Rate ") established pursuant to the Auction Procedures described in APPENDIX C —
"AUCTION PROCEDURES." An "ARS Interest Period" begins on and includes an ARS Interest
Payment Date and ends on but excludes the next succeeding ARS Interest Payment Date for the
applicable Series of Auction Rate Securities; the first ARS Interest Period commences on the Closing
Date. The Applicable ARS Rate will not exceed the Maximum Lawful Rate. Interest on the Auction
Rate Securities will be computed on the basis of a 360 -day year for the actual number of days elapsed
during the applicable ARS Interest Period. In certain circumstances, however, the Auction Procedures
may be canceled or suspended. For example, the Auction Agent will suspend the Auction Procedures
upon the occurrence of a default by the City and the Bond Insurer in the payment of the principal of or
interest on the Auction Rate Securities. The Applicable ARS Rate for each Auction Period for the
Auction Rate Securities commencing after the occurrence of such default, unless such default is cured or
waived at least two Business Days prior to commencement of any subsequent Auction Period, will be
15% per annum; provided, that in no event shall it exceed the Maximum Lawful Rate.
The Auction Agent Agreement also requires that no further Auctions be held if the ownership of
the Auction Rate Securities is no longer maintained in the book -entry system. See "THE AUCTION
RATE SECURITIES — Auction Rate Securities" herein and APPENDIX C — "AUCTION
PROCEDURES."
Converting Interest Rate Periods and Mandatory Tender for Purchase. With the consent of the
Bond Insurer, Hoag Hospital may elect to convert any Series of Auction Rate Securities to other Interest
Rate Periods effective as of an ARS Interest Payment Date immediately following an Auction Period.
Upon such conversion, the Bonds of such Series may accrue interest in a different Interest Rate Period (as
such Interest Rate Periods are defined in the Bond Indenture). In order to effect such conversion, Hoag
OHS West:2601854183
Hospital shall provide a written direction to the City, the Bond Trustee, the Auction Agent and the
Broker - Dealer for such Series of its election to convert the Auction Rate Securities of such Series to
another Interest Rate Period. The Bond Trustee shall provide notice of such conversion to the Holders of
such Auction Rate Securities not less than 30 days prior to the proposed effective date of such conversion.
The Auction Rate Securities of such Series will be subject to mandatory tender for purchase on the first
day of each Interest Rate Period subject to the terms of the Bond Indenture; provided, however, in the
case of a failed conversion of Auction Rate Securities there will be no mandatory purchase and the
Auction Rate Securities shall bear interest at 15% (but in no event shall it exceed the Maximum Lawful
Rate) until the next succeeding Auction Period, then at the Applicable ARS Rate. The tender price shall
be equal to the principal amount thereof tendered for purchase, without premium, plus accrued interest
from the immediately preceding Interest Accrual Date to the date of such tender. See APPENDIX D —
"SUMMARY OF PRINCIPAL DOCUMENTS."
Concerning the Auction Rate Securities
Role of Broker - Dealer. Citigroup Global Markets Inc. (the "Broker- Dealer ") has been appointed
by the issuers or obligors of various auction rate securities to serve as the initial dealer in the auctions for
those securities and is paid by the issuers or obligors for its services. Citigroup Global Markets Inc.
receives broker - dealer fees from such issuers or obligors at an agreed -upon annual rate that is applied to
the principal amount of securities sold or successfully placed through Citigroup Global Markets Inc. in
such auctions.
Broker - Dealer is designated in the Broker - Dealer Agreement as the Broker - Dealer to contact
Existing Owners and Potential Owners and solicit Bids for the Bonds bearing interest at the Auction Rate.
The Broker - Dealer will receive Broker - Dealer Fees from Hoag Hospital with respect to the Bonds sold or
successfully placed through it in Auction. The Broker - Dealer may share a portion of such fees with other
dealers that submit Orders through it that are filled in the Auction.
Bidding by Broker-Dealer. The Broker - Dealer is permitted, but not obligated, to submit Orders
in Auctions for the Bonds for its own account either as a buyer or seller and routinely does so in the
auction rate securities market in its sole discretion. If the Broker - Dealer submits an Order for its own
account, it would have an advantage over other Bidders because Broker - Dealer would have knowledge of
the other Orders placed through it in that Auction for the Bonds and thus, could determine the rate and
size of its Order so as to increase the likelihood that (i) its Order will be accepted in the Auction for the
Bonds and (ii) the Auction for the Bonds will clear at a particular rate. For this reason, and because the
Broker - Dealer is appointed and paid by Hoag Hospital to serve as a Broker - Dealer in the Auctions for the
Bonds, the Broker - Dealer's interests in serving as Broker - Dealer in an Auction for the Bonds may differ
from those of Existing Owners and Potential Owners who participate in Auctions for the Bonds. See
"Role of Broker - Dealer." The Broker - Dealer would not have knowledge of Orders submitted to the
Auction Agent by any other firm that is, or may in the future be, appointed to accept Orders pursuant to a
Broker - Dealer Agreement.
The Broker - Dealer is the only Broker - Dealer appointed by Hoag Hospital to serve as Broker -
Dealer in the Auction for the Bonds, and as long as that remains the case it will be the only Broker- Dealer
that submits Orders to the Auction Agent in the Auction for the Bonds. As a result, in such
circumstances, the Broker - Dealer may discern the clearing rate before the Orders are submitted to the
Auction Agent and set the clearing rate with its Order.
The Broker - Dealer routinely places bids in auctions generally for its own account to acquire
securities for its inventory, to prevent an "Auction Failure" (which occurs if there are insufficient clearing
bids and results in the auction rate being set at the maximum rate) or to prevent an auction from clearing
OHS West260185418.3 6
at a rate that the Broker - Dealer believes does not reflect the market for such securities. The Broker -
Dealer may place one or more Bids in an Auction for the Bonds for its own account to acquire the Bonds
for its inventory, to prevent an Auction Failure or to prevent Auctions for the Bonds from clearing at a
rate that the Broker - Dealer believes does not reflect the market for the Bonds. The Broker - Dealer may
place such Bids even after obtaining knowledge of some or all of the other Orders submitted through it.
When Bidding in an Auction for the Bonds for its own account, the Broker - Dealer also may Bid inside or
outside the range of rates that it posts in its Price Talk. See " —Price Talk" herein.
The Broker - Dealer routinely encourages bidding by others in auctions generally for which it
serves as broker - dealer. The Broker - Dealer also may encourage Bidding by others in Auctions for the
Bonds, including to prevent an Auction Failure or to prevent an Auction for the Bonds from clearing at a
rate that the Broker - Dealer believes does not reflect the market for the Bonds. The Broker - Dealer may
encourage such Bids even after obtaining knowledge of some or all of the other Orders submitted through
it.
Bids by the Broker - Dealer or by those it may encourage to place Bids are likely to affect (i) the
Auction Rate — including preventing the Auction Rate from being set at the Maximum Rate or otherwise
causing Bidders to receive a lower rate than they might have received had the Broker - Dealer not Bid or
not encouraged others to Bid and (ii) the allocation of the Bonds being auctioned — including displacing
some Bidders who may have their Bids rejected or receive fewer Bonds than they would have received if
the Broker - Dealer had not Bid or encouraged others to Bid. Because of these practices, the fact that an
Auction for the Bonds clears successfully does not mean that an investment in the Bonds involves no
significant liquidity or credit risk. The Broker- Dealer is not obligated to continue to place such Bids or to
continue to encourage other Bidders to do so in any particular Auction for the Bonds to prevent an
Auction Failure or an Auction for the Bonds from clearing at a rate the Broker - Dealer believes does not
reflect the market for the Bonds. Investors should not assume that the Broker - Dealer will place Bids or
encourage others to do so or that Auction Failures will not occur. Investors should also be aware that
Bids by the Broker - Dealer or by those it may encourage to place Bids may cause lower Auction Rates to
occur.
The statements herein regarding Bidding by a Broker - Dealer apply only to a Broker - Dealer's
auction desk and any other business units of the Broker - Dealer that are not separated from the auction
desk by an information barrier designed to limit inappropriate dissemination of bidding information.
In any particular Auction for the Bonds, if all outstanding Bonds are the subject of Submitted
Hold Orders, the Auction Rate for the next succeeding Auction Period will be the All Hold Rate (such a
situation is called an "All Hold Auction "). If the Broker - Dealer holds any Bonds for its own account on
an Auction Date, it is the Broker - Dealer's practice to submit a Sell Order into the Auction for the Bonds
with respect to such Bonds, which would prevent that Auction for the Bonds from being an All Hold
Auction. The Broker - Dealer may, but is not obligated to, submit Bids for its own account in that same
Auction for the Bonds, as set forth above.
Price Talk. Before the start of an Auction for the Bonds, the Broker - Dealer, in its discretion,
may make available to its customers who are Existing Owners and Potential Owners the Broker - Dealer's
good faith judgment of the range of likely clearing rates for the Auction for the Bonds based on market
and other information. This is known as "Price Talk." Price Talk is not a guaranty that the Auction Rate
established through the Auction for the Bonds will be within the Price Talk, and Existing Owners and
Potential Owners are free to use it or ignore it. The Broker - Dealer occasionally may update and change
the Price Talk based on changes in Hoag Hospital or Bond Insurer credit quality or macroeconomic
factors that are likely to result in a change in interest rate levels, such as an announcement by the Federal
Reserve Board of a change in the Federal Funds Rate or an announcement by the Bureau of Labor
OHS Wesk2601854183
Statistics of unemployment numbers. Potential Owners should confirm with the Broker - Dealer the
manner by which the Broker- Dealer will communicate Price Talk and any changes to Price Talk.
All-or-Nothing" Bids. The Broker- Dealer will not accept "all -or- nothing" Bids (i.e., Bids
whereby the Bidder proposes to reject an allocation smaller than the entire quantity Bid) or any other type
of Bid that allows the Bidder to avoid Auction Procedures that require the pro -rata allocation of Bonds
where there are not sufficient Sell Orders to fill all Bids at the Winning Bid Rate.
No Assurances Regarding Auction Outcomes. The Broker - Dealer provides no assurance as to
the outcome of any Auction. The Broker - Dealer also does not provide any assurance that any Bid will be
successful, in whole or in part, or that the Auction for the Bonds will clear at a rate that a Bidder
considers acceptable. Bids may be only partially filled, or not filled at all, and the Auction Rate on any
Bonds purchased or retained in the Auction for the Bonds may be lower than the market rate for similar
investments.
The Broker- Dealer will not agree before an Auction to buy Bonds from or sell Bonds to a
customer after the Auction.
Deadlines. Each particular Auction for the Bonds has a formal deadline by which all Bids must
be submitted by the Broker - Dealer to the Auction Agent. This deadline is called the "Submission
Deadline." To provide sufficient time to process and submit customer Bids to the Auction Agent before
the Submission Deadline, the Broker - Dealer imposes an earlier deadline — called the "Internal
Submission Deadline" (also known as the "Broker- Dealer Deadline ") — by which Bidders must submit
Bids to the Broker - Dealer. The Internal Submission Deadline is subject to change by the Broker - Dealer.
Potential Owners should consult with the Broker - Dealer as to its Internal Submission Deadline. The
Broker - Dealer may allow for correction of clerical errors after the Internal Submission Deadline and prior
to the Submission Deadline. Broker - Dealer may submit Bids for its own account at any time until the
Submission Deadline. The Auction Procedures provide that for a period of up to one hour after the
Auction Agent completes the dissemination of the results of the Auction to the Broker - Dealer (without
regard to the time of receipt of such results by the Broker - Dealer, however, in no event shall this deadline
extend past 4:00 p.m., New York City time, unless the Auction Agent experiences technological failure or
force majeure in disseminating the Auction results which causes a delay in dissemination past 3:00 p.m.,
New York City time), new Orders can be submitted to the Auction Agent if such Orders were received by
the Broker - Dealer or generated by the Broker - Dealer for its own account prior to the Submission
Deadline and such Orders are accompanied by a certification to the Auction Agent from the Broker -
Dealer to the effect that (i) such Order shall have been communicated to, and time - stamped by, such
Broker - Dealer prior to the Submission Deadline; and (ii) a force majeure event (including, without
limitation, a technological failure or malfunction) impeded the Broker - Dealer's ability to submit the Order
prior to the Submission Deadline.. In addition a Broker - Dealer may modify or withdraw an Order
submitted to the Auction Agent prior the Submission Deadline if the Broker - Dealer determines that such
Order contained a clerical error. In the event of such a submission, modification or withdrawal the
Auction Agent will rerun the Auction, if necessary, taking into account such submission, modification or
withdrawal.
Existing Owner's Ability to Resell Auction Rate Securities May Be Limited. An Existing
Owner may sell, transfer or dispose of a Bond (i) in an Auction for the Bonds, only pursuant to a Bid or
Sell Order in accordance with the Auction Procedures, or (ii) outside an Auction for the Bonds, only to or
through a Broker - Dealer.
Existing Owners will be able to sell all of the Bonds that are the subject of their Submitted Sell
Orders only if there are Bidders willing to purchase all those Bonds in the Auction for the Bonds. If
OHS West260185418.3
Sufficient Clearing Bids have not been made, Existing Owners that have submitted Sell Orders will not be
able to sell in the Auction for the Bonds all, and may not be able to sell any, of the Bonds subject to such
Submitted Sell Orders. As discussed above (see "Bidding by Broker - Dealer "), the Broker - Dealer may
submit a Bid in an Auction for the Bonds to avoid an Auction Failure, but it is not obligated to do so.
There may not always be enough Bidders to prevent an Auction Failure in the absence of the Broker -
Dealer Bidding in the Auction for the Bonds for its own account or encouraging others to Bid. Therefore,
Auction Failures are possible, especially if the credit of the City, Hoag Hospital, or the Bond Insurer were
to deteriorate, if a market disruption were to occur or if, for any reason, the Broker - Dealer were unable or
unwilling to Bid.
Between Auctions for the Bonds, there can be no assurance that a secondary market for the Bonds
will develop or, if it does develop, that it will provide Existing Owners the ability to resell the Bonds on
the terms or at the times desired by an Existing Owner. The Broker - Dealer, in its own discretion, may
decide to buy or sell the Bonds in the secondary market for its own account from or to investors at any
time and at any price, including at prices equivalent to, below, or above par for the Bonds. However, the
Broker - Dealer is not obligated to make a market in the Bonds and may discontinue trading in the Bonds
without notice for any reason at any time. Existing Owners who resell between Auctions for the Bonds
may receive an amount less than par, depending on market conditions.
If an Existing Owner purchased a Bond through a dealer which is not the Broker- Dealer for the
securities, such Existing Owner's ability to sell its security may be affected by the continued ability of its
dealer to transact trades for the Bonds through the Broker - Dealer.
The ability to resell the Bonds will depend on various factors affecting the market for the Bonds,
including news relating to Hoag Hospital or the Bond Insurer, the attractiveness of alternative
investments, investor demand for short term securities, the perceived risk of owning the Bonds (whether
related to credit, liquidity or any other risk), the tax or accounting treatment accorded the Bonds
(including U.S. generally accepted accounting principles as they apply to the accounting treatment of
auction rate securities), reactions of market participants to regulatory actions (such as those described in
"Securities and Exchange Commission Settlement" below) or press reports, financial reporting cycles and
market conditions generally. Demand for the Bonds may change without warning, and declines in
demand may be short-lived or continue for longer periods.
Resignation of the Auction Agent or the Broker-Dealer Could Impact the Ability to Hold
Auctions. The Auction Agent Agreement provides that the Auction Agent may resign from its duties as
Auction Agent by giving at least [45 days notice to Trustee, the City, Hoag Hospital, and each Broker -
Dealer and does not require, as a condition to the effectiveness of such resignation, that a replacement
Auction Agent be in place if its fee has not been paid]. The Broker - Dealer Agreement provides that the
Broker - Dealer thereunder may resign [upon 30 days notice or immediately, in certain circumstances, and
does not require, as a condition to the effectiveness of such resignation, that a replacement Broker - Dealer
be in place]. For any Auction Period during which there is no duly appointed Auction Agent or Broker -
Dealer, it will not be possible to hold Auctions for the Bonds, with the result that the interest on the
Bonds will be the ARS Maximum Rate.
Securities and Exchange Commission Settlements. On May 31, 2006, the U.S. Securities and
Exchange Commission (the "SEC ") announced that it had settled its investigation of fifteen firms,
including Citigroup Global Markets Inc., that participate in the auction rate securities market regarding
their respective practices and procedures in this market. The SEC alleged in the settlement that the firms
had managed auctions for auction rate securities in which they participated in ways that were not
adequately disclosed or that did not conform to disclosed auction procedures. As part of the settlement,
Citigroup Global Markets Inc. agreed to pay a civil penalty. In addition, Citigroup Global Markets Inc.,
OHS West260t854t8.3
without admitting or denying the SEC's allegations, agreed to provide to customers written descriptions
of its material auction practices and procedures, and to implement procedures reasonably designed to
detect and prevent any failures by Citigroup Global Markets Inc. to conduct the auction process in
accordance with disclosed procedures. No assurance can be offered as to how the settlement may affect
the market for auction rate securities or the Bonds.
In addition on January 9, 2007, the SEC announced that it had settled its investigation of three
banks (the "Settling Auction Agents "), that participate as auction agents in the auction rate securities
market, regarding their respective practices and procedures in this market. The Auction Agent for the
Bonds, Wells Fargo Bank, National Association, is not one of the Settling Auction Agents. The SEC
alleged in the settlement that the Settling Auction Agents allowed broker - dealers in auctions to submit
bids or revise bids after the submission deadlines and allowed broker - dealers to intervene in auctions in
ways that affected the rates paid on the auction rate securities. As part of the settlement, the Settling
Auction Agents agreed to pay civil penalties. In addition, each Settling Auction Agent, without admitting
or denying the SEC's allegations, agreed to provide to broker - dealers and issuers written descriptions of
its material auction practices and procedures and to implement procedures reasonably designed to detect
and prevent any failures by that Settling Auction Agent to conduct the auction process in accordance with
disclosed procedures. No assurance can be offered as to how the settlement may affect the market for
auction rate securities or the Bonds.
Book - Entry-Only System
The Bonds, when issued, will be registered in the name of Cede & Co., DTC's partnership
nominee. When the Bonds are issued, ownership interests will be available to purchasers only through a
book -entry-only system maintained by DTC (the "Book -Entry-Only System "). One fully- registered bond
certificate will be issued for the entire aggregate principal amount of each Series of Bonds and will be
deposited with DTC.
DTC and its Participants. DTC is a limited - purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A
of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2.2 million
issues of U.S. and non -U.S. equity, corporate and municipal debt issues, and money market instruments
from over 100 countries that DTC's participants ( "Direct Participants ") deposit with DTC. DTC also
facilitates the post -trade settlement among Direct Participants of sales and other securities transactions in
deposited securities, through electronic computerized book -entry transfers and pledges between Direct
Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct
Participants include both U.S. and non -U.S. securities brokers and dealers, banks, trust companies,
clearing corporations, and certain other organizations. DTC is a wholly -owned subsidiary of The
Depository Trust & Clearing Corporation ( "DTCC "). DTCC, in turn, is owned by a number of Direct
Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income
Clearing Corporation, and Emerging Markets Clearing Corporation, ( "NSCC," "FICC," "MBSCC" and
"EMCC," also 'subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American
Stock Exchange LLC, and the National Association of Securities Dealer, Inc. Access to the DTC system
is also available to others such as both U.S. and non -U.S. securities brokers and dealers, banks, trust
companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly ( "Indirect Participants "). DTC has Standard & Poor's highest
rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange
Commission. More information about DTC can be found at www.dtcc.com and www.dtc.ora.
OHS Wesk260185418.3 10
Purchase of Ownership Interests. Purchases of the Bonds under the DTC system must
be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's
records. The ownership interest of each actual purchaser of each Bond (the "Beneficial Owner ")
is, in turn, to be recorded on the Direct and Indirect Participants' records. Beneficial Owners
will not receive written confirmation from DTC of their purchase Beneficial Owners are,
however, expected to receive written confirmations providing details of the transaction, as well
as periodic statements of their holdings, from the Direct or Indirect Participant through which the
Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are
to be accomplished by entries made on the books of Participants acting on behalf of the
Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership
interests in the Bonds, except in the event that use of the book -entry system for the Bonds is
discontinued.
To facilitate subsequent transfers, all Bonds deposited by Participants with DTC are registered in
the name of DTC's partnership nominee, Cede & Co. or such other name as may be requested by an
authorized representative of DTC. The deposit of Series Bonds with DTC and their registration in the
name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has
no knowledge of the actual Beneficial Owners of the Bonds. DTC's records reflect only the identity of
the Direct Participants to whose accounts such Bonds are credited, which may or may not be the
Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on
behalf of their customers.
None of the City, Hoag Hospital, the Underwriter or the Bond Trustee will have any
responsibility or obligation, legal or otherwise, to any party other than to the registered owners of any
Bond on the registration books of the Bond Trustee.
Notices. Conveyance of notices and other communications by DTC to Direct Participants, by
Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to
Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain
steps to augment the transmission to them of notices of significant events with respect to the Bonds, such
as redemptions, tenders, defaults, and proposed amendments to the bond documents. For example,
Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit
has agreed to obtain and transmit notices to Beneficial Owners. Beneficial Owners may wish to provide
their names and addresses to the Bond Trustee and request that copies of the notices be provided directly
to them. Redemption notices shall be sent to DTC. If less than all of the Bonds of a Series within an
issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct
Participant in such issue to be redeemed.
None of the City, Hoag Hospital, the Underwriter or the Bond Trustee will have any
responsibility or obligation, legal or otherwise, to any party other than to the registered owners of any
Bond on the registration books of the Bond Trustee.
Consenting or Voting Rights. Neither DTC nor Cede & Co. (or such other DTC nominee) will
consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with
DTC's procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as
possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to
those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a
listing attached to the Omnibus Proxy).
OHS West:26018508.3 11
NONE OF THE CITY, THE BOND TRUSTEE OR HOAG HOSPITAL WILL HAVE ANY
RESPONSIBILITY OR OBLIGATION TO SUCH PARTICIPANTS OR THE PERSONS FOR WHOM
THEY ACT AS NOMINEES WITH RESPECT TO THE PAYMENT TO, OR THE PROVIDING OF
NOTICE FOR, SUCH PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS
NOMINEES.
Payments of Principal, Tender Price, Premium, if any, and Interest. So long as any Bond is
registered in the name of DTC's nominee, principal, redemption price and interest payments on the Bonds
will be made to Cede & Co., or such other nominee as may be requested by an authorized representative
of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and
corresponding detail information from the City or the Bond Trustee, on a payment date in accordance
with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners
will be governed by standing instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name," and will be the responsibility of
such Participant and not of DTC, the Bond Trustee, the Members of the Obligated Group or the City,
subject to any statutory or regulatory requirements as may be in effect from time to time. Principal,
redemption price and interest payments to Cede & Co. (or such other nominee as may be requested by an
authorized representative of DTC) is the responsibility of the City or the Bond Trustee, disbursement of
such payments to Direct Participants will be the responsibility of DTC, and disbursement of such
payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.
Discontinuance of Book -Entry-Only System. In the event (i) DTC determines not to continue to
act as securities depository for the Bonds or (ii) Hoag Hospital, with the consent of the City and the Bond
Trustee, determines in accordance with the terms of the Bond Indenture that (a) DTC is incapable of
discharging its duties or (b) it is in the best interests of the Holders of the Bonds not to continue the Book -
Entry -Only System or that interests of the beneficial owners of the Bonds might be adversely affected if
the Book -Entry-Only System is continued, then the City will discontinue the Book -Entry-Only system
with DTC. Upon the occurrence of the event described in (i) or (ii)(a) above, Hoag Hospital will attempt
to locate another qualified securities depository. If Hoag Hospital fails to identify another qualified
securities depository to replace DTC or makes the determination noted in (ii)(b) above, the Auction Rate
Securities will be converted to accrue interest in a different Interest Rate Period, and the Bond Trustee
will authenticate and deliver the Bonds in accordance with the Bond Indenture.
No Assurance Regarding DTC Practices
The foregoing information in this section concerning DTC and DTC's book -entry system has
been obtained from sources that Hoag Hospital believes to be reliable, but Hoag Hospital, the City, the
Underwriter and the Bond Trustee do not take any responsibility for the accuracy thereof.
So long as Cede & Co. is the registered owner of the Bonds as nominee of DTC, references
herein to the Holders or registered owners of the Bonds will mean Cede & Co. and will not mean the
beneficial owners of the Bonds.
None of the City, Hoag Hospital, the Bond Trustee, the Auction Agent or the Underwriter will
have any responsibility or obligation to the Participants, DTC or the persons for whom they act with
respect to (i) the accuracy of any records maintained by DTC or by any Direct or Indirect Participant of
DTC, (ii) payments or the providing of notice to Direct Participants, the Indirect Participants or the
beneficial owners, (iii) the selection by DTC or by any Direct or Indirect Participant of any beneficial
owner to receive payment in the event of a partial redemption of the Bonds or (iv) any other action taken
by DTC or its partnership nominee as owner of the Bonds.
OHS west:260185418.3 12
Redemption
Optional Redemption. The Auction Rate Securities are subject to redemption prior to their stated
maturity, at the option of the City (which option shall be exercised upon request of Hoag Hospital), in
whole or in part, on any ARS Interest Payment Date for such Series of Bonds at a redemption price equal
to the principal amount of Auction Rate Securities called for redemption, plus accrued interest to the date
fixed for redemption, without premium.
Extraordinary Optional Redemption. The Bonds are subject to extraordinary optional
redemption prior to their stated maturity, at the option of the City (which option shall be exercised upon
request of Hoag Hospital), in whole or in part at any time in the event of any damage to or destruction or
condemnation of any part of Hoag Hospital's facilities (or the facilities of any future additional Members)
to the extent that the proceeds of any hazard insurance or condemnation award relating thereto are not
applied to the repair, reconstruction or restoration of such facilities and Hoag Hospital elects to use such
unapplied proceeds for an optional redemption. If called for redemption prior to maturity as described in
this paragraph, the Bonds may be redeemed at a redemption price equal to the principal amount of each
such Bond to be redeemed, without premium, plus accrued interest thereon to the redemption date.
Optional Redemption in the Event of a Change in Law. The Bonds are subject to optional
redemption prior to their stated maturity, at the option of the City (which option shall be exercised upon
request of Hoag Hospital), in whole at any time at a redemption price equal to the principal amount
thereof, without premium, plus accrued interest to the redemption date, if as a result of any change in the
Constitution of the United States of America or any state, or legislative or administrative action or
inaction by the United States of America or any state, or any agency or political subdivision thereof, or by
reason of any judicial decisions there is a good faith determination by any Member that (a) the Master
Indenture has become void or unenforceable or impossible to perform, or (b) unreasonable burdens or
excessive liabilities have been imposed on such Member, including without limitation, federal, state or
other ad valorem property, income or other taxes being then imposed which were not being imposed on
the date of issuance of the Bonds.
Mandatory Redemption. The Series 2007A Bonds are also subject to redemption prior to their
stated maturity in part, by lot, from Sinking Fund Installments, on any December 1, on or after
December 1, 20. at the principal amount thereof and interest accrued thereon to the date fixed for
redemption, without premium, as follows:
Redemption Date Sinking Fund Redemption Date
(December 1) Installment (December 1)
s Final Maturity
OHS West:260185418.3 13
Sinking Fund
Installment
The Series 2OO7B Bonds are also subject to redemption prior to their stated maturity in part, by
lot, from Sinking Fund Installments, on any December 1, on or after December 1, 20_, at the principal
amount thereof and interest accrued thereon to the date fixed for redemption, without premium, as
follows:
Redemption Date
(December 1)
* Final Maturity
Sinking Fund Redemption Date
Installment (December 1)
Sinking Fund
Installment
The Series 20O7C Bonds are also subject to redemption prior to their stated maturity in part, by
lot, from Sinking Fund Installments, on any December 1, on or after December 1, 20_, at the principal
amount thereof and interest accrued thereon to the date fixed for redemption, without premium, as
follows:
Redemption Date Sinking Fund Redemption Date
(December 1) Installment (December 1)
* Final Maturity
OHS West260185418.3 14
Sinking Fund
Installment
The Series 2OO7D Bonds are also subject to redemption prior to their stated maturity in part, by
lot, from Sinking Fund Installments, on any December I, on or after December I, 20_, at the principal
amount thereof and interest accrued thereon to the date fixed for redemption, without premium, as
follows:
Redemption Date
(December 1)
* Final Maturity
Sinking Fund
Installment
Redemption Date Sinking Fund
(December 1) Installment
The Series 2007E Bonds are also subject to redemption prior to their stated maturity in part, by
lot, from Sinking Fund Installments, on any December 1, on or after December I, 20 , at the principal
amount thereof and interest accrued thereon to the date fixed for redemption, without premium, as
follows:
Redemption Date Sinking Fund Redemption Date Sinking Fund
(December 1) Installment (December 1) Installment
* Final Maturity
Notwithstanding the foregoing, if the scheduled redemption date for any Auction Rate Security is
not an ARS Interest Payment Date for such security (other than the final maturity), redemption of such
Auction Rate Securities will occur on the applicable ARS Interest Payment Date immediately following
such scheduled redemption date.
Notice of Redemption of the Auction Rate Securities. Notice of redemption will be mailed by
the Bond Trustee not less than 25 nor more than 60 days prior to the redemption date, to the respective
Holders of any Auction Rate Securities designated for redemption at their addresses appearing on the
OHS West:260185418.3 15
bond registration books of the Bond Trustee, to the Bond Insurer, the Auction Agent, the Broker - Dealer
and to one or more securities information services specified by Hoag Hospital.
Failure by the Bond Trustee to give notice to the Bond Insurer, the Auction Agent, the Broker -
Dealer or any one or more of the securities information services or securities depositories or the
insufficiency of any such notice shall not affect the sufficiency of the proceedings for redemption.
Failure by the Bond Trustee to mail notice of redemption as described to any one or more of the
respective Holders of any Auction Rate Securities designated for redemption shall not affect the
sufficiency of the proceedings for redemption with respect to the Holders to whom such notice was
mailed.
In the event any of the Bonds are called for redemption, the Bond Trustee will give notice of the
redemption of such Bonds, which notice must (i) specify the Bonds to be redeemed, the Series
designation, the redemption date, the redemption price, and the place or places of redemption, the
maturity, CUSIP numbers, if any, and, if less than all of the Bonds are to be redeemed, the portions of the
principal amount thereof to be redeemed, and (ii) state that on said date, there will become due and
payable on each of said Bonds the redemption price thereof or of said specified portion of the principal
amount thereof in the case of a Bond to be redeemed in part only, together with interest accrued thereon
to the redemption date, and that from and after such redemption date interest thereon shall cease to
accrue, and shall require that such Bonds be then surrendered. Such notice may set forth any additional
information relating to such redemption, including the fact that redemption is conditional upon receipt by
the Bond Trustee of sufficient funds.
Any redemption notice may be rescinded by written notice from Hoag Hospital to the Bond
Trustee at least five Business Days prior to the date specified for such redemption. The Bond Trustee
shall give notice of such rescission in the same manner as for the notice of redemption.
As of the date of redemption, interest on the Auction Rate Securities so called for redemption
shall cease to accrue from and after the date fixed for redemption thereof, if, on the date fixed for
redemption, sufficient moneys for the redemption of such Auction Rate Securities, together with interest
to the date fixed for redemption, are held by the Bond Trustee for such purposes. Said Auction Rate
Securities shall cease to be entitled to any benefit or security under the Bond Indenture after the date of
redemption, and Holders of said Auction Rate Securities shall have no rights in respect thereof except to
receive payment of the Redemption Price plus accrued interest to the date fixed for redemption from
funds held by the Bond Trustee for such payment.
Redemption of Portion of Bonds. The Bonds will be redeemed only in Authorized
Denominations. If less than all of the Bonds of a Series are called for redemption, the Bond Trustee will
select the Bonds of such Series or portions thereof by lot, and the remaining Bonds of a Series that have
not been so called for redemption will be in Authorized Denominations.
SO LONG AS THE ONLY OWNER OF THE BONDS IS DTC, SUCH SELECTION WILL,
HOWEVER, BE MADE BY DTC. If a portion of a Bond is called for redemption, a new Bond in the
principal amount equal to the unredeemed portion thereof will be issued to the Holder upon surrender
thereof.
SECURITY FOR THE BONDS
General
In the Loan Agreement, Hoag Hospital agrees to make the Loan Repayments to the Bond Trustee,
which payments, in the aggregate, will be in amounts sufficient for the payment in full of all amounts
OHS West:260185418.3 16
payable with respect to each Series of Bonds, including the total interest payable on each Series of Bonds
to the date of maturity of such Bonds or earlier redemption, the principal amount of such Bonds, any
redemption premiums, and certain other fees and expenses (the "Additional Payments "), less any amounts
available for such payment as provided in the Bond Indenture. Each Series of Bonds is also payable from
payments made on Obligation No. 1, [proceeds of such Series of Bonds], investment earnings on
proceeds of the Bonds, amounts on deposit under the Bond Indenture and proceeds of insurance or
condemnation awards, each in the manner and to the extent set forth in the Bond Indenture.
As security for its obligation to make the Loan Repayments, Hoag Hospital, as Credit Group
Representative, concurrently with the issuance of the Bonds will issue Obligation No. I to the Bond
Trustee pursuant to which the Obligated Group and any future Members of the Obligated Group agree to
make payments to the Bond Trustee in amounts sufficient to pay, when due, the principal of and
premium, if any, and interest on the Bonds. As of the date of issuance and delivery of the Bonds, Hoag
Hospital and NEC are the only Members of the Obligated Group under the Master Indenture. Each
Member is jointly and severally liable for payment of the Obligations issued under the Master Indenture,
including Obligation No. 1. See "SECURITY FOR THE BONDS —The Master Indenture" below.
There is no debt service reserve fundfor the Bonds.
The Master Indenture
The Master Indenture includes covenants that require Members of the Obligated Group to restrict
certain actions, including incurring Additional Indebtedness. In determining whether Hoag Hospital and
future Members of the Obligated Group have satisfied such covenants and tests, the Master Indenture
requires the Obligated Group to combine all Members' income and assets at any point of calculation,
including any other future Members of the Obligated Group, in determining whether such covenants and
tests are satisfied under the Master Indenture. See APPENDIX D — "SUMMARY OF PRINCIPAL
DOCUMENTS — MASTER INDENTURE — Membership in the Obligated Group."
Grant of Security Interest in Gross Receivables. Pursuant to Supplement No. I, Hoag Hospital
and NHC, as the Members of the Obligated Group, each agree to pledge, assign, convey, transfer and
grant to the Master Trustee, for the benefit of the Holders of Obligations, subject in all cases to Permitted
Liens, a security interest in, general lien upon, and the right of setoff against all right, title and interest in
the Gross Receivables (as defined in Supplement No. 1), whether now owned or hereafter acquired. See
APPENDIX D — "SUMMARY OF PRINCIPAL DOCUMENTS — SUPPLEMENTAL MASTER
INDENTURE NO. I — Gross Receivables Pledge."
The security interest in Gross Receivables described above has been perfected to the extent, and
only to the extent, that such security interest may be perfected under the Uniform Commercial Code of
the State of California. The grant of a security interest in Gross Receivables may be subordinated to the
interest and claims of others in several instances. See "SECURITY FOR THE BONDS — Security and
Enforceability."
Unsecured Debt Master Indenture Obligations issued under the Master Indenture are not
secured by a lien on real or personal property (including revenues) of any Member, including Hoag
Hospital. Accordingly, holders of Master Indenture Obligations would be unsecured creditors in any
bankruptcy or insolvency proceeding involving Hoag Hospital or any other future Member of the
Obligated Group.
Covenant Against Liens. Pursuant to the Master Indenture, each Member of the Obligated Group
agrees that it will not, and each Controlling Member covenants that it will not permit any of its
OHS WcsC260185418.3 17
Designated Affiliates to, create, assume or suffer to be created or permit the existence of any Lien upon
any of its Property, except for Permitted Liens.
Permitted Liens include Liens on Property of the Obligated Group, including Liens which may be
granted to secure additional Master Indenture Obligations and other Indebtedness, provided that the Value
of the Property that is encumbered is not more than 25% of the Value of all Property. See the definition
of "Permitted Liens" in APPENDIX D — "SUMMARY OF PRINCIPAL DOCUMENTS — Definitions of
Certain Terms" and "— MASTER INDENTURE — Particular Covenants of Each Member of the Obligated
Group — Limitation on Creation of Liens — Restrictions on Encumbering Revenues."
Additional Indebtedness. Additional Indebtedness on a parity with Master Indenture Obligations
issued under the Master Indenture may be issued by Hoag Hospital or any other Member for the purposes,
upon the terms and subject to the conditions provided in the Master Indenture. Each Master Indenture
Obligation will be the full and unlimited obligation of the issuing Member and each Member will jointly
and severally guarantee the payment of any and all amounts payable under the Master Indenture
Obligation. Subject to the conditions therein, the Master Indenture also permits Hoag Hospital and any
other Member to incur secured and unsecured indebtedness in addition to Master Indenture Obligations
and to enter into Guarantees. See APPENDIX D — "SUMMARY OF PRINCIPAL DOCUMENTS" and
"— MASTER INDENTURE — Particular Covenants of Each Member of the Obligated Group."
As of April 30, 2007, Hoag Hospital had an aggregate principal amount of obligations previously
issued and outstanding under the Master Indenture, dated as of October 1, 1984 (the "Prior Master
Indenture "), between Hoag Hospital and Wells Fargo Bank, National Association, as successor master
trustee of $_,000,000 (with the Master Indenture obligations securing a standby liquidity facility
relating to existing bonds secured by a separate Master Indenture obligation only counted one time). On
the date the Bonds are issued, Hoag Hospital will cause a Replacement Obligation to be issued under the
Master Indenture to replace Prior Master Indenture Obligation No. 14 ( "Prior Obligation No. 14 ") issued
under the Prior Master Indenture and outstanding thereunder in the principal amount of $200,000,000.
All other Prior Master Indenture Obligations relate to the Prior Bonds (defined below). Certain proceeds
of the Bonds will be used no later than 90 days following the date of issuance of the Bonds to refund or
redeem all of the Prior Bonds. The payment of the principal of and interest on the Prior Bonds is secured
by master indenture obligations outstanding under the Prior Master Indenture in the aggregate principal
amount of $ (the "Prior Bond Obligations" and together with Prior Obligation No. 14, the "Prior
Obligations." Upon replacement or payment of the Prior Obligations which will occur no later than the
90th day following the date the Bonds are issued, the Prior Master Indenture will be discharged. See also
APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL
PRESBYTERIAN, NEWPORT HEALTH CARE CENTER LLC AND OTHER AFFILIATES —
SELECTED UTILIZATION AND FINANCIAL INFORMATION — Capitalization."
Additional Covenants. Hoag Hospital has agreed in Supplement No. 1 to comply with certain
financial covenants in addition to the financial covenants contained in the Master Indenture described
above. These additional financial covenants are for the sole benefit of the Bond Insurer and may be
enforced, waived or modified at any time at the Bond Insurer's sole discretion, so long as the Bond
Insurer is not in default of its payment obligations under the Bond Insurance Policy (as defined below)
without the approval of the Master Trustee or the holder of any Master Indenture Obligation. See
APPENDIX D — "SUMMARY OF PRINCIPAL DOCUMENTS —SUPPLEMENT NO. 1 —Bond Insurer
Covenants."
Release of Obligation No. 1. Under the circumstances described in the Bond Indenture, the Bond
Trustee is required to exchange Obligation No. 1 for a note or similar obligation (the "Replacement
Obligation ") of a credit group that could be financially and operationally different from the Obligated
OHS West 260185418.3 18
Group, and the new credit group could have substantial debt outstanding that would rank on a parity with
the Replacement Obligation. Such exchange could adversely affect the market price for and marketability
of the Bonds. For a summary of the conditions that must be satisfied before a Replacement Obligation
could be exchanged for Obligation No. 1, see APPENDIX D— "SUMMARY OF PRINCIPAL
DOCUMENTS — BOND INDENTURE — Replacement of Obligation No. 1."
Designated Affdiates. Under the Master Indenture, Hoag Hospital, as the Credit Group
Representative, may by resolution designate "Designated Affiliates" from time to time, and may rescind
any such designation at any time. Currently no entities have been designated by Hoag Hospital, as
Designated Affiliates. Management of Hoag Hospital has no intention of designating any Designated
Affiliates in the immediately foreseeable future.
The Master Indenture provides that Hoag Hospital, as Credit Group Representative, must, by
resolution, designate a Controlling Member (who must be a Member of the Obligated Group) for each
Designated Affiliate. Each Controlling Member is required under the Master Indenture to cause each of
its Designated Affiliates to pay or otherwise transfer to the Credit Group Representative or other Member
amounts necessary to enable the Members to pay when due the principal of, premium, if any, and interest
on any Outstanding Master Indenture Obligations. Any Designated Affiliates are not obligated under
Obligation No. 1 or any other Master Indenture Obligations, nor may the Bond Trustee or any
Holder seek to enforce compliance with the Master Indenture against any Designated Affiliate.
Compliance with the Master Indenture by a Designated Affiliate may only be enforced by its
Controlling Member or the Credit Group Representative and the ability of such Controlling
Member or the Credit Group Representative to enforce compliance with the Master Indenture will
vary and the available remedies may be limited depending on the nature of the relationship
between the Designated Affiliate and the Controlling Member.
Under the Master Indenture the Controlling Member for a Designated Affiliate must either: (i)
maintain, directly or indirectly, control of the Designated Affiliate, including the power to direct the
management, policies, disposition of assets and actions of such Designated Affiliate to the extent required
to cause the Designated Affiliate to comply with the Master Indenture, or (ii) have in effect such contracts
or other agreements, which in the judgment of the Governing Bodies of the Credit Group Representative
and the Controlling Member, are sufficient to allow such Controlling Member to enforce compliance by
the Designated Affiliate with the terms of the Master Indenture.
If the Controlling Member maintains organizational control of the Designated Affiliate,
compliance with the Master Indenture generally may be enforced by the Controlling Member exercising
its reserved powers to direct actions of the Designated Affiliate, including replacing the members of the
governing body of such Designated Affiliate, if necessary. The level of organizational control and the
procedures for exercising such control may vary among Designated Affiliates and there is no
assurance that a Controlling Member would be able to enforce compliance by its Designated
Affiliate in a timely manner.
With respect to those Designated Affiliates who are not subject to organizational control but have
only a contractual relationship with the a Controlling Member, the ability of the Controlling Member to
enforce compliance with the Master Indenture will be based solely on the applicable contract. Should any
such non - controlled Designated Affiliate refuse to comply with the covenants and requirements of the
Master Indenture, the Controlling Member's remedies would be limited to litigation to specifically
enforce the provisions of the applicable written contract. In particular, the execution of a written contract
may not give the Obligated Group the power or authority to replace the governing body or management
of a Designated Affiliate. Moreover, the Designated Affiliate may have certain defenses to such
litigation, and there is no assurance that the Controlling Member would prevail in such an action. See
OHS Wese260185418.3 19
"SECURITY FOR THE BONDS — Enforceability of the Master Indenture, the Loan Agreement and
Obligation No. 1"
The Master Indenture provides that after an entity is designated as a Designated Affiliate, the
Credit Group Representative may at any time declare that such entity is no longer a Designated Affiliate.
Accordingly, there can be no assurance that an entity designated as a Designated Affiliate will continue to
be a Designated Affiliate for the term of Obligation No. 1.
Security and Enforceability
Enforceability of the Master Indenture, the Loan Agreement and Obligation No. 1. The state
of the insolvency, fraudulent conveyance and bankruptcy laws relating to the enforceability of guaranties
or obligations issued by one corporation in favor of the creditors of another or the obligations of an
Obligated Group Member to make debt service payments on behalf of an Obligated Group Member is
unsettled, and the ability to enforce the Master Indenture and the Master Indenture Obligations against
any Obligated Group Member that would be rendered insolvent thereby could be subject to challenge. In
particular, such obligations may be voidable under the Federal Bankruptcy Code or applicable state
fraudulent conveyance laws if the obligation is incurred without "fair" and/or "fairly equivalent"
consideration to the obligor and if the incurrence of the obligation thereby renders the Obligated Group
Member insolvent. The standards for determining the fairness of consideration and the manner of
determining insolvency are not clear and may vary under the Federal Bankruptcy Code, state fraudulent
conveyance statutes and applicable cases.
The joint and several obligation described herein of each Member of the Obligated Group to pay
debt service on Obligation No. 1 may not be enforceable under any of the following circumstances:
(i) to the extent payments on Obligation No. 1 are requested to be made from assets
of a Member (if any is added in the future) other than Hoag Hospital which are donor - restricted
or which are subject to a direct, express or charitable trust that does not permit the use of such
assets for such payments;
(ii) if the purpose of the debt created and evidenced by Obligation No. 1 is not
consistent with the charitable purposes of the Member (other than Hoag Hospital) from which
such payment is requested or required, or if the debt was incurred or issued for the benefit of an
entity other than a nonprofit corporation that is exempt from federal income taxes under sections
501(a) and 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code ") and is not a
"private foundation" as defined in section 509(a) of the Code;
(iii) to the extent payments on Obligation No. 1 would result in the cessation or
discontinuation of any material portion of the health care or related services previously provided
by such Member (other than Hoag Hospital); or
(iv) if and to the extent payments are requested to be made pursuant to any loan
violating applicable usury laws.
These limitations on the enforceability of the joint and several obligations of the Members of the
Obligated Group on Obligation No. 1 also apply to their obligations on all Master Indenture Obligations.
If the obligation of a particular Member of the Obligated Group to make payment on a Master Indenture
Obligation is not enforceable and payment. is not made on such Master Indenture Obligation when due in
full, then Events of Default will arise under the Master Indenture.
OHS West260185418.3 20
In addition, common law authority and authority under state statutes exists for the ability of
courts in such states to terminate the existence of a nonprofit corporation or undertake supervision of its
affairs on various grounds, including a finding that such corporation has insufficient assets to carry out its
stated charitable purposes. Such court action may arise on the court's own motion or pursuant to a
petition of the attorney general of such states or such other persons who have interests different from
those of the general public, pursuant to the common law and statutory power to enforce charitable trusts
and to see to the application of their funds to their intended charitable uses.
The legal right and practical ability of the Bond Trustee to enforce its rights and remedies against
Hoag Hospital under the Loan Agreement and related documents and of the Master Trustee to enforce its
rights and remedies against Obligated Group Members under Obligation No. 1 may be limited by laws
relating to bankruptcy, insolvency, reorganization, fraudulent conveyance or moratorium and by other
similar laws affecting creditors' rights. In addition, the Bond Trustee's and the Master Trustee's ability to
enforce such terms will depend upon the exercise of various remedies specified by such documents which
may in many instances require judicial actions that are often subject to discretion and delay or that
otherwise may not be readily available or may be limited.
The various legal opinions delivered concurrently with the issuance of the Bonds are qualified as
to the enforceability of the various legal instruments by limitations imposed by state and federal laws,
rulings, policy and decisions affecting remedies and by bankruptcy, reorganization or other laws of
general application affecting the enforcement of creditors' rights or the enforceability of certain remedies
or document provisions.
For a further description of the provisions of the Bond Indenture, the Loan Agreement and the
Master Indenture, including covenants that secure the Bonds, events of default, acceleration and remedies
under the Master Indenture, see APPENDIX D — "SUMMARY OF PRINCIPAL DOCUMENTS."
Security for Obligations. All Master Indenture Obligations issued and Outstanding under the
Master Indenture are equally and ratably secured by the Master Indenture except to the extent specifically
provided otherwise in the Master Indenture. Any one or more series of Master Indenture Obligations
issued under the Master Indenture may, so long as any Liens created in connection therewith constitute
Permitted Liens, be secured by security (including, without limitation, letters or lines of credit, insurance,
Liens on Property of the Members or Designated Affiliates, or security interests in a depreciation reserve,
debt service or interest reserve or debt service or similar funds). Such security need not extent to any
other Indebtedness (including any other Master Indenture Obligations or series of Master Indenture
Obligations). Consequently, the Related Supplement pursuant to which any one or more series of Master
Indenture Obligations is issued may provide for such supplements or amendments to the provisions of the
Master Indenture, as are necessary to provide for such security and to permit realization upon such
security solely for the benefit of the Master Indenture Obligations entitled thereto.
Bankruptcy. In the event of bankruptcy of an Obligated Group Member, the rights and remedies
of the Bondholders are subject to various provisions of the federal Bankruptcy Code. If an Obligated
Group Member were to file a petition in bankruptcy, payments made by that Obligated Group Member
during the 90 day (or perhaps one -year) period immediately preceding the filing of such petition may be
avoidable as preferential transfers to the extent such payments allow the recipients thereof to receive more
than they would have received in the event of such Obligated Group Member's liquidation. Security
interests and other liens granted to a Bond Trustee or the Master Trustee and perfected during such
preference period also may be avoided as preferential transfers to the extent such security interest or other
lien secures obligations that arose prior to the date of such perfection. Such a bankruptcy filing would
operate as an automatic stay of the commencement or continuation of any judicial or other proceeding
against the Obligated Group Member and its property and as an automatic stay of any act or proceeding to
OHS West:2601854183 21
enforce a lien upon or to otherwise exercise control over its property, as well as various other actions to
enforce, maintain or enhance the rights of the Bond Trustee and the Master Trustee. If the bankruptcy
court so ordered, the property of the Obligated Group Member, including accounts receivable and
proceeds thereof, could be used for the financial rehabilitation of such Obligated Group Member despite
any security interest of the Bond Trustee therein. The rights of the Bond Trustee and the Master Trustee
to enforce their respective security interests and other liens could be delayed during the pendency of the
rehabilitation proceeding.
Such Obligated Group Member could file a plan for the adjustment of its debts in any such
proceeding, which plan could include provisions modifying or altering the rights of creditors generally or
any class of them, secured or unsecured. The plan, when confirmed by a court, binds all creditors who
had notice or knowledge of the plan and, with certain exceptions, discharges all claims against the debtor
to the extent provided for in the plan. No plan may be confirmed unless certain conditions are met,
among which are conditions that the plan be feasible and that it shall have been accepted by each class of
claims impaired thereunder. Each class of claims has accepted the plan if at least two- thirds in dollar
amount and more than one -half in number of the class cast votes in its favor. Even if the plan is not so
accepted, it may be confirmed if the court finds that the plan is fair and equitable with respect to each
class of non - accepting creditors impaired thereunder and does not discriminate unfairly.
In the event of bankruptcy of any Member, there is no assurance that certain covenants, including
tax covenants, contained in the Loan Agreement and certain other documents would survive.
Accordingly, a bankruptcy trustee could take action that would adversely affect the exclusion of interest
on the Bonds from gross income of the Bondholders for federal income tax purposes.
Unsecured Debt. In addition, the obligations of Hoag Hospital under the Loan Agreement and of
Hoag Hospital and any future Members under the Master Indenture are not secured by a lien on or
security interest in any assets or revenues of the Members. In the event of a bankruptcy of Hoag Hospital
or any other future Members, Bondholders would be unsecured creditors and would be in an inferior
position to any secured creditors and on a parity with all other unsecured creditors.
Other
THE BONDS ARE LIMITED OBLIGATIONS OF THE CITY PAYABLE SOLELY FROM
PAYMENTS REQUIRED TO BE MADE BY HOAG HOSPITAL PURSUANT TO THE LOAN
AGREEMENT AND OBLIGATION NO. I ISSUED PURSUANT TO THE MASTER INDENTURE.
NEITHER THE STATE OF CALIFORNIA NOR THE CITY SHALL BE OBLIGATED TO PAY THE
PRINCIPAL OF THE BONDS, OR THE PREMIUM OR INTEREST THEREON, EXCEPT FROM
THE FUNDS PROVIDED UNDER THE LOAN AGREEMENT, OBLIGATION NO. I AND THE
BOND INDENTURE, AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF
THE CITY, THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF, IS
PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR THE PREMIUM OR INTEREST ON
THE BONDS. THE ISSUANCE OF THE BONDS SHALL NOT DIRECTLY OR INDIRECTLY OR
CONTINGENTLY OBLIGATE THE CITY, THE STATE OF CALIFORNIA OR ANY POLITICAL
SUBDIVISION THEREOF TO LEVY OR TO PLEDGE ANY FORM OF TAXATION OR TO MAKE
ANY APPROPRIATION FOR THEIR PAYMENT.
OHS West:260185418.3 22
BOND INSURANCE
Payment Pursuant to Bond Insurance Policy
Ambac Assurance Corporation ( "Ambac Assurance" or the "Bond Insurer ") has made a
commitment to issue a financial guaranty insurance policy (the "Bond Insurance Policy ") relating to the
Bonds, effective as of the date of issuance of the Bonds. Under the terms of the Bond Insurance Policy,
Ambac Assurance will pay to The Bank of New York, in New York, New York, or any successor thereto
(the "Insurance Trustee "), that portion of the principal of and interest on the Bonds that shall become Due
for Payment but shall be unpaid by reason of Nonpayment by the Obligor (as such terms are defined in
the Bond Insurance Policy). Ambac Assurance will make such payments to the Insurance Trustee on the
later of the date on which such principal and/or interest becomes Due for Payment or within one business
day following the date on which Ambac Assurance shall have received notice of Nonpayment from the
Trustee. The insurance will extend for the term of the Bonds and, once issued, cannot be canceled by
Ambac Assurance.
The Bond Insurance Policy will insure payment only on stated maturity dates and on mandatory
sinking fund installment dates, in the case of principal, and on stated dates for payment, in the case of
interest. If the Bonds become subject to mandatory redemption and insufficient funds are available for
redemption of all outstanding Bonds, Ambac Assurance will remain obligated to pay the principal of and
interest on outstanding Bonds on the originally scheduled interest and principal payment dates, including
mandatory sinking fund redemption dates. In the event of any acceleration of the principal of the Bonds,
the insured payments will be made at such times and in such amounts as would have been made had there
not been an acceleration, except to the extent that Ambac Assurance elects, in its sole discretion, to pay
all or a portion of the accelerated principal and interest accrued thereon to the date of acceleration (to the
extent unpaid by the Obligor). Upon payment of all such accelerated principal and interest accrued to the
acceleration date, Ambac Assurance's obligations under the Bond Insurance Policy shall be fully
discharged.
In the event the Trustee has notice that any payment of principal of or interest on a Bond that has
become Due for Payment and that is made to a holder by or on behalf of the Obligor has been deemed a
preferential transfer and theretofore recovered from its registered owner pursuant to the United States
Bankruptcy Code in accordance with a final, non - appealable order of a court of competent jurisdiction,
such registered owner will be entitled to payment from Ambac Assurance to the extent of such recovery if
sufficient funds are not otherwise available.
The Bond Insurance Policy does not insure any risk other than Nonpayment (as set forth in the
Bond Insurance Policy). Specifically, the Bond Insurance Policy does not cover:
1. payment on acceleration, as a result of a call for redemption (other than mandatory
sinking fund redemption) or as a result of any other advancement of maturity;
2. payment of any redemption, prepayment or acceleration premium; and
3. nonpayment of principal or interest caused by the insolvency or negligence of the
Trustee, Paying Agent or Bond Registrar, if any.
If it becomes necessary to call upon the Bond Insurance Policy, payment of principal requires
surrender of the Bonds to the Insurance Trustee together with an appropriate instrument of assignment so
as to permit ownership of such Bonds to be registered in the name of Ambac Assurance to the extent of
the payment under the Bond Insurance Policy. Payment of interest pursuant to the Bond Insurance Policy
OHS West:2601854183 23
requires proof of holder entitlement to interest payments and an appropriate assignment of the holder's
right to payment to Ambac Assurance.
Upon payment of the insurance benefits, Ambac Assurance will become the owner of the Bond,
appurtenant coupon, if any, or right to payment of the principal of or interest on such Bond and will be
fully subrogated to the surrendering holder's rights to payment.
The Bond Insurance Policy does not insure against loss relating to payments made in connection
with the sale of the Bonds at auctions or losses suffered as a result of a holder's inability to sell the
Bonds.
In the event that Ambac Assurance were to become insolvent, any claims arising under the Bond
Insurance Policy would be excluded from coverage by the California Insurance Guaranty Association,
established pursuant to the laws of the State of California.
Ambac Assurance Corporation
Ambac Assurance is a Wisconsin - domiciled stock insurance corporation regulated by the Office
of the Commissioner of Insurance of the State of Wisconsin, and is licensed to do business in 50 states,
the District of Columbia, the Territory of Guam, the Commonwealth of Puerto Rico and the U.S. Virgin
Islands, with admitted assets of approximately $9,699,000,000 (unaudited) and statutory capital of
approximately $6,223,000,000 (unaudited) as of September 30, 2006.. Statutory capital consists of Ambac
Assurance's policyholders' surplus and statutory contingency reserve. Standard & Poor's Ratings
Services, a division of The McGraw -Hill Companies, Inc., Moody's Investors Service, Inc. and Fitch
Ratings have each assigned a triple -A financial strength rating to Ambac Assurance.
Ambac Assurance has obtained a ruling from the Internal Revenue Service to the effect that the
insuring of an obligation by Ambac Assurance will not affect the treatment for federal income tax
purposes of interest on such obligation and that insurance proceeds representing maturing interest paid by
Ambac Assurance under policy provisions substantially identical to those contained in the Bond
Insurance Policy shall be treated for federal income tax purposes in the same manner as if such payments
were made by the Obligor.
Available Information
The parent company of Ambac Assurance, Ambac Financial Group, Inc. (the "Company "), is
subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act "), and in accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC "). These reports, proxy statements and other
information can be read and copied at the SEC's public reference room at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Please call the SEC at 1 -800- SEC -0330 for further information on the public
reference room. The SEC maintains an internet site at http: / /www.sec.gov that contains reports, proxy
and information statements and other information regarding companies that file electronically with the
SEC, including the Company. These reports, proxy statements and other information can also be read at
the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
Copies of Ambac Assurance's financial
accounting standards are available from Ambac
administrative offices is One State Street Plaza,
telephone number is (212) 668 -0340.
statements prepared in accordance with statutory
Assurance. The address of Ambac Assurance's
19th Floor, New York, New York 10004, and its
OHS W" 260M418.3 24
Incorporation of Certain Documents by Reference
The following documents filed by the Company with the SEC (File No. 1- 10777) are
incorporated by reference in this Official Statement:
1. The Company's Annual Report on Form 10 -K for the fiscal year ended December 31,
2005 and filed on March 13, 2006;
2. The Company's Current Report on Form 8 -K dated and filed on April 26, 2006;
3. The Company's Quarterly Report on Form 10 -Q for the fiscal quarterly period ended
March 31, 2006 and filed on May 10, 2006;
4. The Company's Current Report on Form 8 -K dated July 25, 2006 and filed on July 26,
2006;
5. The Company's Current Report on Form 8-K dated and filed on July 26, 2006;
6. The Company's Quarterly Report on Form 10 -Q for the fiscal quarterly period ended
June 30, 2006 and filed on August 9, 2006;
7. The Company's Current Report on Form 8 -K dated and filed on October 25, 2006;
8. The Company's Quarterly Report on Form 10 -Q for the fiscal quarterly period ended
September 30, 2006 and filed on November 8, 2006;
9. The Company's Current Report on Form 8 -K dated and filed on January 31, 2007; and
10. The Company's Current Report on Form 8 -K dated and filed on February 12, 2007.
All documents subsequently filed by the Company pursuant to the requirements of the Exchange
Act after the date of this Official Statement will be available for inspection in the same manner as
described above in "Available Information."
DISCLAIMER
The information relating to the Bond Insurer and the Bond Insurance Policy contained herein has
been furnished by the Bond Insurer. No representation is made by the City, Hoag Hospital or the
Underwriter as to the accuracy, completeness or adequacy of such information or as to the absence of
material adverse changes in the condition of the Bond Insurer subsequent to the date of this Official
Statement. Reference is made to APPENDIX G for a specimen of the Bond Insurance Policy.
No assurance can be given that the Bond Insurer will be financially able to meet its
contractual obligations under the Bond Insurance Policy.
So long as the Bond Insurer performs its obligations under the Bond Insurance Policy, the Bonds
cannot be accelerated without the prior written consent of the Bond Insurer, including, without limitation,
if the tax - exempt status of the interest on the Bonds is not maintained.
In the event that the Bond Insurer is unable to make scheduled payments of principal of or
interest on the Bonds as such payments become due, the Bonds are payable solely from moneys received
by the Bond Trustee as set forth in the Bond Indenture.
OHS West:260185418.3 25
In the event that the Bond Insurer is required to pay principal of or interest on the Bonds, no
representation or assurance is given or can be made that such event will not adversely affect the market
price for or marketability of the Bonds.
Owners of the Bonds should note that, although the Bond Insurance Policy will insure payment of
the principal amount (but not any premium) that is paid to any owner of the Bonds in connection with the
optional or extraordinary redemption of any Bond and that is recovered from such owner as a voidable
preference under applicable bankruptcy laws, such amounts will be repaid by the Bond Insurer to such
owner only at such times and in such amounts as would have applied in the absence of such redemption.
PLAN OF FINANCE
General
The issuance of the Bonds and the loan of the proceeds thereof is for the benefit of Hoag Hospital
in order to (i) finance and refinance the costs of certain capital improvements at the facilities owned and
operated by Hoag Hospital, (ii) refund the Prior Bonds identified below and (iii) pay for costs of issuing
the Bonds and paying the premium for the Bond Insurance Policy.
The Project
A portion of the proceeds from the sale of the Bonds will be used by Hoag Hospital to finance the
Project, consisting of certain capital improvements and.equipmentacquisitions on the campus of its acute
care health facilities in Newport Beach. See APPENDIX A — "INFORMATION CONCERNING HOAG
MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTH CARE CENTER LLC AND
OTHER AFFILIATES — FACILITIES DESIGN AND CONSTRUCTION." Hoag Hospital has
determined to refund certain outstanding. bonds (the "Prior Bonds") issued for the benefit of Hoag
Hospital. All of the Prior Bonds are to be refunded in whole and such bonds and the amounts thereof
outstanding as of the date of issue of the Bonds are described in the following chart'.
$ AMOUNT
ISSUER / SERIES OUTSTANDING
City of Newport Beach Variable Rate Demand Revenue Bonds (Hoag
Memorial Hospital Presbyterian) Series 1992
City of Newport Beach Variable Rate Demand Revenue Bonds (Hoag
Memorial Hospital Presbyterian) Series 1996
City of Newport Beach Variable Rate Demand Revenue Bonds (Hoag
Memorial Hospital Presbyterian) Series 1999
Total
A'portion of the proceeds derived from the sale of the Bonds, will be used by the Bond Trustee to
purchase Investment Securities, which will be deposited in the Escrow Account and will be transferred on
the redemption date to the trustee for each of the Prior Bonds for the payment of the principal of and
interest on such Prior Bonds. The Prior Bonds will be redeemed no more than 90 days from the date of
issue of the Bonds. Neither the maturing principal of such Investment Securities nor the, interest income
thereon will be available to make payments on the Bonds; provided, however, that any amount remaining
in the Escrow Account after ninety (90) days from the date of issue of the Bonds will be transferred to the
Project Fund. Upon redemption of the 1992 and 1996 Prior Bonds, the Corporation intends to terminate
OHS West:260185418.3 26
the liquidity facilities provided.in connection with such Prior Bonds, in the total approximate amount of
$191,000,000.
Following issuance of the Bonds and redemption of the Prior Bonds, the only outstanding bonds
secured under the Master Indenture will be the Bonds and $200,000,000 of the Series 2005 Bonds.
Interest Rate Swaps
Hoag Hospital has entered into interest rate swap agreements (the "Interest Rate Swap
Agreements ") relating each Series of the Bonds. Citibank N.A., New York is the counterparty to the
Interest Rate Swap Agreements. The Interest Rate Swap Agreements will have a term equal to the term
of each Series of the Bonds, respectively, and the aggregate notional amount and amortization of the
Interest Rate Swap Agreements will be approximately, equal to the aggregate principal amount and
amortization of each Series of the Bonds. Under the Interest Rate Swap Agreements, Hoag Hospital will
pay a fixed rate and will receive a floating rate based on an index, in each case based on a notional
amount set forth in the respective Interest Rate Swap Agreement.. Hoag Hospital intends to secure the
Interest Rate Swap Agreements with Master Indenture Obligations entitled to the benefits of the Master
Indenture approximately 90 days following the issuance of the Bonds. Certain of Hoag Hospital's
payment obligations under the Interest Rate Swap Agreements will also be insured by the Bond Insurer.
Under certain circumstances, the Interest Rate Swap Agreements are subject to termination prior
to the maturity of each Series of the Bonds to which they relate and prior to the scheduled termination
dates thereof. In the event of an early termination of any Interest Rate Swap Agreement, there can be no
assurance that (i) Hoag Hospital will receive any termination payment payable to it by the counterparty,
(ii) Hoag Hospital will have sufficient amounts to make a termination payment payable by it to the
counterparty, or (iii) Hoag Hospital will be able to obtain a replacement swap agreement with comparable
terms. Payments due upon early termination may be substantial.
Hoag Hospital is obligated to make debt service payments on the Bonds regardless of the
performance by the Swap Provider of its obligations under the Interest Rate Swap Agreements. The
Swap Provider has no obligation to make any payments with respect to the.principal of, premium, if any,
and interest on the Bonds and is only obligated to make certain payments to Hoag Hospital pursuant to
the terms of the Interest Rate Swap Agreements. The agreement by the Swap Provider to pay amounts to
Hoag Hospital under the Interest Rate Swap Agreements does not alter or affect Hoag Hospital's
obligation to pay the principal of, premium, if any and interest on the Bonds. Neither the holders of the
Bonds nor any other person other than Hoag Hospital will have any rights under the Interest Rate Swap
Agreements or against the Swap Provider.
OHS Wa5i:260185418.3 27
below:
ESTIMATED SOURCES AND USES OF FUNDS
The proceeds to be received from the sale of the Bonds will be applied approximately as set forth
Sources of Funds:
Bond Proceeds
Total Sources of Funds
Uses of Funds:
Project Costs
Refunding of Prior Bonds
Costs of Issuancelll
Total Uses of Funds
(1) Includes legal, printing, rating agency, accounting, Bond Trustee and City fees, underwriting discount, Bond Insurance
Policy premium and other miscellaneous costs of issuance.
CONTINUING DISCLOSURE
Since the Bonds are limited obligations of the City, payable solely from amounts received from
Hoag Hospital, financial or operating data concerning the City is not material to an evaluation of the
offering of the Bonds or to any decision to purchase, hold or sell the Bonds, and the City is not providing
any such information. Hoag Hospital has undertaken all responsibilities for any continuing disclosure to
Holders of the Bonds, as described below, and the City shall have no liability to the Holders of the Bonds
or any other person with respect to Rule 15c2 -12 promulgated by the Securities and Exchange
Commission (the "Rule ").
Hoag Hospital has covenanted for the benefit of holders and beneficial owners of the Bonds to
provide certain financial information and operating data relating to Hoag Hospital by not later than six
months following the end of Hoag Hospital's fiscal year (which currently is August 31) (the "Annual
Report"), commencing with the report for the fiscal year ending August 31, 2007 (due on or before
February 28, 2008) and to provide notices of the occurrence of certain enumerated events, if material.
The Annual Report will be filed by Hoag Hospital with each Nationally Recognized Municipal Securities
Information Repository and with a repository designated by the State of California, if any, as the state
depository for the purpose of the Rule and recognized as such by the Securities and Exchange
Commission (the "State Repository"). As of the date of this Official Statement, there is no State
Repository. The notices of material events will be filed by Hoag Hospital with the State Repository, if
any, and with the Municipal Securities Rulemaking Board or each Nationally Recognized Municipal
Securities Information Repository. See APPENDIX F — "FORM OF CONTINUING DISCLOSURE
AGREEMENT." These covenants have been made in order to assist the Underwriter in complying with
the Rule. Hoag Hospital has never failed to comply in all material respects with any previous undertaking
with regard to said Rule to provide annual reports or notices of material events.
OHS West:260185418.3 28
BONDHOLDERS' RISKS
The purchase of the Bonds involves investment risks that are discussed throughout this Official
Statement. Prospective purchasers of the Bonds should evaluate all of the information presented in this
Official Statement. This section on Bondholders' Risks focuses primarily on the general risks associated
with hospital or health system operations; whereas APPENDIX A describes Hoag Hospital specifically.
These should be read together. For risks related to the auction rate securities market, see "THE
AUCTION RATE SECURITIES" herein.
General
Except as noted under "SECURITY FOR THE BONDS," the Bonds are payable from Loan
Repayments made pursuant to the Loan Agreement and funds provided under Obligation No. 1 and the
Bond Indenture. No representation or assurance can be made that revenues will be realized by Hoag
Hospital in amounts sufficient to pay principal of and interest on the Bonds.
Hoag Hospital is subject to a wide variety of federal and state regulatory actions and legislative
and policy changes by those governmental and private agencies that administer Medicare, Medicaid and
other payers and are subject to actions by, among others, the National Labor Relations Board, the Joint
Commission on Accreditation of Healthcare Organizations ( "JCAHO "), the Centers for Medicare and
Medicaid Services ( "CMS ") of the U.S. Department of Health and Human Services ( "DHHS "), and other
federal, state and local government agencies. The future financial condition of Hoag Hospital could be
adversely affected by, among other things, changes in the method and amount of payments to Hoag
Hospital by nongovernmental payers, the financial viability of these payers, increased competition from
other health care entities, demand for health care, other forms of care or treatment, changes in the
methods by which employers purchase health care for employees, capability of management, future
changes in the economy, demographic changes, availability of physicians and nurses, and malpractice
claims and other litigation. These factors and others may adversely affect both payment by Hoag
Hospital under the Loan Agreement and payment by the Obligated Group on Obligation No. 1 and,
consequently, on the Bonds.
Significant Risk Areas Summarized
Certain of the primary risks associated with the operations of Hoag Hospital are briefly
summarized in general terms below and are explained in greater detail in subsequent sections.
Nonprofit Hea/theare Environment As a nonprofit tax- exempt organization, Hoag Hospital is
subject to federal, state and local laws, regulations, rulings and court decisions relating to its organization
and operation, including its operation for charitable purposes. There can be a tension between the rules
designed to regulate a wide range of charitable organizations and the day -to -day operations of a complex
healthcare organization. As a result, an increasing number of the operations or practices of healthcare
providers have been challenged or questioned to determine if they are consistent with the regulatory
requirements for nonprofit tax- exempt organizations.
Areas which have come under examination have included pricing practices, billing and collection
practices, charitable and community care policies and procedures, executive compensation, exemption of
property from real property taxation, private use of tax- exempt bond financed assets and others. These
challenges and questions have come from a variety of sources, including the California Attorney General,
the Internal Revenue Service, labor unions, Congress, state legislatures and other state attorneys general
and patients; these issues have been raised in a variety of forums, including hearings, audits and litigation.
OHS West:260185418.3 29
The challenges and examinations, and any resulting legislation, regulations, judgments or penalties, could
have a material adverse effect on Hoag Hospital.
Reliance on Medicare. Inpatient hospitals rely to a high degree on payment from the federal
Medicare program. Future changes in the underlying law and regulations, as well as in payment policy
and timing, create uncertainty and could have a material adverse impact on hospitals' payment stream
from Medicare. With health care and hospital spending reported to be increasing faster than the rate of
general inflation, Congress and/or CMS may take action in the future to decrease or restrain Medicare
outlays for hospitals.
Managed Care Exposure and Rate Pressure from Major Purchasers. Certain hospital markets,
including many communities in California, are strongly impacted by managed care and major purchasers
of health services. In those areas, managed care companies have significant influence over hospital rates,
utilization and competition. Rate pressure imposed by managed care payors or other major purchasers
may have a material adverse impact on hospitals, particularly if major purchasers put increasing pressure
on payors to restrain rate increases. Business failures by managed care companies also could have a
material adverse impact on contracted hospitals in the form of payment shortfalls or delay, and/or
continuing obligations to care for managed care patients without receiving payment.
Capital Needs vs. Capital Capacity. Hospital operations are capital intensive. Regulation,
technology and physician/patient expectations require constant and often significant capital investment.
In California, seismic requirements mandated by the State of California may require that many hospital
facilities be substantially modified, replaced or closed. Nearly all hospitals in California are affected.
Estimated construction costs are substantial and actual costs of compliance may exceed estimates. Total
capital needs may outstrip capital capacity.
Government "Fraud" Enforcement. "Fraud" in government funded health care programs is a
significant concern of DHHS, CMS and many states and is one of the federal government's prime law
enforcement priorities. The federal government and, to a lesser degree, state governments impose a wide
variety of extraordinarily complex and technical requirements intended to prevent over - utilization based
on economic inducements, misallocation of expenses, overcharging and other forms of "fraud" in the
Medicare and Medicaid programs, as well as other state and federally- funded health care programs. This
body of regulation impacts a broad spectrum of hospital commercial activity, including billing,
accounting, recordkeeping, medical staff oversight, physician contracting and recruiting, cost allocation,
clinical trials, discounts and other functions and transactions.
Violations and alleged violations may be deliberate, but also frequently occur in circumstances
where management is unaware of the conduct in question, as a result of mistake, or where the individual
participants do not know that their conduct is in violation of law. Violations may occur and be prosecuted
in circumstances that do not have the traditional elements of fraud, and enforcement actions may extend
to conduct that occurred in the past. The government periodically conducts widespread investigations
covering categories of services or certain accounting or billing practices.
Violations and Sanctions. The government and/or private "whistleblowers" often pursue
aggressive investigative and enforcement actions. The government has a wide array of civil, criminal and
monetary penalties, including withholding essential hospital payments from the Medicare or Medicaid
programs, or exclusion from those programs. Aggressive investigation tactics, negative publicity and
threatened penalties can be, and often are, used to force settlements, payment of fines and prospective
restrictions that may have a materially adverse impact on hospital operations, financial condition and
reputation. Multi- million dollar fines and settlements are common. These risks are generally uninsured.
Government enforcement and private whistleblower suits may increase in the hospital sector.
OHS West:260185418.3 30
Interest Rate Swaps and Other Hedge Risk. Any interest rate swap or other hedge agreement to
which Hoag Hospital is a party, including the Interest Rate Swap Agreements, may, at any time, have a
negative value to Hoag Hospital. If either a swap or other hedge counterparty or Hoag Hospital
terminates such an agreement when the agreement has a negative value to Hoag Hospital, Hoag Hospital
would generally be obligated to make a termination payment to the counterparty in the amount of such
negative value, and such payment could be substantial and potentially materially adverse to Hoag
Hospital's financial condition. A counterparty may generally only terminate such an agreement upon the
occurrence of defined termination events such as nonpayment by Hoag Hospital and the Bond Insurer, or
in the event ratings agencies withdraw or downgrade the ratings of Hoag Hospital and the Bond Insurer
below specified levels. See "PLAN OF FINANCE — Interest Rate Swaps" herein.
Risks Related to Variable Rate Obligations. The Auction Rate Securities are variable rate
obligations. The interest rates vary on a periodic basis and may rise. Hoag Hospital could convert the
variable rate to a fixed interest rate, but this protection against rising interest rates is limited because the
Obligated Group would be required to continue to pay interest at the variable rate until it is permitted to
convert the obligations to a fixed rate pursuant to the terms of the applicable transaction documents.
Nursing and Other Shortages. Currently, a nursing shortage exists which may have its primary
impact on hospitals. Various studies have predicted that this nursing shortage will become more acute
over time and grow to significant proportions. In California a new state regulation establishing minimum
nurse staffing to patient ratios will likely intensify the nursing shortage. In addition, shortages of other
professional and technical staff such as pharmacists, therapists, laboratory technicians and others may
occur or worsen. Hospital operations, patient and physician satisfaction, financial condition and future
growth could be negatively affected by these shortages, resulting in material adverse impact to hospitals.
Technical and Clinical Developments. New clinical techniques and technology, as well as new
pharmaceutical and genetic developments and products, may alter the course of medical diagnosis and
treatment in ways that are currently unanticipated, and that may dramatically change medical and hospital
care. These could result in higher hospital costs, reductions in patient populations and/or new sources of
competition for hospitals.
Costs and Restrictions from Governmental Regulation. Nearly every aspect of hospital
operations is regulated, in some cases by multiple agencies of government. The level and complexity of
regulation appears to be increasing, bringing with it operational limitations, enforcement and liability
risks, and significant and sometimes unanticipated cost increases.
Proliferation of Competition. Hospitals increasingly face competition from specialty providers
of care. This may cause hospitals to lose essential inpatient or outpatient market share. Competition may
be focused on services or payor classifications where hospitals realize their highest margins, thus
negatively affecting programs that are economically important to hospitals. Specialty hospitals or special
use surgery and imaging centers may attract specialists as investors and may seek to treat only profitable
classifications of patients, leaving full- service hospitals with higher acuity and/or lower paying patient
populations. These new sources of competition may have material adverse impact on hospitals,
particularly where a group of a hospital's principal physician admitters may curtail their use of a hospital
service in favor of competing facilities.
Labor Costs and Disruption. Hospitals are labor intensive. Labor costs, including salary,
benefits and other liabilities associated with the workforce and a significant component of hospital
expenses and therefore, have significant impact on hospital operations and financial condition. Hospital
employees 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,
OHS West260185418.3 31
and turnover is 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. See APPENDIX A — "INFORMATION CONCERNING
HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTH CARE CENTER LLC
AND OTHER AFFILIATES — EMPLOYEES."
Pension and Benefit Funds. 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 in some cases may be erratic or unanticipated and may
require significant commitments of available cash needed for other purposes. Hoag Hospital does not
provide a pension plan for its employees or former employees.
State Medicaid Programs. While state Medicaid programs are rarely as important to hospital
financial results as Medicare, they nevertheless constitute an important payor source to many hospitals.
These programs often pay hospitals at levels that may be below the actual cost of the care provided. As
Medicaid is partially funded by states, if the financial condition of states significantly deteriorates then a
result is lower Medicaid funding levels and/or payment delays. These could have a material adverse
impact on hospitals.
General Economic Conditions; Bad Debt and Indigent Care. Hospitals are economically
influenced by the environment in which they are located. To the extent that the State of California or
surrounding county governments are unable to provide a safety net of medical services, pressure is
applied to local hospitals to increase free care. Economic downturns and lower funding of state Medicaid
programs may increase the number of patients treated by hospitals who are uninsured or otherwise unable
to pay for some or all of their care. These conditions may give rise to increased bad debt and higher
indigent care utilization. At the same time, nonoperating revenue from investments may be reduced or
eliminated. These factors may have a material adverse impact on hospitals.
Medical Liability Litigation and Insurance. 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.
Hospitals may be affected by negative financial and liability impacts on physicians. Costs of insurance,
including self - insurance, may increase dramatically.
Facility Damage. Hospitals are highly dependent on the condition and functionality of their
physical facilities. Damage from earthquake, other natural causes, fire, deliberate acts of destruction, or
various facilities system failures may have a material adverse impact on hospital operations and financial
status.
Nonprofit Health Care Environment
Recently, an increasing number of the operations or practices of health care providers have been
challenged or questioned to determine if they are consistent with the regulatory requirements for nonprofit
tax - exempt organizations. These challenges are broader than concerns about compliance with federal and
state statutes and regulations, such as Medicare and Medicaid compliance, and instead in many cases are
examinations of core business practices of the health care organizations. Areas that have come under
examination have included pricing practices, billing and collection practices, charitable care, executive
compensation, exemption of property from real property taxation, private use of tax- exempt bond
financed assets and others. These challenges and questions have come from a variety a sources, including
state attorneys general, the Internal Revenue Service (the "IRS "), labor unions, Congress, state
OHS Wes1:260185418.3 32
legislatures, and patients, and in a variety of forums, including hearings, audits and litigation. These
challenges or examinations include the following, among others:
Congressional Hearings. The House Committee on Energy and Commerce (the "House
Committee ") has launched a nationwide investigation of hospital billing and collection practices and
prices charged to uninsured patients. Twenty large hospital and health care systems were requested by
the House Committee to provide detailed historical charge and billing practice information for acute care
services.
The Senate Finance Committee (the "Senate Committee ") also conducted hearings on required
reforms to the nonprofit sector in 2004. At the hearing, the Senate Committee released a staff discussion
draft on proposals for reform in the area of tax- exempt organizations, including a proposal for a five-year
review of tax- exempt status by the IRS. It is uncertain if any of the staff proposals will be adopted by the
entire Senate Committee or if the Senate Committee will recommend legislative changes as a result of the
hearing.
Complementary to the Senate Committee hearings, the House Committee on Ways and Means
("Ways and Means Committee") held a hearing in April, 2005 to examine the tax- exempt sector. In
May, 2007, the Ways and Means Committee conducted a hearing that focused more specifically on
hospital tax- exemption. In March, 2006, the Ways and Means Committee's subcommittee on select
revenue measures held a hearing on the use of tax- preferred bond financing. It is uncertain whether the
Ways and Means Committee will recommend legislative changes as a result of its inquiries.
IRS Examination of Compensation Practices. In August 2004, the Internal Revenue Service
announced a new enforcement effort to identify and halt abuses by tax- exempt organizations that pay
excessive compensation and benefits to their officers and other insiders. The IRS announced that it would
contact nearly 2,000 charities and foundations to seek more information about their compensation
practices and procedures. This examination project is ongoing. Hoag Hospital has not been contacted by
the IRS in connection with this enforcement effort.
Litigation Regarding Billing and Collection Practices. Lawsuits have been filed in federal and
state courts alleging, among other things, that hospitals have failed to fulfill their obligations to provide
charity care to uninsured patients and have overcharged uninsured patients. Many of these cases have
since been dismissed by the courts. A number of cases are still pending in various courts around the
county with inconsistent results. While it is not possible to make general predictions, some hospitals and
health systems have entered into substantial settlements.
Action by Purchasers of Hospital Services and Consumers. Major purchasers of hospital
services also could take action to restrain hospital charges or charge increases. In California, the
California Public Employees' Retirement System ( "CALPERS "), the nation's third largest purchaser of
employee health benefits, has pledged to take action to restrain the rate of growth of hospital charges and
has excluded certain California hospitals from serving its covered members. Hoag Hospital is not
excluded from serving covered members of CALPERS.
As a result of increased public scrutiny, it is also possible that the pricing strategies of hospitals
may be perceived negatively by consumers, and hospitals may be forced to reduce fees for their services.
Decreased utilization could result, and hospitals' revenues may be negatively impacted.
Challenges to Real Property Tax Exemptions. Recently, the real property tax exemptions
afforded to certain nonprofit health care providers by state and local taxing authorities have been
challenged on the grounds that the health care providers were not engaged in charitable activities. These
OHS West:260185418.3 33
challenges have been based on a variety of grounds, including allegations of aggressive billing and
collection practices and excessive financial margins. While Hoag Hospital is not aware of any current
challenge to the tax exemption afforded to any material real property of the Obligated Group Members,
there can be no assurance that these types of challenges will not occur in the future.
The foregoing are some examples of the challenges and examinations facing nonprofit health care
organizations. They are indicative of a greater scrutiny of the billing, collection and other business
practices of these organizations and may indicate an increasingly more difficult operating environment for
health care organizations, including Hoag Hospital and NHC. The challenges and examinations, and any
resulting legislation, regulations, judgments, or penalties, could have a material adverse effect on
hospitals.
Healthcare Reform Initiatives
Healthcare reform has been identified as a priority by business leaders, public advocates, political
leaders and candidates for office at the federal, state and local levels. Proposals include: (1) establishing
universal healthcare coverage or purchasing pools; (2) modifying how hospitals, physicians and other
healthcare providers are paid; and (3) evaluating hospitals, physicians and other healthcare providers on a
variety of quality and efficacy standards to support pay -for- performance systems. Other initiatives
affecting hospitals as major employers include: (1) imposing higher minimum or living wages; (2)
enhancing occupational health and safety standards; and (3) penalizing employers of undocumented
immigrants. Legislation or regulation on any of the above or related topics could have a material adverse
effect on the Obligated Group and their ability to make payments under the Loan Agreement and
Obligation No. 1.
Patient Service Revenues
The Medicare Program. Medicare is the federal health insurance system under which hospitals
are paid for services provided to eligible elderly and disabled persons. Medicare is administered by CMS,
which delegates to the states the process for certifying hospitals to which CMS will make payment. In
order to achieve and maintain Medicare certification, hospitals must meet CMS's "Conditions of
Participation" on an ongoing basis, as determined by the state and/or the JCAHO. The requirements for
Medicare certification are subject to change, and, therefore, it may be necessary for hospitals to effect
changes from time to time in their facilities, equipment, personnel, billing, policies and services to
address such changing requirements. For example, revised Conditions of Participation addressing
medical staff, nursing services, medical record services, pharmaceutical services and anesthesia services
took effect in January, 2007.
Over the past several years, various laws and regulations have modified Medicare payment
methodologies and levels. The Medicare Prescription Drug, Improvement and Modernization Act of
2003 mandates substantial and wide ranging changes to the Medicare program to be implemented over a
number of years. Some significant changes include, without limitation, the expansion of outpatient
prescription drug coverage through the creation of a new voluntary prescription drug benefit, the
replacement of the current Medicare managed care program with a new program that offers additional
health plan options, modifications to coverage and payment for various providers under traditional fee -
for- service Medicare, changes to combat waste, fraud and abuse, and reforms to regulatory procedures.
The Deficit Reduction Act of 2005 was enacted to slow the growth of Medicare and Medicaid funding
and contains provisions that affect Medicare reimbursement for hospital and physician services.
Significant changes include, for example, extending and revising the requirement that hospitals submit
quality data to obtain a full market basket increase in inpatient and outpatient rates (and avoid a 2%
reduction in the increase). CMS has also, by regulation, proposed a significant reform to the current
OHS West:2601854183 34
payment system for inpatient care. The reforms are intended to ensure that payments more accurately
reflect the costs of services provided by hospitals. See "Hospital Inpatient Reimbursement" below. The
individual or collective effect of these federal laws and regulations cannot be determined. Furthermore,
additional actions by the federal government in future years affecting Medicare coverage and payment
may occur.
For each of the fiscal years ended August 31, 2004, August 31, 2005 and August 31, 2006,
Medicare charges (excluding capitation) represented approximately 33.9 %, 35.4% and 34.8 %,
respectively, of Hoag Hospital's gross patient service revenue. See APPENDIX A — "INFORMATION
CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTH CARE
CENTER LLC AND OTHER AFFILIATES — SELECTED UTILIZATION AND FINANCIAL
INFORMATION — Sources of Patient Services Revenue."
Hospital Inpatient Reimbursement Hospitals are generally paid for inpatient services provided
to Medicare beneficiaries based on established categories of treatments or conditions known as diagnosis
related groups ( "DRGs "). The actual cost of care, including capital costs, may be more or less than the
DRG rate. DRG rates are subject to adjustment by CMS and are subject to federal budget considerations.
A revised prospective payment system implemented by CMS beginning October 1, 2006 weights DRGs
based on hospital costs rather than charges. By no later than 2008, CMS will also replace the current 526
DRGs with either a system of 861 "consolidated severity- adjusted" DRGs or an alternative severity -
adjusted DRG system developed in response to public comments the agency is soliciting. There is no
guarantee that DRG rates, as they change from time to time, will cover actual costs of providing services
to Medicare patients.
Hospital Outpatient Reimbursement. Hospitals are also paid a pre - determined payment amount
for most outpatient services based upon ambulatory payment classification ( "APC ") groups. An APC
group includes various services and procedures determined to be similar. There can be no assurance that
the hospital APC payment, which bases payment on APC groups rather than on individual services, will
be sufficient to cover the actual costs of the outpatient services.
Other Medicare Service Payments. Medicare payment for general outpatient services are based
on regulatory formulas or pre - determined rates. There is no guarantee that these rates, as they may
change from time to time, will be adequate to cover the actual cost of providing these services to
Medicare patients.
Reimbursement of Hospital Capital Costs. Hospital capital costs apportioned to Medicare
patient use (including depreciation and interest) are paid by Medicare exclusively on the basis of a
standard federal rate (based upon average national costs of capital), subject to limited adjustments specific
to the hospital. There can be no assurance that future capital - related payments will be sufficient to cover
the actual capital - related costs of Hoag Hospital's facilities applicable to Medicare patient stays or will
provide flexibility for hospitals to meet changing capital needs.
Medicaid Program. Medicaid is a program of medical assistance, funded jointly by the federal
government and the states,.for certain needy individuals and their dependants. Under Medicaid, the
federal government provides limited funding to states that have medical assistance programs that meet
federal standards. Attempts to balance or reduce federal and state budgets will likely negatively impact
Medicaid spending.
California Medi -CaL Medi -Cal is the California Medicaid program. The State of California
selectively contracts with general acute care hospitals to provide inpatient services to Medi -Cal patients.
The state is obligated to make contractual payments only to the extent the Legislature appropriates
OHS Ww:260185418.3 35
adequate funding. Except in areas of the state that have been excluded from contracting, a general acute
care hospital generally will not qualify for payment for non - emergency acute inpatient services rendered
to a Medi -Cal beneficiary unless it is a contracting hospital. Typically, either party may terminate such
contracts on 120 days' notice and the state may terminate without notice under certain circumstances. No
assurances can be made that hospitals will be awarded Medi -Cal contracts or that any such contracts will
reimburse hospitals for the cost of delivering services. As of the date hereof, Hoag Hospital does not
have a Medi -Cal contract.
For each of the fiscal years ended August 31, 2004, August 31, 2005 and August 31, 2006, Hoag
Hospital received approximately 3.6 %, 4.0% and 3.9 %, respectively, of gross patient service revenues
from state Medicaid programs. See APPENDIX A – "INFORMATION CONCERNING HOAG
MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTH CARE CENTER LLC AND
OTHER AFFILIATES — SELECTED UTILIZATION AND FINANCIAL INFORMATION— Sources of
Patient Services Revenue."
California Budget and Other Legislative Matters. Because of well - publicized and continuing
state budget problems in California there can be no guarantee that the Medi -Cal program, in the future,
will not become the target of State spending cuts adversely affecting the financial condition of the
Obligated Group.
The California Legislature has enacted or is considering a number of provisions that have resulted
or will result in reductions in payments to Medi -Cal providers with respect to various services. It is
unknown whether the State will continue to reduce outlays for Medi -Cal programs.
Health Plans and Managed Care. Most private health insurance coverage is provided by various
types of "managed care" plans, including health maintenance organizations ( "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.
In California, managed care plans have replaced indemnity insurance as the prime source of non-
governmental payment for hospital services, and hospitals must be capable of attracting and maintaining
managed care business, often on a regional basis. Regional coverage and aggressive pricing may be
required. However, it is also essential that contracting hospitals be able to provide the contracted services
without significant operating losses, which may require multiple forms of cost containment.
Defined broadly, for each of the fiscal years ended August 31, 2004, August 31, 2005 and
August 31, 2006, managed care payments (including capitated Medicare contracts and all capitated and
non- capitated managed care) constituted approximately 58.8 %, 57.2% and 57.2 %, respectively, of gross
patient service revenues of Hoag Hospital. See APPENDIX A– "INFORMATION CONCERNING
HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTH CARE CENTER LLC
AND OTHER AFFILIATES— SELECTED UTILIZATION AND FINANCIAL INFORMATION —
Sources of Patient Services Revenue."
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.
OHS West:260185418.3 36
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. A 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 from time to time have disputes with managed care payers concerning
payment and contract interpretation issues.
Failure to maintain contracts could have the effect of reducing Hoag Hospital's market share and
net patient services revenues. Conversely, participation may result in lower net income if participating
hospitals are unable to adequately contain their costs. Thus, managed care poses one of the most
significant business risks (and opportunities) the hospitals face.
Regulatory Environment
"Fraud" and "False Claims. " Health care "fraud and abuse" laws have been enacted at the
federal and state levels to broadly regulate the provision of services to government program beneficiaries
and the methods and requirements for submitting claims for services rendered to the beneficiaries. Under
these laws, hospitals and others can be penalized for a wide variety of conduct, including submitting
claims for services that are not provided, billing in a manner that does not comply with government
requirements or including inaccurate billing information, billing for services deemed to be medically
unnecessary, or billings accompanied by an illegal inducement to utilize or refrain from utilizing a service
or product.
Federal and state governments have a broad range of criminal, civil and administrative sanctions
available to penalize and remediate health care fraud, including the exclusion of a hospital from
participation in the Medicare/Medicaid programs, civil monetary penalties, and suspension of
Medicare/Medicaid payments. Fraud and abuse cases may be prosecuted by one or more government
entities and/or private individuals, and more than one of the available sanctions may be, and often are,
imposed for each violation.
Laws governing fraud and abuse may apply to a hospital and to nearly all individuals and entities
with which a hospital does business. Fraud investigations, settlements, prosecutions and related publicity
can have a catastrophic effect on hospitals. See "Enforcement Activity," below. Major elements of these
often highly technical laws and regulations are generally summarized below.
False Claims Act The False Claims Act ( "FCA ") makes it illegal to submit or present a false,
fictitious or fraudulent claim to the federal government, and may include claims that are simply
erroneous. FCA investigations and cases have become common in the health care field and may cover a
range of activity from intentionally inflated billings, to highly technical billing infractions, to allegations
of inadequate care. Violation or alleged violation of the FCA most often results in settlements that
require multi- million dollar payments and compliance agreements. The FCA also permits individuals to
initiate civil actions on behalf of the government in lawsuits called "qui tam" actions. Qui tam plaintiffs,
or "whistleblowers," can share in the damages recovered by the government or recover independently if
the government does not participate. The FCA has become one of the government's primary weapons
against health care fraud. FCA violations or alleged violations could lead to settlements, fines, exclusion
or reputation damage that could have a material adverse impact on a hospital.
OHS West260185418.3 37
Anti - Kickback Law. The federal "Anti- Kickback Law" is a criminal statute that prohibits anyone
from soliciting, receiving, offering or paying any remuneration, directly or indirectly, overtly or covertly,
in cash or in kind, in return for a referral (or to induce a referral) for any item or service that is paid by
any federal or state health care program. The Anti- Kickback Law applies to many common health care
transactions between persons and entities with which a hospital does business, including hospital -
physician joint ventures, medical director agreements, physician recruitment agreements, physician office
leases and other transactions.
Violation or alleged violation of the Anti- Kickback Law most often results in settlements that
require multi- million dollar payments and compliance agreements. The Anti - Kickback Law can be
prosecuted either criminally or civilly. Violation is a felony, subject to a fine of up to $250,000 for each
act (which may be each item or each bill sent to a federal program), imprisonment and/or exclusion from
the Medicare and Medicaid programs. In addition, civil monetary penalties of $10,000 per item or service
in noncompliance (which may be each item or each bill sent to a federal program), or an "assessment" of
three times the amount claimed may be imposed.
Stark Referral Law. The federal "Stark" statute prohibits the referral of Medicare and Medicaid
patients for certain designated health services (including inpatient and outpatient hospital services,
clinical laboratory services, and radiology and other imaging services) to entities with which the referring
physician has a financial relationship. It also prohibits a hospital furnishing the designated services from
billing Medicare, or any other payor or individual, for Medicare - covered services performed pursuant to a
prohibited referral. The government does not need to prove that the entity knew that the referral was
prohibited to establish a Stark violation. if certain technical requirements are met, many ordinary
business practices and economically desirable arrangements between hospitals and physicians arguably
constitute "financial relationships" within the meaning of the Stark statute, thus triggering the prohibition
on referrals and billing. Most providers of the designated health services with physician relationships
have some exposure to liability under the Stark statute.
Medicare may deny payment for all services related to a prohibited referral and a hospital that has
billed for prohibited services may be obligated to refund the amounts collected from the Medicare
program. For example, if an office lease between a hospital and a large group of heart surgeons is found
to violate Stark, the hospital could be obligated to repay CMS for the payments received from Medicare
for all of the heart surgeries performed by all of the physicians in the group for the duration of the lease; a
potentially significant amount. The government may also seek substantial civil monetary penalties, and in
some cases, a hospital may be liable for fines up to three times the amount of any monetary penalty,
and/or be excluded from the Medicare and Medicaid programs. Although Stark does not have an
extensive enforcement history, potential repayments to CMS, settlements, fines or exclusion for a Stark
violation or alleged violation could have a material adverse impact on a hospital.
HIPAA. The Health Insurance Portability and Accountability Act of 1996 ( "HIPAA ") adds
additional criminal sanctions for health care fraud and applies to all health care benefit programs, whether
public or private. HIPAA also provides for punishment of a health care provider for knowingly and
willfully embezzling, stealing, converting or intentionally misapplying any money, funds, or other assets
of a health care benefit program. A health care provider convicted of health care fraud could be subject to
mandatory exclusion from Medicare.
Exclusions from Medicare or Medicaid Participation. The government may exclude a hospital
from Medicare/Medicaid program participation that is convicted of a criminal offense relating to the
delivery of any item or service reimbursed under Medicare or a state health care program, any criminal
offense relating to patient neglect or abuse in connection with the delivery of health care, fraud against
any federal, state or locally financed health care program or an offense relating to the illegal manufacture,
OHS West:2601854i8.3 38
distribution, prescription, or dispensing of a controlled substance. The government also may exclude
individuals or entities under certain other circumstances, such as an unrelated conviction of fraud, or other
financial misconduct relating either to the delivery of health care in general or to participation in a federal,
state or local government program. Exclusion from the Medicare/Medicaid program means that a
hospital would be decertified and no program payments can be made. Any hospital exclusion could be a
materially adverse event.
Compliance with Conditions of Participation. CMS, in its role of monitoring participating
providers' compliance with conditions of participation in the Medicare program, may determine that a
provider is not in compliance with its conditions of participation. In that event, a notice of termination of
participation may be issued or other sanctions potentially could be imposed.
Enforcement Activity. Enforcement activity against health care providers has increased, and
enforcement authorities have adopted aggressive approaches. In the current regulatory climate, it is
anticipated that many hospitals and physician groups will be subject to an audit, investigation, or other
enforcement action regarding the health care fraud laws mentioned above. In addition, enforcement
agencies increasingly pursue sanctions for violations of health care fraud and abuse laws through civil
administrative actions. Administrative regulations may require less proof of a violation than do criminal
laws and, thus, health care providers may have a higher risk of imposition of monetary penalties as a
result of administrative enforcement actions.
Enforcement authorities are often in a position to compel settlements by providers charged with
or being investigated for false claims violations by withholding or threatening to withhold Medicare,
Medicaid and/or similar payments and/or by instituting criminal action. In addition, the cost of defending
such an action, the time and management attention consumed, and the facts of a case may dictate
settlement. Therefore, regardless of the merits of a particular case, a hospital could experience materially
adverse settlement costs, as well as materially adverse costs associated with implementation of any
settlement agreement. Prolonged and publicized investigations could be damaging to the reputation and
business of a hospital, regardless of outcome.
Certain acts or transactions may result in violation or alleged violation of a number of the federal
health care fraud laws described above, and therefore penalties or settlement amounts often are
compounded. Generally these risks are not covered by insurance. Enforcement actions may involve
multiple hospitals in a health system, as the government often extends enforcement actions regarding
health care fraud to other hospitals in the same organization. Therefore, Medicare fraud related risks
identified as being materially adverse as to a hospital could have materially adverse consequences to a
health system taken as a whole.
Liability Under State "Fraud" and "False Claims" Laws. Hospital providers in California also
are subject to a variety of state laws, related to false claims (similar to the FCA or that are generally
applicable false claims laws), anti- kickback (similar to the federal Anti- Kickback Law or that are
generally applicable anti - kickback or fraud laws), and physician referral (similar to Stark). These
prohibitions while similar in public policy and scope to the federal laws have not in all instances been
avidly enforced to date. However, in the future they could pose the possibility of material adverse impact
for the same reasons as the federal statutes.
Privacy Requirements. State and federal laws address the confidentiality of individuals' health
information. HIPAA, a federal law addresses the confidentiality of individuals' health information.
Disclosure of certain broadly defined protected health information is prohibited unless expressly
permitted under the provisions of the HIPAA statute and regulations or authorized by the patient.
HIPAA's confidentiality provisions extend not only to patient medical records, but also to a wide variety
OHS West260185418.3 39
of health care clinical and financial settings where patient privacy restrictions often impose new
communication, operational, accounting and billing restrictions. These add costs and create potentially
unanticipated sources of legal liability.
HIPAA imposes civil monetary penalties for violations and criminal penalties for knowingly
obtaining or using individually identifiable health information. The penalties range from $50,000 to
$250,000 and/or imprisonment if the information was obtained or used with the intent to sell, transfer or
use the information for commercial advantage, personal gain or malicious harm.
EMTALA. The Emergency Medical Treatment and Active Labor Act ( "EMTALA ") is a federal
civil statute that requires hospitals to treat or conduct a medical screening for emergency conditions and
to stabilize a patient's emergency medical condition before releasing, discharging or transferring the
patient. A hospital that violates EMTALA is subject to civil penalties of up to $50,000 per offense and
exclusion from the Medicare and Medicaid programs. In addition, the hospital may be liable for any
claim by an individual who has suffered harm as a result of a violation.
Licensing, Surveys, Investigations and Audits. Health facilities are subject to numerous legal,
regulatory, professional and private licensing, certification and accreditation requirements. These
include, but are not limited to, requirements of state licensing agencies and the JCAHO. Renewal and
continuation of certain of these licenses, certifications and accreditations are based on inspections or other
reviews generally conducted in the normal course of business of health facilities. Loss of, or limitations
imposed on, hospital licenses could reduce hospital utilization or revenues, or a hospital's ability to
operate all or a portion of its facilities.
Environmental Laws and Regulations. Hospitals are subject to a wide variety of federal, state
and local environmental and occupational health and safety laws and regulations. These include but are
not limited to: air and water quality control requirements; waste management requirements; specific
regulatory requirements applicable to asbestos and radioactive substances; requirements for providing
notice to employees and members of the public about hazardous materials handled by or located at the
hospital; and requirements for training employees in the proper handling and management of hazardous
materials and wastes.
Hospitals may be subject to requirements related to investigating and remedying hazardous
substances located on their property, including such substances that may have migrated off the property.
Typical hospital operations include the handling, use, storage, transportation, disposal and/or discharge of
hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants and
contaminants. As such, hospital operations are particularly susceptible to the practical, financial and legal
risks associated with the environmental laws and regulations. Such risks may result in damage to
individuals, property or the environment; may interrupt operations and/or increase their cost; may result
in legal liability, damages, injunctions or fines; and may result in investigations, administrative
proceedings, civil litigation, criminal prosecution, penalties or other governmental agency actions; and
may not be covered by insurance. See "Other Risk Factors — Natural Gas" below.
Business Relationships and Other Business Matters
Integrated Physician Groups. Hospitals often own, control or have affiliations with relatively
large physician groups. For a description of Hoag Hospital's affiliations, see APPENDIX A —
"INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT
HEALTH CARE CENTER LLC AND OTHER AFFILIATES — GENERAL — Organizational Structure."
Generally, the sponsoring hospital or health system will be the capital and funding source for such
OAS W"t:26W85418.3 40
alliances and may have an ongoing financial commitment to provide growth capital and support operating
deficits.
These types of alliances are generally designed to respond to trends in the delivery of medicine to
better integrate hospital and physician care, to increase physician availability to the community and/or to
enhance the managed care capability of the affiliated hospitals and physicians. However, these goals may
not be achieved, and an unsuccessful alliance may be costly and counterproductive to all of the above -
stated goals.
Integrated delivery systems carry with them the potential for legal or regulatory risks in varying
degrees. The ability of hospitals or health systems to conduct integrated physician operations may be
altered or eliminated in the future by legal or regulatory interpretation or changes, or by health care fraud
enforcement.
Indigent Care. Tax- exempt hospitals often treat large numbers of indigent patients who are
unable to pay in full for their medical care. Typically, urban, inner -city hospitals may treat significant
numbers of indigents. These hospitals may be susceptible to economic and political changes that could
increase the number of indigents or their responsibility for caring for this population. General economic
conditions that affect the number of employed individuals who have health coverage affects the ability of
patients to pay for their care. Similarly, changes in governmental policy, which may result in coverage
exclusions under local, state and federal health care programs (including Medicare and Medicaid) may
increase the frequency and severity of indigent treatment by such hospitals and other providers. It also is
possible that future legislation could require that tax- exempt hospitals and other providers maintain
minimum levels of indigent care as a condition to federal income tax exemption or exemption from
certain state or local taxes.
Physician Medical Staff. The primary relationship between a hospital and physicians who
practice in it is through the hospital's organized medical staff. Medical staff bylaws, rules and policies
establish the criteria and procedures by which a physician may have his or her privileges or membership
curtailed, denied or revoked. Physicians who are denied medical staff membership or certain clinical
privileges or who have such membership or privileges curtailed or revoked often file legal actions against
hospitals and medical staffs. Such actions may include a wide variety of claims, some of which could
result in substantial uninsured damages to a hospital. In addition, failure of the hospital governing body
to adequately oversee the conduct of its medical staff may result in hospital liability to third parties.
Competition Among Health Care Providers. Increased competition from a wide variety of
sources, including specialty hospitals, other hospitals and health care systems, inpatient and outpatient
health care facilities including surgery centers and imaging centers, long -term care and skilled nursing
services facilities, clinics, physicians and others, may adversely affect the utilization and/or revenues of
hospitals. Existing and potential competitors may not be subject to various restrictions applicable to
hospitals, and competition, in the future, may arise from new sources not currently anticipated or
prevalent. See APPENDIX A — SERVICE AREA AND COMPETITION.
Specialty hospital developments that attract away an important segment of an existing hospital's
admitting specialists may be particularly damaging. For example, some large hospitals may have
significant dependence on heart surgery programs, as revenue streams from those programs may cover
significant fixed overhead costs. If a significant component of such a hospital's heart surgeons develop
their own specialty heart hospital (alone or in conjunction with a growing number of specialty hospital
operators and promoters) taking with them their patient base, the hospital could experience a rapid and
dramatic decline in net revenues that is not proportionate to the number of patient admissions or patient
days lost. It is also possible that the competing specialty hospital, as a for - profit venture, would not
OHS West:260185418.3 41
accept indigent patients or other payors and government programs, leaving low -pay patient populations in
the full- service hospital. In certain cases, such an event could be materially adverse to the hospital. A
moratorium under Stark on physician investment in new specialty hospitals recently expired. A variety of
proposals have been advanced recently to permanently prohibit such investments. Nonetheless, specialty
hospitals and other outpatient surgery and imaging facilities continue to represent a significant
competitive challenge for full- service hospitals.
Additionally, scientific and technological advances, new procedures, drugs and appliances,
preventive medicine and outpatient health care delivery may reduce utilization and revenues of the
hospitals in the future or otherwise lead the way to new avenues of competition. In some cases, hospital
investment in facilities and equipment for capital- intensive services may be lost as a result of rapid
changes in diagnosis, treatment or clinical practice brought about by new technology or new
pharmacology.
Antitrust While enforcement of the antitrust laws against hospitals has been less intense in
recent years, antitrust liability may arise in a wide variety of circumstances, including medical staff
privilege disputes, payor contracting, physician relations, joint ventures, merger, affiliation and
acquisition activities, certain pricing or salary setting activities, as well as other areas of activity. The
application of the federal and state antitrust laws to health care is evolving, and therefore not always clear.
Currently, the most common areas of potential liability are joint action among providers with respect to
payor contracting and medical staff credentialing disputes.
Violation of the antitrust laws could result in criminal and/or civil enforcement proceedings by
federal and state agencies, as well as actions by private litigants. In certain actions, private litigants may
be entitled to treble damages, and in others, governmental entities may be able to assess substantial
monetary fines.
Labor Relations and Collective Bargaining. Hospitals are large employers with a wide diversity
of employees. Increasingly, employees of hospitals are becoming unionized, and many hospitals have
collective bargaining agreements with one or more labor organizations. Employees subject to collective
bargaining agreements may include essential nursing and technical personnel, as well as food service,
maintenance and other trade personnel. Renegotiation of such agreements upon expiration may result in
significant cost increases to hospitals. Employee strikes or other adverse labor actions may have an
adverse impact on operations, revenue and hospital reputation.
Hoag Hospital's employees currently are not covered by collective bargaining agreements. See
APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL
PRESBYTERIAN, NEWPORT HEALTH CARE CENTER LLC AND OTHER AFFILIATES —
EMPLOYEES."
Health Care Worker Classification. Health care providers, like all businesses, are required to
withhold income taxes from amounts paid to employees. If the employer fails to withhold the tax, the
employer becomes liable for payment of the tax imposed on the employee. On the other hand, businesses
are not required to withhold federal taxes from amounts paid to a worker classified as an independent
contractor. The IRS has established criteria for determining whether a worker is an employee or an
independent contractor for tax purposes. If the IRS were to reclassify a significant number of hospital
independent contractors (e.g., physician medical directors) as employees, back taxes and penalties could
be material.
Stang. In recent years, the health care industry has suffered from a scarcity of nursing
personnel, respiratory therapists, pharmacists and other trained health care technicians. A significant
OHS West260185418.3 42
factor underlying this trend includes a decrease in the number of persons entering such professions. This
is expected to intensify in the future, aggravating the general shortage and increasing the likelihood of
hospital- specific shortages. Competition for employees, coupled with increased recruiting and retention
costs will increase hospital operating costs, possibly significantly, and growth may be constrained. This
trend could have a material adverse impact on hospitals.
Regulations to implement a law passed by the California legislature in 1999 calling for minimum
nurse to patient staffing ratios have been the subject of attention by California healthcare officials, unions,
the national media, and Governor Arnold Schwarzenegger. The controversial rules require hospitals to
maintain a ratio of one nurse to every five patients in medical/surgical units, effective January 1, 2005.
The required staffing, in aggregate, is more costly than past staffing patterns.
Professional Liability Claims and General Liability Insurance. In recent years, the number of
professional and general liability suits and the dollar amounts of damage recoveries have increased in
health care nationwide, resulting in substantial increases in malpractice insurance premiums, higher
deductibles and generally less coverage. Professional liability and other actions alleging wrongful
conduct and seeking punitive damages are often filed against health care providers. Insurance does not
provide coverage for judgments for punitive damages.
Litigation also arises from the corporate and business activities of hospitals, from a hospital's
status as an employer or as a result of medical staff or provider network peer review or the denial of
medical staff or provider network privileges. As with professional liability, many of these risks are
covered by insurance, but some are not. For example, some antitrust claims or business disputes are not
covered by insurance or other sources and may, in whole or in part, be a liability of Hoag Hospital if
determined or settled adversely.
There is no assurance that hospitals will be able to maintain coverage amounts currently in place
in the future, that the coverage will be sufficient to cover malpractice judgments rendered against a
hospital or that such coverage will be available at a reasonable cost in the future.
Tax- Exempt Status and Other Tax Matters
Maintenance of the Tax - Exempt Status of Hoag Hospital The tax- exempt status of the Bonds
presently depends upon maintenance by Hoag Hospital of its status as an organization described in
section 501(c)(3) of the Code. The maintenance of such status is contingent on compliance with general
rules promulgated in the Code and related regulations regarding the organization and operation of tax -
exempt entities, including their operation for charitable and other permissible purposes and their
avoidance of transactions that may cause their earnings or assets to inure to the benefit of private
individuals. As these general principles were developed primarily for public charities that do not conduct
large -scale technical operations and business activities, they often do not adequately address the myriad
of operations and transactions entered into by a modern health care organization. Although traditional
activities of health care providers, such as medical office building leases, have been the subject of
interpretations by the IRS in the form of Private Letter Rulings, many activities or categories of activities
have not been fully addressed in any official opinion, interpretation or policy of the IRS.
Hoag Hospital participates in a variety of transactions with physicians either directly or indirectly.
Management believes that the transactions to which Hoag Hospital is a party are consistent with the
requirements of the Code as to tax- exempt status, but, as noted above, there is uncertainty as to the state
of the law.
OHS west26 01 8 541 8.3 43
The IRS has periodically conducted audit and other enforcement activity regarding tax- exempt
health care organizations. The IRS conducts special audits of large tax- exempt health care organizations
with at least $500 million in assets or $1 billion in gross receipts. Such audits are conducted by teams of
revenue agents, often take years to complete and require the expenditure of significant staff time by both
the IRS and taxpayers. These audits examine a wide range of possible issues, including tax- exempt bond
financing of partnerships and joint ventures, retirement plans and employee benefits, employment taxes,
political contributions and other matters.
If the IRS were to find that Hoag Hospital has participated in activities in violation of certain
regulations or rulings, the tax- exempt status of such entity could be in jeopardy. Although the IRS has
not frequently revoked the 501(c)(3) tax- exempt status of nonprofit health care corporations, it could do
so in the future. Loss of tax- exempt status by Hoag Hospital potentially could result in loss of tax
exemption of the Bonds and of other tax- exempt debt of Hoag Hospital and defaults in covenants
regarding the Bonds and other related tax - exempt debt and obligations likely would be triggered. Loss of
tax- exempt status also could result in substantial tax liabilities on income of Hoag Hospital. For these
reasons, loss of tax- exempt status of Hoag Hospital could have a material adverse effect on the financial
condition of Hoag Hospital.
In some cases, the IRS has imposed substantial monetary penalties on tax- exempt hospitals in lieu
of revoking their tax- exempt status. In those cases, the IRS and tax- exempt hospitals entered into
settlement agreements requiring the hospital to make substantial payments to the IRS. Given the size of
Hoag Hospital, the wide range of complex transactions entered into by it, and potential exemption risks,
Hoag Hospital could be at risk for incurring monetary and other liabilities imposed by the IRS.
In lieu of revocation of exempt status, the IRS may impose penalty excise taxes on certain
"excess benefit transactions" involving 501(c)(3) organizations and "disqualified persons." An excess
benefit transaction is one in which a disqualified person or entity receives more than fair market value
from the exempt organization or pays the exempt organization less than fair market value for property or
services, or shares the net revenues of the tax- exempt entity. A disqualified person is a person (or an
entity) who is in a position to exercise substantial influence over the affairs of the exempt organization
during the five years preceding an excess benefit transaction. The statute imposes excise taxes on the
disqualified person and any "organization manager" who knowingly participates in an excess benefit
transaction. These rules do not penalize the exempt organization itself, so there would be no direct
impact on Hoag Hospital or the tax status of the Bonds if an excess benefit transaction were subject to
IRS enforcement, pursuant to these "intermediate sanctions" rules.
State and Local Tax Exemption. Until recently, the state of California has not been as active as
the IRS in scrutinizing the income tax exemption of health care organizations. In California it is possible
that legislation may be proposed to strengthen the role of the California Franchise Tax Board and the
Attorney General in supervising nonprofit health systems. It is likely that the loss by Hoag Hospital of
federal tax exemption would also trigger a challenge to its state tax- exemption. Depending on the
circumstances, such event could be material and adverse.
State, county and local taxing authorities undertake audits and reviews of the operations of tax -
exempt health care providers with respect to their real property tax exemptions. In some cases,
particularly where authorities are dissatisfied with the amount of services provided to indigents, the real
property tax- exempt status of the health care providers has been questioned. The majority of the real
property of Hoag Hospital is currently treated as exempt from real property taxation. Although the real
property tax exemption of Hoag Hospital with respect to their core hospital facilities has not, to the
knowledge of management, been under challenge or investigation, an audit could lead to a challenge that
could adversely affect the real property tax exemption of Hoag Hospital.
OHS West:260185418.3 44
It is not possible to predict the scope or effect of future legislative or regulatory actions with
respect to taxation of nonprofit corporations. There can be no assurance that future changes in the laws
and regulations of state or local governments will not materially adversely affect the financial condition
of Hoag Hospital by requiring payment of income, local property or other taxes.
Maintenance of Tax- Exempt Status of Interest on the Bonds. The Code imposes a number of
requirements that must be satisfied for interest on state and local obligations, such as the Bonds, to be
excludable from gross income for federal income tax purposes. These requirements include limitations
on the use of bond proceeds, limitations on the investment earnings of bond proceeds prior to expenditure,
a requirement that certain investment earnings on bond proceeds be paid periodically to the United States
Treasury, and a requirement that the City file an information report with the IRS. Hoag Hospital has
covenanted in the Loan Agreement that it will comply with such requirements. Future failure by Hoag
Hospital to comply with the requirements stated in the Code and related regulations, rulings and policies
may result in the treatment of interest on the Bonds as taxable, retroactively to the date of issuance. The
City has covenanted in the Bond Indenture that it will not take any action or refrain from taking any
action that would cause interest on the Bonds to be included in gross income for federal income tax
purposes.
IRS officials have recently indicated that more resources will be invested in audits of tax- exempt
bonds in the charitable organization sector. The Bonds may be, from time to time, subject to audits by the
IRS. Hoag Hospital believes that the Bonds properly comply with the tax laws. In addition, Bond
Counsel will render an opinion with respect to the tax- exempt status of the Bonds, as described under the
caption "TAX MATTERS." Hoag Hospital has not sought to obtain a private letter ruling from the IRS
with respect to the Bonds, and the opinion of Bond Counsel is not binding on the IRS. There is no
assurance that an IRS examination of the Bonds will not adversely affect the market value of the Bonds.
See "TAX MATTERS" herein.
Limitations on Contractual and Other Arrangements Imposed by the Internal Revenue Code.
As a tax- exempt organization, Hoag Hospital is limited with respect to 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. Uncertainty in this area has been reduced somewhat by the
issuance by the IRS of guidelines on permissible physician recruitment practices. The IRS scrutinizes a
broad variety of contractual relationships commonly entered into by hospitals and has issued a detailed
audit guide suggesting that field agents scrutinize numerous activities of the hospitals in an effort to
determine whether any action should be taken with respect to limitations on or revocation of their tax -
exempt status or assessment of additional tax. Any suspension, limitation or revocation of Hoag
Hospital's tax- exempt status or assessment of significant tax liability would have a materially adverse
effect on Hoag Hospital and might lead to loss of tax exemption of interest on the Bonds.
Future Legislation
California Universal Health Care Proposal. Recently, several proposals have emerged that
would, if enacted, expand health care coverage for individuals in California. For example, Governor
Schwarzenegger has proposed a plan to enact legislation to require universal health insurance coverage in
California. As currently proposed, coverage would be funded by cost containment measures such as
reducing regulatory requirements, requiring facilities and providers to implement measures to prevent
medical errors and health provider acquired infections, and promoting healthy lifestyles, as well as the
following fundraising measures: (a) increasing employment fees on California employers who have at
least ten employees and who do not provide insurance coverage for those employees, (b) increasing
payments to physicians and hospitals through improved Medi -Cal reimbursement rates, (c) requiring
physicians and hospitals to contribute 2% and 4% of their gross revenues, respectively, to a fund used to
OHS West:260185418.3 45
finance the proposal, and (d) redirecting funds currently used to reimburse providers for indigent care.
An additional component of the proposal would require insurers and hospitals to apply at least 85% of
their premium and spending on patient care rather than profit and administration. In addition, the
proposal would establish potentially significant new regulatory requirements on .California hospitals
related to use of health information technology. The proposal continues to be revised, and it is not clear
whether or in what form the proposal will be enacted, nor what impact the proposal would have on the
health care industry.
If legislation were enacted in accordance with the above proposal or other similar health care
reform efforts, California hospitals would potentially get higher reimbursement from Medi -Cal, and for
indigent care, and perhaps higher private insurance payments, offset by a potentially significant "tax" on
revenues and the cost of complying with additional regulatory requirements. It is not possible to gauge at
this time whether the offset would be positive or negative to California hospitals generally or to Hoag
Hospital in particular.
Charity Care Legislation. Legislative bodies have considered legislation concerning the charity
care standards that nonprofit, charitable hospitals must meet to maintain their federal income tax - exempt
status under the Code and legislation mandating that nonprofit, charitable hospitals have an open -door
policy toward Medicare and Medicaid patients as well as offer, in a non - discriminatory manner, qualified
charity care and community benefits. Excise tax penalties on nonprofit, charitable hospitals that violate
these charity care and community benefit requirements could be imposed or their tax - exempt status under
the Code could be revoked. The scope and effect of.legislation, if any, that may be enacted at the federal
or state levels with respect to charity care of nonprofit hospitals cannot be predicted. Any such legislation
or similar legislation, if enacted, could have the effect of subjecting a portion of the income of an
Obligated Group Member to federal or state income taxes or to other tax penalties and adversely affect
the ability of the Obligated Group Members individually and of the Obligated Group, taken as a whole, to
generate net revenues sufficient to meet its obligations and to pay the debt service on the Bonds and its
other obligations.
Bond Insurance
In the event payment of the principal of and interest on any of the Bonds when the same become
due are not paid, any owner of Bonds will have recourse against the Bond Insurer for such payments
under the Bond Insurance Policy. However, the Bond Insurance Policy does not insure the principal of or
interest on the Bonds so insured coming due by reason of acceleration or optional redemption, nor does it
insure the payment of any redemption premium payable upon the redemption of the Bonds. See "BOND
INSURANCE" above.
There can be no assurance that the Bond Insurer will be financially able to meet its contractual
obligations under the Bond Insurance Policy. In the event that the Bond Insurer is unable to make
payments of principal of or interest on any series of the Bonds insured by it, such Bonds will be payable
solely from the other sources specified in the Bond Indenture.
Under no circumstances, including the situation in which interest on the Bonds becomes subject
to federal taxation for any reason, can the Bonds of a series be accelerated except with the consent of the
Bond Insurer as long as the Bond Insurer is not insolvent or in default under the Bond Insurance Policy.
Furthermore, so long as the Bond Insurer performs its obligations under the Bond Insurance Policy, the
Bond Insurer may direct, and must consent to, any remedies that the Bond Trustee exercises under the
Bond Indentures.
OHS West260185418.3 46
Holders of the Bonds should note that although the Bond Insurance Policy will insure payment of
the principal amount (but not any premium) that is paid to any owner in connection with the optional or
extraordinary redemption of any Bonds that is recovered from such owner as a voidable preference under
applicable bankruptcy laws, such amounts will be repaid by the Bond Insurer to such owner only at such
times and in such amounts as would have applied in the absence of such redemption.
Other Risk Factors
Facility Damage, Earthquakes and other Disasters. The occurrence of a natural or man -made
disaster could damage the Obligated Group's facilities, interrupt utility service to such facilities, result in
an abnormally high demand for health care services or otherwise impair the Obligated Group's operations
and the generation of revenues from the facilities effected. Further, many hospitals in California are in
close proximity to active earthquake faults. A significant earthquake in California could destroy or
disable the hospital facility of Hoag Hospital or the NHC.
California requires each acute care hospital in the state to either comply with new hospital
seismic safety standards or cease acute care operations by January I, 2008. Delays in compliance with
the January I, 2008 deadline will be permitted if a hospital shows that capacity lost in the closure of a
facility cannot be provided by another facility in the area or if a hospital agrees that on or before January
1, 2013, designated services will be provided by moving into an existing conforming building, relocating
to a newly built building or continuing in the building as retrofitted to comply with the standards. The
2013 deadline may be extended up to two years to January I, 2015 if a hospital demonstrates certain
requirements, including that it is under construction at the time of the request for the extension, it has
made reasonable progress in meeting the deadline, and it cannot meet the deadline due to reasons beyond
its control.
Natural Gas. Hoag Hospital is located in an area subject to the natural gas seepage of methane
and hydrogen sulfide. Methane is a malodorous asphyxiate as well as being highly explosive at certain
concentrations in the air. The gas seepage is the result of geological conditions that permit the vertical
migration of gas from the West Newport Oil Field. This geological condition is in close proximity to the
surface underneath the Lower Campus. To address the potential hazards associated with this gas seepage
Hoag Hospital has designed and constructed a gas extraction and treatment facility capable of extracting
the gas from the underlying strata before it is able to reach the surface. Each year the Hoag Hospital plant
removes approximately 42 million cubic feet of gases from the underlying strata. Hoag Hospital utilizes, a
Portion of the extracted gas to assist in the heating and cooling of its facilities. In 2002, the extraction and
treatment facility was awarded recognition from the Orange County Chapter of the American Society of
Civil Engineers as the "Best Environmental Project of the Year." In addition, the structures on the Lower
Campus, including structures encompassed by the Project, were and will be constructed with gas
mitigation measures including subslab gas impermeable membrane, interior ventilation and interior gas
detection systems.
Risks Related to Outstanding Variable Rate Obligations. The Bonds will be variable rate
obligations, the interest rates on which could rise significantly. Such interest rates vary on a periodic
basis and may be converted to a fixed interest rate. This protection against rising interest rates is limited,
however, because Hoag Hospital would be required to continue to pay interest at the variable rate until it
is permitted to convert the obligations to a fixed rate pursuant to the terms of the applicable transaction
documents.
Hoag Hospital has entered into an interest rate swap agreement which will be subject to periodic
"mark -to- market" valuations and at any time may have a negative value to Hoag Hospital. The Swap
counterparty may terminate the Swap upon the occurrence of certain "termination events" or "events of
OHS Wesi:260185418.3 47
default." Hoag Hospital may terminate the Swap at any time. If either the counterparty to the Swap or
Hoag Hospital terminates any of the Swap during a negative value situation, Hoag Hospital may be
required to make a termination payment to such Swap cotmterparty, and such payment could be material.
See APPENDIX A — "INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL
PRESBYTERIAN, NEWPORT HEALTH CARE CENTER LLC AND OTHER AFFILIATES —
SELECTED UTILIZATION AND FINANCIAL INFORMATION — Indebtedness and Certain
Liabilities."
Liquidity. The obligation of Hoag Hospital to purchase certain of its prior obligations upon
optional or mandatory tender is not supported by a liquidity facility or a covenant of Hoag Hospital to
maintain levels of liquid assets (although Hoag Hospital may elect to provide such a liquidity facility in
the future). The Bonds are not subject to optional tender while bearing interest at Auction Rates, but if
any Series of Bonds is converted to another Interest Rate Period subject to optional and/or mandatory
tender, Hoag Hospital is obliged to transfer to the Tender Agent sufficient funds to pay the purchase price
of such Bonds, whether or not such Bonds are successfully remarketed. Any proceeds derived from the
remarketing of such Bonds would be transferred to Hoag Hospital.
There is no such assurance that Hoag Hospital will have sufficient available funds to provide for
the purchase of any such tendered Bonds or prior bonds. Such funds may not be available for various
reasons, including a depletion of Hoag Hospital's reserves or the necessity of liquidating investments in
unfavorable market conditions. See APPENDIX A — "INFORMATION CONCERNING HOAG
MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTH CARE CENTER LLC AND
OTHER AFFILIATES — SELECTED UTILIZATION AND FINANCIAL INFORMATION — Liquidity
and Investment Policy — Liquidity Portfolio."
Contributions. Hoag Hospital regularly receives substantial contributions from the Hoag
Hospital Foundation and members of the local community. While Hoag Hospital has an active
contribution development program, there can be no assurances that Hoag Hospital will be the recipient of
substantial contributions in the future. A significant portion of the total cost of the Project (up to $100
million) is to be paid from such contributions. Failure to raise this amount would require Hoag Hospital
to modify the Project or provide additional funds from other reserves or sources. Any reduction in
projected philanthropic support, whether in connection with the Project or otherwise, would have a
material adverse impact on the financial condition of Hoag Hospital.
Investments. Hoag Hospital has significant holdings in a broad range of investments. Market
fluctuations may affect the value of those investments and those fluctuations may be and historically have
been at times material. For a discussion of Hoag Hospital's investments, see APPENDIX A —
"INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT
HEALTH CARE CENTER LLC AND. OTHER AFFILIATES — SELECTED UTILIZATION AND
FINANCIAL INFORMATION— Liquidity and Investment Policy."
Construction Risks. Construction projects are subject to a variety of risks, including but not
limited to delays in issuance of required building permits or other necessary approvals or permits,
including environmental approvals, strikes, shortages of materials and adverse weather conditions. Such
events could delay occupancy. Cost overruns may occur due to change orders, delays in the construction
schedule, changes in scope of development, scarcity of building materials and other factors. Cost
overruns could cause the costs to exceed available funds.
In particular, substantial portions of the Project involve construction of new facilities and
rehabilitation and retrofitting of existing facilities of Hoag Hospital. In such circumstances, the
possibility of cost overruns, scope of work revisions or inadequate initial estimates of cost of completion
OHS West260185418.3 48.
of the Project is particularly acute. Also, some components of the Project are in early stages of
development where costs have been estimated based on architects' and engineers' estimates, but plans,
specifications and construction drawings have not been developed and have not been bid to contractors or
resulted in construction contracts. See APPENDIX A — "INFORMATION CONCERNING HOAG
MEMORIAL HOSPITAL PRESBYTERIAN, NEWPORT HEALTH CARE CENTER LLC AND
OTHER AFFILIATES — FACILITIES DESIGN AND CONSTRUCTION — The Project."
Other Future Risks. In the future, the following factors, among others, may adversely affect the
operations of health care providers, including Hoag Hospital, or the market value of the Bonds, to an
extent that cannot be determined at this time.
(a) Adoption of legislation that would establish a national or statewide single -payor health
program or other health care system legislation or that would establish national, statewide or otherwise
regulated rates applicable to hospitals and other health care providers.
(b) Reduced demand for the services of Hoag Hospital that might result from decreases in
population.
(c) Bankruptcy of an indemnity /commercial Bond Insurer, managed care plan or other payor.
(d) Efforts by Bond Insurers and governmental agencies to limit the cost of hospital services,
to reduce the number of beds and to reduce the utilization of hospital facilities by such means as
preventive medicine, improved occupational health and safety and outpatient care, or comparable
regulations or attempts by third -party payors to control or restrict the operations of certain health care
facilities.
(e) The occurrence of a natural or man -made disaster that could damage Hoag Hospital's
facilities, interrupt utility service to the facilities, result in an abnormally high demand for health care
services or otherwise impair Hoag .Hospital's operations and the generation of revenues from the
facilities.
(f) Limitations on the availability of, and increased compensation necessary to secure and
retain, nursing, technical and other professional personnel.
TAX MATTERS
In the opinion of Orrick, Herrington & Sutcliffe LLP ( "Bond Counsel ") to the City, based upon
an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters,
the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is
excluded from gross income for federal income tax purposes under section 103 of the Code and is exempt
from state of California personal income taxes. Bond Counsel is of the further opinion that interest on the
Bonds is not a specific preference item for purposes of the federal individual or corporate alternative
minimum taxes, although Bond Counsel observes that such interest is included in adjusted current
earnings in calculating corporate alternative minimum taxable income. Bond Counsel expects to deliver
an opinion at the time of issuance of the Bonds substantially in the form set forth in APPENDIX E hereto.
The Code imposes various restrictions, conditions and requirements relating to the exclusion from
gross income for federal income tax purposes of interest on obligations such as the Bonds. The City and
Hoag Hospital have made certain representations and have covenanted to comply with certain restrictions,
conditions and requirements desigued to ensure that interest on the Bonds will not be included in federal
gross income. Inaccuracy of these representations or failure to comply with these covenants may result in
OHS Wtsr.260165416.3 49
interest on the Bonds being included in gross income for federal income tax purposes, possibly from the
date of original issuance of the Bonds. The opinion of Bond Counsel assumes the accuracy of these
representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or
to inform any person) whether any actions taken (or not taken) or events occurring (or not occurring), or
any other matters coming to Bond Counsel's attention after the date of issuance of the Bonds may
adversely affect the value of, or the tax status of interest on, the Bonds.
In addition, Bond Counsel has relied, among other things, on the opinion of Stradling Yocca
Carlson & Rauth, a Professional Corporation, counsel to Hoag Hospital, regarding the current
qualification of Hoag Hospital as an organization described in Section 501(c)(3) of the Code. Such
opinion is subject to a number of qualifications and limitations. Bond Counsel has also relied upon
representations of Hoag Hospital concerning Hoag Hospital's "unrelated trade or business" activities as
defined in Section 513(a) of the Code. Neither Bond Counsel nor counsel to Hoag Hospital has given any
opinion or assurance concerning Section 513(a) of the Code and neither Bond Counsel nor counsel to
Hoag Hospital can give or has given any opinion or assurance about the future activities of Hoag
Hospital, or about the effect of future changes in the Code, the applicable regulations, the interpretation
thereof or the resulting changes in enforcement thereof by the IRS. Failure of Hoag Hospital to be
organized and operated in accordance with the IRS's requirements for the maintenance of their status as
organizations described in section 501(c)(3) of the Code, or to operate the facilities financed by the Bonds
in a manner that is substantially related to Hoag Hospital's charitable purposes under Section 513(a) of
the Code, may result in interest payable with respect to the Bonds being included in federal gross income,
possibly from the date of the original. issuance of the Bonds.
Although Bond Counsel is of the opinion that interest on the Bonds is excluded from gross
income for federal income tax purposes and is exempt from state of California personal income taxes, the
ownership or disposition of, or the accrual or receipt of interest on, the Bonds may otherwise affect a
Beneficial Owner's federal, state or local tax liability. The nature and extent of these other tax
consequences depends upon the particular tax status of the Beneficial Owner or the Beneficial Owner's
other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax
consequences.
Future legislation, if enacted into law, or clarification of the Code, or court decisions, may cause
interest on the Bonds to be subject, directly or indirectly, to federal income taxation or to be subject to or
exempted from state income taxation, or otherwise prevent Beneficial Owners from realizing the full
current benefit of the tax status of such interest. The introduction or enactment of any such future
legislation or clarification of the Code or court decision may also affect the market price for, or
marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisers
regarding any pending or proposed federal tax legislation, as to which Bond Counsel expresses no
opinion.
The opinion of Bond Counsel is based on current legal authority, covers certain matters not
directly addressed by such authorities, and represents Bond Counsel's judgment as to the proper treatment
of the Bonds for federal income tax purposes. It is not binding on the IRS or the courts. Furthermore,
Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the
City or Hoag Hospital, or about the effect of future changes in the Code, the applicable regulations, the
interpretation thereof or the enforcement thereof by the IRS. The City and Hoag Hospital have
covenanted, however, to comply with the requirements of the Code.
Bond Counsel's engagement with respect to the Bonds ends with the issuance of the Bonds, and,
unless separately engaged, Bond Counsel is not obligated to defend the City, Hoag Hospital or the
Beneficial Owners regarding the tax- exempt status of the Bonds in the event of an audit examination by
OHS Wesr.260185418.3 50
the IRS. Under current procedures, parties other than the City, Hoag Hospital and their appointed
counsel, including the Beneficial Owners, would have little, if any, right to participate in, the audit
examination process. Moreover, because achieving judicial review in connection with an audit
examination of tax - exempt bonds is difficult, obtaining an independent review of IRS positions with
which the City or Hoag Hospital legitimately disagree, may not be practicable. Any action of the IRS,
including but not limited to selection of the Bonds for audit, or the course or result of such audit, or an
audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the
Bonds, and may cause the City, Hoag Hospital or the Beneficial Owners to incur significant expense.
APPROVAL OF LEGALITY
Legal matters incident to the issuance of the Bonds are subject to the approving opinion of
Orrick, Herrington & Sutcliffe LLP, as .Bond Counsel to the City. Bond Counsel undertakes no
responsibility for the accuracy, completeness or fairness of this Official Statement. Certain other legal
matters will be passed upon for the City by the City Attorney, for Hoag Hospital by Stradling Yocca
Carlson & Rauth, a Professional Corporation, and for the Underwriter by its counsel, Foley &
Lardner LLP, Chicago, Illinois, which also undertakes no responsibility for the accuracy, completeness or
fairness of this Official Statement. From time to time Stradling Yocca Carlson & Rauth, a Professional
Corporation, represents the Underwriter and the City in matters unrelated to the Bonds.
INDEPENDENT AUDITORS
The consolidated financial statements of Hoag Memorial Hospital Presbyterian as of
August 31, 2006 and 2005 and for the years then ended, included in Appendix B, have been audited by
Ernst & Young LLP, independent auditors, as stated in their report included in Appendix B.
LITIGATION
Hoag Hospital
There is no controversy or litigation of any nature now pending against Hoag Hospital or, to the
knowledge of its officers, threatened, seeking to restrain or enjoin the issuance, sale, execution or delivery
of the Bonds, or in any way contesting or affecting the validity of the Bonds, any proceedings of Hoag
Hospital taken concerning the issuance or sale thereof, the pledge or application of any moneys or
security provided for the payment of the Bonds. There can be no assurance, however, that future
litigation will not have a material adverse effect on Hoag Hospital.
As with most health care providers, Hoag Hospital is subject to certain legal actions that, in whole
or in part, are not or may not be covered by insurance (or reinsurance as to certain self - insured risks)
because of the type of action or amount or types of damages requested (e.g., punitive damages), because
of a reservation of rights by an insurance carrier, or because the action has not proceeded to a stage that
permits full evaluation. There are certain legal actions currently pending against Hoag Hospital known to
management for which insurance coverage is uncertain or inapplicable for the above . reasons.
Management does not anticipate that any such suits will ultimately result in punitive damage awards or
judgments in excess of applicable insurance limits, or if such awards or judgments were to be entered,
that they would have a material adverse impact on the financial condition of Hoag Hospital.
Other than as described above, there is no litigation of any nature now pending against Hoag
Hospital or, to the knowledge of each Member's respective officers, threatened, which, if successful,
would materially adversely affect the operations or financial condition of Hoag Hospital.
OHS West:260185418.3 51
The City
To the knowledge of the officers of the City, there is no litigation of any nature now pending or
threatened against the City, restraining or enjoining the issuance, sale, execution or delivery of the Bonds,
or in any way contesting or affecting the validity of the Bonds, any proceedings of the City taken
concerning the issuance or sale thereof, the pledge or application of any moneys or security provided for
the payment of the Bonds, or the existence or powers of the City relating to the issuance of the Bonds.
RATINGS
Hoag Hospital expects to receive ratings of "AAA" and "Aaa" from Standard & Poor's Ratings
Services, a Division of The McGraw -Hill Companies ( "Standard & Poor's ") and Moody's Investors
Service ( "Moody's), respectively, for the Bonds, with the understanding that, upon the issuance of the
Bonds, the Bond Insurance Policy guaranteeing the scheduled payment of the principal of and interest on
the Bonds when due will be issued by the Bond Insurer. Standard & Poor's and Moody's assigned
underlying ratings on the Bonds of " " and "_," respectively, without regard to the Bond Insurance
Policy. Hoag Hospital has furnished to Standard & Poor's and Moody's certain information and
materials concerning the Bonds and itself. No application was made to any other rating agency for the
purpose of obtaining additional ratings on the Bonds. Any explanation of the significance of such ratings
may only be obtained from the rating agency furnishing the same. Generally, rating agencies base their
ratings on such information and materials and on investigations, studies and assumptions made by the
rating agencies themselves. There is no assurance that the ratings mentioned above will remain in effect
for any given period of time or that they might not be lowered or withdrawn entirely by the rating
agencies, if in their judgment circumstances so warrant. The City has undertaken no responsibility either
to bring to the attention of the Holder or beneficial owners of the Bonds any proposed change in or
withdrawal of any rating or to oppose any such proposed revision or withdrawal. Any such downward
change in or.withdrawal.of the ratings might have an adverse effect on the market price or marketability
of the Bonds.
UNDERWRITING
The Bonds are being purchased by Citigroup Global Markets Inc. (the "Underwriter "). Pursuant
to the Purchase Contract for the Bonds, the Underwriter has agreed to purchase the Bonds at a purchase
price of $ (consisting of the aggregate .principal amount of the Bonds of $[AGGREGATE PAR
AMOUNT], less an underwriter's discount of $ The Purchase Contract for the Bonds
provides that the Underwriter will purchase all of the Bonds, if any are purchased, and contains the
agreements of Hoag Hospital to indemnify the Underwriter and the City against certain liabilities.
The initial public offering.price of the Bonds set forth on the inside cover page may be changed
without notice by the Underwriter.
CERTAIN RELATIONSHIP
Citibank N.A., New York, a party to the Interest Rate Swap Agreements, is affiliated with the
Underwriter.
FINANCLAL ADVISOR TO HOAG HOSPITAL
Kaufman, Hall & Associates, has served as financial advisor to Hoag Hospital in connection with
the financing described in this Official Statement. Kaufman, Hall & Associates is a national consulting
OHS West:260185418.3 52
firm which acts as financial advisor to healthcare organizations, particularly in the areas of short- and
long -term debt financings, mergers and acquisitions and overall capital planning.
MISCELLANEOUS
The foregoing and subsequent summaries or descriptions of provisions of the Bonds, the Bond
Indenture, the Loan Agreement, the Master Indenture, Supplement No. I and Obligation No. I and all
references to other materials not purporting to be quoted in full are only brief outlines of some of the
provisions thereof and do not purport to summarize or describe all of the provisions thereof, and reference
is made to said documents for full and complete statements of their provisions. The appendices attached
hereto are a part of this Official Statement. Copies, in reasonable quantity, of the Bond Indenture, the
Loan Agreement, the Master Indenture, Supplement No. I and Obligation No. I may be obtained during
the offering period upon request directed to the Underwriter and, thereafter, upon request directed to the
corporate trust office of the Bond Trustee.
The information contained in this Official Statement has been compiled or prepared from
information obtained from Hoag Hospital and official and other sources deemed to be reliable and, while
not guaranteed as to completeness or accuracy, is believed to be correct as of the date of this Official
Statement. The City furnished only the information contained under the headings "THE CITY" and
"LITIGATION —The City" and, except for such information, makes no representation as to the adequacy,
completeness or accuracy of this Official Statement or the information contained herein. Any statements
involving matters of opinion, whether or not expressly so stated, are intended as such and not as
representations of fact.
OHS West:260185418.3 53
This Official Statement has been delivered by the City and approved by Hoag Hospital. The
Bond Trustee has not participated in the preparation of this Official Statement. This Official Statement is
not to be construed as a contract or agreement among any of the City, Hoag Hospital and the purchasers
or Holders of the Bonds.
CITY OF NEWPORT BEACH
in
Mayor
Approved:
HOAG MEMORIAL HOSPITAL
PRESBYTERIAN
By: /s/ Jennifer C. Mitzner
Vice President Finance and
Chief Financial Officer
OHS West260185418.3 54
APPENDIX A
INFORMATION CONCERNING HOAG MEMORIAL HOSPITAL PRESBYTERIAN,
NEWPORT HEALTH CARE CENTER LLC AND OTHER AFFILIATES
OHS WesC260185418.3 A -1
APPENDIX B
FINANCIAL STATEMENTS OF HOAG MEMORIAL HOSPITAL
PRESBYTERIAN AND AFFILIATES
OHS Wes[:260185418.3 B -1
APPENDIX C
AUCTION PROCEDURES
OHS Wese260185418.3 C -1
APPENDIX D
SUMMARY OF PRINCIPAL DOCUMENTS
OHS West 260185418.3 D -1
APPENDIX E
FORM OF OPINION OF BOND COUNSEL
OHS West2601 8 5 41 8.3 E -1
APPENDIX F
FORM OF CONTINUING DISCLOSURE AGREEMENT
OHS W esl:260185418.3 F -1
APPENDIX F
FORM OF CONTINUING DISCLOSURE AGREEMENT
OHS West:260185418.3 F -1
APPENDIX G
SPECIMEN OF BOND INSURANCE POLICY
OHS West260185418.3 G -1
DRAFT
4/23/07
APPENDIX A
INFORMATION CONCERNING
HOAG MEMORIAL HOSPITAL PRESBYTERIAN,
NEWPORT HEALTHCARE CENTER, LLC
AND OTHER AFFILIATES
The information contained in this Appendix A has been obtained from Hoag Memorial Hospital Presbyterian.
OHS Wesr.260219584.1
GENERAL
History
DRAFT
4/23/07
Hoag Memorial Hospital Presbyterian (the "Corporation ") was incorporated as a nonprofit corporation
under the laws of the State of California on May 22, 1944. The Corporation is currently operating as a nonprofit
public benefit corporation under the laws of the State of California. The Corporation is an organization described in
Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code "), and is not a private foundation
under Section 509 of the Code. The initial funding for the Corporation was provided in half by the George Hoag
Family Foundation and in half by funds raised from the community through the Presbyterian Church.
Mission
The Corporation's mission as a not - for - profit, faith -based hospital is to provide the highest quality
healthcare services to the communities it serves. Inspired by the vision of its founders and community partners and
the dedication of its employees and physicians, the Corporation is committed to being a leading hospital in
California, renowned for its excellence, specialized healthcare services, and exceptional physicians and staff. The
Corporation promotes five core values: excellence, respect, integrity, patient centeredness and community benefit.
Core Strategies
To realize its vision, the Corporation has established a 10 -year strategic plan which includes key initiatives
in the areas of quality and service, people, physician partnerships, strategic growth, fmancial stewardship and
community benefit and philanthropy.
Quality and Service: The Corporation strives to be recognized as a leading hospital in California for its
excellent performance in safety, service, and clinical quality. To accomplish its goals, the Corporation continues to
redefine and streamline its operational processes to improve service to patients and referring physicians, and seeks to
enhance its capabilities in performance improvement for specific clinical conditions and patient safety. Additionally,
the Corporation plans to realign the Hospital's medical staff along service lines.
People: The Corporation is committed to attracting, developing, and retaining a high - performing workforce
and developing a workplace environment that reflects the organization's values and commitment to employees. Key
initiatives to support this strategy include development and implementation of innovative methods of delivering
employee education, and hiring or developing high performance leaders.
Physician Partnership: The Corporation is committed to creating sustainable, mutually beneficial
partnerships with exceptional physicians by looking for additional economic partnership opportunities, expanding
the availability of medical office space within the Hospital's service area, and developing and implementing
physician connectivity tools.
Strategic Growth: The Corporation strives to become the hospital of choice throughout Orange County. As
part of this strategy, the Corporation plans to undertake initiatives to expand the development of its Centers of
Excellence to include a comprehensive service line approach to care and to expand and develop the Hospital's base
of primary care physicians. Hoag's vision for the next decade centers on becoming a regional referral center of
prominence, recognition and significance.
Financial Stewardship: The Corporation is committed to maintaining its financial strength. Specific
initiatives in this area include efforts to increase availability of ambulatory capacity and improve profitability.
Community Benefit and Philanthropy: The Corporation has endeavored to provide resources and partner
with community -based organizations to improve the health of its communities. Additionally, the Corporation will
fully implement Renaissance Hoag, a capital fund- raising campaign that will help transform the hospital from a
great community hospital to an extraordinary medical enterprise. Philanthropy will help the Corporation reach its
OHS West260219584.1
vision through program growth and development, expansion of our facilities, enhancement of technology, and
broadening of our medical staff leadership.
Hospital Facilities
The Corporation established a nonprofit acute care hospital (the "Hospital ") licensed for 75 beds in the City
of Newport Beach, California (the "City ") in 1952. The primary Hospital facility is on a 37 -acre parcel in Newport
Beach in a campus -like setting of 60 buildings which total approximately 890,000 square feet and approximately 2,
271 parking spaces. The Hospital underwent major expansions in 1969, 1974, 1990, and 2005 and is currently
licensed for 511 general acute care beds. Further major improvement projects have been undertaken in recent years
and are ongoing. See "The Project" below. The Corporation provides a wide range of medical, surgical, diagnostic
and therapeutic services, and has established specialty centers referred to as Centers of Excellence in Heart and
Vascular, Cancer, Orthopedics, Women's Health, and Neurosciences. The Hospital is licensed by the Department of
Health Services of the State of California as a general acute care hospital and is accredited by the Joint Commission
on Accreditation of Healthcare Organizations ( "JCAHO" ).
In January of 1991, the Corporation opened the Patty and George Hoag Cancer Center (approximately
60,000 square feet) located on the Hospital's campus in Newport Beach (the "Cancer Center "). The Cancer Center
houses three linear accelerators, a Gamma Knife, a day hospital for chemotherapy, a biotherapeutics laboratory and
physician offices for medical oncologists.
In October of 2005, the Corporation opened the Sue and Bill Gross Women's Pavilion, an all -
encompassing center, located on the Hospital's campus in Newport Beach, which combines progressive technology
with patient education and comfort. The building is a seven -story approximately 320,000 square -foot facility that
has added 102 licensed beds and provides expanded clinical space. The Pavilion serves as the new main entrance for
the Hospital and houses more than 15 new and existing services, including Women's Health Services,
Comprehensive Breast Center, Laboratory Services, Patient Registration, Patient Education and a hospitality center,
as well as 6 new operating rooms. Additionally, the Pavilion has been designed to address variables such as
evolving technologies and healthcare delivery modalities, population growth, aging demographics and healthcare
needs specific to Orange County residents.
In 2006, the Corporation completed the construction of a Cogeneration Plant, a base- loaded plant to
generate power. The new two-story approximately 24,000 square-foot facility is located on the Hospital's campus in
Newport Beach and houses generators capable of supplying as much as 4.5 megawatts of power. The Cogeneration
Plant captures its waste heat and converts it to chilled and hot water which is used for air conditioning and heating
systems of the Hospital to maximize energy output. The Cogeneration Plant became operational in March 2007.
The Corporation has funded previous improvements from its own resources and the proceeds of loans from
prior revenue bond issues of the City, outstanding as of December 31, 2006, in the aggregate principal amount of
$516,000,000. Most recently, the Corporation utilized the proceeds of the City's $200,000,000 Auction Rate
Securities (Hoag Memorial Hospital Presbyterian) 2005 Series A, B and C (the "2005 Bonds "), and additional
monies to fund construction of the Cogeneration Plant, the Sue and Bill Gross Women's Pavilion, replacement of
certain Hospital infrastructure and other general capital expenditures. Proceeds of the 2005 Bonds are not fully
expended. The expansion project being financed with proceeds of the Bonds is a continuation of the project
financed in part with proceeds of the 2005 Bonds and includes other new improvements to the Hospital campus.
See "The Project" below.
The Corporation currently operates two free- standing facilities for outpatient surgery. The first, James
Irvine Surgery Center, was opened on the Hospital campus in 1972 and contains three operating rooms. The second,
Newport Surgicare, opened in 1983, is located four miles from the Hospital in one of four major medical office
buildings in Newport Center and contains four operating rooms.
OHS West:260219584.1 A -2
In 2006, the Corporation continued to expand its commitment to provide quality and convenient healthcare
to the community by opening Hoag Health Center — Woodbury and Hoag Health Center — Newport Beach. With
these two new additions, the Corporation now operates eight medical office buildings ( "Health Centers ") in the
cities of Irvine (approximately 33,000 square feet), North Irvine - Woodbury (approximately 5,800 square feet),
Huntington Beach (approximately 53,000 square feet), Huntington Harbor (approximately 6,500 square feet), Costa
Mesa (approximately 20,000 square feet), Aliso Viejo (approximately 33,000 square feet), Fountain Valley
(approximately 8,263 square feet), and Newport Beach (approximately 300,000 square feet).
The Corporation owns the land and facilities on the main campus in Newport Beach. The Corporation also
owns the facilities and land in Huntington Beach, Irvine and Aliso Viejo Health Centers, owns the facility in
Huntington Harbor, and leases space in the Costa Mesa and North Irvine — Woodbury. The Hoag Health Center
facility in Newport Beach is owned and operated by Newport Healthcare Center, LLC, a wholly owned subsidiary of
the Corporation.
Newport Healthcare Center
In February 2006, Newport Healthcare Center, LLC ( "NHC "), a wholly owned subsidiary of the
Corporation, purchased the Newport Technology Center, approximately 300,000 square feet facility located several
blocks north of the Hospital's campus. The office complex will provide space for medical services, including
expansion for outpatient imaging services, such as multi -slice CT, Pet Scan and advanced MRI, as well as physician
medical office space. The office complex will also provide space for certain administrative functions. The planned
use for the facility is subject to change. NHC will be required to obtain city approvals to fully transition the property
from its current approvals for office and research/development to medical offices space. There can be no assurance
that the required approvals will be obtained.
ORGANIZATIONAL STRUCTURE
Obligated Group
As defined in the Master Indenture dated May I, 2007, the Corporation and NHC are the sole Members of
the Obligated Group. However, the Corporation is the sole shareholder or is otherwise affiliated with several
entities consisting of other wholly -owned subsidiaries and affiliates. References herein to the "Obligated Group" or
"Members" mean the Corporation and NHC as of this date, although other entities may become Members of the
Obligated Group in the future in accordance with the terms of the Master Indenture.
In 2005, NHC was formed as a wholly-owned subsidiary of the Corporation to own and operate a medical
office building as described above. The Corporation originally capitalized NHC with $85 million. The Board of
Directors of the Corporation has authorized additional funding in fiscal year 2007 in the amount of $35 million, of
which $8.4 million has been funded as of December 31, 2006.
Other Affiliated Entities Not Members of the Obligated Group
Wholly -Owned Subsidiaries Which Are Immaterial Affiliates
The Corporation is the sole shareholder and appoints one -half of the board members of Coastal Physician
Purchasing Group Inc. ( "CPPG "), a for - profit corporation which provides shared purchasing services for physicians.
The Corporation is also the sole shareholder and appoints all the board members for Hoag Practice Management Inc.
( "HPMI "), a for -profit corporation which provides physician practice management and billing services to
physicians. The Corporation has capitalized HPMI with $10 million; however, the Corporation does not plan to
expand or grow this line of business. The Corporation is also the sole member of Bluff View, LLC, an entity
created in 2006 for the purpose of purchasing certain non - operating property. As of August 31, 2006, the net assets
of Bluff View, LLC were $0.8 million. Bluff View, CPPG and HPMI, collectively referred to herein as "Immaterial
Affiliates" as defined in the Master Trust Indenture dated May 1, 2007, are not Members of the Obligated Group and
are not obligated with respect to the Bonds.
OHS West:260219584.1 A -3
References herein to the "Wholly -Owned Subsidiaries" shall mean Bluff View, CPPG, HPMI and
NHC; however, Bluff View, CPPG and HPMI are not Members of the Obligated Group and are not obligated
with respect to the Bonds.
The Corporation is also affiliated with the Hoag Hospital Foundation, Newport Imaging Center, Newport
Beach Lido Surgery Center, and Orthopedic Surgery Center of Orange County, and these entities, together with
CPPG and HPMI, are included in the consolidated financial statements of the Corporation and are referred to herein
as "Other Affiliates." The Other Affiliates are not Members of the Obligated Group and are not obligated
with respect to the Bonds.
Hoag Hospital Foundation
The Hospital receives support through Hoag Hospital Foundation (the "Foundation ") which is a separate
nonprofit 501(c)(3) corporation. The Board of Directors of the Foundation is elected by the Board of Directors of
the Corporation. Under the direction of the Foundation, there are four support groups with a total membership of
over 3,000 men and women. The audited financial statements of the Foundation are consolidated with those of the
Corporation. The assets and liabilities of the Foundation are primarily included in the temporarily and permanently
restricted net assets in the consolidated financial statements. As of August 3I, 2006, the Foundation's total assets
and total net assets were $I09.2 million and $I06.9 million, respectively. In the fiscal years 2005 and 2006, the
Foundation distributed funds to the Corporation for property and capital additions in the amount of approximately
$9.3 million and $13.7 million, respectively. The Foundation is not a Member of the Obligated Group and is not
obligated with respect to the Bonds.
In addition to the Foundation, there is also an independent 750- member Auxiliary that supports the
Hospital with volunteers and contributions. There are approximately 550 additional volunteers on site.
Other Rfliates
The Corporation is a co- general partner in a two - location imaging center, Newport Imaging Center
( "NIC "). One of the imaging centers is located in one of four major medical office buildings in the Newport Center
facility, and the other within one mile from the main Hospital campus. The Corporation has a controlling interest in
the partnership.
The Corporation is also a member of Newport Beach Lido Surgery Center, LLC ( "NBLSC "), a joint
venture between the Corporation and physicians, formed to operate an ambulatory surgery center ( "ASC ") in a
leased building adjacent to the Hospital. After the initial offering in the fourth quarter of 2006, the Corporation's
current ownership interest in the company is 57 %. NBLSC plans to conduct a secondary offering in 2007 and the
Corporation's ownership interest is expected to be decreased to 50 %. It is anticipated that the ASC will commence
operations in the summer of 2007. NBLSC will be required to obtain certain licenses upon completion of
construction and installation of medical equipment prior to commencement of operations.
Additionally, the Corporation is a member of a limited liability company which operates an outpatient
orthopedic specialty surgery center, The Orthopedic Surgery Center of Orange County, LLC ( "OSCOC "). The
Corporation has a 20% non - controlling interest in OSCOC.
The financial statements of NIC and NBLSC are consolidated with those of the Corporation. The assets and
liabilities of NIC are included in unrestricted net assets in the consolidated financial statements. The results of
operations of OSCOC are not consolidated with the results of operations of the Corporation in its financial
statements. OSCOC, NBLSC and NIC are not Members of the Obligated Group and are not obligated with respect
to the Bonds.
From time to time the Corporation may modify its level of participation in its existing ventures or consider
additional investments in other joint ventures. All such activities are expected to further the Corporation's strategic
interests.
OHS West:260219584.1 A -4
Organization Chart
The following chart depicts the organizational structure of the Corporation, the Corporation's Wholly -
Owned Subsidiaries and other Affiliates.
HOAG MEMORIAL HOSPITAL
PRESBYTERIAN AND AFFILIATES
(AS CONSOLIDATED)
Hoag
Other
Hospital
Joint
Foundation
Ventures
(the
( "Other
"Foundation ")
Entities ":)
Newport
Imaging
Bluff Coastal Hoag.. tenter
View, LLC Physicians Practice ( "WIC ")
IBM Purchasing. Management,
View ") Group, Inc.
Inc.
( "CPPG ") Newport
Beach Lido
Surgery
Center, LLC
( "NBLSC ")
"The Corporation and NHC are the only Member of the Obligated Group.
Integrated Physician Group Relationship
As of August 31, 2006, approximately 12% of the Corporation's and its Wholly -Owned Subsidiaries'
Operating Revenue was "capitation" revenue derived through Greater Newport Physicians Medical Group, Inc.
("Greater Newport"). Greater Newport is an Independent Physicians Association (`IPA ") with approximately 600
physicians contracted to treat approximately 112,000 capitated lives. "Capitation" refers to a financing arrangement
where an amount is paid periodically to a health care provider for specified health services, regardless of quantity of
services rendered; amounts paid are based on a fixed "per member per month" payment. The Hospital is the
primary acute care facility utilized by Greater Newport. The Corporation has a risk sharing agreement with Greater
Newport, which expires on December ') I, 2008. Because both the Corporation and Greater Newport have
agreements with managed care organizations requiring them to provided services to members on a capitated
payment basis, the risk sharing agreement allows for an allocation and reimbursement of costs and expenses
between the Corporation and Greater Newport. The Corporation also contracts to provide outpatient radiology
services to Greater Newport's capitated patients.
The Corporation also has an agreement to provide all management services for Greater Newport. This
agreement expires on December 31, 2007. Although the Corporation has provided the management services for
Greater Newport since it was established in 1985, there can be no assurance this relationship will be continued. For
more information regarding integrated delivery generally, see "BONDHOLDERS' RISES — Business Relationships
and Other Business Matters — Integrated Physician Groups" in this Official Statement.
OHS West:260219554.1 A -5
HOSPITAL SERVICES
Description of Services
The Hospital is an acute care, not - for -profit hospital located on California's Orange County coastline
between Los Angeles and San Diego. Since opening on September 15, 1952, the Hospital has grown from 75 beds
to 511; from 68 doctors to over 1,000 and from 60 employees to more than 4,000. In fiscal year 2006, the
Corporation treated approximately 26,000 inpatients and over 320,000 outpatients.
The Hospital is among the top five percent of hospitals in the nation based on a recent study by
HealthGrades, and is a recipient of the 2007 Distinguished Hospital Award for both Clinical Excellence and Patient
Safety. National Research Corporation has endorsed the Hospital as Orange County's most preferred hospital for the
past 10 consecutive years, and for I I years, residents have chosen the Hospital as the county's best hospital in a
local newspaper survey.
The Corporation provides a full spectrum of health care services including, but not limited to:
• cardiology /cardiac surgery
• community medicine
• comprehensive cancer services
9 chemical dependency
• women's services
9 critical care
• orthopedics and joint replacement
• specialty programs such as sleep
• radiology (e.g., NIRIs and X -rays)
disorders and pain management
• neurological and neurosurgical services
9 other scientific and technical services
• general acute medical and surgical services
needed to treat patients
• robotics
• women's wellness services
• gamma knife
Approximately 44% of all inpatients, excluding newborns, come through the emergency department (ED).
Within the last year, the ED has seen in excess of 60,000 patients, approximately 166 per day, which reflects
continued high census levels.
Centers of Excellence
The Corporation supports five specialty centers referred to as "Centers of Excellence" — Hoag Cancer
Center, Hoag Heart and Vascular Institute, Hoag Orthopedic Services, Hoag Women's Health Services, and Hoag
Neuroscience Institute — through which the Corporation provides a wide range of specialized medical, surgical,
diagnostic and therapeutic services.
Hoag Cancer Center
Designated by the American College of Surgeons as a comprehensive community cancer program in late
1990, Hoag Cancer Center is the largest cancer program in Southern California outside of Los Angeles County, as
measured by number of cases reported to the California State Tumor Registry Board. As Orange County's leading
provider of radiation therapy and cancer care, the center treats more than 2,100 new patients annually.
OHS West:260219584.1 A -6
Hoag Cancer Center provides:
• chemotherapy
• radiation therapy
• sentinel node/lymphatic mapping
• gamma knife treatment of brain tumors
• radioactive seed implantation for prostate
cancer
• stereotactic radiotherapy
• high dose rate brachythyerapy (HDR)
• intensity modulated radiation therapy
(IMRT)
• TomoTherapy
• site specific programs for cancers of the
breast, prostate, gastrointestinal, lung and
brain cancers Biotherapy and
immunotherapy including interleukin -2 and
monoclonal antibodies
• pheresis
• vaccine therapy clinical trials for melanoma,
renal cell cancer, and lung cancer
• hereditary cancer program
• cancer data services
• cell biology research laboratory
• robotic Surgery
• patient and family support programs
• Complementary Care Program — Creative
Expressions Art Program, Yoga, T'ai Chi,
Aerobics, Relaxation/meditation, Brighter
Image, and more
• outpatient treatment clinic with ONS certified
nurses
• inpatient oncology unit with ONS certified
nurses
• outreach education programs to the
community
• weekly containing medical education
conferences for medical staff
• annual comprehensive CME course in
medical oncology for physicians, nurse
practitioners, physician assistants, and
pharmacists
• annual comprehensive CME course for
oncology nurses
• cell biology laboratory that produces
investigational, patient- specific cell products
for cancer therapy
• I -131 therapy for thyroid cancer
• radiolabeled antibody therapy for lymphoma
• comprehensive support and educational
services for patients
Hoag Cancer Center has attained five -year survival rates that exceed national rates as reported by the
National Cancer Institute's Surveillance, Epidemiology and End Results (SEER) program in January 2005.
Hoag Heart and Vascular Institute
Hoag Heart and Vascular Institute delivers comprehensive care for the cardiovascular patient, from
emergency care to complex cardiovascular surgery. The Institute is recognized as a leader in emergency heart care,
in part, because angioplasty and cardiac stent placement services are available around the clock, and response times
from the ECU to the cardiac lab are faster than the national average.
The Institute's cardiac surgeons have recognized expertise in complex valve surgery and mitral valve
repair, in addition to other advanced surgical techniques, including minimally invasive heart surgery, intraoperative
ablation for treatment of arrhythmia and beating heart surgery.
In June 2006, the Corporation introduced the new Hoag Heart Valve Center. The Hospital is the first
hospital on the West Coast, and one of only a few in the nation, to have a dedicated heart valve center. The Center
offers screenings, diagnosis treatment and surgical expertise, and is dedicated to patient and physician education, on-
going clinical research and collaboration, and early intervention.
The Hospital was selected as one of the fast hospitals in the United States to provide coronary drug - eluting
stents. The Institute has also been involved in a series of clinical trials for carotid stents to evaluate the potential for
these devices to prevent stroke. The Institute is now one of only three Regional Education Centers in California
authorized to educate other physicians in this new technology.
OHS West:260219584.1 A -7
Hoag Heart and Vascular Institute specialties include:
• anticoagulation clinic
• cardiac rehabilitation
• cardiac surgery (CABG, complex valve
surgery)
• diagnostic & interventional cardiology
• electrophysiology services
• emergency treatment
Hoag Orthopedic Services
• endovascular diagnosis and therapy
• interventional radiology
• pacemaker & arrhythmia center
• patient & community education
• research
• vascular surgery
Hoag Orthopedic Services has the largest medical staff in Orange County, including more than 30
physicians specializing in advanced orthopedic and spine procedures, including minimally invasive techniques and
total joint replacement. Based on State of California Office of Statewide Health Planning and Development
( "OSHPD ") data, the Corporation's physicians perform more orthopedic procedures than any other hospital in
Orange County, helping to pioneer new treatments that offer promising alternatives to traditional surgeries.
Hoag Orthopedic Services offers:
• state -of -the -art diagnostic services
• advanced surgical treatments
• arthroscopic surgery
• partial and total joint replacement
• complex spine/back surgery
• minimally invasive procedures
• non - surgical treatments
• emergency treatment of injuries
• sports medicine
• clinical research
• rehabilitation services
• community education
• pain management
The Corporation provides an integrative approach to patient care. For example, the Institute for Spine
implements a collaborative effort between the neurosurgeons and orthopedic surgeons. The close partnership
between the medical specialties creates a synergy and has helped distinguish the Corporation among the top spine
surgery centers in California. Patients are provided access to advanced medical techniques and the opportunity to
participate in a variety of clinical trials.
Also, through its total joint program, JointWorksO, the Corporation combines joint replacement surgery
with patient education and rehabilitation processes to help motivate, encourage and support patients and their
families before, during and after surgery.
Hoag Women's Health Services
Providing quality health care for the women has always been a priority at the Hospital. In late 2005, the
Corporation opened the Sue and Bill Gross Women's Pavilion, an all- encompassing center that combines
progressive technology with patient education, comfort and exceptional care.
As the birthing center of choice for Orange County families, Hoag places family- centered care at the heart
of its mission. Hoag's maternal child program provides state -of -the -art mother/baby care as well as a wide selection
of prenatal and postpartum education and support services.
The Sue and Bill Gross Women's Wellness Center, the first of its kind in Southern California, promotes an
integrative approach to healthy living. The center focuses not only on a woman's physical health, but also on the
relationship between body, mind and spirit.
OHS West260219584.1 A -8
Hoag's Breast Care Center provides the latest in direct -to- digital mammography, dedicated breast MRI,
breast ultrasound and minimally invasive breast biopsy. A multidisciplinary team of breast care experts remains at
the forefront of leading -edge breast care, which results in earlier diagnosis of breast cancer.
Hoag Continence Center offers renowned care in the new medical specialty of urogynecology. The
Continence Center provides precise diagnostic tools and tailored treatment options for all types of incontinence and
pelvic floor dysfunction.
Additional Hoag Women's Health Services include:
• pregnancy & prepared childbirth
• neonatal intensive care
• menopause treatment
• minimally invasive surgery
• breast care & digital mammography
Hoag Hospital Neurosclences
• osteoporosis screening & treatment
• women's resource line
• patient & family education
• community education
• gynecologic oncology
The Hospital is one of only a few medical centers in Orange County with a dedicated neuroscience center,
offering prevention, diagnosis, management and treatment for all complex neurological conditions including stroke,
brain tumors, dementia, epilepsy, Parkinson's disease, sleep disorders and more.
Hoag Neuroscience Institute brings together a multidisciplinary team of medical experts who specialize in
the fields of neurology, neurosurgery, neuroradiology, neurovascular telemetry, Gamma Knife, epilepsy, neuro
radiation oncology, neuropathology and neuropsychology. With specialty - trained interventional neuroradiologists,
the Hospital offers leading -edge interventional procedures such as carotid stenting and brain aneurysm coiling. And
with dedicated neuro hospitalists, the Hospital is equipped to respond to neurological emergencies. This integrated,
subspecialized team of neuroscientists is actively involved in research and clinical trials to discover new therapies,
drugs and other medical advancements to better the lives of patients suffering from neurological conditions.
Hoag Neuroscience Institute provides an integration of services specializing in the following:
• stroke
• brain tumors
• brain Aneurysms / Vascular Malformations
• alzheimer's / Dementia
• movement Disorders / Parkinson's desease
• epilepsy
• sleep disorders
• spinal tumors
• headache
• psychosomatic pain management
• neurosurgery
• neurology
Other Services
Community Medicine
• neuro radiation oncology
• neuroradiology
• interventional neuroradiology
• epilepsy monitoring
• gamma knife
• neuro hospitalist
• neuropathology
• neuropsychology
• neuro rehab
• neurodiagnostic lab
• sleep lab
The Corporation provides charitable community benefit programs that meet those required by California
law governing community healthcare needs assessments and nonprofit hospital community benefit plans. The
Corporation's Community Benefit Plan consists of programs that are conducted primarily as collaborative
OHS Wese2602195&4.1 A -9
partnerships within Orange County without financial return to the Corporation or expectation of business
augmentation. The Plan is designed to improve access to health care for vulnerable populations and the overall
physical and social health status of local communities. Working with in -kind services and direct monetary
donations to support nonprofit organizations, and focusing on disproportionate unmet health needs, the Community
Benefit Plan addresses primary prevention, chronic disease management and health promotion through:
• patient & family support groups
• financially uncompensated clinical research
• health education classes
• informational programs & materials
• enhancement of access to health care
• screening & immunization programs
• general & emergency medical services for
vulnerable populations
• resource referral services
• culturally and linguistically appropriate
counseling services for at -risk families and
youth
• community partnerships, such as those with the
Share Our Selves (SOS) Free Medical and Dental
Clinic and Adult Day Services of Orange County
• culturally and linguistically appropriate
community case management for vulnerable
populations
• support and creation of public health partnership
programs targeting specific entities (i.e., domestic
violence, teen pregnancy, diabetes, obesity, and
youth gangs)
• health ministries parish nurse program
• senior transportation programs
Pediatric Care: Affiliation with Children's Hospital of Orange County
In January 2007, the Corporation announced a new alliance with Children's Hospital of Orange County
( "CHOC "), one of the premier facilities for pediatric care in the county. Through a formal affiliation agreement
with CHOC, executed in February 2007, the Corporation expanded its pediatric outpatient services, and in addition
created an expedited system of evaluation and transfer of children and infants with critical illnesses and special
needs to the specialty children's hospital. The affiliation significantly benefits pediatric patients in need of
emergency care. Using robotic telemedicine technology, critical care specialists stationed remotely at CHOC are
available to assist Hoag Emergency Medicine physicians in the evaluation and care of pediatric patients in the Hoag
Emergency Department ( "ED "). This enhancement to care is available 24 hours a day to children seen in the Hoag
ED. Emergency transport services between the Hospital and CHOC are also improved. A dedicated transport team
from CHOC, consisting of a physician, nurse and respiratory therapist, is readily available to transport pediatric
patients via ambulance when a child's complexity of care or severity of illness requires admission at CHOC.
Through this new affiliation with CHOC, the Corporation's neonatal care services have been expanded.
Pediatric Subspecialty Faculty ( "CHOC PSF "), a nationally recognized specialty physician group affiliated with
CHOC, staffs and provides medical management to Hoag's Neonatal Intensive Care Unit, enhancing clinical
capabilities in support of the Corporation's growing obstetrical and perinatal programs.
Additionally, CHOC will establish pediatric specialty clinics in the soon -to -be developed outpatient facility
owned and operated by Newport Healthcare Center, LLC. UrgiKids, an after -hours urgent care service for children
currently based in Costa Mesa, will also relocate to the NHC facility, completing the expanding pediatric services
that will be available at the Hospital. There can be no assurance that these plans will materialize.
OHS West260219584.1 A -10
Bed Distribution
The Corporation's Hospital is currently licensed for 511 beds, 417 of which are currently staffed and
operating. The following table shows the existing distribution of licensed and staffed beds by bed category and the
proposed distribution of licensed and staffed beds following the completion of the West Tower 4h Floor Renovation
and the Critical Care Tower projects. ( "Post Project") (see "The Project' below). In addition to the 479 estimated
Post - Project licensed beds, the Corporation will have two open floors in the Critical Care Tower that may be
converted into critical care and telemetry rooms with a total of approximately 48 additional beds.
Medical/Surgical
Intensive Care
Maternity/LDR
Intensive Care Nursery
Pediatrics
Chemical Dependency
Total
Licensed Beds
OHS West:260219584.1 A -11
Staffed Beds
Post
Current
Frolect
353
302
37
56
70
70
21
21
9
9
_U
=Z1
511
479
OHS West:260219584.1 A -11
Staffed Beds
post
Current
Prolect
265
266
29
44
74
74
21
21
9
9
J-9
12
417
433
MEDICAL STAFF
The Board of Directors of the Corporation requires an organized medical staff to have a critical role in the
process of providing oversight of quality care, treatment and services delivered by the physicians, dentists, oral
surgeons, and podiatrists who are credentialed and privileged to utilize the Hospital's services and facilities and
participate in the medical activities of the Hospital on a regular basis.
As of August 31, 2006, the Hospital's Medical Staff was comprised of 1,054 physicians, dentists, oral
surgeons and podiatrists. The average age of the medical staff is approximately 48 years. For the fiscal year ended
August 31, 2006, the top 20 attending physicians, whose average age was 40 years, accounted for approximately
27% of the Hospital's inpatient admissions, excluding newborns as separate admissions.
The following chart includes all physicians on the Hospital's Medical Staff as of August 31, 2006:
Specialty Number of Physician
Allergy & Immunology
10
Anesthesia
49
Cardiology
47
Cardiovascular Surgery
3
Colon - Rectal Surgery
4
Critical Care
7
Dental/Oral Surgery
23
Dermatology
32
Emergency Medicine
20
Endocrinology
9
Family Medicine
112
General Surgery
27
Gastroenterology
25
General Internists
112
Infectious Diseases
12
Nephrology
13
Neurologists
19
Neurosurgeons
13
Obstetrics /Gynecology
74
Oncology
29
Ophthalmology
53
Orthopedic Surgery
31
Otolaryngology
24
Pathology
9
Pediatrics
72
Pediatric Surgery
7
Perinatology & Neonatology
17
Physical Medicine/Rehab
9
Plastic Surgery
65
Podiatry
13
Psychiatry
18
Pulmonologists
22
Radiology & Radiation Oncology
40
Rheumatologists
8
Thoracic Surgery
2
Urology
14
Vascular Surgery
10
TOTAL
1,054
OHS West:260219584.1 A -12
Source: Corporation
Service Area
SERN7ICE AREA AND COMPETITION
The Hospital is located in Newport Beach, California, approximately 50 miles south of Los Angeles and 90
miles north of San Diego, on the coast of the Pacific Ocean. The Corporation defines the Hospital's service ai ea by
patient origin, geographic accessibility to the Hospital and location of a majority of the physician offices of its
Medical Staff. The Hospital's Primary Service Area includes Newport Beach/Corona Del Mar, Costa Mesa,
Huntington Beach, Irvine, Fountain Valley and Laguna Beach. The Hospital's patient discharges from its Primary`
Service Area averaged 67 %of its- inpatient discharges for fiscal years 2004 -2006.
North N naP rk 3 -- /'
0 P.IT. j r'- - Central
r I�� � 7
' AnaM1ean rya
•.n'P1C65� .L __mod � 1_
'�' $tartan• �:Oianye '
Las AI'aiM .a P
G�en'aeh
Saal.Eluaeh yyayKrr,urriMRNd- �ay�CMY SlN ra" [artyon
Suns�rn Be �chSUn� Ja
f_ Tusm
N
4-
r =
Hoag Hospital Service Areas
0 Hoag Health Centers
Primary C@mtxzR
South North
South
Primary Service Area includes Newport Beach /Corona Del Mar, Costa Mesa, Huntington Beach, Irvine_ Fountain Valley_ and
Laguna Beach.
South Service Area includes Aliso Viejo, Capistrano Beach. Dana Point, Foothill Ranch, Ladera Ranch, Laguna Hills, Laguna
Niguel, Lake Forest, Mission Viejo: Rancho Santa Margarita San Clemente, San Juan Capistrano, and Trabuco Canyon.
North Service Area includes Buena Park, Cypress, Garden Grove, La Palma, Los Alamitos, Westminster, Seal Beach, and
Stanton.
Central Service Area includes Orange, Santa Ana, Anaheim; Brea. Fullerton; La Habra, Tustin, and Torba Linda.
OHS Wesc26021.9584.1 A -1=
Market Share and Competition
The following illustrates market share data for some of the general acute care providers of service for the
Hospital's Primary Service Area for the calendar years 2003, 2004 and 2005. This data is based solely upon discharges
from the Hospital's Primary Service Area which are determined by zip code. The 2005 data is the most recent data
available. The Hospital's market share has remained the highest in the service area over the three years shown.
Hospital
2003
2004
2005
Hoag Memorial Hospital Presbyterian
32.3%
32.5%
33.0%
Fountain Valley Regional Hospital & Medical CenterllI
10.5
9.5
9.5
Orange Coast Memorial Medical Centerlll
7.1
8.2
8.7
Irvine Regional Hospitall'I
7.8
7.7
7.2
Huntington Beach Hospital & Medical Centerl'1
4.6
4.6
4.5
St. Joseph Hospital- Orange [41
3.9
4.0
4.1
University of California- Irvine Medical Centerl"
3.8
4.1
3.9
Kaiser Anaheiml6l
2.5
2.4
2.5
Saddleback Memorial Medical Center[ 21
1.9
2.2
2.3
South Coast Medical Centerlsl
2.2
2.4
2.2
Western Medical Center - Santa Ana [71
2.5
2.1
2.1
Coastal Communities Hospitall'1
1.6
1.5
1.4
Mission Hospital Regional Medical Center141
1.4
1.4
1.4
Source for Market Share Information: Office of Statewide Health Planning and Development, State of California.
Excludes discharges with DRG -391 (normal newbom)
The following footnotes each indicate the name of the system or organization that owns or operates the referenced facility:
t'1 Tenet
l'I Memorial Care -
1 �1 Prime Health Systems
l41 St. Joseph Health System
i'l University of California
161 Kaiser Foundation Hospitals
17l Integrated Healthcare Holdings Inc.
Isl Adventist Healthcare
Demographics
The following table presents expected population growth in Orange County. The Hospital's Primary
Service Area is expected to experience an approximately 7.9% increase in population through 2011.
Orange County Area
2006
2011
% Change
Primary Service Area
663,250
715,889
7.9%
North
492,826
506,192
2.7
Central
1,314,228
1,365,864
3.9
South
573.573
623,684
8_7
Total Orange County
3,044,127"
3,211,629'
5.5%
"Source: Medstat Market Expert.
OHS West:260219584.1 A -14
The table below summarizes average income per household for the City of Newport Beach and each of the
Hospital's Service Areas (as referenced below and defined above).
Newuort Beach "'
149,646
Number of Households
37,636
• Household Income > $75K
61.1%
• Household Income > $ I OOK
48.7%
Primary Service Area
376,043
Number of Households
250,805
% Household Income > $75K
51.1%
% Household Income >$100K
36.3%
South Service Area
Number of Households
208,573
• Household Income > $75K
54.9%
• Household Income >$100K
39.6%
North Service Area
Number of Households
149,646
Household Income > $75K
35.1%
Household Income > $100K
21.3%
Central Service Area
Number of Households
376,043
• Household Income > $75K
37.1%
• Household Income > $100K
23.6%
I'] The Hospital is located in Newport Beach. Data includes Newport Beach, Newport Coast & Corona] Del Mar
Source: Medstat Market Expert.
FACILITIES DESIGN AND CONSTRUCTION
The Master Plan
The Corporation's Board of Directors developed a Master Plan of Development (the "Master Plan") for the
Hospital in the early 1990's. The Master Plan was designed to meet the Corporation's mission and strategy to serve
its community and includes a comprehensive capital improvement program which has been refined over time as
various elements have been constructed. Implementation of the Master Plan's capital improvements set forth below
also results in the Hospital complying with the State of California's seismic requirements (discussed below).
[The Master Plan capital improvements projected through 2012 include approximately $_ of new
buildings, renovation, improvements and equipment throughout the Hospital campus (the "Project "), of which
approximately $_ of expenditures have been incurred prior to _J The major elements of the Project are
described below. Proceeds of the Bonds will be used to finance a portion of the Project; management expects to use
Bond proceeds to finance expenditures on Project elements to be incurred in the upcoming 18 -36 months. The
majority of the Bond proceeds will be used for the Heart and Vascular/Critical Care Facility and the Ancillary
Building (each described in greater detail below). The Corporation expects to pay for the remaining Project
expenses from existing and future operating revenues and from future charitable contributions.
OHS west:260219584.1 A -15
The Project
Major Project elements include:
(1) Heart and Vascular /Critical Care Facilities. In 2008, construction is expected to begin on a
building on the upper campus to house predominantly inpatient services associated with the Hoag Heart and
Vascular Institute, and new operating rooms. The new building will provide space for extensive cardiovascular
program enhancements including dedicated cardiovascular operating rooms, expanded cath labs and endovascular
suites. The facility will also provide much needed expansion in critical care beds beyond the cardiovascular area.
The project will provide an additional 48 critical care and telemetry beds resulting in a net gain of 19 critical care
beds. The total estimated cost of the project is approximately $425 million.
(2) Ancillary Building Renovation and Structural Upgrade. The Ancillary Building which currently
houses the Emergency Department, portions of Radiology Services and other ancillary services, will be renovated to
accommodate the expansion of the Emergency Department and the improvement and consolidation of inpatient
imaging services. In addition, the building will be structurally upgraded in order to meet Senate Bill 1953 seismic
requirements. Upon completion of this project, the number of ED beds will increase from 30 to 51. The total
estimated cost of the project is approximately $65 million.
(3) West Building Renovation. In conjunction with required seismic upgrades, the aging infrastructure
of the West Building is being upgraded or replaced to meet the Hospital's anticipated needs. In addition, the
finishes on each of the floors are being modernized and infrastructure for new technologies is being put in place.
The renovation of the tenth through fifth floors has been completed. Renovation of the fourth floor is currently
underway. The estimated total remaining cost of the West Building renovation is approximately $74 million and
includes the installation of base isolators to complete the structural upgrade in order to meet Senate Bill 1953
seismic requirements.
(4) Lower Campus Outpatient Services. Beginning in 2007, an expanded Outpatient Services
facilities and related parking will be incorporated with the existing Cancer Center on the Hospital's lower campus.
These facilities will expand outpatient cancer treatment capabilities as well as provide needed space for growing
neurosciences and related imaging services. By late 2008 /early 2009, these new facilities will accommodate the
expansion of the outpatient cancer and neurosciences programs and will allow a significant part of the Hospital's
outpatient imaging, chemotherapy, Gamma Knife, other radiation oncology and additional outpatient treatment
services to be redirected to the lower campus entrance. The project will entail excavation and construction of a
retaining wall to primarily facilitate the construction of the planned facilities and related parking. The total estimated
cost of this expansion is approximately $_ million.
(5) Seismic Upgrades. California legislation, Senate Bill 1953 ( "SB 1953 "), requires all acute care
hospitals to be upgraded to new seismic standards. SB 1953 requires hospitals to comply with the following
deadlines: by 2008, all general acute -care inpatient buildings at risk of collapsing during a strong earthquake must
be rebuilt, retrofitted or closed; and by 2030, all hospital buildings in the State must be operational following a
major earthquake. The Sue and Bill Gross Women's Pavilion is compliant with seismic standards of inpatient care
and meets the requirements of SB 1953. However, some of the other buildings are currently not compliant. In
conjunction with the infrastructure replacements and upgrades, these buildings will be retrofitted to meet most of the
new seismic standards. The Corporation has received approval for a five -year extension of SB 1953 compliance to
2013. Estimated cost of seismic upgrades or retrofits are included in specific Project element cost estimates.
(6) Routine Capital Improvement Expenditures. A portion of the routine capital expenditures of the
Corporation during fiscal years 2007, 2008, and 2009 is expected to be funded from proceeds of the Bonds. The
estimated cost of these routine capital expenditures in total is approximately $41 million although not all of that may
be funded with proceeds of the Bonds.
(7) Information Technology. The Hospital plans to acquire and/or replace certain information
systems, including software and hardware. Some of the key projects include acquisition of electronic chart and
physician documentation, enterprise patient scheduling system, physician electronic medical record connectivity
and infrastructure, server /network/storage upgrades, telecommunications upgrades, infrastructure upgrades and
OHS West:260219584.1 A -16
redundancy system, and radiology system replacement. The Hospital continues to invest in state -of- the -alt
information technology solutions which contribute to the Hospital's success. The estimated cost of these information
technology expenditures for fiscal years 2007, 2005, and 2009 in total is approximately $80 million.
The artist rendering below depicts the current and planned transformation of the Hospital Campus over the
next several years in accordance with the Master Plan.
LEGEND
1. Norrn Parking Slmaure.
2. lame,Irrme Ovpatimr
sugery(rmet
3. PovterPlanl
4. Anullwy guiding
5. Weg Udlding
6. Adminiamdon
7. chearmd Dependency
a. Wo At PaWbon
9. Original 1952 BuildirmlPropmd
Heart &t'asmlarx itiral tare
.adlldes
10. South Pmllrg Saccrum
11. (anocadM
12. (nnFerenmClmeParking
5mrame
13. Cdaferena Center
14. Childcare Cemer
15. Co -Gen Plait
18. FutereCltgdcw(eimrSte
17. Funm!IOwergnrpus0ulpmwnt
smicesFaciliq
19. Hoag HeaDA Center
-
Newinne Beady (UHQ
HOAG'
HBSPITAL
Project .Approvals. Pursuant to a Development Agreement between the Corporation and the City, adopted
in 1994, the Corporation has a vested right to develop the Hospital site in accordance with its Master Plan, approved
by the City in 1992, subject to compliance with the Development Agreement, supplemental requirements of the
California Environmental Quality. Act ( "CEQA ") and certain other conditions, including preparation of certain
traffic report studies for consideration by the City. The Development Agreement may be amended to relocate
allowed square feet of development from the Hospital's lower campus to the upper campus. An updated
environmental impact report is expected to be completed as part of the amendment process. The Project will be
developed in compliance with the Development Agreement and the Master Plan. However, building permits are
required prior to construction. In addition, State approval is required for the design of new inpatient and certain
other facilities. In addition, as currently planted, the size of the Heart and Vascular /Critical Care Facility will
exceed the aggregate square footage allowed on the upper campus of the Hospital under existing City land use
approvals, including the Development Agreement. The Corporation is processing with the City a revision to these
agreements which is expected to allow a transfer of up to 225,000 square feet of building from that allowed on the
lower campus to the upper campus. The City has engaged a consultant to prepare an environmental impact report in
connection with these changes, and the Corporation expects these changes to be considered by the City by early
2005. If the Corporation does not receive this proposed modification to its land use entitlement with the City, the
Heart and Vascular /Critical Care Facility and other project elements will be redesigned and development will occur
within the existing entitlement applicable at the time, if at all. Buildings on the lower campus are subject to review
by the California Coastal Commission. Moreover, significant elements of the Project will need to be licensed by the
State upon completion. There can be no assurance that the required approvals will be obtained in a timely manner or
at all.
OHS Wesr.2 602 19 3 8 4.1 A -17
Cost Estimates. Construction of portions of the Master Plan Project is expected to occur over a ten -year
period. In addition to Bond proceeds and earnings thereon, the Corporation expects to fund certain Project costs
through charitable contributions. The Corporation expects to receive as much as $315 million in charitable
contributions, a portion of which may be used towards costs of the Project. The remainder of the Project costs is
expected to be funded from cash flow.from operations and investment income during the course of construction and
from existing resources. The estimated contribution from cash flow has been derived from certain cash flow plans
prepared by the Corporation's finance staff. In the event such sources are inadequate, the Corporation would expect
to fund costs from existing reserves, or to modify elements of the Project, if feasible. For a further discussion of
certain risks relating to cost overruns on the Project, please refer to the section of this Official Statement entitled
BONDHOLDERS' RISKS — Other Risk Factors — "Contributions" and "Construction Risks."
The Corporation has estimated the costs of the improvements to be financed with the proceeds of the Bonds
and other Project elements based on architects' and engineers' estimates. It is expected that the work for that portion
of improvements to be constructed in and around the existing Corporation activities will be conducted in a manner
to minimize disruption to Corporation services. While this effort is expected to be successful, it will involve
significant increased cost and occasional disruption to construction work. The degree of this disruption is hard to
predict, and may cause costs to exceed the estimates shown.
The Corporation has not let contracts for a portion of the Project, including some elements expected to be
funded with proceeds of the Bonds, primarily related to the lower campus building and remodel projects. Therefore,
the Corporation's estimates are imprecise. In addition, the scope of some Project components is subject to periodic
internal review and revision which may cause estimates to increase. Especially in light of the substantial
rehabilitation work to be conducted, it is possible the Corporation will experience significant cost overruns with
respect to part or all of the Project, and such overruns could be in amounts which would in the aggregate be material
to the Corporation's operating results. While contingencies have been included in all Corporation cost estimates set
forth here, it is possible that the scope of some Project elements may need to be reduced if actual costs exceed
estimates.
OHS West :260219584. t A -18
SELECTED UTILIZATION AND FINANCIAL INFORMATION
Sources of Patient Services Revenue
The Corporation receives payment for its services from several sources with a variety of payment
arrangements. Insurance payments include preferred provider organizations (PPOs) and health maintenance
organizations (WAOs). The federal government, through the Medicare program, pays for most services for persons
over 65 years old and the State of California pays for indigent patients through the Medi -Cal program. Orange
County also funds certain indigent patients through the Medical Services for the Indigent (MSI) program and other
patients through the Cal - Optima program. The following table shows the Corporation's distribution of gross patient
revenue by payor for the past three fiscal years.
(1) Includes capitated commercial and Medicare.
For a further discussion of Medicare, Medi-Cal and other payors, please refer to the section of this Official
Statement entitled `BONDHOLDERS' RISKS."
Historical Utilization
The Corporation's utilization statistics for the past three fiscal years are presented below.
Fiscal Year Ended Aueust 31,
Outpatient Visits
2004
2005
2006
Medicare
33.9%
35.4%
34.8%
PPO
28.1
27.9
27.5
HMO (1)
30.7
29.3
29.7
Medi -Cal & MSl
3.6
4.0
3.9
Other
3.7
3.4
4.1
(1) Includes capitated commercial and Medicare.
For a further discussion of Medicare, Medi-Cal and other payors, please refer to the section of this Official
Statement entitled `BONDHOLDERS' RISKS."
Historical Utilization
The Corporation's utilization statistics for the past three fiscal years are presented below.
Outpatient Statistics
Emergency Visits
Fiscal Year Ended Auaust 31,
Outpatient Visits
2004
2005
2006
Licensed Beds — acute care
409
511
511
Inpatient Statistics
Staffed Beds — acute care
354
354
417
Admissions — acute care
24,841
25,267
26,704
Average Length of Stay (days)
4.24
4.17
4.23
Patient Days — acute care
105,057
105,133
112,885
Births
4,716
4,602
4,993
Percent Occupancy (staffed bed)
81.0%
81.4%
742%
Average Daily Census — acute
288
288
309
Case Mix Index —All
1.38
1.37
1.38
Case Mix Index— Medicare
1.71
1.67
1.71
Outpatient Statistics
Emergency Visits
56,505 58,276 62,089
Outpatient Visits
214,269 231,690 248,675
Outpatient Surgeries
11_,409 10314 10,653
Total Outpatient Volume
321.417
OHS West:260219584.1 A -19
Summary of Financial Information
The following summary of revenues and expenses and balance sheets of the Corporation and its Wholly -
Owned Subsidiaries for the fiscal years ended August 31, 2005 and 2006 is derived by management from the
consolidating statements of operations and balance sheets to the consolidated financial statements of the Corporation
and Affiliates, which is included with the unaudited "Other Financial Information" following the audited
consolidated financial statements in APPENDIX B. For purposes of analysis by the Corporation's management, the
financial information of the Corporation and its Wholly -Owned Subsidiaries is consolidated and presented in the
column named "Hospital" in the consolidating statements of operations and balance sheets to the consolidated
financial statements of the Corporation and Affiliates, which is included with the unaudited "Other Financial
Information" following the audited consolidated financial statements in APPENDIX B.
The summary of financial information should be read in conjunction with the consolidated financial
statements and related notes contained in APPENDIX B, which have been audited by Ernst & Young, LLP,
independent auditors.
The following chart illustrates the components of the Hospital column of the Other Financial Information
that accompanies the audited financial statements, as well as the components of the consolidated financial
statements, as of and for the years ended August 31, 2006 and 2005:
The financial information for the six months ended February 28, 2006 and 2007, is derived by management
from the internal unaudited financial statements of the Corporation and its Wholly -Owned Subsidiaries for such
periods. The unaudited financial data for the six months ended February 28, 2006 and 2007 includes all adjustments
which the Corporation's management considers necessary to fairly present such information in accordance with
accounting principles generally accepted in the United States. Operating results for the six months ended February
28, 2007, are not necessarily indicative of the results which may be expected for the entire fiscal year ended August
31. 2007.
OHS WesC260219584.1 A -20
As of and for the ear ended August 31, 2006:
Percentages of Hospital
Percentages
of Consolidated Totals
Obligated
Immaterial
Total
Total
Other
Group
Group
Affiliates
Hospital
Hospital
Hospital
Entities
Consolidated
109%
-9%
100%
83%
17%
100%
Income from Operations
Excess of Revenue over Expenses
Excess of Revenue over Expenses
101%
-1%
100%
93%
98%
2%
100%
Total Assets
100%
0%
100%
93%
94%
6%
100%
Total Net Assets
100%
0%
100%
90%
91%
9%
100%
The financial information for the six months ended February 28, 2006 and 2007, is derived by management
from the internal unaudited financial statements of the Corporation and its Wholly -Owned Subsidiaries for such
periods. The unaudited financial data for the six months ended February 28, 2006 and 2007 includes all adjustments
which the Corporation's management considers necessary to fairly present such information in accordance with
accounting principles generally accepted in the United States. Operating results for the six months ended February
28, 2007, are not necessarily indicative of the results which may be expected for the entire fiscal year ended August
31. 2007.
OHS WesC260219584.1 A -20
As of and for the year ended Ati ust 31, 2005:
Percentages of Hospital
Percentages of Consolidated Totals
Obligated
Immaterial
Total
Total
Other
Group
AffIiates
Hospital
Hospital
Entities
Consolidated
100%
0%
100%
86%
14%
100%
Income from Operations
Excess of Revenue over Expenses
100%
0%
100%
93%
7%
100%
Total Assets
100%
0%
100%
93%
7%
100%
Total Net Assets
99%
1%
100%
90%
10%
100%
The financial information for the six months ended February 28, 2006 and 2007, is derived by management
from the internal unaudited financial statements of the Corporation and its Wholly -Owned Subsidiaries for such
periods. The unaudited financial data for the six months ended February 28, 2006 and 2007 includes all adjustments
which the Corporation's management considers necessary to fairly present such information in accordance with
accounting principles generally accepted in the United States. Operating results for the six months ended February
28, 2007, are not necessarily indicative of the results which may be expected for the entire fiscal year ended August
31. 2007.
OHS WesC260219584.1 A -20
The following chart illustrates the components of the unaudited financial statements of the Corporation and
its Wholly -Owned Subsidiaries as of and for the six -month period ended February 28, 2007, and for the six-month
period ended February 28, 2006:
As of and for the six-month period ended February 28,2007:
Income from Operations
Excess of Revenue over Expenses
Percentages of Hospital
Percentages of Hospital
Obligated
Immaterial
Total
Group
Affiliates
Hospital
Income from Operations
103%
-3%
100%
Excess of Revenue over Expenses
100%
0%
100%
Total Assets
100%
0%
1000/0
Total Net Assets
100%
0%
100%
For the six -month period ended February 28, 2006:
Income from Operations
Excess of Revenue over Expenses
Percentages of Hospital
Obligated Immaterial Total
Group Affiliates Hospital
106% -6% 100%
101% _1% 100%
OHS West:260219584.1 A -21.
Summary of Revenues and Expenses of the Corporation and its Wholly -Owned Subsidiaries
(Dollars in Thousands)
Fiscal Years Ended
Six Months Ended
August 31,
Februar_yl&
2005
22006
2006
2007
Net Patient Service Revenue
$420,515
$474,169
$230,975
$246,356
Revenue Earned on Prepaid Contracts
73,761
70,960
34,223
38,584
Other Operating Revenue
42518
43.856
20.639
25.206
TOTAL OPERATING REVENUE
536,794
588,985
285,837
310,I46
Operating Expenses:
Salaries & Benefits
246,344
275,558
134,486
143,513
Supplies
89,861
101,354
49,206
50,654
Purchased Services
61,509
69,533
33,077
34,449
Professional Fees
6,555
7,721
3,759
4,133
Depreciation and Amortization
32,078
40,218
19,668
20,239
Provision for Doubtful Accounts
14,994
21,159
8,678
11,025
Interest
9,307
17,652
8,612
9,235
Other
37,248
40464
20205
21.363
TOTAL OPERATING EXPENSES
497,896
573,659
277,691
294,611
INCOME FROM OPERATIONS
38,898
15,326
8,146
15,535
Nonoperating Revenues/Expenses:
Investment Income, Net
42,222
72,496
32,891
70,142111
Other
2,088
459
1 484
(2 87)
TOTAL NONOPERATING
44,310
72,037
34,375
69,855
REVENUES/EXPENSES
EXCESS OF REVENUE OVER
EXPENSES
$83.20
S87,361
$
111 In fiscal year 2007, the Corporation recognized previously unrealized cumulative gains of approximately $30
million as a result of a non -cash exchange of individual securities for units of a common trust fund.
OHS West:260219584.1 A -22
Balance Sheet of the Corporation and its Wholly -Owned Subsidiaries
(Dollars in Thousands)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents
Patient accounts receivable, net of allowance
for doubtful accounts
Investments
Other Current Assets
Due From Related Parties
TOTAL CURRENT ASSETS:
ASSETS LIMITED AS TO USE:
Board designated for Capital Improvements
Under indenture agreement held by trustee
Under malpractice claims funding arrangement
held by trustee
For health and dental insurance claims
TOTAL ASSETS LIMITED AS TO USE
PROPERTY AND EQUIPMENT, NET
OTHER ASSETS
TOTAL ASSETS
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES:
Account payable
Accrued expenses
Accrued liabilities under capitated contracts
Estimated third -party payor settlements
Due to Related Parties
TOTAL CURRENT LIABILITIES:
NONCURRENT LIABILITIES
Au¢ust 31, . February 28,
2005
2006
2007
$18,163
$39,702
$47,608
47,535
59,903
63,918
4,307
5,099
4,934
14,609
17,709
22,931
2,024
948
1,126
86,638
123,361
140,517
900,308
864,701
915,353
94,064
50,806
29,396
16,857
17,496
18,369
1,414
-
1,012,643
933,003
963,118
522,913
630,441
634,782
19,186 20,530 22,090
$1,641,380 $1,707,335 $1,760,507
$37,706
$23,307
$17,368
53,505
48,940
41,368
13,755
12,861
9,316
778
1,485
1,551
329
255
322
106,073
86,848
69,925
Estimated malpractice claims
14,650
12,200
13,040
Bonds payable
516,000
516,000
516,000
Other long -term liabilities
1,314
2,547
2,512
TOTAL NONCURRENT LIABILITIES
531,964
530,747
531,552
TOTAL LIABILITIES
638,037
617,595
601,477
TOTAL NET ASSETS
TOTAL LIABILITIES & NET ASSETS
1,003,343 1,089,740 1,159,030
$1,641,380 $1,707,335 $1,760,507
OHS West:260219584.1 A -23
Management's Discussion and Analysis of Financial Information
For the fiscal year ended August 31, 2006, the Corporation reported Net Patient Service Revenue totaling
approximately $474 million in comparison to $421 million for the year prior. The approximate $53 million, or
12.6 %, increase is due primarily to both growth in inpatient and outpatient services, as well as rate increases from
payors. Fiscal year 2006 marked the opening of the Women's Pavilion and with it, additional inpatient capacity and
outpatient services. Inpatient volume, as measured by admissions, grew 5.7% over the prior year, exceeding the
target growth of 5.4% for the year. The Hospital continued to have strong outpatient volume which grew 7% over
the prior year. For the interim periods of six months ended February 28, 2007 and 2006, Net Patient Service
Revenue totaled approximately $246 and $231 million, respectively. The year- over -year growth of approximately
6.5% is the result of growth in both admissions, 7.5 %, and outpatient visits, 6.4 %.
For the fiscal year ended August 31, 2006, the Corporation reported Revenue Earned on Prepaid Contracts
of approximately $71 million in comparison to $74 million for the year prior. Revenue Earned on Prepaid Contracts
consists of revenue earned by the Corporation through capitated payment arrangements with payors. For the interim
periods of the six months ended February 28, 2007 and 2006, Revenue Earned on Prepaid Contracts totaled
approximately $39 and $34 million, respectively. While capitated contracts remain an active payor category, the
Corporation does not expect to grow this business. In August 2006, the Corporation had approximately 29,217
actual lives covered under prepaid contracts.
The Corporation's inpatient activity remains strong as evident in the continued high occupancy rates of
81 %, 81% and 74% for 2004, 2005 and 2006, respectively, with the decline in 2006 a result of increased capacity
associated with the Women's Pavilion. Results for fiscal year 2006 benefited from strength in outpatient volume
which grew 7% over the prior year. Importantly, the Corporation exceeded budgeted volumes in outpatient surgery,
reversing the prior year trend for a profitable service. Successful outreach strategies and investment in key outpatient
technologies and programs have contributed to this continued growth. Other Operating Revenue was $44 million as
compared to $43 million for 2005 and is comprised mainly of certain management agreements between the
Corporation, its wholly -owned subsidiaries and physician related entities as part of the Corporation's physician
integration strategies. For the six months ended February 28, 2007 and 2006, the Corporation and its Wholly -
Owned Subsidiaries reported Other Operating Revenue of $25 and $21 million, respectively.
Salaries and benefits for the fiscal year ending August 31, 2006 totaled $276 million, a 12 % increase over
2005 at $246 million. The increase in salaries and benefits is largely attributable to increased volume. The Hospital
continues to manage outside registry and traveler costs to less than 2% of labor. Despite the strong labor shortages in
California, the Corporation's overall turnover rate remains below 18% with nursing at approximately 12 % as of
October 30, 2006. For the six months ended February 28, 2007, the Corporation and its Wholly -Owned Subsidiaries
reported Salaries and Benefits of $144 million in comparison to $134 million for the comparison period. The
Corporation staffs to the current State - mandated nurse - staffing ratios.
Professional fees represent the Corporation's investment in certain physician coverage programs and
medical directorships. Examples of coverage programs include contract physician hospitalists and intensivists, as
well as OB night call coverage, to provide needed patient care. For the fiscal year ended August 31, 2006, the
Corporation reported professional fees of $8 million as compared to $7 million the year prior. For the six -month
interim periods ended February 28, 2007 and February 28, 2006, the Corporation reported professional fees of $4
million.
Expenditures related to bad debt increased approximately 40% during the year from $15 million for the
year ended August 31, 2005 to $21 million for the year ended August 31, 2006. Included in the current fiscal year
amounts are amounts attributable to adverse development on prior year accounts and an increase in un- and
underinsured patients. Bad debt expense as a percent of gross charges remains under 2 %.
Supplies expense for the fiscal year ending August 31, 2006 totaled approximately $101 million. This
represents an approximate 12% increase over 2005 ($90 million) which is due largely to volume. The Corporation
remains committed to supporting its Centers of Excellence, including advancements in technologies which often
contain supply related components. For the six months ended February 28, 2006, the Corporation and its Wholly-
OHS West260219584.1 A -24
Owned Subsidiaries reported Supplies Expense of $51 million in comparison to $49 million for the 2006
comparison period.
Total other operating expenses, including utilities, rent, insurance and other expenses, was $40 million for
the year ended August 31, 2006 as compared to $37 million for the year prior. For the six months ended February
28, 2007 and 2006, the Corporation and its Wholly -Owned Subsidiaries reported other operating expenses in the
amount of $21 and $20 million, respectively.
Purchased Services for the fiscal year ending August 31, 2006 totaled approximately $69 million as
compared to $62 million for the year prior. The increase over 2005 was largely attributable to the cost of covered
lives utilizing outside purchased health care, including emergency and trauma, for which the Corporation is
financially responsible. For the six months ended February 28, 20075 the Corporation and its Wholly -Owned
Subsidiaries reported Purchased Services of $34 million in comparison to $33 million for the 2006 comparison
period.
For the fiscal year ended August 31, 2006 depreciation expense totaled approximately $40 million as
compared to $32 million for the year prior. Continued progress in the capital expansion program, namely the
Women's Pavillion, and technology investment has contributed to this increase. For the six months ended February
285 2007 and February 28, 2006, the Corporation and its Wholly -Owned Subsidiaries reported depreciation expense
of $21 million and $20 million, respectively.
Interest expense totaled approximately $18 million for the fiscal year ended August 31, 2006 as compared
to $9 million for the year prior. The increase in the interest expense was primarily due to the issuance of $200
million auction rate long -term debt in August 2005. In addition, interest expense includes the Corporation's variable
rate debt totaling $316 million at August 31, 2006. Additionally, interest expense contains certain costs associated
with a fixed rate swap entered into by the Corporation in 2002. This contract was terminated in the second quarter
of 2006. For the six months ended February 28, 2007 and February 28, 2006, interest expense totaled approximately
$9 million.
Investment income for the fiscal year ended August 31, 2006 totaled $72 million in comparison to $42
million for the year prior. Investment income for the periods then ended represents the net result of realized gains
and losses on investment activity, as well as dividend and interest income. The fluctuation in periods is due to
changes in market conditions. The Corporation yielded gross investment return of approximately 7% for the twelve-
month period ended August 31, 2006. Investment income for the six months ended February 28, 2007 was $70
million in comparison to $33 million for the comparison period. Included in the 2007 year-to -date amounts are
approximately $30 million of previously unrealized gains, now recognized. The Corporation yielded an annualized
gross return of approximately 13% for the six months ended February 28, 2007.
The Corporation's and its Wholly -Owned Subsidiaries' total net income before depreciation and interest
( "EBDI ") for fiscal years 2006 and 2005 was $145,233 (or 24.7% of Total Operating Revenue) and $124,593 (or
23.2% of Total Operating Revenue), respectively. The Corporation's EBDI for the six months ended February 28,
2007 and 2006 was $114,864 (or 37.0% of Total Operating Revenue) and $70,801 (or 24.8% of Total Operating
Revenue), respectively.
Overall, the Corporation's operations have remained financially strong. Fiscal year 2006 was a transition
year with the opening of the Women's Pavilion and its associated operating expenses. Fiscal 2007 year-to -date
results have produced increased operating cash flow margins from 2006 with continued top line revenue growth.
The Corporation continues to be successful in rate negotiations, implementing certain cost containment strategies,
focusing on recruitment and retention and maintaining market share in its primary and secondary service areas. It is
management's expectation that downward pressure from payors and employers on rate increases will strengthen in
2007. However, management expects to maintain overall positive operating margins and strong cash flow margins
while continuing to invest in facilities, programs and technologies to maintain and then grow market share,
particularly in support of the Corporation's Centers of Excellence.
OHS West:260219584.1 A -25
Liquidity and Investment Policy
The Corporation and its Wholly -Owned Subsidiaries had approximately $9I0 million of unrestricted cash,
cash equivalents and investments, including board designated funds and other investments, at August 31, 2006. The
following table sets forth the Corporation's and its Wholly -Owned Subsidiaries' unrestricted cash and investments
for fiscal years 2005, 2006, and the six months ended February 28, 2007.
Cash and cash equivalents consist mainly of bank deposits and short-term investments in money market
funds and commercial paper. In accordance with its investment and operating objectives, the Corporation has
segregated its Board Designated Investment Reserves into three distinct portfolios: Building Plan Portfolio,
Liquidity Portfolio, and Long -Term Portfolio. The Corporation may consolidate the portfolios within the Board
Designated Investment Reserves at its discretion but in accordance with its investment policies in existence at
the time of the consolidation.
Market Value
1'1 Comprised of investments in debt and equity mutual funds.
121 In 2004, the Corporation segregated its Board Designated Reserves into three distinct pools: Building Plan Portfolio,
Liquidity Portfolio, and Long -Term Portfolio. The Corporation may consolidate the pools at its discretion but in accordance
with its investment policies.
[31 Total Cash & Investments does not include unspent bond proceeds which totaled $94,064 and $50,806 as of August 31, 2005
and 2006, respectively. The total amount of unspent bond proceeds was $29,224 as of February 28, 2007.
OHS West:260219S84.1 A -26
August 31,
2005
August 31, 2006
February 28
2007
Cash & Cash Equivalents
$ 18,163
2.0%
$ 39,702
4.4%
$47,608
4.9%
Other Short -Term Investmentsjll
4,307
0.5%
5,099
0.5%
4,934
0.5%
Building Plan Portfolioj2l
Fixed Income Securities
120,024
13.0%
30,119
3.3%
27,281
2.8%
Liquidity Portfoliol �1
Fixed Income Securities
114,540
12.4%
116,880
12.9%
120,991
12.5%
Long -Term Portfoliol2J
Fixed Income Securities
251,020
214,079
220,279
U.S. Large Cap Equity
26,563
59,798
66,574
Securities
U.S. Smaller & Mid Cap
69,944
80,314
89,991
Equities
Global Equity
105,815
130,853
142,331
Absolute Return
212,402
232,097
245,902
Private Equity
0
55611
2 004
Total Long -Term Portfolio
665,744
72.1%
717,702
78.9%
767,081
79.3%
Total Cash & Investments
$ 922.778
100.0%
909502
100.0%
24
100.0%
1'1 Comprised of investments in debt and equity mutual funds.
121 In 2004, the Corporation segregated its Board Designated Reserves into three distinct pools: Building Plan Portfolio,
Liquidity Portfolio, and Long -Term Portfolio. The Corporation may consolidate the pools at its discretion but in accordance
with its investment policies.
[31 Total Cash & Investments does not include unspent bond proceeds which totaled $94,064 and $50,806 as of August 31, 2005
and 2006, respectively. The total amount of unspent bond proceeds was $29,224 as of February 28, 2007.
OHS West:260219S84.1 A -26
The Corporation's funds are invested pursuant to investment policies established by the Corporation's
Board of Directors. The investment policies provide for an overall philosophy that is specific enough to
demonstrate what is expected of selected investment managers yet sufficiently flexible to allow for changing
economic conditions and securities markets. The policy seeks to identify acceptable risk levels associated with
reaching long -term rate of return objectives, which serve as criteria for evaluating investment performance. The
Corporation's Long -Term Portfolio investment policy directs such assets to be invested in a manner which:
• Preserves principal through prudent diversification and investment in highly rated securities as well as
certain non -rated securities such as small capitalization stocks and international equities and high yield
bonds, where permitted;
• Reduces overall portfolio volatility while pursuing targeted investment returns through allocation of a
portion of the portfolio's long -term investment reserves to alternative investment strategies;
• Meets the liquidity needs of the Corporation coordinated with the anticipated working capital
requirements of the Corporation; and
• Maximizes term in light of these guidelines and prevailing market conditions.
The Corporation's investments are currently managed by several professional investment managers, under
the supervision of the Investment Management Committee of the Corporation's Board of Directors and the finance
staff. Portfolio investments undergo significant turnover and are actively managed by the investment managers
retained by the Corporation.
Building Plan Portfolio
The investment policies for the Building Plan Portfolio include the goal of providing short-term liquidity
and generating cash for the Corporation's building needs. The Building Plan Portfolio is managed under a U.S.
Fixed Income mandate. The investment manager is specifically directed to target an average duration range between
95% - 105% of the Lehman Aggregate Index. In addition, the investment manager is instructed to limit fixed
income investments in any single corporate issue, other than U.S. Government instrumentalities and agency
mortgage- backed securities, to no more than 5% of the fixed income assets under management at the time of
purchase. Investments in certain derivative products, private placements and commodities are limited. At February
28, 2007, the Building Plan Portfolio had an aggregate market value of approximately $27 million. The Corporation
is currently liquidating this portfolio in accordance with the Board approval to fund NHC. The Corporation may
transfer additional funds to this portfolio as needed.
Liquidity Portfolio
As of February 28, 2007, the Corporation maintained self - liquidity in connection with a portion of its
outstanding bonds. The Corporation was subject to an arrangement with certain of the bond rating agencies whereby
it had to maintain, in the aggregate, sufficient long -term assets, primarily marketable fixed income securities and
other liquidity support vehicles, to be used to repurchase the bonds in the unlikely event that tendered bonds were
not resold in the open market. In 2004, the Corporation established the Liquidity Portfolio. The investment policies
for the Liquidity Portfolio include the goal of providing short-term liquidity and generating cash for the
Corporation's building needs and purchase of tendered bonds. The Corporation has retained one investment manager
to invest the liquidity funds by pursuing a short-term fixed income strategy. The investment manager is directed to
invest in strictly "Aaa" quality fixed income securities. Non -dollar denominated securities or corporate bonds may
not be purchased. At February 28, 2007, the Liquidity Portfolio had an aggregate market value of approximately
$121 million and represented approximately 4.9% of the Corporation's and its Wholly -Owned Subsidiaries' total
cash and investments. Upon refunding the outstanding bonds, the need for the Liquidity Portfolio will most
likely be eliminated and the Corporation may consolidate this portfolio with its other investment assets.
OHS West260219584.1 A -27
Long -Term Portfolio
The investment objectives for the Long -Term Portfolio are structured as long -term goals designed to
maximize returns without exposure to undue risk. With the understanding that fluctuating rates of return are
characteristic of the securities markets, the investment managers' greatest concern is expected to be long -term
appreciation of the assets and consistency of total portfolio returns.
At February 28, 2007, the Long -Term Portfolio had an aggregate market value of approximately $767
million and represented approximately 79.3% of the Corporation's and its Wholly -Owned Subsidiaries' total cash
and investments. The overall asset allocation for the Long -Term Portfolio is currently targeted for 30% fixed
income, 40% equities, and 30% absolute return investments ( +/- 10%). This target allocation may vary over time
based on economic and market conditions. Actual investments at February 28, 2007 were in substantial compliance
with the current investment policy.
The Corporation's Long -Term Portfolio investment policy is intended to be used as a framework to help
achieve the stated investment objectives at a level of risk deemed acceptable at the investment manager level. The
policies are designed to minimize interfering with the efforts to attain overall objectives and to minimize risk
without excluding the managers from appropriate investment opportunities.
The fixed income assets held in the Corporation's Long -Term Portfolio are managed by an investment
manager who must maintain a minimum average portfolio quality of "A" and a minimum credit quality at purchase
for up to 10% of its portfolio of `Baa" or equivalent rating by at least one of the major rating services. The
investment manager is specifically directed to target an average duration of three to five years and to limit its
holdings to no more than (i) 10% in non -U.S. foreign government instruments, (ii) 10% in high -yield securities rated
at least "BB" or equivalent, and (iii) 25% in nonleveraged derivatives (including futures). At February 28, 2007, the
fixed income portfolio had an aggregate market value of approximately $220 million with portfolio duration of 5.3
years. The average credit quality of the holdings in the fixed income portfolio was in the "AAA" category from the
major rating services.
Six investment managers manage the Corporation's equity investments, with specific .investment
restrictions among the following categories:
• Large Capitalization
• Mid Capitalization
• Small Capitalization
• Global
Each equity manager has specific investment guidelines and defined portfolio benchmarks appropriate for
the managed asset class.
In 2003, the Corporation recognized the need to further diversify its investments to reduce overall portfolio
volatility in light of its planned capital needs. In accordance with the Corporation's investment policies and
procedures, the Corporation may invest up to 30% of its assets in alternative investments, such as private equity and
absolute return investments.
Absolute Return Investments
The Corporation's classification of absolute return investments currently includes "fund -of- funds" hedge
funds, as well as investments under multiple asset class mandates with broad investment manager discretion. As of
February 28, 2007, approximately 21% of the absolute return portfolio was invested in a mutual fund -of -funds
which seeks a positive return regardless of market direction and which is not restricted with respect to its exposure
to any particular asset class. At the investment manager's discretion, the fund may invest all or substantially all of
OHS West:260219584.1 A -28
its assets in a limited number of underlying funds that primarily invest in marketable equity and fixed income
securities denominated in both U.S. and foreign currencies with an exposure to both emerging markets and
developed markets. As of February 28, 2007, approximately 79% of the absolute return portfolio was invested in
four offshore multi- manager "fund -of- funds" hedge funds which implement a range of alternative investment
strategies including but not limited to long /short equity, market neutral, diversified futures, commodities, emerging
country debt, event driven, merger arbitrage, distressed and high yield, convertibles, interest -rate driven, and credit
driven. The level of risk associated with these "fund -of- funds" hedge fund investments is generally greater than the
risk associated with traditional fixed income or equity investments. Risk factors associated with these "fund -of-
funds" hedge funds include the use of leverage. Such leverage involves increased risk as well as substantial interest
expense. The use of leverage by the funds can, in certain circumstances, increase the adverse impact to which the
investment portfolio may be subject. Additional risk factors include limited transferability and liquidity. Some of
the "fund -of- funds" hedge funds are subject to liquidity restrictions such as redemption provisions which provide for
specified redemption windows with certain advance notice requirements. There can be no assurance that the
absolute return managers will achieve their investment objectives.
Private Equity Investments
In mid -2006, the Corporation made a capital commitment in the amount of $6 million to a private equity
buyout fund. The fund invests primarily in privately negotiated investments that have equity -like returns often
involving leverage. The Corporation is subject to capital calls with generally ten days prior notice. The investments
are typically valued at cost until realization or a material event. Fund distributions may not commence until several
years after the initial closing of the fund as investments are disposed. The Corporation anticipates that its private
equity investment will yield negative returns in the initial years as capital is drawn down and invested. While
returns are expected to gradually increase as investments begin to mature, there can be no assurance that the
private equity manager will achieve its investment objectives. The private equity investments are highly illiquid
and difficult to value. In addition, the Corporation has limited transferability and withdrawal rights with respect to
the fund. As of February 28, 2007, the Corporation's unused capital commitment which is subject to future capital
calls totaled approximately $4 million. The Corporation may increase its allocation to private equity investments in
the future subject to any limitations imposed by its investment policies.
The investment policies are subject to revision from time to time by the Corporation Board of
Directors.
Capitalization
The following table sets forth the capitalization for the Corporation and its Wholly -Owned Subsidiaries at
August 31, 2006. The pro forma capitalization has been adjusted to reflect the issuance of the Bonds, as if such
transaction had occurred on August 31, 2006.
Outstanding Long -Term Debt
Less: Refunding Escrow (Series 1992, 1996, 1999)
Plus: The 2007 Bonds
Subtotal
Total Net Assets
Total Capitalization
Percent Long -Term Debt to Capitalization
Estimated Debt Service Coverage (PENDING)
Actual
Pro Forma
August 31, 2006
August 31, 2006
- (000's)-
$516,000
$516,000
$316,000
423,000
516,000
623,000
1.089.740
1,089,740
$1,605,740
$1,712,740
32.1%
36.4%
The following table sets forth the Corporation's and its Wholly -Owned Subsidiaries' estimated annual debt
service coverage for the fiscal years ended August 31, 2005 and 2006. The pro forma debt service coverage has
been adjusted to reflect the issuance of the Bonds, as if such transaction had occurred on September 1, 2006 in the
aggregate amount of $130 million. All debt assumes an interest rate of _ per annum (to be updated by
OHS west:2602195B4.1 A -29
Citigroup), the approximate 10 -year average of the BMA Index.
[ *DSCRatio assumptions to be clarified under new MTI.]
OHS Wes[260219584.1 A -30
Pro Forma
August 31, 2006
$ 87,363
40,218
Actual
Actual
August 31, 2005
August 31, 2006
-(000)-
Net Income
$83,208
$87,363
Depreciation and Amortization
32,078
40,218
Interest
9.307
17.652
Income Available for Debt Service
124,593
145,233
Estimated Debt Service
14 242
14.242
Debt Service Coverage Ratio (times)*
8.7
1 10.2
[ *DSCRatio assumptions to be clarified under new MTI.]
OHS Wes[260219584.1 A -30
Pro Forma
August 31, 2006
$ 87,363
40,218
ORGANIZATION AND MANAGEMENT
Corporate Structure
The Corporation has fifty members, twenty -five appointed by the George Hoag Family Foundation and
twenty -five by the Association of Presbyterian Members of Orange County. The members elect the Board of
Directors of the Corporation. Nominations to the Board are made as follows: a nominating committee of the Board
— between nine and thirteen; the Medical Staff— three, and the President & CEO as an ex- officio director; for a total
of thirteen to seventeen nominations.
Board of Directors
The current members of the Board are listed below. There are currently two vacancies on the Board.
Years on Term
Name Occupation Board Expires it]
Richard M. Ortwein, Chair
Robert W. Evans, Vice Chair
Max W. Hampton, Secretary
Richard F. Afable, MD
Dick P. Allen
John L Benner
James J. Berman, MD
Allyson Brooks, MD
John L. Curci
Jake Easton III
Joanne D. Fix
Kris V. Iyer, MD
Stephen Jones
Melinda Hoag Smith
V irgina Ueberroth
Vacancy
Vacancy
Independent Real Estate Developer
7
2008
Retired Sales & Marketing Executive
9
2009
Retired Merrill Lynch Executive
10
2007
Hospital President & CEO
2
2008
Independent Investment Manager
16
2008
Retired Financial Management Consultant
2
2007
Physician, Internal Medicine
5
2007
Physician, Gynecology
2 mo.
2009
Independent Real Estate Investment Manager
I0
2009
Management Consultant
3
2009
Retired Accountant
I5
2008
Physician, Endocrinology
1
2008
General Contractor, Commercial Const.
5
2007
Philanthropist
12
2008
Philanthropist
3
2009
2007
2009
Ell Terms ending in 2007 will expire at the Corporation's Annual Meeting scheduled for November, 2007. Terms
may be renewed indefinitely at each Annual Meeting.
Management
The management of the Corporation has been delegated by the Board of Directors to the administrative
staff. Brief resumes of members of senior management are included below.
President and CEO. Richard Afable, M.D., MPH, age 53, has been President and Chief Executive Officer
of the Corporation since August, 2005. Prior to his selection as President and Chief Executive Officer of the
Corporation, Dr. Afable served as executive vice president and chief medical officer at Catholic Health East, the
largest not- for - profit health care system on the East Coast, and was part of their senior management team, which
guided the strategic operation, and management of the health system. As executive vice president, he was
responsible for all aspects of clinical performance and quality management and had corporate responsibility for
information technology, managed care, patient safety, communications, and physician relationships. Before joining
Catholic Health East, Dr. Afable was the founder and president/CEO of Preferred Physician Partners (PPP), a
physician practice management company that supported physician groups and provider networks. Prior to hospital
administration, Dr. Afable was in private practice in Chicago, specializing in internal medicine and geriatrics. Dr.
Afable received his BS degree from Loyola University in Chicago and an MD from the Loyola Stritch School of
Medicine. He obtained his MPH degree from the University of Illinois School of Public Health and a certificate in
business administration from Villanova University in Pennsylvania.
OHS West:260219584.1 A -31
Senior Vice President — Hospital Services. Robert T. Braithwaite, age 41, has been with the Corporation
since 1999, and is responsible for daily hospital operations including all ancillary and support services as well as the
Hospital's Centers of Excellence for Cancer and Orthopedics. He also directs the Corporation's quality and
performance improvement initiatives. Mr. Braithwaite received his Masters in Health Services Administration
from Arizona State University and a Bachelor of Science in Health PromotionfManagement. Mr. Braithwaite
previously served as Vice President for Service Line Development and Quality (1996 -1999) at St. Joseph Hospital in
Orange California and as Vice President of Support Services at Hoag Hospital (1992- 1996).
Senior Vice President — Chief Quality lacer. Jack Cox, M.D., MMM, age 53, joined the organization in
2006. Dr. Cox is a seasoned physician executive with over 20 years experience across a broad field of health care
environments. Prior to Hoag, he served as Chief Medical Officer and Senior VP with Premier, Inc, a national
healthcare alliance. There he developed a model for quality improvement initiatives in conjunction with the Institute
of Healthcare Improvement and was instrumental in designing a medical technology evaluation process that
incorporated quality and safety. Dr. Cox was a medical director for Intermountain Health Care, Inc. where he led
operational and quality improvement for eight outpatient physician group practices. He has served on the clinical
faculty for five medical schools and was previously involved in academics and research for 13 years, including
serving as director for two residencies. He has served on a number of boards and committees including the
American Hospital Association, the Health Technology Center, an IOM subcommittee and the JCAHO Journal on
Quality. Dr. Cox is a board certified Family Physician, a fellow of the American Board of Family Practice, a fellow
of the American College of Physician Executives and holds a master's degree in Medical Management from Tulare
University. He has published and spoken nationally and internationally on various aspects of healthcare.
Senior Vice President — Resource Development and Community Relations. Ronald Guziak, age 60, is
responsible for direction and supervision of the Corporation's fund raising activities, which are coordinated with
Hoag Hospital Foundation. Mr. Guziak is also the Executive Director of Hoag Hospital Foundation. Mr. Guziak
graduated from West Virginia University where he received his bachelor's degree in journalism. He earned his
master's degree in social science from Wesleyan University in Middletown, Connecticut. Prior to assuming his
position with the Corporation, Mr. Guziak served as president of Little Company of Mary Hospital Foundation
(Torrance, California) and San Pedro Peninsula Hospital Foundation (San Pedro, California). He has also held
positions at St. Luke's Episcopal Hospital (Houston, Texas), California Hospital Medical Center (Los Angeles,
Calif), Memorial Hospital of Glendale (Glendale, California), Northwestern Memorial Hospital (Chicago, IIlinois),
and Wesleyan University (Middletown, Connecticut). Mr. Guziak is a Fellow in the Association for Healthcare
Philanthropy (AHP) and a member of the Association of Fundraising Professionals (AFP).
Senior Vice President — Patient Care Services and Chief Nursing Officer. Richard Martin, MSN, RN, age
48 , has been with the Corporation for 15 years and is responsible for Nursing Services and Patient Care Services
departments including; Pharmacy, Pulmonary, Emergency Care Unit, and Surgical Services as well as the Women's
Center of Excellence. Mr. Martin received his Masters in Nursing from the University of Virginia and a Bachelor of
Science in Nursing from West Virginia University. Mr. Martin previously served as Assistant Vice President for
Critical Services (1985 -1991) at Lewis -Gale Hospital in Salem, Virginia.
Vice President — Finance and Chief Financial Officer, Jennifer C. Mitzner, age 38, has been with the
Corporation for nearly 13 years. As Chief Financial Officer, she is responsible for all aspects of corporate finance
including treasury, accounting, finance, materials management, managed care contracting, patient financial services,
patient access functions, and internal audit of the Corporation. Ms. Mitzner received her Master of Public
Administration degree in Health Care Administration from the University of San Francisco and her Bachelor of
Business Administration, Accounting from Texas Christian University and is a Certified Public Accountant. Ms.
Mitzner was previously with KPMG Peat Marwick in the advisory services group for both the healthcare and
insurance industry (1990 - 1994).
EMPLOYEES
As of August 31, 2006, the Corporation and its Wholly -Owned Subsidiaries had approximately 3,062 full -
time and 1,199 part-time employees or 3,716 full -time equivalents. This includes all hospital related functions as
well as support functions. Support functions include the Child Care Center, eight outreach medical office buildings,
OHS West:260219594.1 A -32
a physicians billing service, management of the Foundation, management and operating staff for the Independent
Physicians Association (IPA) and several practice management sites.
Generally, the markets in which the Corporation operates are experiencing nursing shortages. To address
this shortage, the Corporation has implemented a number of initiatives to fund nursing education programs and
expand the supply of nurses. In fiscal year 2007, the Corporation expects to award approximately $300,000 in
scholarships to Hoag employees. The scholarship funds help nursing students buy books and pay for tuition and
fees. In addition, to help local colleges and universities, the Corporation provides professorships for nursing
instructors. A one -year professorship, valued at $100,000, enables 12 nursing students to enroll from a waiting list.
Presently, the Corporation partners with Golden West College, California State University, Long Beach, Saddleback
College, California State University, Fullerton and Santa Ana College. In fiscal year 2007, the Corporation expects
to fund approximately $1,000,000 in nursing professorship. In addition, the Corporation recently celebrated the
opening of The Marion Knott Nursing Education Center, an on- campus Nursing Education Center featuring
classroom space, and the latest technology and equipment to educate current staff, new hires and nursing students
performing clinical rotations. To maximize the learning experience, the education center duplicates the Hospital's
patient environment.
Employees of the Corporation are not represented by any union and management of the Corporation has
not observed any significant union activity at the Hospital in recent years. Management considers its relations with
its employees to be good.
The Corporation does not sponsor any deftted benefit plans.
LEGAL & REGULATORY MATTERS
(To be updated if necessan' upon completion of Due Diligence)
The Corporation is involved in various liability disputes, governmental and regulatory inspections,
inquiries, investigations, proceedings and litigation matters that arise from time to time in the ordinary course of
business. The Corporation is self - insured with respect to professional liability and comprehensive general liability
risks, subject to certain limitations. Professional and comprehensive general liability risks in excess of $2,000,000
per occurrence are reinsured with major independent insurance companies. See `BONDHOLDERS' RISKS —
Business Relationships and Other Business Matters — Professional Liability Claims and General Liability Insurance"
and "LITIGATION — Hoag Hospital" in the forepart of this Official Statement for additional information regarding
litigation and claims risks.
POTENTIAL AFFILIATIONS AND TRANSACTIONS
(To be updated upon completion of Due Diligence)
As with many healthcare providers, the Corporation has considered an affiliation with various healthcare
systems in the past and might in the future. There are no current affiliations either under discussion or
contemplation.
The Corporation may negotiate for and enter into affiliations, joint ventures or contractual arrangements in
the future in furtherance of its strategic plans and community mission. Future acquisitions, affiliations, or joint
ventures may involve substantial capital expenditures, all or a portion of which may be financed through debt
incurred by the Corporation.
OHS West:260219584.1 A -33
TABLE OF CONTENTS
Page
GENERAL.................................................................................................................................... ............................... I
Descriptionof Services .................................................................................................... ..............................4
Centersof Excellence ..................................................................................................... ............................... 5
OtherServices ................................................................................................................ .........................:..... 7
BedDistribution ............................................................................................................. ............................... 8
MEDICALSTAFF ........................................................................................................................ ..............................9
SERVICE AREA AND COMPETITION .................................................................................. ............................... I I
ServiceArea ................................................................................................................. ............................... I I
Market Share and Competition ....................................................................................... .............................12
Demographics................................................................................................................. .............................12
FACILITIES DESIGN AND CONSTRUCTION ........................................................................ .............................13
TheMaster Plan ............................................................................................................ ............................... 13
TheProject ................................................................................................................... ............................... 14
SELECTED UTILIZATION AND FINANCIAL INFORMATION ......................................... ............................... 17
Sources of Patient Services Revenue ..............................................................................
.............................17
HistoricalUtilization ......................................................................................................
.............................18
Summary of Financial Information ................................................................................
.............................18
Management's Discussion and Analysis of Financial Information ................................
.............................21
Liquidity and Investment Policy ...................................................................................
............................... 23
Indebtedness and Certain Liabilities ...............................................................................
.............................25
ExistingLiquidity Facility ..............................................................................................
.............................26
Self - Liquidity .................................................................................................................
.............................26
Capitalization................................................................................................................
............................... 26
Estimated Debt Service Coverage ................................................................................
............................... 27
ORGANIZATION AND MANAGEMENT .................................................................................
.............................27
OHS West260219584.1
CITY OF NEWPORT BEACH
"•R]
HOAG MEMORIAL HOSPITAL PRESBYTERIAN
LOAN AGREEMENT
Dated as of May 1, 2007
relating to
$[AGGREGATE PAR]
CITY OF NEWPORT BEACH
INSURED REVENUE BONDS
(HOAG MEMORIAL HOSPITAL PRESBYTERIAN)
SERIES 2007A, 2007B, 2007C, 2007D and 2007E
OHS West:260186534.4
OH &S
DRAFT
04/23/07
This LOAN AGREEMENT, dated as of May 1, 2007 (the "Loan Agreement "),
between the CITY OF NEWPORT BEACH, a municipal corporation and charter city duly
organized under a freeholder's charter under the Constitution and laws of the State of California
(the "City "), and HOAG MEMORIAL HOSPITAL PRESBYTERIAN, a nonprofit public benefit
corporation duly organized and existing under the laws of the State of California (the
"Corporation ");
WITNESSETH:
WHEREAS, the City has the right and power to make and enforce all laws and
regulations in respect to municipal affairs and certain other matters in accordance with and as
more particularly provided in Sections 3, 5 and 7 of Article XI of the Constitution of the State of
California and Section 200 of Article II of the charter of the City (the "Charter ");
WHEREAS, the City Council of the City, acting under and pursuant to the powers
reserved to the City under Sections 3, 5 and 7 of Article XI of the Constitution of the State of
California and Section 200 of Article II of the Charter, has duly enacted Ordinance No. 85 -23
and 84 -4 of the City (the "Law "), establishing a procedure for the authorization, sale and
issuance of revenue bonds by the City for the purpose, inter alia, of making loans to participating
health institutions to finance and refinance health facilities as provided in the Law;
WHEREAS, the Corporation has requested the assistance of the City in the
financing and refinancing of the acquisition, construction, and equipping of health facilities
located within the City;
WHEREAS, after due investigation and deliberation, the City has approved said
request and authorized the issuance of its Insured Revenue Bonds (Hoag Memorial Hospital
Presbyterian), Series 2007A, 2007B, 2007C, 2007D and 2007E (collectively, the "Bonds ") in the
aggregate principal amount of dollars ($[AGGREGATE PAR]) to
accomplish such purposes in accordance with the Law;
WHEREAS, pursuant to a master indenture, dated as of May 1, 2007 (the "Master
Indenture "), between the Corporation, Newport Healthcare Center LLC, a California limited
liability company ( "NHC "), the sole corporate member of which is the Corporation and such
other Members as may join the obligated group as defined therein (the "Obligated Group ") and
Wells Fargo Bank, National Association, as master trustee (the "Master Trustee "), and a
Supplemental Master Indenture for Obligation No. 1, dated as of May 1, 2007, between the
Corporation and the Master Trustee ( "Supplement No. 1 "), the Corporation has issued its
Obligation No. 1 to evidence the joint and several obligation of the Members to make all
payments required of the Corporation under this Loan Agreement, including amounts sufficient
to pay the principal of and premium and interest on the Bonds;
WHEREAS, in order to further support payments of principal of and interest on
the Bonds, the Corporation has obtained a Bond Insurance Policy from Ambac Assurance
Corporation, as Bond Insurer;
OHS Wwt:260186534.4
WHEREAS, the Corporation has requested the City to enter into this loan
agreement specifying the terms and conditions of a loan by the City to the Corporation of the
proceeds of the Bonds and of the payment by the Corporation to the City of the amounts required
for the payment of the principal of, and interest and premium, if any, on the Bonds and certain
related expenses;
WHEREAS, the City and the Corporation have each duly authorized the
execution, delivery and performance of this Loan Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS; INTERPRETATION
Section I.I. Definitions. Unless otherwise required by the context, all terms
used herein shall have the meanings assigned to such terms in Section 1.01 of the Bond
Indenture between the City and Wells Fargo Bank, National Association, as trustee (the "Bond
Trustee "), dated as of May 1, 2007, as originally executed and as amended or supplemented from
time to time.
Section 1.2. Interpretation.
(a) Unless the context otherwise indicates, words expressed in the singular
shall include the plural and vice versa and the use of the neuter, masculine, or feminine gender is
for convenience only and shall be deemed to mean and include the neuter, masculine or feminine
gender, as appropriate.
(b) Headings of articles and sections herein and the table of contents hereof
are solely for convenience of reference, do not constitute a part hereof and shall not affect the
meaning, construction or effect hereof.
Section 1.3. Content of Certificates and ORnions. Every certificate or opinion
provided for in this Loan Agreement with respect to compliance with any provision hereof shall
include the requirements set forth in Section 1.02 of the Bond Indenture.
ARTICLE II
ISSUANCE OF BONDS AND OBLIGATION NO. 1
Section 2.1.
authorized the issuance
The Bonds. Pursuant to the Bond Indenture, the City has
of the Bonds in the aggregate principal amount of
_ dollars ($[AGGREGATE PAR]). The Corporation hereby
approves the Bond Indenture, the assignment thereunder to the Bond Trustee of the right, title
and interest of the City (with certain exceptions noted therein) in this Loan Agreement and
Obligation No. 1 and the issuance thereunder by the City of the Bonds. All rights accruing to or
vested in the City with respect to Obligation No. 1 may be exercised by the Bond Trustee.
OHS We t260186534.4
Section 2.2. Issuance of Obligation No. 1. In consideration of the issuance of
the Bonds by the City and the application of the proceeds thereof, as provided in the Bond
Indenture, the Corporation agrees to issue and to cause to be authenticated and delivered to the
City or its designee, pursuant to the Master Indenture and Supplement No. 1, concurrently with
the issuance and delivery of the Bonds, Obligation No. 1 in substantially the form set forth in
[Section 11] of Supplement No. 1. The City agrees that Obligation No. 1 shall be registered in
the name of the Bond Trustee. The Corporation agrees that the aggregate principal amount of
Obligation No. 1 shall be limited to dollars ($[AGGREGATE PAR]),
except for any Obligation No. 1 authenticated and delivered in lieu of another Obligation No. 1
as provided in [Section 6] of Supplement No. 1 with respect to the mutilation, destruction, loss
or theft of Obligation No. 1, issuance and delivery of the Bonds by the City shall be a condition
of the issuance and delivery of Obligation No. 1.
Section 2.3. Restrictions on Number and Transfer of Obligation No. 1.
(a) The Corporation agrees that, except as provided in subsection (b) of this
Section, so long as any Bond remains Outstanding, Obligation No. 1 shall be issuable only as a
single obligation without coupons, registered as to principal and interest in the name of the Bond
Trustee, and no transfer of Obligation No. I shall be registered under the Master Indenture or be
recognized by the Corporation except for transfers to a successor Bond Trustee.
(b) Upon the principal of all Obligations Outstanding (within the meaning of
that term as used in the Master Indenture) being declared immediately due and payable,
Obligation No. 1 may be transferred if and to the extent that the Bond Trustee requests that the
restrictions of subsection (a) of this Section on transfers be terminated.
ARTICLE III
LOAN OF PROCEEDS; PAYMENTS
Section 3.1. Loan of Proceeds; Payments of Principal, Premium and Interest.
(a) The City hereby lends and advances to the Corporation, and the
Corporation hereby borrows and accepts from the City a loan in a principal amount equal to the
aggregate principal amount of the Bonds, the net proceeds of which loan shall be equal to the net
proceeds received from the sale of the Bonds, such proceeds to be applied under the terms and
conditions of this Loan Agreement and the Bond Indenture. In consideration of the loan of such
proceeds to the Corporation, the Corporation agrees to pay, or cause to be paid, "Loan
Repayments" in an amount sufficient to enable the Bond Trustee to make the transfers and
deposits required at the times and in the amounts pursuant to Section 5.02 of the Bond Indenture.
Each Loan Repayment shall be made in immediately available funds at least three days prior to
the time the Bond Trustee must make each transfer and deposit pursuant to Section 5.02 of the
Bond Indenture. Notwithstanding the foregoing, the Corporation agrees to make payments, or,
cause payments to be made, at the times and in the amounts required to be paid as principal or
Redemption Price of and interest on the Bonds from time to time Outstanding under the Bond
Indenture and other amounts required to be paid under the Bond Indenture, as the same shall
become due whether at maturity, upon redemption, by declaration of acceleration or otherwise.
OHS West:260186534.4 3
(b) Except as otherwise expressly provided herein, all amounts payable with
respect to Obligation No. 1 or hereunder by the Corporation to the City shall be paid to the Bond
Trustee or other parties entitled thereto as assignee of the City and this Loan Agreement and all
right, title and interest of the City in any such payments are hereby assigned and pledged to the
Bond Trustee so long as any Bonds remain Outstanding.
Section 3.2. Additional Payments. In addition to Loan Repayments and
payments on Obligation No. 1, the Corporation shall also pay to the City, the Bond Trustee, the
Tender Agent, (if any), the Liquidity Facility Provider (if any), the Bond Insurer, the Auction
Agent (if any), the Broker - Dealer (if any) or the designated agent of any of them, as the case may
be, "Additional Payments," as follows:
(a) All taxes and assessments of any type or character charged to the City or
to the Bond Trustee affecting the amount available to the City or the Bond Trustee from
payments to be received hereunder or in any way arising due to the transactions contemplated
hereby (including taxes and assessments assessed or levied by any public agency or
governmental authority of whatsoever character having power to levy taxes or assessments) but
excluding franchise taxes based upon the capital and /or income of the Bond Trustee and taxes
based upon or measured by the net income of the Bond Trustee; provided, however, that the
Corporation shall have the right to protest any such taxes or assessments and to require the City
or the Bond Trustee, at the Corporation's expense, to protest and contest any such taxes or
assessments levied upon them and that the Corporation shall have the right to withhold payment
of any such taxes or assessments pending disposition of any such protest or contest unless such
withholding, protest or contest would adversely affect the rights or interests of the City or the
Bond Trustee;
(b) All reasonable fees, charges, expenses and indemnities of the Bond
Trustee and the Tender Agent (if any) hereunder and under the Bond Indenture, the reasonable
fees, charges, expenses and indemnities of the Liquidity Facility Provider (if any) under the
Liquidity Facility (if any), the Auction Agent (if any). and the Broker - Dealer (if any), as and
when the same become due and payable;
(c) The reasonable fees and expenses of such accountants, consultants,
attorneys and other experts as may be engaged by the City or the Bond Trustee to prepare audits,
financial statements, reports, opinions or provide such other services required under this Loan
Agreement, Supplement No. 1, Obligation No. 1 or the Bond Indenture;
(d) The reasonable fees and expenses of the City, or any agent selected by the
City to act on its behalf, in connection with this Loan Agreement, Supplement No. 1, Obligation
No. 1, the Bonds or the Bond Indenture, including any and all fees and expenses incurred in
connection with the authorization, issuance, sale and delivery of any such Bonds or by the City's
attorneys in connection with any litigation which may at any time be instituted involving this
Loan Agreement, Supplement No. 1, Obligation No. 1, the Bonds or the Bond Indenture or any
of the other documents contemplated thereby, or in connection with the supervision or inspection
of the Corporation, any Members, their properties, assets or operations or otherwise in
connection with the administration of this Loan Agreement;
OHS West260186534.4 4
(e) Any amounts due to the Bond Insurer hereunder or -under the Bond
Indenture; and
(f) All other reasonable and necessary fees and expenses attributable to the
Bonds, this Loan Agreement, Obligation No. 1 or related documents, including without
limitation all payments required pursuant to the Tax Agreement.
Such Additional Payments shall be billed to the Corporation by or upon direction
of the City, the Bond Trustee, the Tender Agent, (if any), the Auction Agent (if any), the Broker -
Dealer (if any), the Bond Insurer or the Liquidity Facility Provider (if any) from time to time,
together with a statement certifying that the amount billed has been incurred or paid for one or
more of the above items. After such a demand, amounts so billed shall be paid by the
Corporation within thirty (30) days after receipt of the bill by the Corporation.
The obligations of the Corporation under this Section shall survive the resignation
or removal of the Bond Trustee or Tender Agent (if any) under the Bond Indenture and payment
of the Bonds and discharge of the Bond Indenture.
Section 3.3. Credits for Payments. The Corporation shall receive credit against
its payments required to be made under Section 3.1, in addition to any credits resulting from
payment or repayment from other sources, as follows:
(a) on installments of interest in an amount equal to moneys deposited in the
Interest Account, which amounts are available to pay interest on the Bonds, to the extent such
amounts have not previously been credited against such payments;
(b) on installments of principal in an amount equal to moneys deposited in the
Principal Account, which amounts are available to pay principal of the Bonds, to the extent such
amounts have not previously been credited against such payments;
(c) on installments of principal and interest in an amount equal to the
principal amount of Bonds for the payment at maturity or redemption of which sufficient
amounts (as determined by Section 10.03 of the Bond Indenture) in cash or United States
Government Obligations are on deposit as provided in Section 10.03 of the Bond Indenture to the
extent such amounts have not previously been credited against such payments, and the interest
on such Bonds from and after the date fixed for payment at maturity or redemption thereof. Such
credits shall be made against the installments of principal and interest which would have been
used, but for such call for redemption, to pay principal of and interest on such Bonds when due;
and
(d) on installments of principal and interest in an amount equal to the
principal amount of Bonds acquired by the Corporation and surrendered to the Bond Trustee for
cancellation or purchased by the Bond Trustee on behalf of the Corporation and canceled, and
the interest on such Bonds from and after the date interest thereon has been paid prior to
cancellation. Such credits shall be made against the installments of principal and interest which
would have been used, but for such cancellation, to pay principal of and interest on such Bonds
when due.
OHS West: 260186534.4 5
Section 3.4. Prepayment. The Corporation shall have the right, so long as all
amounts which have become due hereunder have been paid, at any time or from time to time to
prepay all or any part of the Loan Repayments and the City agrees that the Bond Trustee shall
accept such prepayments when the same are tendered. Prepayments may be made by payments
of cash, deposit of United States Government Obligations or surrender of Bonds, as
contemplated by subsections 3.3(c) and (d). All such prepayments (and the additional payment
of any amount necessary to pay the applicable premium, if any, payable upon the redemption of
Bonds) shall be deposited upon receipt at the Corporation's direction in (i) the Principal
Account, (ii) the Optional Redemption Account of the Redemption Fund if the Bonds are to be
redeemed pursuant to Section 4.01(B), (C), (D) or (E) of the Bond Indenture, or (iii) the Special
Redemption Account of the Redemption Fund if the Bonds are to be redeemed pursuant to
Section 4.01(A) or (G) of the Bond Indenture and, at the request of and as determined by the
Corporation, credited against payments due hereunder or used for the redemption or purchase of
Outstanding Bonds in the manner and subject to the terms and conditions set forth in the Master
Indenture and the Bond Indenture. Notwithstanding any such prepayment or surrender of Bonds,
as long as any Bonds remain Outstanding or any Additional Payments required to be made
hereunder remain unpaid, the Corporation shall not be relieved of its obligations hereunder.
Section 3.5. Pavment of Purchase Price of Purchased Bonds.
(a) The Corporation agrees that with the consent of the Bond Insurer, if a
Liquidity Facility is not in effect with respect to a Series of Bonds, it shall pay to the Tender
Agent all amounts necessary for the purchase of Bonds of such Series pursuant to Section 4.10 of
the Bond Indenture and not deposited with the Tender Agent by the Remarketing Agent from the
proceeds of the sale of such Bonds pursuant to Section 4.10 of the Bond Indenture. Each such
payment by the Corporation to the Tender Agent pursuant to this Section shall be in immediately
available funds and paid to the Tender Agent at its Principal Office by 3:00 p.m., New York City
time, on each date upon which a payment is to be made pursuant to Section 4.10 of the Bond
Indenture.
(b) If the Fixed Rate Conversion Date for a Series of Bonds is established
pursuant to the Bond Indenture, the obligations of the Corporation pursuant to this Section 3.5
with respect to such Bonds shall be terminated following the Fixed Rate Conversion Date.
Section 3.6. Obligations Unconditional. The obligations of the Corporation
hereunder and under Obligation No.1 are absolute and unconditional, notwithstanding any other
provision of this Loan Agreement, Supplement No. 1, Obligation No. 1, the Master Indenture or
the Bond Indenture. Until this Loan Agreement is terminated and all payments hereunder are
made, the Corporation:
(a) will pay all amounts required hereunder without abatement, deduction or
setoff except as otherwise expressly provided in this Loan Agreement;
(b) will not suspend or discontinue any payments due hereunder or under
Obligation No. I for any reason whatsoever, including, without limitation, any right of setoff or
counterclaim;
OHS West260186534.4 6
(c) will perform and observe all its other agreements contained in this Loan
Agreement; and
(d) except as provided herein, will not terminate this Loan Agreement for any
cause, including, without limiting the generality of the foregoing, damage, destruction or
condemnation of the facilities financed or refinanced with the proceeds of the Bonds or any part
thereof, commercial frustration of purpose, any change in the tax or other laws of the United
States of America, the State of California or any political subdivision of either, or any failure of
the City to perform and observe any agreement, whether express or implied, duty, liability or
obligation arising out of or connected with this Loan Agreement. Nothing contained in this
Section 3.6 shall be construed to release the City from the performance of any of the agreements
on its part contained herein, and in the event the City should fail to perform any such agreement
on its part, the Corporation may institute such action against the City as the Corporation may
deem necessary to compel performance.
The rights of the Bond Trustee, the Bond Insurer or any parry or parties on behalf
of whom the Bond Trustee is acting shall not be subject to any defense, setoff, counterclaim or
recoupment whatsoever, whether arising out of any breach of any duty or obligation of the City,
the Master Trustee, the Bond Insurer or the Bond Trustee owing to the Corporation, or by reason
of any other indebtedness or liability at any time owing by the City, the Master Trustee, the Bond
Insurer or the Bond Trustee to the Corporation.
Section 3.7. Condition Precedent. The obligation of the City to make the loan
as herein provided shall be subject to the receipt by it of the proceeds of the issuance and sale of
the Bonds.
ARTICLE IV
FINDINGS BY THE CITY;
REPRESENTATIONS AND WARRANTIES OF THE CORPORATION
Section 4.1. Findings by the City. The City hereby finds and determines based
upon the representations, warranties and agreements of the Corporation and such other
information as the City deems necessary that (i) the Corporation is a "participating health
institution" and the Project is a "health facility" as such terms are defined in the Law; (ii) the
loan to be made hereunder with the proceeds of the Bonds will promote the purposes of the Law
by providing funds to pay the cost of acquiring, constructing, rehabilitating or improving health
facilities or to refinance indebtedness incurred for that purpose; (iii) said loan is in the public
interest, serves a public purpose, promotes the health, welfare and safety of the citizens of the
State of California, and meets the requirements of the Law; (iv) the portion of the proceeds of the
Bonds allocable to the cost of financing of the Project does not exceed the total cost thereof as
determined by the Corporation; and (v) no member of the City council, department head or other
officer of the City (except a member of any board or commission) is financially interested,
directly or indirectly (as interpreted in accordance with Section 608 of the Charter of the City) in
the transactions contemplated by this Loan Agreement.
OHS West:260186534.4 7
Section 4.2. Representations and Warranties of the Corporation. The
Corporation represents and warrants to the City that, as of the date of execution of this Loan
Agreement and as of the date of delivery of the Bonds to the initial purchasers thereof and of
Obligation No. 1 to the Bond Trustee (such representations and warranties to remain operative
and in full force and effect regardless of the issuance of the Bonds or any investigation by or on
behalf of the City or the results thereof):
(a) the Corporation is a nonprofit public benefit corporation duly incorporated
and in good standing under the laws of the State of California; the Corporation has full legal
right, power and authority to enter into this Loan Agreement, the Master Indenture, Supplement
No. 1 and Obligation No. 1 and to carry out and consummate all transactions contemplated
hereby and thereby and by proper corporate action has duly authorized the execution, delivery
and performance of this Loan Agreement, the Master Indenture, Supplement No. 1 and
Obligation No. 1;
(b) the officers of the Corporation executing this Loan Agreement, the Master
Indenture, Supplement No. 1 and Obligation No. 1 are duly and properly in office and fully
authorized to execute the same;
(c) this Loan Agreement, the Master Indenture, Supplement No. 1 and
Obligation No. 1 have been duly authorized, executed and delivered by the Corporation;
(d) this Loan Agreement and Obligation No. 1, when assigned to the Bond
Trustee pursuant to the Bond Indenture, will constitute the legal, valid and binding agreements of
the Corporation, enforceable against the Corporation in accordance with their terms for the
benefit of the Holders of the Bonds, and any rights of the City and obligations of the Corporation
not so assigned to the Bond Trustee constitute the legal, valid, and binding agreements of the
Corporation enforceable against the Corporation, as applicable, in accordance with their terms;
except as enforcement may be limited by bankruptcy, insolvency or other laws affecting the
enforcement of creditors' rights generally and by the application of equitable principles if
equitable remedies are sought;
(e) the execution and delivery of this Loan Agreement, the Master Indenture,
Supplement No. 1, Obligation No. 1 and the consummation of the transactions herein and
therein contemplated and the fulfillment of or compliance with the terms and conditions hereof
and thereof, will not conflict with or constitute a violation or breach of or default under the
articles of incorporation of the Corporation, its bylaws or any applicable law or administrative
rule or regulation, or any applicable court or administrative decree or order, or any indenture,
mortgage, deed of trust, loan agreement, lease, contract or other agreement or instrument to
which the Corporation is a party or by which it or its properties are otherwise subject or bound,
or result in the creation or imposition of any prohibited lien, charge or encumbrance of any
nature whatsoever upon any of the property or assets of the Corporation, which conflict,
violation, breach, default, lien, charge or encumbrance might have consequences that would
materially and adversely affect the consummation of the transactions contemplated by this Loan
Agreement, the Master Indenture, Obligation No. 1, Supplement No. 1 or the financial
condition, assets, properties or operations of the Corporation;
OHS West:260186534.4 8
(f) no consent or approval of any trustee or holder of any indebtedness of the
Corporation and no consent, permission, authorization, order or license of, or filing or
registration with, any governmental authority is necessary in connection with the execution and
delivery of this Loan Agreement, the Master Indenture, Supplement No. 1 or Obligation No. 1
or heretofore required for the consummation of any transaction herein or therein contemplated,
except as have been obtained or made and as are in full force and effect;
(g) there is no action, suit, proceeding, inquiry or investigation, before or by
any court or federal, state, municipal or other governmental authority, pending, or to the
knowledge of the Corporation, after reasonable investigation, threatened, against or affecting the
Corporation or the assets, properties or operations of the Corporation which, if determined
adversely to the Corporation or its interests, would have a material adverse effect upon the
consummation of the transactions contemplated by, or the validity of, this Loan Agreement, the
Master Indenture, Obligation No. 1 or Supplement No. 1 or upon the financial condition, assets,
properties or operations of the Corporation, and the Corporation is not in default with respect to
any order or decree of any court or any order, regulation or demand of any federal, state,
municipal or other governmental authority, which default might have consequences that would
materially and adversely affect the consummation of the transactions contemplated by this Loan
Agreement, the Master Indenture, Obligation No. 1 or Supplement No. 1 or the financial
condition, assets, properties or operations of the Corporation. All tax returns (federal, state and
local) required to be filed by or on behalf of the Corporation have been filed, and all taxes shown
thereon to be due, including interest and penalties, except such, if any, as are being actively
contested by the Corporation, in good faith, have been paid or adequate reserves have been made
for the payment thereof;
(h) the Corporation enjoys the peaceful and undisturbed possession of all of
the premises upon which it is operating its facilities;
(i) the consolidated audited financial statements of the Corporation and its
affiliates (described in such financial statements) as of August 31, 2006, and the other financial
information and consolidated related statements of operations and changes in net assets and cash
flows for the year ended on such date (copies of which, certified by [Ernst & Young, LLP]
independent auditors, have been furnished to the City), fairly state the financial position of the
Corporation and its affiliates at August 31, 2006, and the results of operations of the Corporation
and its affiliates for the year ended on such date, and since August 31, 2006, there has been no
material adverse change in the condition (financial or otherwise) of the Corporation and its
affiliates, except as is specifically disclosed in the Official Statement;
0) no written information, exhibit or report furnished to the City by the
Corporation in connection with the negotiation of this Loan Agreement, the Master Indenture,
Obligation No. 1 or Supplement No. 1 (including, without limitation, information in the Official
Statement of the City for the Bonds) contains any untrue statement of a material fact or omits to.
state a material fact required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
(k) the Corporation is an organization described in Section 501(c)(3) of the
Code, is exempt from federal income tax under Section 501(a) of the Code and is not a private
foundation as described in Section 509(a) of the Code;
OHS West260186534.4 - 9
(1) the Corporation is and has at all times been in compliance with all
applicable Environmental Laws in all respects material to the ability of the Corporation to
perform its obligations with respect to the transactions contemplated by this Loan Agreement,
Obligation No. 1 or Supplement No. 1;
(m) there has been no spill, discharge, release, cleanup, contamination of any
Hazardous Materials or toxic waste or substance used, generated, treated, stored, disposed of or
handled by the Corporation which spill, discharge, release, cleanup, or contamination is material
to the ability of the Corporation to perform its obligations with respect to the transactions
contemplated by this Loan Agreement, Obligation No. 1 or Supplement No. .1;
(n) except for such Hazardous Materials or toxic substances or wastes as
occur, are handled, and are disposed of in the ordinary course of business of the Corporation and
in all respects material to the ability of the Corporation to perform its obligations with respect to
the transactions contemplated by this Loan Agreement, the Master Indenture, Obligation No. 1
or Supplement No. 1, no Hazardous Materials or toxic substances or wastes are located at, or
have been removed from the Corporation's properties other than as is disclosed in the Official
Statement with respect to the Bonds under the caption "BONDHOLDERS' RISKS" — Other Risk
Factors — Natural Gas.';
(o) The Corporation is a "participating health institution" and operates "health
facilities," as those terms are defined in the "Law "; and
(p) the Corporation has good title to the facilities it owns and operates free
and clear from all encumbrances other than Permitted Liens;
ARTICLE V
COVENANTS
Section 5.1. Incorporation by Reference. The covenants of the Obligated
Group as set forth in the Master Indenture are hereby incorporated by reference and reaffirmed
for the benefit of the City and the Holders of the Bonds.
Section 5.2. Prohibited Uses. No portion of the proceeds of the Bonds will be
used to finance or refinance any facility, place or building used or to be used or to be used (1)
primarily for sectarian instruction or study or as a place for devotional activities or religious
worship or (2) by a Person that is not an organization described in Section 501(c)(3) of the Code
or a Governmental Unit or by an organization described in Section 501(c)(3) of the Code
(including the Corporation) in an "unrelated trade or business" (as set forth in Section 513(a) of
the Code), in such a manner or to such extent as would result in any of the Bonds being treated
as an obligation not described in Section 103(a) of the Code.
Section 5.3. Nonliability of the City. (a) The City shall not be obligated to pay
the principal of, premium, if any, and interest on the Bonds, except from payments received
hereunder, under Obligation No. 1 and other Revenues. Neither the faith and credit nor the
taxing power of the City or the State of California or any political subdivision thereof is pledged
to the payment of the principal of, premium or interest on the Bonds. The City shall not be
liable for any costs, expenses, losses, damages, claims or actions, of any conceivable kind or any
OHS West:260166534.4 10
conceivable theory, under or by reason of or in connection with this Loan Agreement, Obligation
No. 1, the Bonds or the Bond Indenture, except only to the extent amounts are received for the
payment thereof from the Corporation under this Loan Agreement or under Obligation No. 1.
(b) The Corporation hereby acknowledges that the City's sole source of
moneys to repay the Bonds will be provided by the payments made by the Corporation hereunder
and pursuant to Obligation No. 1 and other Revenues, together with amounts on deposit in, and
investment income on, certain funds and accounts held by the Bond Trustee under the Bond
Indenture, and hereby agrees that if the payments to be made hereunder and under Obligation
No. 1 shall ever prove insufficient to pay all principal of, premium, if any, and interest on or
Purchase Price of the Bonds as the same shall become due (whether by maturity, redemption,
acceleration, tender or otherwise), then upon notice from the Bond Trustee, the Corporation shall
pay such amounts as are required from time to time to prevent any deficiency or default in the
payment of such principal, premium, interest or Purchase Price, including, but not limited to, any
deficiency caused by acts, omissions, nonfeasance or malfeasance on the part of the Bond
Trustee, the Auction Agent, if any, the Broker - Dealer, if any, the Tender Agent, if any, the
Liquidity Facility Provider, if any, the Master Trustee, the Members, the City or any third party,
as the case may be.
Section 5.4. Expenses. The Corporation covenants and agrees to pay and to
indemnify the City and the Bond Trustee against all costs and charges, including reasonable fees .
of attorneys, accountants, consultants and other experts, incurred in good faith and arising out of
or in connection with the transactions contemplated hereby and by the Bonds, the Bond
Indenture, the Master Indenture, Supplement No. 1, Obligation No. 1, or the Tax Agreement.
The obligations under this Section and Section 5.6 shall remain valid and in effect
notwithstanding the repayment of the loan hereunder or termination of this Loan Agreement or
the Bond Indenture.
Section 5.5. Tax Covenant. The Corporation covenants and agrees that it will
at all times do and perform all acts and things permitted by law, the Tax Agreement and this
Loan Agreement which are necessary in order to assure that interest paid on the Bonds (or any of
them) will be excluded from gross income for federal income tax purposes and will take no
action that would result in such interest not being so excluded. Without limiting the generality of
the foregoing, the Corporation agrees to comply with the provisions of the Tax Agreement. This
covenant shall survive payment in full or defeasance of the Bonds.
Section 5.6. Indemnification of the Bond Trustee and the City.
(a) To the fullest extent permitted by law, the Corporation agrees to
indemnify, hold harmless and defend the City, the Bond Trustee, and each of their respective
officers, governing members, directors, officials, employees, attorneys and agents (collectively,
the "Indemnified Parties" ), against any and all losses, damages, claims, actions, liabilities, costs
and expenses of any conceivable nature, kind or character (including, without limitation,
reasonable attorneys' fees, litigation and court costs, amounts paid in settlement and amounts
paid to discharge judgments) to which the Indemnified Parties, or any of them; may become
subject under or any statutory law (including federal or state securities laws) or at common law
or otherwise, arising out of or based upon or in any way relating to:
OHS West:260186534.4 11
(i) the Bonds, the Bond Indenture, this Loan Agreement, the Master
Indenture, Supplement No. 1, Obligation No. 1 or the Tax Agreement or the execution or
amendment hereof or thereof or in connection with transactions contemplated hereby or thereby,
including the issuance, sale or resale of the Bonds;
(ii) any act or omission of the Corporation or any of the Members or their
agents, contractors, servants, employees or licensees in connection with the Project or any of
their facilities, the operation of the Project or any of their facilities, or the condition,
environmental or otherwise, occupancy, use, possession, conduct or management of work done
in or about, or from the planning, design, acquisition, installation or construction of, the Project
or any of their facilities or any part thereof;
(iii) any lien or charge upon payments by the Corporation to the City and the
Bond Trustee hereunder, or any taxes (including, without limitation, all ad valorem taxes and
sales taxes), assessments, impositions and other charges imposed on the City or the Bond Trustee
in respect of any portion of the Project or any of their facilities;
(iv) any violation of any Environmental Laws with respect to, or the release of
any Hazardous Materials from, the Project or any of their facilities or any part thereof;
(v) the defeasance and/or redemption, in whole or in part, of the Bonds;
(vi) any untrue statement or misleading statement or alleged untrue statement
or alleged misleading statement of a material fact contained in any offering statement or
disclosure or continuing disclosure document for the Bonds or any of the documents relating to
the Bonds, or any omission or alleged omission from any offering statement or disclosure or
continuing disclosure document for the Bonds of any material fact necessary to be stated therein
in order to make the .statements made therein, in the light of the circumstances under which they
were made, not misleading;
(vii) any declaration of taxability of interest on the Bonds, or allegations (or
regulatory inquiry) that interest on the Bonds is taxable, for federal tax purposes;
(viii) the Bond Trustee's acceptance or administration of the trust of the Bond
Indenture, or the exercise or performance of any of its powers or duties thereunder or under any
of the documents relating to the Bonds to which it is a parry;
except (A) in the case of the foregoing indemnification of the Bond Trustee or any of its
respective officers, members, directors, officials, employees, attorneys and agents, to the extent
such damages are caused by the negligence or misconduct of such Indemnified Party; or (B) in
the case of the foregoing indemnification of the City or any of its officers, members, directors,
officials, employees, attorneys and agents, to the extent such damages are caused by the willful
misconduct of such Indemnified Party. In the event that any action or proceeding is brought
against any Indemnified Party with respect to which indemnity may be sought hereunder, the
Corporation, upon written notice from the Indemnified Party, shall assume the investigation and
defense thereof, including the employment of counsel selected by the Indemnified Party and
reasonably acceptable to the Corporation, and shall assume the payment of all expenses related
thereto, with full power to litigate, compromise or settle the same in its discretion; provided that
the Indemnified Party shall have the right to review and approve or disapprove any such
OHS West:260186534.4 12
compromise or settlement. Each Indemnified Party shall have the right to employ separate
counsel in any such action or proceeding and participate in the investigation and defense thereof,
and the Corporation shall pay the reasonable fees and expenses of such separate counsel;
provided, however, that such Indemnified Parry may only employ separate counsel at the
expense of the Corporation if in the reasonable judgment of such Indemnified Party a conflict of
interest exists by reason. of common representation or if all parties commonly represented do not
agree as to the action (or inaction) of counsel.
(b) The rights of any Persons to indemnity hereunder and rights to payment of
fees and reimbursement of expenses pursuant to Section 5.4 or this Section 5.6 and Section 6.6
shall survive the final payment or defeasance of the Bonds and in the case of the Bond Trustee
any resignation or removal. The provisions of this Section shall survive the termination of this
Loan Agreement.
Section 5.7. Liquidity Facility; Alternate Liquidity Facility.
(a) Unless the Bond Insurer agrees otherwise, in the case of a Conversion of a
Series of Bonds from any Interest Rate Period to any other Interest Rate Period (except a Serial
Bond Interest Rate Period effective to the Maturity Date for such Series or an ARS Interest Rate
Period for such Series) the Corporation shall furnish a Liquidity Facility (or, if a Liquidity
Facility is then in existence, an Alternate Liquidity Facility in substitution for the Liquidity
Facility then in effect) to provide for the purchase of Bonds of any Series upon their optional or
mandatory tender in accordance with the Bond Indenture. Any Liquidity Facility (or Alternate
Liquidity Facility) shall be a facility provided by a commercial bank or other financial institution
in an amount equal to the Required Stated Amount for such Series with a term of at least 364
days from the effective date thereof. The Liquidity Facility Provider shall be of sufficient
financial strength to cause the short-term ratings for any Series of Bonds to be secured by such
Liquidity Facility Provider's Liquidity Facility to be rated at least "A -1" by S &P and VM1G -1
by Moody's; the Corporation shall provide written evidence of such rating to the Bond Trustee
and the Bond Insurer prior to delivery of a Liquidity Facility.
(b) If a Liquidity Facility has been delivered in accordance with subsection (a)
of this Section with respect to a Series of Bonds, prior to the Fixed Rate Conversion Date for
such Series of Bonds, the Corporation (1) shall maintain the Liquidity Facility or an Alternate
Liquidity Facility, in an amount equal to the Required Stated Amount for such Series prior to its
termination, and (2) shall not voluntarily terminate the Liquidity Facility or any Alternate
Liquidity Facility without at least sixty (60) days written notice to the Bond Trustee, the Tender
Agent and the Bond Insurer and without providing for an Alternate Liquidity Facility prior to the
effective date of termination. So long as the Bond Insurance Policy is in effect and the Bond
Insurer is not in default thereunder, the Bond Insurer retains the right to consent to the provider
of a Liquidity Facility or an Alternate Liquidity Facility and the terms thereof relating to
payment with respect to the Bonds.
(c) The Corporation hereby covenants and agrees that if the Liquidity Facility
Provider for a Series of Bonds (1) receives a short-term rating downgrade below the highest
short-term Rating Categories or below the top three highest long -term Rating Categories of any
Rating Agency then rating such Bonds or (2) defaults in payment under the Liquidity Facility for
such Series of Bonds, the Corporation shall, unless waived by the Bond Insurer, use its best
0145 West:260186534.4 13
efforts to obtain an Alternate Liquidity Facility for such Series of Bonds provided by a Liquidity
Facility Provider that meets the requirements of Section 5.07(a) hereof within 90 days of receipt
of notice of such downgrade or payment default.
(d) The Bond Insurer shall be provided by the Corporation with notice (and a
copy) of all renewals, amendments and supplements to a Liquidity Facility.
Section 5.8. Continuing Disclosure. The Corporation hereby covenants and
agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure
Certificate. Notwithstanding any other provision of this Loan Agreement or the Master
Indenture, failure of the Corporation to enter into and comply with the Continuing Disclosure
Certificate shall not be considered a Loan Default Event or an Event of Default; however, the
Bond Trustee may (and, at the request of any Participating Underwriter (as defined in the
Continuing Disclosure Certificate) or the Holders of at least 25% in aggregate principal amount
of Outstanding Bonds, shall) or any Bondholder or Beneficial Owner may, take such actions as
may be necessary and appropriate, including seeking specific performance by court order, to
cause the Corporation to comply with its obligations under this Section 5.8.
Section 5.9. Acquisition Construction and Installation of the Proiect. The
Corporation shall acquire, construct and install the Project or cause such Project to be acquired,
constructed and installed and shall proceed with due diligence and use its best efforts to cause the
construction and installation of the Project to be completed by no later than the third anniversary
date of the Date of Issuance, delays beyond the reasonable control of the Corporation only
excepted. The Corporation has entered or will enter into purchase commitments and agreements
which provide, in the aggregate, for the acquisition, installation and construction of the Project
by such date and at a price which will permit completion of the Project for an amount not to
exceed the amount of money deposited in the Project Fund and other available funds. The
Corporation hereby grants, subject to applicable law, to the City, until completion of the Project,
all reasonable rights of access necessary for the City to carry out its obligations and to enforce its
rights hereunder. It is expressly understood and agreed that the City and the Bond Trustee shall
be under no liability of any kind or character whatsoever for the payment of any cost of the
Project or any expense incurred in connection with the Project and that all such costs and
expenses shall be paid by the Corporation. The acquisition, installation and construction of the
Project shall be in accordance with all applicable zoning, planning and building regulations, and
the Corporation shall obtain all necessary governmental permits, licenses, certificates,
authorizations and approvals necessary to be obtained for the acquisition, installation,
construction and operation of the Project.
Section 5.10. Disbursements from the Proiect Fund. Disbursements will be
made from the Project Fund to pay the costs of the Project and subject to the terms and
conditions set forth in the Bond Indenture. If amounts in the Project Fund are not sufficient to
pay the costs of the Project in full, the Corporation shall use its best efforts to cause the
completion of the Project elements financed with proceeds of the Bonds and shall pay at its own
expense such costs in excess of amounts available in the Project Fund, from its own funds,
without any diminution or postponement of any Loan Repayment or Additional Payment and
without any right of reimbursement from the City or the Bond Trustee. Nothing herein shall
obligate the Corporation to complete every element of the Project.
OHS West260186534.4 14
Section 5.11. Compliance with Bond Indenture. The Corporation hereby
covenants and agrees that it will comply with and carry out all of the provisions of the Bond
Indenture to be performed by the Corporation or the Obligated Group.
Section 5.12. Waiver of Personal Liability. No, official, officer, agent or
employee of the City or any member, officer, director, agent or employee of the Corporation or
any other Member shall be individually or personally liable for the payment of any principal of
or interest or premium on any Bonds or any other sum hereunder or be subject to any personal
liability or accountability by reason of the execution and delivery of this Loan Agreement, but
nothing herein shall relieve any such member, director, officer, agent or employee from the
performance of any official duty provided by law or by this Loan Agreement.
Section 5.13. Reimbursement of Bond Insurer. The Corporation hereby
covenants and agrees it shall reimburse the Bond Insurer for any amounts paid under the Bond
Insurance Policy and all costs of collection thereof and enforcement of this Bond Indenture and
any other documents executed in connection with this Bond Indenture, together with interest
thereon, from the date paid or incurred by the Bond Insurer until payment thereof in full by the
Corporation, payable at the Insurer Payment Rate (as hereinafter defined), including without
limitation (to the extent permitted by applicable law) interest on claims paid by the Bond Insurer
in respect of interest on the Bonds. Such payment obligation shall be payable on demand and on
a parity with, and from the same sources and secured by the same security as, regularly
scheduled principal and interest payments in respect of the Bonds. For purposes of the
foregoing, "Insurer Payment Rate" shall mean the lesser of (a) the maximum rate permissible
under applicable usury or similar laws limiting interest rates and (b) the greater of (i) the then
applicable highest rate of interest on the Bonds and (ii) the per annum rate of interest, publicly
announced from time to time by JPMorgan Chase Bank, N.A. ( "Chase ") at its principal office in
the City of New York, as its prime or base lending rate ( "Prime Rate ") (any change in such
Prime Rate to be effective on the date such change is announced by Chase) plus 3 percent. The
Insurer Payment Rate shall be computed on the basis of the actual number of days elapsed over a
year of 360 days. In the event that Chase ceases to announce its Prime Rate publicly, Prime Rate
shall be the publicly announced prime or base lending rate of such national bank as the Bond
Insurer shall specify.
1:11.4014141I/I
EVENTS OF DEFAULT AND REMEDIES
Section 6.1. Events of Default. Each of the following events shall constitute
and be referred to herein as a "Loan Default Event ":
(a) failure by the Corporation to pay in full any payment required hereunder
or under Obligation No. 1 when due, whether on an interest payment date at maturity, upon a
date fixed for prepayment, by declaration, upon tender of the Bonds for purchase pursuant to the
Bond Indenture, or otherwise pursuant to the terms hereof or thereof,
(b) if any material representation or warranty made by the Corporation herein
or made by the Corporation or any Member in any document, instrument or certificate furnished
OHS West:260186534.4 15
to the Bond Trustee or the City in connection with the issuance of Obligation No. 1 or the Bonds
shall at any time prove to have been incorrect in any respect as of the time made;
(c) if the Corporation shall fail to observe or perform any other covenant,
condition, agreement or provision in this Loan Agreement on its part to be observed or
performed, other than as referred to in subsection (a) or (b) of this Section, or shall breach any
warranty by the Corporation herein contained, for a period of sixty (60) days after written notice,
specifying such failure or breach and requesting that it be remedied, has been given to the
Corporation by the City, the Bond Insurer or the Bond Trustee; except that, if such failure or
breach can be remedied but not within such sixty -day period and if the Corporation has taken all
action reasonably possible to remedy such failure or breach within such sixty -day period, such
failure or breach shall not become a Loan Default Event for so long as the Corporation shall
diligently proceed to remedy such failure or breach in accordance with and subject to any
directions or limitations of time established by the Bond Trustee with the written consent of the
Bond Insurer;
(d) If the Corporation files a petition in voluntary bankruptcy, for the
composition of its affairs or for its corporate reorganization under any state or federal bankruptcy
or insolvency law, or makes an assignment for the benefit of creditors, or admits in writing to its
insolvency or inability to pay debts as they mature, or consents in writing to the appointment of a
trustee or receiver for itself or for the whole or any substantial part of the Corporation's facilities;
(e) If a court of competent jurisdiction shall enter an order, ,judgment or
decree declaring the Corporation an insolvent, or adjudging it bankrupt, or appointing a trustee or
receiver of the Corporation or of the whole or any substantial part of the Corporation's facilities,
or approving a petition filed against the Corporation seeking reorganization of the Corporation
under any applicable law or statute of the United States of America or any state thereof, and such
order, judgment or decree shall not be vacated or set aside or stayed within sixty (60) days from
the date of the entry thereof;
(f) If, under the provisions of any other law for the relief or aid of debtors,
any court of competent jurisdiction shall assume custody or control of the Corporation's
facilities, and such custody or control shall not be terminated within sixty (60) days from the date
of assumption of such custody or control;
(g) If the Corporation shall abandon the Corporation's facilities or any
substantial part thereof and such abandonment shall continue for a period of sixty (60) days after
written notice thereof shall have been given to the Corporation by the City or the Bond Trustee;
(h) any Event of Default as defined in and under the Bond Indenture; or
(i) any Event of Default as defined in and under the Master Indenture.
Section 6.2. Remedies on Default. If a Loan Default Event shall occur, then,
and in each and every such case during the continuance of such Loan Default Event, the Bond
Trustee on behalf of the City, but subject to the limitations in the Bond Indenture as to the
enforcement of remedies, shall at the written direction of the Bond Insurer, or may with the
written consent of the Bond Insurer, take such action as it deems necessary or appropriate to
collect amounts due hereunder, to enforce performance and observance of any obligation or
OHS West:260186534.4 16
agreement of the Corporation hereunder or to protect the interests securing the same, and may,
without limiting the generality of the foregoing:
(a) Exercise any or all rights and remedies given hereby or available
hereunder or given by or available under any other instrument of any kind securing the
Corporation's performance hereunder (including, without limitation, Obligation No. 1 and the
Master Indenture);
(b) By written notice to the Corporation declare all Loan Repayments and
Additional Payments to be immediately due and payable under this Loan Agreement, whereupon
the same shall become immediately due and payable; and
(c) Take any action at law or in equity to collect the payment required
hereunder then due, whether on the stated due date or by declaration of acceleration or otherwise,
for damages or for specific performance or otherwise to enforce performance and observance of
any obligation, agreement or covenant of the Corporation hereunder.
Section 6.3. Discontinuance or Abandonment of Default Proceedings. If any
proceeding taken by the Bond Trustee on account of any Loan Default Event shall have been
discontinued or abandoned for any reason, or shall have been determined adversely to the Bond
Trustee, then and in every. case. the City, the Bond Trustee, the Bond Insurer and the Corporation
shall be restored to their former position and rights hereunder, respectively, and all rights, .
remedies and powers of the City, the Bond Insurer and the Bond Trustee shall continue as though
no such proceeding had taken place.
Section 6.4. Remedies Cumulative. No remedy conferred upon or reserved to
the City or the Bond Trustee hereby or now or hereafter existing at law or in equity or by statute,
shall be exclusive but shall be cumulative with all others. Such remedies are not mutually
exclusive and no election need be made among them, but any such remedy or any combination
of such remedies may be pursued at the same time or from time to time so long as all amounts
realized are properly applied and credited as provided herein. No delay or omission to exercise
any right or power accruing upon any Loan Default Event shall impair any such right or power
or shall be construed to be a waiver thereof, but any such right or power may be exercised from
time to time and as often as may be deemed expedient by the City or the Bond Trustee. In the
event of any waiver of a Loan Default Event hereunder, the parties shall be restored to their
former positions and rights hereunder, but no such waiver shall extend to any other or subsequent
Loan Default Event or impair any right arising as a result thereof. In order to entitle the Bond
Trustee to exercise any remedy reserved to it, it shall not be necessary to give notice other than
as expressly required herein.
Section 6.5. Application of Moneys Collected. Any amounts collected
pursuant to action taken under this Article VI shall be applied in accordance with the provisions
of Article VII of the Bond Indenture and to the extent applied to the payment of amounts due on
the Bonds shall be credited against amounts due on Obligation No. 1.
Section 6.6. Attorney's Fees and Other Expenses. If, as a result of the
occurrence of a Loan Default Event, the City, the Bond Insurer or the Bond Trustee employs
attorneys or incurs other expenses for the collection of payments due hereunder or for the
OHS W est160186534.4 17
enforcement of performance or observance of any obligation or agreement on the part of the
Corporation, the Corporation will, on demand, reimburse the City, the Bond Insurer or the Bond
Trustee, as the case may be, for the reasonable fees of such attorneys and such other reasonable
expenses so incurred.
Section 6.7. Notice of Default. The Corporation agrees that, as soon as is
practicable, and in any event within ten (10) days, the Corporation will furnish the Bond Trustee
and the Bond Insurer notice of any event which is a Loan Default Event pursuant to Section 6.1
which has occurred and is continuing on the date of such notice, which notice shall set forth the
nature of such event and the action which the Corporation proposes to take with respect thereto;
provided, however, that with respect to a Loan Default Event pursuant to Section 6.1(a), the
Bond Trustee shall give the Corporation and the Bond Insurer immediate telephonic notice on
the date such default occurs.
ARTICLE VII
MISCELLANEOUS
Section 7.1. Amendments and Supplements. This Loan Agreement may be
amended, changed or modified only as provided in Section 6.08 of the Bond Indenture.
Section 7.2. Time of the Essence; Non - Business Days. Time shall be of the
essence for purposes of this Loan Agreement. When any action is provided for herein to be done
on a day named or within a specified time period, and the day or the last day of the period falls
on a day other than a Business Day, such action may be performed on the next ensuing Business
Day with the same effect as though performed on the appointed day or within the specified
period.
Section 7.3. Binding Effect. This instrument shall inure to the benefit of and
shall be binding upon the City and the Corporation and their respective successors and assigns,
subject to the limitations contained herein; provided, however, that the Bond Trustee shall have
only such duties and obligations as are expressly given to it hereunder.
Section 7.4. Entire Agreement-, Third Party Beneficiaries. This Loan
Agreement, together with all agreements and documents incorporated by reference herein,
constitutes the entire agreement of the parties and is not subject to modification, amendment,
qualification or limitation except as expressly provided herein. The City and the Corporation
recognize and agree that the Bond Insurer is a third -parry beneficiary to the provisions of this
Agreement. No other Person shall be deemed a third -party beneficiary hereof.
Section 7.5. Severability. If any covenant, agreement or provision, or any
portion thereof contained in this Loan Agreement, where the application thereof to any Person or
circumstance is held to be unconstitutional, invalid or unenforceable, the remainder of this Loan
Agreement and the application of such covenant, agreement or provision, or portion thereof, to
other Persons or circumstances, shall be deemed severable and shall not be affected thereby, and
this Loan Agreement shall remain valid, and the Bondholders shall retain all valid rights and
benefits accorded to them under this Loan Agreement and the Constitution and laws of the State
of California.
OHS West260186534.4 . is
Section 7.6. Notices.
(a) Unless otherwise expressly specified or permitted by the terms hereof, all
notices, consents or other communications required or permitted hereunder shall be deemed
sufficiently given or served if given by confirmed facsimile transmission or in writing, mailed by
first -class mail, postage prepaid and addressed as follows:
(1) to the City at:
City of Newport Beach
3300 Newport Boulevard; P.O. Box 1768
Newport Beach, California 92658 -8915
Attention:
Telephone: (949) 644 -3123
Facsimile: (949) 644 -3339
(2) to the Corporation at:
Hoag Memorial Hospital Presbyterian
One Hoag Drive
P.O. Box 6100
Newport Beach, California 92658 -6100
Attention: Chief Financial Officer
Telephone: (949) 764 -4411
Facsimile: (949) 764 -4416
(3) to the Bond Trustee at:
Wells Fargo Bank, National Association
707 Wilshire Boulevard, 17th Floor
Los Angeles, CA 90017
Attention: Corporate Trust Services
Telephone: (213) 614 -3350
Facsimile: (213) 614 -3355
(4) to the Bond Insurer at:
Ambac Assurance Corporation
One State Street Plaza
New York, New York 10004
Attn: Healthcare Surveillance
OHS West160196534.4 19
(b) The Corporation, the City, the Bond Insurer and the Bond Trustee may at
any time and from time to time by notice in writing to the other Persons listed in Section 7.6(a)
designate a different address or addresses for notice under this Loan Agreement.
Section 7.7. Consent of the Bond Insurer. Notwithstanding any other provision
hereof, any provision requiring the consent of, or control of proceedings by, the Bond Insurer
shall be in effect for so long as, and only during such time as, the Bond Insurance Policy is in
effect and no default by the Bond Insurer under the Bond Insurance Policy has occurred and is
then continuing.
Section 7.8. Term. Except as otherwise provided herein this Loan Agreement
shall remain in full force and effect from the date of execution hereof until no Bonds remain
Outstanding under the Bond Indenture and all payments required hereunder have been made.
Section 7.9. Counterparts. This Loan Agreement may be executed in several
counterparts, each of which shall be an original and all of which shall constitute one instrument.
Section 7.10. Goveminp, Law; Venue. This Loan Agreement shall be governed
by and construed according to the Constitution and laws of the State of California applicable to
contracts made and performed within such State.
OHS W=:260156534.4 20
IN WITNESS WHEREOF, the City and the Corporation have caused this Loan
Agreement to be executed in their respective names as of the date first written above.
[Seal]
Attest:
L-N
City Clerk
[oil MY9]20:0iY9)dM:39UG).1
0
Mayor
HOAG MEMORIAL HOSPITAL
PRESBYTERIAN
10
Authorized Representative
OHS West:260186534.4 21
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS; INTERPRETATION
Section1.1. Definitions ............................................................................... ............................... 2
Section1.2. Interpretation ............................................................................ ..............................2
Section 1.3. Content of Certificates and Opinions ...................................... ............................... 2
ARTICLE II
ISSUANCE OF BONDS AND OBLIGATION NO. 1
Section2.1. The Bonds ............................................................................... ............................... 2
Section 2.2. Issuance of Obligation No. 1 .................................................. ............................... 3
Section 2.3. Restrictions on Number and Transfer of Obligation No. 1 ..... ............................... 3
ARTICLE III
LOAN OF PROCEEDS; PAYMENTS
Section 3.1.
Loan of Proceeds; Payments of Principal, Premium and Interest ..........................
3
Section 3.2.
Additional Payments ............................................................... ...............................
4
Section 3.3.
Credits for Payments ............................................................... ...............................
5
Section3.4.
Prepayment ............................................................................. ...............................
6
Section 3.5.
Payment of Purchase Price of Purchased Bonds ..................... ...............................
6
Section 3.6.
Obligations Unconditional ...................................................... ...............................
6
Section 3.7.
Condition Precedent ................................................................ ...............................
7
ARTICLE IV
FINDINGS BY THE CITY;
REPRESENTATIONS AND WARRANTIES OF THE CORPORATION
Section 4.1.
Findings by the City ................................................................ ...............................
7
Section 4.2.
Representations and Warranties of the Corporation ............... ...............................
8
ARTICLE V
COVENANTS
Section 5.1.
Incorporation by Reference ................................................... ...............................
10
OHS West260186534.4 _i_
TABLE OF CONTENTS
(continued)
Page
Section5.2.
Prohibited Uses ..................................................................... ...............................
10
Section 5.3.
Nonliability of the City ......................................................... ...............................
10
Section5.4.
Expenses ............................................................................... ...............................
11
Section5.5.
Tax Covenant ........................................................................ ...............................
11
Section 5.6.
Indemnification of the Bond Trustee and the City ................. ...............................
11
Section 5.7.
Liquidity Facility; Alternate Liquidity Facility .................... ...............................
13
Section 5.8.
Continuing Disclosure .......................................................... ...............................
14
Section 5.9.
Acquisition, Construction and Installation of the Project ..... ...............................
14
Section 5.10.
Disbursements from the Project Fund ................................... ...............................
14
Section 5.11.
Compliance with Bond Indenture ......................................... ...............................
15
Section 5.12.
Waiver of Personal Liability ................................................. ...............................
15
Section 5.13.
Reimbursement of Bond Insurer ........................................... ...............................
1.5
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES
Section6.1.
Events of Default .................................................................. ...............................
15
Section 6.2.
Remedies on Default ............................................................. ...............................
16
Section 6.3.
Discontinuance or Abandonment of Default Proceedings .... ...............................
17
Section 6.4.
Remedies Cumulative ........................................................... ...............................
17
Section 6.5.
Application of Moneys Collected ......................................... ...............................
17
Section 6.6.
Attorney's Fees and Other Expenses .................................... ...............................
17
Section 6.7.
Notice of Default ................................................................... ...............................
18
ARTICLE VII
MISCELLANEOUS
Section 7.1.
Amendments and Supplements ............................................. ...............................
18
Section 7.2.
Time of the Essence; Non - Business Days ............................ ...............................
18
Section7.3.
Binding Effect ....................................................................... ...............................
18
Section 7.4.
Entire Agreement; Third Party Beneficiaries ....................... ...............................
18
Section7.5.
Severability ........................................................................... ...............................
18
Section7.6.
Notices .................................................................................. ...............................
19
OHS West:260186534.4 -ii-
TABLE OF CONTENTS
(continued)
Section 7.7. Consent of the Bond Insurer ...............
Section7.8. Term ..................... ...............................
Section 7.9. Counterparts ......... ...............................
Section 7.10. Governing Law; Venue .......................
OHS West260186534.4 _jjj_
Page
............................. ............................... 20
............................. ............................... 20
............................. ............................... 20
............................. ............................... 20
BOND PURCHASE CONTRACT
S
CITY OF NEWPORT BEACH
INSURED REVENUE BONDS
(HOAG MEMORIAL HOSPITAL PRESBYTERIAN)
SERIES 2007A, 2007B, 2007C, 2007D AND 2007E
CHIC_1433333 -4
F &L Draft Dated 4/23/07
(clean version)
TABLE OF CONTENTS
Section
Page
1. Purchase, Sale and Delivery of the Bonds ............................................ ...............................
l
2. Representations, Warranties and Agreements of the City ..................... ..............................4
3. Conditions to Obligations of the Underwriter ....................................... ..............................6
4. Conditions to the Obligations of the City ............................................. .............................11
5. Expenses / Fees ....................................................................................... .............................12
6. Notices .................................................................................................. .............................12
7. Governing Law ..................................................................................... .............................12
8. Miscellaneous ....................................................................................... .............................12
9. Counterparts .......................................................................................... .............................12
Exhibit A Letter of Representation
Exhibit B Schedule of Maturity and Initial Auction Period
Exhibit C Form of Agreed -Upon Procedures Letter of Ernst & Young LLP
Exhibit D Form of Opinion of City Counsel
Exhibit E Form of Opinion of Counsel to the Borrower
Exhibit F Form of Opinion of Underwriter's Counsel
Exhibit G Officer's Certificate
-i-
CHIC 1433333.4
$,000,000
CITY OF NEWPORT BEACH
INSURED REVENUE BONDS
(HOAG MEMORIAL HOSPITAL PRESBYTERIAN)
SERIES 2007A, 2007B, 2007C, 2007D AND 2007E
BOND PURCHASE CONTRACT
May _, 2007
City of Newport Beach
3300 Newport Boulevard
Newport Beach, California 92658
Ladies and Gentlemen:
Citigroup Global Markets Inc. (the "Underwriter ") offers to enter into this Bond Purchase
Contract, including the Letter of Representation attached hereto as Exhibit A (the "Letter of
Representation "), being herein called the "Bond Purchase Contract," with the City of Newport
Beach (the "City ") with the approval of Hoag Memorial Hospital Presbyterian, as Borrower (the
"Borrower "), which, upon acceptance, will be binding upon the City and the Underwriter. This
offer is made subject to the City's acceptance on or before 11:59 p.m., Newport Beach,
California time, on the date hereof, and, if not so accepted, will be subject to withdrawal by the
Underwriter upon written notice delivered to the City by the Underwriter at any time prior to
acceptance.
. Capitalized terms used herein and not otherwise defined shall have the meanings assigned
to such terms in the Bond Indenture (described below).
1. Purchase, Sale and Delivery of the Bonds.
(a) Subject to the terms and conditions and in reliance upon the
representations, warranties and agreements set forth herein and in the Letter of Representation,
dated the date hereof, executed and delivered contemporaneously herewith by the Borrower and
attached hereto as Exhibit A, the Underwriter hereby agrees to purchase from the City, and the
City hereby agrees to sell to the Underwriter, all (but not less than all) of the (i) $
aggregate principal amount of the City's Insured Revenue Bonds (Hoag Memorial Hospital
Presbyterian) Series 2007A (the "Series 2007A Bonds "), (ii) $ aggregate principal
amount of the City's Insured Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series
2007B (the "Series 2007B Bonds "), (iii) $ aggregate principal amount of the City's
Insured Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series 2007C (the "Series
2007C Bonds "), (iv) $ aggregate principal amount of the City's Insured Revenue
Bonds (Hoag Memorial Hospital Presbyterian) Series 2007D (the "Series 2007D Bonds ") and (v)
$ aggregate principal amount of the City's Insured Revenue Bonds (Hoag Memorial
CHIC_1433333.4
Hospital Presbyterian) Series 2007E (the "Series 2007E Bonds and together with the Series
2007A Bonds, the Series 2007B Bonds, the Series 2007C Bonds and the Series 2007D Bonds,
the `Bonds') identified on Exhibit B hereto, such Bonds to be dated the date of delivery, to be
issued in the aggregate principal amounts and bearing interest and maturing on the dates set forth
in Exhibit B hereto. The aggregate purchase price for the Bonds shall be $
consisting of the par amount of the Bonds of $ less an underwriting discount of
The Bonds shall be substantially in the form described in, shall be issued and
secured under the provisions of, and shall be payable as provided in, that certain Bond Indenture
dated as of May 1, 2007 (the `Bond Indenture "), by and between the City and Wells Fargo Bank,
National Association, as bond trustee (the "Trustee "). The Bonds shall be limited obligations of
the City payable solely from Loan Repayments (as that term is defined in the Bond Indenture)
made by the Borrower under that certain Loan Agreement dated as of May 1, 2007 (the "Loan
Agreement ") by and between the City and the Borrower, from payments made on Obligation No.
1 (as hereinafter defined) by the Obligated Group (as hereinafter defined) and from amounts held
in certain funds established pursuant to the Bond Indenture (including certain proceeds of the
sale of the Bonds). The Bonds will be further secured by an assignment of the right, title and
interest of the City in the Loan Agreement and in Obligation No. 1, to the extent and as more
particularly described in the Bond Indenture.
The Bonds will initially be issued as Auction Rate Securities, or ARS. While the
Bonds are ARS, the interest rates thereon will be determined by implementation of the Auction
Procedures pursuant to an Auction Agent Agreement dated as of May 1, 2007 (the "Auction
Agent Agreement ") by and between the Trustee and Wells Fargo Bank, N.A., as Auction Agent
(the "Auction Agent ") and a Broker - Dealer Agreement dated as of May 1, 2007 (the `Broker -
Dealer Agreement ") by and among the Auction Agent, Citigroup Global Markets Inc., as Broker -
Dealer (the "Broker - Dealer") and the Borrower.
The proceeds from the sale of the Bonds will be loaned to the Borrower pursuant
to the Loan Agreement and will be used, together with other available funds, (i) to finance or
reimburse the Borrower for certain capital expenditures at facilities owned or operated by the
Borrower, (ii) to refund the City's Variable Rate Demand Revenue Bonds (Hoag Memorial
Hospital Presbyterian) Series 1992, (iii) to refund the City's Variable Rate Demand Revenue
Bonds (Hoag Memorial Hospital Presbyterian) Series 1996, (iv) to refund the City's Variable
Rate Demand Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series 1999, (v) to pay
costs of issuance of the Bonds and (vi) to pay the premium for the financial guaranty insurance
policy for the Bonds (the "Insurance Policy ") to be issued by Ambac Assurance Corporation (the
"Insurer ").
The Borrower, as Credit Group Representative (as defined in the Master
Indenture, defined below) will issue its Obligation No. 1 ("Obligation No. I") to evidence the
obligation of the Obligated Group Members to make payments sufficient to pay the principal of,
premium, if any, and interest on the Bonds pursuant to the Supplemental Master Indenture for
Obligation No. 1, dated as of May 1, 2007 (the "Supplemental Master Indenture for Obligation
No. I"), by and between the Borrower, as Credit Group Representative, and Wells Fargo Bank,
National Association, as master trustee (the "Master Trustee "), supplementing the Master
-2-
CHIC_1433333.4
Indenture dated as of May 1, 2007 (the "Master Indenture ") between the Borrower, Newport
Healthcare Center, LLC ( "NHC ") and such other Members as may join the obligated group as
defined therein (the "Obligated Group ") and the Master Trustee.
The Borrower, as Credit Group Representative, will issue its Obligation No. 2
( "Obligation No. 2" and together with Obligation No. 1, the "Obligations ") to evidence and
secure the obligation of the Obligated Group Members to make payments sufficient to pay the
principal of, premium, if any, and interest on the City of Newport Beach Insured Revenue Bonds
(Hoag Memorial HospitaF Presbyterian), Series 2005A, 2005B and 2005C (the "Series 2005
Bonds ") pursuant to the Supplemental Master Indenture for Obligation No. 2, dated as of May 1,
2007 (the "Supplemental Master Indenture for Obligation No. 2" and together with the
Supplemental Master Indenture for Obligation No. 1, the "Supplemental Master Indentures "), by
and between the Borrower, as Credit Group Representative, and the Master Trustee,
supplementing the Master Indenture. The Credit Group Representative is issuing Obligation No.
2 in substitution for certain covenants in the Supplemental Master Indenture for Obligation No.
14, dated as of August 1, 2005, supplementing the prior Master Trust Indenture dated as of
October 1, 1984, each between the Borrower and Wells Fargo Bank, National Association, as
prior master trustee.
The Borrower will undertake, pursuant to a Continuing Disclosure Certificate,
dated as of the date of issuance and delivery of the Bonds (the "Continuing Disclosure
Certificate "), by and between the Borrower and the Trustee, to provide certain annual financial
information, certain quarterly financial information and notices of the occurrence of certain
events, if material. A description of this undertaking is set forth in the Official Statement, as
hereinafter described.
(b) The Borrower will deliver or cause to be delivered to the Underwriter
copies of the Official Statement dated May _, 2007 (the "Official Statement'), signed on
behalf of the City by the Mayor of the City and approved by the Borrower by its Vice President
Finance and Chief Financial Officer (or such other officer as is acceptable to the Underwriter).
Such Official Statement shall be delivered in sufficient quantity as may reasonably be requested
by the Underwriter in order to comply with Rule 15c2 -12 and the rules of the Municipal
Securities Rulemaking Board ( "MSRB ") within seven business days of the date hereof and, in
the event the Closing Date is less than seven business days after the date hereof, upon request of
the Underwriter, in sufficient time to accompany any confirmation requesting payment from any
customers of the Underwriter. The City has deemed the information contained in the Official
Statement regarding the City under the captions "THE CITY" and "LITIGATION — The City" to
be final as of its date. The City hereby ratifies, confirms and approves the use and distribution
by the Underwriter prior to the date hereof of the Official Statement, and hereby authorizes the
Underwriter to use and distribute the Official Statement and drafts of the Master Indenture, the
Bond Indenture and the Loan Agreement in connection with the offer and sale of the Bonds.
(c) No later than 1:00 p.m., New York time, on May _2007, or at such
earlier or later time or date as shall be agreed by the City and the Underwriter (such time and
date being herein referred to as the "Closing Date "), the City will deliver to or upon the order of
The Depository Trust Company ( "DTC ") in New York, New York, for the account of the
Underwriter (or such other location as may be designated by the Underwriter and approved by
531
CHIC_1433333.4
the City), the Bonds in the form of a separate, single, fully registered Bond (which may be
typewritten) for each series of Bonds (all of the Bonds bearing CUSIP numbers), duly executed
by the City and authenticated by the Trustee, and will deliver to the Underwriter at the offices of
Orrick, Herrington & Sutcliffe LLP in Los Angeles, California, the other documents herein
mentioned. The Underwriter will accept such delivery and pay the purchase price of the Bonds
as set forth in paragraph (a) of this Section by certified or official bank check payable in, or wire
transfer of, immediately available funds (such delivery and payment being herein referred to as
the "Closing "). Notwithstanding the foregoing, neither the failure to print CUSIP numbers on
any Bond nor any error with respect thereto shall constitute cause for a failure or refusal by the
Underwriter to accept delivery of and pay for the Bonds on the Closing Date in accordance with
the terms of this Bond Purchase Contract.
(d) On or prior to the date hereof, the Underwriter shall have received (i) from
Ernst & Young LLP, an executed copy of its letter, substantially in the form of Exhibit C hereto
(the "Procedures Letter "), and (ii) from Ernst & Young LLP, its consent to the inclusion of its
audit report on the financial statements of the Borrower that are included in the Official
Statement and to the references to its name in the Official Statement.
2. Representations. Warranties and Agreements of the City.
The City represents and warrants to and agrees with the Underwriter and the
Borrower as follows:
(a) The City is and will be at the Closing Date a municipal corporation and
charter city duly organized and existing under a freeholder's charter under the Constitution and
laws of the State of California (the "State ") and pursuant to the Charter of the City with the full
power and authority to issue the Bonds and to execute this Bond Purchase Contract, the Bond
Indenture and the Loan Agreement.
(b) When delivered to and paid for by the Underwriter at the Closing in
accordance with the provisions of this Bond Purchase Contract, the Bonds will have been duly
authorized, executed, issued and delivered, and will constitute valid and binding limited
obligations of the City in conformity with, and entitled to the benefit and security of, the Bond
Indenture (subject as to enforcement to any applicable bankruptcy, reorganization, insolvency,
moratorium or other law or laws affecting the enforcement of creditors' rights generally or
against municipal corporations such as the City from time to time in effect and further subject to
the availability of equitable remedies).
(c) By official action of the City prior to or concurrently with the acceptance
hereof, the City has consented to the distribution of the Official Statement and authorized and
approved the execution and delivery of and the performance by the City of, the obligations on its
part contained in the Bonds, the Loan Agreement, the Bond Indenture and this Bond Purchase
Contract and the consummation by the City of all other transactions contemplated by the Official
Statement and this Bond Purchase Contract, including approval of the Insurance Policy.
(d) Other than as described in the Official Statement, there is no action, suit,
proceeding, inquiry or investigation, at law or in equity, before or by any court, governmental
-4-
CHIC_1433333.4
agency, public board or body, known to the City to be pending or threatened against the City
seeking to restrain or enjoin the issuance, sale, execution or delivery of the Bonds, or in any way
contesting or affecting any proceedings of the City taken concerning the issuance or sale thereof,
the pledge or application of any moneys or security provided for the payment of the Bonds, in
any way contesting the validity or enforceability of the Bonds, the Bond Indenture, the Loan
Agreement or this Bond Purchase Contract or contesting in any way the completeness or
accuracy of the Official Statement, as amended or supplemented, or the existence or powers of
the City relating to the issuance of the Bonds or any of the transactions contemplated by the
Official Statement or this Bond Purchase Contract.
(e) As of the date thereof and both at the time of acceptance hereof by the
City and at the Closing Date, the statements and information contained in the Official Statement
relating to the City and its functions, duties and responsibilities under the captions "THE CITY"
and "LITIGATION — The City" do not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(f) The City will furnish such information, execute such instruments and take
such other action in cooperation with the Underwriter as the Underwriter may reasonably request
in order for the Underwriter (i) to qualify the Bonds for offer and sale under the Blue Sky or
other securities laws and regulations of such states and other jurisdictions of the United States as
the. Underwriter may designate and (ii) to determine the eligibility of the Bonds for investment
under the laws of such states and other jurisdictions, and to continue such qualification in effect
so long as required for distribution of the Bonds; provided, however, that in no event shall the
City be required to take any action which would subject it to general or unlimited service of
process in any jurisdiction in which it is not now so subject.
(g) If, between the date of this Bond Purchase Contract and up to and
including the 25th day following the end of the underwriting period (as such term is defined in
Rule 15c2 -12 of the Securities and Exchange Commission), an event occurs, of which the City
has knowledge, which might or would cause the information relating to the City and its
functions, duties and responsibilities contained in the Official Statement under the captions
"THE CITY" and "LITIGATION — The City," as then supplemented or amended, to contain an
untrue statement of a material fact or to omit to state a material fact required to be stated therein
or necessary to make such information therein not misleading in the light of the circumstances
under which it was presented or if the City is notified by the Borrower pursuant to Section 20 of
the Letter of Representation, or otherwise requested to amend, supplement or otherwise change
the Official Statement, the City will notify the Underwriter and the Borrower. If, in the opinion
of the Underwriter, such event requires the preparation and publication of a supplement or
amendment to the Official Statement, the City will amend or supplement the Official Statement
in a form and in a manner approved by the Underwriter, provided all expenses thereby incurred
will be paid by the Borrower or the Underwriter pursuant to Section 22 of the Letter of
Representation.
(h) The execution and delivery of the Bonds, the Loan Agreement, the Bond
Indenture and this Bond Purchase Contract, and compliance with the provisions on the City's
part contained therein, will not conflict with or constitute a breach of or default under any
-5-
CHIC_1433333.4
existing law, administrative regulation, judgment, decree, loan agreement, indenture, bond, note,
resolution, agreement or other instrument to which the City is a party or is otherwise subject, nor
will any such execution, delivery, adoption or compliance result in the creation or imposition of
any lien, charge or other security interest or encumbrance of any nature whatsoever upon any of
the properties or assets of the City under the terms of any such law, administrative regulation,
judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other
instrument, except as provided by the Bond Indenture and the Loan Agreement.
(i) The execution and delivery of this Bond Purchase Contract by the City
shall constitute a representation by the City to the Underwriter that the representations and
agreements contained in this Section 2 are true as of the date hereof, and as to all matters of law
the City is relying on the advice of counsel to the City; and provided further that no member of
the City shall be individually liable for the breach of any representation, warranty or agreement
contained herein.
3. Conditions to Obligations of the Underwriter.
The obligation of the Underwriter to accept delivery of and pay for the Bonds on
the Closing Date shall be subject, at the option of the Underwriter, to the accuracy in all material
respects of the representations, warranties and agreements on the part of the City contained
herein as of the date hereof and as of the Closing Date, to the accuracy in all material respects of
the statements of the officers and other officials of the City made in any certificates or other
documents fumished pursuant to the provisions hereof, to the performance by the City of its
obligations to be performed hereunder at or prior to the Closing Date and to the following
additional conditions.
(a) At the Closing Date, the Master Indenture shall be in full force and effect,
and the Supplemental Master Indentures, the Obligations, the Bond Indenture, the Official
Statement, the Loan Agreement, the Auction Agent Agreement, the Broker - Dealer Agreement,
the Insurance Policy and the Continuing Disclosure Certificate shall have been duly authorized,
executed and delivered by the respective parties thereto, in substantially the forms heretofore
submitted to the Underwriter, with only such changes as shall have been agreed to in writing by
the Underwriter and the City, and said agreements shall not have been amended, modified or
supplemented, except as may have been agreed to in writing by the Underwriter, and there shall
have been taken in connection therewith, with the issuance of the Bonds and with the
transactions contemplated thereby and by this Bond Purchase Contract all such actions as, in the
opinion of Orrick, Herrington & Sutcliffe LLP, bond counsel ( "Bond Counsel ") and City of
Newport Beach City Attorney ( "City Counsel "), shall be necessary and appropriate.
(b) At the Closing Date, the Official Statement shall not have been amended,
modified or supplemented, except as may have been agreed to by the Underwriter.
(c) At the time of Closing, there shall not have occurred any change or any
development involving a prospective change, in the condition, financial or otherwise, or in the
earnings or operations of the Borrower from that set forth in the Official Statement that in the
judgment of the Underwriter, is material and adverse and that makes it, in the judgment of the
0
CHIC 1433333.4
Underwriter, impracticable or inadvisable to proceed with the offer, sale or delivery of the Bonds
on the terms and in the manner contemplated in the Official Statement.
(d) Between the date hereof and the Closing Date, the market price or
marketability of the Bonds, at the initial offering prices set forth in the Official Statement, shall
not have been materially adversely affected, in the judgment of the Underwriter (evidenced by a
written notice to the City and the Borrower terminating the obligation of the Underwriter to
accept delivery of and pay for the Bonds), by reason of any of the following:
(1) legislation shall be introduced in or enacted by the Congress of the
United States or adopted by either House thereof or introduced in or enacted by
the legislature of the State, or a decision by a federal court (including the Tax
Court of the United States of America) or State court shall be rendered, or a
ruling, regulation (proposed, temporary or final) or official statement by or on
behalf of the Treasury Department of the United States of America, the Internal
Revenue Service or other federal or State agency shall be made, with respect to
federal or State taxation upon revenues or other income of the general character
expected to be derived by the City or upon interest received on bonds of the
general character of the Bonds, or which would have the effect of changing
directly or indirectly the federal or State income tax consequences of interest on
bonds of the general character of the Bonds in the hands of the holders thereof,
which legislation, ruling, regulation or official statement would, in the
Underwriter's reasonable judgment, materially adversely affect the market price
of the Bonds;
(2) legislation enacted, introduced in the Congress or recommended
for passage by the President of the United States of America, or a decision
rendered by a court established under Article III of the Constitution of the United
States of America, or an order, ruling, regulation (final, temporary or proposed) or
official statement issued or made by or on behalf of the Securities and Exchange
Commission, or any other governmental agency having jurisdiction of the subject
matter, to the effect that obligations of the general character of the Bonds, or the
Bonds, including any or all underlying arrangements, are not exempt from
registration under the Securities Act of 1933, as amended, or that the Bond
Indenture or the Master Indenture are not exempt from qualification under the
Trust Indenture Act of 1939, as amended;
(3) the outbreak or escalation of hostilities involving the United States
of America, including, but not limited to, acts of terrorism, or the declaration by
the United States of America of a national emergency or war or the occurrence of
any other national emergency, calamity or crisis, the effect of which on the
financial markets is such as to make it, impractical or inadvisable to proceed with
the offering or delivery of the Bonds as contemplated by the Official Statement;
(4) the declaration of a general banking moratorium by federal, New
York or California authorities, or the general suspension of trading on any
national securities exchange;
-7-
CHIC_1433333.4
(5) the imposition by the New York Stock Exchange or other national
securities exchange, or any governmental authority, of any material restrictions
not now in force with respect to the Bonds or obligations of the general character
of the Bonds or securities generally, or the material increase of any such
restrictions now in force, including those relating to the extension of credit by, or
the charge to the net capital requirements of, underwriters;
(6) an order, decree or injunction of any court of competent
jurisdiction, or order, ruling, regulation or official statement by the Securities and
Exchange Commission, or any other governmental agency having jurisdiction of
the subject matter, issued or made to the effect that the issuance, offering or sale
of obligations of the general character of the Bonds, or the issuance, offering or
sale of the Bonds, including any or all underlying obligations, as contemplated
hereby or by the Official Statement, is or would be in violation of the federal
securities laws as amended and then in effect;
(7) the withdrawal or downgrading of any rating of the Bonds by a
national rating agency;
(8) any event occurring or information becoming known which, in the
reasonable judgment of the Underwriter, makes untrue in any material respect any
statement or information contained in the Official Statement or has the effect that
the Official Statement contains any untrue statement of material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, in the light of the circumstances under which
they were made; or
(9) a material disruption in securities settlement, payment or clearance
services in the United States shall have occurred.
(e) At or prior to the Closing Date, the Underwriter and the City shall have
received executed or, as noted below, conformed copies of the following documents, in each
case satisfactory in form and substance to the Underwriter and the City:
(1) The Master Indenture, Obligation No. I (specimen copy),
Obligation No. 2 (specimen copy), the Supplemental Master Indentures, the Bond
Indenture, the Loan Agreement, the Auction Agent Agreement, the Broker - Dealer
Agreement, the Insurance Policy and the Continuing Disclosure Certificate, duly
executed and delivered by the respective parties thereto, with such amendments,
modifications or supplements as may have been agreed to in writing by the
Underwriter;
(2) The unqualified approving opinion of Bond Counsel, dated the
Closing Date and addressed to the City, in substantially the form attached as
Appendix E to the Official Statement, together with a reliance letter addressed to
the Underwriter and a supplemental opinion of Bond Counsel in a form
In
CHIC_1433333.4
acceptable to the Underwriter, dated the Closing Date and addressed to the
Underwriter, to the effect that:
(i) the Bonds are not subject to the registration requirements of
the Securities Act of 1933, as amended, and the Bond Indenture is exempt
from qualification pursuant to the Trust Indenture Act of 1939, as
amended;
(ii) this Bond Purchase Contract has been duly executed and
delivered by the City and, assuming due authorization, execution and
delivery by the Underwriter and approval by the Borrower, is a valid and
binding agreement of the City, subject to bankruptcy, insolvency,
reorganization, arrangement, fraudulent conveyance, moratorium and
other laws relating to or affecting creditors' rights, to the application of
equitable principles and to the exercise of judicial discretion in appropriate
cases; and
(iii) the statements contained in the Official Statement under the
captions "THE AUCTION RATE SECURITIES," "SECURITY FOR
THE BONDS," "TAX MATTERS," "APPENDIX C — Auction
Procedures" and "APPENDIX D — Summary of Principal Documents,"
insofar as such statements expressly summarize certain provisions of the
Bonds, the Master Indenture, the Obligations, the Bond Indenture, the
Loan Agreement, the Supplemental Master Indentures, the Auction Agent
Agreement, the Broker - Dealer Agreement or the opinion of Bond Counsel
concerning certain tax matters, are accurate in all material respects;
(3) The opinion of City Counsel, dated the Closing Date, in
substantially the form attached hereto as Exhibit D;
(4) The opinion, dated the Closing Date and addressed to the City, the
Underwriter, the Borrower, Bond Counsel and the Insurer, of Stradling Yocca
Carlson & Rauth, a Professional Corporation, counsel to the Borrower, in
substantially the form attached hereto as Exhibit E;
(5) The opinion of Foley & Lardner LLP, counsel to the Underwriter,
dated the Closing Date and addressed to the Underwriter, in substantially the form
attached hereto as Exhibit F;
(6) The opinion of counsel to the Insurer, dated the Closing Date and
addressed to the City, the Trustee, the Borrower and the Underwriter, in a form
satisfactory to Bond Counsel and Underwriter's Counsel;
(7) A certificate, dated the Closing Date and signed by an authorized
official of the City, to the effect that (a) to the best of such official's knowledge,
no litigation is pending or threatened against the City (i) to restrain or enjoin the
issuance or delivery of any of the Bonds or the collection of the Revenues (as
defined in the Bond Indenture) pledged under the Bond Indenture; (ii) in any way
Q
CHIC_1433333.4
contesting or affecting the authority for the issuance of the Bonds or the validity
of the Bonds, the Bond Indenture, the Loan Agreement, the Auction Agent
Agreement, any Broker - Dealer Agreement, the Insurance Policy or this Bond
Purchase Contract; or (iii) in any way contesting the existence or powers of the
City; and (b) no event affecting the City or its functions, duties and
responsibilities has occurred since the date of the Official Statement that would
cause as of the Closing Date.any statement or information concerning the City or
its functions, duties and responsibilities contained in the Official Statement under
the captions "THE CITY" and "LITIGATION — The City" to contain any untrue
statement of a material fact or omit to state a material fact necessary in order to
make the statements made concerning the City or its functions, duties and
responsibilities contained under such caption not misleading in the light of the
circumstances under which they were made;
(8) A certificate of the Vice President Finance and Chief Financial
Officer of the Borrower, or such other officer as is acceptable to the Underwriter
and the City, dated the Closing Date, substantially in the form attached hereto as
Exhibit G;
(9) A certificate of the Insurer, dated the Closing Date, in a form
satisfactory to Bond Counsel and Underwriter's Counsel;
(10) A certificate of the Auction Agent, dated the Closing Date, in a
form satisfactory to Bond Counsel and Underwriter's Counsel;
(11) Certified copies of the resolution of the City authorizing the
execution and delivery of the Bond Indenture, the Loan Agreement, the Bonds,
this Bond Purchase Contract and the Official Statement;
(12) Copies of each of the Borrower's and NHC's articles of
incorporation or articles of organization certified as of a date not earlier than
fifteen (15) days prior to the Closing Date by the Secretary of State of the State of
California; a good standing certificate of recent date certified by the Franchise
Tax Board of the State of California; and certified copies of the Borrower's and
NHC's bylaws or operating agreement;
(13) Certified copies of the resolutions of the Board of Directors of the
Borrower authorizing the execution and delivery of the Loan Agreement, the
Master Indenture, the Supplemental Master Indentures, the Obligations, the
Continuing Disclosure Certificate and the Letter of Representation, and approving
this Bond Purchase Contract, the Bond Indenture, the Auction Agreement and the
Official Statement (and distribution thereof);
(14) Certified copies of the resolutions of the Board of Directors of
NHC authorizing the execution and delivery of the Master Indenture;
(15) Evidence that each of the Borrower and NHC has been determined
to be an organization described in Section 501(c)(3) of the Code;
-10-
CHIC_1433333.4
(16) A Tax Agreement in form satisfactory to Bond Counsel;
(17) Satisfactory evidence that the Bonds have been assigned the long-
term municipal bond ratings of "AAA" by Standard & Poor's Ratings Services, a
division of The McGraw -Hill Companies, Inc. and "Aaa" by Moody's Investors
Service;
(18) Two copies of the Official Statement executed as required by
Section 1(b) hereof,
(19) A properly completed and executed Form 8038 of the Internal
Revenue Service relating to the Bonds; and
(20) Such additional corporate resolutions, legal opinions, certificates,
proceedings, instruments and other documents as the Underwriter, the City or
Bond Counsel may reasonably request to evidence compliance by the City, the
Borrower and NHC with legal requirements, the truth and accuracy, as of the
Closing Date, of the representations of the City contained herein, of the Borrower
contained in the Letter of Representation, and the due performance or satisfaction
by the City, the Borrower and NHC at or prior to such time of all agreements then
to be performed and all conditions then to be satisfied by the City, the Borrower
and NHC.
If the City shall be unable to satisfy the conditions to the Underwriter's
obligations contained in this Bond Purchase Contract or if the Underwriter's obligations shall be
terminated for any reason permitted herein, this Bond Purchase Contract shall terminate and
neither the Underwriter nor the City shall have any further obligation hereunder.
4. Conditions to the Obligations of the City.
The obligations of the City to issue and deliver the Bonds on the Closing Date
shall be subject, at the option of the City, to the performance by the Underwriter of its
obligations to be performed hereunder at or prior to the Closing Date and to the following
additional conditions:
(a) The Master Indenture, the Supplemental Master Indentures, the
Obligations, the Bond Indenture, the Loan Agreement, the Continuing Disclosure Certificate and
this Bond Purchase Contract shall have been executed by the parties thereto;
(b) The Insurance Policy shall have been delivered;
(c) No order, decree, injunction, ruling or regulation of any court, regulatory
agency, public board or body shall have been issued, nor shall any legislation have been enacted,
with the purpose or effect, directly or indirectly, of prohibiting the offering, sale or issuance of
the Bonds as contemplated hereby or by the Official Statement; and
CHIC_1433333.4
(d) The documents contemplated by Section 3(e) (other than those required to
be delivered by or on behalf of the City) shall have been delivered in substantially the forms set
forth herein or in form and substance satisfactory to Bond Counsel.
5. Expenses/Fees.
All reasonable expenses and costs of the City incident to the performance of its
obligations in connection with the authorization, issuance and sale of the Bonds to the
Underwriter, including printing costs, fees and expenses of consultants, fees and expenses of
rating agencies, fees and expenses of Bond Counsel, City Counsel, Underwriter's Counsel
(including fees in connection with qualification of the Bonds for sale under the Blue Sky or other
securities laws and regulations of various jurisdictions and preparation and printing of a blue sky
survey and legal investment memorandum) and counsel for the Borrower and N14C shall be paid
by the Borrower. The Borrower shall pay for expenses incurred on behalf of the Borrower's
employees which are incidental to implementing this Bond Purchase Contract, including but not
limited to, meals, transportation, lodging and entertainment of those employees (some of which
expenses may have been paid for by the Underwriter and included in the expense component of
the underwriting discount). All fees and expenses to be paid by the Borrower pursuant to this
Bond Purchase Contract may be paid from Bond proceeds to the extent permitted by the Bond
Indenture and Tax Agreement.
6. Notices.
Any notice or other communication to be given to the City under this Bond
Purchase Contract may be given by delivering the same in writing at the City's address as set
forth above, and any such notice or other communication to be given to the Underwriter may be
given by delivering the same in writing to Citigroup Global Markets Inc., 444 South Flower
Street, 27`I' Floor, Los Angeles, California 90071. The approval of the Underwriter when
required hereunder or the determination of its satisfaction as to any document referred to herein
shall be in writing signed by the Underwriter and delivered to you.
Governing Law.
This Bond Purchase Contract shall be construed in accordance with and governed
by the Constitution and the laws of the State of California.
8. Miscellaneous.
This Bond Purchase Contract is made solely for the benefit of the City, the
Borrower and the Underwriter (including the successors or assigns of each), and not other
person, partnership, association or corporation shall acquire or have any right hereunder or by
virtue hereof.
9. Counterparts.
This Bond Purchase Contract may be executed in any number of counterparts and
all such counterparts shall together constitute one and the same instrument.
-12-
CHIC_1433333.4
-13-
CHIC_1433333.4
CITIGROUP GLOBAL MARKETS INC.
ILa
Director
Signature Page to Bond Purchase Contract for the
City of Newport Beach
Insured Revenue Bonds (Hoag Memorial Hospital Presbyterian)
Series 2007A, 2007B, 2007C, 2007D and 2007E
CHIC_1433333.4
Accepted and Agreed to:
CITY OF NEWPORT BEACH
Lo
Mayor
CHIC 1433333.4
Signature Page to Bond Purchase Contract for the
City of Newport Beach
Insured Revenue Bonds (Hoag Memorial Hospital Presbyterian)
Series 2007A, 2007B, 2007C, 2007D and 2007E
Approve d:
HOAG MEMORIAL HOSPITAL PRESBYTERIAN
Authorized Representative
Signature Page to Bond Purchase Contract for the
City of Newport Beach
Insured Revenue Bonds (Hoag Memorial Hospital Presbyterian)
Series 2007A, 2007B, 2007C, 2007D and 2007E
CHIC 1433333.4
EXHIBIT A TO
BOND PURCHASE CONTRACT
LETTER OF REPRESENTATION
May_, 2007
City of Newport Beach
3300 Newport Boulevard
Newport Beach, California 92658
Citigroup Global Markets Inc.
444 South Flower Street
27'h Floor
Los Angeles, California 90071
Ladies and Gentlemen:
The City of Newport Beach (the "City ") proposes to enter into a Loan Agreement with
Hoag Memorial Hospital Presbyterian (the "Borrower ") dated as of May 1, 2007 (the "Loan
Agreement "). Pursuant to a Bond Purchase Contract, dated the date hereof (the "Bond Purchase
Contract "), between the City and Citigroup Global Markets Inc. (the "Underwriter "), which the
Borrower has approved, the City proposes to sell the $ aggregate principal amount
of the City's Insured Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series 2007A (the
"Series 2007A Bonds "), the $ aggregate principal amount of the City's Insured
Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series 2007B (the "Series 2007B
Bonds "), the $ aggregate principal amount of the City's Insured Revenue Bonds
(Hoag Memorial Hospital Presbyterian) Series 2007C (the "Series 2007C Bonds "), the
$ aggregate principal amount of the City's Insured Revenue Bonds (Hoag Memorial
Hospital Presbyterian) Series 2007D (the "Series 2007D Bonds ") and the $
aggregate principal amount of the City's Insured Revenue Bonds (Hoag Memorial Hospital
Presbyterian) Series 2007E (the "Series 2007E Bonds" and together with the Series 2007A
Bonds, the Series 2007B Bonds, the Series 2007C Bonds and the Series 2007D Bonds, the
"Bonds ") identified on Exhibit B hereto. The offering of the Bonds is described in an Official
Statement dated May _, 2007 (the "Official Statement ").
The Bonds shall be issued and secured under the provisions of that certain Bond
Indenture dated as of May 1, 2007 (the "Bond Indenture "), by and between the City and Wells
Fargo Bank, National Association, as bond trustee (the "Trustee "). The Bonds shall be payable
from payments made by the Borrower under that certain Loan Agreement dated as of May 1,
2007 (the "Loan Agreement "), by and between the City and the Borrower, from payments made
on Obligation No. 1 (as hereinafter defined) by the Obligated Group (as hereinafter defined) and
from amounts held in certain funds established pursuant to the Bond Indenture (including certain
proceeds of the sale of the Bonds). The Bonds will be further secured by an assignment of the
A -1
CHIC 1433333.4
right, title and interest of the City in the Loan Agreement and in Obligation No. 1, to the extent
and as more particularly described in the Bond Indenture. All terms not otherwise defined herein
shall have the meanings ascribed thereto in the Bond Purchase Contract.
The proceeds from the sale of the Bonds will be loaned to the Borrower pursuant
to the Loan Agreement and will be used, together with other available funds, (i) to finance or
reimburse the Borrower for certain capital expenditures at facilities owned or operated by the
Borrower, (ii) to refund the City's Variable Rate Demand Revenue Bonds (Hoag Memorial
Hospital Presbyterian) Series 1992, (iii) to refund the City's Variable Rate Demand Revenue
Bonds (Hoag Memorial Hospital Presbyterian) Series 1996, (iv) to refund the City's Variable
Rate Demand Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series 1999, (v) to pay
costs of issuance of the Bonds and (vi) to pay the premium for the financial guaranty insurance
policy for the Bonds (the "Insurance Policy ") to be issued by Ambac Assurance Corporation (the
"Insurer ").
The Borrower, as Credit Group Representative (as defined in the Master Indenture,
defined below), will issue its Obligation No. 1 ( "Obligation No. I") to evidence and secure the
obligation of the Obligated Group Members to make payments sufficient to pay the principal of,
premium, if any, and interest on the Bonds pursuant to the Supplemental Master Indenture for
Obligation No. 1, dated as of May 1, 2007 (the "Supplemental Master Indenture for Obligation
No. I"), by and between the Borrower, as Credit Group Representative, and Wells Fargo Bank,
National Association, as master trustee (the "Master Trustee "), supplementing the Master
Indenture dated as of May 1, 2007 (the "Master Indenture ") among the Borrower, Newport
Healthcare Center, LLC ( "NHC ") and such other Members as may join the obligated group as
defined therein (the "Obligated Group ") and the Master Trustee.
The Borrower, as Credit Group Representative, will issue its Obligation No. 2
( "Obligation No. 2" and together with Obligation No. 1, the "Obligations ") to evidence and
secure the obligation of the Obligated Group Members to make payments sufficient to pay the
principal of, premium, if any, and interest on the City of Newport Beach Insured Revenue Bonds
(Hoag Memorial Hospital Presbyterian), Series 2005A, 2005B and 2005C (the "Series 2005
Bonds ") pursuant to the Supplemental Master Indenture for Obligation No. 2, dated as of May 1,
2007 (the "Supplemental Master Indenture for Obligation No. 2" and together with the
Supplemental Master Indenture for Obligation No. 1, the "Supplemental Master Indentures "), by
and between the Borrower, as Credit Group Representative, and the Master Trustee,
supplementing the Master Indenture. The Credit Group Representative is issuing Obligation No.
2 in substitution for certain covenants in the Supplemental Master Indenture for Obligation No.
14, dated as of August 1, 2005, supplementing the prior Master Trust Indenture dated as of
October 1, 1984, each between the Borrower and Wells Fargo Bank, National Association, as
prior master trustee.
Pursuant to the terms of the Master Indenture and the Supplemental Master Indentures,
the Borrower, NHC and any future Members of the Obligated Group will be jointly and severally
obligated to make payments on the Obligations according to the terms thereof when due. The
Borrower and NHC are presently the only Members of the Obligated Group.
I_da
CHIC 1433333.4
The Borrower will undertake, pursuant to a Continuing Disclosure Certificate, dated as of
the date of issuance and delivery of the Bonds (the "Continuing Disclosure Certificate "), by and
between the Borrower and the Trustee, to provide certain annual financial information, certain
quarterly financial information and notices of the occurrence of certain events, if material.
In order to induce the City and the Underwriter to enter into the Bond Purchase Contract
and to make the sale and purchase and reoffering of the Bonds therein contemplated, the
Borrower, on its own behalf as Borrower and as Credit Group Representative on behalf of the
other Obligated Group Members, hereby represents, warrants and agrees with each of you as
follows:
1. The Borrower is a nonprofit public benefit corporation duly organized and
existing under the laws of the State of California.
2. NHC is a limited liability company duly organized and existing under the laws of
the State of California.
3. The Borrower and/or NHC has, and at the Closing Date will have, full legal right,
power and authority to enter into and perform its obligations under this Letter of Representation,
the Loan Agreement, the Master Indenture, the Supplemental Master Indentures, the Obligations,
the Broker - Dealer Agreement dated as of May 1, 2007 (the "Broker - Dealer Agreement ") by and
among Wells Fargo Bank, N.A., as auction agent (the "Auction Agent'), Citigroup Global
Markets Inc., as broker - dealer (the "Broker - Dealer ") and the Borrower relating to the Bonds and
the Continuing Disclosure Certificate, to approve the Bond Purchase Contract, the Bond
Indenture, the Official Statement and the Auction Agent Agreement dated as of May 1, 2007 (the
"Auction Agent Agreement") by and between the Trustee and the Auction Agent relating to the
Bonds and to carry out and consummate all transactions contemplated by the Bond Purchase
Contract, the Bond Indenture, the Loan Agreement, the Master Indenture, the Supplemental
Master Indentures, the Obligations, this Letter of Representation, the Continuing Disclosure
Certificate, the Auction Agent Agreement, the Broker - Dealer Agreement and the Official
Statement, and by proper corporate action has duly authorized the execution and delivery of this
Letter of Representation, the Loan Agreement, the Master Indenture, the Supplemental Master
Indentures, the Obligations, the Broker - Dealer Agreement and the Continuing Disclosure
Certificate, the approval of the Bond Purchase Contract, the Bond Indenture, the Auction Agent
Agreement and the Official Statement (including the distribution thereof) and the obtaining of
the Insurance Policy.
4. The officers of the Borrower and NHC executing the Master Indenture and the
officers of the Borrower executing this Letter of Representation, the Loan Agreement, the
Supplemental Master Indentures, the Obligations, the Broker - Dealer Agreement and the
Continuing Disclosure Certificate, approving the Bond Purchase Contract, the Bond Indenture,
the Auction Agent Agreement and the Official Statement (including the distribution thereof) and
obtaining the Insurance Policy are, or were when executed, fully authorized to execute and
approve the same.
5. The Bond Purchase Contract, the Bond Indenture, the Official Statement and the
Auction Agent Agreement have been duly approved by the Borrower; this Letter of
A -3
CHIC_1433333.4
Representation has been duly authorized, executed and delivered by the Borrower; the Insurance
Policy has been duly obtained by the Borrower; the Master Indenture has been duly authorized
and, at the Closing, will have been duly executed and delivered by the Borrower and NHC; the
Loan Agreement, the Supplemental Master Indentures, the Obligations, the Broker - Dealer
Agreement and the Continuing Disclosure Certificate have been duly authorized and, at the
Closing, will have been duly executed and delivered by the Borrower.
6. This Letter of Representation constitutes and the Loan Agreement, the Broker -
Dealer Agreement and the Continuing Disclosure Certificate will constitute the legal, valid and
binding agreements of the Borrower, and the Master Indenture, the Supplemental Master
Indentures and the Obligations will constitute the legal, valid and binding agreements of the
Borrower and NHC, in each case enforceable against the Borrower and NHC, as applicable, in
accordance with their respective terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance or other laws
affecting the enforcement of creditors' rights generally, including without limitation self -help
remedies and applicable foreclosure procedures, and also limited by the application of equitable
principles, regardless of whether such enforceability is considered in a proceeding in equity or at
law and except as enforcement may be held to be against public policy.
7. Neither the Borrower nor NHC is in any material way (i) in violation of any
applicable law or administrative regulation of the state in which it is incorporated or the United
States of America or any applicable judgment or decree, which violation would materially
adversely affect the financial position or operations of the Borrower and the Obligated Group
taken as a whole, or (ii) in default under any loan agreement, indenture, bond, note, resolution,
agreement or other instrument to which the Borrower or NHC is a party or is otherwise subject,
and no event has occurred and is continuing which, with the passage of time or the giving of
notice or both, would constitute an event of default under any such instrument which default
would materially adversely affect the financial position or operations of the Borrower taken as a
whole.
8. The execution and delivery of this Letter of Representation, the approval of the
Bond Purchase Contract, the Bond Indenture, the Official Statement and the Auction Agent
Agreement; at the Closing, the execution and delivery of the Loan Agreement, the Master
Indenture, the Supplemental Master Indentures, the Obligations, the Broker - Dealer Agreement
and the Continuing Disclosure Certificate; the consummation of the transactions contemplated
herein and therein; and the fulfillment of or compliance with the terms and conditions hereof and
thereof will not conflict with or constitute a violation or breach of or default (with due notice or
the passage of time or both) under the articles of incorporation of the Borrower, its bylaws or the
articles of organization of NHC or its operating agreement or any applicable law or
administrative rule or regulation, or any applicable court or administrative decree or order, or any
indenture, mortgage, deed of trust, loan agreement, lease, contract or other agreement or
instrument to which the Borrower or NHC is a parry or by which they or their properties are
otherwise subject or bound, or result in the creation or imposition of any prohibited lien, charge
or encumbrance of any nature whatsoever upon any of the property or assets of the Borrower or
NHC, which conflict, violation, breach, default, lien, charge or encumbrance might have
consequences that would materially and adversely affect the consummation of the transactions
contemplated by the Bond Purchase Contract, the Bond Indenture, the Loan Agreement, the
/:n
CHIC_1433333.4
Master Indenture, the Supplemental Master Indentures, the Obligations, the Auction Agent
Agreement, the Broker - Dealer Agreement, the Continuing Disclosure Certificate, this Letter of
Representation or the Official Statement or the financial condition, assets, properties or
operations of the Borrower or the Obligated Group taken as a whole.
9. No consent or approval of any trustee or holder of any indebtedness of the
Borrower or NHC, and no consent, permission, authorization, order or license of, or filing or
registration with, any governmental authority (except in connection with Blue Sky proceedings)
is necessary in connection with the execution and delivery of this Letter of Representation; at the
Closing, the execution and delivery of the Loan Agreement, the Master Indenture, the
Supplemental Master Indentures, the Obligations, the Broker - Dealer Agreement or the
Continuing Disclosure Certificate; the approval of the Bond Purchase Contract, the Bond
Indenture, the Official Statement or the Auction Agent Agreement; the obtaining of the
Insurance Policy; or the consummation of any transaction therein or herein contemplated, except
as have been obtained or made and as are in full force and effect (or, with respect to the
consummation of any transaction therein or herein contemplated, except as are expected to be
obtained in due course).
10. Except as described in the Official Statement, there is no action, suit, proceeding,
inquiry or investigation before or by any court or federal, state, municipal or other government
authority pending or, to the knowledge of the Borrower, threatened against or affecting the
Borrower or NHC or the assets, properties or operations of the Borrower or NHC which, if
determined adversely to the Borrower or NHC or their interests, would have a material and
adverse effect upon the consummation of the transactions contemplated by or the validity of the
Bond Purchase Contract, the Loan Agreement, the Master Indenture, the Supplemental Master
Indentures, the Obligations, this Letter of Representation, the Official Statement, the Broker -
Dealer Agreement or the Continuing Disclosure Certificate or upon the financial condition,
assets, properties or operations of the Borrower or the Obligated Group taken as a whole.
Neither the Borrower nor NHC is in violation of any order or decree of any court or any order,
regulation or demand of any federal, state, municipal or other governmental authority, which
violation might have consequences that would materially and adversely affect the consummation
of the transactions contemplated by the Bond Purchase Contract, the Loan Agreement, the
Master Indenture, the Supplemental Master Indentures, the Auction Agent Agreement, the
Broker - Dealer Agreement, the Obligations, the Continuing Disclosure Certificate, this Letter of
Representation and the Official Statement or the financial conditions, assets, properties or
operations of the Borrower or the Obligated Group taken as a whole.
11. The Borrower is a corporation organized and operated exclusively for charitable
purposes, not for pecuniary profit, and no part of the net earnings of the Borrower inures to the
benefit of any private shareholder or individual. The Borrower is an organization described in
Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, which is exempt from
federal income taxes under Sections 501(a) of the Internal Revenue Code of 1986, as amended,
except for unrelated trade or business income subject to taxation under Section 511 of said Code.
12. The proceeds of the Bonds will not be used by an organization described in
Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, in an "unrelated trade or
business" within the meaning of Section 513(a) of the Internal Revenue Code of 1986, as
A -5
CHIC_1433333.4
amended, or by any other person, in such manner or to such extent as would result in the loss of
exclusion from gross income for federal income tax purposes of interest on any of the Bonds
under Section 103 of said Code.
13. Each of the Borrower and NHC has all necessary power and authority to conduct
the business now being conducted by it and the business contemplated by the Master Indenture,
the Supplemental Master Indentures, the Obligations, the Loan Agreement, the Continuing
Disclosure Certificate and the Broker - Dealer Agreement and has all necessary power and
authority to enter into the respective documents mentioned above and to approve the Bond
Purchase Contract and the Official Statement.
14. Each of the Borrower and NHC has good and marketable title to its Property, free
and clear from all encumbrances other than Permitted Liens (as such terms are defined in the
Master Indenture).
15. Each of the Borrower and NHC has all permits, licenses, accreditation and
certifications, including, without limitation, licensing and certification of the Property (as defined
in the Master Indenture), necessary to conduct its business as it is presently being conducted.
16. The Borrower is eligible under applicable statutes, regulations and administrative
practices for payment under Medicare and Medicaid.
17. The Borrower is currently participating in the programs of Medicare and
Medicaid, and there are in full force and effect agreements providing for payments to the
Borrower with respect to patients enrolled in such programs.
18. The Borrower has not incurred any material liability, direct or contingent, nor has
there been any material adverse change in the financial position, results of operations or
condition, financial or otherwise, of the Borrower since August 31, 2006, which is not described
in the Official Statement, whether or not arising from transactions in the ordinary course of.
business.
19. Between the date hereof and the date of the Closing, the Borrower and NHC will
not, without the prior written consent of the Underwriter, except as described in or contemplated
by the Official Statement, incur any material liabilities, direct or contingent, other than in the
ordinary course of business.
20. As of the date thereof and as of the date hereof and at the Closing Date, the
Official Statement, as amended or supplemented pursuant to the Bond Purchase Contract or this
Letter of Representation, if applicable, does not contain any untrue statement of a material fact or
omit to state. a material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not misleading; provided,
however, that the Borrower makes no representation or warranty as to the information contained
in or omitted from the Official Statement in reliance upon and in conformity with information
furnished in writing to the Borrower by or on behalf of the Underwriter, the City or the Insurer
specifically for inclusion therein.
MR
CHIC_1433333.4
21. If, between the date hereof and up to and including the 25th day following the end
of the underwriting period (as defined in Rule 15c2 -12 of the Securities and Exchange
Commission), any event relating to or affecting the Borrower, NHC or any future Members of
the Obligated Group or their respective present or proposed facilities shall occur which might or
would cause the Official Statement, as then supplemented or amended, to contain an untrue
statement of a material fact or to omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, in the light of the circumstances under
which they were made, the Borrower shall notify the City and the Underwriter and if, in the
opinion of the Borrower, the City or the Underwriter such event requires the preparation and
publication of a supplement or amendment to the Official Statement, the Borrower will request
the City to cause the Official Statement to be amended or supplemented in a form and in a
manner approved by the Underwriter.
22. For twenty -five days from the date of the end of the underwriting period (as
defined in Rule 15c2 -12 of the Securities and Exchange Commission), the Borrower will (a) not
participate in the issuance of any amendment of or supplement to the Official Statement to
which, after being furnished with a copy, any of you shall reasonably object in writing or which
shall be disapproved by your respective counsel and (b) if any event relating to or affecting the
City, the Borrower or NHC or any future Members of the Obligated Group or their respective
present or proposed facilities shall occur as a result of which it is necessary, in the opinion of
counsel for the Underwriter or the City, to amend or supplement the Official Statement in order
to make the Official Statement not misleading in the light of the circumstances existing at the
time it is delivered to a purchaser, forthwith prepare and furnish to the Underwriter and the City
(at the expense of the Borrower for 90 days from the date of Closing, and thereafter at the
expense of the Underwriter) a reasonable number of copies of an amendment of or supplement to
the Official Statement (in form and substance satisfactory to counsel for the Underwriter and
counsel to the City) which will amend or supplement the Official Statement so that it will not
contain an untrue statement of a material fact or omit to state a material fact necessary in order to
make the statements therein not misleading, in the light of the circumstances existing at the time
the Official Statement is delivered to the purchaser. For the purposes of this section, the
Borrower will furnish such information with respect to itself, NEC, any future Members of the
Obligated Group and their respective present and proposed facilities as any of you may from
time to time reasonably request.
23. (a) The Borrower, on its own behalf and on behalf of NHC, agrees to indemnify
and hold harmless the Underwriter, the directors, officers, employees and agents of the
Underwriter and each person who controls the Underwriter within the meaning of either the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, against
any and all losses, claims, damages or liabilities, joint or several, to which they or any of them
may become subject under the Securities Act of 1933, as amended, the Securities Exchange Act
of 1934, as amended, or other federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement of a material fact
contained in the Official Statement (or in any supplement or amendment thereto), or arise out of
or are based upon the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the circumstances under
which they were made, not misleading, and agrees to reimburse each such indemnified party, as
A -7
CHIC_1433333.4
incurred, for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action; provided, however,
that the Borrower will not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made in the Official Statement, or in any amendment
thereof or supplement thereto, in reliance upon and in conformity with written information
furnished to the Borrower by or on behalf of the Underwriter specifically for inclusion therein.
This indemnity agreement will be in addition to any liability which the Borrower, NHC and each
future Member of the Obligated Group may otherwise have.
(b) The Borrower, on its own behalf and on behalf of NHC, agrees to indemnify
and hold harmless the City, the directors, officers, employees and agents of the City and each
person who controls the City within the meaning of either the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, against any and all losses, claims,
damages or liabilities, joint or several, to which they or any of them may become subject under
the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, or
other federal or state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in the Official
Statement (or in any supplement or amendment thereto), or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances under which they were
made, not misleading, and agrees to reimburse each such indemnified party, as incurred, for any
legal or other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however, that the Borrower
will not be liable in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any such untrue statement or alleged untrue statement or omission
or alleged omission made in the Official Statement, or in any amendment thereof or supplement
thereto, in reliance upon and in conformity with written information famished to the Borrower
by or on behalf of the City specifically for inclusion therein. This indemnity agreement will be in
addition to any liability which the Borrower, NHC and each future Member of the Obligated
Group may otherwise have.
(c) The Underwriter agrees to indemnify and hold harmless the Borrower, each of
its officials, directors, officers and employees, and each person who controls the Borrower within
the meaning of either the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended, to the same extent as the foregoing indemnity from the Borrower to the
Underwriter, but only with reference to written information relating to the Underwriter furnished
to the Borrower by or on behalf of the Underwriter specifically for inclusion in the Official
Statement (or in any amendment or supplement thereto). This indemnity agreement will be in
addition to any liability which the Underwriter may otherwise have. The Borrower acknowledges
that the statements set forth in the section entitled, "UNDERWRITING" and the paragraph
related to stabilization on the inside cover page of the Official Statement, constitute the only
information furnished in writing by or on behalf of the Underwriter for inclusion in the Official
Statement (or in any amendment or supplement thereto).
CHIC_1433333.4
(d) Promptly after receipt by an indemnified party under this Section 23 of notice
of the commencement of any action, such indemnified party will, if a claim in respect thereof is
to be made against the indemnifying party under this Section 23 notify the indemnifying party in
writing of the commencement thereof, but the failure so to notify the indemnifying party (i) will
not relieve it from liability under paragraph (a), (b) or (c) above unless and to the extent it did not
otherwise learn of such action and such failure results in the forfeiture by the indemnifying party
of substantial rights and defenses; and (ii) will not, in any event, relieve the indemnifying party
from any obligations to any indemnified party other than the indemnification obligation provided
in paragraph (a), (b) or (c) above. The indemnifying party shall be entitled to appoint counsel of
the indemnifying party's choice at the indemnifying party's expense to represent the indemnified
party in any action for which indemnification is sought (in which case the indemnifying party
shall not thereafter be responsible for the fees and expenses of any separate counsel retained by
the indemnified party or parties except as set forth below); provided, however, that such counsel
shall be satisfactory to the indemnified party. Notwithstanding the indemnifying party's election
to appoint counsel to represent the indemnified party in an action, the indemnified party shall
have the right to employ separate counsel (including local counsel), and the indemnifying party
shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of
counsel chosen by the indemnifying party to represent the indemnified party would present such
counsel with a conflict of interest; (ii) the actual or potential defendants in, or targets of, any
such action include both the indemnified party and the indemnifying party and the indemnified
party shall have reasonably concluded that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those available to the
indemnifying party; (iii) the indemnifying party shall not have employed counsel satisfactory to
the indemnified party to represent the indemnified party within a reasonable time after notice of
the institution of such action; or (iv) the indemnifying party shall authorize the indemnified party
to employ separate counsel at the expense of the indemnifying party. An indemnifying party will
not, without the prior written consent of the indemnified parties, settle or compromise or consent
to the entry of any judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action, suit or proceeding.
(e) In the event that the indemnity provided in paragraph (a) or (c) of this
Section 23 is unavailable to or insufficient to hold harmless an indemnified party for any reason,
the Borrower and the Underwriter agree to contribute to the aggregate losses, claims, damages
and liabilities (including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses ") to which the Borrower and the
Underwriter may be subject in such proportion as is appropriate to reflect the relative benefits
received by the Borrower on the one hand and by the Underwriter on the other from the offering
of the Bonds. If the allocation provided by the immediately preceding sentence is unavailable for
any reason, the Borrower and the Underwriter shall contribute in such proportion as is
appropriate to reflect not only such relative benefits but also the relative fault of the Borrower on
the one hand and of the Underwriter on the other in connection with the statements or omissions
which resulted in such Losses, as well as any other relevant equitable considerations. In no case
shall the Underwriter be responsible for any amount in excess of the purchase discount or
commission applicable to the Bonds purchased by the Underwriter hereunder. Benefits received
M
CHIC 1433333.4
by the Borrower shall be deemed to be equal to the total net proceeds from the offering (before
deducting expenses) received by it, and benefits received by the Underwriter shall be deemed to
be equal to the total purchase discounts and commissions in each case set forth in the Official
Statement under the section entitled "UNDERWRITING." Relative fault shall be determined by
reference to, among other things, whether any untrue or any alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact relates to information
provided by the Borrower on the one hand or the Underwriter on the other, the intent of the
parties and their relative knowledge, information and opportunity to correct or prevent such
untrue statement or omission. The Borrower and the Underwriter agree that it would not be just
and equitable if contribution were determined by pro rata allocation or any other method of
allocation which does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this paragraph (e), no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act of 1933, as
amended) shall be entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 23, each person who controls the Underwriter
within the meaning of either the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, and each director, officer, employee and agent of the Underwriter shall
have the same rights to contribution as the Underwriter, and each person who controls the
Borrower within the meaning of either the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, and each official, director, officer and employee of the
Borrower shall have the same rights to contribution as the Borrower, subject in each case to the
applicable terms and conditions of this paragraph (e).
24. The Borrower has filed all annual reports when and where they are required to be
filed pursuant to any Continuing Disclosure Certificate executed and delivered by the Borrower
pursuant to Rule 15c2 -12 of the Securities and Exchange Commission that has been binding
upon the Borrower, and has filed all required notices of "listed events," as described in Rule
15c2 -12, when and where such notices are required to be filed pursuant to such Continuing
Disclosure Certificates.
25. The representations, warranties, agreements and indemnities herein shall survive
the Closing under the Bond Purchase Contract, and any investigation made by or on behalf of
any of you or any person who controls any of you of any matters described in or related to the
transactions contemplated hereby and by the Bond Purchase Contract, the Official Statement, the
Loan Agreement, the Bond Indenture, the Master Indenture, the Supplemental Master
Indentures, the Auction Agent Agreement, the Broker - Dealer Agreement, the Obligations and
the Continuing Disclosure Certificate.
26. The Borrower hereby agrees to pay the expenses described in Section 5 of the
Bond Purchase Contract (which are the responsibility of the Borrower), and to pay any expenses
incurred in amending or supplementing the Official Statement pursuant to the Bond Purchase
Contract or this Letter of Representation.
27. The Borrower acknowledges that in connection with the offering of the Bonds (a)
the Underwriter has acted at arms length, is not an agent of, and owes no fiduciary duties to the
Borrower or NHC or any other person, (b) the Underwriter owes the Borrower and NHC only
those duties and obligations set forth in the Bond Purchase Contract and (c) the Underwriter may
A -10
CHIC_1433333.4
have interests that differ from those of the Borrower and NHC. The Borrower, on its own behalf
and on behalf of NHC, waives to the full extent permitted by applicable law any claims it may
have against the Underwriter arising from an alleged breach of fiduciary duty in connection with
the offering of the Bonds.
28. This Letter of Representation shall be binding upon the Borrower and inure solely
to the benefit of each of you and, to the extent set forth herein, persons controlling any of you,
and their respective members, officers, employees, agents, successors and assigns, and no other
person or firm shall acquire or have any right under or by virtue of this Letter of Representation.
No recourse under or upon any obligation, covenant or agreement contained in this Letter of
Representation shall be had against any officer or director of the Borrower as individuals, except
as caused by their bad faith.
29. This Letter of Representation may be executed in any number of counterparts and
all such counterparts shall together constitute one and the same instrument.
A -11
CHIC 1433333.4
Very truly yours,
HOAG MEMORIAL HOSPITAL PRESBYTERIAN
C
Authorized Representative
Signature Page to Letter of Representation for the
City of Newport Beach
Insured Revenue Bonds (Hoag Memorial Hospital Presbyterian)
Series 2007A, 2007B, 2007C, 2007D and 2007E
CHIC_1433333.4
Accepted and Agreed to:
CITIGROUP GLOBAL MARKETS INC,
M
Director
CHIC_1433333.4
Signature Page to Letter of Representation for the
City of Newport Beach
Insured Revenue Bonds (Hoag Memorial Hospital Presbyterian)
Series 2007A, 2007B, 2007C, 2007D and 2007E
Accepted and Agreed to:
CITY OF NEWPORT BEACH
LN
Mayor
CHIC_1433333.4
Signature Page to Letter of Representation for the
City of Newport Beach
Insured Revenue Bonds (Hoag Memorial Hospital Presbyterian)
Series 2007A, 2007B, 2007C, 2007D and 2007E
EXHIBIT B TO
BOND PURCHASE CONTRACT
SCHEDULE OF MATURITIES AND INTEREST PERIODS
Series 2007A Bonds
Principal Maturity Initial Auction Day Initial Interest Interest Payment Length of
Amount Date Auction Generally Payment Date Date Generally Initial Period
Series 2007E Bonds
Principal Maturity Initial Auction Day Initial Interest Interest Payment Length of
Amount Date Auction Generally Payment Date Date Generally_ Initial Period
Series 2007C Bonds
Principal Maturity Initial Auction Day Initial Interest Interest Payment Length of
Amount Date Auction Generally Payment Date Date Generally Initial Period
Series 2007D Bonds
Principal Maturity Initial Auction Day Initial Interest Interest Payment Length of
Amount Date Auction Generally Payment Date Date Generally Initial Period
Series 2007E Bonds
Principal Maturity Initial Auction Day Initial Interest Interest Payment Length of
Amount Date Auction Generally Payment Date Date Generally Initial Period
ps
CHIC 1433333.4
Mandatory Sinking Fund Redemption
Series 2007A Bonds. The Series 2007A Bonds are subject to redemption prior to their
stated maturity in part, by lot, from sinking fund installments, on any December I on or after
December 1, 20_, at the principal amount thereof and interest accrued thereon to the date fixed
for redemption, without premium, as follows:
Redemption Date
(December 1)
* Final maturity.
Sinking Fund
Installment
Series 2007B Bonds. The Series 2007B Bonds are subject to redemption prior to their
stated maturity in part, by lot, from sinking fund installments, on any December I on or after
December 1, 20 , at the principal amount thereof and interest accrued thereon to the date fixed
for redemption, without premium, as follows:
Redemption Date
(December 1)
* Final maturity.
CHIC_1433333.4
IM
Sinking Fund
Installment
Series 2007C Bonds. The Series 2007C Bonds are subject to redemption prior to their
stated maturity in part, by lot, from sinking fund installments, on any December 1 on or after
December 1, 20 , at the principal amount thereof and interest accrued thereon to the date fixed
for redemption, without premium, as follows:
Redemption Date
(December 1)
* Final maturity.
Sinking Fund
Installment
Series 2007D Bonds. The Series 2007D Bonds are subject to redemption prior to their
stated maturity in part, by lot, from sinking fund installments, on any December 1 on or after
December 1, 20 , at the principal amount thereof and interest accrued thereon to the date fixed
for redemption, without premium, as follows:
Redemption Date
(December 1)
* Final maturity.
CHIC_1433333.4
IM
Sinking Fund
Installment
Series 2007E Bonds. The Series 2007E Bonds are subject to redemption prior to their
stated maturity in part, by lot, from sinking fund installments, on any December 1 on or after
December 1, 20. at the principal amount thereof and interest accrued thereon to the date fixed
for redemption, without premium, as follows:
Redemption Date Sinking Fund
(December 1) Installment
* Final maturity.
Notwithstanding the foregoing, if the scheduled redemption date for any Bond bearing
interest at an Auction Rate is not an ARS Interest Payment Date (other than the final maturity),
then the redemption date will occur on the applicable ARS Interest Payment Date immediately
following such scheduled redemption date.
Optional/Extraordinary Optional Redemption
The Bonds shall be subject to optional and extraordinary optional redemption under the
circumstances as described in the Bond Indenture.
MI
CHIC 1433333.4
EXHIBIT C TO
BOND PURCHASE CONTRACT
FORM OF AGREED -UPON PROCEDURES LETTER OF ERNST & YOUNG LLP
May _, 2007
Hoag Memorial Hospital Presbyterian
One Hoag Drive
Newport Beach, California 92658
and
Citigroup Global Markets Inc.
444 South Flower Street
27th Floor
Los Angeles, California 90071
Ladies and Gentlemen:
We have audited the consolidated balance sheets of Hoag Memorial Hospital
Presbyterian and Affiliates ( "Hoag ") as of August 31, 2006 and 2005 and the consolidated
statements of operations, changes in net assets and cash flows, for each of the two years ended
August 31, 2006 and 2005 included in the Official Statement for the [DESCRIBE BONDS] (the
"Bonds "). Our report with respect thereto is included in the official statement. The official
statement dated May _, 2007, is herein referred to as the "Official Statement."
We are independent certified public accountants with respect to Hoag under Rule 101 of
the Code ofProfesslonal Conduct of the American Institute of Certified Public Accountants, and
its rulings and interpretations.
We have not audited any financial statements of Hoag as of any date or for any period
subsequent to August 31, 2006. The purpose (and, therefore, the scope) of our audit for the year
ended August 31, 2006 was to enable us to express an opinion on the consolidated financial
statements as of August 31, 2006 and for the year then ended but not on the financial statements
for any interim period within that year. Therefore, we are unable to and do not express any
opinion on the unaudited Balance Sheet of the Corporation and its Wholly -Owned Subsidiaries
(consisting of Hoag Memorial Hospital Presbyterian, Bluff View, LLC, Coastal Physician
Purchasing Group Inc., Hoag Practice Management Inc. and Newport Healthcare Center, LLC)
at February 28, 2007; or the unaudited Summary of Revenues and Expenses of the Corporation
and its Wholly -Owned Subsidiaries for the six -month periods ended February 28, 2007 and
2006, including in the Official Statement; or on the financial position, results of operations, or
C -1
CHIC_1433333.4
cash flows of Hoag or the Corporation and its Wholly -Owned Subsidiaries as of any date or for
any period subsequent to August 31, 2006.
At your request, we have read the fiscal year 2007 minutes of the meetings of the
Board of Directors and the Finance and Audit Committees of Hoag as set forth in
minute books through May _, 2007, officials of Hoag having advised us that the
minutes of all such meetings through that date were set forth therein and have
carried out other procedures through May 2007 as follows (our work did not
extend to the period from May _, 2007 to May _, 2007, inclusive), as follows:
a. With respect to the six -month periods ended February 28, 2007 and 2006,
we have:
(i) Read the unaudited Balance Sheet of the Corporation and its
Wholly -Owned Subsidiaries as of February 28, 2007 and the
unaudited Summary of Revenues and Expenses of the Corporation
and its Wholly -Owned Subsidiaries for the six -month periods
ended February 28, 2007 and 2006 included in the Official
Statement and agreed the amounts contained therein with Hoag's
accounting records as of February 28, 2007 and for the six -month
periods ended February 28, 2007 and 2006.
(ii) Inquired of certain officials of Hoag who have responsibility for
financial and accounting matters whether the unaudited financial
statements of the Corporation and its Wholly -Owned Subsidiaries
referred to in a.(i) are in conformity with accounting principles
generally accepted in the United States applied on a basis
substantially consistent with that of the audited consolidated
financial statements of Hoag included in the Official Statement.
Those officials stated that the unaudited financial statements
referred to in a.(i) are in conformity with accounting principles
generally accepted in the United States applied on a basis
substantially consistent with that of the audited consolidated
financial statements of Hoag included in the Official Statement.
b. With respect to the period from March 1, 2007 to April 30, 2007, we have:
(i) Read the unaudited financial statements of the Corporation and its
Wholly -Owned Subsidiaries as of and for the eight -month period
ended April 30, 2007, furnished to us by Hoag, and agreed the
amounts contained therein with Hoag's accounting records.
Officials of Hoag have advised us that no such financial statements
as of any date or for any period subsequent to April 30, 2007 were
available.
(ii) Inquired of certain officials of Hoag who have responsibility for
financial and accounting matters whether (1) the unaudited
C -2
CHIC_1433333.4
financial statements of the Corporation and its Wholly -Owned
Subsidiaries referred to in b.(i) are stated on a basis substantially
consistent with that of the audited consolidated financial
statements of Hoag included in the Official Statement, (2) at April
30, 2007, there was any increase in [long -term debt/bonds payable]
or decrease in total net assets of the Corporation and its Wholly -
Owned Subsidiaries as compared with the amounts shown in the
February 27, 2007 unaudited Balance Sheet of the Corporation and
its Wholly -Owned Subsidiaries included in the Official Statement
and (3) for the period from March 1, 2007 to April 30, 2007 there
were any decreases, as compared with the corresponding period in
the preceding year, in the total operating revenue or in the excess
of revenue over expenses of the Corporation and its Wholly -
Owned Subsidiaries.
Those officials stated that (1) the unaudited financial statements
referred to in b.(i) are stated on a basis substantially consistent with
that of the audited consolidated financial statements of Hoag
included in the Official Statement, (2) at April 30, 2007, there was
no increase in [long -term debt/bonds payable] or decrease in total
net assets of the Corporation and its Wholly -Owned Subsidiaries
as compared with amounts shown in the February 28, 2007
unaudited Balance Sheet of the Corporation and its Wholly -Owned
Subsidiaries included in the Official Statement, and (3) there were
no decreases for the period from March 1, 2007 to April 30, 2007,
as compared with the corresponding period in the preceding year,
in the total operating revenue or in the excess of revenue over
expenses of the Corporation and its Wholly -Owned Subsidiaries.
[PROVIDE ALTERNATIVE POSITIVE/NEGATIVE REPS AS
NEEDED.]
C. As mentioned in l.b.(i), officials of Hoag have advised us that no financial
statements as of any date or for any period subsequent to April 30, 2007
are available, accordingly the procedures carried out by us with respect to
changes in financial statement items after April 30, 2007 have, of
necessity, been even more limited than those with respect to periods
referred to in l.a. and l.b. We have inquired of certain officials of Hoag
who have responsibility for financial and accounting matters whether (1)
at May _, 2007, there was any increase in [long -term debt/bonds payable]
or any decrease in total net assets of the Corporation and its Wholly -
Owned Subsidiaries as compared with the amounts shown in the February
28, 2007 unaudited Balance Sheet of the Corporation and its Wholly -
Owned Subsidiaries included in the Official Statement or (2) for the
period from March 1, 2007 to May _, 2007 there were any decreases, as
compared with the corresponding period in the preceding year, in the total
operating revenue or in the excess of revenue over expenses of the
Corporation and its Wholly -Owned Subsidiaries.
C -3
CHIC 1433333.4
[Those officials referred to above stated that (1) at May _, 2007 they
were unable to state whether there was no increase in [long -term
debtibonds payable] or decrease in total net assets of the Corporation and
its Wholly -Owned Subsidiaries as compared with the amounts shown in
the February 28, 2007 unaudited Balance Sheet of the Corporation and its
Wholly -Owned Subsidiaries and (2) they were unable to state whether
there was no decrease for the period from March 1, 2007 to May _, 2007,
as compared with the corresponding period in the preceding year, in the
Corporation and its Wholly -Owned Subsidiaries' total operating revenue
or the excess of revenue over expenses because their financial accounting
system does not provide the required information.] [PROVIDE
ALTERNATIVE POSITIVE/NEGATIVE REPS IF INFORMATION IS
AVAILABLE]
2. Our audits of the consolidated financial statements of Hoag for the periods
referred to in the introductory paragraph of this letter comprised audit tests and
procedures deemed necessary for the purpose of expressing an opinion on such
financial statements taken as a whole. For none of the periods referred to therein,
nor for any other period, did we perform audit tests for the purpose of expressing
an opinion on individual balances of accounts or summaries of selected
transactions such as those enumerated below, and, accordingly, we express no
opinion thereon. At your request for the purpose of this letter, we have read the
following circled information identified by you and set forth in the attached pages
from the Official Statement (Attachment A consisting of _ pages) and have
performed the following procedures which were applied as indicated with respect
to the symbols explained below.
Symbol Procedures and Findings
A We compared the dollar amount to the corresponding amount in the
consolidating balance sheets and statements of operations of Hoag
included in the "Other Financial Information" appended to the audited
consolidated financial statements of Hoag for the years ended August 31,
2006 and 2005, or the audited consolidated financial statements of Hoag
for the years ended August 31, 2005 and 2004 to the extent such amount
is included in or can be derived from such statements and found it to be
in agreement. For changes between periods stated in dollar amounts
and/or percentages, we proved the arithmetical accuracy of these items.
It should be noted that "EBDI," is not a measure of operating
performance or liquidity defined by accounting principles generally
accepted in the United States and may not be comparable to similarly
titled measures represented by other companies. We make no comment
about Hoag's definition, calculation or presentation of "EBDI" or their
usefulness for any purposes. Additionally, we make no comment with
respect to reasons given for changes between period.
B Compared the dollar amount to a schedule prepared by Hoag from its
.!
CHIC 1433333.4
accounting records and found such amounts to be in agreement. We also
(a) compared the amounts on the schedule to a corresponding amount in
Hoag's accounting records, rounded to hundreds of thousands, and found
such amount to be in agreement and (b) determined that the schedule was
mathematically correct. For percentages and changes between periods
stated in dollar amounts and/or percentages, we proved the arithmetical
accuracy of these percentages and amounts. However, we make no
comment with respect to reasons given for changes between periods.
Furthermore, we make no comment as to the classification of investments
in the various Portfolios as enumerated in the table under the Section
"Liquidity and Investment Policy" on page A -_ of Appendix A.
C We proved the arithmetical accuracy of the percentage or the amount,
rounded to hundreds of thousands where indicated, based on amounts
included in the "Other Financial Information" appended to Hoag's
audited consolidated financial statements for the years ended August 31,
2006 and 2005. It should be noted that "Income Available for Debt
Service," "Total Capitalization," and "Percent Long -Term Debt to
Capitalization" are not measures of operating performance or liquidity
defined by accounting principles generally accepted in the United States
and may not be comparable to similarly titled measures presented by
other companies. We make no comment about Hoag's definition,
calculation or presentation of "Income Available for Debt Service,"
"Total Capitalization" and "Percent Long -Term Debt to Capitalization"
or their usefulness for any purposes. Furthermore, we make no comment
as to the classification of investments in the various Portfolios as
enumerated in the table under the Section "Liquidity and Investment
Policy" on page A -_ of Appendix A.
3. It should also be understood that we have no responsibility for establishing (and
did not establish) the scope and nature of the procedures enumerated in
paragraphs 1 and 2 above; rather, the procedures enumerated therein are those that
the requesting party asked us to perform. Accordingly, we make no
representations regarding questions of legal interpretation or as to the sufficiency
for your purposes of the procedures enumerated in the preceding paragraphs; also
such procedures would not necessarily reveal any material misstatement of the
information identified in the preceding paragraphs as set forth in the Official
Statement. Further, we have addressed ourselves solely to the foregoing data and
make no representations as to the adequacy of disclosures or whether any material
facts have been omitted. This letter relates only to the financial statement items
specified above and does not extend to any consolidated financial statements of
Hoag taken as a whole.
CHIC_1433333.4
4. The foregoing procedures do not constitute an audit conducted in accordance with
auditing standards generally accepted in the United States. Had we performed
additional procedures or had we conducted an audit or a review of Hoag's
consolidated or the Corporation or its Wholly -Owned Subsidiaries February 28 or
April 30, 2007 and 2006 unaudited financial statements in accordance with
standards established by the American Institute of Certified Public Accountants,
other matters might have come to our attention that would have been reported to
you.
5. These procedures should not be taken to supplant any additional inquiries or
procedures that you would undertake in your consideration of the proposed
offering.
6. This letter is solely for your information and to assist you in your inquiries in
connection with the offering of the bonds covered by the Official Statement, and
it is not to be used, circulated, quoted, or otherwise referred to for any other
purpose, including but not limited to the purchase, or sale of bonds, nor is it to be
filed with or referred to in whole or in part in the Official Statement or any other
document, except that reference may be made to it in any list of closing
documents pertaining to the offering of the securities covered by the Official
Statement.
7. We have no responsibility to update this letter for events and circumstances
occurring after May _, 2007.
Very truly yours,
C -6
CHIC_1433333.4
EXHIBIT D TO
BOND PURCHASE CONTRACT
FORM OF OPINION OF CITY COUNSEL
May 31, 2007
City of Newport Beach, California
Newport Beach, California
Citigroup Global Markets Inc.
Los Angeles, California
Hoag Memorial Hospital Presbyterian
Newport Beach, California
City of Newport Beach
Insured Revenue Bonds
(Hoag Memorial Hospital Presbyterian)
Series 2007A, 2007B, 2007C, 2007D and 2007E
(the "Bonds ")
Ladies and Gentlemen:
This opinion is delivered to you pursuant to the Bond Purchase Contract dated May _,
2007 (the "Purchase Contract'), between the City of Newport Beach, California (the "City ") and
Citigroup Global Markets Inc. (the "Purchaser "), which Hoag Memorial Hospital Presbyterian
(the "Borrower ") has approved, in connection with the issuance by the City of $
aggregate principal amount of its Insured Revenue Bonds (Hoag Memorial Hospital
Presbyterian) Series 2007A, 2007B, 2007C, 2007D and 2007E (the "Bonds ") pursuant to a Bond
Indenture dated as of May 1, 2007 (the "Bond Indenture "), between the City and Wells Fargo
Bank, National Association, as bond trustee (the "Bond Trustee "). The Bonds are being issued
for the purpose of making a loan of the proceeds thereof to the Borrower pursuant to a Loan
Agreement dated as of May 1, 2007 (the "Loan Agreement) between the City and the Borrower.
The opinions or conclusions expressed herein are based on an analysis of existing laws,
regulations, rulings ands court decisions and cover certain matters not directly addressed by such
authorities. Such opinions may be affected by actions taken or omitted or events occurring after
the date hereof. We have not undertaken to determine, or to inform any person, whether any
such actions or events are taken or do occur. We have assumed the genuineness of all documents
and signatures presented to us (whether as originals or as copies) and the due and legal execution
and delivery thereof by, and validity against, any parties other than the City. We have not
undertaken to verify independently, and have assumed, the accuracy of the factual matters
represented, warranted or certified in the documents, and of the legal conclusions contained in
D -1
CHIC_i433333.4
the opinions, referred to in the second paragraph hereof. We have further assumed compliance
with all covenants and agreements contained in such documents. In addition, we call attention to
the fact that the rights and obligations under the Bonds, the Bond Indenture, the Loan Agreement
and the Purchase Contract may be subject to bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other laws affecting creditors' rights, to the application of
equitable principles and to the exercise of judicial discretion inappropriate cases. We express no
opinion with respect to any indemnification, contribution, choice of law, choice of forum or
waiver provisions contained in the foregoing documents.
As counsel for the City in connection with the issuance of the Bonds, I have examined
certain documents, records and proceedings as I have deemed necessary and appropriate for the
purpose of this opinion and, on the basis of the foregoing and upon consideration of applicable
law, I am of the opinion that:
1. The City is a municipal corporation and charter city duly organized and validly
existing under a freeholder's charter under the Constitution and laws of the State of California
and has corporate power and authority to consummate and carry out all transactions
contemplated by the Purchase Contract.
2. The Official Statement used in connection with the issuance and sale of the Bonds
(the "Official Statement ") has been duly authorized, executed and delivered by the City.
3. Without assuming any responsibility for the accuracy, completeness or fairness of
the information or the statements contain in the Official Statement, to my knowledge, the
information relating to the City in its limited role as the conduit issuer of the Bonds contained in
the Official Statement under the headings "THE CITY" and "LITIGATION — The City" does not
contain any untrue statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
4. The Resolution of the City Council of the City approving and authorizing the
execution and delivery of the Bond Indenture, the Purchase Contract, the Bonds, the Loan
Agreement and the Official Statement was duly adopted at a meeting of the City Council which
was called and held pursuant to law and all public notices required by law and the procedural
rules of the City Council and at which a quorum was present and acting throughout.
5. There is no action, suit, proceeding or investigation at law or in equity before or
by any court, public board or body known to be pending or threatened against or affecting the
City to restrain or enjoin the issuance of delivery of the Bonds or the collection of revenues
pledged under the Bond Indenture or the assignment of the Loan Agreement under the Bond
Indenture, in any way contesting or affecting any authority for the issuance of the Bonds or the
validity of the Bonds, the Loan Agreement, the Bond Indenture or the Purchase Contract or in
any way contesting the existence or powers of the City with respect to the issuance of the Bonds
or the security therefore wherein an unfavorable decision, ruling or finding would materially
adversely affect the transactions contemplated by the Official Statement, the Bond Indenture, the
Loan Agreement or the Purchase Contract or the validity of the Bonds.
D -2
CHIC 1433333.4
6. The execution and delivery of the Bonds, the Bond Indenture, the Loan
Agreement and the Purchase Contract and compliance with the provisions thereof under the
circumstances contemplated thereby do not and will not conflict with or constitute on the part of
the City a breach or default under any agreement or other instrument to which the City is a parry
or by which it is bound or any existing law, regulation, court order or consent decree to which
the City is subject, the result of which breach or default would be to materially adversely affect
the City's ability to perform its obligations under the Loan Agreement, the Bond Indenture, the
Bonds or the Purchase Contract.
7. The Loan Agreement, the Bond Indenture, the Bonds and the Purchase Contract
have been duly executed and delivered by the City and, assuming due authorization, execution
and delivery by the other parties thereto, are valid and binding obligations of the City
enforceable in accordance with their terms subject to laws relating to bankruptcy, insolvency,
reorganization or creditors' rights generally and to the application of equitable principles if
equitable remedies are sought.
8. All right and title to the payments due under the Loan Agreement have been duly
and legally assigned and pledged to the Bond Trustee for the payment of the principal of,
premium, if any, and interest on the Bonds.
Respectfully Submitted,
CITY ATTORNEY
D -3
CHIC_1433333.4
EXHIBIT E TO
BOND PURCHASE CONTRACT
FORM OF OPINION OF COUNSEL TO
THE BORRO WER
May 31, 2007
City of Newport Beach
Newport Beach, California
Citigroup Global Markets Inc.
Los Angeles, California
Wells Fargo Bank, National Association
as bond trustee and as master trustee
Los Angeles, California
Re: $ City of Newport Beach Insured Revenue Bonds (Hoag Memorial
Hospital Presbyterian) Series 2007A, 2007B, 2007C, 2007D
and 2007E
Ladies and Gentlemen:
We have acted as special counsel to Hoag Memorial Hospital Presbyterian, a California
nonprofit public benefit corporation (the "Corporation'), in connection with the sale and delivery
of $ City of Newport Beach Insured Revenue Bonds (Hoag Memorial Hospital
Presbyterian) Series 2007A, 2007B, 2007C, 2007D and 2007E (collectively, the `Bonds');
however, we are not general counsel to the Corporation.
Our opinion is based on the following general transaction structure:
The Bonds are being executed and delivered pursuant to an indenture dated as of May 1,
2007 (the "Indenture ") between the City of Newport Beach (the "City ") and Wells Fargo Bank,
National Association, as trustee (the "Bond Trustee "). The proceeds of the Bonds are being
loaned to the Corporation under the terms of a loan agreement dated as of May 1, 2007 (the
"Loan Agreement') between the City and the Corporation.
The Corporation, as Credit Group Representative, is issuing its Obligation No. 1
( "Obligation No. 1 ") to evidence the obligation of the Obligated Group Members to make
payments sufficient to pay the principal of, premium, if any, interest on and purchase price of the
Bonds pursuant to the Supplemental Master Indenture for Obligation No. 1, dated as of May 1,
2007 (the "Supplemental Master Indenture for Obligation No. 1 "), by and between the
Corporation, as Credit Group Representative, and Wells Fargo Bank, National Association, as
master trustee (the "Master Trustee "), supplementing the Master Indenture dated as of May 1,
2007 (the "Master Indenture') between the Corporation, Newport Healthcare Center, LLC
E -1
CHIC_1433333.4
( "NHC ") and such other Members as may join the obligated group as defined therein (the
"Obligated Group ") and the Master Trustee.
The Corporation, as Credit Group Representative, is issuing its Obligation No. 2
( "Obligation No. 2" and together with Obligation No. 1, the "Obligations ") to evidence the
obligation of the Obligated Group Members to make payments sufficient to pay the principal of,
premium, if any, and interest on the City of Newport Beach Insured Revenue Bonds (Hoag
Memorial Hospital Presbyterian), Series 2005A, 2005B and 2005C (the "Series 2005 Bonds ")
pursuant to the Supplemental Master Indenture for Obligation No. 2, dated as of May 1, 2007
(the "Supplemental Master Indenture for Obligation No. 2" and together with the Supplemental
Master Indenture for Obligation No. 1, the "Supplemental Master Indentures "), by and between
the Borrower, as Credit Group Representative, and the Master Trustee, supplementing the Master
Indenture. The Credit Group Representative is issuing Obligation No. 2 in substitution for
certain covenants in the Supplemental Master Indenture for Obligation No. 14, dated as of
August 1, 2005, supplementing the prior Master Trust Indenture dated as of October 1, 1984,
each between the Borrower and Wells Fargo Bank, National Association, as prior master trustee.
The Bonds are being sold pursuant to a bond purchase contract dated May _, 2007
between the Corporation, the City and Citigroup Global Markets Inc. (the "Purchase Contract').
An official statement dated May _, 2007 (the "Official Statement') has been prepared to
furnish information with respect to the sale and delivery of the Bonds.
Following their issuance the Bonds will bear interest at the Auction Rate, as defined in
the Indenture, determined by Wells Fargo Bank, National Association, as the Auction Agent,
pursuant to certain Auction Procedures, as defined in the Indenture. The Auction Procedures
require the participation of one or more broker - dealers.
Pursuant to a broker - dealer agreement dated as of May 1, 2007 (the "Broker - Dealer
Agreement') by and among Wells Fargo Bank, N.A., as Auction Agent, Citigroup Global
Markets Inc. and the Corporation, Citigroup Global Markets Inc agrees to act as Broker - Dealer
with respect to the Auction Procedures.
This Opinion is provided pursuant to paragraph 3(e)(4) of the Purchase Contract.
We have made such investigations of facts and law, examined such documents, obtained
such certificates from public officials and officers of the Corporation, and done such other things
as we have determined to be necessary or appropriate to render this opinion. As to questions of
fact relevant to this opinion, we have been furnished with and relied solely upon certificates of
public officials, closing certificates of and questionnaires completed by certain officers of the
Corporation, and documents submitted to us in response to our information request to the
Corporation dated , 2007 and follow -up with officers of the Corporation where
indicated based on the information received from such sources. We have assumed and have not
verified the accuracy of the facts stated in any certificate, questionnaire or the documents
provided to us in response to our requests as described above. Whenever a statement herein is
qualified by "known to us," "to our current actual knowledge," or similar phrase, it is intended to
indicate that, during the course of our representation of the Corporation, no information that
would give us current actual knowledge of the inaccuracy of such statement has come to the
E -2
CHIC_1433333A
attention of those attorneys in this firm who have rendered legal services in connection with the
transaction described in the introductory paragraph hereof. However, except as otherwise
expressly indicated, we have not undertaken any independent investigation to determine the
accuracy of such statement, and any limited inquiry undertaken by us during the preparation of
this opinion letter should not be regarded as such an investigation; no inference as to our
knowledge of any matters bearing on the accuracy of any such statement should be drawn from.
the fact of our representation of the Corporation.
We have assumed the legal capacity of all natural persons and that, with respect to all
parties to agreements or instruments relevant hereto (other than the Corporation), such parties
had the requisite power and authority to execute, deliver and perform such agreement or
instruments, that such agreements or instruments have been duly authorized by all requisite
action, executed and delivered by such parties, and that such agreement or instruments are the
valid binding and enforceable obligations of such parties. We have further assumed the
authenticity of all items submitted to us as originals, the conformity to originals of all items
submitted to us as certified or photostatic copies, and except for signatures on behalf of the
Corporation, the genuineness of such signatures. We have further assumed that the City is a duly
organized and validly existing local government entity and that the Bonds have been duly issued
by the City.
Our opinions expressed herein are subject to and limited by the effect of Trident Center V.
Connecticut General Life Insurance Co., 847 F.2d 564 (9' Cir. 1988), in which the Ninth Circuit
Court of Appeals, applying what it said was California law, held that parole evidence was
admissible to vary the provisions of an unambiguous agreement. To the extent Trident
accurately expresses California law on the subject, our opinion assumes that no party to any
agreement or instrument referenced herein in any action seeking to enforce it offers any parole
evidence that would expand, modify or otherwise affect the express terms of said agreement or
document or the respective rights or obligations of the parties thereunder.
Based on the foregoing, and subject to the additional assumptions, exceptions, the
qualifications and limitations set forth below, as of the date of this letter, it is our opinion that:
1. The Corporation is a nonprofit public benefit corporation duly organized and in
good standing under the laws of the State of California.
2. NHC is a limited liability company duly organized and in good standing under the
laws of the State of California.
3. The Corporation has the corporate power and authority to enter into the Loan
Agreement, the Tax Certificate and Agreement (as defined in the Indenture), the Purchase
Contract (including the Letter of Representation appended thereto), the Broker - Dealer
Agreement, the Supplemental Master Indentures, the Obligations and the Continuing Disclosure
Certificate (collectively, the "Borrower Documents "), to perform all of its duties contained
therein, and to approve the Official Statement.
4. Each of the Corporation and NHC has the corporate power and authority to enter
into the Master Indenture and to perform all of its duties contained therein.
E -3
CHIC 1433333.4
5. The execution of the Supplemental Master Indentures are authorized or permitted
by the Master Indenture.
6. All conditions precedent to the execution of the Master Indenture and the
Supplemental Master Indentures have been complied with. The Borrower Documents have been
duly authorized by all necessary corporate action on the part of the Corporation and have been
duly executed and delivered by the Corporation. The Master Indenture has been duly authorized
by all necessary corporate action on the part of the Corporation and NHC and has been duly
executed and delivered by the Corporation and NHC.
7. The obligations under the Loan Agreement and Obligation No. 1 which have been
assigned to the Bond Trustee constitute the legal, valid and binding agreements of the
Corporation (and NHC with respect to Obligation No. 1) with the Bond Trustee enforceable
against the Corporation (and NHC with respect to Obligation No. 1) in accordance with their
terms.
8. (i) The Borrower Documents and any obligations of the Corporation under the
Loan Agreement not so assigned to the Bond Trustee and (ii) the Master Indenture and any
obligations of the Corporation and NHC under Obligation No. 1 not so assigned to the Bond
Trustee constitute the legal, valid and binding obligations of the Corporation and NHC, as
applicable, enforceable against the Corporation and NHC, as applicable, in accordance with their
terms.
9. The Corporation has the corporate power to approve and has duly approved the
Indenture and the Official Statement and duly authorized the distribution of the Official
Statement.
10. The distribution of the Official Statement and the approval thereof by the
Corporation, the approval by the Corporation of the Indenture, the execution and delivery by the
Corporation of the Borrower Documents and the execution and delivery by the Corporation and
NHC of the Master Indenture, the performance by the Corporation and NHC, as applicable, of
the duties and covenants of the Corporation and NHC contained therein and the fulfillment of or
compliance by the Corporation and NHC with the terms and conditions thereof (a) do not and
will not constitute on the part of the Corporation or NHC a breach of or default (with due notice
or the passage of time or both), and do not result in the creation or imposition of any prohibited
lien, charge or encumbrance upon the property or assets of the Corporation or NHC, under the
articles of incorporation or bylaws of the Corporation or NHC, or the resolution of the Board of
Directors of the Corporation duly adopted on , 2007 authorizing the transactions
contemplated by the documents referred to in this paragraph, (b) do not and will not, to our
knowledge, constitute a material breach of the terms, conditions or provisions of, or constitute a
default under, any material contract, undertaking, indenture or other agreement or instrument;
and (c) neither is prohibited by, nor subjects the Corporation or NHC to, a fine, penalty, or other
similar sanction under, any statute or regulation of the State of California, or any federal statute
or regulation, of a type which are typically applicable to transactions similar to those transactions
contemplated by the documents referred to in this paragraph, and which breach, default, lien,
charge or encumbrance would materially and adversely affect the consummation of the
E -4
CHIC_1433333.4
transactions contemplated by the documents referred to in this paragraph, or the financial
condition or operations of the Corporation or NHC.
11. With respect to requirements imposed on the Corporation or NHC, no consent,
approval, authorization of or designation, declaration, or filing with any California or United
States federal authority (except as may be required under any state or federal blue sky or
securities laws) is required in connection with the execution and delivery by the Corporation and
NHC of the Master Indenture and by the Corporation of the Borrower Documents or the
approval by the Corporation of the Indenture and the Official Statement or the distribution of the
Official Statement, or, in the case of the Master Indenture and the Borrower Documents, is
required in cormection with the performance of the obligations and duties of the Corporation and
NHC contained therein, except as has been obtained or made on or before the date hereof and as
is in full force and effect or which are not required to be made or obtained until after the date
hereof. All requirements and conditions to be fulfilled by the Corporation prior to the issuance
of the Obligations set forth in the Master Indenture and the Supplemental Master Indentures have
been complied with and satisfied.
12. (a) To our current actual knowledge, there is no action, suit, or pending
against the Corporation or NHC or their properties in any court or before any governmental
authority or agency, or arbitration board or tribunal, which challenges the consummation of the
financing transactions contemplated by or the validity of the Bonds, the Master Indenture or the
Borrower Documents, which, if determined adversely to the Corporation or NHC, would have a
material and adverse effect on such consummation or validity.
(b) To our current actual knowledge, there is no action, suit or proceeding,
pending against the Corporation or NHC or the assets, properties or operations of the
Corporation or NHC which, if determined adversely to the Corporation or NHC, would have a
material and adverse effect on the Corporation or NHC or their financial condition, assets or
operations (taken as a whole).
(c) To our current actual knowledge, each of the Corporation and NHC is not
in violation or breach with respect to any specific judicial or administrative adjudicative order or
decree directed to or affecting the Corporation or NHC by any federal, state, or municipal court
or other governmental authority which violation or breach might have consequences that would
materially and adversely affect the consummation of the transactions contemplated by the
documents referred to in this paragraph 12 or the financial condition or operations of the
Corporation or NHC (taken as a whole).
13. The Corporation is an organization described in Section 501(c)(3) of the Internal
Revenue Code of 1986, as amended (the "Code "), and is exempt from federal income taxation
under Section 501(a) of the Code except for unrelated business income subject to taxation under
Section 511 of the Code.
14. The Corporation is an organization described in Section 3(a)(4) of the Securities
Act of 1933, as amended, and Section 12(g)(2)(D) of the Securities Act of 1934, as amended.
E -5
CHIC_1433333.4
15. Each of the Corporation and NHC has the corporate power and authority to own
its properties and assets and to carry on its business as now being conducted by it.
16. The Corporation is duly licensed by the State of California Department of Health
Services as a general acute care hospital and is qualified to participate in the federal Medicare
and state Medi -Cal programs.
17. The Master Indenture is exempt from qualification under the Trust Indenture Act
of 1939, as amended, and Obligation No. 1 is exempt from registration under the Securities Act
of 1933, as amended.
In connection with our participation in the preparation of the Official Statement, we have
not independently verified the accuracy, completeness or fairness of the statements contained
therein, and the limitations inherent in the examination made by us and the knowledge available
to us are such that we are unable to assume, and we do not assume, any responsibility for the
accuracy, completeness or fairness of the statements contained in the Official Statement.
However, on the basis of our examination and our participation in conferences with certain
officers of the Corporation and NHC, its independent auditors and representatives of the
Underwriter, its counsel and Bond Counsel in connection with the preparation of the Official
Statement, we can advise you supplementally as a matter of fact that we have no current actual
knowledge that the Official Statement as of its date or the date hereof contained or contains any
untrue statement of a material fact or omitted or omits to state any material fact required to be
stated therein or necessary in order to make the statements therein not misleading. However, we
are not expressing any belief as to the financial statements and the notes thereto or any financial
statistical or economic data or forecast, or the demographic and statistical data, or any
information regarding the City, the Book -Entry Only System and The Depository Trust
Company, all as contained in the Official Statement.
Our opinion is subject to the following qualifications:
(a) We have not examined the question of what law would govern the
interpretation or enforcement of the Master Indenture, the Indenture, Obligation No. 1,
the Loan Agreement, the Purchase Contract or the Broker- Dealer Agreement and, except
as set forth in b, c and d below, we express no opinion with respect to the laws of any
state or jurisdiction other than California.
(b) We express our opinion with respect to federal law only as set out in
paragraphs 10, 11, 12, 13, 14, 15, 16 and 17 hereof and as it may apply to exception
paragraphs c, d, a and g.
(c) Except as specifically provided in paragraphs 14 and 17 and in exception
paragraph d, we express no opinion with respect to the registration or qualification
provisions of federal or state securities laws or their application to any of the documents
referred to herein or any transaction contemplated thereunder.
(d) The enforceability of the documents listed in paragraphs 7 and 8 may be
limited:
E -6
CHIC 1433333.4
(i) by bankruptcy, insolvency, fraudulent conveyance, or other similar
laws or proceedings affecting the enforcement of creditors' rights generally as
such proceedings or laws affect the Corporation, including, without limitation,
self -help remedies, applicable foreclosure procedures and by application of
equitable principles regardless of whether such enforceability is considered in a
proceeding in equity or at law,
(ii) to the extent that enforcement may be held to be against public
policy,
(iii) to the extent that the indemnification provisions in such documents
may be limited by applicable securities law or public policy,
(iv) by the implied covenant of good faith and fair dealing, and
(v) to the extent that enforcement may be limited by donor restrictions
on certain funds.
(e) Our opinion as expressed in paragraphs 10 (as to decrees and orders) and
12 is based solely upon a Lexis on -line search conducted on May _, 2007 of the
plaintiff and defendant indexes in the Superior Court of the State of California for the
County of Orange and certain other California counties as well as the United States
District Court for the Central District of California and a status review of the litigation
identified by such searches, an interview with the Executive Vice President of the
Corporation, a review of the minutes of the Board of Directors of the Corporation, and a
review of responses to inquiries by us of litigation counsel identified by the Corporation
regarding litigation matters pertaining to the Corporation.
(� We express no opinion as to:
(i) The enforceability of provisions in any of the documents
mentioned herein with respect to the payment of attorneys' fees.
(ii) The enforceability under certain circumstances of provisions
waiving stated rights or unknown future rights, or providing that rights or
remedies are not exclusive, but every right or remedy is cumulative and may be
exercised in addition or with any other right or remedy or that the election of
some particular remedy or remedies does not preclude or waive recourse to one or
more others.
(iii) The enforceability under certain circumstances of provisions which
waive statutory rights to receive notice or to be allowed to cure, or which waive
statutes of limitations.
(iv) The enforceability under certain circumstances of provisions to the
effect that failure to exercise or delay in exercising rights or remedies will, not
operate as a waiver of that right or remedy or that waivers must be in writing in
order to be effective.
E -7
CHIC 1433333.4
(v) The enforceability under certain circumstances of provisions to the
effect that the invalidity or unenforceability of certain provisions shall not impair
the validity or enforceability of remaining provisions.
(vi) The enforceability of provisions in any of the documents relating
to the disposition of insurance proceeds or condemnation proceeds.
(vii) The enforceability of provisions in any of the documents relating
to the execution of claims by third parties to such documents.
(viii) The enforceability of provisions increasing the interest rate payable
after a default or imposing a prepayment premium (except upon voluntary
prepayment) or late charges.
(ix) The enforceability of provisions which waive rights of set -off.
(x) The enforceability of provisions that time is of the essence.
(xi) The enforceability of any provisions that indemnify any party
against its own negligence or willful misconduct.
(xii) The effect of California Civil Code Section 1670.5 which provides
that a court may refuse to enforce, or may limit the application of, a contract or
any clause thereof which the court finds as a matter of law to have been
unconscionable at the time it was made.
(xiii) The effect of Section 1698 of the California Civil Code which
provides in part that provisions of any instrument or agreement may only be
waived in writing will not be enforced to the extent that an oral agreement has
been executed modifying provisions of such instrument or agreement.
(xiv) The enforceability of provisions governing choice of law, waiving
the right to trial by jury, consenting to jurisdiction or venue, altering the statutory
method of service of process, or appointing any party as the attorney -in -fact for
the other party.
(g) Certain provisions of the Borrower Documents and the Master Indenture
may be unenforceable under applicable California laws governing such provisions, but
neither such laws nor the possible unenforceability of the provisions referred to in
section (f) above, subject to the other exceptions, qualifications and limitations in this
Opinion, render the Borrower Documents and the Master Indenture invalid as a whole or
substantially interfere with realization of the principal benefits provided by the Borrower
Documents and the Master Indenture. In addition, we advise you that California court
decisions invoking statutes or principles of equity have held that certain covenants and
provisions of agreements are unenforceable where (i) the breach of such covenants or
provisions imposes restrictions or burdens upon the debtor, including the acceleration of
indebtedness due under debt instruments, and it cannot be demonstrated that the
enforcement of such restrictions or burdens is reasonably necessary for the protection of
E -8
CHIC 1433333.4
the creditor, or (ii) the creditor's enforcement of such covenants or provisions under the
circumstances would be unreasonable, violate the creditor's implied covenant of good
faith and fair dealing or would be commercially unreasonable.
(h) Our opinions as expressed in paragraphs 13 and 14 are based solely upon:
(i) The current articles of incorporation as certified by the Secretary of
State of the State of California and bylaws of the Corporation as provided to us by
the Corporation;
(ii) A copy of a letter dated March 10, 1954 by the Internal Revenue
Service addressed to the Corporation confirming that the Corporation is exempt
from federal income taxes under Section 501(a) of the Code as an organization
described in Section 501(c)(3) and that the Corporation is not a "private
foundation" within the meaning of Section 509(a) of the Code;
(iii) A certificate from the Executive Vice President of the Corporation
stating that the Corporation has not been notified by the Internal Revenue Service
of any investigation of, or proposed or actual revocation of its status as an
organization described in section 501(c)(3) of the Code which is not a private
foundation; and
(iv) Factual information set forth in certificates from officers of the
Corporation, the Corporation's responses to our questionnaire dated ,
2007 and the documents and other information submitted to us in response to our
information request to the Corporation dated 2007, and follow -up
with officers of the Corporation where indicated based on the information
received from such sources.
(i) We understand that you will rely upon the opinion of Bond Counsel as to
matters concerning the effect of the execution and delivery of the Indenture on the
validity and tax - exempt status of the Bonds, and we express no opinion herein on such
matters.
0) The opinions expressed herein are based on facts, laws, regulations and
case law in effect as of the date hereof, and we assume no obligation to revise or
supplement this letter should such facts, laws, regulations and case law be changed in any
respect, including any changes in organization or affairs of the Corporation and NHC.
(k) We have not rendered insurance advice to the Corporation or NHC as to
any types or classifications of coverage, including general and medical malpractice
liability coverage, and we do not represent, by this opinion or otherwise that we have
reviewed or made any assessment about, nor do we express any opinion about the types
or amounts of coverage, of the ability of any insurer or any self insurance program or
organization to meet its obligations pursuant to any policy or agreement with the
Corporation or NHC, or of the adequacy of the funding or reserves thereof.
E -9
CHIC_1433333.4
(1) As special counsel to the Corporation in this matter, we have not rendered
financial advice to the Corporation and do not represent by this opinion, or otherwise,
that we have reviewed or made any assessment about, nor do we offer any opinion about,
the financial condition of the Corporation, past, present or future (except only as financial
condition is related to a standard of materiality as used in paragraphs 10, 11(b) and 11(c)
hereof), and with respect to the latter we have relied entirely on the assessment of
materiality made by the Executive Vice - President of the Corporation.
(m) We express no opinion with respect to any numerical or mathematical
calculation or computation regarding the Bonds, any of the documents referred to herein
or any certificate given or issued with respect to the matters referred to herein. Without
limiting the generality of the above, we specifically express no opinion with respect to
any such calculation or computation contained in or related to the subject matter of the
"Tax Certificate and Agreement" or Internal Revenue Service Form 8038.
(n) We express no opinion as to the ownership or the condition of title of any
real or personal property of the Corporation or NHC.
(o) Our opinion is limited to the matters expressly set forth herein, and no
opinion or other statement may be inferred or implied beyond the matters expressly
stated.
We are members of the Bar of the State of California and, accordingly, do not purport to
be experts on or to be qualified to express any opinion herein concerning, nor do we express any
opinion herein concerning, any laws other than the laws of the State of California and federal
law.
This opinion is famished by us as special counsel to the Corporation and it may be relied
upon only by the addressees, their counsel and Orrick, Herrington & Sutcliffe LLP, as Bond
Counsel. This letter shall not be used, quoted, disseminated, circulated or relied upon by any
other person or entity, for any purpose, without our prior written consent, except as copies may
be included in transcripts of the proceedings relating to the issuance of the Bonds.
Respectfully submitted,
E -10
CHIC_1433333.4
EXHIBIT F TO
BOND PURCHASE CONTRACT
FORM OF OPINION OF UNDERWRITER'S COUNSEL
May 31, 2007
Citigroup Global Markets Inc.
Los Angeles, California
Re: $ aggregate principal amount of the City of Newport Beach
Insured Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series
2007A, 2007B, 2007C, 2007D and 2007E (the "Bonds ")
Ladies and Gentlemen:
We have acted as counsel to you as the Underwriter in connection with the purchase by
you of the $ aggregate principal amount of the City of Newport Beach Insured
Revenue Bonds (Hoag Memorial Hospital Presbyterian) Series 2007A, 2007B, 2007C, 2007D
and 2007E (the "Bonds "), pursuant to a Bond Purchase Contract (the "Bond Purchase
Contract "), by and between the City of Newport Beach (the "City ") and you, as the Underwriter,
which Hoag Memorial Hospital Presbyterian (the "Borrower "), as Borrower, has approved. The
Bonds are being issued pursuant to a Bond Indenture dated as of May 1, 2007 (the "Bond
Indenture's between the City and Wells Fargo Bank, National Association, as bond trustee (the
"Trustee ") for the purpose of making a loan to the Borrower pursuant to the Loan Agreement
dated as of May 1, 2007 (the "Loan Agreement ") between the City and the Borrower.
In that connection,. we have reviewed the Loan Agreement; the Bond Indenture; the
Master Indenture dated as of May 1, 2007 between the Borrower, Newport Healthcare Center,
LLC ( "NHC ") and Wells Fargo Bank, National Association, as master trustee (the "Master
Trustee "), as supplemented by the Supplemental Master Indenture for Obligation No. 1 and by
the Supplemental Master Indenture for Obligation No. 2 (as so supplemented, the "Master
Indenture "), between the Borrower and the Master Trustee; Obligation No. 1; Obligation No. 2;
the Official Statement dated May _, 2007 (the "Official Statement ") relating to the Bonds; the
Continuing Disclosure Certificate dated the date of issuance and delivery of the Bonds (the
"Continuing Disclosure Certificate ") between the Borrower and Wells Fargo Bank, National
Association, as Dissemination Agent; the Letter of Representation described in the Bond
Purchase Contract; the Auction Agent Agreement dated as of May 1, 2007 between the Trustee
and Wells Fargo Bank, N.A., as Auction Agent; the Broker - Dealer Agreement, dated as of May
1, 2007, among the Auction Agent, the Borrower and you, as Broker - Dealer;, the financial
guaranty insurance policy of Ambac Assurance Corporation (the "Insurer ") insuring the Bonds;
the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, counsel to the
Borrower, dated the date hereof; certifications of the City, the Borrower, NHC, the Master
Trustee, the Trustee and others as to certain matters; such opinions and such other records and
F -1
CHIC_1433333.4
documents; and we have made such investigations of law, as we have deemed appropriate as a
basis for the opinions and statements hereinafter expressed.
In rendering the opinions and making the statements hereinafter expressed, we are not
expressing any opinion or view of the validity, accuracy or sufficiency of the documents,
certificates or opinions referred to above or on the authorization, issuance, delivery or validity of
the Bonds and we have assumed, but not independently verified, that the signatures on all
documents, certificates and opinions that we have reviewed are genuine.
Based on and subject to the foregoing, and in reliance thereon, we are of the opinion that:
1. The Bonds are not subject to the registration requirements of the Securities Act of
1933, as amended; and the Bond Indenture and the Master Indenture are exempt from
qualification pursuant to the Trust Indenture Act of 1939, as amended.
2. Because the primary purpose of our professional engagement was not to establish
factual matters and because of the wholly or partially non -legal character of many determinations
involved in the preparation of the Official Statement, we are not passing upon and do not assume
any responsibility for the accuracy, completeness or fairness of any of the statements contained
in the Official Statement and make no representation that we have independently certified the
accuracy, completeness or fairness of any such statements. However, in our capacity as counsel
for the Underwriter during the course of preparation of the Official Statement, we met in
conferences or had discussions with your representatives, representatives of the Borrower and its
counsel, bond counsel, and others, during which conferences the contents of the Official
Statement and related matters were discussed. Based on our participation in the above
mentioned conferences and in reliance thereon and on the certificates, opinions and other
documents herein mentioned, we advise you that no information came to our attention which
caused us to believe that the Official Statement as of its date and as of the date of this opinion
(except for any financial or statistical data or forecasts and the information relating to DTC and
the Insurer contained therein as to which we express no opinion or view) contained any untrue
statement of a material fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under which they were
made, not misleading.
3. The Continuing Disclosure Certificate satisfies the requirements of Section
(b)(5)(i) of Rule 15c2 -12 of the Securities and Exchange Commission (17 C.F.R., Part 240,
§420.15c2- 12)(the "Rule "), which provide for an undertaking for the benefit of the holders,
including beneficial owners, of the Bonds to provide certain annual financial information and
event notices to various information repositories at the times and in the manner required by the
Rule.
4. With respect to the Bonds, other than the Borrower, there are no "obligated
persons" within the meaning of the Rule which would be required to provide certain annual
financial information and event notices to various information repositories as required by the
Rule.
F -2
CHIC 1433333.4
In rendering the foregoing opinions in paragraphs 3 and 4 hereof, we have assumed the
due authorization, execution and delivery of the Continuing Disclosure Certificate by the
Borrower, and that such Continuing Disclosure Certificate is a valid and binding obligation of
the Borrower enforceable in accordance with its terms.
The opinions expressed herein are based upon existing law as of the date hereof and we
express no opinion herein as of any subsequent date or with respect to any pending legislation.
We assume no obligation to supplement this opinion if any applicable laws change after the date
hereof or if we become aware of any facts that might change the opinions expressed herein after
the date hereof.
In rendering these opinions, we are expressing no opinion on the validity of the Bonds or
on the exclusion of interest evidenced by the Bonds from the gross income of the holders thereof
for federal income tax purposes or the exemption of interest on the Bonds from State of
California personal income taxes. We understand that you are relying on the opinion of Bond
Counsel in that regard.
The opinions herein are limited to the laws of the United States.
We are furnishing this letter to you pursuant to the Bond Purchase Contract solely for
your benefit as Underwriter. This letter is not to be used, circulated, quoted or otherwise referred
to for any other purpose except that reference to our opinion in the first numbered paragraph of
this letter may be made in the Official Statement or other documents and except that reference
may be made to this letter in any list of closing documents pertaining to the sale of the Bonds.
Respectfully,
Foley & Lardner LLP
F -3
CHIC_1433333.4
EXHIBIT G TO
BOND PURCHASE CONTRACT
OFFICER'S CERTIFICATE
City of Newport Beach
Insured Revenue Bonds
(Hoag Memorial Hospital Presbyterian)
Series 2007A, 2007B, 2007C, 2007D and 2007E
(the "Bonds ")
I, Jennifer Mitzner, hereby certify that I am the Vice President Finance and Chief
Financial Officer of Hoag Memorial Hospital Presbyterian (the "Corporation "), a nonprofit
public benefit corporation duly organized and existing under the laws of the State of California
and that, as such, I am authorized to execute this certificate on behalf of the Corporation under
the Master Indenture dated as of May 1, 2007, as supplemented and amended, by and among the
Corporation, Newport Healthcare Center, LLC and such other members as may join the
obligated group as defined therein and Wells Fargo Bank, National Association, as master
trustee.
I hereby further state and certify, to the best of my knowledge, that:
1. Since August 31, 2006, no material and adverse change has occurred in the
financial position or results of operation of the Corporation which is not described in the Official
Statement prepared in connection with the issuance of the Bonds or which has not been
described in writing delivered by the Corporation to the City and the Underwriter.
2. The Corporation has not, since August 31, 2006, incurred any material liabilities
other than in the ordinary course of business which are not described in or contemplated by the
Official Statement or in writing delivered by the Corporation to the City and the Underwriter.
3. No proceedings are pending or threatened in any way contesting or affecting the
Corporation's status as an organization described in Section 501(c)(3) of the Internal Revenue
Code of 1986 (the "Code', as amended, or which would subject any income of any Member of
the Obligated Group to federal income taxation.
4. No event affecting the Corporation has occurred since the date of the Official
Statement which (i) makes untrue or incorrect in any material respect as of the date hereof, or at
such earlier or later time or date as shall be agreed by the City and the Underwriter, any
statement or information contained in the Official Statement or (ii) is not reflected in the Official
Statement but should be reflected therein in order to make the statements and information therein
not misleading in any material respect.
CHIC_1433333.4
G -1
5. The representations and warranties made by the Corporation in the Letter of
Representation delivered by the Corporation in connection with the execution of the Bond
Purchase Contract related to the Bonds, are true and correct as of the date hereof as if made on
the date hereof.
Capitalized terms used and not defined herein have the meanings assigned to them in the
Bond Purchase Contract dated May _, 2007, between Citigroup Global Markets Inc. and the
City of Newport Beach and approved by the Corporation.
Dated: May 31, 2007
CHIC_1433333.4
HOAG MEMORIAL HOSPITAL PRESBYTERIAN
Vice President Finance and Chief Financial Officer
G -2
RiAblic Hearing
Hoag Hospital Conduit Revenue Bonds Issuance
NOTICE IS HEREBY GIVEN that on April 24, 2007, a public hearing as
required by Section 147(f) of the Internal Revenue Code (the "Code ") will be
held with respect to the proposed issuance by the City of Newport Beach,
California (the "City ") of its revenue bonds in one or more series in an
amount not to exceed $500,000,000 (the "Bonds "). The proceeds of the
Bonds will be used by Hoag Memorial Hospital Presbyterian (the
"Corporation ") to finance and refinance the cost of acquisition, construction,
improvement, equipping, renovation, rehabilitation, remodeling and other
capital projects located at the hospital campus at One Hoag Drive, Newport
Beach, CA (the "Project "). The facility listed above is owned and operated
by the Corporation, a nonprofit public benefit corporation as described in
Section 501(c)(3) of the Code.
The hearing will commence at 7:00 p.m., or as soon thereafter as the matter
can be heard, and will be held at the City Council Chambers, City Hall, 3300
Newport Boulevard, Newport Beach, California 92663. Interested persons
wishing to express their views on the issuance of the Bonds or on the nature
and location of the health facilities proposed to be financed may attend the
public hearing or, prior to the time of the hearing, submit written comments.
The Bonds will be issued by the city under the powers reserved to the City
under Sections 3, 5 and 7 of Article XI of the Constitution of the State of
California and Section 200 if Article II of the Charter of the City to finance
the costs of the Project described above and will be limited obligations of
the City to be repaid solely from revenues received by the City from the
Corporation.
Additional information concerning the above matter may be obtained form
and written comments should be addressed to the City Clerk, City of
Newport Beach, 3300 Newport Boulevard, Newport Beach, California 92658.
NOTICE IS HEREBY FURTHER GIVEN If you challenge this project in
court, you may be limited to raising only those issues you or someone else
raised at the public hearing (described in this notice) or in written
correspondence delivered to the City, at, or prior to, the public hearing. For
information call (949) 644 -3123.
GTr C,t.�2lC
-61 LaVonne A Harkless, City C k
City of Newport Beach